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Final Econ > Final Exam Econ (I love you babyyyyy) > Flashcards

Final Exam Econ (I love you babyyyyy) Flashcards

1
Q

Perfect competition

A

many firms, identical products, price takers,

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2
Q

Perfect competition

A

P = MC

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3
Q

Monopoly

A

one firm, price maker

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4
Q

Monopoly

A

P > MC

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5
Q

Two extreme forms of market structures

A

Perfect competition & Monopoly

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6
Q

in between the extremes - Imperfect competition

A

Oligopoly & Monopolistic competition

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7
Q

Oligopoly

A

only a few sellers offer similar or identical products.

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8
Q

Monopolistic competition

A

many firms sell similar but not identical products.

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9
Q

Oligopoly Concentration ratio

A

Measure a market’s domination by a small number of firms
The percentage of total output in the market supplied by the four largest firms
Less than 50% for most industries
Greater than 90% in: aircraft manufacturing, tobacco, passenger car rentals, and express delivery services

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10
Q

Monopolistic Competition Characteristics

A

Numerous firms competing over customers
Product differentiation
Not price takers; D curve slopes downward
Free entry and exit
Zero economic profit in the long run

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11
Q

Monopolistic Examples

A

Books, video games, restaurants, piano lessons, cookies, clothing

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12
Q

Four types of market structure

A

Monopoly- one firm
oligopoly- few firm
Monopolistic Competition- many firms, differentiated products
Perfect Competition- many firms, identical products

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13
Q

Short Run Equilibrium

A

Profit maximization in the short run for the monopolistically competitive firm:
-Produce quantity where MR=MC
-Price is on the demand curve
-If P>ATC: profit
-If P<ATC: loss
-Similar to monopoly

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14
Q

Short run equilibrium example

A

-To maximize profit, firm produces Q where MR=MC

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15
Q

Long Run equilibrium

A

If monopolistically competitive firms are making profit in short run:
-new firms: incentive to enter market
-increase number of products
-reduces demand faced by each firm, demand curve shifts left, price falls
-each firms profit declines to zero

If losses in the short run:
-Some firms exit the market, remaining firms enjoy higher demand and prices

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16
Q

Long run equilibrium

A

Entry and exit until P=ATC and profit=0

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17
Q

Monopolistic Vs. Perfect Competition

A

-Excess capacity: quantity is not at minimum ATC (it is on the downward-sloping portion of ATC)
-Markup over marginal cost: P > MC

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18
Q

Perfect Competition

A

-Quantity: at minimum ATC (efficient scale)
-P = MC

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19
Q

Monopolistically Competitive markets

A

-Do not have all the desirable welfare properties of perfectly competitive markets

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20
Q

Sources of inefficiency

A

-Markup of price over marginal cost
-Too much or too little entry (number of firms in the market)
Product-variety externality
Business-stealing externality

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21
Q

Markup, P>MC

A

-Market quantity < socially efficient quantity, Deadweight loss of monopoly pricing

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22
Q

The product-variety externality

A

-Consumers get extra surplus from the introduction of new products

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23
Q

The business-stealing externality

A

-Losses incurred by existing firms when new firms enter market

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24
Q

Incentive to advertise

A

-When firms sell differentiated products and charge prices above marginal cost
-Advertise to attract more buyers

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25
Q

Advertising spending

A

-Highly differentiated goods: 10-20% of revenue
-Industrial products: little advertising
-Homogenous products: no advertising

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26
Q

Critique of Advertising 1

A

-Is psychological rather than informational
-Creates a desire that otherwise might not exist

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27
Q

The defense of advertising

A

-It provides useful information to buyers
-Informed customers make better choices
-Advertising promotes competition, reduces market power

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28
Q

Case Studies Advertising

A

-Eyeglasses: more expensive in states that prohibited advertising
-Liquor: about 20% cheaper after advertising was allowed

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29
Q

Advertising as a signal of Quality

A

-Even if contains little apparent information
-The real information offered is a signal
-The willingness to spend large amount of money is a signal about -the quality of the product
Content of advertising = irrelevant

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30
Q

Brand names

A

-In many markets, brand name products coexist with generic ones.
-Brand names spend more on advertising and charge higher prices than generic substitutes
-As with advertising, there is disagreement about the economics of brand names…

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31
Q

Critics of brand names

A

-Products are not differentiated
-Irrationality: consumers are willing to pay more for brand names

