The Market System and Circular flow
Price Elasticity of Demand
-Measures consumers response to the price change. If consumers are relatively sensitive to price changes demand is elastic. If they are unresponsive to price changes demand is inelastic. -Percentage change in quantity demanded divided by the percentage change in price -If it is greater than 1 demand is elastic -Less than 1 demand is inelastic - Equal to 1 is Unit elasticity
Advertising may effect Prices, Competition, efficiently either positively O
. Positive it can provide consumers with low-cost information about competing products, help introduce new competing products into concentrated industries, and generally reduce monopoly power and it's attendant inefficiencies.
The optimal amount of negative externality occurs when
.MB=MC
Three Oligopoly Models
1. The Kinked Demand Curve 2Collusive Pricing 3. Price Leadership
Arguments that Unions use to demand wage boosts
1. What others are getting 2. The employers ability to pay based on probability 3. Increases in the cost of living 4. Increases in labor productivity
On average Union workers realize wage rates...
15 percent higher than those of comparable nonunion workers
ATC
=TC/Q=TFC/Q+TVC/Q
Where demand is of unit elasticity
A change in Price leaves total revenue unchanged
Oligopoly
A few sellers of a standardized or differentiated product so each firm is effected by the decisions of its rivals.
Break even point PCSR
A firm Makes a normal profit but not a economic profit
In the Long run a firms capacity
A firm can vary plant size and firms can enter or leave the industry
If price is less than min average variable cost PCSH
A firm shuts down.
Cartel O
A group of producers that typically creates a formal written agreement specifying how much each member will produce and charge
Income effect
A lower price increases the purchasing power of a buyers income
Simultaneous consumption PM
A products ability to satisfy a large number of consumers at the same time
Mutual Interdependence O
A situation in which each firms profit depends not just on its own price and strategy but also on the other firms in the highly concentrated industry.
The demand curve for a resource will shift as a result of... RM
A. A change in the demanded for, and therefore the price of the product the resource is producing B. Changes in the Productivity of the resource C. Changes in the prices of other resources
Oligopolists emphasize non-price competition because
A. Advertising and product variations are less easy for rivals to match B. Oligopolists frequently have ample resources to finance non- price competition
A Union may raise competitive wage rates by
A. Increasing the derived demand for labor B.Restricting the supply of labor through exclusive unionism C. Directly enforcing an above-equilibrium wage rate through inclusive unionism.
Wage differentials are largely explainable in terms of
A. Marginal revenue productivity of various groups of workers B. Noncompeting groups arriving from differences in the capacities and education of different groups of workers C. Compensating wage differences that is wage differences that must be paid to offset nonmonetary differences in jobs D. Market Imperfections in the form of lack of job Information , geographic immobility, union and government restraints, and descrimination
Game Theory O
A. Shows the independence of oligopolists pricing policies B. Reveals the tendency of Oligopolists to collude C. Explains the temptation of Oligopolists to cheat on collusive arrangements
The elasticity of demand will be greater RM
A. The greater the ease of substituting other resources for labor B. The greater the elasticity of demand for the product C. The larger the proportion of total production costs attributable to the resource
Monopolistic Competition distinguishing features
A.ere are enough firms in the industry to ensure that each firm has only limited control over price, mutual independence is absent, and collusion is nearly impossible. B. Products are characterized by real or perceived differences so that economic rivalry entails both price and Non-Price competition C. Entry to the industry is relatively .
Natural Monopoly
ATC is minimized when only one firm produces the particular good or service
In Long run equilibrium P=ATC=MC
ATC=MC
Marginal Cost
Added expense beyond the cost of the smaller diamond
Market demand Curves are found by
Adding horizontally the demand curves of the many individual consumers in the market.
The term labor encompasses...
All people that work for pay
The marginal Productivity theory of income distribution holds that RM
All resources are paid according to their marginal contribution to output. Critics say that such an income distribution is too unequal and that real-world market imperfections result in pay above and below marginal contributions output.
