Econ 1 Final

economic efficiency

- MB = MC -happens when the marginal benefit to consumers of the last unit produced is equal to the marginal cost to producers -happens at market equilibrium

ATC curve

-(P - ATC) x Q -P > ATC = positive profit -P < ATC = negative profit -P = ATC = zero profit (break even)

shortage

-Qs < Qd -suppliers are offering too little of their product to the market and the market will attempt to correct this issue -firms will increase prices without losing any sales

market equilibrium

-Qs = Qd -where quantity demanded is equal to quantity supplied -characterize this by the price and quantity at that point

surplus

-Qs > Qd -suppliers are offering too much of their product to the market and the market will attempt to correct this issue -firms will try to get rid of their inventory by slashing prices

prisoner's dilemma

-a game where each firm chooses the dominant strategy but it ends up leaving them worse off than if they cooperated -both firms could make more money than they make in equilibrium if they cooperate and charge $14.99 each -the problem is, if Apple charges $14.99 then Spotify can undercut them at $9.99 and earn even more money -cooperation can happen when the game is played more than once -repeated games in cooperative equilibrium, best interest of the firm to maintain cooperation -firms may implicitly collude by signaling what price they will charge to each other (ex. price match/lowest price guarantee, price leadership)

oligopoly

-a market structure with a few large firms -interdependent -4 firms concentration ratio: what part of an industry's sales comes from the top 4 firms -we can't use demand curves for this type of market and instead we use game theory

utility

-a measure of the individual satisfaction, enjoyment (happiness) you receive from a good, service, action, etc. -consumers like to spend their budget as best as they can so as to maximize their ____

collusion

-agreement by firms to charge the same price/not compute -illegal

perfect competition

-all firms sell identical products -no barriers to entry -firms are price takers (can't set their own prices) -they will make 0 economic profit in the long run -each firm is so small compared to the market that any changes in their supply do not shift the market supply curve at all (they decide the best output level) -choose the level of production that makes the difference between revenues and costs largest -P = MC -if firms are making profits, more firms will enter (and vice versa) -in the long run firms will break even -economic efficient, economic surplus is maximized

law of demand

-ceteris paribus -when the price of a product falls, the quantity demanded will increase (vice versa) P ^ Qd down and P down Qd^ -inverse relationship between price and quantity -makes sense because if price is higher you are less likely to buy more -consumer behaviors + decisions = ________

marginal product of labor

-change in Q/change in labor -additional output produced by another worker

perfect price discrimination

-charge every single customer a different price -their willingness to pay -only works if you can identify this number, and prevent resale -no consumer surplus -profits increase, consumer surplus decreases -no deadweight loss -charging different prices by groups extracts some consumer surplus as profit, but not all -elasticity

price discrimination

-charging different prices to different customers for the same product -different prices are not because of variations in cost -requires market power -occurs when some customers have a higher willingness to pay than others- and you know which ones these are -happens when resale is impossible -the inelastic group gets charged the higher price -the elastic group gets charged the lower price -ex. student pricing, airline tickets

indifferent curves

-curves that show different combinations of goods that give a consumer the same level of utility -higher curves = higher utility -they can NEVER EVER CROSS! -slope of the ____: marginal rate of substitution (MRS), the rate that the consumer will trade off one good for another -the MRS changes!

solving externalities

-doesn't necessarily mean getting rid of all pollution -whoever benefits from pollution reduction can pay the polluters an amount equal to the costs of reducing pollution -total benefits of reduction- costs of reduction (paid to polluters) = Net benefit to society

externalities

-external cost or benefit of your actions that you don't incorporate in decisions -your consumption or production results in costs or benefits that don't affect you directly -still make decisions using MB = MC -the market won't be able to achieve efficient outcomes in the face of externalities -deadweight loss results

cartels

-firms that collude by agreeing to restrict output to increase prices and profit -ex. OPEC

shut down point

-happens when P falls below AVC -when a firm can't cover all variable costs or any of the fixed costs -if price is above AVC, the firm can pay for all of its fixed costs and a portion of it's variable costs -P < AVC --> ______

budget constraint

-illustrates the amount of income available -slope: -Px/Py -increase in income = new ___ and new optimal point

positive externality

-in consumption: there are some benefits of consumption that don't impact the consumer directly -ex. college graduates may benefit society -private benefits: higher paying jobs, knowledge, etc. -social benefits: private benefits AND more informed voters, innovators, etc.

