Term
| What are the three coordination problems every society must solve? |
|
Definition
| The three coordination problems any economy must solve are what to produce, how to produce it, and for whom to produce it. In solving these problems, societies have found that there is a problem of scarcity. |
|
|
Term
| How would an economist make a decision? |
|
Definition
| Economic reasoning structures all questions in a cost/ benefit framework: If the marginal benefits of doing something exceed the marginal costs, do it. If the marginal costs exceed the marginal benefits, don't do it. |
|
|
Term
| What is not relevant to economic decision making? |
|
Definition
|
|
Term
| What is opportunity cost? |
|
Definition
| The opportunity cost of undertaking an activity is the benefit you might have gained from choosing the next-best alternative. |
|
|
Term
| What is the one thing that you should know as an economist? (hint: relates to cost) |
|
Definition
| Everything has a cost --> There ain't no such thing as a free lunch |
|
|
Term
| What are the three forces that affect economic reality? |
|
Definition
economic forces
political forces
social forces. |
|
|
Term
| How does the market allocate scare resources efficiently? |
|
Definition
| Through the price mechanism |
|
|
Term
| What is the difference between Microeconomics and Macroeconomics |
|
Definition
Economics can be divided into microeconomics and macroeconomics.
Microeconomics is the study of individual choice and how that choice is influenced by economic forces.
Macroeconomics is the study of the economy as a whole. It considers problems such as inflation, unemployment, business cycles, and growth. |
|
|
Term
| What is positive economics, normative economics, and the art of economics |
|
Definition
Positive economics is the study of what is
Normative economics is the study of what should be
The Art of Economics relates positive to normative economics and how they come together |
|
|
Term
| What are economic theories, models, and principles? |
|
Definition
Economic theories are generalizations that are insights into how economies work.
Theories may be embodied in economic models or economic principles.
Economic model – a framework that places the generalized insights of the theory in a more specific contextual setting.
Economic principle – a commonly held insight stated as a law or general assumption. |
|
|
Term
| How does the market efficiently ration? |
|
Definition
| through the price mechanism which is guided by the invisible hand |
|
|
Term
| What is economic efficiency? |
|
Definition
| Achieving a goal as cheaply as possible using as few inputs as possible |
|
|
Term
| What are economic instituitions? |
|
Definition
| Economic institutions are laws, common practices, and organizations in a certain society which affect the economy. These institutions sometimes act in a manner contrary to economic theory and they differ significantly among nations. |
|
|
Term
| What are economic policies? |
|
Definition
| Economic policies are actions (or inactions) taken by the government to influence the economy |
|
|
Term
| What does the Production Possibilities Curve Measure and what economic concept does it embody? (Hint: econ concept from chapter one) |
|
Definition
| The production possibility curve measures the maximum combination of outputs that can be obtained from a given number of inputs. It embodies the opportunity cost concept |
|
|
Term
| What is the principle of ever increasing marginal opportunity cost? |
|
Definition
| In general, in order to get more and more of something, we must give up ever-increasing quantities of something else. |
|
|
Term
|
Definition
| It allows people to use their comparative advantage and shift out their Productions Possibilities Curve. |
|
|
Term
| What do the different points on a PPC graph mean (i.e. inside, on, and outside)? |
|
Definition
| Points inside the production possibility curve are inefficient, points along the production possibility curve are efficient, and points outside are unattainable. |
|
|
Term
| What does having a comparative advantage mean? |
|
Definition
| It means having the lowest opportunity cost |
|
|
Term
| What does specialization in one's comparative advantage do? |
|
Definition
| It allows one to utilize the comparative advantage and make the most goods for trade. By doing this, a country can increase its consumption and shift the PPC out |
|
|
Term
| What is the outward bow of the PPC a result of? |
|
Definition
| Comparative advantage and trade. Also the principle of ever increase marginal opportunity. |
|
|
Term
| Recently the US has been outsourcing industrial jobs to places like India and China. What must the US do to maintain it's current wage rates? |
|
Definition
| The US needs to continue to be at the fore of technological innovation. The next possible field for the US is nanotechnology. If this does not happen adjustment of relative wage rates and exchange rates must occur. |
|
|
Term
| What is the Law of One Price and how can it affect a company's decision? |
|
Definition
| The Law of One Price states that the wages of workers in one country will not differ significantly from the wages of equal workers in another institutionally similar country. This can affect a company's decisions because outsourcing is a product of the law of one price and this law reflects companies' tenancy to shift production to countries where it is cheapest to produce. |
|
|
Term
|
Definition
| The increasing integration of economies, cultures, and institutions across the world. |
|
|
Term
| What are some things that would cause the PPC to shift out |
|
Definition
Increase in
Natural resources or capital
Technology
Productivity of Workers
Greater specialization and trade will also shift the curve |
|
|
Term
| Why do countries outsource? |
|
Definition
| Companies want to move their production to the lowest cost area. Therefore, they will move their production from higher wage countries to lower wage countries. As this happens, wages tend to equalize. |
|
|
Term
| What are the benefits and drawbacks of globalization? |
|
Definition
| The drawbacks of globalization are that domestic workers and companies who cannot compete with the foreign market might not survive. The benefits are that consumers end up with a better, lower priced product. The benefits typically outweigh the costs. |
|
|
Term
| What is a production possibilities curve |
|
Definition
A production possibilities curve illustrates opportunity cost by showing trade-offs among choices we make.