Command System
Also known as socialism or communism. The government owns most resources and central planners coordinate most economic activity
Nash Equilibrium
An option which neither rival wants to deviate. Both rivals see their current strategy as optimal given the other firms strategic choice.
Economists disagree about the desirability of the minimum wage as an
Antipoverty Mechanism. While it causes unemployment for some low income workers, it raises the income of those who retain their jobs.
The equilibrium Price and quantity
Are established at the intersection of the supply and demand curves
Industries that sell products which have high income elasticity of demand
Are hit harder by recessions
Economic Resources
Are inputs into the production process and can be classified as land, labor, capital, and entrepreneurial ability. They are also known as inputs or the factors of productions.
Network Effects PM
Are present if the value of a product to each user, including existing users, increases as the total number of users rise.
Explicit Cost
Are the monetary payments a firm makes to those from whom it must purchase resources that It does not own
Implicit cost
Are the opportunity costs of using resources that it already owns to make the firms own product rather than selling those resources to outsiders for cash.
The law of Supply
As Price goes up so does quantity supplied
Invisible Hand
As if directed by an invisible hand, competition harnesses the self interest motives of businesses and resource suppliers to further the social interest.
Substitution effect
At a lower price buyers have the incentive to substitute what is now a less expensive product for other products that are now relatively more expensive
Industrial Unions
Automobile workers and steel workers. Such unions seek as members all unskilled, semiskilled, and skilled workers in the industry.
Consumers blank from the wide diversity of product choice that monopolistic competition provides
Benefit
Utility Maximization model PM
By providing insights on income effect and substitution effects of a price decline, the utility maximization model helps explain why demand curves are downsloping
Accounting Profit
Calculated by subtracting total explicit costs from total revenue
Negative Externalities
Cause supply side market failures. These failures happen because producers do not take into account their negative externalities have on others. Causes supply curves to shift to the right or below where they would be.
Positive Externalities
Causes Demand Side Market failures. It occurs because market demand curves fail to include the willingness to pay of the third parties who receive external benefits. Shifts the demand curve to the left.
MC
Change In TC/Change in Q
MRP= RM
Change in Total revenue/Unit change in Resource quantity
Marginal Product
Change in total product divided by change in labor input
MRC= RM
Change in total(Resource) cost/Unit change in resource quantity
Framing effects PM
Changes in peoples preferences that are caused by new information that alters the frame used to Define whether situations are gains or losses.
Monopolistic Competition
Characterized by a very large number of sellers producing differentiated products. Widespread nonprice competition which is not based on price but quality called product differentiation. Entry or exit is easy
The uncertainties inherent in Oligopoly promote.... O
Collusion.
Marginal Analysis
Comparing of MB and MC
Short Run maximization of a Competitive firm PCSR
Comparing total revenue and total cost
Interindustry Competition O
Competition between two products associated with different industries
Determinants of demand
Consumer tastes, the number of buyers in the market, the money incomes of consumers, the prices of related goods, and consumer expectations.
The Law of Demand
Consumers will buy more of a product at a low price than a high price. As price goes up Quantity demanded goes down
Diseconomies of Scale
Control and coordination problems, Communication Problems, Worker Alienation, Shriking
Positive economic analysis
Deals with facts
Obstacles to Collusive Oligopoly
Demand and Cost differences, a large number of firms, cheating through secret price concessions, recessions, and antitrust laws.
If total revenue changes in the opposite direction from price
Demand is Elastic
If price and total revenue change in the same direction
Demand is inelastic
Inferior Goods
Demand varies inversely with money income
The Optimal point on the production possibilities curve
Determined by expanding the production of each good until MB=MC
How to improve resource allocation in situations where negative externalities affect many people and community resources?
