Final Memorization Flashcards
Scarcity
Inability to satisfy all our wants
incentive
reward that encourages an action or a penalty that discourages an action
Economics
The social science that studies the choices individuals, businesses, governments, and societies make as they cope with scarcity and the incentives that influence and reconcile those choices
Microeconomics
the study of the choices that individuals and businesses make and how those choices interact with markets and influence governments
Macroeconomics
the study of the performance of the national and global economies
Two big economic questions
How do choices end up determining what, how, and for whom goods and services get produced?
When do choices made in the pursuit of self interest also promote the social interest
Factors of production
Land, Labour, Capital, Entrepreneurship
Human Capital
The quality of labour. Knowledge and skills that people obtain from education on job training and experience
What each factor earns
Land earns rent
Labour earns wages
Capital earns interst
Entrepreneurship earns profit
Dimensions of social interest
Efficiency
Equity
Efficiency
resource use is efficient ifs it is impossible to make someone better off without making someone worse off
Equity
equity is fairness but economists have differing views about what is fair
Topics that generate discussion and illustrate tension between self interest and social interest
Globalization
Information Age monopolies
Global warming
Economic instability
Six key ideas that define the economic way of thinking
A choice is a tradeoff
people make rational choices by comparing benefits and costs
benefit is what you gain
cost is what you must give up
most choices are how much choices made at the margin
choices respond to incentives
Opportunity Cost
the highest valued alternative that must be given up to get something
Positive Vs Normative Statements
Positive is facts and can be tested and proven, normative is opinion and can not be proven either way
Economic Model
description of some aspect of the economic world that includes only those features needed for the purpose at hand
alternatives to testing models
natural experiments
statistical investigations
economic experiments
skills needed for economic jobs
critical thinking
analytical skills
math
writing
oral communication
Production Possibilities Frontier(PPF)
the boundary between those combinations of goods and services that can be produced and those that cannot
Production Efficiency
cannot produce more of one good without producing less of some other good
Marginal Benefit
The benefit received from consuming one more unit of a good measured as the maximum a person is willing to pay for an additional unit
Marginal Cost
Opportunity cost of producing one more unit of a good measured as the minimum a producer is willing to accept to sell the good
Allocative efficiency
Cannot produce more of any one good without giving up some other good that we value higher. The point at which MB equals MC
Comparative advantage
when one person can perform an activity at a lower opportunity cost than someone else
Absolute advantage
when one person is more productive than others
Economic Growth
the expansion of production possibilities(an increase in the standard of living). Comes from technological change or capital accumulation
Social institutions for economic coordination
Firms
Markets
Property rights
Money
Firm
an economic unit that hires and organizes factors of production to produce and or sell goods and services
Market
any arrangement that enables buyers and sellers to get information and do business with eachother
Property rights
social arrangements taht govern ownership, use, and disposal of resources, goods, or services
Money
any commodity or token that is generally acceptable as a means of payment
Competitive market
a market that has many buyers and many sellers so no one single buyer or seller can influence the price
Money price vs relative price
money price is how much money to buy a good
relative price is the ratio of a goods money price to the money price of the best alternative good(its opportunity cost, slope of the budget line)
Demand
someone wants it, can afford it, has made plans to buy it
Law of demand
when the price of a good rises the quantity demanded decreases
Substitution effect
when the relative price of a good rises people seek substitutes for it so the quantity demanded decreases
Income effect
when the price of a good or service rises relative to income people can not afford everything they used to buy so the quantity demanded for a good decreases
Factors that change demand
prices of related goods
expected future prices
income
expected future income and credit
population
preferences
substitute
a good that can be used in place of another good
compliment
a good that is used in conjunction with another good
normal good
when income increases demand increases
inferior good
when income increases demand decreases
Supply
a firm has the resource and the tech to produce it, can profit from producing it, has made a plan to produce and sell it
Law of supply
as price increases for a good quantity supplied of the good increases
Factors that change supply
the prices of factors of production
the prices of related goods produced
expected future prices
the number of suppliers
tech
state of nature
Price elasticity of demand
units free measure of the responsiveness of the quantity demanded of a good to a change in its price
factors that change elasticity of demand
closeness of substitutes
proportion of income spent on the good
time elapsed since a price change
total revenue test
method of estimating the price elasticity of demand by observing the change in total revenue that comes form a price change
income elasticity of demand
measures how the quantity demanded of a good responds to a change in income
cross elasticity of demand
measure of responsiveness of demand for a good to a change in the price of a substitute or a complement
elasticity of supply
measures the responsiveness of the quantity supplied to a change in the price of a good
factors that influence elasticity of supply
resource substitution possibilities
time frame for supply decision
resource allocation methods
market price
command
majority rule
contest
first come fist served
lottery
personal characteristics
force
consumer surplus
the excess of the benefit received from a good over the amount paid for it
producer surplus
the excess of the amount received form the sale of a good over the cost of producing it
deadweight loss
the decrease in total surplus due to over or under production
sources of market failure
price and quantity regulations
taxes and subsidies
externalities
public goods and common resources
monopoly
high transaction costs
Fairness
comes from fair results and fair rules
utilitarianism
the principal that we should strive to achieve the threats happiness for the greatest number
the big tradeoff
due to the cost of making income transfers the pursuit of fairness takes away from the pursuit of efficiency
symmetry principle
the requirement that people in similar situations be treated similarly
Robert Nozick rules to fairness
the state must create and enforce laws that establish and protect private property
private property may be transferred only by voluntary exchange
