econ 2 study guide
Suppose that Gigantic Company is increasing in size. As Gigantic Company grows, they are able to buy inputs in bulk, resulting in lower input prices. It is likely that continued growth will result in:
economies of scale.
The individual supply curve is positively sloped because a higher price
encourages a firm to increase its output by purchasing more materials and hiring more workers.
The observation that people tend to value something more highly when they own it than when they don't is called the
endowment effect.
the total burden of the tax
exceeds the revenue generated by the tax shifted onto consumers bc the price of the good increases shifted onto input suppliers bc they receive a decrease in price and in quantity
network externalities
exist when the value of a product to a consumer increases with the number of other consumers who use it.
To deter entry, a monopolist can simply threaten that if a second firm enters, the monopolist will cut its price to the average cost
false
oligopoly industries
firms are interdependent, and thus, firms act strategically.
bowed-out ppf
give up more and more of 1 good as we produce more of the other good = increasing marginal opportunity cost. Some resources are better suited for the production of one of the goods (= specialized resources) implies increasing opportunity cost
A perfectly competitive firm has a ________ demand curve, whereas a monopolistic competitive firm has a ________ demand curve.
horizontal; downward sloping
tax incidence
how the burden of the tax is distributed between buyer and producer
If we are on the lower portion of a linear demand curve, an increase in price will _______________ total revenue.
increase
Suppose demand is inelastic and the price increases. Total revenue will
increase
demand shifts
increase demand, therefore increase price and quantity
supply shifts
increase supply, therefore increase quantity and decrease price
At a natural monopolist's current level of output, marginal revenue exceeds marginal cost. The firm should ______________ its output and _____________ its price.
increase; decrease
the market equilibrium
maximizes the total surplus of the market because it guarantees that all mutually beneficial transactions will happen.
The production possibilities frontier shows the ________ combinations of two products that may be produced in a particular time period with available resources.
maximum attainable
We can use ____________________ analysis to determine how well the government performs its roles in the market economy and explore the trade-offs associated with various public policies.
microeconomic
Which of the following is not a factor of production?
money
Compare monopolistic competitive firm with perfect competitive firm (Graphs):
monopolistic competitive firm still charges a higher price (not as high as the monopolist) and has lower output compared to the perfectly competitive firm.
reasons why monopolies exist
natural monopoly (ATC decreases as the scale of production increases), firm has control of the key resource, government created monopolies (patent, copyright)
The income effect of an increase in the price of salmon
refers to the effect on a consumer's purchasing power which causes the consumer to buy less salmon, holding all other factors constant.
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
consumer surplus
the amount a customer is willing to pay for a product minus the amount the consumer actually pays
The most important determinant of the price elasticity of demand for a good is
the availability of substitutes for the good.
A decrease in demand occurs when
the demand curve shifts left because a variable other than the price of the product changed.
Atlantic Coffee has recently decided to raise its prices by 10%. It was shocked by its customers' reaction to the price increase when sales dropped 24%. Such a sharp drop in sales occurred because
the demand for a specific brand of coffee is highly elastic.
deadweight loss from taxation
the difference between the total burden of a tax and the amount of revenue collected by the government also excess burden of tax
private cost of production
the production cost borne by a producer which typically includes the costs of labor, capital, and materials
Refer to the diagram to the right which shows various points on three different production possibilities frontiers for a nation. A movement from X to Y
could occur because of an influx of immigrant labor.
The harmattan (dry wind) _____________ the supply of cocoa from West Africa and _______________ the world price of cocoa.
decreases; increases
Suppose your expenses for this term are as follows: tuition: $10,000, room and board: $6,000, books and other educational supplies: $1,000. Further, during the term, you can only work partminustime and earn $8,000 instead of your fullminustime salary of $20,000. What is the opportunity cost of going to college this term, assuming that your room and board expenses would be the same even if you did not go to college?
$23000
In the short run, the marginal cost of the first unit of output is $20, the average variable cost of producing three units of output is $16, and the marginal cost of producing the second unit of output is $16. What is the marginal cost of producing the third unit of output?
