2nd Midterm Flashcards
(106 cards)
1
Q
Consumer equilibrium
A
Consumer equilibrium is a state of stability in consumer purchasing patterns in which the individual has maximized her utility.
2
Q
Law of demand
A
The law of demand states the assumed inverse relationship between product price and quantity demanded, everything else held constant.
3
Q
Market demand
A
Market demand is the summation of the quantities demanded by all consumers of a good or service at each and every price during some specified time period.
4
Q
Price elasticity of demand
A
Price elasticity of demand is a measure of the responsiveness of consumers, in terms of the quantity purchased, to a change in price, everything else held constant.
5
Q
Elastic demand
A
Elastic demand is a relatively sensitive consumer response to price changes. If the price goes up or down, consumers will respond with a large decrease or increase in the quantity demanded.
6
Q
Inelastic demand
A
Inelastic demand is a relatively insensitive consumer response to price changes. If the price goes up or down, consumers will respond with a small decrease or increase in the quantity demanded.
7
Q
Elasticity coefficient of demand
A
The elasticity coefficient of demand (Ed) is the ratio of the percentage change in the quantity demanded to the percentage change in price.
8
Q
Perfectly elastic demand
A
A perfectly elastic demand is a demand that has an elasticity coefficient of infinity. It is expressed graphically as a curve horizontal to the X-axis.
9
Q
Normal good or service
A
A normal good or service is any good or service for which demand rises with an increase in income and falls with a decrease in income.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 309). Cambridge University Press. Kindle Edition.
10
Q
Inferior good or service
A
An inferior good or service is any good or service for which demand falls with an increase in income and rises with a decrease in income.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 309). Cambridge University Press. Kindle Edition.
11
Q
Network good
A
A network good is a product or service whose value to consumers depends intrinsically on how many other people buy the good.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 309). Cambridge University Press. Kindle Edition.
12
Q
substitute goods
A
can be used in place of the good in question
13
Q
complementary goods
A
are used in conjunction with the good in question
14
Q
Rational consumers will _____
That is to say, they will so allocate their expenditures that the _________
A
equate at the margins.
marginal utility of the last unit of every good is equal to every other.
15
Q
The law of demand is a
A
natural consequence of rational behavior.
16
Q
Demand does not consist of ________
rather, it represents the _______
A
what people would like to have or are willing to buy at a given price;
inverse relationship between price and quantity, a relationship described by a downward sloping curve.
17
Q
The market demand curve for a private good is
A
obtained by horizontally summing individuals’ demand curves for the good.
18
Q
Total revenue will rise when demand is
Total revenue will fall when demand is
A
elastic and the price is reduced, and vice versa.
inelastic and the price is reduced, and vice versa.
19
Q
Availability of substitutes, portion of income spent, and time available to make the purchase are determinants of
A
elasticity of demand.
20
Q
The slope and elasticity of a demand curve are
The slope of a straight-line demand curve is
The elasticity of demand, as measured by
A
not the same.
the same at all points along the demand curve.
the elasticity coefficient, increases with movements up a straight-line demand curve.
21
Q
Not all downward sloping demand curves are
They differ radically in terms of
The elasticity of demand can
A
alike.
the elasticity of demand, or the responsiveness of consumers to a price change.
heavily influence business pricing strategies.
22
Q
An explicit cost
A
An explicit cost is the money expenditure required to obtain a resource, product or service.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 359). Cambridge University Press. Kindle Edition.
23
Q
Implicit cost
A
An implicit cost is the forgone opportunity to do or acquire something else or to put one’s resources to another use that doesn’t require a monetary payment.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 359). Cambridge University Press. Kindle Edition.
24
Q
Sunk cost
A
A sunk cost is a past cost. It is a cost that already has been incurred, which means it cannot be changed and, hence, is irrelevant to current decisions.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 359). Cambridge University Press. Kindle Edition.
25
Normal profits
Zero economic profit = normal profit
Normal profits are the opportunity and risk costs of doing business not reported on firms’ P&L statements that must be covered in order that the owners will not redeploy firm resources.
26
Book profits
Book profits are the profits reported on firms’ “bottom lines” of their P&L statements.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 359). Cambridge University Press. Kindle Edition.
27
An economic loss
An economic loss occurs when firms’ total costs, including their unrecorded opportunity and risk costs, exceed their total revenues.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 359). Cambridge University Press. Kindle Edition.
28
Economic profits
Economic profits are realized when firms’ total costs, including their unrecorded opportunity and risk costs, are less than their total revenues.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 359). Cambridge University Press. Kindle Edition.
29
Marginal cost
Marginal cost is the additional cost incurred by producing one additional unit of a good, activity, or service.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 359). Cambridge University Press. Kindle Edition.