It measures the maximum number of outputs that can be achieved from a given number of inputs. |
|
|
Term
| How is the slope of the combined PPC found? |
|
Definition
| It is determined by the country with the lowest opportunity cost |
|
|
Term
| What is a market economy and how does it solve problems? |
|
Definition
| A market economy is a system based on private property and the market. It gives property rights to individuals and relies on the market to solve the three coordination problems; what, why, and for whom. |
|
|
Term
| In a market economy how are people's desires coordinated and goods rationed? |
|
Definition
| Desires and goods are coordinated and rationed through the price mechanism |
|
|
Term
| How does socialism solve the three coordination problems? |
|
Definition
| In principle, it solves the coordination problems in the best interest of all those in society. This is based the good will of others. |
|
|
Term
| What is a command economy? |
|
Definition
|
|
Term
| How is socialism done in practice? Hint: This is what would be known as a "step" to true communism/ socialism. |
|
Definition
| The government owns the means of production and economic activity is governed by central planning. |
|
|
Term
| Capitalism is...? (Hint: Traditional capitalism, rather than the mixed 'capitalism' we have today |
|
Definition
| A market based system in which the means of production resides with a small group of people called capitalists. |
|
|
Term
| Feudalism, mercantilism, and capitalism. Main differences, GO! |
|
Definition
| In feudalism, tradition rules; in mercantilism, the government rules; in capitalism, the market rules. |
|
|
Term
| Economic systems are in constant evolution. True or False |
|
Definition
|
|
Term
| Economics systems are isolated. True or False (also what are the main sectors in the US economy, how do they interact with each other if at all, |
|
Definition
| False. Economic systems are very connected. There are three main sectors in the US economy; households, businesses and government. Households supply labor to businesses and government in what is called the factors market. Businesses supply goods to households and government in the goods market. Government also taxes businesses and households and households and businesses provide goods The US economy is also connected to the world economy. |
|
|
Term
| In the US who makes the what, how, and for whom decisions? What is the corollary to this answer. |
|
Definition
| businesses. If businesses do not satisfy their customers, they will not succeed. That is called consumer sovereignty. |
|
|
Term
| What are the three main types of businesses and how are they different |
|
Definition
Corporation, partnership, sole proprietorship
Corporation: Business which is owned by stockholders but is treated as a person legally. Stockholders are not liable for what the 'person' does. It also has tax and legal advantages and it is easier to get funds. However it is a legal hassle to organize.
Partnership: Two or more owners, you can share the burden, but there is the possibility for unlimited liability.
Sole Proprietorship: Has only one owner and are very easy to start. There are few bureaucratic hassles
also see pg 61 for the advantages and disadvantages of various types of businesses |
|
|
Term
| What is the most powerful economic institution? |
|
Definition
| Households because they ultimately control both government and businesses. However consumers assign much of this power to representatives and businesses spend and inordinate amount of time telling us what we want. Households are mostly suppliers of labor. |
|
|
Term
| What are two government roles in the economy? And what are the six jobs or roles of government? |
|
Definition
referee (sets the rules that govern interaction between households and businesses
actor (collects and spends money)
1)provide for a stable set of institutions and rules
2) Promoting effective and workable competition
3) Correcting for externalities
4) Ensuring economic stability and growth
5) Providing Public Goods
6) Adjusting for undesirable market results |
|
|
Term
| What is a global corporation? |
|
Definition
| It is a corporation with substantial operations in more than one country |
|
|
Term
| What is one important difference between global and national economic issues? |
|
Definition
| National economies have governments to try to sort out their problems, global economies do not |
|
|
Term
| The Federal government's largest expenditure is on? |
|
Definition
|
|
Term
| What is one way the government can act as a referee? |
|
Definition
| When it alters the health and safety standards for an industry. |
|
|
Term
| What are some examples of international organizations which can help coordinate global issues |
|
Definition
UN
IMF
Group of Five
Group of Eight
World Bank |
|
|
Term
| What does the Law of Demand state? |
|
Definition
| As quantity demanded rises, demand falls all other things constant. i.e. demand and quantity demanded are inversely related and this is the reason the demand curve is downward sloping. |
|
|
Term
| What does the Law of Supply state? |
|
Definition
| That as the quantity supplied rises, the price rises. These are proportional and the reason the line is upward sloping. |
|
|
Term
| What are shift factors? What are some examples? |
|
Definition
| Shift factors are those factors, besides price, which affect supply and demand. Shift factors of demand can include income, taste, price of other goods, expectations, and taxes and subsidies to consumers. Shift Factors of supply can include the price of inputs, technology, expectations, and taxes and subsidies to suppliers |
|
|
Term
| On the graph, what is the difference between changes in quantity supplied/ demanded and changes in demand and supply? |
|
Definition
| Quantity Supplied/ demanded has to do with a price change and results in a movement along the curve while changes in supply and demand result from a shift factor and shift the entire curve |
|
|
Term
| Why is the law of supply and dEemand possible? How is it that people can survive without this or that good that may fall outside of the realm of possible payment? |
|
Definition
| People can substitute. Instead of the Rolex I get the Casio. |
|
|
Term
| What is the market supply curve a sum of? |
|
Definition
| It is the horizontal sum of all the individual supply curves |
|
|
Term
|
Definition
| It is where quantity supplied equals quantity demanded |
|
|
Term
| Is equalibrium likely to be where supply and demand meet when in the real world? |
