Micro Final Exam quizlet
Price Elasticity of Demand
% change in quantity demanded / % change in price
Critiques of Efficiency
- Distribution is important for equity - Willingness to pay - The means matter, not just the ends
Tax on Sellers
- Shifts the demand curve to the left - Higher marginal cost
Tax on Buyers
- Shifts the demand curve to the left - Lower willingness to pay
External Benefit
A benefit imposed on bystanders
External Cost
A cost imposed on bystanders
Sunk Costs
A cost that has been incurred and cannot be reversed
Focal Point
A cue from outside the game that helps you coordinate on a specific equilibrium
Coordination game
A game where all players have a common interest in coordinating their choices
Search Good
A good that you can easily evaluate before buying
Quota
A limit on the maximum quantity of a good that can be sold
Strategic plan
A list of instructions that describes how to respond to any possible situation
Natural Monopoly
A market where it is cheapest for a single business to sell to the market
Monopolistic Market
A market where there is only one seller. The seller has a lot of market power.
Oligopolistic Market
A market with a handful of large sellers. Each seller has some of the market power.
Price Ceilings
A maximum price that sellers can charge
Price Elasticity of Demand
A measure of how responsive buyers are to a price change
Income elasticity of demand
A measure of how responsive the demand for a good is to changes in income % change in quantity demanded / % change in income
Cross-price elasticity of demand
A measure of how responsive the demand of one good is to price changes of another % change in quantity demanded / % change in price of another good
Quantity Regulations
A minimum or maximum quantity that can be sold
Price Floor
A minimum price that sellers can charge
Subsidy
A payment made by the government for every sale someone makes
Quantity Discount
A per-unit price that is lower when you buy a larger quantity
Rival Good
A person's use affects others
Nonrivial Good
A person's use doesn't affect others
Binding Price Floor
A price floor that prevents the market from reaching the equilibrium price
Cap and Trade
A quantity regulation implemented by allocation a fixed number of permits
Mandate
A requirement to buy or sell a minimum amount of goods
Externality
A side effect of an activity that affects bystanders whose interests aren't taken into account
First mover advantage
A strategic gain from an anticipatory action that can force a rival to respond less aggressively
Payoff Table
A table that lists your choices in each row, lists other players choice in each columns, showing all possible outcomes
Corrective Tax
A tax designed to induce people to take account of the negative externalities they cause
Positive Externality
Activity whose side affects benefit bystanders.
Negative Externality
Activity whose side affects harm others
Informative Advertising
Advertising that informs potential customers about a product
Persuasive Advertising
Advertising that tries to persuade or manipulate you into believing you'll enjoy a particular product
Marginal Social Benefit
All marginal benefits
Marginal Social Cost
All marginal costs
Efficient Allocation
Allocating goods to create the largest surplus possible
Price Taker
An actor who charges the market price
Collusion
An agreement by rivals not to compete with each other but instead to charge high prices
Collusion
An agreement to limit competition
Nash Equilibrium
An equilibrium where the choice that each player makes is a best response to the choices other players are making
An interstate highway
An example of a public good would be
Moral Hazard
Behavior changes after a purchase is made
Statutory Burden
Being assigned a tax payment by the government
Rational Rule for Buyers
Buy more of an item if the marginal benefit is more than the price
Exchange
Buyers and sellers exchange money for goods
Group Pricing
Charging different prices to different groups of people
Perfect price discrimination
Charging each customer their reservation price
Interdependence Principle
Choices other businesses make affect your decisions
Non-price competition
Competing to win customers by differentiating your product
Price Competition
Competing to win customers by offering lower prices
Five Forces framework
Competition in your market that - reveals underlying source of profitability - shows potential threats to profitability
Average Cost
Cost per unit, calculated as total revenue divided by the quantity supplied
Variable Costs
Costs that change according to the quantity of output
Fixed Costs
Costs that stay the same (your paying it no matter what)
Elastic, Inelastic
Demand is ________ when elasticity is greater than 1. Demand is ______ when elasticity is less than 1.
Positive Analysis
Describes what is happening
Normative Analysis
Describes what should happen
Marginal External Cost
Distance between: Marginal private cost and Marginal social cost
Private information
Distorts what is bought and sold
Diminishing Marginal Benefit
Each additional item has a smaller marginal benefit than the item before it
Product Differentiation
Efforts by the sellers to make their products different from the competitors products
Cost Benefit Principle
Evaluating the full set of costs and benefits of any choice
Marginal Private Benefit
Extra benefit from one extra unit paid by the buyer
Marginal Private Cost
Extra cost from one extra unit paid by the seller
Marginal External Benefit
Extra external benefit from one extra unit
Anti-cooridnation games
Games in which you best response is to take a different, but complementary action to another player
Complementary Goods
Goods that go together Ex: If the price of good 1 decreases by 10 percent, the quantity demanded of good B increases by 8 percent, then goods A and B are likely to be
Substitute Goods
Goods that replace each other
Productivity Growth
Growth that occurs when businesses figure out how to produce more output with fewer inputs
Finitely repeated games
Having the same interaction a fixed number of times
Indefinitely repeated game
Having the same interaction an unknown number of times
Repeated game
Having the same interaction with the same rivals and payoffs
Willingness to pay
How much you value the good
Coase Theron
If bargaining is costless, property rights are established and enforced
Switching costs
Impediments that make it costly for customers to switch to buying from another business
One-shot game
Interaction that only occurs once
Strategic Interactions
Interactions that occur when YOUR best choices depend on what OTHERS choose, and when OTHER's choices depend on what YOU choose
Three Step Tax Evaluation
Is the supply curve or demand curve shifting? Is the shift an increase or decrease in taxes? How will prices and quantities change in the new equilibrium?
