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Microeconomics > Microeconomics Final > Flashcards

Microeconomics Final Flashcards

1
Q

Above-normal profits are eliminated by entry, and below- normal profits are eliminated by exit is known as . .

A

The Elimination Principle

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2
Q

The P = MC condition balances production across firms….

A

that minimizes total industry production costs.

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3
Q

Originator of the concept of creative destruction

A

Joseph Schumpeter

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4
Q

Entry and exit signals balance production across different industries in a way….

A

that maximizes the total production value.

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5
Q

All firms in a perfectly competitive industry face…

A

the same market price.

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6
Q

In a competitive market, total industry costs are minimized because each firm produces where…

A

Price = Marginal cost

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7
Q

Resources flow from low-profit industries…

A

to high-profit industries

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8
Q

Implication of the elimination principle

A
  • Above-normal profits are temporary.

– To earn above-normal profits, entrepreneurs must innovate.

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9
Q

The invisible hand will not work if:

A
  • Prices are not accurate
  • Markets are not competitive
  • Commodities are public goods
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10
Q

Not all markets are competitive. T/F

A

True

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11
Q

competitive markets align self-interest with the social interest. T/F

A

True

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12
Q

the time after all exit or entry has occurred

A

Long Run

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13
Q

the time period before exit or entry can occur

A

Short Run

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14
Q

An industry is competitive when firms don’t have much influence over the price of their product. T/F

A

True

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15
Q

In a perfectly competitive market, a firm will set its price:

A

equal to the market price.

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16
Q

Sunk Cost

A

A cost that cannot be recovered. These costs are never relevant because they cannot be changed by any choice.

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17
Q

What is the general principle of rational choice.

A

Ignore what you can’t change. Focus on what you can change.

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18
Q

Explicit Cost

A

a cost that requires an outlay of money.

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19
Q

Implicit Cost

A

a cost that does not require an outlay of money; opportunity cost.

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20
Q

Accounting Profit

A

total revenue minus total explicit cost

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21
Q

Economic Profit

A

total revenue minus total explicit cost and implicit costs.

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22
Q

Fixed Costs

A

costs that you must pay regardless of how much you sell. (rent, salaries, insurance, etc.)

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23
Q

Variable Costs

A

costs that change as output changes (production supplies, commissions, delivery costs.)

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24
Q

Total Revenue (TR) = ____ x _____

A

Price x Quantity

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25
Q

Total Cost (TC)

A

the sum of fixed costs and variable costs.

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26
Q

Marginal Revenue

A

The change in total revenue from selling an additional unit. For a firm in a competitive industry, MR = Price.

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27
Q

Marginal Cost

A

the change in total cost from selling an additional unit.

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28
Q

A competitive firm will maximize its profit at the quantity where:

A

MR = MC

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29
Q

if price increases, a firm will

A

Expand Production

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30
Q

Average Cost of Production (Formula)

A

the total cost (TC) divided by the total output quantity (Q)
ACP = TC/Q

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31
Q

If a firm produces at the output where MR = MC, it will always make a profit T/F

A

False

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32
Q

Zero profits really means

A

Normal Profits. the point where all resources are being efficiently used and could not be put to better use elsewhere

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33
Q

Average variable cost of production (Formula)

A

the variable cost per unit, or the total variable cost of producing Q units divided by Q
AVC = TVC/Q

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34
Q

Average fixed cost of production (Formula)

A

the fixed cost per unit, or the total fixed cost of producing Q units divided by Q
AFC = TFC/Q

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35
Q

Increasing Cost Industry

A

An industry in which industry costs increase with greater output; it is shown with an upward-sloped supply curve.

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36
Q

Constant Cost Industry:

A

An industry in which industry costs do not change with greater output; it is shown with a flat supply curve.

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37
Q

Decreasing Cost Industry:

A

An industry in which industry costs decrease with greater output; it is shown with a downward-sloped supply curve.

38
Q

Market Power

A

the power to raise price above marginal cost without fear that other firms will enter the market.

39
Q

Monopoly

A

A firm with Market Power.

40
Q

For a firm with market power, marginal revenue is:

A

lower than the price.

41
Q

A monopolist’s price is:

A

higher than a competitive firm’s.

42
Q

Monopolies are especially harmful if they…

A

control a good that is used to produce other goods.

43
Q

Sources of Monopoly Power

A
  1. Economies of scale
  2. Barriers to entry
  3. Network effects
  4. Innovation
44
Q

Economies of Scale

A

the advantages of large-scale production that reduce average cost as quantity increases.

45
Q

Natural Monopoly

A

when a single firm can supply the entire market at a lower cost than two or more firms.

46
Q

Barriers to Entry

A

Factors that increase the cost to new firms of entering an industry.

