FINALS REVIEW Flashcards
What is the economic perspective?
A view point that envisions individuals and institutions making ration decisions by comparing marginal costs and benefits associated with their actions
What is the definition of economics?
The social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity
How does the PPC illustrate scarcity?
Scarcity is illustrated by the unattainable points outside of the curve
How does the PPC illustrate choice?
The PPC illustrates choice by the variety of different combinations on the curve
How does the PPC illustrate cost?
Cost is illustrated by the downward slope of the curve
What are the determinants of the PPC?
Technology, quantity, capital stock, and international trade
What are the five fundamental questions?
1) What goods and services will be produced?
2) How will they be produced?
3) Who will receive the goods and services?
4) How will the system accommodate change?
5) How will the system promote progress?
What is consumer sovereignty?
The role consumers play in deciding what is produces through their “dollar votes”
Why is specialization between nations good?
It makes use of difference in ability, fosters learning by doing, and saves time, overall achieving efficiency.
Positive economics
Analysis of facts or data to establish scientific generalizations (what is)
Normative economics
Value judgements on what the economy SHOULD be like (policy economics)
Factors of production/resources
Land, labor, capital, entrepreneurship
Productive efficiency
Production at the least cost possible, found at the minimum ATC
Allocative efficiency
Production of goods most wanted by society, MB=MC, and surplus is at a maximum
Market system
Market system relies on private property, freedom of enterprise (ensures people can obtain resources) and freedom of choice
Market system results in competition and incentives
A market brings together buyers and sellers
Command System
Heavily government run and is called socialism or communism
Two insurmountable problems of a command economy are coordination and incentive
Laissez Faire Economy
Little government and no one has ever attempted this, otherwise referred to as “pure capitalism”
Law of increasing opportunity costs
As the production of one good increases, so does the opportunity cost of the other
Law of diminishing marginal returns
As more workers are added, there is less benefit to each additional unit
Absolute advantage
A situation where one person can produce more of a good than another nation
Comparative advantage
A situation where one nation can produce a good at a lower opportunity cost than the other
“invisible hand”
Firms, while acting in their own self interest, will end up also acting in society’s best interest, creating unity between private and social interests
Individual’s economizing problem
Finite amount of income but infinite amount of wants. Solution to this is a budget line, a PPC
Society’s economizing problem
Where do we donate our resources?
Why is the PPC bowed out?
Law of increasing opportunity costs
Demand
Amount of a product that consumers are willings and able to purchase at a series of prices
Supply
Various amounts of product that producers are willing and able to produce at a series of prices
Determinants of demand
1) change in consumer taste
2) change in the number of buyers in the market
3) consumer’s income
4) price of related goods
5) consumer expectations
Determinants of supply
1) resource prices
2) technology
3) taxes and subsidies
4) prices of other goods
5) producer expectations
6) number of sellers in the market
Why is the demand curve down sloping?
Because of the law of demand, as the price decreases people buy more of the product
- Diminishing marginal utility
- Substitution effect
- Income effect
Why is the supply up sloping?
The law of supply, as the price of a product increases producers are willing to produce more of a product
Why is equilibrium important in a market economy?
It is where the intentions of buyers and sellers meet
Formula of the price elasticity of demand
The ratio of the percent change in quantity demanded to the percent change in its price
Determinants of elasticity of demand
Substitutability, proportion of income, luxuries vs. necessity, and time
What is the total revenue test?
TR=P*Q
If TR changes in the opposite direction of price then demand is elastic, if TR changes in the same direction of price then demand is inelastic
What are the administrative costs of price ceilings and floors?
Shortages and surpluses, resources are misallocated, and produce negative side effects
Normal good
A good that when income increases, consumption increases and when income decreases consumption decreases (price constant)
Ei=+
Inferior good
Consumption declines when income rises (price constant)
Ei=-
Rationing function of prices
The ability of market forces in a competitive market to equalize quantity demanded and supplies and to eliminate shortages and surplus via price changes
Price ceiling
Price producers cannot surpass, intended to help consumers but ends up in a shortage
Price floor
Intended to help producers but ends up in a surplus
Short run
The time in which producers can change some of the resources they employ but not all, some resources are fixed some are variable
Long run
Producers are able to change all the resources they employ
Cross elasticity
Measures how a change in X affects Y, positive means substitutes negative means complements, 0 means unrelated
Utility
The want satisfying power of a good or service
Law of diminishing marginal utility
As a consumer consumes each additional good, utility shrinks
Utility maximizing rule
MUx/Px=MUy/Py
Determinants of elasticity of supply
TIME
immediate run=inelastic and long period=elastic
Substitution Effect
The reduction in the quantity demanded of one resource due to the price of its substitute falling causing firms that employ both resources to switch to using more of the lower price resource and less of the higher price resource
Income effect
A change in the quantity demanded of a product due to a change in real income (purchasing power) caused by a change in price of the product
Explicit costs
the monetary payments
Implicit costs
the monetary income a firm sacrifices to use the resource rather than selling it
Normal profit
the payment made by a firm to obtain and retain entrepreneurial ability, also equal to zero economic profit
Economic profit
Total revenue-all costs
Economies of scale
the situation where the firm’s ATC decreases in the long run as the firm increases the plant size
Diseconomies of scale
the situation where the firm’s ATC increases in the long run as the firm increases plant size
Natural monopoly
an industry in which economies of scale are so great that a single firm can produce the industry’s product at a lower ATC than would be possible if more than one firm produced
Imperfect competition structures
Monopoly, oligopoly, monopolistic competition
Profit maximizing
MR=MC
X-inefficiency
the production of output at a higher average (and total) cost than is necessary
Rent-seeking behavior
the action of persons, firms, or unions to gain special benefits from the government at the taxpayer’s or someone else’s cost
Concentration ratio
the percentage of total sales of an industry made by the four (or some other number) largest sellers
Product differentiation
a strategy in which one firm’s product is distinguished from competing products by means of design, related services, location, or any other attributes besides price
Dominant strategy
the strategy in which no matter which the other person chooses, you will be better off
NASH equilibrium
the outcome in which neither person could make themselves better off
Price leadership
an informal method that firms in an oligopoly may use to set prices, one producer starts by changing the price and the others soon follow
What is the difference between economic and accounting profits?
