Economics Flashcards
economic profit=0=breakeven when total rev=total fixed+total variable costs; P=avg rev=avg total cost
any point below P=ATC, economic loss
short term, P>avg variable cost, continued to operate short run to minimize loss but shut down in long run (some fixed cost covered); if P<avg variable cost, reduce loss by shut down in short run and long run, losses are greater than fixed cost
in long run, all costs are variable;
long run, P<avg total cost, shut down regardless in long run; if P>avg varaible cost and avg total cost, operate in short run shut down in long run; if P< both, shut down short and long run
under perfect competition (firm as price taker)
under perfect competition (firm as price taker)
AR>=AVC, continue to operate even if have losses short and long run;
AR>=AVC but AR<ATC, operate short run, long-run shutdown;
AR<AVC, short-run shutdown and exit in long run;
AR=ATC, breakeven
under imperfect competition, firm as price-searcher, marginal rev is no longer equal to price
TR=TC, breakeven;
TC>TR>TVC, operating in short run, shut down in long run;
TR<TVC, shutdown short and long run;
If the entire TC curve exceeds TR (i.e., no breakeven point), the firm minimize the economic lossshort run by operating at the quantity with smallest (negative) value of TR – TC.
economiesand diseconomies of scale
ATC decrease first and then eventually increase with larger output;
lowest point on LRATC=min ATC=minimum efficient scale;
firm should opereating at min efficient scale in long-run equilibrium. firms with higher ATC will have economic losses
perfect competition, horizonal demand curve (perfectly elastic), sell any quantity at that price without affecting the market price;no firm has a large enough portion of the overall market to affect the market price of the good;
monopoly=steepest demand curve;
monopolistic competition=relatively elastic downward-sloping demand curve;
oligopoly=steepness between mono and monopolitic comp
For both horizontal and downward-sloping demand curves, maximize profits by producing quantity at MR=MC and charge the price at demand curve, earn positive economic profit because P>ATC or 0 economic profit if P=ATC
perfect competition=identical products, low barriers to entry, compete only on price, perfectly elastic demand curve, market supply and demand determine the price of wheat
e.g.wheat
Monopolistic competition=products not identical, differentiate using quality, features, marketing; downward-sloping demand curve, nonidentical prices because of perceived difference among products, low barriers to entry
e.g. toothpaste differentiate their products through features and marketing; If the price of your personal favorite increases, you are not likely to immediately switch to another brand as we assume under perfect competition
oligopoly=only a few firms, each firm consider actions and responses of other firms in setting price and business strategy; interdependent, products are good substitutes, similar or differentiated, high barriers to entry cuz economies of scale. more or less elastic demand than monop comp;
Kinked demand curve model: competitors less likely to match a price increase but decrease, so price above P is more elastic (small price increase will result in a large decrease in demand), below is less elastic;
Cournot duopoly model=2 firms choose price based on price of the other firm in previous period, assume price will not change, divide market equally at equilibrium price;competitors choose price simultaneously each period;
Stackelberg model=pricing decisions are made sequentially, leader choose a price, others follow;
the resulting price will be somewhere between the price based on perfect collusion that would maximize total profits to all firms in the market (which is actually the monopoly price), and the price that would result from perfect competition and generate zero economic profits in the long run
e.g. automobile, oil
monopoly=no sub, steep downward-slope demand curve (market demand curve), high barriers to entry due to copyrights and patents, supported by regulations; nature of competition is not price nor marketing, features but advertising
e.g. electric utility
Nash equilibrium=the choices of all firms are such that there is no other choice that makes any firm better off (increases profits or decreases losses)
expansion=real GDP increasing,expansion approaches its peak, the rates of increase in spending, investment, and employment slow but remain positive, while inflation accelerates; peak=real GDP stop increase and begin decrease, contraction=real GDP decreasing, inflation rate decreases with a lag. import less, trough=stop decresae and begin increasing, high unemployment rate, moderate or decreasing inflation
two consecutive quarters of growth in real GDP to be the beginning of an expansion; two consecutive quarters of declining real GDP to be the beginning of a contraction
Credit cycles=o cyclical fluctuations in IR and the availability of loans (credit)
expansion=lender willing to lend and lower IR;
credit cycle amplify business cycle;
credit cycles have been longer in duration than business cycles on average.
Consumers are more willing to purchase high-value durable goods (e.g., appliances, furniture, automobiles) during expansions; Spending on nondurable goods, such as food at home or household products for everyday use, remains relatively stable over the business cycle.
Increasing growth of domestic GDP leads to increases in purchases of foreign goods (imports), while decreasing domestic GDP growth reduces imports
Exports depend on the growth rates of GDP of other countries
leading indicators
house price, retail sales, new orderes, stock prices, new unemployment claims, yield curve, expectation
lagging indicators
duration of unemployment, CPI, inventory-sales ratio, inflation
coincident indicators
industrial production, personal income
Fiscal policy:
influence economic activity and stablize demand;
redistribution of income and wealth;
Allocating resources among economic agents and sectors in the economy
government spending and taxation to influence economic activity;
budget surplus when tax>spending;
increase in budget deficit is expasionary, increase GDP; deficits and interest expense need to be evaluated relative to annual GDP
Keynesian=fiscal policy have strong effect on economic growth when the economy is operating at considerable lots unemployment; a lot to deploy
Monetarists=effect of fiscal is temporary, and that monetary policy should be used to increase or decrease inflationary pressures over time; do not believe that monetary policy should be used in an attempt to influence aggregate demand to counter cyclical movements in the economy.
Monetary policy
central bank money supply and interest rate to influence economic activity;
expansionary=increase moey supply and credit, buy govy, decrease IR;
contractionary=sell govy, decrease monetary supply;
monetary and fiscal policies
maintaining stable prices and producing positive economic growth
Discretionary fiscal policy
spending and taxing decisions of a national government that are intended to stabilize the economy;
automatic stabilizers=tax automatically fall in recession, spending unemployment increase, expansionary;
country debt ratio
aggregate debt to GDP;
tax related to GDP growth;
if real IR growth>real GDP growth, debt ratio increase
