Micro Final Exam quizlet

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Price Elasticity of Demand

% change in quantity demanded / % change in price

Critiques of Efficiency

- Distribution is important for equity - Willingness to pay - The means matter, not just the ends

Tax on Sellers

- Shifts the demand curve to the left - Higher marginal cost

Tax on Buyers

- Shifts the demand curve to the left - Lower willingness to pay

External Benefit

A benefit imposed on bystanders

External Cost

A cost imposed on bystanders

Sunk Costs

A cost that has been incurred and cannot be reversed

Focal Point

A cue from outside the game that helps you coordinate on a specific equilibrium

Coordination game

A game where all players have a common interest in coordinating their choices

Search Good

A good that you can easily evaluate before buying

Quota

A limit on the maximum quantity of a good that can be sold

Strategic plan

A list of instructions that describes how to respond to any possible situation

Natural Monopoly

A market where it is cheapest for a single business to sell to the market

Monopolistic Market

A market where there is only one seller. The seller has a lot of market power.

Oligopolistic Market

A market with a handful of large sellers. Each seller has some of the market power.

Price Ceilings

A maximum price that sellers can charge

Price Elasticity of Demand

A measure of how responsive buyers are to a price change

Income elasticity of demand

A measure of how responsive the demand for a good is to changes in income % change in quantity demanded / % change in income

Cross-price elasticity of demand

A measure of how responsive the demand of one good is to price changes of another % change in quantity demanded / % change in price of another good

Quantity Regulations

A minimum or maximum quantity that can be sold

Price Floor

A minimum price that sellers can charge

Subsidy

A payment made by the government for every sale someone makes

Quantity Discount

A per-unit price that is lower when you buy a larger quantity

Rival Good

A person's use affects others

Nonrivial Good

A person's use doesn't affect others

Binding Price Floor

A price floor that prevents the market from reaching the equilibrium price

Cap and Trade

A quantity regulation implemented by allocation a fixed number of permits

Mandate

A requirement to buy or sell a minimum amount of goods

Externality

A side effect of an activity that affects bystanders whose interests aren't taken into account

First mover advantage

A strategic gain from an anticipatory action that can force a rival to respond less aggressively

Payoff Table

A table that lists your choices in each row, lists other players choice in each columns, showing all possible outcomes

Corrective Tax

A tax designed to induce people to take account of the negative externalities they cause

Positive Externality

Activity whose side affects benefit bystanders.

Negative Externality

Activity whose side affects harm others

Informative Advertising

Advertising that informs potential customers about a product

Persuasive Advertising

Advertising that tries to persuade or manipulate you into believing you'll enjoy a particular product

Marginal Social Benefit

All marginal benefits

Marginal Social Cost

All marginal costs

Efficient Allocation

Allocating goods to create the largest surplus possible

Price Taker

An actor who charges the market price

Collusion

An agreement by rivals not to compete with each other but instead to charge high prices

Collusion

An agreement to limit competition

Nash Equilibrium

An equilibrium where the choice that each player makes is a best response to the choices other players are making

An interstate highway

An example of a public good would be

Moral Hazard

Behavior changes after a purchase is made

Statutory Burden

Being assigned a tax payment by the government

Rational Rule for Buyers

Buy more of an item if the marginal benefit is more than the price

Exchange

Buyers and sellers exchange money for goods

Group Pricing

Charging different prices to different groups of people

Perfect price discrimination

Charging each customer their reservation price

Interdependence Principle

Choices other businesses make affect your decisions

Non-price competition

Competing to win customers by differentiating your product

Price Competition

Competing to win customers by offering lower prices

Five Forces framework

Competition in your market that - reveals underlying source of profitability - shows potential threats to profitability

Average Cost

Cost per unit, calculated as total revenue divided by the quantity supplied

Variable Costs

Costs that change according to the quantity of output

Fixed Costs

Costs that stay the same (your paying it no matter what)

Elastic, Inelastic

Demand is ________ when elasticity is greater than 1. Demand is ______ when elasticity is less than 1.

Positive Analysis

Describes what is happening

Normative Analysis

Describes what should happen

Marginal External Cost

Distance between: Marginal private cost and Marginal social cost

Private information

Distorts what is bought and sold

Diminishing Marginal Benefit

Each additional item has a smaller marginal benefit than the item before it

Product Differentiation

Efforts by the sellers to make their products different from the competitors products

Cost Benefit Principle

Evaluating the full set of costs and benefits of any choice

Marginal Private Benefit

Extra benefit from one extra unit paid by the buyer

Marginal Private Cost

Extra cost from one extra unit paid by the seller

Marginal External Benefit

Extra external benefit from one extra unit

Anti-cooridnation games

Games in which you best response is to take a different, but complementary action to another player

Complementary Goods

Goods that go together Ex: If the price of good 1 decreases by 10 percent, the quantity demanded of good B increases by 8 percent, then goods A and B are likely to be

Substitute Goods

Goods that replace each other

Productivity Growth

Growth that occurs when businesses figure out how to produce more output with fewer inputs

Finitely repeated games

Having the same interaction a fixed number of times

Indefinitely repeated game

Having the same interaction an unknown number of times

Repeated game

Having the same interaction with the same rivals and payoffs

Willingness to pay

How much you value the good

Coase Theron

If bargaining is costless, property rights are established and enforced

Switching costs

Impediments that make it costly for customers to switch to buying from another business

One-shot game

Interaction that only occurs once

Strategic Interactions

Interactions that occur when YOUR best choices depend on what OTHERS choose, and when OTHER's choices depend on what YOU choose

Three Step Tax Evaluation

Is the supply curve or demand curve shifting? Is the shift an increase or decrease in taxes? How will prices and quantities change in the new equilibrium?

