general review Flashcards
what are the shifters for demand
INEPT:
income
number of buyers
expectations of future prices
price of related goods
tastes and preferences
Supply shifters:
NITE
Number of sellers
Input prices
technology
expectations of future prices
Traditional economy
the production, distribution, and consumption of goods and services are guided by cultural norms and values that have been passed down through generations (Amish community)
Command economy (communism)
resources and businesses are owned by the government. The government decides what goods and services will be produced and what prices will be charged for them
market economy (capitalism)
individual entrepreneurs decide what to produce and how to produce it
they make decisions based on supply and demand
what does a linear PPC curve mean
opportunity costs are constant
what does a concave PPC curve mean
when opportunity costs increase as production of a good increases
reasons why demand curve is downward sloping
- income effect
- substitution effect
- diminishing marginal utility
TR > TVC
firm will operate and loss will be < FC
TR < TVC
firm will temporarily shut down
accounting profit is always higher than economic profit
true
if firm is making zero economic profit, they are still making…
accounting profit
what does a lump sum subsidy effect in the short run
only FC not MC or MR
long run
all inputs ( labor and capital ) are variable including FC
- allows for greater flexibility in production choices
short run
at least one input is fixed
- because firms are only able to influence prices through production-level adjustments
MP increase, and TP increase
at an increasing rate, its called
increasing returns ( upward sloping part of the upside down MC curve which is the MP curve )
MP decrease, and TP increase at decreasing rate, is called
diminishing returns
MP negative (below x-axis), and TP decrease is called
negative returns
shifters for Demand for labor
NSPE
1. # of consumers
2. substitutes
3. productivity of workers -> can change through gov. regulation (Lower MRP)
4. Education (higher MRP)
shifters for supply of labor
LNATI
1. Leisure Time
2. # of alternatives
3. age distribution
4. Time spent on education
5. Immigration, # of people available to work
characteristics of monopsonistic factor market
- one buyer of labor, on competition
- wage makers
- always hire fewer quantity of workers, also lower wage rate
- high barriers to entry
why does monopsonistic factor makers pay lower wages and hire fewer workers than perf comp
because they price from MRP = MFC DOWN to the supply curve
short run MC eventually increase because of the effect of
diminishing marginal product
compared to perfect competition, a monopoly price and output are
price is higher and output is lower
In a perfectly competitive labor market, an increase in an effective minimum wage will result in
decrease # of workers being hired
the three types of taxes that can fix inequality
progressive tax
proportional tax
regressive tax
what is regressive taxes
a tax where the proportion of income paid in taxes decreases as income rises
what are porpotional taxes
everyone pays the same regardless of the level of income
what are progressive taxes
proportion of income paid in taxes rises as income rises
formula for utility maximization
MUx/Px = MUy/Py
rate of change formula
(new - old / old) x 100 = %
price elasticity of demand formula
%changeQD / %changeP
price elasticity of supply formula
%changeQS / %changeP
income elasticity formula
%changeQD / %changeIncome
cross price elasticity formula
%changeQD of good X / %changeP of good Y
what is the difference between ATC and AVC equal to
AFC
if TR > TC, firm is earning
economic profit
if TR = TC, firm is earning
normal profit
if TR , TC, firm is earning
economic loss
is MR > MC, firm should
produce more output as long as MR curve is greater than MC curve
if MR < MC, firms should
produce less output, If MC curve is greater than MR curve
D > MR in what competition
imperfect, monopolistic
Possible Outcomes for oligopoly
- Tacit Collision
- firms making decisions without direct communication - Cartel Covert Collision
- communicate openly to create an up to 4 firm monopoly (illegal activity) - Strategic choice/ game theory
- companies make decisions by weighing decisions of other companies - stable pricing over time
- price will stabilize overtime
what does a lump sum tax change
only changes fixed costs, has no effect on MC therefore there is no effect on the quantity produced in the market by a lump sum tax
how do you fix a negative externality
taxation
how do you fix a positive externality
a subsidy
in marginal analysis, how can you calculate consumer surplus of a unit
CS = MB - P
look at MB from the unit you’re looking at and from before it and subtract that from the price of the good.
what is a fair return price
where price = ATC
when is AP of labor at its max
when AVC is at its minimum
what is the difference between
P < ATC and P < AVC
P < ATC: firm is making economic losses, firm will leave industry in long run
P < AVC: why a firm shuts down
ways of calculating economic profit
TR - ( E.C. + I.C.)