Direct Controls and Specific Taxes
A monopolist regarding price PM
Does not charge the highest price possible
The firms demand curves for a resource slopes RM
Downward because the marginal product of additional units declines in accordance with the law of diminishing returns.
Monopolistically competitive In the short run may MC
Earn economic profits or incur losses
Monopoly creates a blank for society PM
Efficiency Loss/Deadweight Loss
Products may be O
Either virtually uniform or significantly differentiated.
Elasticity varies at different price ranges tends to be
Elastic in the upper left segment and inelastic in the lower right segment. Elasticity cannot be judged by the steepness or flatness of the demand curve.
Economists
Employ the Scientific method in which they form and test hypotheses of cause and effect relationships to generate theories, laws, and principals. Illustrate society's economizing problem through production possibilities analysis.
International trade
Enables a nation to obtain more goods from its limited resources than its production possibilities curve indicates.
Technological Advances and Increases in the quality and quantity and quality of resources
Enables the economy to produce more of all goods and services or in other words to experience economic growth.
Microeconomics
Examines the decision making of specific economic unites or institutions
Surplus
Excess supply
Exclusive unionism
Excluding workers from unions and therefore from the labor supply; craft unions succeed in elevating wages
Marginal Utility PM
Extra Satisfaction a consumer yields from an additional unit of that product
Lockout
Firm forbids workers to return to work until a contract is signed
When Price is greater than average variable cost but less than ATC PCSR
Firms choose to operate because revenue always exceeds VC.
Decreasing Cost industries. PCLR
Firms experience lower costs as their industry expands.
In the short run a firms capacity is
Fixed
Productive efficiency PCLR
Goods are produced in the least costly way
Ben Franklin
Hapiness=Income/wants
Change in Quantity Demanded
Happens because of a change in Price
The majority of the 10 fastest growing occupations in the US relate to RM
Healthcare and computers. The 10 most rapidly declining are mixed
An Oligopoly may be either
Homogeneous or differentiated
Same six questions for all market structures
How much will the firm produce? How much will it charge? What will be its total revenue? What will be its total cost? What will be its profit or loss? What will happen through time?
Graphically a budget Line or budget constraint
Illustrates the economizing problem for individuals. The line shows the various combinations of two products that a consumer can purchase with a specific money income, given the prices of the products.
Bilateral Monopoly
In many industries the labor market takes this form In which a strong Union sells labor to a monopsonistic employer. The wage rate outcome of this labor market model depends on Union and employer bargaining power.
Economic Perspective
Includes three elements Scarcity and choice, Purposeful behavior, and marginal analysis. It sees individuals and institutions making rational decisions based on comparisons of marginal cost and marginal benefits.
Various Barriers of Scale O
Including economies of scale, underlie and maintain oligopoly
Cross elasticity of demand
Indicates how sensitive the purchase of one product is to the changes in the price of another product. Percentage change in quantity demanded divided by percentage change in price of Y. Positive cross elasticity identifies substitute goods. Negative cross elasticity identifies complementary goods.
Income Elasticity of demand
Indicates the responsiveness of consumers purchase to a change in income. Percentage change in quantity demanded divided by percentage change on income. Its positive for normal goods and negative for inferior goods.
The monopolist avoids which region of its demand curve? PM
Inelastic
National Labor Relations Board
Investigates unfair labor practices charges
Pure Competition
Involves a very large number of firms producing a standardized product for which each producers output is virtually identical. New firms can enter or leave very easily
Anchoring PM
Irrelevant Information that influences
Complementary good
Is a one used together with another good
Demand
Is a schedule or curve representing the willingness of buyers in a specific period to Purchase a particular product at each of various prices
Price leadership O
Is an informal means of collusion whereby one firm, usually the largest or most efficient, initiates price changes and the other firms follow
Utility Maximization Rule PM
Is maximized when income is allocated so that the last dollar spent on each product purchased yields the same amount of extra satisfaction. MU of product A divided by price equals MU of Product B divided by price
Substitute Good
Is one that can be Used in the place of another
Pure Monopolist
Is the Sole producer of a commodity for which there are no close substitutes.
