AGB 144 Final exam

Generalizations

Meant to describe the average consumer

Explicit Costs

Monetary payments for resources that a firm doesn't own Ex. salaries, rent, inputs

Export Subsidy

Money given to domestic producer to encourage exports

Money and government

Money: medium of exchange; active but limited government(market failures)

A decrease in quantity demanded is depicted by a

Move from point Y to point X

The price elasticity of demand is generally

Negative but the minus sign is ignored

We would expect the cross elasticity of demand between dress shirts and ties to be

Negative, indicating complementary goods

Infant Industries

New industries should be protected to allow them to become competitive; most common in developing countries; protection can persist after industry has been established

Framing Effects and Advertising

New information can alter your perception of a gain or loss

Monopolistic Competition: Efficiency

No allocative or productive efficiency

"NAFTA" stands for

North American Free Trade Agreement

Inelastic

Not responsive to price change; 1% change in prices leads to a less than 1% change in quantity demanded

Price Elasticity Coefficient of Demand

Numbers used to gauge how sensitive consumers are to changes in price

Scientific Method

Observe, Hypothesis, Test, Accept/Reject/Modify, Continue Testing; A well tested and accepted theory = economic law or principal

Technology and Capital Goods

Technological advances in capital goods creates efficiency

Ag economics in the long run: Industry

Technological progress: result of experiment stations, USDA educational programs and private industry; demand has increased in the u.s. because of slow population growth or "lagged demand"

An extraordinarily small crop of farm products due to drought causes

a large increase in the price of farm products because the demand for farm products is price inelastic

Marginal Revenue (Pure competition vs. Pure monopoly)

Pure competition: MR = P ; Pure monopoly: MR<P, have to lower price to increase demand

Demand curve: pure competition vs. pure monopoly

Pure competition: less elastic, less competition, product differentiation; Pure monopoly: more elastic, more competition

Quantity Supplied vs. Supply

Quantity supplied is a move from one point on the line to another; Supply is a shift of the supply curve, right for increase, left for decrease

Suppose that tacos&pizza are substitutes and that soda&pizza are complements, we would expect an increase in the price of pizza to

Reduce the demand for soda and increase the demand for tacos

Geographic Specialization

Regions, international

Monopolistic competition: characteristics

Relatively large number of sellers, differentiated products, easy entry and exit, some price control

Elastic

Responsive to price change; 1% change in price leads to a greater than 1% change in quantity demanded

Private Goods

Rivalry, Excludability

3 parts of economic perspective

Scarcity and choice, purposeful behavior, marginal analysis

Budget Lines

Schedule/Curve of all the combinations of goods/services you can afford; attainable: what you can afford; unattainable: outside your budget; Tells us what we can buy, not what we should buy

Supply

Schedule/curve showing the various amounts of a product that produces are willing and able to make available for sale at each of a serious of possible prices during a specific period

A decrease in demand is depicted by a

Shift from line D2 to line D1

Characteristics of a Pure Monopoly

Single seller, no close substitutes, price maker, blocked entry, non price competition

Regulated monopoly: Socially optimal vs. Fair return price

Socially optimal: where the price would be if in purely competitive market; Fair return: P = ATC

A leftword shift of a product supply curve might be caused by

Some firms leaving the industry(decrease in supply)

Losses and Shrinking Packages

Status Quo: People react when the price rises, they don't always notice when the package gets smaller

Microeconomics

Study of the individual

Macroeconomics

Study of the whole economy

Determinants of Price Elasticity of Demand

Substitutability, Proportion of Income, Luxury/Necessity

World Trade Organization

Successor to GATT; 153 member nations in 2010; oversees trade agreements and helps to settle disputes; additional trade negotiations

Consumer Surplus

Surplus benefit received by consumers, maximum price consumers are willing to pay minus the actual price they pay

Producer Surplus

Surplus benefit received by supplier, price received by producer minus minimum acceptable price for the producer