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32
Q

Defenders of brand names

A

-Consumers get information about quality
-Firms have an incentive to maintain high quality to protect the reputation of their brand name

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33
Q

Concentration ratio

A

-Measure a market’s domination by a small number of firms
-The percentage of total output in the market supplied by the four largest firms
-Less than 50% for most industries

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34
Q

Oligopoly

A

-Market structure in which only a few sellers offer similar or identical products

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35
Q

Strategic behavior in oligopoly

A

-A firm’s decisions about P or Q can affect other firms and cause them to react
-The firm will consider these reactions when making decisions

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36
Q

Game Theory

A

-the study of how people behave in strategic situations

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37
Q

Oligopolists

A

-Make the most profit when they cooperate and together act like one big monopolist
-Strong incentives hinder a group of firms from maintaining the cooperative outcome

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38
Q

Duopoly

A

-A market with only two sellers
-Simplest type of oligopoly

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39
Q

Collusion

A

-Agreement among firms in a market about quantities to produce or prices to charge
-One possible duopoly outcome

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40
Q

Cartel

A

-A group of firms acting in unison
-Once a cartel is formed, the market is in effect served by a monopoly

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41
Q

Collusion vs. Self-Interest

A

-Both firms would be better off if both stick to the collusion agreement (form a cartel)

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42
Q

Lesson

A

-It is difficult for oligopoly firms to form cartels and honor their agreements

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43
Q

Nash Equilibrium

A

-Economic actors interacting with one another, each choose their best strategy
-Given the strategies that all the other actors have chosen

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44
Q

When firms in an oligopoly individually choose production to maximize profit

A

-Produce Q: greater than monopoly Q, less than competitive Q
-The price: is less than the monopoly P, greater than the competitive P = MC

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45
Q

Increasing output has two effects on a firm’s profits

A

-Output effect: because P > MC, increasing output raises profits
-Price effect: raising production increases total quantity sold, which reduces price and reduces profit on all units sold

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46
Q

As the number of sellers in an oligopoly increases:

A

-The price effect becomes smaller
-The oligopoly looks more and more like a competitive market
-The price approaches marginal cost
-The market quantity approaches socially efficient quantity

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47
Q

The Prisoners’ Dilemma

A

-Particular “game” between two captured prisoners
-Illustrates why cooperation is difficult to maintain even when it is mutually beneficial

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48
Q

Dominant strategy

A

-Strategy that is best for a player in a game
-Regardless of the strategies chosen by the other players

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49
Q

When oligopolies form a cartel

A

-Hoping to reach the monopoly outcome, they become players in a prisoners’ dilemma
-The monopoly outcome is jointly rational, but each firm has an incentive to cheat: self-interest makes it hard to maintain the cooperative outcome with low production, high prices, and monopoly profits

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50
Q

Examples of prisoners’ dilemma

A

-Two firms spend millions on TV ads to steal business from each other.
-Each firm’s ad cancels out the effects of the other, and both firms’ profits fall by the cost of the ads

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51
Q

Non-cooperative oligopoly equilibrium

A

-May be bad for oligopolists
Prevents them from achieving monopoly profits
-May be bad for society
Examples: Arms race game, Common resource game
-May be good for society
Quantity and price – closer to optimal level

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52
Q

Why people sometimes cooperate

A

-Two strategies may lead to cooperation
-When the game is repeated many times, cooperation may be possible

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53
Q

Public policy toward oligopolies

A

-Governments can sometimes improve market outcomes
-Policymakers:
Try to induce firms in an oligopoly to compete rather than cooperate
Move the allocation of resources closer to the social optimum

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54
Q

Sherman Antitrust Act, 1890

A

-Elevated agreements among oligopolists from an unenforceable contract to a criminal conspiracy

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55
Q

The Clayton Act, 1914

A

-Further strengthened the antitrust laws

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56
Q

Antitrust laws are used to prevent:

A

-Mergers that would give a firm excessive market power
-Oligopolists from acting together in ways that would make their markets less competitive

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57
Q

Resale Price Maintenance

A

-A manufacturer imposes lower limits on the prices retailers can charge
-Often opposed because it appears to reduce competition at the retail level
-Yet, any market power the manufacturer has is at the wholesale level
-No gains from restricting competition at the retail level

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58
Q

Goal of Resale Price Maintenance

A

-Preventing discount retailers from free-riding on the services provided by full-service retailers

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59
Q

Predatory Pricing

A

-A firm cuts prices to prevent entry or drive a competitor out of the market
-Illegal under antitrust laws
-Economists debate whether predatory pricing should concern antitrust policymakers

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60
Q

Bundling

A

-A manufacturer bundles two products together and sells them for one price
-Firms may use bundling for price discrimination
-Bundling cannot change market power

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61
Q

Factors of production

A

-Inputs used to produce goods and services: labor, land, capital
-Prices and quantities are determined by supply and demand in factor markets

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62
Q

Derived demand for a factor of production

A

-A firm’s demand for a factor of production is derived from its decision to supply a good in another market.