The nominal wage rate
Is the amount of money received per Unit of time
Normal Profit
Is the implicit cost of entrepreneurship
Minimum efficient scale(MES) PM
Is the lowest level of output at which a firm's long run average total cost is at a minimum
Price Ceiling
Is the maximum price set by government and is designed to help consumers. Effective price ceiling produce persistent product shortages and if an equitable distribution of the product is sought, government must ration the product to consumers
Human Capital
Is the personal stock of knowledge, know how, and skills, that enables a person to be productive and thus to earn income.
Economics
Is the social science that examines how individuals, institutions, and society make optimal choices under conditions of scarcity. Central to economics is the idea of opportunity costs.
Total Product
Is the total quantity or total output of a particular good or service produced
Advertising may effect Prices, Competition, efficiently either Negatively O
It can promote monopoly power via persuasion and the creation of entry barriers. Moreover, it can be self canceling when engaged in by rivals; then boosts costs and creates inefficiency while accomplishing little else
A monopolist can increase its profits practicing price discrimination provided PM
It can segregate buyers on the basis of elasticity's of demand and its product or services cannot be readily transferred between the segregated markets.
Noncollusive Oligopolists may face a blank demand curve O
Kinked. This curve and the accompanying MR curve explain the price rigidity that characterizes oligopolies however do not explain how the actual prices of products were first established
Economies of Scale
Labor Specialization, Efficient Capital, Managerial Specialization
Productive efficiency
Least cost production
Any specific level of output will be produced with the RM
Least costly combination of variable resources when the marginal product per dollars worth of each input is the same. When MRP of Labor/Price of Labor=MRP of capital/ Price of Capital.
The long run equilibrium position of the monopolistic competitive producer is blank than that of a pure competitor MC
Less efficient
Increases in supply
Lower equilibrium price and raise equilibrium quantity
Economies of scale may PM
Lower unit costs available to monopolists but not too competitors.
Maximizes Profit PM
MR=MC
Provided price exceeds minimum average variable cost competitive firm maximizes profits by producing output at PCSR
MR=MC
Monopsony
Market structure in which there is a single buyer. The workers providing this type of labor have few options other than working for the monopsony because they are either geographically immobile or because finding alternative employment would mean acquiring new skills. The firm is a wage maker
Collusion oligopolists such as cartels O
Maximize joint profits that is, they behave like Pure monopolists
High Costs and a weak demand PM
May prevent any profit
Consumer Sovereignty
Means that both businesses and resource suppliers are subject to the wants of consumers. Through their dollar votes consumers decide on the Composition of output.
Excludability
Means that sellers can keep people who do not pay for a product from obtaining is benefit.
Constant Cost industries PCLR
Means that the industry expansion or contraction will not affect resource prices. Graphically the entry and exit of firms does not shift the Long run ATC curves.
Specialization
Means using the resources of an individual firm, region, or nation to produce one or a few goods or services rather than the entire range of goods and services.
The four Firm concentration ratio MC
Measures the percentage of total industry output accounted for by the largest four firms.
The elasticity of demand for a resource RM
Measures the responsiveness of producers to a change in the resources price. Percentage change in resource quantity demanded divided by the Percentage change in resource price
Studying Resource pricing is important for RM
Money Income determination, Cost Minimization, Resource Allocation, and Policy Issues.
Diminishing Marginal Utility
More of a particular product yields less satisfaction
Increasing Cost industries PCLR
Most industries are this. Firms ATC curves shift upward as the industry expands and downward as the industry contracts. Entry of New firms usually increases resource prices.
Compensating Differences
Must be paid to compensate for nonmonetary differences in jobs.
An economy that is fully employed and thus operating on a production possibilities curve.