negative externalities

-in production: there are some costs of production that don't impact the producer directly -ex. pollution from a factory producing shoes -private costs: leather for the shoes, labor costs, etc. -social costs: private costs AND polluted air, river

game theory

-incorporates profit maximization while also thinking about other firms in the industry -since firms are large relative to the market this is crucial to determining profitability for a given firm -rules: laws, production function, etc. -strategies: actions possible to maximize profit -payoffs: profit earned

monopolistic competition

-many buyers and sellers -barriers to entry low -not identical products, similar but differentiated -price makers, firms have market power -if a firm would like to sell more, they must decrease their price -if a firm would like to raise their price, they will sell less -P≠MR -P > MC -in the long run firms break even (as price is now equal to ATC) -use marketing and brand management to keep product differentiation alive -decrease in consumer surplus -increase in producer surplus -overall deadweight loss

law of diminishing marginal utility

-marginal utility decreases with each additional unit of a good or service (not total) -more and more bananas... less and less additional satisfaction/utility from each banana -this does NOT necessarily mean total utility went down

utility maximizing rule

-marginal utility per dollar spent should be equal for all goods -MUx/Px = MUy/Py

implicit cost

-non-monetary cost, opportunity cost -ex. I gave up having a wonderful time teaching you economics, so the foregone wages are an opportunity cost -so is the interest I lose from the money I take out of my bank account to start this business

comparative advantage

-producing at a lower cost -two people can produce the same product but if I can produce the same amount at a lower cost than my competitor than I have the comparative advantage

product efficiency

-production of a good/service at the lowest possible cost -in the long run, competitive forces push the price to the typical firm's minimum average cost (perfect competition) -firms work to lower costs to increase profits --> other firms copy their strategies --> prices drop and consumers benefit

Coase Theorem

-property rights don't matter in this bargaining! -if those who are harmed by pollution have the property rights to clean air, water, etc. the polluters have to pay them for the right to pollute -if the polluters have the right to pollute/property rights, those harmed by pollution pay to reduce it -coase: if transaction costs are low, private bargaining will result in an efficient solution to an externality problem

income effect

-purchasing power -normal vs. inferior good (Mercedes vs. Toyota)

substitution effect

-substitute one for another -prices of other (related goods) -Netflix and Hulu

unit elastic

-the change in quantity demanded is equal to the change in price -elasticity is equal to 1 (absolute value) -a 10% increase in price results in a 10% decrease in quantity demanded -consumers are proportionally sensitive to price -if Price ^ then there is no net effect on total revenue

inelastic

-the change in quantity demanded is less than the change in price -happens whenever the absolute value of elasticity is less than 1 -if price increases by 10%, this product's quantity demanded will fall by 5% -the steeper curve -consumers are not as sensitive to price -if Price ^ then total revenue ^

elasticity

-the change in quantity demanded is more than the change in price -greater than 1 (absolute value), such as 3 -in that case a 10% price increase results in a 30% drop in quantity demanded -consumers are very sensitive to price -if Price ^ then total revenue drops -the flatter curve -more substitutes

output effect

-the firms sell more -good for the firm!

marginal benefit

-the highest price the consumer if willing to pay for the good -depicted by the demand curve

marginal cost

-the lowest price the firm is willing to sell the good for -depicted by the supply curve

price effect

-they had to lower the price to sell more -bad for the firm

market failure

-when the market doesn't function the way it "should" resulting in the wrong allocation of goods -not efficient

law of supply

-when the price of a product falls, the quantity supplied will decrease (vice versa) -direct relationship between price and quantity -firms make more money the higher the price they can sell their product for so, the higher the price, the higher the quantity supplied