Reason Backward
Keep reasoning backwards until you can see all the consequences that follow from todays decision
Diminishing Marginal Product
Leads to rising marginal costs
Pay-for-Performance
Linking the income your workers earn to measures of their performance
Look forward
Looking forward to anticipate the likely consequences of your choices
Signal
Making you and your product look good (ex. a warranty)
Rational Rule for markets
Marginal Benefit = Marginal Cost
Perfectly Competitive Markets
Markets where - All businesses in an industry sell an identical good - There are many sellers and many buyers, each is small compared to the size of the market
Price elasticity of supply
Measures how responsive sellers are to price changes % change in quantity supplied / % change in price
Monopolistic Competition
Monopolistically Competitive markets are markets where many small businesses compete. They each sell differentiated products.
Common Resource
Nonexcludable and rival
Common resources
Nonexcludable and rival
Club Good
Nonrival and excludable
Public Goods
Nontrivial goods afflicted by the free-rider problem
Sellers of high quality goods may choose....
Not to sell
Barriers to entry
Obstacles that make it difficult for new firms to enter
Scarcity
Occurs when resources are limited
Hurdle Method
Offering lower prices only to buyers who are willing to overcome some hurdle or obstacle
Tragedy of the commons
Overuse of a common resource
Profit margin
Price - average cost
Rational Rule for Society
Produce more of a product as long as its marginal social benefit is at least as large as the marginal social cost
Efficient Production
Producing a given quantity at the lowest possible cost
Free Entry
Pushes economic profit down to 0 in the long run
Midpoint formula for quantity Midpoint Formula for price
Q2-Q1 / (Q2+Q1 / 2) P2-P1 / (P2+P1 / 2)
Average Revenue
Revenue per unit, calculated as total revenue divided by quantity supplied
Reduce the forces of competition.
Rules and regulations are often blunt instruments because they
Rational rule for exit
Says to exit the market if you expect to earn a negative economic profit. Negative economic profit occurs when price is less than average cost
Rational rule for entry
Says you should enter the market if you expect to earn a positive economic profit. Positive economic profit occurs when price exceeds average cost.
Adverse selection problems will arise when
Sellers have private information about the product
Price Discrimination
Selling the same product at different prices
Game Tree
Shows how a game plays out over time. The first move forms the trunk, the choice after that are the branches, and the final choices are the leaves, which show all possible outcomes
Private Bargaining
Side payments to solve externalities
Social Optimal
Social costs + social benefits
Grim Trigger Strategy
Strategy that punishes your rival for not responding
Consumer Surplus
Surplus you get from buying something
Producer Surplus
Surplus you get from selling something
Marginal Revenue (MR)
The addition to total revenue you get from selling one more unit
Second-mover advantage
The advantage that can follow from taking an action that adapts to your rival's choices
Economic Burden
The change in after-tax prices faced by buyers and sellers
Change in quantity demanded
The change in quantity associated with movement along a demand curve
Equilibrium Quantity
The demand when the market is in equilibrium
Tax Incidence
The division of the burden of a tax between buyers and sellers
Market Power
The extent too which a sellers can charge a higher price without losing sales to competing businesses
Deadweight Loss
The loss endured as a result of economic surplus falling below efficient outcome
Reservation price
The maximum price someone will pay for a product
Efficiency
The more surplus gained = the more efficient outcome
Movement along the demand curve
The movement from one point on a demand curve to another point on the same curve, caused by a price change
Socially Optimal
The outcome that is most efficient for society as a whole
Equilibrium
The point at which there is no tendency for change
Equilibrium Price
The price when the market is in equilibrium
Principle-agent problem
The problem that arises when a principal hires an agent to do something on their behalf, but the principle can't observe the agents choices
Law of Demand
The quantity demanded is higher when the price is lower
Firm Demand Curve
The quantity that buyers demand from an individual firm as the price changes
Efficient Quantity
The quantity that produces the largest surplus
Output Effect
The revenue increase from selling one more unit
Discount Effect
The revenue lost from decreasing he price on every unit sold
Buyers, sellers and bystanders
The socially optimal outcome is the most efficient outcome for
Adverse selection of BUYERS
The tendency for the mix of buyers to be skewed toward the more high-cost buyers when the sellers don't know the buyers types
Adverse selection of SELLERS
The tendency for the mix of goods to be skewed more towards the low quality goods when buyers can't observe quality
Total Revenue
The total amount you receive from buyers Price x Quantity
Opportunity Cost
The true cost of something and what you give up for it
Economic surplus
Total benefits - total costs
Surplus
Total benefits - total costs
Economic profit
Total profit when looking at financial and opportunity cost
Accounting Profit
Total revenue financial costs
The possible revenue from selling it's units
Under a cap-and-trade system, what is a firm's opportunity cost of producing harmful gases?
Next best alternative
Value of your next best option
Congestion Effect
When a good becomes less valuable because other people use it
Network Effect
When a good becomes more useful because other people use it
Private Bargining
When all interested parties are included, externalities can be removed through
Inferior Good
When higher income causes a decrease in demand
Normal Good
When higher income causes an increase in demand
Private Information
When one party knows something about a product that the other party does not know
Non-excludable
When people cannot easily be excluded from using a good
Free-Rider Problem
When someone can enjoy the benefits of a good without having to pay
Market Failure
When supply and demand lead to an inefficient outcome
Multiple Equilibria
When their is more than one equilibria
Sellers of low quality goods.....
Will choose to sell
Bargining power
Your ability to negotiate a better deal