Must sacrifice the output of some types of goods and services to increase the production of others. The gain of one type of good or service is always accompanied by an opportunity cost in the form of the loss of some other type.
Purely Competitive labor market
Numerous firms compete with one another to hire a specific type of labor, Each of many qualified workers with identical skills supplies that type of labor, individual firms and individual workers are wage takers since neither can exert any control over the market wage rate.
Externality
Occurs when some of the costs or the benefits of a good or service are passed on to someone other than the immediate buyer and seller.
High Concentration Ratios indicate O
Oligopoly(Monopoly) Power
Free Rider problem
Once a producer has provided a good everyone can obtain its benefit.
Pure Monopoly
One firm is the sole seller of a product or service. Since the entry of additional firms is blocked one firm constitutes the entire industry. They produce a single unique product so product differentiation is not an issue.
Dominant strategy O
Option that is better than any alternative option regardless of what the other firm does
Most significant international cartel O
Organization of Petroleum Exporting Countries
Oligopolies are Allocatively Inefficient where
P is greater than MC
Oligopolies are Productively inefficient where
P is greater than minATC
Perfectly inelastic demand is graphed as a line
Parallel to the vertical axis
Barriers to Entry PM
Patents,Licenses, Ownership or control of essential resource, economies of scale, slashing price, stepping up advertising,
Economic Costs
Payment that must be made to obtain and retain the services of a resource.
Endowment Effect PM
People put a higher value on things that they currently possess
Marginal Benefit
Perceived Lifetime Pleasure (utility)
Elasticity of Supply
Percentage Change in quantity supplied divided by the percentage change in price. Depends on the ease of shifting resources between alternative uses, which varies directly with the time producers have to adjust to a price change.
Unionization rate
Percentage of workers unionized is high in government, transportation, telecommunications, construction, and manufacturing
Union Shop
Permits the employer to hire non union workers but makes the workers join the union within a specific time period or they lose their job.
Labor in advanced economies is highly productive because of
Plentiful Capital, Access to abundant natural resources, Advance technology, Labor quality,
Total Revenue
Price X Quantity
Productive inefficiency M
Price is greater than ATC
Allocative inefficiency M
Price is greater than MC
Wage rate
Price paid per unit of time for labor
The monopolistic competitor seeks the specific combination of MC
Price, product, and advertising that will maximize product
Market System
Private individuals own most resources and markets coordinate most economic activity. Characterized by the private ownership of goods, including capital, and freedom of individuals to engage in economic activities of their choice to advance their material well being. Self interest is the driving force and competition is the control mechanism.
MC greater than MR
Produce Less
If Mc is less than MR
Produce more
Allocative efficiency
Producing the right amount of a product relative to other products
Market shares in Oligopolistic industries are usually determined on a basis of
Product development and advertising
When a firm is selling in an imperfectly competitive market the demand curve shifts for a second reason which is?
Product price must be reduced for the firm to sell a larger output. The market demand curve for a resource is derived by summing horizontally the demand curves of all the firms hiring that resource
The equilibrium quantity in competitive markets reflects both
Productive efficiency and allocative efficiency
Neither Blank or Blank is realized in oligopolistic markets
Productive or Allocative efficiency
Superior or Normal goods
Products whose demands vary directly with money income
Oligopoly may be superior to pure competition in
Promoting research and development and technological progress
The real wage rate
Purchasing power of the nominal wage
Deadweight Losses
Quantities less than or greater than the allocatively efficient level of output create efficiency losses
Increases in demand
Raise equilibrium price and equilibrium quantity
Normative economics
Reflects value judgments
Entry and exit help to improve PCLR
Resource Allocation Firms that exit the industry release their resources to be used more profitability in other industries. Firms that enter the industry bring with them resources that were less profitability used in other industries. Both processes increase allocative efficiency
Determinants of Supply
Resource prices, production techniques, taxes or subsidies, the prices of other goods, producer expectations, and the number of sellers in a market
With the same price the monopolist will find it profitable to PM
Restrict Output and charge a higher price than would sellers in a purely competitive market. This restriction of output causes resources to be Misallocated, as is evidenced by the fact that price exceeds MC in monopolized markets.