Average Total Cost

TC/Q and AFC+AVC

Total Cost

TFC/Q

Average Variable Cost

TVC/Q

A breakdown in price leadership leading to successive rounds of price cuts is known as

a price war

Nonprice competition refers to

advertising, product promotion, and changes in the real or perceived characteristics of a product

Law of Diminishing Marginal Utility

all wants are insatiable, but the want for a particular item can be satisfied at some point

OPEC provides an example of

an international cartel

Law of Demand

as price decreases, demand increases

Product variety & profit maximization: Complications

assumptions: fixed product and fixed level of advertising; assumptions don't hold

Which of the following is the best example of oligopoly?

automobile manufacturing

Collusion

cooperate with your rivals in order to increase your profits; incentive exists to cheat

Other things equal, economists would prefer

free trade to tariffs and tariffs to import quotas

Criticisms: Policies

fund research to increase productivity while limiting acreage

The study of how people (or firms) behave in strategic situations is called

game theory

The demand for agricultural products

has a price elasticity coefficient of about .20 to .25

Product Variety & Profit maximization: Profits

having a differentiated product and advertising could increase profitability

Free trade: Characteristics

higher efficiency, more choice, higher satisfaction, promotes competition, links national interests, high world incomes

Suppose that domestic price (no-international-trade price) of copper is $1.20 a pound in the U.S. while the world price $1.00 a pound. Assuming no transportation costs, the U.S. will

import copper

If the demand for agricultural product is inelastic, a bumper crop will

lower price and decrease total revenues

Marginal Analysis

marginal = extra

The monopolistically competitive seller maximizes profit by producing at the point where

marginal revenue equals marginal cost

Tariffs

may be imposed either to raise revenue (revenue tariffs) or to shield domestic producers from foreign competition (protective tariffs)

Monopolistically competitive firms

may realize either profits or losses in the short run, but realize only accounting profits in the long run

The restaurant, legal assistance, and clothing industries are each illustrations of

monopolistic competition

Price discrimination: Assumptions

monopoly power, market segregation, no resale

Under monopolistic competition entry to the industry is

more difficult than under pure competition but not nearly as difficult as under pure monopoly

The primary gain from international trade is

more goods than would be attainable through domestic production alone

Which of the following is a unique feature of oligopoly?

mutual interdependence

Profit maximizing characteristics

not highest price, no supply curve, maximize total profit, losses are possible

In a two nation model, the equilibrium world price will occur where

one nation's export supply curve intersects the other nation's import demand curve

Productive Efficiency

produce goods in least cost way

Copyrights and Trademarks are examples of

property rights

Acreage allotment programs were designed to

reduce the supply of agricultural products

Long run equilibrium for monopolistically competitive firm where economic profits are zero results from

relatively easy entry

The demand for agricultural products is

relatively inelastic with respect to price

The demand schedules for such products as eggs, bread, and electricity tend to be

relatively price inelastic

Kinked demand theory

rival will either (A) match changes in price or (B) ignore changes in price

Econ of farm policy: government subsidies

support for ag prices, income and output; soil and water conservation; ag research; farm credit; crop insurance; subsidized sale of farm products in world markets

Price supports

surplus outputs; gain to farmers; consumer losses; additional losses; international costs; environmental costs

Trade barriers

tariffs, import quota, non-tariff barriers, voluntary export restriction, export subsidy

Revenue Tariff

used on items not produced domestically

Criticisms: Parity

value should be determined based on supply and demand which is always changing

Division of Labor

Differences in ability, learning by doing, saving time

Why do we trade?