economic profit is the revenue-explicit-implicit costs and if you make $0, then economist would say no profit and accounting would say profit because you broke even!
Why does the MC curve intersect ATC and AVC curves at their lowest point?
because once the cost is above the average, the average will increase too
Why is MR=Price for a perfectly competitive firm?
MR=change in TR as you sell more goods
If a PC firm sees a demand curve that is perfectly elastic (price never changes), the additional revenue they get is always the same
MRDARP
What are the challenges in regulation natural monopolies?
T]the regulation leads to too much of a loss for the monopoly so instead they do a fair return price where demand intersects minimum ATC
What are the potential benefits and drawbacks of nonprice competition?
benefits are increased quality of good, and more differentiation. drawbacks are unnecessary advertising costs
How does a firm determine the optimal amount of R&D expenditures?
when mb=mc
What does the inverted U theory tell us about the likelihood of R&D expenditures in different industries?
Monopolistic competition and oligopoly will spend more than monopoly and perfect competition. PC has incentive but no ability and monopoly has ability and no incentive
How does technological advance enhance economic efficiency?
Improve productive efficiency by increasing productivity of inputs and reducing average costs, improves allocative efficiency by giving society a more preferred mix of good and services
To price discriminate a firm must have:
monopoly power, ability to separate people into groups, and no resale
In perfect price discrimination,
mr=d and everyone pays what they are willing to pay this also means mr=mc which means profit
Regulation of a typical monopoly
regulation leads to less monopoly profit but socially optimal
Determinants of resource demand
Productivity, prices of other resources, product demand, and occupational employment trends
Least-cost rule
MPl/Pl=MPc/Pc
Profit-maximizing rule
MRPl/Pl=MRPc/Pc=1
Nominal wage
not adjusted for inflation
Real wage
adjusted for inflation which attracts productivity
How does a firm determine how many workers to hire and what to pay them in a purely competitive labor market?
individual firms and workers are wage takers since neither can exert any control over the market wage rate. the intersection of supply and demand determines wage rate and level of employment. the supply of labor is perfectly elastic and mrc is constant
Three different types of unions
1) demand enhancement model: increases demand which increases mrp and employment
2) craft: decreases supply through regulations on who can work
3) inclusive union: teachers union puts pressure on the government
Wage differentials
Differences in wages due to differences in productivity (mrp), amounts of human capital, nonmonetary aspects of the job and market imperfections
What are the determinants of supply and demand in the loanable funds market?
Supply:
Demand:
Supply curve on a loanable funds graph
At higher interest rates households will save more, making more funds available for lending
Demand curve on a loanable funds graph
Businesses will borrow more at lower interest rates
Profit and profit expectations affect the..
levels of investment, total spending, and domestic output
MRC formula
change in TC/change in quantity of resources employed
MPP
the additional output produced when one additional worker is employed
change in TP/change in quantity of resource employed
To maximize or minimize losses, a firm should produce where
MRC=MRP
Output effect
after the substitution effect has been taken into account: when the lower price of resource A so greatly lowers the total cost of production that the quantity demanded of both resource A and B is raised because of the total production in the end
Marginal productivity theory of income distribution
all resources are paid according to their marginal contribution to output
Monopsony
- one buyer of a specific type of labor and workers have few other options
- firm is a wage maker
- employs fewer workers and pays less than purely competitive
Economic rent
the price paid for use of resources that are perfectly inelastic (land)
Profit
return earned by entrepreneurial ability
What kind of profit do entrepreneurs receive?
Accounting profit unless their accounting profit exceeds the normal profit that could have been earned elsewhere
Economic profit sources
- bearing of uninsurable risk
- uncertainty of innovation
- monopoly power
In the resource market the buyer is the
firm
In the resource market the demand is
derived
What happens if workers become more productive in the resource market?
the mrp goes up causing the demand curve to shift out and more workers to be hired
In the resource market the demand=
MRP
MRC=
change in total resource cost/ unit change in resource quantity
Interest factors
-risk, maturity (length), size (bigger loans have smaller taxes), taxability
Four reasons resource pricing is significant
- money-income determination
- cost minimization (resource price=cost for firms and profit maximizing is mr=mc)
- resource allocation (technology and productivity change can change where we put our resources)
- policy issues (minimum wage and labor union restrictions)
What happens when MR=0 on a monopoly or monopolistic competition graph?
Unit elastic and maximized total revenue
