F Flashcards
1
Q
Law of demand
A
As P increases Q decreases (inverse relationship)
2
Q
Variables in demand function
A
Income, Price, Taste
3
Q
Law of supply
A
As P increases Q increases (direct relationship)
4
Q
Variables in supply function
A
Price, Inputs, Tech
5
Q
Finding equilibrium P and Q
A
Qd = Qs
6
Q
Substitutes relationship
A
As Pa increases Db increases
7
Q
Complements relationship
A
As Pa increases Db decreases
8
Q
Normal relationship
A
As INC increases D increases
9
Q
Inferior relationship
A
As INC increases D decreases
10
Q
As P of inputs increases,
A
Supply decreases
11
Q
As Tech increases
A
Depends on IP rights, usually nothing
12
Q
Price elasticity of demand
A
% change in Qd brought about by 1% change in P
13
Q
PE formula
A
PE = -ΔQ/ΔP * P/Q
14
Q
Inelastic
A
Below 1
15
Q
Elastic
A
Above 1
16
Q
Perfect inelastic
A
0
Any change in P doesn’t affect Q
17
Q
Perfect elastic
A
Infinity
Any change in P means Q = O
18
Q
Unit elastic
A
1
19
Q
Relationship of ΔP to elasticity
A
Lower ΔP = less elastic
20
Q
When to raise or cut prices
A
Elastic = cut
Inelastic = raise
21
Q
Cross price elasticity
A
determines strength of relationship between I and J
22
Q
Cross price elasticity of demand formula
A
Eij = ΔQi/ΔPj * Pj/Qi
23
Q
Cross price for complements
A
negative
24
Q
cross price for substitutes
A
positive
25
income elasticity
how sensitive Qd is to a change in income
26
income elasticity for normal goods
positive
27
income elasticity formula
n = ΔQ/ΔI * I/Q
28
income elasticity for inferior goods
negative
29
rational choice axioms
1) complete
2) transitive
3) more = better
30
marginal utility formula
dU/dx
or ΔU/ΔX
31
law of diminishing marginal utility
as you increase X, you decrease your MUx
32
relationship between indifference curve and utility
utility is constant on each indifference curve
33
perfect complements and perfect substitutes indifference curves
***
34
budget line equation
Px(x) + Py(y) = I
y = I/Py - Px/Py (x)
35
marginal rate of substitution
rate at which consumer is willing to trade Y for X
36
MRS formula
MRS = -MUx/MUy
ratio of marginal utilities
37
figuring out max utility combo of X and Y formula
MUx/MUy = Px/Py
MUx/Px = MUy/Py
38
figuring out max utility combo of X and Y dx method
given I
use: y = I/Py - Px/Py (x) to solve for x
plug into Ux
dU/dx
MU = 0
solve for y
39
two types of inefficiency
technical
allocative
40
technical inefficiency
doing the right thing in the wrong way
41
allocative inefficiency
doing the wrong thing
42
MPl =
MPl = ΔQ/ΔL
dAPL/dL
43
MPk =
MPk = ΔQ/ΔK
dAPk/dK
44
marginal rate of technical substitution
rate at which firm can substitute K for L without changing Q
44
define short run and long run
short run = at least one input is fixed
long run = all inputs can be varied
44
law of diminishing product of labor
as you increase L (holding K fixed) Q increases at a decreasing rate
44
what influences decisions
1) expertise
2) motivation
3) opportunity
44
isoquant
combo of K and L that produce the same Q
45
MRTS
-MPl / MPk
46
isocost
combo of K and L that have the same cost
47
isocost equation
C = Kr + Lw
K = C/r - w/r (L)
48
equilibrium for production firm
MPl/w = MPk/r
49
economic cost formula
economic cost = explicit cost + implicit cost
50
mistakes firms make
1) hidden costs
2) sunk costs
3) discounting investments
51
TC =
FC + VC
52
ATC =
TC/Q
53
AFC =
FC/Q
54
AVC =
VC/Q
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ATC =
AFC + AVC
56
as time increases, what happens to AFC, ATC, and AVC?