47
Q

Potential Barriers to Entry

A
  • Ownership of an input that is difficult to duplicate: Brands and trademarks
  • Development of a relationship with the market (for example, the TI-84 graphing calculator)
48
Q

The government has many tools to regulate monopolies:

A
  • Price controls

– Government ownership

– Antitrust law

49
Q

Price control on a monopoly can increase the output. T/F

A

True

50
Q

Reducing Monopoly Prices…

A
  • Increases output and consumer surplus

– Decreases the incentive to innovate

51
Q

Antitrust laws are…

A

Antimonopoly Laws

52
Q

Price Discrimination is…

A

Selling the same products to different buyers at different prices

53
Q

A firm with market power can use price discrimination to:

A

Increase Profits

54
Q

Arbitrage

A

Taking advantage of price differences for the same good in different markets by buying low in one market and selling high in another market.

55
Q

Perfect Price Discrimination

A

Each customer is charged his or her maximum willingness to pay.

56
Q

Price discrimination is better than single pricing if:

A

Total Surplus Increases.

57
Q

Single Pricing

A

Charging the same price to all buyers.

58
Q

Tying

A

To use one good, a consumer must use a second good that is sold only by the same firm.

59
Q

Bundling

A

Requiring that products be bought together in a bundle or package.

60
Q

Oligopoly

A

A market that is dominated by a small number of firms.

61
Q

Cartel

A

A group of suppliers who try to act as if they were monopoly.

62
Q

Strategic Decision Making

A

Decision making in situations that are interactive.

63
Q

Cartels try to increase their profits by:

A

Reducing Quantity

64
Q

Cartels tend to collapse and lose their power for three reasons:

A
  1. Cheating by the cartel members
  2. New entrants and demand response
  3. Government prosecution and regulation
65
Q

Prisoner’s Dilemma

A

A game in which players act in rational, self-interested ways that leave everyone worse off; the negative counterpart to the invisible hand.

66
Q

Dominant Strategy

A

A strategy that has a higher payoff than any other strategy, no matter what the other player does.

67
Q

Tacit Collusion:

A

When firms limit competition with one another but do so without explicit agreement or communication.

68
Q

A firm in an oligopoly has some influence over price and, therefore, has an incentive to reduce output and increase price. T/F

A

True

69
Q

Price in an oligopoly is likely to be below monopoly levels but above competitive levels. T/F

A

True

70
Q

Oligopoly Prices tend to be:

A

Lower than monopoly prices but higher than competitive prices.

71
Q

Example of a loyalty plan

A

Frequent Flyer program

72
Q

If a firm raises price, its customers will remain loyal; if it lowers price, other firms’ customers will also remain loyal. T/F

A

True

73
Q

Loyalty increases monopoly power and results in higher prices. T/F

A

True

74
Q

External Costs

A

The costs of a market activity paid by people who are not participants.

75
Q

Social Cost

A

The total cost of producing a good or service, including both the private cost and any external cost.

76
Q

Private Cost

A

The cost borne by the producer of a good or service. (the cost to hire labor, and buy materials or other inputs.)

77
Q

Externalities

A

The same thing as External Costs.

78
Q

Social Surplus

A

The sum of consumer surplus and producer surplus

79
Q

Consumer Surplus

A

The difference between what a consumer is willing to pay and what they paid for a product.

80
Q

Producer Surplus

A

The difference between the market price and the lowest price a producer is willing to accept to produce a good.

81
Q

Efficient Equilibrium

A

The price and quantity that maximizes social surplus.

82
Q

Pigouvian Tax

A

A tax on a good with external costs. (Examples include tobacco taxes, sugar taxes, and carbon taxes.)

83
Q

External Benefit

A

A benefit that an individual or firm confers on others without receiving compensation. (Taking a bus reduces congestion on a road, enabling other road users to travel more quickly.)

84
Q

Pigouvian Subsidy

A

A payment designed to encourage activities that yield external benefits.

85
Q

Internalization of Externalities

A

Adjusting incentives so that decision makers take into account all the benefits and costs of their actions, private and social.

86
Q

Transaction Costs

A

All the costs necessary to reach an agreement

87
Q

Coase Theorem

A

The principle that if transactions costs are low and property rights are clearly defined, private bargains will ensure that the market equilibrium is efficient even when there are externalities.

88
Q

There are three types of government solutions to externality problems:

A
  • taxes and subsidies
  • command and control
  • tradeable allowances.
89
Q

Command and control solutions can work but are often high-cost because they are inflexible and do not take advantage of differences in the costs and benefits of eliminating and producing the externality. T/F

A

True

90
Q

The Coase theorem explains that the ultimate source of the externality problem is too few markets. T/F

A

True

Microeconomics (4 decks)

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