Economics Flashcards
Factors of production
crude oil, labor. Firms are buyers in product markets
Services and finished goods
cars, clothing etc. Firms are sellers in product markets
Law of Demand
Quantity demanded typically increases at lower prices and decreases at higher prices
Law of Supply
Increase in price results in an increase in the quantity supplied
To find the market supply or demand you must ___
multiply the coefficients by the number of participating firms
Stable Equilibrium
When there are forces that move price and quantity back towards equilibrium values when they deviate from those values
Unstable Equilibrium
If the supply curve is less steeply sloped than the demand curve, prices above or below equilibrium will tend to get further from equilibrium
Common Value Auction
Value of item to be auctioned will be the same to any bidder, but the bidders do not know the value at the time of the auction (oil lease auctions). All bidders must determine what the value is. Winner’s curse is when the bidder overestimates
Private Value Auction
Auction of art or collectibles
English Auction or Ascending Price Auction
Bidders can bid an amount greater than the previous high bid ad the bidder that first offers the highest bid of the auction wins the item
Sealed Bid Auction
Each bidder provides one bid which is unknown to other bidders
Second Price Sealed Bid Auction
Bidder submitting highest bid wins but pays price of the second bidder
Reservation Price
The highest bid that a bidder is willing to pay
Descending Price Auction (Dutch Auction)
Begins with the price greater than what any bidder will pay, this price is reduced until a bidder agrees to pay it
Noncompetitive Bid
Indicates those bidders will accept the amount of Treasuries indicated at the price determined by the auction, rather than specifying a maximum price
Consumer Surplus
The difference between the total value to consumers of the units of a good that they buy and the total amount they must pay for those units
Producer Surplus
The excess of the market price above the opportunity cost of production or total revenue minus the total variable cost of producing those units
The efficient quantity of a good for a producer
is also the quantity of production that maximizes total consumer surplus and producer surplues
Allocation of Resources is efficient if…
it maximizes the sum of consumer and producer surplus. Any excess or shortage is known as deadweight loss
Price Controls
rent control and minimum wage
Taxes and Trade Restrictions
subsidies and quotas. Taxes increase the price that buyers pay and decrease the amount sellers receive. Subsidies effectively increase the amount sellers receive and decrease the price buyers pay, leading to production of more goods
Quotas are imposed production limits, resulting in production of less than the efficient quantity of the good
External Benefits
Result in demand curves that do not represent the societal benefit of the good or service, so the equilibrium quantity produced and consumed is less the efficient quantity
External Costs
Result in an over-allocation of resources to production by the polluting firms
Public Goods
Consumed by people regardless of whether or not you paid for them. I.e national defense
Free Rider Problem
People benefit from public goods regardless of if they paid for it
Price Ceilings
If price ceiling is below equilibrium price, a shortage occurs where the quantity supplied is less tan the quanity demanded. Price above which producers cannot legally sell and is generally set below the market equilibrium
Price Ceilings Lead too
Long lines (opportunity cost of time), suppliers engage in discrimination, suppliers take bribes, suppliers reduce quality of goods
Example is rent control
Price Floor
If price floor is above equilibrium price, excess supply occurs as producers produce more at a higher price than they should be producing
Price Floors lead too
unsold goods, lower demand. Minimum wage is an example of a price floor
Tax on a good will
increase its equilibrium price and decrease its equilibrium quantity
Tax Revenue is
the amount of the tax times the new equilibrium quantity
Statutory Incidence
Who is legally responsible for paying the tax
Actual tax incidence
Is independent of whether the government imposes the tax on consumers or suppliers
If demand is less elastic than supply, consumers will
bear a higher burden or pay a greater portion of the tax than suppliers
If Supply is less elastic than demand, producers will
bear a higher burden or pay a greater portion of the tax than consumers
Subsidy
Usually results in a shift downward of the supply curve, or more goods produced
Price Elasticity
Measure of the responsiveness of the quantity demanded to a change in price. Percentage change in quantity demanded over percentage change in price
Elasticity
Not dependent on units of measurement because it is based on percentage changes. IT IS NOT THE SLOPE FOR DEMAND CURVES