30
Marginal product
Marginal product is the increase in total output that results when one additional unit of a resource – for example, labor, fertilizer, and land – is added to the production process, everything else held constant.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 359). Cambridge University Press. Kindle Edition.
31
Marginal revenue
Marginal revenue is the additional revenue that a firm acquires by selling another unit of output.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 359). Cambridge University Press. Kindle Edition.
32
Last-period (or end-period) problem
The last-period (or end-period) problem refers to the costs that can be expected to be incurred from opportunistic behavior when the end of a working relationship approaches.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 359). Cambridge University Press. Kindle Edition.
33
Firms
Firms are collections of departments (and people) who have continuing relationships that are not always up for re-bidding, which means that the parties can figure that they will be continued, with there being no clear last period.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 359). Cambridge University Press. Kindle Edition.
34
Agency (or principal–agent) problem
The agency (or principal–agent) problem inside firms is the conflict of interest between the owners (principals) of firms and their hired employees (agents) that emerges because both want to maximize their own gain from the use of firm resources.
35
Economies of scale
Economies of scale are the cost savings that emerge when all resource inputs – labor, land, and capital – are increased together.
36
Cost plays a pivotal role in
Costs change with
The pattern of those changes determines the
a producer’s choices.
the quantity produced.
limit of a producer’s activity—from the production of saleable goods and
services to the employment of leisure time.
37
The maximizing individual will produce a good or service, or engage in an activity, until
Graphically, this is the point at which the .
At this point, although additional benefits might be obtained
by producing additional units of the good, service, or activity, the
marginal cost equals marginal benefit (marginal revenue).
supply and demand
curves for the individual’s behavior intersect
additional costs that would be incurred
discourage further production.
38
Costs will not affect an individual’s behavior unless
For this reason, managers can often improve incentives—increasing firm profits and employees’ benefits—by
she perceives them as costs.
Looking for hidden or implicit costs in the choices being made, and making the changes necessary to ensure that they and their workers confront those choices.
39
All costs—explicit and implicit—must be considered when
deciding whether to produce anything and
when deciding how much of anything should be produced if profits are to be maximized.
40
The market supply curve in a competitive market is the
horizontal summation of individual firms’ supply curves (or their marginal cost curves above the minimum of the average variable cost curve).
41
Firms exist because they tend to
reduce the overall cost of doing business, most prominently external
coordinating (or transaction) costs.
42
o Firm size is limited not only by
o Firm size, profitability, and survival are crucially dependent on
economies of scale but also by agency costs.
balancing internal and external coordinating
costs.
43
Short run
The short run is the period during which one or more resources (and thus one or more costs of production) cannot be changed – either increased or decreased.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 402). Cambridge University Press. Kindle Edition.
44
Fixed cost
A fixed cost is any cost that does not vary with the level of output. Fixed costs include overhead expenditures that extend over a period of months or years: insurance premiums, leasing and rental payments, land and equipment purchases, and interest on loans.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 402). Cambridge University Press. Kindle Edition.
45
Variable cost
A variable cost is any cost that changes with the level of output.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 402). Cambridge University Press. Kindle Edition.
46
Long run
The long run is the period during which all resources (and thus all costs of production) can be changed – either increased or decreased.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 402). Cambridge University Press. Kindle Edition.
47
Economies of scale
Economies of scale are cost savings that technology allows when all resource inputs are increased together.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 402). Cambridge University Press. Kindle Edition.
48
Diseconomies of scale
Diseconomies of scale are added costs that, beyond some point, accompany the expansion of production through the use of more of all inputs.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 402). Cambridge University Press. Kindle Edition.
49
Natural monopoly
A natural monopoly is an industry in which long-run marginal and average costs generally decline with increases in production within the relevant range of the market demand for a good or service.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 402). Cambridge University Press. Kindle Edition.
50
Very long run
The very long run is the time period during which the technology of production and the availability of resources can change because of invention, innovation, and discovery of new technologies and resources.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 402). Cambridge University Press. Kindle Edition.
51
Cost structures for firms (made up of average fixed, average variable, average total, and marginal cost curves) are
Such structures help managers
a graphical device designed to yield insights on how much a firm should produce in order to maximize profits over a range of output levels.
go beyond the limitations
on thinking presented by a firm’s accounting statements, which report the costs incurred for a given
output level.
52
The law of diminishing marginal returns is close to a fact of nature that shapes a firm’s short-run marginal cost curve and
ultimately imposes a constraint on how much a firm can produce in the short run if it intends to maximize profits.