Private goods
Rivalry and Excludability. Goods offered for sale in shops and stores and internet.
Strategic Behavior O
Self interested behavior that takes into account the reactions of others
Changes in one or more of the determinants of demand
Shift the demand Curve. A shift to the right is an Increase in Demand. A shift to the left is a decrease.
Changes in Determinants of Supply
Shift the supply curve. A shift the right an increase in supply while a shift to the left is a decrease in supply.
Because resources are not equally productive in all possible uses
Shifting resources from one use to another creates increasing opportunity costs. The production of additional units of one product requires the sacrifice of increasing amounts of another product.
Production Possibility tables and curves
Show the different combinations of goods or services that can be produced in a fully employed economy, assuming that resource quantity, resource quality, and technology are fixed
Supply
Shows the amounts of a product that producers are willing to offer in the market at each possible price during a specific period.
Monopoly PM
Single Seller, No Close Substitutes, Price Maker, Blocked Entry, Nonprice Competition
Mental Accounting PM
Sometimes people took at consumption options in isolation
Through Product differentiation, product development, and advertising a firm may MC
Strive to increase the demand for its product more than enough to cover the added cost of such non-price competition.
How to improve resource allocation in situations where + externalities affect many people and community resources?
Subsidizing Consumers which increases market demand or subsidizing producers which increases market supply. Such subsidies increases the equilibrium output.
Economic profit
Subtracting all economic costs from total revenue
Price war O
Successive and continuous rounds of price cuts by rivals as they attempt to maintain their market shares
The Herfindahl Index MC
Sums the squares of the percent market shares of all firms in the industry. Designed to measure market dominance in an industry.
AFC
TFC/Q
The Market System encourages
Technological advance and capital accumulation
The Prices that a household receives for the resources it supplies to the economy determine
That households income which in turn determines that households claim on the economy's output
Rationing function of prices
The ability of market forces to synchronize selling and buying decisions to eliminate potential surpluses and shortages.
The long run growth of real hourly compensation also known as
The average real wage, roughly matches that of productivity, with both increasing over the long run
Firms engage in strategic behavior and are Mutually independent: O
The behavior of any one firm directly affects and is affected by, the actions of rivals
The fair Price return is determined where PM
The demand and average total costs curves intersect.
The marginal Revenue curve for any resource is RM
The demand curve for that resource because the firm equates resource price and MRP in determining its profit maximization level of resource employment.
Marginal Revenue Product is RM
The extra revenue a firm obtains when it employs 1 more unit of resource.
X-Inefficiency PM
The failure to produce with the least costly combination of inputs- is more common to monopolists than to competitive firms.
The circular flow model illustrates
The flows of resources and products from households to businesses and from businesses to households along with the corresponding monetary flows.
Least cost combination of resources RM
The last dollar spent on each resource yields the same marginal product.
The Pure monopolist's market situation differs from pure competition in that PM
The monopolists demand curve is downsloping,Causing the MR curve to lie below the demand curve.
Determinants of elasticity of Demand
The number of available substitutes, the size of an items price relative to ones budget, whether the product is a luxury or necessity, and the length of time to adjust.
Oligopolistic industries are characterized by
The presence of few firms, each having a significant portion of the market.
Cost benefit analysis
The process of comparing projects using the MB=MC rule
The demand for any resource is derived from... RM
The product it helps produce. That means that the demand for any resource will depend on its productivity and on the market value (Price) of the good its producing.
Closed shop
The strongest form of union Security in which a worker must be (or become) a member of the union before being hired
Specific wage rates depend on
The structure of the particular labor market
Price regulation Can be Invoked wholly or partially to eliminate PM
The tendency of monopolists to underallocate and to earn economic profits.