Distribution of resources uneven: labor, land, capital intensive goods; technology and technological expertise vary by nation; preferences

Protection against dumping

Dumping: sale of products in foreign countries below cost or below prices charged domestically; may want to drive competitor out of business or may have to lower price to be competitive in other markets; antidumping laws in u.s.; rarely occurs

Unit Elastic

E(d) = 1 ; A 1% change in price will lead to a 1% change in quantity demanded

Mid-Point Formula

E(d) = [Q2-Q1/(Q2+Q1)/2] / [P2-P1/(P2+P1)/2]

Barriers to entry

Economies of scale, ownership/control of resources, patents, licenses, price wars, advertising

Pure monopoly (complications)

Economies of scale: simultaneous consumption, network effects; X-inefficiency: not using least cost measures; Monopoly preserving expenditures: costs incurred to keep monopoly; Very long run: technological advances

Freedom

Enterprise: can buy and use resources to produce their choice of goods and services to sell in the open market Choice: employer, employees, consumer

Decreasing Cost Industry

Entry of firms decrease costs of resources, Exit of firms increases cost of resources

Increasing Cost Industry

Entry of new firms increases cost of resources, exit decreases cost of resources

Constant Cost Industry

Entry/exit doesn't affect resource prices

Self Interest

Maximize profits, Minimize losses, maximize utility

To Maximize Utility

MU of A/$A = MU of B/$B all income should be spent

Resources

land, labor, capital, entrepreneurial ability(makes all decisions for the business, innovate, bears risk)

Monopolistic competition is characterized by a

large number of firms and low entry barriers

Reducing Surpluses

(1) Reduce Supply: acreage allotments, stop farming worst land, use better technology to increase yield, not as effective as was hoped, Conservation Reserve Program; (2) Increase Demand: research(ethanol), Government Programs(SNAP, WIC, school lunches), Marketing(Check off programs), reduce barriers to trade

The relationship between quantity supplied and price is (1) and the relationship between quantity demanded and price is (2)

(1) direct (2) inverse

Allocative Efficiency

-right mix of goods are produced -maximize consumer and producer surplus

What percentage of their spending do U.S. consumers allocate to food purchases?

12 percent

Percentage consumers spend on food

12% of expenditures

North American Free Trade Agreement

1993: canada, mexico and u.s. created free trade zone

Demand Curve

A schedule/curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time

Comparative vs. Absolute Advantage

Absolute advantage: most efficient producer of the product; Comparative advantage: produce the product for the lowest opportunity cost; More important to have comparative than absolute advantage

The Invisible Hand

Adam Smith; The market essentially regulates itself through self interest and competition; efficiency, incentives, freedom

Which of the following arguments is not generally made to justify farm subsidies?

Agribusiness firms need subsidies to achieve economies of scale

Price leadership model

Allows for coordinated prices without breaking laws; One firm rises/decreases prices and the rest follow, infrequent price changes, communication through "need to raise prices", limit pricing; keep prices low enough to keep other firms out

Market

An institution that brings buyers and sellers into contact

Pure monopoly: Policy options

Anti-trust laws, regulate prices and operations, ignore

Diseconomies of Scale

As a firm increases production, average cost increases

Constant Returns to Scale

As a firm increases production, average cost remains constant

Economies of Scale

As a firm produces more, there is a lower average cost of production; Ex. labor specialization, managerial specialization, efficient capital

Diminishing marginal utility

As you consume more of an item, each additional unit yields less and less marginal utility

An economist for a bicycle company predicts that, other things equal, a rise in consumer incomes will increase the demand for bicycles. This prediction assumes that

Bicycles are normal goods

Complications with regulation

Bureaucracies, inefficiency, rate increases

The price elasticity of demand coefficient measures

Buyer responsiveness to price changes

Private Property

Can own property and enter into legal contracts regarding that property; intellectual property rights(patents, copy rights, trademarks)

What is a distinguishing feature of a command system?

Central Planning

Marginal Revenue

Change in Total Revenue/Change in Quantity

Quantity demanded vs. demand

Change in demand is a shift of the demand curve, increase shift to right, decrease shift to left; Change in quantity demanded is a movement from one point to another as a fixed demand curve

Price discrimination: Types

Charging each consumer the maximum price they are willing to pay; charging one price for the 1st unit then lower prices for additional units; Charging some consumers one price and other consumers another price

Product variety & profit maximization: Benefits

Choice; variety could trump efficiency; product improvement

Command systems are also known as

Communism

Digital Cameras and Memory Cards are

Complementary Goods

DVD player and DVD's are

Complementary goods

Determinants of Demand

Consumer preferences, number of buyers in the market, income, price of related goods, consumer expectations