Reason Backward

Keep reasoning backwards until you can see all the consequences that follow from todays decision

Diminishing Marginal Product

Leads to rising marginal costs

Pay-for-Performance

Linking the income your workers earn to measures of their performance

Look forward

Looking forward to anticipate the likely consequences of your choices

Signal

Making you and your product look good (ex. a warranty)

Rational Rule for markets

Marginal Benefit = Marginal Cost

Perfectly Competitive Markets

Markets where - All businesses in an industry sell an identical good - There are many sellers and many buyers, each is small compared to the size of the market

Price elasticity of supply

Measures how responsive sellers are to price changes % change in quantity supplied / % change in price

Monopolistic Competition

Monopolistically Competitive markets are markets where many small businesses compete. They each sell differentiated products.

Common Resource

Nonexcludable and rival

Common resources

Nonexcludable and rival

Club Good

Nonrival and excludable

Public Goods

Nontrivial goods afflicted by the free-rider problem

Sellers of high quality goods may choose....

Not to sell

Barriers to entry

Obstacles that make it difficult for new firms to enter

Scarcity

Occurs when resources are limited

Hurdle Method

Offering lower prices only to buyers who are willing to overcome some hurdle or obstacle

Tragedy of the commons

Overuse of a common resource

Profit margin

Price - average cost

Rational Rule for Society

Produce more of a product as long as its marginal social benefit is at least as large as the marginal social cost

Efficient Production

Producing a given quantity at the lowest possible cost

Free Entry

Pushes economic profit down to 0 in the long run

Midpoint formula for quantity Midpoint Formula for price

Q2-Q1 / (Q2+Q1 / 2) P2-P1 / (P2+P1 / 2)

Average Revenue

Revenue per unit, calculated as total revenue divided by quantity supplied

Reduce the forces of competition.

Rules and regulations are often blunt instruments because they

Rational rule for exit

Says to exit the market if you expect to earn a negative economic profit. Negative economic profit occurs when price is less than average cost

Rational rule for entry

Says you should enter the market if you expect to earn a positive economic profit. Positive economic profit occurs when price exceeds average cost.

Adverse selection problems will arise when

Sellers have private information about the product

Price Discrimination

Selling the same product at different prices

Game Tree

Shows how a game plays out over time. The first move forms the trunk, the choice after that are the branches, and the final choices are the leaves, which show all possible outcomes

Private Bargaining

Side payments to solve externalities

Social Optimal

Social costs + social benefits

Grim Trigger Strategy

Strategy that punishes your rival for not responding

Consumer Surplus

Surplus you get from buying something

Producer Surplus

Surplus you get from selling something

Marginal Revenue (MR)

The addition to total revenue you get from selling one more unit

Second-mover advantage

The advantage that can follow from taking an action that adapts to your rival's choices

Economic Burden

The change in after-tax prices faced by buyers and sellers

Change in quantity demanded

The change in quantity associated with movement along a demand curve

Equilibrium Quantity

The demand when the market is in equilibrium

Tax Incidence

The division of the burden of a tax between buyers and sellers

Market Power

The extent too which a sellers can charge a higher price without losing sales to competing businesses

Deadweight Loss

The loss endured as a result of economic surplus falling below efficient outcome

Reservation price

The maximum price someone will pay for a product

Efficiency

The more surplus gained = the more efficient outcome

Movement along the demand curve

The movement from one point on a demand curve to another point on the same curve, caused by a price change

Socially Optimal

The outcome that is most efficient for society as a whole

Equilibrium

The point at which there is no tendency for change

Equilibrium Price

The price when the market is in equilibrium

Principle-agent problem

The problem that arises when a principal hires an agent to do something on their behalf, but the principle can't observe the agents choices

Law of Demand

The quantity demanded is higher when the price is lower

Firm Demand Curve

The quantity that buyers demand from an individual firm as the price changes

Efficient Quantity

The quantity that produces the largest surplus

Output Effect

The revenue increase from selling one more unit

Discount Effect

The revenue lost from decreasing he price on every unit sold

Buyers, sellers and bystanders

The socially optimal outcome is the most efficient outcome for

Adverse selection of BUYERS

The tendency for the mix of buyers to be skewed toward the more high-cost buyers when the sellers don't know the buyers types

Adverse selection of SELLERS

The tendency for the mix of goods to be skewed more towards the low quality goods when buyers can't observe quality

Total Revenue

The total amount you receive from buyers Price x Quantity

Opportunity Cost

The true cost of something and what you give up for it

Economic surplus

Total benefits - total costs

Surplus

Total benefits - total costs

Economic profit

Total profit when looking at financial and opportunity cost

Accounting Profit

Total revenue financial costs

The possible revenue from selling it's units

Under a cap-and-trade system, what is a firm's opportunity cost of producing harmful gases?

Next best alternative

Value of your next best option

Congestion Effect

When a good becomes less valuable because other people use it

Network Effect

When a good becomes more useful because other people use it

Private Bargining

When all interested parties are included, externalities can be removed through

Inferior Good

When higher income causes a decrease in demand

Normal Good

When higher income causes an increase in demand

Private Information

When one party knows something about a product that the other party does not know

Non-excludable

When people cannot easily be excluded from using a good

Free-Rider Problem

When someone can enjoy the benefits of a good without having to pay

Market Failure

When supply and demand lead to an inefficient outcome

Multiple Equilibria

When their is more than one equilibria

Sellers of low quality goods.....

Will choose to sell

Bargining power

Your ability to negotiate a better deal


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