Final Exam Flashcards
The study of the choices of consumers, business managers, and government officials make to attain their goals, given scarce sources
Economic definition
3 economic ideas
- People are rational
- People respond to economic incentives
- Rational people think @ the margin
When you know all the pieces and still make the decision
Rational
When you don’t know all the pieces and still make the decision
Irrational
Graph that shows the maximum attainable combination of two goods that may be produced with available resources & technology
Production possibilities frontier
The ability of an individual firm or country to produce at a lower opportunity cost then its competitor.
Comparative advantage
The ability to produce a good using fewer inputs.
Absolute advantage
3 characteristics of a perfectly competitive market?
- Homogeneous good
- Lots of buyers and sellers
- No barriers to new firms entering the market
An inverse relationship between the price of a product and the quantity of the product demanded
Law of demand
Two effects that drive the law of demand
Substitution effect
Income effect
An agreement between firms that usually compete against each other in efforts to set the price for their goods in order to gain an advantage
Collusion
Anything that keeps new firms from entering an industry in which firms are earning economic profits.
Barriers to entries
A pricing strategy that charges customers different prices for the same product or service
Price discrimination
A game in which pursuing dominant strategies results in non-cooperation that leaves everyone worse off.
Prisoners Dilemma
A firm that is the only seller of a good or service that does not have a close substitute
Monopoly
A market structure in which a small number of interdependent firms compete
Oligopoly
Three important barriers to entry:
- Economies of scale
- Ownership of key input
- Government imposed barriers
The situation when a firm’s long-run average costs fall as the firm increases output.
Economies of scale
If production of a good requires a particular input
Ownership of a key input
The exclusive right to a product for a period of 20 years from the date the __ is filed with the government
Patent
A buyer or seller that is unable to affect the market price.
Price taker
The period of time during which at least one of a firm’s inputs is fixed
Short run
The period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant
Long run
The cost of all the inputs a firm uses in production
Total cost
Costs that change as outputs change
Variable cost
Costs that remain constant as output changes.
Fixed cost
The highest valued alternative that must be given up to engage in an activity
Opportunity cost
A cost that involves spending money
Explicit cost
A non monetary opportunity cost
Implicit cost
Total cost equation
Total cost = fixed cost + variable cost
Average total cost equation
Total cost divided by the quantity of output produced
A) Elastic demand
B) Inelastic demand
C) Unit-elastic demand
A) >1
B) <1
C) =1
The key determinants of the price elasticity of demand are:
- The availability of close substitutes to the good
- The passage of time
- Whether the good is a luxury or a necessity
- The definition of the market
- The share of the good in the consumer’s budget
Equation for cross-price elasticity of demand
Percentage change in quantity demanded of one good
Divided by
percentage change in price of another good
A legally determined maximum price that sellers may charge
Price ceiling
A legally determined minimum price that sellers may receive
Price floor
The additional benefit to consumer from consuming one more unit of a good or service
Marginal benefit
Accounting profit equation
Total revenue - totals explicit costs
Economic profit equation
Total revenue - total costs