When an economist says that the demand for a product has increased, this means that

Consumers are now willing to purchase more of this product at each possible price

Fixed Cost

Cost that doesn't vary with production; Ex. rent, electricity, salary

Variable Costs

Costs that vary with production; Ex. input costs, hourly wages

The advent of DVD's has virtually removed the market for videocassettes. This is an example of

Creative destruction

Examples of command economies are

Cuba and north korea

Demise of the Command System

Deciding production levels, securing the capital resources, no way to correct if production level estimates are wrong, bigger economy means bigger problems, no incentive to innovate or take risks

Obstacles to collusion

Demand and cost differences, large number of firms, cheating, recessions, entry of new firms, antitrust laws

Demand-Side Market Failures

Demand curve doesn't reflect actual willingness to pay ex: fireworks, roadways, shoveling sidewalks

Prices

Determined by buyers and sellers

Terms of trade

Exchange ratio between two countries for goods; Depend on supply of the goods in question relative to their demand

Import vs. Export

Export: world price is higher than domestic price; Import: world price is lower than domestic price

Positive Economics

Facts, cause-and-effects; no value judgements

Economics of farm policy: Justifying Subsidies

Farm products are important and should receive a higher price through the government; family farm is desirable in itself; farm products are subject to hazards not faced by other industries and would be uninsurable otherwise; farm products are purely competitive but the inputs aren't

Oligopoly: characteristics

Few sellers, either homogeneous or differentiated products, control over price but with mutual interdependence, some barriers to entry(similar to those found in a monopoly)

Voluntary export restriction

Foreign firms volunteer to restrict supply in order to reduce a tariff or stricter quota

Competition

Freedom of sellers and buyers to enter or leave markets on the basis of their economic self interest

Assumptions

Full employment, fixed resources, fixed technology, two goods(consumer and capital); make assumptions to limit variables

Managing Risk

Future markets, contracting with processors, crop revenue insurance, leasing land, non farm income

Trade agreements

General goal is to lower barriers to trade

What is not a characteristic of the market system?

Government ownership of major industries

The Command System

Government owns all factors of production; no method to motivate because the government decides everything

If a demand for a product is elastic, the value of the price elasticity coefficient is

Greater than one

Elasticity

Have to continually lower the price by larger and larger amounts to convince consumers to purchase more

Proportion of Income

High proportion(elastic); Low proportion(inelastic)

Cross elasticity of demand

How sensitive are consumers of product X to changes of the price of Y; Substitutes: E(d) is positive, the price of Y increases and demand increases; Complements: E(d) is negative, the price of Y increases, demand decreases

Income Elasticity of Demand

How sensitive are consumers to changes in income?; Normal goods: E(d) is positive, as income increases, demand increases; Inferior goods: E(d) is negative, as income increases, demand decreases

Military self-sufficiency

Idea that national security trumps efficiency

A market is in equilibrium

If the amount producers want to sell is equal to the amount consumers want to buy

Diversification for Stability

Impose tariffs or quotas to encourage diversification

How will it be produced?

In combinations and ways that minimize the cost per unit output

Which of the following statements is correct?

In the long run, purely competitive firms and monopolistically competitive firms earn zero economic profits, while pure monopolies may or may not earn economic profits

When the price of a product increases, a consumer is able to but less of it with a given money income. This describes the

Income effect

Gains from trade

Increased trading possibilities line: improved alternatives, greater output

Demand (slope)

Individual firm(perfectly elastic), Total market(downward sloping)

3 oligopoly models

Kinked demand theory, Collusive pricing, Price leadership; 3 models because oligopolies are diverse and complications of interdependence

Nontariff barriers

Licensing, inspections, unreasonable standards

Import Quota

Limit on the amount or value of a product; prices are higher; consumption is reduced; domestic production gets higher price and increased sales

Substitutability

Lots of subs(elastic); Hardly any subs(inelastic)

Luxury/Necessity

Luxury(elastic); Necessity(inelastic)

