Microeconomics

Compensating Differentials

A difference in wages that arises to offset the monetary characteristics of different jobs. Ex: Garbage man Vs Floor Sweeper. Garbage man gets paid more because its stinky and gross.

Inferior good

A good for which an increase in income leads to a decrease in demand. Ex: Getting a raise and not buying Kroger brand anymore.

Normal Good

A good for which, other things equal, an increase in income leads to an increase in demand.

Demand Curve

A graph of the relationship between the PRICE of a good and the QUANTITY demanded.

Monopoly

A market structure characterized by a single seller, selling a unique product in the market. The seller faces no competition, as he is the sole seller of goods with no close substitute. Ex: Providers of water, gas, TV, power

Arrow's impossibility theorem

A mathematical result showing that, under certain assumed conditions, there is no scheme for aggregating individual preferences into a valid set of social preferences.

Price elasticity of supply

A measure of how much the quantity supplied of a good responds to a change in the price of that good. %change in Q / %change in $

Oligopoly

A situation in which a particular market is controlled by a small group of firms. Much like a monopoly, in which only one company exerts control over most of a market. There are at least two firms controlling the market. Ex: auto industry, Ford, GMC, Chrysler

Nash Equilibrium

A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen.

Duopoly

A situation in which two suppliers dominate the market for a commodity or service.

Dominant Strategy

A strategy that is best for a player in a game regardless of the strategies chosen by the other players.

Which of the following instances of wage disparity is an example of the existence of compensating differentials?

A window washer working in a suburban subdivision gets paid less than one who is washing windows on the outside of a skyscraper.

Screening

An action taken by an uninformed party to induce an informed party to reveal information. Ex: a person buying a new car asking for a check by a mechanic.

Satiation

Any activity at which its maximum benefit has already been derived and, therefore, the marginal benefit equals zero.

Diminishing marginal product of labor

As the number of workers increases, the marginal product of labor declines. Ex: At first you only need a few workers to pick the low apples. But you hire more workers to pick the high apples. So more additional workers, each additional worker contributes less.

Downward sloping labor supply curve

Because of the law of diminishing returns... As a firm hires more and more workers, each additional worker contributes less and less additional output—and revenue—to the firm.

External benefit

Benefit someone gains from someone else's actions. Ex: flu shot

Perfectly inelastic

Consumer will buy a good regardless of the movement of price. No substitutes. Ex: medication

Fixed cost

Costs that do not vary with the quantity of output produced. Ex: rent

Variable cost

Costs that vary with the quantity of output produced. Ex: raw materials, packaging, and labor directly involved in a company's manufacturing process

Adverse Selection

Describes an undesired result due to the situation where one party of a deal has more accurate and different information than the other party. Ex: Buying a used car

Explicit cost

Direct payment made to others. Ex: rent

Private good

EXCLUDABLE & RIVAL IN CONSUMPTION. Ex: ice-cream cone. You can prevent someone from eating it and no one can eat it after you.

Club good

EXCLUDABLE, but not rival. Ex: WiFi. You can put a password on it and you using it doesn't effect anyone else from using it.

Non-satiation

For any amount of a good or service, more is preferred to less.

Imports

Goods produced abroad and sold domestically.

Exports

Goods produced domestically and sold abroad.

Income Effect

How changes in income affect the amount of goods or services consumers will demand or purchase.

Upward sloping labor supply curve means:

If the substitution effect is stronger than the income effect. An increase in wages provides an incentive to supply additional hours of labor. That a higher opportunity cost of leisure induces people to take less leisure and work more.

Firms in the model of perfect competition will:

Increase output up to the point that the marginal benefit of an additional unit of output is greater that the marginal cost.

Implicit cost

Input costs that do not require an outlay of money by the firm. Ex: the other job you could be getting paid for

Monopolistic competitive firms

Market which many firms sell products that are similar but not identical. Ex: grocery stores

Public good

NEITHER rival or excludable. Ex: tornado siren. You can't prevent someone from hearing it and if one person gets the warning it doesn't limit anyone else.

Monopsony

Occurs when a firm has market power in employing factors of production. One buyer and many sellers. Ex: government in employing nurses, police, etc

Moral Hazard

Occurs when a party provides misleading information and changes his behavior when he does not have to face consequences of the risk he takes. Ex: fire insurance

Common good

RIVAL IN CONSUMPTION but not excludable. Ex: fish. When one person catches a fish no one can catch that same fish. But no one man can catch all the fish.

Idle Resources

Refers to money, capital or labor that is being wasted. Ex: if someone is unemployed, that person's talent is being wasted.

Backward bending labor supply curve

Results when an even higher wage actually entices people to work less and to "consume" more leisure or non-paid time.

External cost

Someone imposes on another without their consent. Ex: oil power plant nasty air

Collusion

Takes place within an industry when rival companies cooperate for their mutual benefit.

Comparative Advantage

The ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.