If price elasticity equals -1 then
total revenue (p x q) is maximized at that price
Price Elasticity - Portion of Income spent on a good
the large the proportion of income that is spent on a good, the more elastic an individuals demand for that good will be (i.e. car or house)
Time
Elasticity of demand tends to be greater the longer the time period since the price change
Income Elasticity
The sensitivity of quantity demanded to change in income
Cross Price Elasticity of Demand
Ratio of the percentage change in the quantity demanded of a good to the percentage change in the price of a related good
Substitutes
When the increase in price of a good leads to an increase in demand for another good
Complement
When an increase in price of a good leads to a decrease in demand for another good
Changes in demand and supply equate to ____
shifts in the demand / supply curve
Supply is increased by
advances in production technology and by decreases in input prices
Supply changes in response to a change in the cost of inputs
true
Utility Theory
Explains consumer behavior based on preferences for various alternative combinations of goods, in terms of the relative level of satisfaction they provide
Condition of Non-Satiation
Other things equal, more is always preferred to less
If Utility is 200 vs. another bundle utility of 100,
You can only say that you prefer bundle 1 to bundle 2
Indifference curves rules
- For two goods, slope downward
- Convex towards the origin
- Cannot cross
Marginal Rate of Substitution
The rate at which the consumer will willingly exchange units of good x for good y
Equilibrium Bundle of Goods
The point where the highest attainable indifference curve is just tangent to the budget line
Key point about the substitution effect and income effect
Substitution effect always acts to increase the consumption of a good that has fallen in price, while the income effect can either increase or decrease consumption of a good that has fallen in price
Normal Good
One for which the income effect is positive
Inferior Good
Income effect is negative
Giffen Good
An inferior good for which the negative income effect outweighs the positive substitution effect when price falls. Giffen good would have an upward sloping demand curve
Veblen Good
Higher price makes the good more desireable (Gucci bag)
Accounting Profit
Equates to the bottom line. Total revenues less total explicit costs
Economic Profit
Accounting Profit less implicit costs (opportunity costs)
Economic Profit of zero is ______
what we expect in equilibrium - that’s why they are called abnormal profits.
Economic Rent
The payment to a resource in excess of the minimum payment to retain resources in their current use. Supply is inelastic
Total revenue
price x quantity
Average Revenue
TR / Quantity
Marginal Revenue
The increase in total revenue from selling one more unit of a good or service
Factors of Production
land, labor, capital, materials
Production Function
Q = f(K,L)
Marginal Product
Output with only one worker`(slope)
Diminishing Marginal Productivity
When the quantity of labor for which the additional output for each additional worker begins to decline
In the short run, as long as items are being sold for more than their cost, the store should ____
stay open
In the long run, as long as items are sold for less than their average total cost, the store should ____
shut down
Firm under perfect competition
Price = MR = AR
Short-run shutdown point
If average revenue is less than average variable cost in the short run
Increasing Cost Industry
an industry in which per-unit costs and output prices are higher when industry output is increased in the long run. An example includes oil - as oil demand increases, costs of E&P increase more
Decreasing Cost Industry
an industry in which per-unit costs and output prices are lower when industry output is increased in the long run. Flat panel televisions are a good example of this
Constant Cost Industry
When firms in the industry experience no change in resources costs and output prices over the long run
Relationships among the marginal and average cost curves
AFC slopes downward
The vertical distance between the ATC and the AVC curves is equal to AFC
MC declines initially, then increases
ATC and AVC are U shaped
The MC curve above AVC is the firm’s short run supply curve in a perfectly competitive market
Minimum efficient scale
Under perfect competition, firms must operate at minimum efficient scale in long-run equilibrium
Under perfect competition firms earn ________
zero economic profit
Profit Maximization Formula
MR = MC or TR-TC max
Marginal Revenue Product
The amount of additional revenue received from employing an additional unit of an input
At the optimal combination of labor and capital, the ratio of each input’s marginal revenue product to its cost per unit is equal to one
TRUE
Perfect Competition
Many firms produce identical products
Monopoly
Producers are not identical
Oligopoly
only a few firms are competing.