Profit Maximization: Pure Monopoly

MR = MC rule still applies; only difference is that MR doesn't equal price

Law of Supply

Other things equal, as prices rise, the quantity supplied will rise

When a monopolistically competitive firm is in long-run equilibrium

P = MC = ATC

Monopoly demands: Assumptions

Patents, economies of scale, resource ownership; no government regulation; charges same price to everyone

Triple Bottom Line

People (Employees, Consumers), Planet, Profit

The basic formula for the price elasticity of demand coefficient is

Percentage change in quantity demanded divided by percentage change in price

Short Run

Plant capacity is fixed but can adjust the degree to which the plant is used

Long Run

Plant capacity variable

Break Even Point

Point at which all costs are recovered ATC = MC

We would expect the cross elasticity of demand between Coke and Pepsi to be

Positive, indicating substitute goods

Shutdown

Price < minimum AVC

Equilibrium

Price and quantity at which all that is demanded is produced and all that is produced is sold; market clearing price and quantity; no surplus or shortage; supply = demand

The Demand Curve shows the relationship between

Price and quantity demanded

The law of demand states that, other things equal,

Price and quantity demanded are inversely related

Price Floors

Price is held artificially high; Chronic surplus(restrict supply, buy excess)

Price Ceilings

Price is held artificially low; Chronic shortage(black markets, rationing)

Determinants of Supply

Price of good itself, resource prices, technology, taxes and subsidies, prices of other goods, producer expectations, number of sellers

Breakdowns in price leadership

Price wars; Eventually one will break and raise prices, rest will follow suit and the price leader has been established

Total Revenue

Price x Quantity Sold

Market System

Private industry owns factors of production; markets are used to motivate and direct economic activity; lassez faire: markets make all decisions; danger: monopoly, market crash

Characteristics of the Market System

Private property, freedom, self interest, competition, markets and prices, technology, specialization, use of money, active but limited government

The law of supply indicates that, other things equal,

Producers will offer more of a product at high prices than at low ones

Monopolistic competition: Differentiation

Product attributes, Service, Location, Brand name and packaging

Four Market Models

Pure Competition(Agriculture), Pure Monopoly(Electric Companies), Monopolistic Competition(Cell Phone Companies), and Oligopoly(OPEC)

In which of these continuums of degrees of competition (highest to lowest) is oligopoly properly placed?

Pure competition, monopolistic competition, oligopoly, pure monopoly

Other things equal, what might shift the demand curve of gasoline to the left?

The development of a low-cost electric automobile (decrease in demand)

What will be produced?

The goods and services that can be produced at a continuing profit will be produced, while those whose production generates a continuing loss will be discontinued

The elasticity of demand for a product is likely to be greater

The greater amount of time over which buyers adjust to a price change

Which of following best describes the short-run problem faced by farms?

The highly inelastic nature of agricultural demand, together with fluctuations in exports of farm goods, has caused small year-to-year fluctuations in farm output to result in highly unstable farm incomes

Increased Domestic Employment

The idea that cutting off imports will increase domestic employment; If one nation reduces their imports, it reduces the income in the exporting nation and they reduce their imports; Net effect is that imports and exports are reduced

Economizing Problem

The need to make choices because economic wants exceed economic needs; holds true for the individual and the firm

Implicit Costs

The opportunity costs of using the resources that the firm does own; Ex. OC of land, OC of natural resources

Cross elasticity of demand measures how sensitive purchases of a specific product are to changes in

The price of some other product

Suppose that corn prices rise significantly. If farmers expect the price of corn to continue rising relative to other crops, then we would expect

The supply to increase as farmers plant more corn

The market system's answer to the fundamental question "who will get the goods and services?" is essentially

Those willing and able to pay for them

Opportunity Costs

To obtain more of one thing, society forgoes the opportunity of getting the next best thing

Economic Profit

Total Revenue - (Explicit Costs + Implicit Costs) Gives an accurate picture of the success of your business