$12
A gamer is excited to buy the next edition of "Elder Scrolls" and has saved up $45 to buy the game. When the gamer gets to the store, she is excited to learn that the game is on sale for $25. The gamer's consumer surplus is
$20
Table 8.3 presents the cost schedule for Candy's Cakes. If Candy produces two cakes, Candy's marginal cost is:
$20
Advertising for eyeglasses ___________ the price of eyeglasses because advertising promotes ___________
decreases; price competition
The deadweight loss from monopoly is shown graphically by the area between the
demand and supply curves from the equilibrium quantity to the quantity supplied.
graph/model for monopolist
demand curve is downward sloping and MR is below demand curve
The prisoners' dilemma is that each prisoner would be better off if both prisoners _________________, but both end up _____________
do not confess; confessing
Increased specialization in large firms might lead to:
downward-sloping long-run average cost curves.
In the short run, the marginal cost of the first unit of output is $20, the marginal cost of producing the second unit of output is $16, and the marginal cost of producing the third unit of output is $12. The firm's total variable cost of producing three units of output is:
$48
Suppose you currently live and work in Cleveland, earning a salary of $60 comma 000 per year and spending $15 comma 000 for housing. You just heard that you will be transferred to a city in California where housing is 50 percent more expensive. In negotiating a new salary, your objective is to keep your real income constant.
$67500
A long-run equilibrium in a monopolistically competitive market satisfies the following two conditions:
(1) marginal revenue equals marginal cost (2) average cost equals price
Shown at right is the demand for Polly's Popcorn. Using the midpoint formula, the price elasticity of demand between point 'a' and point 'b' is
.43
A newspaper story on the effect of higher milk prices on the market for ice cream contained the following: "As a result [of the increase in milk prices], retail prices for ice cream are up 4 percent from last year. . . . And ice cream consumption is down 3 percent." Source: John Curran, "Ice Cream, They Scream: Milk Fat Costs Drive Up Ice Cream Prices," Associated Press, July 23, 2001. Based on the information given, what is the price elasticity of demand for ice cream?
0.75
A market is considered unconcentrated if the Herfindahl-Hirschman Index (HHI) is below ____________; it is considered highly concentrated if the Herfindahl-Hirschman Index (HHI) is above ____________
1000; 1800
Refer to Table 8.1, which gives a firm's production function. Assume that all nonminuslabor inputs are fixed. The marginal product of the fourth worker is:
11 units
The following table shows the quantities of corn supplied and demanded at different price levels. a. 1.) Use the line drawing tool to draw and label the demand line given the information in the table above. 2.) Use the line drawing tool to draw and label the supply line given the information in the table above.. Carefully follow the instructions above, and only draw the required objects. b. The equilibrium price of corn is $ _______ , and the equilibrium quantity is _______ tons. (Enter your responses as integers.) c. At a price of $170, there is excess __________ equal to ________ tons. (Enter your response as an integer.)
160; 100; supply; 30
Sherman Antitrust Act
1890 law banning any trust that restrained interstate trade or commerce. Made it illegal to monopolize a market or to restrain trade.
The price elasticity of demand for Stork ice - cream is minus 4. Suppose you're told that following a price increase, quantity demanded fell by 10 percent. What was the percentage change in price that brought this about?
2.5 percent
You are willing to pay $4 comma 000 to have your house painted, and Tim's marginal cost of painting a house is $2 comma 800. If you and Tim agree to split the difference, the price is $__________ (enter your response as an integer), your consumer surplus is $___________ (enter your response as an integer), and Tim's producer surplus is $_________
3400; 600; 600
The city of Bookburg initially allows only one bookstore, which sells books at a price of $20 and an average cost of $11. Suppose the city eliminates its restrictions on bookstores, allowing additional stores to enter the market. According to an expert in the book market, "Each additional bookstore will decrease the price of books by $2 per book and increase the average cost of selling books by $1 per book." The equilibrium number of bookstores is ____ stores.
4 stores
Gasoline Price Controls. The equilibrium price of gasoline is $3.00 and the equilibrium quantity is 100 million gallons. Suppose the government sets a maximum price of $2.80. (For producers, each $0.01 increase in price increases quantity supplied by 3 million gallons.) a. 1.) Use the line drawing tool to show the maximum price. Label this line 'Price Max'. 2.) Use the point drawing tool to indicate the quantity supplied under the maximum price and label that point 'b'. Carefully follow the instructions above, and only draw the required objects. b. At a price of $2.80, quantity supplied of gasoline will be ___________ million gallons.