AFC approaches 0
ATC decreases over time as Q increases (because specialization)
after some Q, ATC increases again due to AVC
AVC and ATC almost equal each other
57
MC =
dxTC
ΔTC/ΔQ
ΔVC/ΔQ
58
minimizing AVC formula
MC = AVC
or
dxAVC = 0
59
marginal average rule
MC < AC then average is falling
MC > AC then average is rising
MC = AC then average is constant
60
minimum efficient scale
smallest level of q at which long run ATC is minimized
61
MES formula
dx AVC = 0
62
if MES is large, then
must enter industry with large volume
63
relationship between players and MES
fewer players = larger MES
64
shut down rules
P < AVC
P < ANSC
TR < VC
65
operating leverage
measures responsiveness of profit to changes in output
66
DOL formula
DOL = P - AVC / P - ATC
67
high DOL means
high variability in Q leads to high variability in profit
68
TR =
TR = PQ
69
MR =
ΔTR/ΔQ
or
dTR/dq
70
in a perfect market, P =
P = AR = MR
71
always true for all firms
P = AR
72
average non sunk cost formula
ANSC = AVC + ANSFC
ANSFC = NSFC / Q
73
profit =
TR - TC
AR - ATC
74
first order condition
MR = MC
dprofit/dQ = 0
75
second order condition
second derivative of profit must be negative
76
maximizing profit in perfect competition
MR = MC
FOC, SOC
remember P = MR
therefore P = MC
77
a competitive firm perceives demand as
the equilibrium market price
firm perceives it can sell as much as it wants at the market price
78
what is the equilibrium market price for a competitive firm
outcome of actions taken by all firms and consumers acting in a decentralized fashion
79
characteristics about short term firms
firms cannot enter or exit
they can only shut down or operate
80
how does demand and cost relate to time
short term = demand changes
long term = cost changes
81
in the short run, a competitive firm can earn what type of profit
1) positive
2) negative
3) zero
82
a competitive firm will earn positive profit when at Q*:
MC > ATC
remember: MC > AVC
83
positive profit on a graph for a competitive firm =
area under P
84
a competitive firm will earn negative profit when at Q*:
MC < ATC
remember MC still > AVC
85
loss on a graph for a competitive firm =
area above P where Q* lies on ATC
86
if firm is making negative profit in short run, but MC is still greater than VC should they still produce?
yes
87
a competitive firm will shut down when at Q*:
MC < AVC
this also means MC < ATC
88
marginal average rule
ATC approaches AVC
89
where does MC intersect ATC and AVC
at their minimums
90
for a competitive firm, at Q* MC = ?
MC = MR
which means
MC = MR = P = AR
91
cost on a graph is equal to
area under the ATC curve
92
a competitive firm will be indifferent about operating when at Q*:
MC = ATC
remember MC > AVC
93
a competitive firm's supply curve is equal to
its MC above AVC
when P is at or above AVC
If P < AVC then shut down
94
as competition increases, the margins are squeezed by who
buyers, suppliers, and competitors
95
benchmarks
perfect competition
first degree price discrimination
96
characteristics of a monopoly
1) single seller
2) no good substitutes
3) high barriers to entry
4) cost is borne by entrant not by incumbent
97
what are barriers to enter into monopoly market
capital, connections, knowledge
98
what is unique about monopolies
P does not equal MR
99
relationship between P and MR in monopolies
MR < P
100
monopoly MR equation
MR = ΔP/ΔQ * Q + P
101
when Q increases in a monopoly, P per unit will
decrease
102
single price monopolist
charges one price for every unit
103
single price monopolist profit maximization problem
same as competitive firm
MR = MC
FOC
SOC
BUT NOTE: P does not equal MC because P doesn't equal MR
104
graph for single price monopolist
MR lies below Demand curve
105
cost on single price monopolist graph
area under Q* on AC
106
profit on single price monopolist graph
area in between Q* on demand and AC curve
107
consumer surplus on single price monopolist graph
area above Q* (where MC = D) on demand
108
how is a monopolist inefficient compared to a competitive firm
produce less
charges more
Qm < Qc
Pm > Pc
109
producer surplus on single price monopolist graph
area below Q* on demand but above MC
110
for a monopolist, every incremental unit it produces
depresses the price it receives on ALL units
as Q increases, P decreases
111
remember that the demand curve for all firms =
P = AR
112
when exam says solve it, find:
Q*
P*
total profit
NASH equilibrium
113
social objections to monopoly
1) concentration of economic and political power
2) loss of choice, competition, efficiency
3) income and wealth inequality
114
price discrimination
selling similar goods for different prices
115
why do firms engage in price discrimination
people have different WTP and firms want to capitalize on this
want to prevent cross over
116
price discrimination quote
"having refused the poor what is necessary, they give the rich what is superfluous" - Jules Dupuit
117
price discrimination challenges
identifying max WTP
enforcing differential pricing
118
when FC increases, what happens to VC and DOL
FC increases leads to
VC decreases
DOL increases
119
first degree price discrimination
benchmark
individual
complete extraction of consumer surplus
120
solving first degree price discrimination (given P and VC)
1) set D = MC, find Q*
2) graph
3) find area above MC = surplus
4) find area below MC = cost
5) total revenue = cost + surplus
6) profit = total revenue - cost
finding Q*, TR, and profit
121
how do companies acquire personal information
smart cash registers
amazon.com
google
122
solving first degree price discrimination (given individual WTP)
firm will sell units until WTP = MC
1) determine units (Q*)
2) find TR
3) find TC = MC * Q
4) find profit
123
characteristics of first degree PD
benchmark
highest possible profit
no consumer surplus
124
second degree price discrimination
non-linear pricing
every individual who buys the same amount pays the same price
125
methods of second degree PD
1) comprehensiveness and features
2) amenities
3) convenience
4) speed of operation
126
solving unobservable types (second degree PD)
1) set MC = D, find Q* (for both)
2) graph
3) outlay of Q1 = area under D1 up to Q1
4) outlay of Q2 = outlay of Q1 plus area under D2 up to Q2 (second part)
127
why do we remove BAFD
giving back the consumer surplus because we want to force those with D2 to buy Q2 and not settle for Q1
128
third degree price discrimination problems
1) normal
2) forced to charge single price
3) unobservable types
128
third degree price discrimination
group pricing
segmented by explicit signals given off by the group
129
solving normal third degree price discrimination
solve both as if they were single price monopolists (MR = MC)
130
solving forced to charge single price third degree price discrimination
1) add together the Qs (add the intercepts and sum the slopes)
2) solve as if single price monopolist (MR = MC)
3) plug the P back into Q equations to find separate Q
4) find profit
131
solving unobservable types third degree price discrimination
treat it as second degree (AREA)
132
if a third degree PD monopolist charges a higher price to market A, what can we conclude about QA?
