Chapter 2 Micro econ bec

- Total product - Marginal product - Average product

1) Total product is the entire production of a good or service for a given period of time. 2) Marginal product is the additional output obtained by adding one extra unit of input. It is computed by dividing the change in total output at a given level of input by the change in inputs. 3) Average product equals total product divided by the number of inputs used at a given level of output.

1. Nominal wages 2. real wages

1. Nominal wages are the amounts paid (and received 2. real wages represent the actual purchasing power (goods and services) of nominal wages.

What ways do price increases shift the supply curve?

1. an increase in input costs(wages or raw materials, shifts the supply curve left 2. a decrease in input costs shifts the supply curve right.

- What are the economic consequences of Monopoly

A. Given sufficiently low costs and adequate demand, a monopolist earns an economic profit in the long run. B. Because the firm is restricting the level of output to the profit-maximizing level, consumers have fewer goods and pay higher prices than under pure competition. C. Because price exceeds MC, resources are underallocated. 1) Allocation is efficient when price is reduced to MC, the value of what is forgone by society to make the product.

-Marginal Analysis

A. Marginal analysis allows economic decisions to be made based on projecting the result of varying level of resource consumption and output production

MONOPOLY defining characteristics

A. The industry consists of one firm. b. The product has no close substitutes. c. The firm can strongly influence price because it is the sole supplier of the product. Economists commonly use two terms to describe a monopolist's pricing behavior. Price Maker, Price searcher d. Entry by other firms is completely blocked in a monopoly

Implicit costs

A. are those costs not recognized in a concern's formal accounting records. B. Implicit costs are opportunity costs, i.e., the maximum benefit forgone by using a scarce resource for a given purpose and not for the next-best alternative

Constant returns to scale

With some plant sizes, an increase in the level of production results in no change in average costs.

- Accounting profits

Accounting profits are earned when the (book) income of an organization exceeds the (book) expenses.

Under pure competition, strategic plans focus on: a. Profitability from production levels that maximize profits. b. Maintaining the market share and being responsive to market conditions related to sales price. c. Maintaining the market share and planning for enhanced product differentiation. d. Maintaining the market share, ensuring product differentiation, and adapting to price changes or required changes in production volume.

Choice "b" is correct. Under pure (or perfect) competition, strategic plans include maintaining the market share and responsiveness of the sales price to market conditions.

Under oligopoly, strategic plans focus on: a. Profitability from production levels that maximize profits. b. Maintaining the market share and being responsive to market conditions related to sales price. c. Maintaining the market share and planning for enhanced product differentiation. d. Maintaining the market share, ensuring product differentiation, and adapting to price changes or required changes in production volume.

Choice "d" is correct. Under oligopoly, strategic plans focus on maintaining market share and call for the proper amount of advertising (to ensure product differentiation) and ways to properly adapt to price changes or required changes in production volume.

Normal Goods

Commodities which demand is positively related to income by consumer...steak

Market Demand is?

Market demand is the sum of the individual demand curves of all buyers in the market. Market supply is the sum of the individual supply curves of all sellers in the market.

-Price maker Monopoly characteristic

Draws attention to the monopolist's power to set price as high as it likes, unconstrained by competition.

-law of diminishing returns

Each additional unit of input leads to increased production, but the increase is smaller with each unit; the "bang for the buck" steadily diminishes. This is referred to as the point of diminishing marginal returns

Economic profits

Economic profits are a significantly higher hurdle. They are not earned until the organization's income exceeds not only costs as recorded in the accounting records, but the firm's implicit costs as well. Economic profit is also called pure profit.

Economies of scale

Economies of scale, also called increasing returns to scale. Initially, as production increases, average costs of production tend to decline. Some of the reasons are a) Increased specialization and division of labor b) Better use and specialization of management c) Use of more efficient machinery and equipment

unitary elasticity

Equal to one, supply has unitary elasticity (usually a very limited range). A single-unit change in price brings about a single-unit change in quantity supplied.

perfectly inelastic

Equal to zero, supply is perfectly inelastic (depicted as a vertical line). a seller cannot change the quantity supplied

relatively elastic

Greater than one, demand is in a relatively elastic range. A small change in price results in a large change in quantity demanded

Law of supply?

If all other factors are held constant (ceteris paribus), the price of a product and the quantity supplied are directly (positively) related; i.e., the higher the price, the greater the quantity supplied.