40
The average cost for providing off-street parking is $25 per space per day, and as a monopolist you could charge $40 per space per day for 200 spaces. The maximum amount that you are willing to pay for a monopoly is $_____ per day.
40-25 x 200 = 3000
If a consumer receives 20 units of utility from consuming two candy bars, and 25 units of utility from consuming three candy bars, the marginal utility of the third candy bar is
5 utility units.
For Quigley, the opportunity cost of producing 1 financial statement is _____ tax return(s) and the opportunity cost of producing 1 tax return is _____ financial statement(s). For Slokum, the opportunity cost of producing 1 financial statement is ___ tax return(s) and the opportunity cost of producing 1 tax return is ____ financial statement(s). Quigley has a comparative advantage in ____________ , while Slokum has a comparative advantage in __________________
6; .17; 1; 1; tax returns; financial statements
In the figure to the right, Bea's producer surplus is $____, compared to Dee's producer surplus which is $_____. Bea's producer surplus is ___________ than Dee's because Dee has a ___________ marginal cost of production.
6; 2; greater; higher
duopolists' dilemma
A situation in which both firms in a market would be better off if both chose the high price, but each chooses the low price. (prisoner's dilemma)
grim trigger strategy
A strategy where a firm responds to underpricing by choosing a price so low that each firm makes zero economic profit When Jack underprices Jill, she drops her price to a level at which they will both make zero economic profits forever (his action triggers the grim consequences).
food additives (price fixing case)
An employee of Archer Daniels Midland (ADM) provided videotapes of executives scheming to fix prices. ADM pleaded guilty and was fined $100 million.
tie-in sales
An illegal practice in which the purchase of an additional product is mandatory
The table to the right shows the output per month of two people, Fred and Barney. They can either devote their time to making pogo sticks or making unicycles. Which of the following statements is true?
Barney has an absolute advantage in making both products.
What is the economist's solution to the congestion problem?
Charge a toll during rush hour.
oligopoly occurs for three reasons
Government barriers to entry Economies of scale in production Advertising campaigns
Graph / Model for the monopolistic competitive firm in the long run (firms enter and compete profits away)
Economic profit = 0 (P=ATC), D-curve more elastic, firm does not produce at minimum ATC and has excess capacity Therefore inefficiency exists, which is noticeable in dead weight loss on the graph.
A monopoly is inefficient solely because the monopolist gets a profit at the expense of consumers.
False
Sergio Vignetto raises cattle and llamas on his land. A portion of his land is more suitable for raising cattle, and the other portion is better suited for raising llamas. Which of the graphs represent his production possibilities frontier?
Graph C
Consider a state that initially has a single casino for gambling. Suppose the state allows a second casino to enter the market. How would you expect the entry of the second casino to affect (a) the variety of games offered in the casinos and (b) the payout (winnings) per dollar spent?
Greater variety of games; increased payout per dollar spent.
Consider the following statement from a firm that has proposed a merger between two companies: "The two companies could save about $50 million per year by combining our production, marketing, and administrative operations. In other words, we could realize substantial economies of scale. Therefore, the government should allow the merger." In light of the new guidelines concerning mergers, how would you react to this statement?
If the evidence for greater efficiency is convincing, the government might allow a merger that reduces the number of firms in a market.
welfare cost of monopoly
In contrast to a competitive firm, the monopoly charges a price above the marginal cost. From the standpoint of consumers, this high price makes monopoly undesirable. However, from the standpoint of the owners of the firm, the high price makes monopoly very desirable. consumer surplus will decrease. there will be dead weight loss.
differentiation by location
In some monopolistically competitive markets, the source of the differentiation is simply the location. Firms sell the same product at different locations.
Which of the following statements about the price elasticity of demand along a downward-sloping linear demand curve is true?
It is elastic at high prices and inelastic at low prices.
For each bottle of wine that Italy produces, it gives up the opportunity to make 10 pounds of cheese. France can produce 1 bottle of wine for every 25 pounds of cheese it produces. Which of the following is true about the comparative advantage between the two countries?
Italy has the comparative advantage in wine.
Duopoly price strategy
Jill prices high until Jack underprices her. She then picks the duopoly price for the lifetime of her firm.