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63
Q

All markets are competitive

A

-The typical firm is a price taker
In the market for the good it produces
And in the labor market (factors of production)

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64
Q

Firms care only about maximizing profits

A

-Each firm’s supply of output and demand for inputs are derived from this goal

65
Q

Cost of hiring another worker

A

-The wage=the price of labor

66
Q

Benefit of hiring another worker

A

-Produce and sell more output, increasing revenue.
-The size of this benefit depends on the production function: the relationship between the quantity of inputs used to make a good and the quantity of output of that good

67
Q

Marginal product of labor (MPL)

A

MPL= change in Q/change in Labor
The increase in the amount of output from an additional unit of labor

68
Q

Diminishing marginal product

A

-The marginal product of an input declines as the quantity of the input increases

69
Q

Value of the marginal product

A

-Problem:
Cost of hiring another worker is measure in dollars
-Benefit of hiring another worker (MPL) is measured in units of output
-Convert MPL to dollars

70
Q

Value of the MPL

A

VMPL= P x MPL
The marginal product of an input times the price of output

71
Q

VMPL and labor demand

A

-To maximize profits, hire workers up to the point where VMPL=W
-VMPL curve us the labor demand curve

72
Q

Changes un the output price, P

A

-An increase in P increases VMPL, which is the demand curve

73
Q

Technological change (affects MPL)

A

-Can increase the MPL, increasing the demand for labor

74
Q

Marginal Cost

A

-cost of producing an additional unit of output
-MC = ∆TC/∆Q, where TC = total cost
-In general: MC = W / MPL

75
Q

Competitive firm’s rule for demanding labor

A

-P × MPL = W
-Divide both sides by MPL: P = W / MPL
-Substitute MC = W / MPL from previous slide: P = MC

76
Q

Trade-off between work and leisure

A

-The more time you spend working, the less time you have for leisure

77
Q

Wage

A

-Is the opportunity cost of leisure
-When wage increases, the opportunity cost of enjoying leisure goes up

78
Q

Labor supply curve

A

An increase in W is an increase in the opportunity cost of leisure.

79
Q

Causes that shift Labor-supply curve

A

-change in preferences
-Change in alternatives opportunities
-immigration

80
Q

Equilibrium in the labor market

A

-Wage: adjusts to balance S and D for labor.
-The wage always equals the value of the marginal product of labor (VMPL).

81
Q

With land and capital, must distinguish between:

A

-Purchase price: the price a person pays to own that factor indefinitely
-Rental price: the price a person pays to use that factor for a limited period of time

82
Q

How the rental price of land is determined

A

-Firms increase the quantity of land to rent until the value of the marginal product (VMP) of land equals the land’s rental price

83
Q

How the rental price of capital is determined

A

-Firms increase the quantity of capital to rent until the value of the marginal product (VMP) of capital equals the capital’s rental price.

84
Q

Buying a unit of capital or land

A

-Yields a stream of rental income

85
Q

The rental income in any period

A

-Equals the value of the marginal product (VMP)

86
Q

Equilibrium purchase price of a factor

A

Depends on both the current VMP and the VMP expected to prevail in future periods

87
Q

Factors of production are used together

A

-In a way that makes each factor’s productivity dependent on the quantities of the other factors
Example: an increase in the quantity of capital

88
Q

Neoclassical theory of income distribution

A

-Theory developed in this chapter
-Factor prices are determined by supply and demand
-Each factor is paid the value of its marginal product
-Used by most economists as a starting point for understanding the distribution of income

89
Q

Compensating differential

A

-Difference in wages that arises to offset nonmonetary characteristics of different jobs (unpleasantness, difficulty, safety

90
Q

Human capital

A

-Accumulation of investments in people, such as education and on-the-job training
-Affects productivity, labor demand, wages

