Micro Flashcards
Tax effect with relatively inelastic supply
tax incidence falls on seller
long run-supply curves v. short-run supply curves
long-run supply curves are MORE ELASTIC and FLATTER than short-run supply curves
law of demand
as price decreases, quantity demanded increases
law of supply
as price increases, quantity supplied increases
change in quantity demanded or supplied
movement along the demand or supply curve when equilibrium price changes (change in price)
increases or decreases in supply or demand
shift of the supply or demand curve, due to change in one of the independent variables other than price
excess supply
price is above its equilibrium level
excess demand
price is below equilibrium level
consumer surplus
excess of the total value to consumers of the units they purchase above the total amount paid
difference between price paid and marginal benefit
producer surplus
excess of the amount producers receive for the units they sell above their total cost of production
marginal cost
supply curve (when no external costs or benefits associated with production and consumption of good)
marginal benefit
demand curve (when no external costs or benefits associated with production and consumption of good)
underproduction
producing at a quantity less than equilibrium.
consumers are willing to pay more than the cost to supply
MB > MC
overproduction
producing at a quantity greater than equilibrium
consumers are willing to pay less than the cost to supply
MB < MC
deadweight loss
decrease in total surplus that results from an inefficient level of production
tax on suppliers
equilibrium Price increases, equilibrium quantity decreases
actual incidence of tax given inelastic demand
buyers suffer the greater burden
actual incidence of tax given inelastic supply
sellers suffer the greatest burden
subsidies
lead to overproduction
external costs of production
when not borne by suppliers, result in a deadweight loss from overproduction
external benefits of consumption
when not realized by consumers, they consume less than efficient quantity of good, resulting in deadweight loss
price ceiling
results in underproduction and excess demand, non-price allocation to consumers, and deterioration of the quality of the good
price floor on wages
excess supply of unskilled labor and increased unemployment, non-wage worker benefits will be reduced, and producers will substitute other factors of production, including capital equipment and skilled labor, for unskilled labor
price elasticity of demand
ratio of the percent change in quantity demanded to the percent change in price
income elasticity of demand
ratio of the percent change in quantity demanded to the percent change in income
cross price elasticity of demand
ratio of the percentage change in quantity demanded to the percent change in the price of a related good.
positive for substitute
negative for complement
marginal revenue
increase in total revenue from selling one or more unit of a good or service
production function
quantity of output that a firm can produce is a function of the amounts of capital and labor employed
total fixed cost
cost of inputs that do not vary with the quantity of output and cannot be avoided over the period of analysis:
PP&E, normal profit, fixed interest costs on debt financing, etc.
total variable cost
cost of all inputs that vary with output over the period of analysis: wages, raw materials
total cost
total fixed cost + total variable cost
marginal cost
addition to total cost of producing one more unit
curve declines initially and then increases
intersects AVC and ATC at minimum points
above the AVC, represents the short-run supply curve in a perfectly competitive market
average fixed cost (AFC) curve
downward sloping
= distance between Ave total cost and ave var cost curves
average total cost (ATC) curve
U-shaped
minimum point represents lowest cost per unit
a firm should shut down in the long-run if Price < ATC
average variable cost (AVC) curve
u-shaped
as long as Price > AVC, a firm should continue to operate in the short-run
marginal revenue product
additional revenue from employing one or more unit for each productive unit
perfect competition
many firms, small relative to market low barriers to entry homogenous products and perfect substitution no advertising or branding no pricing power
P = MR = MC
perfectly inelastic firm demand curve
zero economic profit in equilibrium
monopolistic competition
many firms low barriers to entry differentiated products heavy advertising and high marketing expenditure some pricing power
P > MR, MR = MC
downward sloping firm demand curve
zero economic profit in long-run
oligopoly
few sellers
high barriers to entry
homogenous products or differentiated by branding and advertising
significant pricing power
P > MR, MR = MC
downward sloping demand curve
may have positive economic profit in long run
tends toward zero economic profit over time
monopoly
single firm comprises the whole market
very high barriers to entry
advertising used to compete with substitute products
significant pricing power
P > MR, MR = MC
downward sloping demand curve
may have positive economic profit in long run
profits may be zero due to expenses to preserve monopoly
Herfindahl-Hirschman Index (HHI)
measure of market concentration that is sensitive to M&A
sum of squares of the market shares of the largest firms in the market
