Baylor University: ECO 2306 Final Vocabulary Study
How do you calculate elasticity?
(Change in Q/Mid point)/(Change in P/Mid point) Sign does not matter
Absolute advantage
A situation in which a country can produce a unit of a good using fewer units of resources.
Nash equilibrium
A situation where both players chose their best strategies.
Dominant Strategy
A strategy that is best for a player in a game regardless of the other players strategies. (i.e. choosing strategy A every time.)
Private Goods
Excludable, rivalrous
Marginal Rate of Substitution
MRS. A rate at which a consumer is willing to trade one good for another. Measured by MUx/MUy
Pareto Improvement
Making at least one individual better off while making no one else worse off.
Characteristics of Competitive Markets
Many Buyers and Sellers Free Entry or Exit Identical Products
Export
Money coming in, goods or services going out.
Import
Money going out, goods or services coming in.
Pareto Efficiency
No one can be made better off without making someone else worse off.
Public Goods
Non-excludable, non-rivalrous
Common Resources
Non-excludable, rivalrous
A specific technological advance causes movement of...
One of the intercepts
Determinants of demand
Own price, prices of related goods, income, tastes, expectations
In competitive Markets P=
P=AR=MR
Profit Maximization of Monopolies
P=AR>MR=MC
Short Run supply curve of a competitive firm is
P=MC where P>=AVC
What is the profit maximization for a competitive firm?
P=MR=MC
Law of Demand
Price goes up, quantity demanded goes down. Vice versa.
Total Surplus
Producer + Consumer surplus
Cross price elasticity?
Same formula remains for elasticity, however, Quantity of Good A goes on top and Price of Good B goes on bottom. Used to see how price change in one good affects the demand of another good. Sign matters.
Income elasticity?
Same formula remains for elasticity, however, instead of price, we use income. Sign matters. Used to see the effects of a change in income on demand.
Gains from trade
The amount a country's consumption increases due to a trade. Measured by After-trade Consumption - Initial Consumption
Producer surplus
The amount a seller is paid minus the amount of the seller's cost.
Consumer surplus
The amount the buyer is willing to pay minus the amount the buyer actually pays
Marginal Analysis
The decision to choose one alternative over another based on its marginal benefit. Marginal Benefit > Marginal Cost
Per-Unit Tax
The government makes buyers and sellers pay a specific amount for each unit.
Diminishing Marginal Product
The idea that marginal product of an input declines as the quantity of the input increases. Vice versa.
Marginal Product
The increase in output from one additional input
Compliments
Two goods that are often consumed together. An increase in the price of good A leads to a decrease in the demand of good B. (i.e. Milk and Cookies)
Substitutes
Two goods that can replace each other. An increase in price of good A leads to an increase in demand of good B. (i.e. Coke and Pepsi)
Shortage
When quantity demanded is greater than quantity supplied.
Surplus
When quantity demanded is less than quantity supplied.
Market Equilibrium
Where Demand meets Supply.
Comparative advantage
Where a country can produce a unit of a good at a lower opportunity cost.
Price Discrimination
Where a monopoly charges different prices on different people based on their demand
Club goods
excludable, non-rivalrous
A party with a more elastic curve takes elastic curve takes a ___________ burden of tax
smaller
Surplus due to imports imply
CS increase, PS decreases, TS increases
Examples of Public Solutions
Corrective Tax, Subsidy, Tradable Permits, Regulation
Incidence of Tax
How the tax burden is shared amongst the two parties of buyers and sellers.
Optimization
I=PxQx+PyQy, MRS = Px/Py
Economies of Scale
Idea that ATC falls as Q increases. Diseconomies of Scale is the exact opposite.
How does one determine whether a country is an importer or exporter?
If a country is producing a surplus, they will export. If a country is producing a shortage, they will import.
Relationship between elasticity and Revenue
If inelastic, a price increase leads to an increase in revenue and expenditure If elastic, a price increase leads to a decrease in revenue and expenditure
Deadweight loss of a Monopoly
1/2 x (Pm-MC) (Qc-Qm)
Income effect
A change in consumption due to a change in purchasing power, a bad guy, depends on whether a good is normal or inferior.
Substitution effect
A change in consumption due to a price change, a good guy, always follows the rule (law of demand)
Price Ceiling
A legal maximum on the price of a good or service. Causes a shortage if binding
Price floor
A legal minimum on the price of a good or service. Causes a surplus if binding
Budget Constraint
A limit on the consumption bundles that a consumer can afford. Determined by income power
Surplus due to exports imply
CS decreases, PS increases, TS increases
Accounting Profit vs. Economic Profit
Accounting Profit = Total Revenue - Explicit Costs Economics Profit = Total Revenue - Explicit Costs - Implicit Costs
Characteristics of Perfectly Competitive Markets
All goods are identical Buyers and sellers are so numerous that no one can affect the market price. (Each participant is a price taker, not price maker)
In the long run...
All inputs are variable
Production Possibilities Frontier
Also referred to as PPF. A curve showing the combination of goods that can be produced in a given time period if an economy's resources are fully and efficiently employed.
Terms of trade
An international trade price of a good expressed in terms of another. (i.e. 1 lb of meat for 4 potatoes)
Giffen Goods
An odd good where increase in price raises quantity demanded Income effect is always greater than substitution effect.
General technological advance causes movement of...
Both intercepts
Increasing Marginal Costs are represented by a ___________ PPF
Bowed out
Both Tariffs and Quotas cause...
Deadweight Loss
Tax creates _________________
Deadweight Loss
Higher elasticities imply higher __________________
Deadweight losses
Positive Externality shifts the ____________ curve up
Demand
Oligopoly
Dominated by a few large firms Few sellers offer similar or identical products Significant barriers to entry
Elasticity Test
Elastic > 1 Inelastic < 1 Unit Elastic = 1
Economic Growth
Increase in the capacity of an economy to produce goods and services. Expansion of a PPF occurs.
Inferior Goods
Goods for which an increase in income leads to a decrease in demand
Normal Goods
Goods for which an increase in income leads to an increase in demand
Characteristics of a natural Monopoly
Significant Economies of Scale Competition from other firms raises average cost
Tragedy of the commons
Since common resources are non-excludable, anyone is free to use them, however, they are rivalrous and in most cases, people will use up the resources until they are gone.
In the short run...
Some inputs are fixed
Constant Marginal Costs are represented by a __________ PPF
Straight line or linear
Negative Externality shifts the _____________ curve up
Supply
Monopolies do not have...
Supply curves
The main difference between tariffs and quotas
Tariffs increase government revenues while quotas do not.
The Laffer Curve illustrates that...
Tax revenue rises and eventually falls
Concentration Ratio
The percentage of the market's total output supplied by its top four firms
Law of Supply
The quantity supplied of a good rises when the price of the good rises. vice versa.
Production Function
The relationship between the quantity of inputs vs the quantity of outputs
Cost Function
The relationship between the quantity of output produced and total cost of production.
Game theory
The study of how people behave in strategic situations
Market Demand
The sum of individual demands
Market Supply
The sum of individual supplies
Opportunity Cost
The value of the next best alternative to any activity. Think, "what you give up to get something."
Effects of perfect price discrimination
Total surplus in a monopoly = total surplus in a competitive market
An increase in tax causes a(n) ________________ in deadweight loss
increase