|
Definition
| No, one must account for the social and legal forces; these forces will not normally allow the market to operate freely. |
|
|
Term
| What is the relationship between price and market quantity demanded? What two things accounts for this relationship? |
|
Definition
| As price rises, quantity demanded falls. Two things account for this: (1) as price rises, people substitute other goods for the goods whose price has risen and some individuals leave the market. Market demand curve slopes down because people can substitute and enter and exit the market. |
|
|
Term
| What is the fallacy of composition? |
|
Definition
| The belief that what is true for the part is also what is true for the whole. i.e. since those with higher income can buy more things, if everyone had higher income then everyone could buy more things. This is false because if everyone had more wealth then prices would just go up (think of inflation and how people are richer now than they were in the 50's but back then gas cost about 0.70 a gallon. |
|
|
Term
| The law of demand states that an increase in price, other things constant, |
|
Definition
| will decrease quantity demanded. |
|
|
Term
|
Definition
| It is a tax on a specific good |
|
|
Term
| What is the market for foreign exchange currency called? |
|
Definition
|
|
Term
| What is the exchange rate? |
|
Definition
| The price of one currency in terms of another. |
|
|
Term
| How are exchange rates determined? |
|
Definition
| By supply and demand. When one country wants to by another country's goods, country A needs to have country B's currency. When a country's goods are more desired, the price of its currency goes up. |
|
|
Term
| What is a Price Ceiling? A Price Floor? |
|
Definition
| A price ceiling is a government imposed limit on how high a price can be charged. A Price Floor is a government imposed limit on how low a price can be charged. |
|
|
Term
| What is a rent control? What does it do to the housing market? |
|
Definition
| A rent control is a government price ceiling. It generally causes a housing shortage |
|
|
Term
|
Definition
| It is a price floor set by the government to determine how low a wage can be paid. It causes a labor surplus. This helps those who are currently employed, but hurts those who can't find work anymore. |
|
|
Term
|
Definition
| A tax on an imported good |
|
|
Term
| What is a quantity restriction? |
|
Definition
| It is a restriction on the number of goods in a market (i.e. taxi medallions in (NYS). Because the supply cannot increase, any increase in demand will result only in an increase in price. |
|
|
Term
| What is a Third-Party Payer Market? |
|
Definition
| It is a market in which the person receiving a good (and generally deciding on quantity purchased) does not pay the full cost of the good. An example would be health care. Equilibrium quantity and spending in these markets are generally much higher. |
|
|
Term
| What is Elasticity and what does it measure? |
|
Definition
| Elasticity measures the change in quantity in relation to a change in price (i.e. small paperbacks go from $7 to $15, how much does that affect the quantity traded?) ------- The FORMULA is % change in quantity demanded or supplied/ % change in price |
|
|
Term
| Elasticity of Supply formula |
|
Definition
| % change in quantity supplied/ % change in price |
|
|
Term
| Elasticity of Demand Formula |
|
Definition
| % change in quantity demanded/ % change in price |
|
|
Term
| Why is elasticity a better descriptor than slope? |
|
Definition
| Because elasticity is independent of units of measure |
|
|
Term
| What are the five elasticity terms? (i.e. at what point is something inelastic or elastic) |
|
Definition
Elastic > 1
Inelastic < 1
unit elastic = 1
Perfectly inelastic = 0
Perfectly elastic = infinity |
|
|
Term
| The more substitutes a good has... |
|
Definition
| ... the greater its elasticity |
|
|
Term
| What are the major factors affecting the number of substitutes a good has? |
|
Definition
1) The Time Period Being Considered
2) The Degree to Which the Good is a Luxury
3) The Market Definition (more specificity equals less elastic (i.e. bananas to food))
4) The Importance of the Good in One's Budget (large proportion equals more elastic) |
|
|
Term
| The more substitutes a good has... |
|
Definition
| ... the greater its elasticity |
|
|
Term
| Does elasticity change as you move down a straight line curve? |
|
Definition
| Yes. As you move further down the demand curve the good becomes more inelastic. At the center the good is unit elastic. |
|
|
Term
| What will happen to a supplier's total revenue if she raises her prices? |
|
Definition
| if the good she sells is inelastic, her TR will increase. If the good is elastic her TR will decrease and if the good is unit elastic her TR will stay the same. |
|
|
Term
| What are income elasticity of demand and cross price elasticity? |
|
Definition
| Income elasticity is the change in demand divided by the change in price (i.e. how what the amount you buy changes as your income changes) and Cross Price Elasticity is the percentage change in demand divided by the percentage change in the price of a related good (i.e. how the demand for peanut butter changes when the price of jelly changes) |
|
|
Term
| What is the formula for income elasticity? |
|
Definition
| % change in demand/ % change in income |
|
|
Term
| What is the formula for cross price elasticity? |
|
Definition
| % change in demand/ % change in the price of a related good |
|
|
Term
|
Definition
| ... goods chose consumption increases with an increase in income |
|
|
Term
|
Definition
| ... goods that have an income elasticity greater than 1 |
|
|
Term
|
Definition
| goods who have an income elasticity less than one |
|
|
Term
|
Definition
| ...are goods whose consumption decreases when income increases |
|
|
Term
| What is the cross price elasticity of demand in substitutes ? In complements? |
|
Definition
| substitutes have positive cross-price elasticities. Complements have negative cross price elasticities. |
|
|
Term
| A price elasticity of demand of 0.5 means that: |
|
Definition
| quantity demanded changes 0.5% for each 1% change in price. |
|
|
Term
| What will a 10% rise in price do to a item with an elasticity of demand of .3 |
|
Definition
| It will lead to a 3% decline in quantity demanded |
|
|
Term
| What will a 10% rise in price do to an item with an elasticity of demand of 5% |
|
Definition
| It will lead to a 50% decline in quantity demanded |