Compliments

If price increase in A results in a decrease in demand for B than A and b are compliments

Market equilibrium

Market equilibrium is the combination of price and quantity at which the market demand and market supply curves intersect

In any competitive market, an equal increase in both demand and supply can be expected to always A. Increase both price and market-clearing quantity. B. Decrease both price and market-clearing quantity. C. Increase market-clearing quantity. D. Increase price.

In a competitive market, equilibrium exists when demand is exactly equal to supply. If both demand and supply increase in equal amounts, the market will still be in equilibrium, but the new price may be higher, lower, or unchanged depending upon the slopes of the demand and supply curves. Whatever the new price, the quantity of products cleared by the market should increase.

- perfectly elastic

Infinite, supply is perfectly elastic (depicted as a horizontal line). i) A perfectly elastic supply curve exists only in theory. The costs of inputs and fixed investments in property, plant, and equipment prevent a supplier from charging a single price for the whole range of possible quantities.

relatively inelastic

Less than one, demand is in a relatively inelastic range. A large change in price results in a small change in quantity demanded.

- Marginal Cost

Marginal cost is the additional (also called incremental) cost incurred by generating one additional unit of output. Mathematically, it is the difference in total cost at each level of output. Typically, unit cost decreases, Thus, while total cost increases gradually for a while, at some point it begins to increase sharply

- Marginal Revenue

Marginal revenue is the additional (also called incremental) revenue produced by generating one additional unit of output. Mathematically, it is the difference in total revenue at each level of output.

Net national product NNP

NNP = GNP-depreciation

National income =

NNP=NIP-indirect business taxes

Substitutes

Price increases in A results in an increase in demand for B, A and B are said to be substitutes

perfectly inelastic

Some consumers' need for a certain product is so high that they will pay whatever price the market sets. The number of these consumers is limited and the amount they desire is relatively fixed.

-Notes on Monopoly Profit Maximization

The corresponding price is found with reference to the (downward-sloping) demand curve. Note that monopoly does NOT result in the highest possible price, nor does the monopolist produce at the lowest average total cost. A key point is that, when the monopolist lowers price to increase sales, the price must be reduced for all units.

A perfectly inelastic supply curve in a competitive market A. Implies a vertical demand curve. B. Exists when firms cannot vary input usage. C. Implies a horizontal market supply curve. D. Can exist only in the long run.

The elasticity of supply is a measure of the responsiveness of a change in the quantity supplied to a percentage change in the price of the commodity. A perfectly inelastic supply curve has an elasticity of zero. This can occur only when the numerator of the elasticity fraction, the percentage change in quantity supplied, is zero. Thus, a condition of perfect inelasticity of supply could occur only when a firm could not vary the quantity it supplies, i.e., when the firm cannot vary its input usage.

kinked demand curve

The essence of the theory is that firms will follow along with a price decrease by a competitor but not a price increase. b. To avoid the hazards of the kinked demand curve, price leadership is typically employed in oligopolistic industries.

If the coefficient of elasticity is zero, then the consumer demand for the product is said to be

When the coefficient of elasticity (percentage change in demand/change in price) is less than one, demand is inelastic. When the coefficient is zero, the demand is perfectly inelastic.

The determinants of supply are? (5)

a) Costs of inputs b) Change in efficiency of the production process, e.g., newer technology c) Expectations about price changes d) Passage of time e) Taxes and subsidies

unitary elasticity

a) Equal to one, demand has unitary elasticity (usually a very limited range). A single-unit change in price brings about a single-unit change in quantity demanded

relatively elastic

a) Greater than one, supply is in a relatively elastic range. A small change in price results in a large change in quantity supplied.

- relatively inelastic

a) Less than one, supply is in a relatively inelastic range. A large change in price results in a small change in quantity supplied.

Define Cartels

a. A cartel arises when a group of oligopolistic firms join together for price-fixing purposes. This practice is legal only in international markets. b. A cartel is a collusive oligopoly. Its effects are similar to those of a monopoly. Each firm will restrict output, charge a higher (collusive or agreed-to) price, and earn the maximum profit. c. Cohesion within a cartel can only be maintained if the members stick to their agreed-upon prices and production quotas. As soon as one member attempts to either increase profits by producing more or increase market share by cutting prices, the cartel can fall apart.

