econ 2005 - final exam

if supply is upward sloping, a decrease in demand with no change in supply will lead to a(n) _____ in equilibrium quantity and a(n) _____ in equilibrium price.

decrease; decrease

normal good

good for which higher income causes an increase in demand. EX: name branded groceries

interdependence principle

how different decision depend on each other.

marginal product

the increase in output that arises from an additional unit of an input, like labor.

market vs. individual supply curve

the individual supply curve refers to quantity an individual firm will supply at each price and market supply plots the total quantity supplied across all sellers.

reservation price

the maximum price a customer will pay.

price discrimination

selling the same good at different prices.

price-taker

someone who decides to charge the prevailing price and whose actions do not affect the prevailing price. EX: when you're a buyer in a perfectly competitive market—say, when you're buying gas—you're acting as a price-taker, because you take the price as given, and decide what quantity to buy.

when making a decision, you should ignore _____ costs and focus on _____ costs.

sunk; marginal

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

absolute advantage

the ability to produce a good using fewer inputs than another producer

marginal principle

the benefit, or not, of doing more or less of something. EX: evaluate whether the extra benefit from hiring one more worker exceeds the extra cost of that extra worker?

demand factors that make it shift

+ shift both individual and market demand: - income - preferences - prices of related goods - expectations - congestion and network effects + only shifts market demand: - the type and number of buyers *** a change in price does not shift the market demand!

factors that shift the supply curve

+ shift both individual and market supply: - input prices - productivity and technology - prices of related outputs - expectations + only shifts market supply: - the type and number of sellers *** not a change in price!

price elasticity of demand

- a measure of how responsive buyers are to price changes. It measures the percent change in quantity demanded that follows from a 1% price change. = percent change in quantity demanded/percent change in price - reflects the availability of substitutes. larger when: 1. there are more competing products 2. for specific brands rather than broad categories 3. things that are not necessities 4. consumers search more 5. when there is more time to adjust

shifts in demand curve

- a rightward shift is an increase in demand - a leftward shift is an decrease in demand

the price elasticity of supply reflects the flexibility of firms to increase or decrease the quantity supplied. it is larger:

- for firms that store inventories - when inputs are easily available - for firms with extra capacity - when firms can easily enter and exit the market - when there's more time to adjust

perfect competition

- markets in which 1) all firms in an industry sell an identical good; and 2) there are many buyers and sellers, each of whom is small relative to the size of the market. EX: gasoline companies! - perfectly competitive firms are price-takers and follow market price. (if they charge more than their competitors, they will lose customers!)

different demand elasticities measure the responsiveness of the quantity demanded to:

- price elasticity of demand: price of this good - cross-price elasticity of demand: price of another good - income elasticity of demand: income

rational rule for sellers in competitive markets

- sell one more item if the price is greater than (or is equal to) the marginal cost. - to maximize profits, apply rule and continue to produce until price = marginal cost.

perfectly elastic

- when any change in price leads to an infinitely large change in quantity. - a perfectly elastic supply curve is horizontal.

network effect & congestion effect

- where a product or service becomes more useful to you as more people use it. - some products become less valuable when more people use them.

economic surplus

= total benefits - total costs

sunk costs

a cost that has been incurred and can't be reversed. exists whatever choice you make, and is not an opportunity cost.

inferior good

a good for which higher income causes a decrease in demand. EX: generic groceries, public transportation

non-rival good

a good whose consumption by one person does not prevent consumption by others. EX: cable TV, sunshine

individual supply curve

a graph plotting the quantity of an item that a business plans to sell at each price.

price of elasticity of supply

a measure of how responsive sellers are to price changes. It measures the percent change in quantity supplied that follows from a 1% price change. = % change in quantity supplied/% change in price - of supply is positive - quantity is relatively unresponsive when supply is inelastic.

income elasticity of demand

a measure of how responsive the demand for a good is to changes in income. It measures the percent change in quantity demanded that follows from a 1% change in income. = % change in quantity demanded/% change in income - positive for normal goods and negative for inferior goods

cross-price elasticity of demand

a measure of how responsive the demand of one good is to price changes of another. It measures the percent change in quantity demanded that follows from a 1% change in the price of another good. = % change in quantity demanded/% change in price of another good - positive for substitutes - negative for complements

binding price ceiling

a price ceiling that prevents the market from reaching the market equilibrium price, meaning that the highest price sellers can charge is set below the equilibrium price.

binding price floor

a price floor that prevents the market from reaching the equilibrium price, meaning that the lowest price that sellers can charge is above the equilibrium price. - a price floor raises prices and lowers the quantity sold.

to be efficient, a person (or country) should operate at a point _______ its PPF? a) on b) inside of c) outside of

a) on

nash equilibrium

an equilibrium in which the choice that each player makes is a best response to the choices other players are making.

rising marginal costs imply: a) falling variable costs b) an upward-sloping supply curve c) a downward-sloping demand d) rising fixed costs

b) an upward-sloping supply curve

a tax (or price control) would create the most deadweight loss if:

both supply and demand are very elastic!

rational rule for buyers

buy more of an item if the marginal benefit of one more is greater than (or equal to) the price. to maximize economic surplus, apply rule and buy until price = marginal benefit.

group pricing

charging different prices to different groups of people.

perfect price discrimination

charging each customer their reservation price.

opportunity cost principle

considering the alternatives before making a choice, the next best alternative you have to give up is the opportunity cost.

cost-benefit principle

considering the costs and benefits of a choice. costs and benefits are incentives that shape decisions.

coase theorem

if bargaining is costless and property rights are clearly established and enforced, then externality problems can be solved by private bargains.

the rational rule

if something is worth doing, keep doing it until your marginal benefits equal your marginal costs.

grim trigger strategy

if the other players have cooperated in all previous rounds, you will cooperate. but if any player has defected in the past, you will defect.

check mark method

if you put a check mark next to each player's best response, then an outcome with a check mark from each player is a nash equilibrium.

hurdle method

offer lower prices only to those buyers who are willing to overcome some hurdle, or obstacle.

non-excludable good

people cannot be easily excluded from using it. EX: forest, lake to fish

law of demand

the tendency for quantity demanded to be higher when the price is lower.

perfectly inelastic demand

when quantity does not respond at all to a price change.

elastic

when the absolute value of the percent change in quantity is larger than the absolute value of the percent change in price, which means that the absolute value of the price elasticity is greater than 1.

inelastic

when the absolute value of the percent change in quantity is smaller than absolute value of the percent change in price, which means that the absolute value of the price elasticity is less than 1.

market failure

when the forces of supply and demand lead to an inefficient outcome. sources of market failure: - market power - externalities - information problems - irrationality - government regulations