|
|
Term
| What is the endpoint problem? |
|
Definition
| The Percent change in something differs depending on which way you calculate the movement (rise or decline). To get around this problem use the average of the two endpoints |
|
|
Term
| To solve the endpoint Problem use this formula |
|
Definition
| ((P2-P1)/(.5(P1+P2)))X 100 |
|
|
Term
| Line A is steeper than line B. Which is more elastic? |
|
Definition
| Line B is more elastic because the steeper a line is at a given point, the less elastic it is. |
|
|
Term
| What is a straight, vertical line? |
|
Definition
|
|
Term
| What is a straight horizontal line? |
|
Definition
|
|
Term
| How does elasticity change along a straight line? |
|
Definition
On the demand curve: at the price intercept until the center of the line the demand is elastic, at the center it is unit elastic, and moving toward the quantity axis we get more inelastic
Supply Curve: If the line intersects the price axis it is perfectly elastic and then the elasticity declines as you move along. If it intersects the quantity axis supply is perfectly inelastic and gets more elastic as you move along. see page 133 for graphs |
|
|
Term
| What is the textbook definition of elasticity? |
|
Definition
| The percentage change in quantity exceeds the percentage change in price |
|
|
Term
| What are the factors of supply elasticity? |
|
Definition
Time
- instantaneous period or momentary supply. The supply is fixed at this point
- short run; some substitution is possible and the supply is somewhat elastic
- Long run; significant substitution is possible and supply is very elastic |
|
|
Term
| How do short run supplies differ from long run supplies? |
|
Definition
| short run supplies are highly inelastic and long run supplies are highly elastic |
|
|
Term
| What is price discrimination? |
|
Definition
| It is when companies try to separate those with inelastic demand in order to charge them more. This is an example of what airlines do when they charge a lower fare to stay over Saturday night. |
|
|
Term
| When demand/ supply shifts... (what formula do you use to find the percentage change in price) |
|
Definition
| Percentage change in price = Percentage change in demand/supply / Ed+Es |
|
|
Term
| What is consumer surplus? Producer surplus? |
|
Definition
Consumer surplus is the value a person gets from buying a product for less than they were willing to pay for it. i.e. I get a shirt for $15 and I would have been willing to pay $20. My consumer surplus is $5
Producer Surplus: this is the difference between the price the seller would have been willing to sell his product for and the price he actually received. |
|
|
Term
| The person who pays the tax is the person who bears the burden of the tax. True or False? |
|
Definition
| False. The burden depends on the elasticity. The one with a more inelastic elasticity will bear the burden. |
|
|
Term
| Why is equilibrium the best place for price and quantity to be held at? |
|
Definition
| Because this is the position that maximizes surplus. If the price is held at another point, there will be a dead-weight loss triangle |
|
|
Term
| what do taxes generally cause? |
|
Definition
| Dead-weight loss because they also cut down the quantity sold. There are all sorts of other inefficiencies caused by taxes as well. |
|
|
Term
| What does the cost of taxation include? |
|
Definition
| The actual cost of the tax, the dead weight loss, and the administrative details involved in the tax |
|
|
Term
| How are price ceilings and floors like taxes? |
|
Definition
| The result in dead-weight loss. Tax ceilings are like a subsidy to consumers and tax on producers and tax floors are like tax on consumers and a subsidy to producers |
|
|
Term
| What are rent seeking activities? |
|
Definition
| Rent-seeking activities are designed to transfer surplus from one group to another. Producers facing inelastic demand for their product will benefit more from rent seeking activities than producers facing elastic demand. The same goes for consumers (inelastic will benefit more than elastic). Economists think rent seeking activities are unproductive. |
|
|
Term
| Do policies tend to reflect large or small group interests? |
|
Definition
| They tend to reflect small group interests because small groups are better at organizing and lobbying than are large groups. |
|
|
Term
| Why do the negative effects of price controls worse with time |
|
Definition
| because elasticity rises as time progresses |
|
|
Term
| Does the elasticity matter to the surpluses or shortages created by a price floor or ceiling? |
|
Definition
| Yes. The larger the elasticity, the greater the surplus or shortage with an effective ceiling or floor. |
|
|
Term
|
Definition
|
|
Term
| What is the formula to find the fraction of the tax born by the demander? |
|
Definition
| Fraction of tax born by demander = Es/(Ed+Es) |
|
|
Term
| What is the formula to find the fraction of the tax born by the supplier? |
|
Definition
| Fraction of tax born by supplier = Ed/ Ed+Es) |
|
|
Term
| Are price controls an example of rent seeking behavior? |
|
Definition
| Yes!!!!!!!!!!!! OMG!!!!!!! |
|
|
Term
| Do economist generally think rent-seeking is unproductive and inefficient? |
|
Definition
|
|
Term
| Does it sometimes pay to restrict supply (not talking about a cartel) |
|
Definition
| Yes; because markets like the food market are inelastic for consumers, when the supply goes up a little the price goes down a lot. Farmers lobby to ensure the supply is restricted |
|
|
Term
| When supply is inelastic do consumers have an incentive to restrict price? |
|
Definition
| Yes; because if they don't the price will touch God (i.e. apartments in NYC) |
|
|
Term
| What is the difference between total and marginal utility? |
|
Definition
| Total utility are the utils gained from consuming a product; marginal utility are the utils gained from consuming one more unit of a good |
|
|
Term
| What does the law of diminishing marginal utility state? |
|
Definition
| At a certain point the marginal utility of consuming another unit of the good will begin to fall |
|
|
Term
| What is the formula for the principle of rational choice? |
|
Definition
| If the marginal utility divided by the price of good X is greater than good Y, consume more of good X until the MU of X and Y are equal |
|
|
Term
| What does the utility maximizing rule say? |
|
Definition
| If the MU of good X divided by the price and the MU of good Y divided by the price are equal you are maximizing utility |