Absolute Advantage

The ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group.

Substitution Effect

The change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution. Based on the idea that as prices rise, consumers will replace more expensive items with cheaper substitutes or alternatives, assuming income remains the same. Ex: price of pizza rises so you buy more Pepsi

Human Capital

The collective skills, knowledge, or other intangible assets of individuals that can be used to create economic value for the individuals, their employers, or their community.

The government decides to increase the sales tax on all goods. The government does not change the tax on income earned for labor. What happens in the market for labor?

The demand for labor decreases.

Income Disparity

The difference between the incomes of the richer and poorer parts of society.

Capital

The equipment and structures used to produce goods and services.

Condorcet paradox

The failure of majority rule to produce transitive preferences for society.

Marginal Cost

The increase in total cost that arises from an extra unit of production.

Discrimination

The offering of different opportunities to similar individuals who differ only by race, sex, age, etc.

Production Function

The relationship between the quantity of inputs used to make a good and the quantity of output of that good.

Which of the following would make it difficult for oligopolists to collude?

There are few buyers in the market.

If total surplus falls, which of the following must have occurred?

There was a decrease in demand or a decrease in supply.

Right shift in labor supply curve means:

Workers are more willing to work a certain number of hours at a given rate than they were before. Ex: Suppose immigration increases the number of workers willing to pick apples.

An industry that consists of two firms is:

a duopoly.

Many people don't reveal their smoking and eating habits on their applications for health insurance. This is an example of:

adverse selection.

An increase in the demand for labor may come about because of:

an increase in the price of the good labor produces.

An economy is said to have a comparative advantage in the production of a good if it can produce that good:

at a lower opportunity cost than another economy.

If the only two firms in an industry agree to fix the price at a given level, this is an example of:

collusion.

Across different types of jobs, wages are often higher or lower depending on how attractive or unattractive the job is. These wage differences are known as:

compensating differentials

Leisure is considered a normal good since people:

consume more of it when their incomes rise.

You insure your car against theft. Consequently, you rarely lock the car. This describes the problem of:

moral hazard.

If an economy is producing a level of output that is on its production possibility frontier, the economy has:

no idle resources and is using resources efficiently.

Consider the labor market for accountants. As more people earn accounting degrees, we should expect to see:

the labor supply curve increase.

To maximize profits a firm will employ workers up to the point at which for the last worker employed:

the value of the marginal product is equal to the wage rate.

Eric is a professor who is paid an annual salary to teach at a local college. Suppose Eric receives a promotion and an increase in his annual salary. Eric's labor supply curve will be:

upward-sloping if the substitution effect is greater than the income effect.

A perfectly competitive firm will continue producing in the short run as long as it can cover its:

variable cost

Perfect competition

1. The goods offered for sale are all exactly the same. 2. The buyers and sellers are so numerous that no single buyer and seller has any influence over the market price. Ex: farmers

Tariff

A tax on goods produced abroad and sold domestically.

Signaling

An action taken by an informed party to reveal private information to an uninformed party. Ex: firm spending money on a commercial to signal to costumers about their product

Rival in consumption

One person using a good prevents someone else from using it.

Excise tax

Price on a specific good. Ex: gas, alcohol

Surplus

Quantity supplied > Quantity demanded

Marginal Revenue

The change in total revenue from an additional unit of labor.

Marginal Product of Labor

The increase in the amount of output from an additional unit of labor.

Negative cross price elasticity of demand

Two products that are complements. Ex: hot dogs & mustard

Elastic

Used to determine how changes in product demand and supply relate to changes in consumer income or the producer's price.

Excludable

Whether someone can be prevented from using a good.

Left shift in labor supply curve means:

Workers are less willing to work a certain number of hours at a given rate.

A firm's demand curve for labor will shift because of:

a change in the product's price.

Lisa works 46 hours a week at a wage of $10 an hour. If her wage increases to $16.50, then:

if leisure is a normal good, the income effect will imply that she works less.

Price discrimination will ____ firms profits.

increase

A wage _____ reduces the quantity of labor supplied through the _____ effect.

increase; income

The opportunity cost of production:

is what you give up to produce the good.

In terms of contribution to total income, the single most important factor of production is:

labor.

Beyond some point, a higher wage may induce an individual to work _____ and the labor supply curve may then _____.

less; bend backward

A labor market in which there is only one firm hiring labor is called a:

monopsony

Moral hazard:

occurs when incentives are distorted, because an individual knows more about his or her actions that other people do. Ex: the employer and employee relationship

A leftward shift in the labor supply curve would result if:

people begin to value leisure more highly.

The Coase theorem states that in the presence of externalities, a market economy will:

reach an efficient solution if transaction costs are sufficiently low.

Demand curve

relationship between price & quantity demanded

A decrease in the quantity demanded of labor will occur if:

the price of labor rises.

Negative cross price elasticity

two products that are compliments Ex: hot dogs & mustard