PURE COMPETITION Defining characteristics (5)

a. A very large number of buyers and sellers act independently. Examples are the stock market and agricultural markets. b. The product is homogeneous or standardized. Thus, the product of one firm is a perfect substitute for that of any other firm. The only basis for competition is price. c. Each firm produces an immaterial amount of the industry's total output and thus cannot influence the market price. d. No barriers to entry or exit from the market exist. e. Every firm has perfect information. f. Firms in perfect competition are therefore called price takers because they must sell at the market price.

-Explicit costs (accounting costs)

a. Explicit costs are those requiring actual cash disbursements. For this reason, they are sometimes called out-of-pocket or outlay costs.

MONOPOLISTIC COMPETITION Defining Characteristics? (4)

a. The industry has a large number of firms. The number is fewer than in pure competition, but it is great enough that firms cannot collude, i.e., they cannot act together to restrict output and fix the price. b. Products are differentiated. In pure competition, products are standardized, so price is the only basis for competition. In monopolistic competition, products can be differentiated on a basis other than price, such as quality, brands, and styles. c. Few barriers to entry and exit exist. Since firms tend not to be large, great economies of scale do not exist. The cost of product differentiation is the most significant barrier to entry. d. Advertising is crucial.

MARKET STRUCTURES. Defining Characteristics (4)

a. The industry has few large firms. Firms operating in an oligopoly are mutually aware and mutually interdependent. Their decisions as to price, advertising, etc., are to a very large extent dependent on the actions of the other firms. b. Products can be differentiated (e.g., autos) or standardized (e.g., steel). c. Prices tend to be rigid (sticky) because of the interdependence among firms. d. Entry is difficult because of barriers that can be natural, e.g., an absolute cost advantage, or created, e.g., ongoing advertising or ownership of patents

Short- vs. Long-Run Costs

a. The short run is a time period so brief that a firm cannot vary its fixed costs. b. The long run is a time period long enough that all inputs, including those incurred through fixed costs, can be varied.

Profit Maximization Under Monopolistic Competition Maximization

a. To maximize profits (or minimize losses) in the short run or long run, a firm in monopolistic competition produces at the level of output at which MR = MC. Just as for a monopolist, the MR curve is negatively sloped and lies below the demand curve. b. In monopolistic competition, a firm has competitors offering substitute products.

Explain M2 money supply

all of m1 plus savings deposits of 100k and below

- Diseconomies of scale

also called decreasing returns to scale. Eventually, as most firms continue to expand output, the marginal cost of production tends to increase. a) The most frequent reason given for diseconomies of scale is the difficulty of managing a large-scale entity.

Expansion phase

an expansion is a period of rising economic activity. Rising level of national output GDP, and by a decline in unemployment rate. Firm profits are likely to be rising. bc the demand for goods and services increase, firms are likely to invest in more new plants and equipment and expand their employment base.

Infinite, demand is perfectly elastic (depicted as a horizontal line)

cannot influence the market price. The demand curve faced by a single seller in such a market is perfectly elastic (although the demand curve for the market as a whole has the normal downward slope).

Peak What is gdp doing? What are profits doing? Any hindrances are advantages?

gdp is at its highest firm profits are at highest capacity constraints and input shortages leading to higher cots and higher overall price level

contractionary phase. What is gdp doing? What are profits doing?

gdp is falling, unemployment rising profits are falling from their highest level

Name 4 parts of business cycle in order:

in order 1. expansion phase 2. peak 3. contraction phase 4. trough 5. recovery phase

Explain m3

inclues all of m2 items plus savings deposits over 100k

What are the characteristics of a Trough?

low point in economic activity a. real gdp is at its lowest level and the unemployment rate tends to be at its highest b. profits are at their lowest level c. firms are likely experience significant excess in production capacity leading them to reduce their workforce and cut costs.

Natural Monopoly

natural monopoly exists when economic or technical conditions permit only one efficient supplier

Nominal GDP =

nominal gdp measures the value of all final goods and services in current prices

Price searcher Monopoly characteristic

on the other hand, implies that the monopolistic firm will not simply set prices arbitrarily high but will seek the price that maximizes its profits

What way does the supply curve shift with an advancement in technology?

shifts the supply to the right

Explain M1 money supply

the amount of notes and coins in circulation plus demand deposits, checking accounts from which money can be withdrawn on demand. also referred to as narrow money