|
|
Term
| Opportunity cost with a Marginal Utility bent? |
|
Definition
| Opportunity cost is essentially the marginal utility per dollar one forgoes from the consumption of the next-best alternative |
|
|
Term
| Can the law of demand be derived from the principle of rational choice? |
|
Definition
| Yes, my friend, yes it can |
|
|
Term
| What will you do if you're in equilibrium and the price of one good rises? |
|
Definition
| you will reduce your consumption of that good |
|
|
Term
| What is the income effect? The Substitution effect? |
|
Definition
Income effect: The reduction in the quantity demanded because the rise in price has made one poorer
Substitution effect: reduction in quantity demanded when price rises because you substitute a good whose prise has not risen
The law of demand is based on these two effects (otherwise the line would not slope down because you would not be able to reduce consumption when the price goes up) |
|
|
Term
| The law of supply can be derived from... |
|
Definition
| the principle of rational choice |
|
|
Term
| The law of supply can be derived from... |
|
Definition
| ... the principle of rational choice |
|
|
Term
| What will happen if your wages rise |
|
Definition
| if your wages rise you will work more in order to satisfy the the utility-maximizing rule. |
|
|
Term
| the cost of decision making means... |
|
Definition
| it is only rational to be somewhat irrational |
|
|
Term
| most people use what in real world situations to make decisions? |
|
Definition
|
|
Term
| what is focal point equilibria? |
|
Definition
| a set of goods are consumed because through luck or advertising they have become the focal point to which people have gravitated |
|
|
Term
| What is conspicuous consumption? |
|
Definition
| This is the consumption of goods in order to show off for others |
|
|
Term
| what happens whenever a need is met? |
|
Definition
| It is replaced by another need which is replaced by a want |
|
|
Term
| Does one need to adjust for underlying assumptions such as costlessness of decision making and given tastes? |
|
Definition
|
|
Term
| The theory of choice assumes that... |
|
Definition
| ... decision making is costless, tastes are given, and individuals maximize utility |
|
|
Term
| What does the ultimatum game suggest? (Hint: do people care about fairness as well as total income?) |
|
Definition
| Yes, people care about fairness as well as total income |
|
|
Term
| What does the status quo bias suggest? |
|
Definition
| (that people are lazy) and that actions are based on perceived norms |
|
|
Term
| Fads, such as wearing extremely baggy jeans, come and go. Which assumption of economists' theory of individual choice do such fads violate? |
|
Definition
|
|
Term
| Do economists assume the goal of consumers is to maximize total utility or to maximize total utility per dollar? |
|
Definition
|
|
Term
|
Definition
|
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Term
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| What are the AVC and MC mirror images of? |
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Definition
| Average product curve and the marginal product curve |
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| How does the marginal cost curve interact with the ATC |
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Definition
| When the MC ATC is rising |
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| change in TC/change in quantity -- Marginal cost is the added cost from one extra unit |
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| What is the relationship between average productivity and marginal productivity? |
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Definition
| As marginal productivity is rising, average productivity must be rising (and vise versa) |
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| When MC = ATC, we know that (Hint: This answer is not "ATC is constant" though that is also correct) |
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| average total cost is minimized. |
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| How can output be increased in the short run? |
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| When output is increased in the short run, it can only be done by increasing the variable input. |
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| What causes marginal and average productivities to fall? |
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Definition
| The law of diminishing productivity causes marginal and average productivities to fall. |
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| As average and marginal productivities fall...(what rises?) |
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Definition
| ...average and marginal costs rise. (these are mirror images of one another; see graph 29 pg 3) |
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| If the MUX/PX > MUY/PY... Which one has a higher opportunity cost |
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Definition
| the opportunity cost of not consuming good x is greater than the opportunity cost of not consuming good y. |
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| Does a technically efficient process need to be economically efficient? |
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Definition
| No. An economically efficient production process must be technically efficient, but a technically efficient process need not be economically efficient. |
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| What is a technically efficient process? |
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Definition
| A process which uses as few inputs as possible |
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| What is economic efficiency |
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| a method that produces a given level of output at the lowest possible cost. Must be technically efficient. |
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| What causes the U shape of the average total cost curve |
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Definition
| The long-run average total cost curve is U-shaped. Economies of scale initially cause average total cost to decrease; diseconomies eventually cause average total cost to increase. |
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| What is an economy of scale? |
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Definition