(P - ATC) x Q
TR - TFC - TVC
just profit: TR-TC
what is true about a constant cost industry
the prices of inputs used to produce a good don’t change when more firms enter the industry
A constant cost industry exists when the entry of more firms has no impact on input prices. Constant cost industries have horizontal long-run supply curves.
what are the long run conditions for a monopolistically competitive firm
P = ATC, MR = MC, P > MC
if TR is increasing as output increase, MR is
greater than zero
why is a monopoly inefficient
produces too little output and sets a price above marginal cost
MSC and MSB in a production eternality
MSC > MSB
MSC and MSB in a consumption externality
MSC < MSB
allocatively efficient quantity in externalities
MSB = MSC
what type of goods are common resources
non-excludable and rival
what will lead to more equal distribution of income
more progressive income taxes
difference between VC is
MC
If a monopoly starts practicing perfect price discrimination, how would producer surplus and efficiency in the market change?
producer surplus and efficiency both increase
when and why will countries trade
only when they can get something else at a lower opportunity cost than if they produced it themselves
firms specialize in what
in what they have comparative advantage in and they are want the other good
why does MR = D for perf competition
because the firm sells each unit of output at a constant price
which is why the additional revenue earned with an additional unit of output (MR) is equal to the market price.
relationship between MR and D for a monopoly
monopoly are price setters and so to sell an additional. unit of output they have to lower their price on all units of output.
so the extra revenue earned from selling an additional unit of output is offset by the selling of other units at a lower price.
characteristics of natural monopoly
- large fixed costs
- long economies of scale
- downward sloping ATC curve
- production point: MR = MC
- Government will correct by forcing them to set price : at ATC=D
difference between perfect price discrimination and price discrimination
Perfect price: MR and Demand merge to now downward sloping curve P = MR = D = AR curve
- produce where P = MC
- no DWL, all turns into producer surplus
why is a monopoly allocatively efficient when it perfectly price discriminates
because the last unit sold will have a price equal to marginal cost.
why does the MR and demand curve merge when a monopoly perfectly price discriminates?
the monopolist is able to charge each consumer their maximum willingness to pay,
because we’re able to earn exactly the additional willingness to pay for each additional unit, unlike before.
when do diminishing marginal returns start on a graph
when MC is at its minimum because the next unit of output will be produced at a higher cost, which results from diminishing returns.
there is no producer surplus when
the supply curve is perfectly elastic, horizontal
the country that has the lower comparative advantage will export that good
dQD > dP what is demand
elastic
what happens if a firm decreases wage rate
MRP > MFC, so firm will increase the quantity of labor demanded until the marginal revenue product of labor equals its marginal factor cost.
What happens to price elasticity of demand as the price of a good increases along a linear demand curve?
price elasticity of demand increases
although a binding price ceiling is below equilibrium, it is the max price
price floor is above equilibrium but it is the minimum price the firm can charge
Which types of firms are allocatively inefficient in the long run?
A single price monopoly and monopolistic competition both charge a price that exceeds marginal cost, so they are both allocatively inefficient.
what type of costs are fixed costs
variable costs
when does price discrimination occur
differences in a product’s price do not reflect difference in costs of production
when will a firm continue to operate at a loss
when P > AVC so losses are LESS THAN fixed costs, so firm will continue to operate and not shut down
how would higher wages effect the supply curve
would cause decrease in supply and shift left in supply curve
An increased wage means a higher income, and since leisure is a normal good, the quantity of leisure demanded will go up. And that means a reduction in the quantity of labor supplied.
profit maximizing for a natural monopoly
MR=MC quantity and price equals up to the demand curve
how do per unit subsidy and taxes affect a monopoly graph
subsidy: MC shifts down
tax: MC shifts up
how to know if you have deadweight loss in imperfect competition
P/D<MC
how to calculate total net benefit
TB - TC
how to calculate marginal net benefit
MB from that unit - the marginal cost
where do you find the price and quantity at which a natural monopolist earns zero economic profit
D = ATC
how do you calculate a lump sum subsidy
(LRATC - Price) x Quantity
when a per unit tax is applied in perf comp what changes and what doesn’t
MC, ATC, AVC all change
Price doesn’t because firm is price taker
when a per unit tax is applied in monopolistic comp what changes and what doesn’t
MC, ATC, and Price increase because price maker at MR = MC
what does a lump sum tax change
only increases ATC, won’t change output level
if price of a product decreases what happens in a factor market
each firm’s marginal revenue product of labor decreases, which decreases the demand for labor. When the demand for labor decreases, employment decreases.
if price of a product increases what happens in a factor market
each firms marginal revenue product. increases which increases the demand for labor. when demand of labor increases, marginal revenue product increases to produce at MRP=MFC
what happens when demand for labor increases
output and employment increase
what type of market is a monopsony
one buyer of labor and many sellers of labor ( households)
why is market supply of labor upward sloping in a monopsony
to hire more labor, it must increase the wage it pays to all workers it hires. Therefore, the marginal factor cost of labor for a firm hiring labor in a monopsony market is greater than the supply of labor.
why is MFC>S curve in a monopsony
firm hires labor in a monopsony market it must increase the wage rate to hire more workers. But every time it does so, it has to pay a higher wage to all workers, not just the additional workers (with the exception of the first worker hired).
An entrepreneur has earned enough total revenue to cover her accounting costs, but economic losses are being incurred. What must be true?
her accounting profits must be less than her implicit costs
what will cause the demand curve for labor to shift
its derived demand, so any change in: product price, product demand, and/or productivity of workers
what will cause the supply curve for labor to shift
of workers, availability of workers, population age, value of leisure time
should you impose a lump sum or per unit subsidy on a monopoly
per unit because MC will shift down
what should you impose on a monopsony to produce where perf comp would
S= D, MRP = S