price ceiling
a regulation that makes it illegal to charge a price higher than a certain level
result of effective rent ceiling
housing shortage
increased search activity
an ilicit market
search activity
time spent looking for someone with whom to do business
illicit market
an illegal market that operates alongside a legal market in which a restriction has been imposed
price floorq
a regulation that makes it illegal to trade at a price lower than a specified level
tax incidence
the division of the burden of tax between buyers and sellers
the benefits principle
people that benefit the most from government services should pay the most tax
the ability to pay principle
people who are able to pay th most taxes should pay the most taxes
production quota
an upper limit to the quantity of a good that may be produced during a specified period
subsidy
a payment made by the government to a producer
budget line
the limits to households consumption choices
real income
income expressed as a quantity of goods the household can afford to buy
indifference curve
a line that shows combinations of goods which a consumer is indifferent
Marginal rate of substitution(MRS)
measures the rate at which a person is willing to give up good y to get an additional unit of good x while at the same time remain indifferent(magnitude of the slope of indifference curve)
Diminishing marginal rate of sub
a general tendency for a person to be willing to give up less of good y to get one more unit of good x while remaining indifferent as the quantity of good x increases
consumers best affordable choice
on the budget line
on the highest attainable indifference curve
mas a MRS equal to the relative price
price effect
the effect of a change in price of a good on the quantity consumed of the good
economic profit
total revenue minus total costs with total cost measured as the opportunity cost of production
opportunity cost of production
sum of the cost of using resource bought in the market, owned by the firm, supplied by the firm owner
implicit rental rate of capital
opportunity cost of using capital the firm owns
made of economic depreciation and interest forgone
economic depreciation
change in the market value of capital over a given period
interest forgone
the return on the funds used to acquire the capital
normal profit
the profit an entrepreneur can expect to receive on average
income forgone
the wage income the owner gives up by not taking the best alternative job
short run
time frame where the quantity of one or more resources used in production is fixed(typically plant is fixed in the short run)
Long run
time frame where the quantities of all resources including plant can be varied
sunk cost
a cost incurred by the firm that can not be changed
does not effect the firms current decisions
total product
total output in a given period
marginal product
the change in total product that results in a one unit increase in a variable cost
average product
total product divided by the quantity of a variable cost or factor of production employed
law of diminishing returns
as a firm uses more of a variable input with a given quantity of fixed inputs the marginal product of the variable input eventually diminishes
total cost
cost of all resources used(TFC + TVC)
total fixed cost
cost of the firms fixed inputs
total variable cost
cost of variable inputs and changes with oputput
Marginal cost
the increase in total cost that results from a one unit increase in total product
average fixed cost
total fixed cost per unit output
average variable cost
total variable cost per unit of output
average total cost
total cost per unit of output
firms production function
the relationship between the maximum output attainable and the quantities of both capital and labour
Long run average cost curve
relationship between the lowest attainable average total cost and output when both the plant and labour are varied
economies of scale
features of a firms technology that lead to a falling long run average cost as output increases
diseconomies of scale
features of a firms technology that lead to rising long run average costs and output increases
constant returns to scale
features of a firms technology that lead to constant long run average cost as output increases
Minimum efficient scale
the smallest quantity of output at which the long run average cost curve reaches its lowest level
Perfect competition
a market where many firms sell identical products to many buyers, there are no restrictions to entry, established firms have no advantages over new ones, sellers and buyers are well informed about prices
Price taker
a firm that cannot influence the price of a good or service
Marginal revenue
the change in total revenue that results from a one unit increase in the quantity sold
firms decisions in perfect competition
how to produce at minimum cost
what quantity to produce
whether to enter or exit a market
Monopoly
a market that produce a good or service which no close substitutes exist, and there is one supplier that is protected from competition by a barrier to entry
types of barriers to entry
natural
ownership
legal
Natural barrier to entry
economies of scale enable one firm to supply the entire market at the lowest possible cost
Ownership barriers to entry
a market with competition an entry restricted by a concentration of ownership
Legal barriers to entry
a restriction to entry from public franchises, government licenses, patents or copyrights
economic rent
consumer and producer surplus or economic profit
rent seeking
the pursuit of wealth by capturing economic rent
Monopolistic competition
a market where a large number of firms compete, each firm produces a differentiated product, firms compete on product quality, price, and marketing, firms are free to enter and exit
Four firm concentration ratio
percentage of total revenue accounted for by the four largest firms in an industry
Less than 60% for competitive markets
over 60% for concentrated market
100% for a monopoly
Herfindahl-Hirschman Index(HHI)
square of percentage market share of each firm summed over the largest 50 firms
Between 1500 and 2500 is competitive
Over 2500 is concentrated and uncompetitive
limitations of concentration measures
geographical scope of market
barriers to entry and firm turnover
correspondence between a market and an industry
Excess capacity
when a firm produces a quantity less than the quantity where ATC is a minimum
Markup
the amount that price exceeds marginal cost
Oligopoly
a market where natural or legal barriers prevent entry of new firms and a small number of firms compete
cartel
a group of firms acting together to limit output, raise price, and increase profit
game theory
a tool for studying strategic behaviour which is behaviour that takes into account the expected behaviour of others and the mutual recognition of interdependence
features of games
rules
strategies
payoffs
outcome
Nash equilibrium
the outcome where both players are rational and choose the action that is best given any action taken by the other player
value of marginal product
the value to a firm of hiring one more unit of a factor
price of one unit of output times the marginal product of the factor
factors effecting demand for labour
price of firms output
price of other factors of production
technology