| when long run average total costs decrease as output increases. Many production processes require a certain level of output to be useful; this is an indivisible set up cost. |
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| What is a diseconomy of scale? |
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Definition
| When long run average total costs increase as output increase. These occur mostly in large firms because of monitoring costs and the decrease in team spirit and morale in large firms. |
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| Short run average total cost curves and marginal costs curves slope upward, so does the long run average total cost curve. Is it for the same reason? |
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Definition
| No. Short run average total cost curves and marginal cost curves slope up because of diminishing marginal productivity while long run average total cost curves slope up because of diseconomies of scale. |
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| Will long run ATCs always be less than or equal to short run ATCs |
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Definition
| Yes. This is represented in the envelope relationship in which the SRATC is tangent to the LRATC in only one place the LRATC acts as an envelope. LR costs are always less than SR costs because in the LR all inputs are variable and in the short run some inputs are fixed and only the variable input can be changed. |
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| Someone who sees the option of selling a good for a higher price than the average cost of producing it |
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| What is an economy of scope |
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Definition
| This is when a producer can make two goods which are interdependent so that the costs are production are lower for the two than it would be to make them both separately |
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| What do the terms learning by doing and technological change mean? |
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Definition
Learning by doing means we learn what works and what doesn't as we move along and over time we become more proficient at the things that work
Technological Change indicates an increase in the range of production techniques that leads to more efficient ways of producing goods as well as the production of new and better goods
These two terms are important to the real world, as opposed to the fake, theoretical, economic world because these can alter the nature of production costs and are not taken into analysis. Costs in the real world are affected by economies of scope, learning by doing and technological change, the many dimensions to output, and unmeasured costs such as opportunity costs. |
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| What are constant returns to scale? |
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Definition
| Where long run average total costs do not change with an increase in output |
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| Why are traditional concepts of fixed and variable costs not a useful today as they may have been previously? |
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Definition
| They are not useful because variable costs are small, for example labor costs in many industries are only 2-3 percent of the total cost. |
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| What is the minimally efficient level of production? |
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Definition
| This is the level at which costs are spread out sufficiently for a firm to undertake production profitably. This is where ATC is at its minimum and it occurs when the market has become large enough for all firms to take full advantage of economies of scale |
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| What are some of the factors that can make cost analysis unhelpful in the real world? |
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Definition
Economies of scope
Learning by doing
Technological change
many dimensions
unmeasured costs such as opportunity cost |
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| Suppose that capital and labor both cost $5 per unit. Currently the firm is using 4 workers and 4 machines to produce an output of 40 units. If the firm wants to produce 100 units of output, it can be done using the 4 machines and 25 workers or with 10 machines and 10 workers. In the short run, how much capital and how much labor will the firm use? What is the total cost and the average cost of the 100 units? |
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Definition
| In the short run, the firm can not change capital, the fixed input, so it must use 4 machines and 25 workers. Total cost = $5x4 + $5x25 = $145. Average cost = $145/100 = $1.45 In the long run, both inputs are variable, so the firm will minimize costs with 10 workers and 10 machines. Total cost = $5x10 + $5x10 = $100 and long-run average cost = $100/100 = $1. |
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| What are the six conditions for perfect competition? |
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Definition
Buyers and sellers are price takers
There are a large number of firms
There is perfect information
All firms are profit maximizers
There are no barriers to entry
One firms product is indistinguishable from another firm's product |
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| What is the profit maximizing position for a perfectly competitive firm? |
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Definition
MR=MC=P=D
(Marginal Revenue=Marginal Cost=Price=Demand) |
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| What is the supply curve for a competitive firm? |
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| It is the MC curve, but only if MC is greater than average variable cost |
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| Where is the profit maximizing point for a competitive firm? |
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| (Price - total cost)(quantity) |
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| Do perfectly competitive firms make a profit? |
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| In the short run a profit is possible, however in the long run only zero-profits are possible because all profits will have been competed away |
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| Where is the shutdown point for a perfectly competitive firm? |