Natural Monopoly
Refers to a situation where the average cost of production is falling over the relevant range of consumer demand (pubic utilities)
The long-run equilibrium output level for a perfectly competitive firm is …..
where MR=MC=ATC
Nash Equilibrium
When two or more participants in a non-cooperative game have no incentive to deviate from their respective equilibrium strategies given their opponents strategies
Exchange Rate
Simply the price or cost of units of one currency in terms of another
$1.416USD/EUR means a EUR cost $1.416USD, or $1.416 USD per EUR
Real exchange rate
Tells us the dollar cost of purchasing that same unit of goods and services based on the new (current) dollar/euro exchange rate
When is the real rate of exchange equal to the nominal rate of exchange?
When the CPI of both currencies is equal
Spot Exchange Rate
Exchange rate for immediate delivery, which for most currencies means the exchange of currencies takes place two days after the trade
Forward Exchange Rate
Currency exchange for an exchange to be done in the future. Forward rates are quoted for various future dates. It is an agreement to exchange a specific amount of one currency for a specific amount of another on a future date specified in the agreement
Forward Contract
An agreement between two parties in which one party, the buyer, agrees to buy from the other party, the seller, an underlying asset at a later date for a price established at the start of the contract
Real Money Accounts
mutual funds, pension funds, insurance companies, and other institutional accounts that do not use derivatives
Primary dealers in currencies and originators of forward foreign exchange contracts are large ____________
large multinational banks
Direct Quote
The value of one unit of a foreign currency in units of the home currency. $0.60USD/AUD is the direct quote of australian dollar to a US investor
Indirect Quote
The amount of a foreign currency for one unit of the home currency
Converting Indirect / Direct Quotes
$1.16USD/EUR direct quote in EUR is 1/1.16 or 0.862EUR/USD
Base Currency
The currency in which the quote represents one unit, or the foreign currency for a direct quote
Price Currency
The currency for which the quote represents a number of units. The home currency is the base currency for an indirect quote
Cross Rate
The exchange rate between two currencies implied by their exchange rates with a common third currency
Forward Rate Quotations are expressed ___
as the unit of points is the last decimal place
When currencies are freely traded and forward currency contracts exist, the forward premium or discount is approximately equal to the difference between the two countries interest rates
This is because there is an arbitrage trade with riskless profit to be made when this relation does not hold
Exchange Rate Regimes
Two for countries that do not issue their own currencies. Seven for countries that issue their own currencies
Two are formal dollarization and a monetary union
Currency Board Arrangement
An explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate (Hong Kong and USD). Essentially imports the inflation rate of the outside currency
Conventional Fixed Peg Arrangement
Country pegs its currency within margins of +/- 1 percent versus another currency or a basket that includes the currencies of its major trading / financial partners
Target Zone
Permitted fluctuations in currency value relative to another currency or basket are wider. More policy discretion because the bands are wider
Crawling Peg
Exchange rate adjusted periodically, typically to adjust for higher inflation vs. the currency used in the peg
Elasticities Approach
Approach to understanding the impact of exchange rate changes on the balance of trade focuses on how exchange rates affect total expenditures on imports and exports. The total expenditures, not the quantity, is what matters
Marshall Lerner Condition
Conditions under which a depreciation of the domestic currency will decrease a trade deficit
Why are import and export quantities relatively insensitive to currency depreciation in the short run?
Because import and export contracts for the delivery of goods most often requires delivery and payment in the future
J-curve Effect
The short-term increase in the deficit followed by a decrease when the Marshall-Lerner condition is met
Absorption Approach
Shortcoming of elasticities approach is that it only considers trade flows and ignores capital flows
Autarky
Does not trade with other countries
Trade Protection
A government places restrictions, limits, or charges on exports or imports