91
Q

Increase in international trade

A

-Domestic demand for skilled labor rises
-domestic demand for unskilled labor falls

92
Q

Skill-biased technological change

A

-raise the demand for skilled workers who can use the new machines
-reduce the demand for the unskilled workers whose jobs are replaced by industrial robots

93
Q

Greater natural ability or effort

A

-Often command higher pay
-These traits increase workers’ marginal products, making them more valuable to the firm

94
Q

Wages are also affected by chance

A

-E.g., new discoveries no one could have predicted make some occupations obsolete, increase demand in others

95
Q

Ability, effort, and chance

A

-Are difficult to measure
-It is hard to quantify their effects on wages
-They are probably important, though, since easily measurable characteristics (education, age, etc.) account for less than half of the variation in wages in our economy

96
Q

Firms use education level to sort between high ability and low ability workers

A

-The difficulty of earning a college degree demonstrates to prospective employers that college graduates are highly capable
-Yet, the education itself has no impact on productivity or skills

97
Q

Policy implication

A

-Increasing general educational attainment would not affect wages

98
Q

Superstars in their field

A

-Great public appeal and astronomical incomes

99
Q

Superstars arise in markets where

A

-Every customer in the market wants to enjoy the services supplied by the best producers.
-The services are produced with a technology that makes it possible for the best producers to supply every customer at low cost.

100
Q

Monopsony

A

-A market that has only one buyer

101
Q

Labor market dominated by single employer

A

-The employer: large influence on the going wage

102
Q

Growing problem: non-complete clauses

A

-Bar employees from leaving to work for a competitor
-Protect employers’ trade secrets
-Curb competition in the labor market, keeping wages below their equilibrium level

103
Q

Minimum wage laws

A

-raise wages above the level they would earn in an unregulated labor market

104
Q

Market power of labor unions

A

-Union: worker association that bargains with employers over wages and working conditions

105
Q

Theory of efficiency wages

A

-Efficiency wages: above-equilibrium wages paid by firms to increase worker productivity
-Firms may pay higher wages to reduce turnover, increase worker effort, or attract higher-quality job applicants.

106
Q

Effects of above-equilibrium wages

A

-Surplus of labor (unemployment)

107
Q

Discrimination

A

-Offering of different opportunities to similar individuals who differ only by
Race, ethnicity, gender, age, religion, sexual orientation, or other personal characteristics

108
Q

Measuring labor-market discrimination

A

Median Earnings:
Black man: 24% less than white man
Black woman: 16% less than white woman; 10% less than median Black man
White woman: 19% less than white man

109
Q

Differences in educational attainment

A

-2019, men aged 25 and older
36% of the white population had a college degree
26% of the black population

110
Q

Quality of public schools

A

Historically: public schools in predominantly black areas have been of lower quality than public schools in predominantly white areas

111
Q

Human Capital

A

-Women are more likely to interrupt their careers to raise children
Women have less on-the-job experience than men
Population aged 25 to 44
24% of women are out of the labor force
10% of men

112
Q

Compensating differentials

A

-Men and women do not always choose the same type of work
-Different working conditions

113
Q

Competitive market economies

A

-Natural antidote to employer discrimination: profit motive

114
Q

Discrimination by Customers

A

Discrimination by customers may result in discriminatory wage differentials.

115
Q

Discrimination by Governments

A

-Some government policies mandate discriminatory practices.
-Such policies prevent the market from correcting discriminatory wage differentials

116
Q

Wage differentials in competitive markets

A

-Workers are paid a wage that equals the value of their marginal products

117
Q

The profit motive can correct

A

-Discrimination by employers
-But not discrimination by customers or discriminatory policies of governments

118
Q

Statistical Discrimination

A

-Arises because an irrelevant but observable personal characteristic is correlated with a relevant but unobservable attribute

119
Q

I LOVE YOU SOSOSOO MUCHHHHHH BABYYYYY

A

Marry me rnnnnnn ur the love of my lifeeeeeeee

120
Q

Market Economics

A

-Usually achieve greater prosperity
-Prosperity is not shared equally

121
Q

Quintile Ratio

A

Income share of the highest quintile divided by income share of the lowest quintile