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Definition
| It is below the minimum point of the AVC |
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| What is the SR market supply curve made up of? |
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Definition
| It is made up of the MC curves for all the firms in the market. The supply curve is shifted by entrance and exit from the market |
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| What is the long run supply curve in a perfectly competitive market? |
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Definition
| The long-run supply curve is a schedule of quantities supplied where firms are making zero profit. |
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| How is the slope of the LR market supply curve for competitive firms determined? |
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Definition
| The slope of the long-run supply curve depends on what happens to factor prices when output increases. |
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| What do the LR supply curves for increasing, decreasing, and constant cost industries look like? |
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Definition
| Constant-cost industries have horizontal long-run supply curves. Increasing-cost industries have upward-sloping long-run supply curves, and decreasing-cost industries have downward-sloping long-run supply curves. |
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| What does the demand curve for a perfectly competitive firm look like? for the market? |
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Definition
| for the firm it is perfectly horizontal, however, for the market it is downward sloping. |
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| The market supply curve is more elastic than a firm's supply curve if input prices are constant because higher output prices: |
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| increase both output per firm and the number of firms. |
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| Do profit maximizing firms care about profit per unit or total profit? |
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| Only care about total profit |
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| In the short run the price does most of the adjusting and in the long run the quantity does most of the adjusting. True or False? |
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| If a perfectly competitive firm is incurring a loss, then in the long run, economists would expect to see |
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| higher prices and fewer firms in this market. |
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| When the entrepreneur of a perfectly competitive firm is in the long run, what does he get? |
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| He gets normal profits. Econ profits are profits above normal profits and he gets zero of that |
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| Can Monopolies make long run economic profit? |
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| Does the monopolists price-maximizing behavior result in welfare loss for the society? |
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| Does MC=MR maximize profit for an Monopolist>? |
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Definition
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| Why can a monopolists charge higher prices than a competitive market can? |
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| Because the monopolist can restrict its output. It is able to do this because there are barriers to entry |
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| How do you determine a monopolist's profit? |
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Definition
| To determine a monopolist's profit, first determine its output (where MC = MR). Then determine its price and ATC at that output level. The difference between price and average total cost at the profit-maximizing level of output is profit per unit. Multiply this by output to find total profit. |
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| Do monopolists like to price discriminant? If they do how do they do it? |
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| Yes. By identifying and separating groups with different elasticities and then making sure they cannot resell among themselves |
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| What are three major barriers to entry? |
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Definition
| Natural ability, economies of scale and government restrictions |
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| What is a natural ability barrier to entry? |
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Definition
| One firm is better at producing a good than anyone else. These are typically known as just monopolies. |
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| What is an economy of scale monopoly? |
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Definition
| This natural monopoly occurs when it is cheaper for all around to have only one firm produce a product. Having two firms would be more expensive. This is only given the technology at the time and there is no welfare loss (may be welfare gain because having one firm is so much more efficient). A competitive solution is impossible because no firm would enter because not even normal profit is going to ever happen |
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| What is a government created monopoly? |
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| This is when the government protects a monopoly. I think like when it issues a patent. |
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| What are three normative arguments against monopoly? |
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Definition
| Monopolies are inconsistent with freedom, the distributional effects of monopolies are unfair and monopolies encourage people to waste time and money trying to get a monopoly. |
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| If a monopolist is producing a quantity where MR is greater than MC and charging a price dictated by the demand curve for that quantity, this monopolist could increase profits by |
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Definition
decreasing price and increasing quantity.