Graphically the Combined amount of Surplus is represented by
The triangle to the left below the demand curve and above the supply curve
Opportunity Cost
The value of the next best good or service forgone to obtain something
If resources C and D are complementary or jointly demanded RM
There is only one output effect , a change in the price of C will change the demand for D in the opposite direction
Average product
Total Product divided by Units of Labor
Economic profit
Total Revenue minus total Cost
Total Utility PM
Total amount of satisfaction or pleasure a person derives from consuming some specific quantity
A graph of average variable cost is PM
U shaped reflecting increasing returns folling by diminishing returns average total cost is the sum of AVC AFC and its graph is also U shaped
Incentive Pay plan
Way of resolving Principal agent problem. Ties worker compensation more closely to worker performance. Piece rates, commissions and royalties, bonuses, stock options, and profit sharing and efficiency wages.
Occupational Licensing
Way to prohibit competition for their services from less qualified labor suppliers. A group of workers in a given occupation pressure federal, state, or municipal government to pass a law that some occupational group (Physicians, Lawyers) can practice their trade only if they meet certain requirements. Which may include a level of education, amount of work experience, passing an exam, and personal characteristics.
Rivalry
When one person buys and consumes a product, it is not available for another person to buy and consume.
Natural Monopoly PM
When the market demand curve intersects the long run ATC Curve at any Point where average total costs are declining.
The Socially Optimal Price PM
Where Demand and Marginal Cost curves intersect
Equilibrium Price
Where quantities demanded and supplied are equal
Inclusive Unionism
Without wage rate the union will supply no labor at all.
Exit Mechanism
Workers quitting and taking other jobs
Monopoly transfers income from consumers to monopolists because PM
a monopolist can charge a higher price than would a purely competitive firm with the same costs. So monopolists in effect levy a private tax on consumers and, if demand is strong enough, obtain substantial economic profits.
Under monopsony the marginal resource cost curve lies
above the resource supply curve because the monopsonist must bid up the wage rate to hire extra workers and must pay the higher wage rate to all the workers. The monopsonist hires fewer workers than are hired under competitive conditions, pays less than competitive wage rates(has lower labor costs), and thus obtains greater profit.
The competitive price system will PCLR
allocate resources in response to consumer tastes, in technology, or in resource supplies and will thereby maintain allocative efficiency over time
Diseconomies PM
are caused by the problems of coordination and communication that arise in large firms
As it applies to labor the Principal agent problem...
arises when workers provide less than expected effort. Firms may combat this by monitoring workers or creating incentive pay schemes that link worker compensation to performance.
The theory of consumer behavior PM
assumes that with limited income and set product prices consumers make rational choices on the basis of well defined preferences
A consumer maximizes utility PM
by allocating income so that the marginal utility per dollar spent is the same for every good purchased
If resources A and B are substitutable for each other, a decline in the price of A will RM
decrease the demand of B provided that the substitution effect is greater than the output effect. But if the Output effect exceeds it a decline in price of A will Increase demand of B
Market failure in competitive markets have two possible causes
demand curves do not reflect a consumer's willingness to pay and supply curves do not reflect the full costs of production
The law of diminishing returns PM
describes what happens to the output as a fixed plant is used more intensively. As successive units are added such as labor to a fixed plant, beyond some point the marginal product associated with each additional unit declines
Lower resource prices shift cost curves PM
downward as does technological progress. Higher input prices shift cost curves upward
In the long run the market price of a product will PCLR
equal the average total cost of production. At a higher price economic profits would cause firms to enter the industry until those profits had been competed away. At a lower price loses would force the exit of firms until the product price rose to equal average total costs
Under monopolistic competition price... MC
exceeds marginal cost indicating an under allocation of resources to the product, and price exceeds min average total cost indicating that consumers do not get the product at the lowest price that cost conditions might allow.