The marginal cost of an additional baseball fan is zero, so the profit-maximizing condition simplifies to
MR=0
how to determine the profit maximizing output decision
MR=MC
Suppose you own a bookstore. You believe that you can sell 40 copies per day of the latest John Grisham novel when the price is $35. You consider lowering the price to $25 and believe this will increase the quantity sold to 50 books per day. Compute the price elasticity of demand using the midpoint formula and these data. Select the correct implication from your work
The demand for the John Grisham book is inelastic. Revenue will fall if the price is lowered.
Clayton Act
Outlawed specific practices (tying contracts, price discrimination for the purpose of reducing competition, and stock-purchase mergers that substantially reduce competition).
Why might pollution from a paper mill be an example of a market failure?
People living downwind of the mill bear part of the cost of production.
In an attempt to encourage a healthy society, the government is making soft drink manufacturers pay a tax for every bottle or can of soda they produce. What will be the effect on the market for soft drinks?
Supply falls and equilibrium price increases.
carton-board pricing in europe (price fixing case)
The European Union Commission fined 19 manufacturers of carton board a total of 132 million euros ($165 million) for operating a cartel that fixed prices.
Outsourcing _________ production costs and ______________ consumer prices.
decreases; decreases
infant formula (price fixing case)
The three major producers of infant formula paid a total of $200 million to wholesalers and retailers to settle lawsuits claiming that they had conspired to fix prices.
GE and Westinghouse (price fixing case)
The two firms were convicted of fixing prices for electrical generators, resulting in fines of over $2 million and imprisonment or probation for 30 executives.
Which of the following is likely to occur as the result of the law of diminishing marginal utility?
Wesley enjoyed his second bottle of iced tea less than his first bottle, other things constant.
Under a price-leadership model, a sudden drop in price by the leader is unlikely to trigger a price war if other firms believe that the price cut was caused by
a change in consumer demand
external cost of production
a cost incurred by someone other than the producer
a simultaneous decrease in demand and supply causes
a decrease in quantity, but the effect on the price depends on the relative size of the shifts
inferior good
a good for which an increase in income decreases demand a "second best" good, so when income increases we can afford the better quality good and demand for the inferior good decreases increases income decreases demand
normal good
a good for which an increase in income increases demand we "like" the good and when income decresaes we consumer more of it increases income increases demand
game tree
a graphical representation of the consequence of different actions in a strategic setting.
cartel
a group of firms that act in unison, coordinating their prices and quantity decisions, choose the monopoly price and quantity
A small, one-unit change in value is called
a marginal change
monopolistic competition
a market served by many firms that sell slightly different products. Each firm has a narrowly defined monopoly. However, since the products produced are close substitutes for each other, there is avid competition between firms. There are no barriers to entry. Firms do not act strategically (no price fixing).
Monopoly
a market structure in which a single firm sells a product that does not have any close substitutes.
oligopoly
a market structure in which only a few sellers offer similar or identical products. a market served by a few firms. few firms have market power.
natural monopoly
a market that runs most efficiently when one large firm supplies all of the output. a market in which the economies of scale in production are so large that only a single large firm can earn a profit.
price ceiling
a max price set by the government decreases with a price below the equilibrium price
deadweight loss
a measure of the inefficiency from monopoly; equal to the decrease in consumer surplus associated with the monopoly market.
price elasticity of demand
a measure of the responsiveness of the quantity demanded to changes in price
price floor
a min price set by the government decreases with a price above the equilibrium price
negative externalities
a negative impact that occurs on a third party
merger
a process in which two or more firms combine their operations. Mergers could reduce competition and lead to higher prices. Mergers are allowed where there is evidence of cost savings, better products, or improved service, even if there are some possible anticompetitive effects.
low-price guarantee
a promise to match a lower price of a competitor. Under pricing is no longer possible, so the temptation to cheat is eliminated. Price-matching policies, while often perceived as advantageous to consumers, may actually guarantee that the consumer will very rarely receive a low price.
tit-for-tat strategy
a repeated game strategy in which a player responds in kind to an opponent's play a strategy where one firm chooses whatever price the other firm chose in the preceding period. Jill picks whatever price Jack picked last. To restore cartel pricing, Jack must eventually price high, allowing Jill to underprice him for one period.
oligopoly markets
a small number of firms sell most or all of the industry output.
payoff matrix
a table that shows the payoffs that each firm earns from every combination of strategies by the firms a matrix or table that shows, for each possible outcome of a game, the consequences for each player. The payoff matrix is an alternative way to represent a price-fixing game.
pollution tax
a tax or charge equal to the external cost per unit of pollution
A natural monopoly occurs when the long-run average cost curve lies entirely ______________ the demand curve of the typical firm in a two-firm market.
above
dominant strategy
an action that is the best choice for a player, no matter what the other player does.
price fixing
an arrangement in which firms conspire to fix prices.
trust
an arrangement under which the owners of several companies transfer their decision-making powers to a small group of trustees (e.g., the Standard Oil Trust of 1882, in which the owners of 40 companies empowered nine trustees to act for them), forming a virtual monopoly.