nothing
Pa>Pb but cannot say Qa
133
rank the types of firms in terms of highest to lowest price
first
second
third
single price
perfect competition
134
for monopolies, MR is what to P
MR < P
135
game theory
formal analysis of strategic interdependence
136
how does game theory help
explain what happened
predict what will happen
prescribe what one should do
design games we should play
137
everyday life examples of game theory
driving
marriage
parenting
team work
negotiating
138
business examples of game theory
pricing
hiring
pollution
standards
investment
139
whats the value of game theory
disciplined thinking
deeper understanding of people, their beliefs, and their priorities
allocentrism
140
rationality in game theory
players have complete knowledge of their interests
141
common knowledge in game theory
every player knows everything there is to know about the game
every player knows that everyone else knows everything
142
equilibrium in game theory
no player has an incentive to change his or her actions given the actions chosen by others
143
dominant strategy
strategy is best no matter what the other player does
144
games where players have dominant strategies
prisoner's dilemma
happy marriage
145
games where players do not have dominant strategies
pizzeria wars (originally)
battle of the sexes
146
games where there's a unique NASH
prisoner's dilemma
happy marriage
147
games where there's two NASH
battle of the sexes
148
prisoner's dilemma
both dominant
unique NASH
unhappy players
149
battle of the sexes
no dominant
two NASH
common and different interests
requires communication
altruism backfires
cannot predict choice
150
finding NASh with multiple rows and columns
cross out dominated
151
happy marriage
dominant
NASH
happy
152
lessons from game theory
1) figure out what you want
2) think about the game from the perspective of other players
3) eliminate dominated strategies
4) rational choice can lead to bad outcomes for all
153
oligopoly
few firms many buyers
each firm recognizes that its payoffs depend on the actions chosen by other players
154
cournot model
each firm chooses production (1) simultaneously and (2) non-cooperatively
155
solving cournot model
1) find FOC for both Q
2) solve for Q1 in terms of Q2
3) plug into Q1, solve for Q1
156
best response functions
define firm A's profit maximizing production level for any given production level chosen by firm B
157
as firms increase, what happens to profit, P and Q
Increase in Firms:
Increase in Q
Decrease in P
Decrease in profit
158
formula for buying out another firm
Max P = current profit - potential profit
159
formula for selling firm
Min Sell = current profit
160
how does Q change with collusion?
Q decreases
161
collusion formulas
Taking the original from if there were two firms:
P = same
Q / 2
Profit / 2
162
why is collusion unstable?
not on the best response function
people have incentive to defect (no trust)
163
risk
potential for unexpected events to occur (or to not occur) that precipitate adverse outcomes
164
risks companies face
operational risk: assembly lines
financial risk: interest rates
legal risks: compliance
reputation risk: media
strategic risk: CEO failures
cybersecurity risk: phishing
165
risk fallacies and answers
1) risk is bad -> risk is opportunity
2) some risks are so bad that they must be eliminated -> at what cost?
3) playing safe is the best thing to do (avoiding type 2 errors) -> wrong because this leads to type 1 errors
166
regrets
foundational: education, money, health
boldness: failure of courage
moral: deceit
relationship
167
expected value formula
EV = p*A + p*B
168
variance formula
V = [p * (A - EV)^2] + [p * (B - EV)^2]
169
von neumann and morgenstern rule
what people care about is expected utility
170
expected utility
expected utility over all expected outcomes
171
EU formula
EU = p*U(X) + p*U(X)
where X = starting state + gamble outcome
172
EU rule
if EU of A is greater than U of current state, do the gamble
173
risk aversion
decision maker who prefers a sure thing to a lottery of equal expected value
can be persuaded by a risk premium
concaves
174
risk neutral
decision maker who is indifferent between a sure thing and a lottery of equal expected value
cannot be persuaded by a risk premium
175
risk seeking
decision maker who prefers a lottery to a sure thing when the former has equal expected value
risk premium is unnecessary
convex
176
risk premium
minimum difference between the EV of a lottery and the payoff of a sure thing that makes the decision maker indifferent between the two
177
how to deal with risk
avoid it
hedge it
diversify it
