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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
Total Cost (TC)
the sum of fixed costs and variable costs.
26
Marginal Revenue
The change in total revenue from selling an additional unit. For a firm in a competitive industry, MR = Price.
27
Marginal Cost
the change in total cost from selling an additional unit.
28
A competitive firm will maximize its profit at the quantity where:
MR = MC
29
if price increases, a firm will
Expand Production
30
Average Cost of Production (Formula)
the total cost (TC) divided by the total output quantity (Q) ACP = TC/Q
31
If a firm produces at the output where MR = MC, it will always make a profit T/F
False
32
Zero profits really means
Normal Profits. the point where all resources are being efficiently used and could not be put to better use elsewhere
33
Average variable cost of production (Formula)
the variable cost per unit, or the total variable cost of producing Q units divided by Q AVC = TVC/Q
34
Average fixed cost of production (Formula)
the fixed cost per unit, or the total fixed cost of producing Q units divided by Q AFC = TFC/Q
35
Increasing Cost Industry
An industry in which industry costs increase with greater output; it is shown with an upward-sloped supply curve.
36
Constant Cost Industry:
An industry in which industry costs do not change with greater output; it is shown with a flat supply curve.
37
Decreasing Cost Industry:
An industry in which industry costs decrease with greater output; it is shown with a downward-sloped supply curve.
38
Market Power
the power to raise price above marginal cost without fear that other firms will enter the market.
39
Monopoly
A firm with Market Power.
40
For a firm with market power, marginal revenue is:
lower than the price.
41
A monopolist’s price is:
higher than a competitive firm's.
42
Monopolies are especially harmful if they...
control a good that is used to produce other goods.
43
Sources of Monopoly Power
1. Economies of scale 2. Barriers to entry 3. Network effects 4. Innovation
44
Economies of Scale
the advantages of large-scale production that reduce average cost as quantity increases.
45
Natural Monopoly
when a single firm can supply the entire market at a lower cost than two or more firms.
46
Barriers to Entry
Factors that increase the cost to new firms of entering an industry.
47
Potential Barriers to Entry
- 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
The government has many tools to regulate monopolies:
- Price controls – Government ownership – Antitrust law
49
Price control on a monopoly can increase the output. T/F
True
50
Reducing Monopoly Prices...
- Increases output and consumer surplus – Decreases the incentive to innovate
51
Antitrust laws are...
Antimonopoly Laws
52
Price Discrimination is...
Selling the same products to different buyers at different prices
53
A firm with market power can use price discrimination to:
Increase Profits
54
Arbitrage
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
Perfect Price Discrimination
Each customer is charged his or her maximum willingness to pay.
56
Price discrimination is better than single pricing if:
Total Surplus Increases.
57
Single Pricing
Charging the same price to all buyers.
58
Tying
To use one good, a consumer must use a second good that is sold only by the same firm.
59
Bundling
Requiring that products be bought together in a bundle or package.
60
Oligopoly
A market that is dominated by a small number of firms.
61
Cartel
A group of suppliers who try to act as if they were monopoly.
62
Strategic Decision Making
Decision making in situations that are interactive.
63
Cartels try to increase their profits by:
Reducing Quantity
64
Cartels tend to collapse and lose their power for three reasons:
1. Cheating by the cartel members 2. New entrants and demand response 3. Government prosecution and regulation
65
Prisoner's Dilemma
A game in which players act in rational, self-interested ways that leave everyone worse off; the negative counterpart to the invisible hand.
66
Dominant Strategy
A strategy that has a higher payoff than any other strategy, no matter what the other player does.
67
Tacit Collusion:
When firms limit competition with one another but do so without explicit agreement or communication.
68
A firm in an oligopoly has some influence over price and, therefore, has an incentive to reduce output and increase price. T/F
True
69
Price in an oligopoly is likely to be below monopoly levels but above competitive levels. T/F
True
70
Oligopoly Prices tend to be:
Lower than monopoly prices but higher than competitive prices.
71
Example of a loyalty plan
Frequent Flyer program
72
If a firm raises price, its customers will remain loyal; if it lowers price, other firms’ customers will also remain loyal. T/F
True
73
Loyalty increases monopoly power and results in higher prices. T/F
True
74
External Costs
The costs of a market activity paid by people who are not participants.
75
Social Cost
The total cost of producing a good or service, including both the private cost and any external cost.
76
Private Cost
The cost borne by the producer of a good or service. (the cost to hire labor, and buy materials or other inputs.)
77
Externalities
The same thing as External Costs.
78
Social Surplus
The sum of consumer surplus and producer surplus
79
Consumer Surplus
The difference between what a consumer is willing to pay and what they paid for a product.
80
Producer Surplus
The difference between the market price and the lowest price a producer is willing to accept to produce a good.
81
Efficient Equilibrium
The price and quantity that maximizes social surplus.
82
Pigouvian Tax
A tax on a good with external costs. (Examples include tobacco taxes, sugar taxes, and carbon taxes.)
83
External Benefit
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
Pigouvian Subsidy
A payment designed to encourage activities that yield external benefits.
85
Internalization of Externalities
Adjusting incentives so that decision makers take into account all the benefits and costs of their actions, private and social.
86
Transaction Costs
All the costs necessary to reach an agreement
87
Coase Theorem
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
There are three types of government solutions to externality problems:
- taxes and subsidies - command and control - tradeable allowances.
89
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
True
90
The Coase theorem explains that the ultimate source of the externality problem is too few markets. T/F
True

Microeconomics (4 decks)

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