For firms with a low-price guarantee, the promise of matching a lower price is ___________ promise, because all firms will charge the same _________ price.
an empty; high
If tolls on a toll road can be raised significantly before commuters will consider using a free alternative, then an increase in tolls will result in
an increase in total revenue
nash equilibrium
an outcome of a game in which each player is doing the best he or she can, given the action of the other player.
The production possibilities curve illustrates the notion of opportunity cost because
as more of one good is produced, less of the other can be produced.
excess demand (shortage)
at the prevailing price, the quantity demanded exceeds the quantity supplied (demand > supply) the price will tend to increase, causing the quantity demanded to decrease and the quantity supplied to increase decrease excess demand, CAUSES PRICE TO RISE
excess supply (surplus)
at the prevailing price, the quantity supplied exceeds the quantity demanded (supply > demand) the price will tend to decrease, causing the quantity demanded to increase and the quantity supplied to decrease decrease excess supply, CAUSES PRICE TO DROP
The trade-off with entry is that an increase in the number of firms leads to higher ______________, but greater _______________
average production costs; variety
A firm that is losing money should continue to operate in the short run if the market price exceeds
average variable cost
Suppose a country has a comparative advantage in shirts but not computer chips. Workers in the shirt industry will be _______ with trade
better off
Consider a good whose consumption takes place publicly. Your decision to buy that good depends
both on the characteristics of the product and on how many other people are buying the good.
There are three types of antitrust policies:
breaking up monopolies, blocking mergers, and regulating business practices.
advertising for product differentiation
can be used for these purposes: To give information about a product. Evidence shows that advertising increases price competition. To differentiate a product.
When there is a nonlinear relationship between two variables, the slope will
change as we move along the curve.
formula for marginal revenue
change in total revenue (TR) / change in quantity output (Q) Suppose, a firm is selling 2 units of a good for $12 but can sell 3 units for $10. Total Revenue = 2 x $12 = 24 New total revenue = 3 x $10 = $30 Therefore the change in total revenue of producing 1 more unit = $30 - $24 = $6 Now: divide the change in total revenue by the change in Q (which in this case is 1) MR = 6 / 1 = $6. Using the Marginal Principle: The monopolist selects the quantity at which marginal revenue equals marginal cost and chooses the price at the point corresponding to that quantity on the demand curve.
Specialization and exchange result from differences in productivity that lead to __________ advantage
comparative
different consumer groups
consumers must have different willingness to pay, and firms must be able to identify the different consumers.
In 1990, the average income for an American worker was $1,518 per month. In 2000, the average income for an American worker was $2,632 per month. During this time period, a basket of necessities (food, housing, etc.) increased from $657 per month in 1990 to $1,402 per month in 2000. The real value of income _______________ over that 10-year period.
decreased
An excess demand for a product will cause the price to ______________. As a consequence of the price change, the quantity demanded will ______________ and the quantity supplied will ___________. Referring to the diagram to the right, at the current market price 'PMarket' of $3, there is an excess demand of ________ thousand pizzas per month.
increase; decrease; increase; 36
Public versus Private Colleges. Consider the market for private college education. If tuition at public colleges increases, what will happen in the market for private college education? Use the line drawing tool to show the market effect of this change. Properly label this line. Carefully follow the instructions above, and only draw the required objects. As a result, the equilibrium price of private colleges will _____________ and the equilibrium quantity demanded for private education will ______________ .
increase; increase
As the quantity produced by a monopolist increases, the gap between the marginal revenue curve and demand curve
increases
As the minimum entry quantity decreases, the entry-deterring quantity _________________ , the limit price ___________________ , and the profit from the entry-deterrence strategy __________________ .
increases; decreases; decreases
If we move from the duopoly outcome to the cartel outcome, the price _________ , the quantity per firm _____________ , and the profit per firm _______________ .
increases; decreases; increases
A production possibilities frontier with a bowed-outward shape indicates
increasing opportunity costs as more and more of one good is produced.