In the short run a Plant's capacity is PM
fixed. It does not have sufficient time in the short run to alter plant size
Collective Bargaining
goal is too establish a work agreement between the firm and the union
High real wages in the advanced industrial countries stem largely from
high labor productivity.
The long run supply curve is PCLR
horizontal for a constant cost industry. Up sloping for an Increasing cost industry and down sloping for a decreasing cost industry
Each point on the MRP curve indicates RM
how many resource units the firm will hire at a specific resource price
At the equilibrium price and quantity in competitive markets
in competitive markets marginal benefit equals marginal cost; maximum willingness to pay equals minimum acceptable price and the total of consumer and producer surplus is maximized. These conditions define allocative efficiency
The entry or exit of firms will change PCLR
industry supply
The socially optimal amount of a public good
is the amount where MB=MC
Consumer Surplus
is the difference between the maximum price a consumer is willing to pay and that lower price that is actually Paid
Producer Surplus
is the difference between the minimum price that a producer is willing to accept for a product and the higher price actually received
Marginal Cost PM
is the extra cost of producing one more unit of output
Principal Agent Problem
is usually accociated with the possible differences in the interests of corporate stock holders(principals) and the executives(Agents) they hire. But this problem extends to all employees
Monopolists may make costly expenditures to PM
maintain monopoly privileges conferred by the government.
Resource Prices help determine... RM
money incomes, and they simultaneously ration resources to various industries and firms
Labor earnings comprise total pay and are found by
multiplying the number of hours worked by the hourly wage rate
In a competitive industry PCSR
no single firm can influence market price. Their demand curve is perfectly elastic and price equals marginal revenue
Public goods
nonrivalry and nonexcludability
Non-Price competition provides a way that monopolistically competitive firms can MC
offset the tendency for economic profit to fall to zero.
Policies for coping with overallocation of resources
private bargaining, liability rules and lawsuits, direct controls, specific taxes, and markets for externality rights
Policies for correcting underallocation of resources and therefore efficiency losses associated with positive externalities are
private bargaining, subsidies to producers, subsidies to consumers, and government provision
The price that yields maximum total profit to the monopolist PM
rarely coincides with the price that yields maximum unit profit.
The government uses taxes to
reallocate resources from the production of private goods to public and quasi-Public goods
Pure monopoly may be more likely than Pure competition to PM
reduce costs via technological advance because of the monopolists ability to realize economic profit which can be used to finance research.
Voice Mechanism
reduces turnover by using collective communication
Global Comparisons suggest that real wages in the united states are
relatively high, but not the highest internationally.
Political pressures often lead to the government
responding inefficiently to market failures
Union and agency shops are legal except in 22 states that prohibit them through the
right to work laws.
The long run equality of price and marginal cost implies PCLR
that resources will be allocated with consumer tastes. Allocative efficiency will occur. In the market the total consumer surplus and producer surplus will be at a maximum
The long run equality of price and minimum average total cost means PCLR
the competitive firms will use the most efficient technology and charge the lowest price consistent with their production costs. They will achieve productive efficiency
In a competitive labor market the equilibrium wage rate and level of employment are determined at
the intersection of the labor supply curve and labor demand curve. For the individual firm the market wage rate establishes a horizontal labor supply curve meaning that the wage rate equals the firms constant marginal resource cost. The firm highers workers to the point where MRP=MRC
Entry and exit will continue until PCLR
the market price determined by industry supply interacting with market demand generates a normal profit in the industry. With firms earning a normal profit there will be no incentive to exit or enter the industry. This situation constitutes long- run equilibrium in a purely competitive industry.
The demand (marginal benefit) curve for a public good is found by
vertically adding the prices that all the members of society are willing to pay for the last unit of output in various output levels
Non competing groups
workers each representing several occupations for which the members of a particular group qualify. In some groups qualified workers are very few while in others they are very high. Workers in one group do not qualify for other groups.