Accounting Profit

Total Revenue - Explicit Costs Overstates the success of your business

Average Revenue

Total Revenue/Quantity

Total Revenue Test

Total amount the seller receives from the sale of a product; TR = PxQ

Principal of Comparative Advantage

Total output will be greatest when each good is produced by the nation that has the lowest domestic opportunity cost for producing that good

Total Product

Total quantity that is produced

Farm Income

Traditionally lower than average income but is changing because prices have been going up; fewer farms, rising productivity, government support; Supplement farm income with off farm jobs

Scarcity and Choice

Unlimited wants but limited resources

Example of an inferior good

Used clothing

Protective Tariff

Used to protect domestic industries

Specialization

Using resources to produce a limited number of items

Purposeful Behavior

Utility = happiness/satisfaction; not to be read as rational, but rather with purpose; not random, limited information, emotions

Normative Economics

Value judgement; use words like "should" or "ought"

Pure Competition characteristics

Very large number of sellers, Standardized product, Price takers, Free entry and exit from the market

5 fundamental questions

What goods/services will be produced, how will it be produced, who will get the goods and services, how will the system accommodate change, how will the system promote progress

Normal Profit

What the entrepreneur could have made elsewhere

Unrelated Goods

When the price of X changes it has no effect of demand for Y

Complements

When the price of X increases, the demand for Y increases

Substitutes

When the price of X increases, the demand for Y increases

Economic systems differ according to which two main characteristics?

Who owns the factors of production and the methods used to coordinate economic activity

The term oligopoly indicates

a few firms producing either a differentiated or a homogeneous product

Monopolistic competition resembles pure competition because

barriers to entry are either weak or nonexistent

Countries engaged in international trade specialize in production based on

comparative advantage

The kinked demand curve of an oligopolist is based on the assumption that

competitors will follow a price cut but ignore a price increase

Farm share of U.S. GDP has

declined from about 7 percent in 1950 to 1 percent today

Ag econ in the long run: demand vs. population

demand hasn't kept pace with increase in supply; income: as income increases, buy other goods; income elasticity is 0.10 ; population: once income elasticity is low, demand must be made through population growth

Differences in production efficiencies among nations in producing a particular good result from

different endowments of fertile soil; different amounts of skilled labor; different levels of technological knowledge

Suppose the domestic price (no-international-trade price) of wheat is $3.50 a bushel in the U.S. while the world price is $4.00 a bushel. Assuming no transportation costs, the U.S. will

export wheat

Mutual Interdependence

firms profit depends on its own price and advertising as well as competitors

In the U.S. cartels are

in violation of the antitrust laws

Because government price supports cause surplus production, government policies have been designed to

increase demand and decrease supply of farm products

The food-stamp program is designed to

increase the demand for farm products

Cartels are difficult to maintain in the long run because

individual members may find it profitable to cheat on agreements

The demand for most agricultural products is

inelastic with respect to both price and income

Which of the following arguments for trade protection contends that new domestic industries need support to establish themselves and survive?

infant industry argument

A market

is an institution that brings together buyers and sellers

Game Theory

is the analysis of how people (or firms) behave in strategic situations

In the theory of comparative advantage, a good should be produced in that nation where

its cost is least in terms of alternative goods that might otherwise be produced

Marginal Cost

the additional cost of producing one more unit of output Change in total cost/change in quantity TC2-TC1/Q2-Q1

Which of the following arguments for trade protection is based on the premise that a nation should have a wide enough range of domestic industries to be self-sufficient if necessary?

the diversification for stability argument

A fundamental difference between the command system and the market system is that, in command systems

the division of output is decided by central planning rather than by individuals operating freely through markets

Utility Maximizing Rule

to maximize satisfaction the consumer should allocate their income so that the last dollar spent on each product yields the same amount of marginal utility

Ag industry in the short run: demand

varies due to dependency on world markets: weather and crop production in foreign markets, fluctuations in foreign income, foreign economic policy, international relations, value of the dollar

The World Trade Organization

was established to resolve disputes arising under world trade rules

World price vs. domestic price

world price: price paid in the open world market; domestic price: price paid in a closed domestic market