If tolls on a toll road can be raised significantly before commuters will consider using a free alternative, demand for using the toll road must be
inelastic
elasticity of demand is negative for
inferior goods for income; complementary goods for cross price
Total utility
is equal to the sum of the marginal utilities of all units consumed.
The difference between a nominal value and a real value is that a nominal value
is the face value of money and a real value expresses its actual buying power.
Refer to the diagram to the right which shows various points on three different production possibilities frontiers for a nation. A movement from Y to Z
is the result of advancements in plastic production technology.
If the price elasticity of demand for canned soup is estimated at -1.62. What happens to sales revenue if the price of canned soup rises?
it falls
The entry of a second firm shifts the firm-specific demand curve of the first firm to the
left
For a monopolist, marginal revenue is _______ than price.
less
If the production possibilities frontier is ________, then opportunity costs are constant as more of one good is produced.
linear
characteristics of monopolistic competition
many sellers, differentiated products, no barriers to entry
You want to determine the profit-maximizing quantity for a monopolist. You can ask the firm's accountant to draw the firm's revenue and costs curves, but each curve will cost you $1,000. From the following list, indicate which curves you will request: average total cost, average fixed cost, average variable cost, marginal cost, demand, marginal revenue.
marginal revenue and marginal cost
A monopoly that cuts its price gains revenue from its ________ customers but loses revenue from its ________ customers.
new; previous
elasticity of demand is positive for
normal goods for income, substitute goods for cross price
____________________ questions study the concept of what ought to be. ___________________ questions study the concept of what is. A 22-year old student is asking a __________ question when she considers the opportunities opened after she finishes graduate school. The decision of whether government should provide forgiveness for student loan debt is a __________ question.
normative; Positive; positive; normative
advertiser's dilemma
occurs when advertising causes a relatively small increase in total sales in an industry but allows the firm that chooses to advertise to gain market share at the expense of firms that do not.
Oligopolies occur for three reasons: (1) the government may limit the number of firms in a market by granting _______________________ or limiting the number of ________________________ ; (2) large economies of ________________________ ; and (3) to get a foothold in the market, large expenditures on ___________________ are required.
patents; business licenses; scale in production; advertising
Graph / Model for monopolistic competitive firm in the short run
positive economic profit (P>ATC), D-curve more inelastic
Robinson-Patman Act
prevents unfair price discrimination by ensuring that the seller offer the same price terms to customers at a given level of trade. Prohibited predatory ("unreasonably low") prices to reduce competition.
for an elastic demand
price increase when total revenue decreases price decreases when total revenue increases
for an inelastic demand
price increases when total revenue increases price decreases when total revenue decreases
social cost of production
private cost plus external cost
Facing stiff competition, a small liberal arts institution decided two years ago to bolster its academic offerings, promising students at least three hands-on experiences outside the classroom, including research, internships and service projects. Although it raised tuition and fees by 29 percent, enrollment in the freshman class rose by 25 percent. Based on the information above, the demand for this education is
relatively price inelastic.
Hart-Scott-Rodino Act
requires large companies to notify the government of their intent to merge. Extended antitrust legislation to proprietorships and partnerships.
The introduction of cognition into a consumer's choice between consumption now and saving shifts the ___________________________ curve upward, causing the marginal utility per dollar of _________________________ to exceed the marginal utility per dollar of __________________________
saving marginal benefit; saving; spending now
All decisions, and the trade-offs associated with them, embody an opportunity cost because of
scarcity
Which of the following does not expand economic growth?
scarcity
Which of the following is NOT considered a factor of production?
scarcity
The advertisers' dilemma occurs when advertising causes a relatively __________ increase in total sales of an industry.
small
equilibrium price increases when
social cost of production is taken into account
characteristics of monopoly
sole seller, unique product, barriers to entry, price maker
Refer to the diagram to the right. Point B is
technically efficient
market power
the ability of a firm to affect the price of its product.