53
A firm in the short run (or long run) should not seek to produce where
It should produce where
its average cost is at a minimum.
marginal costs and marginal revenue (price in the case of the perfect competitor) are equal.
54
Fixed costs should be ignored in
short-run production decisions.
55
Economies of scale and diseconomies of scale will shape
a firm’s long-run cost structure
56
Perfect competition
Perfect competition is a market structure in which price competition is so intense that maximum efficiency in the allocation of resources is obtained.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 449). Cambridge University Press. Kindle Edition.
57
Pure monopoly
A pure monopoly consists of a single seller of a product for which there are no close substitutes and which is protected from competition by barriers to entry into the market.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 449). Cambridge University Press. Kindle Edition.
58
Monopolistic competition
Monopolistic competition is a market composed of a number of producers whose products are differentiated and who face highly elastic, but not perfectly elastic, demand curves.
59
Oligopoly
An oligopoly is a market composed of only a handful of dominant producers – as few as two and generally no more than a dozen – whose pricing decisions are interdependent.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 449). Cambridge University Press. Kindle Edition.
60
Consumer surplus
Consumer surplus is the difference between the total willingness of consumers to pay for a good and the total amount actually spent.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 449). Cambridge University Press. Kindle Edition.
61
Producer surplus
Producer surplus is the difference between the minimum total revenue necessary to induce producers to supply any given quantity of output and the actual total revenue received from selling that quantity.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 449). Cambridge University Press. Kindle Edition.
62
Price takers
Price takers are sellers who do not believe they can influence the market price significantly by varying their own production levels.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 449). Cambridge University Press. Kindle Edition.
63
Price searchers
Price searchers are sellers who cannot control the market price by individually varying their production levels.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 449). Cambridge University Press. Kindle Edition.
64
The demand curve facing a perfect competitor is
meaning the firm is
horizontal (or perfectly elastic),
a price taker—that is, it cannot affect market price by any change in its output.
65
Marginal revenue for a perfect competitor is equal to
market price.
66
A perfect competitor maximizes profit by producing where
marginal cost equals marginal revenue, which equals market price.
67
If the price is below the perfect competitor’s average total cost but above its average variable cost curve, the firm will
It is still more than covering its fixed costs, and therefore, is
not shut down in the long run.
minimizing its losses (over what they would be if the firm ceased to operate).
68
In perfectly competitive markets, any economic profits will be
reduced to zero in the long run due to entry
and the resulting increase in market supply that will push down market price.
69
Perfect competition is
the theoretical construct of perfect competition helps to highlight
an idealized market structure that can never be fully attained in the real world.
the directional influence and consequences of competition.
70
The model of perfect competition also provides a benchmark
The perfectly competitive model clarifies the rules of efficient production and suggests that
Without a free flow of resources, new firms cannot
for comparing the relative efficiency of realworld markets.
free movement of resources is essential to achieve efficient production levels.
move into profitable production lines, increase market supply, push prices down, and force other firms to minimize their production costs.
71
Price discrimination
Price discrimination is the practice of varying the price of a given good or service according to how much is bought and who buys it, supposing that marginal costs do not differ across buyers.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 501). Cambridge University Press. Kindle Edition.
72
Perfect price discrimination
Perfect price discrimination is the practice of selling each unit of a given good or service for the maximum possible price.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 501). Cambridge University Press. Kindle Edition.
73
Imperfect price discrimination
Imperfect price discrimination is the practice of charging a few different prices for different consumption levels or different market segments (based on location, age, income, or some other identifiable characteristic that is unrelated to cost differences).
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 501). Cambridge University Press. Kindle Edition.
74
Rent seeking
Rent seeking is the pursuit of monopoly profits through market restrictions and subsidies provided by the political process.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 501). Cambridge University Press. Kindle Edition.
75
A monopolist maximizes its profits where its marginal cost equals
its marginal revenue.
76
The monopolist faces a downward sloping demand curve, which means that its marginal revenue curve
is
also downward sloping but underneath its demand curve.
77
The consequences of monopoly are
higher prices and lower production levels than are possible under
perfect competition.
78
Monopoly power can also result in inefficiency in production, for the monopolistic firm does not
Consumers might prefer
However, the profit-maximizing monopolist
produce to the point at which its marginal cost equals consumer’s marginal benefit—the product’s price.
that more resources be used in the production of a monopolized good and might be willing to pay a price that exceeds the cost of production for additional units of the good.
stops short of that point.
79
In order for a monopolist to be able to garner monopoly profits, it must be
protected, to one extent or another, with costly entry barriers.
80
The source of a monopolist’s ability to charge an above-competitive price comes from its ability to
materially change market supply through its own production decisions.