This is dictated by the law of demand; people need lower prices to buy more |
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| Does a natural monopoly have strong economies of scale? |
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Definition
| yes, heck yes. A natural monopoly exists where it is cheaper just to have one firm |
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| In a natural monopoly would the competitive price result in losses? |
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| What characteristics define monopolistic competition? |
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Few barriers to entry
Many firms
differentiated products
and multiple dimensions of competition
Most real world markets are closest to this model |
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| What are the central characteristics of an oligopoly? |
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Definition
There are a small number of firms
firms must take into account the actions of other firms and engage in strategic decision making |
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| What are two models that oligopolies follow? |
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Definition
Cartel (illegal in US)
Contestable (will not collude unless there are barriers to entry) |
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| Do individual firms in monopolistic competition face a downward sloping demand curve? |
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| Will a monopolistic competitor make economic profit in the long run? |
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| Where will an monopolist's price be? |
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| Somewhere between the monopolists and the monopolistic competitors |
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| A concentration ratio is the sum of the market shares of individual firms with the largest shares in an industry. |
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| A Herfindahl index is the sum of the squares of the individual market shares of all firms in an industry. |
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| Why are there kinked demand curves? |
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Definition
| Because if a mc firm raises prices none of the other firms will go along. if they lower prices everyone will follow. the top part is very elastic and the bottom part is very inelastic |
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| In regards to classifying industries how does cross price elasticity work |
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Definition
| if the cpe is more than three the goods are in the same industry |
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| in the classification index bigger numbers mean |
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| If all people are acting independently for their best interests, will this result in the best outcome? |
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| Not necessarily. Think of the prisoners dilemma |
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| What is an incentive effect? |
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Definition
| Something which encourages people to work (i.e. wages) if your wages increase, you will work more because the opportunity cost of leisure activities has increased |
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| What does elasticity of market (labor) supply depend on? |
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Definition
individuals' opportunity cost of working
The type of market being discussed
the elasticity of individuals' supply curves
Individuals entering and leaving the labor market |
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| How is the demand for labor by firms derived? |
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Definition
| It is derived from customers demand. if customers want more, then the firm needs more labor to supply that extra demand. Also the higher the wage the lower quantity the firm demands |
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| What does the elasticity of market demand for labor depend on? |
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Definition
| Elasticity of market demand for labor depends on (1) the elasticity of demand for the firm's good, (2) the relative importance of labor in production, (3) the possibility and cost of substitution in production, and (4) the degree to which marginal productivity falls with an increase in labor. |
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| What effect do technological changes and changes in international competitiveness have on the demand for labor? |
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Definition
| They shift the curve. In some fields the curve is shifted back and in some it is shifted out. The overall effect has been to increase the demand for labor |
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| It is a market in which only one firm is buying labor. It gets labor at a lower price and a higher quantity? |
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| What is a bilateral monopoly? |
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Definition
| It is a market in which there is a single buyer and a single seller. The wage rate and quantity depend on the relative strength of the union and monopsonist. |
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| What are efficiency wages? |
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Definition
| Wages above and beyond the going market wage that are paid in order to keep workers happy and productive |
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| Are there laws that mandate comparable pay for comparable work? |
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Definition
| Yes. Because of a rising concern with fairness, there are laws such as these. |
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| What is discrimination generally based on? |
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Definition
Relevant individual characteristics that will affect job performance (i.e. an 80 year old does not make a good underwear model for young people undies)
Group Characteristics (young people are more likely to change jobs so don't hire them)
irrelevant individual characteristics (i.e. you are female and therefore unacceptable to be a CEO) |
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| Have labor unions been declining in importance? |
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Definition
| Yes, because they did such a good job of getting labor laws passed they are no longer needed |
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| For a monopsonist, the cost of hiring another worker: |
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Definition
| Since a monopsonist who hires another worker must pay higher wages not only to that worker but to all other workers, the cost of hiring another worker exceeds the wage. |
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Definition
| a firm where the union controls hiring |
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Term
| Generally speaking, higher real wages lead to |
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Definition
| an increase in the quantity of labor supplied. |
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Term
| factors influencing the demand for labor |
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Definition
The elasticity of demand for the firm’s product.
The relative importance of the factor in the production process.
The possibility of, and cost of, substitution in production.
The degree to which the marginal productivity falls with an increase in the factor. |
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Definition
| The Lorenz curve is a measure of the distribution of income among families in a country. The farther the Lorenz curve is from the diagonal, the more unequally income is distributed. |
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| Which is distributed more equally, wealth or income? |
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Definition
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| Poverty can be defined as a relative or absolute concept |
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Definition
| I just thought you should know |
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| derived from the Lorenz curve--- Area under the line of equality curve/ (area under equality curve + Area under L curve)-- the lower the coefficient the more equality there is |
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| Side effects of re-distributive programs |
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Definition
a tax may result in people switching from labor to leisure
People may attempt to avoid or evade taxes, leading to a decrease in measured incomes
Redistributing money may cause people to make themselves look as if they're more needy than they really are |
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| What can the government do to directly redistribute income? What types of programs and taxes are there? |
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Definition
taxation and expenditures
taxation
progressive tax: average tax rate increases with income
proportional tax rate: the average rate of tax is constant regardless of income level
regressive tax: on in which the average rate decreases as income increases
expenditures
Social Security
Medicare
Public Assistance programs
Other |
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| What are three forms of market failures/ |
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Definition
| Externalities, imperfect information and public goods |
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| What is an optimal policy? |
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Definition
| One in which the marginal benefits = the marginal costs |
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| What to markets with negative externalities produce? |
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Definition
| too much of a good at too low of a price |
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| What do markets with positive externalities produce? |
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Definition
| Too little of a good with too great of a price |
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| What types of programs can the government use to correct externalities? |
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Definition
| Incentive based programs or regulatory programs |
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| What type of good is non-exclusive and non rival? |
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Definition
| a public good. It is hard to measure their benefits |
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Definition
| A good whose consumption by one consumer prevents its consumption by another |
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| What is an exclusive good? |
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Definition
| A good where it is possible to exclude people who have not paid for the good from using the good. |
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| What is a market failure? |
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Definition
| This is when the invisible hand pushes individuals to make derisions which are not socially desirable |
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Term
| in the private goods market people reveal their demand when they buy the good |
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Definition
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| Where do the numbers in the stock market come from? |
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Definition
| prediction of future stream of income (or present valure of the future stream of income |
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