Celler-Kefauver Act
the federal law of 1950 that amended the Clayton Act by prohibiting the acquisition of the assets of one firm by another firm when the effect would be less competition. Outlawed asset-purchase mergers that substantially reduce competition.
willingness to pay
the maximum amount that a buyer will pay for a good shown at each point of the demand curve
willingness to accept
the minimum amount a producer is willing to accept as payment for a product; equal to the marginal cost of production (= to marginal cost of production) shown by each point on the supply curve
the flatter the curve
the more elastic it is
four-firm concentration ratio
the percentage of output produced by the four largest firms. One rule of thumb suggests that if the four-firm concentration ratio is greater than 40 percent, the market can be considered to be an oligopoly.
concentration ratio
the percentage of the market output produced by the largest firms and is used to measure the degree of concentration in a market.
price discrimination
the practice of selling a good at different prices to different consumers.
producer surplus
the price a producer receives for the product minus the marginal cost of production
At the midpoint of the demand curve, in absolute value,
the price elasticity coefficient is one.
unit elastic demand
the price elasticity of demand is equal to one, so the percentage change in quantity is equal to the percentage change in price
elastic demand
the price elasticity of demand is greater than one, so the percentage change in quantity exceeds the percentage change in price
inelastic demand
the price elasticity of demand is less than one, so the percentage change in quantity is less than the percentage change in price
rent seeking
the process of using public policy to gain economic profit. wastes resources that could be used for some productive activity and can increase the deadweight loss to equal all the lost consumer surplus (since the net gain to the firm from having a monopoly will be zero if all profits are spent on rent seeking).
product differentiation
the process used by firms to distinguish their products from the products of competing firms. Product differentiation can come in the form of: Physical characteristics Location Services Aura or image
Consider a bicycle producer that initially employs 200 production workers and 10 customer-service workers. When the firm outsources its customer-service operation to India, the 10 customer-service workers lose their jobs. a. The net effect from outsourcing could be a loss of fewer than 10 jobs in the firm because: b. There will be a net gain in jobs in the firm if:
the savings may allow the firm to hire more production workers.; additional demand for bicycles creates a large boost in production.
limit pricing
the strategy of reducing the price to deter entry.
game theory
the study of decision making in strategic situations.
total surplus
the sum of consumer surplus and producer surplus
Refer to Figure 8.1, which shows a family of average cost curves. The average fixed cost at a given level of output is represented by:
the vertical distance between curve 1 and curve 2 at a given level of output.
demand is inelastic if
there are few substitutes; a short time passes; fraction of consumer budget is small; the product is a necessity
demand is elastic if
there are many substitutes; a long time passes; fraction of consumer budget is large; the product is a luxury
law of demand
there is a negative or inverse relationship between price and quantity demanded ceteris paribus increase in demand shifts curve to the LEFT
law of supply
there is a positive relationship between price and quantity supplied increase in supply shifts curve to the RIGHT
When a business asks how much its sales would increase if another employee is hired, it is considering which of the following?
thinking at the margin
Refer to the diagram to the right which shows the production possibilities frontier for Mendonca, an agrarian nation that produces two goods, meat and vegetables. What is the opportunity cost of one pound of vegetables?
three fourths pounds of meat
how to calculate profit
total revenue - total cost (price - average cost) x quantity
You sell your good in a perfectly competitive market where the market price is $33.00. When you sell 100 units your total revenue is $3,300. When you sell 101 units:
total revenue increases by exactly $33.
complements
two goods for which a decrease in the price of one good increases the demand for the other good increases price decreases demand
substitutes
two goods for which an increase in the price of one good increases the demand for the other good increase price increase demand
predatory pricing
when a firm sells a product at a price below its production costs to drive a rival out of business and then increases the price. However, unless new entry can be deterred, it is unlikely that predatory pricing schemes will be successful because the firm must lose money that it can only regain if it can raise prices later.
equilibrium price
when the quantity demanded equals the quantity supplied at the prevailing market price
If, when you consume another unit of a good, your marginal utility is zero, then
you have maximized your total utility from consuming the good.
Figure 9.1 shows the cost structure of a firm in a perfectly competitive market. If the market price is $40 and the firm is currently producing the profit maximizing output level, its total variable cost is:
$19,800.
Adam Smith listed three reasons for specialization to increase productivity. What are they?
Repetition, Continuity, and Innovation.
Accountants include ________ costs as part of a firm's costs, while economists include ________ costs
explicit; explicit and implicit