81
A monopolist’s ability to hike its price and profits is restricted by the
elasticity of its demand, which is influenced by the closeness of substitutes and the costs of entry facing other producers.
82
A monopolist can increase its profit and increase market efficiency through
however, its ability to price discriminate is constrained by
various and creative forms of price discrimination;
the potential customers
have for reselling the good.
83
Monopolies can move to a competitive rate of return in the long run as the monopoly profits are
eroded by technology changes that make monopoly products irrelevant or as entrepreneurs find ways of
circumventing monopolies’ barriers to entry.
84
Market failure
A market failure occurs when maximum efficiency is not achieved by trades (which means that part of the excess benefits shown by the shaded area in Figure 6.1 are not realized by either buyers or sellers).
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 266). Cambridge University Press. Kindle Edition.
85
Externalities
Externalities are the positive or negative effects that exchanges may have on people who are not in the market. They are sometimes called third-party effects.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 266). Cambridge University Press. Kindle Edition.
86
A market economy will overproduce goods and services that impose
It will
underproduce goods and services that confer
external costs on society.
external benefits.
87
Sometimes, but not always, government intervention can be justified
To be
worthwhile, the benefits of action must
to correct for externalities.
outweigh the costs.
88
Some ways of dealing with external costs and benefits are
more efficient than others.
89
Cartel
A cartel is an organization of independent producers intent on thwarting competition among themselves through the joint regulation of market shares, production levels, and prices.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 548). Cambridge University Press. Kindle Edition.
90
Duopoly
A duopoly is an oligopolistic market shared by only two firms.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 548). Cambridge University Press. Kindle Edition.
91
Natural monopoly
A natural monopoly is a market structure characterized by a decline in the long-run average cost of production within the range of the market demand, which means that the market will be served most cost-effectively with only one producer.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 548). Cambridge University Press. Kindle Edition.
92
Firms in monopolistically competitive and oligopoly markets will follow the same production rule for profit maximization that
perfect competitors and pure monopolies follow: they will produce where marginal
revenue and marginal cost are equal.
93
Monopolistic competitors may earn
but they will not produce at
zero economic profits in the long run,
the minimum of their long-run average cost curve.
94
The downward sloping demand faced by a dominant producer in a market can be derived from
the gaps between the quantity demanded and supplied at various prices by all other small producers.
95
The profit incentive firms have to form cartels in their markets is
a cause for the cartels’ failures, as members cheat on cartel production and price agreements.
96
At times, producers demand government regulation because such regulation can
enable the producers to restrict their aggregate production and charge above-competitive prices.
97
Price ceiling
A price ceiling is a government-determined price above which a specified good cannot be sold.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 198). Cambridge University Press. Kindle Edition.
98
Price floor
A price floor is a government-determined price (or wage) below which a specified good (labor) cannot be sold.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 198). Cambridge University Press. Kindle Edition.
99
Moral hazard
A moral hazard is the tendency of behavior to change after contracts are signed, resulting in unfavorable outcomes from the use of a good or service.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 198). Cambridge University Press. Kindle Edition.
100
Adverse selection
Adverse selection is the tendency of people with characteristics undesirable to sellers to buy a good or service from those sellers.
McKenzie, Richard B.; Lee, Dwight R.. Microeconomics for MBAs (p. 198). Cambridge University Press. Kindle Edition.
101
The market system can perform the very valuable service
however, markets are not always permitted
Government has objectives of its own, objectives that are determined collectively rather than individually. This fact has important implications for
of rationing scare resources among those who want them;
to operate unobstructed.
the types and the efficiency of policies that are selected.
102
Excise taxes, under normal conditions, tend to be
How the tax burden is shared between buyers and sellers depends upon
passed on only partially to consumers, meaning producers often pay a portion of the tax in the form of a lower after-tax price.
the elasticity of supply and demand.
103
Price and rent controls—“price ceilings”—tend to result in
They also tend to result in
shortages.
costs being passed along to buyers in various ways and tend to result in a reduction in the quality of whatever good’s price is subject to control.
104
Minimum wage laws—and other “price floors”—tend to result in
However, such surpluses enable employers to
market surpluses.
offset at least partially the employment effects of minimum wages by reducing fringe benefits and increasing work demands.
105
When a minimum wage is imposed, both workers and employers can be
Employers can be worse off because
Workers can be worse off because
worse off.
the higher wage exceeds the possible cost reductions of fringe benefits being taken away and/or the productivity gains from the imposition of greater work demands on employees.
the value of the loss of fringe benefits and the greater work demands imposed can exceed the higher wage rate.
106
Honesty in business has both a
Honesty is an economic force because it can
moral and an economic dimension.
pay (moral hazard and adverse selection).