5 competitive forces model

1. threat of new entrants 2. bargaining power of customers 3. threat of substitutes 4. bargaining power of suppliers 5. competitive rivalry within an industry

profit on the graph

1. use MC = MR to identify the profit-maximizing quantity 2. draw a vertical line at that quantity 3. the vertical line will hit the demand curve: this is the price 4. the vertical line will also hit the ATC curve: this is the average cost 5. the difference between price and average cost is the profit (or loss) per unit 6. total profit or loss is the rectangle with the per unit profit for its height (P-ATC) and equilibrium quantity for its length (Q*-Q)

average fixed cost

FC/Q

profit maximizing condition

MR = MC

total revenue

P x Q

average product of labor

Q/L -average output per worker

average total cost

Total cost/quantity

average variable cost

VC/Q

deterring entry

a firm makes a move to prevent new firms from choosing to enter in response

monopoly

a single seller, with no close substitutes -can have substitutes, but they should not be close -should be able to ignore the actions of these other firms -ignore the prices that other firms are charging -profits won't be competed away for monopolists!

Consumer incomes rises as a result of a booming economy. What will happen to the equilibrium price and quantity in the car market as a result? a. P and Q increase b. P increases, Q decreases c. P and Q decrease d. P decreases, Q increases

a. P and Q increase

Why would economists argue that the one page solution to global warming, a carbon tax, would work towards solving environmental issues? a. it corrects the price of fossil fuel use to include external social costs, leading to less of their use b. it corrects the price of fossil fuel use to include internal private costs, leading to more of their use c. it corrects the amount of taxes the richest citizens pay d. it corrects the mistakes politicians make

a. it corrects the price of fossil fuel use to include external social costs, leading to less of their use

What is an example of a fixed cost in 'manufacturing the song of the summer', such as Rihanna's "Man Down"? a. renting studios for the song writing camp b. the fee paid to the songwriters/producers if their song is picked c. paying the vocal producer d. advertising the song to different radio stations, iTunes, etc.

a. renting studios for the song writing camp

Rational ≠ right a. true b. false

a. true

economic profit

accounting profit - opportunity cost (implicit)

long run

all costs are variable

law of diminishing returns

at a certain point, adding more of a variable input such as labor to the same amount of a fixed input such as capital causes the marginal product of the variable input to decline

if productivity is down then...

average costs ^

if productivity is ^ then...

average costs are falling

in a monopolistically competitive market: a. P = MR b. P ≠ MR c. P = MC d. none of the above

b. P ≠ MR

In the market for peanut butter, what happens when a strike by jelly assembly line workers causes a shortage of jelly and therefore an increase in its price? Assume peanut butter and jelly are complementary goods. a. an increase in demand b. a decrease in demand c. an increase in quantity demanded d. a decrease in quantity demanded

b. a decrease in demand

A non-binding price floor means government has set: a. above market equilibrium, resulting in surplus b. below market equilibrium, which will not change the price in the market c. above market equilibrium, resulting in a shortage d. below market equilibrium, resulting in a surplus

b. below market equilibrium, which will not change the price in the market

Apple offers an educational discount to students and teachers, allowing these customers to pay lower prices than the general public for the same product. This an example of perfect price discrimination. a. true b. false

b. false

At the equilibrium in the labor market, MRP(L) = W. In this case, firms are not maximizing profits because they are paying workers exactly what they are worth to the business. a. true b. false

b. false

In the long run due to product differentiation, monopolistically competitive firms will be able to maintain their profits. a. true b. false