122
Q

Poverty Rate

A

Percentage of the population whose family income falls below an absolute level

123
Q

Poverty Line

A

Set by the government, three times the cost of adequate diet

124
Q

Poverty is correlated with race

A

Blacks and hispanics are more than twice as likely to live in poverty as whites

125
Q

Standard measure of income distribution and poverty

A

-Based on families’ pre tax incomes
-Based on monetary incomes

126
Q

Economic life cycle

A

-Regular pattern of income variation over a person’s life
-Young adults have low incomes, incomes tend to rise and peak at age 50
-causes inequality in the distribution of annual income

127
Q

Permanent Income

A

A person’s normal income

128
Q

Transitory changes

A

A family’s ability to buy goods and services depends largely on its permanent income

129
Q

Economic Mobility

A

The movement of people among income classes
Variation of income
Many of those below the poverty line are there only temporarily

130
Q

Political Philosophy

A

Political philosophies of redistributing income
-utilitarianism
-liberal contractarianism
-Libertarianism

131
Q

Utility

A

Measure of happiness or satisfaction

132
Q

Utilitarianism

A

Government should choose policies to maximize the total utility of everyone in society

133
Q

Diminishing marginal utility

A

As a person’s income rises, the extra well-being derived from an additional dollar of income falls

134
Q

Liberal contractarianism

A

The government should choose policies deemed just, as evaluated by impartial observers behind a veil of ignorance

135
Q

Maximin criterion

A

Government should aim to maximize the well-being of the worst off person in society

136
Q

Social insurance

A

Government policy aimed at protecting people against the risk of adverse events

137
Q

Libertarianism

A

Government should punish crimes and enforce voluntary agreements but not redistribute income

138
Q

Families with low incomes…

A

Experience: Homelessness, drug dependence, teenage pregnancy, illiteracy, unemployment
-Victims of crimes and commit crimes

139
Q

Minimum wage laws

A

Arguments for:
-Helps the working poor without any cost to government
-Little impact on employment (inelastic demand)
Arguments against:
-Elastic labor demand in long run(high unemployment)
-Teens from middle income families will benefit most instead of low income adults

140
Q

Welfare

A

Government programs that supplement the incomes of the needy

141
Q

Welfare critics vs. proponents

A

Critics:
-Create perverse incentives
-Encourage families to break up
-Encourage birth out of wedlock
Proponents:
-Being poor and a single mother is a difficult existence at best
-Inflation-adjusted welfare benefits as single parent families increased

142
Q

Negative income tax

A

-Tax system that collects revenue from high income households and gives subsidies to low income households
-Provides universal basic income

143
Q

Earned income tax credit

A

-Applies only to the working poor
-Does not discourage people from working

144
Q

In-Kind transfers

A

-Goods or services provided to the needy
-Examples: Soup kitchens, homeless shelters

145
Q

Budget Constraint

A

Trade-offs:
-Buying more of one good leaves less income to buy other goods
-Working more hours means more income and more consumption but less leisure

146
Q

Budget constraint 2

A

The limit on the consumption bundles that a consumer can afford

147
Q

Indifference curve

A

Curve that shows consumption bundles that give the consumer the same level of satisfaction

148
Q

MRS, marginal rate of substitution

A

-Rate at which a consumer is willing to trade one good for another on an indifference curve
-Slope of the indifference curve

149
Q

Four properties of indifference curves

A

1) Higher indifference curves are preferred to lower ones
2) Indifference curves slope downward
3) Indifference curves do not cross
4) Indifference curves are bowed inward

150
Q

Shape of an indifference curve

A

Reveals the consumer’s willingness to trade one good for the other

151
Q

Perfect substitutes

A

Two goods with straight-line indifference curves (constant MRS)

152
Q

Perfect complements

A

Two goods with right angle indifference curves

153
Q

Consumer’s optimal choices

A

-The best possible combination of the two goods
-The combination on the highest possible indifference curve on or below the budget constraint

154
Q

MRS=Relative price

A

-The best bundle of the two goods that the consumer can afford
-The point on the budget constraint that touches the highest possible indifference curve

155
Q

Normal Good

A

A good for which an increase in income raises the quantity demanded

156
Q

Inferior good

A

A good for which an increase in income reduces the quantity demanded

157
Q

Change in income

A

-Shifts the budget constraint
-Move on a different indifference curve

158
Q

The demand curve

A

-Reflects the consumption decisions
-Shows the quantity demanded of a good for any given price
-Summary of the optimal decisions that arise from the budget constraint and indifference curves

159
Q

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A

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Final Econ (1 decks)

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