b. false

You have $10 to spend on apples and bananas. If you spend $6 on bananas, the marginal utility from the last banana you buy is 15. You spend the other $4 on apples so the last apple you buy also gives you marginal utility of 15. You have maximized your utility, given your budget constraint! a. true b. false

b. false

arbitrage

buying a product at a low price and reselling it at a higher price

The price of textbooks never stop rising. As a result you would expect: a. an increase in supply b. a decrease in supply c. an increase in quantity supplied d. a decrease in quantity supplied

c. an increase in quantity supplied

The Coca-Cola Company and PepsiCo were both founded in the 1890's. What are some of the reasons why I may have trouble trying to compete with them by opening my own beverage company? a. The long history of these companies has allowed them to achieve economies of scale/low costs, and therefore low prices, that I will struggle to compete with- forming a barrier to entry into this market b. Coca-Cola and Pepsi have convinced the market that they have access to a secret formula that I will never be able to use, forming a barrier to entry into this market c. both a and b

c. both a and b

Why don't regulators force natural monopolies to operate at efficient price levels? a. in most cases, the company would make a loss and therefore choose not to stay in business b. regulating prices at the break even level allows essential products to be provided while preventing prices from reaching excessively high monopoly levels c. both a and b

c. both a and b

For many students, expensive textbooks have a close substitute in online materials available to the public. This could result in a price elasticity of demand for the textbooks that is: a. relatively inelastic b. perfectly inelastic c. relatively elastic d. perfectly elastic

c. relatively elastic

When calculating elasticity, why is it more important to use percentage changes in the variables rather than absolute changes? a. to avoid calculating different values based on what start and end points you choose b. it is difficult to measure the absolute changes in price and quantity of a good c. to avoid calculating different values based on what units you use

c. to avoid calculating different values based on what units you use

marginal cost

change in TC/change in Q

The price of a luxury vacation to your favorite Caribbean island goes up from $5,000 to $9,000. In response fewer people take vacations, so tourist traffic to the island falls from 1 million visitors a year to 400,000 a year. Calculate the price elasticity of demand, using the midpoint formula. a. 2/3 b. -2/3 c. 3/2 d. -3/2

d. -3/2

In the market for expensive textbooks, the price of paper falls and at the same time more people start going to college and are required to purchase books. What will happen to the equilibrium price and quantity in this market? a. Q and P increase b. Q increases, P decreases c. Q increases, P stays the same d. Q increases, P unsure

d. Q increases, P unsure

Which of the following is an example of a variable cost? a. labor b. raw materials/inputs c. electricity to power the machines in your factory d. all of the above

d. all of the above

consumer surplus

difference between what consumers were willing to pay (the demand curve) and what they actually paid (equilibrium price)

producer surplus

difference between what firms were willing to sell for (supply curve) and what they actually sold for (equilibrium price)

Demand curves are straight lines. Along the entire curve: a. Price elasticity of demand is constant b. slope is constant c. price elasticity of demand is changing d. slope is changing e. both b and c

e. both b and c

nash equilibrium

each firm chooses the best strategy they can, given what the other firms are doing

allocative efficiency

goods/services produced up to the point where the last unit has a MB equal to its MC -price is the MB to the consumer

absolute advantage

highest quantity, can produce more

quantity demanded

how much will be demanded at a specific price point

quantity supplied

how much will be supplied at a certain price point

normal good

income effect is negative

inferior good

income effect is positive

scarcity

limited resources and unlimited wants

long run average cost curve

reflects the lowest possible cost for a given amount of output due to this flexibility

demand

relationship between price and quantity for all prices

supply

relationship between price and quantity for all prices

accounting profit

revenues - all the explicit costs

short run

some costs are fixed

dominant strategy

the best strategy for the firm to pursue, no matter what the other firm does

marginal utility

the extra utility you receive from that next slice of pizza or next beer

profit

total revenues - total cost

total cost

variable costs + fixed costs

decrease units sold

when MR < MC

increase units sold

when MR > MC

profit maximization quantity

where MR = MC