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Micro Econ > Mid term2(chapter 5-10) > Flashcards

Mid term2(chapter 5-10) Flashcards

1
Q

What are the resource allocation mehtods

A

Market, Command, First come, lottery, competition, force, personal characteristics, majority rule, contest

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2
Q

how does market price work

A

whoever can afford to pay the market price gets the scarce resource. for the most part this is the best method

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3
Q

how does the command system work

A

someone in authority decides how resources are allocated. works well in orgs with clear lines of command but bad in an entire economy

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4
Q

how does majority rule work

A

majority voters choose how to allocate resources. works best when decision affects a lot of people and personal interest just be surpressed

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5
Q

how does contest work

A

allocates reproduces to a winner or group of winners. works best when efforts of parties are hard to monitor and reward directly

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6
Q

how does first come first served work

A

allocates resources to the first in line. works best when resource can serve just one person at a time in sequence

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7
Q

how does lottery work

A

allocates resources to a random winner of some sort. work best when there is no way to distinguish between potential users of a resource

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8
Q

how does personal characteristics work

A

allocate resources to the person with the ‘‘right characteristics”.

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9
Q

how does force work

A

people forcefully take and allocate resources from one another

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10
Q

what is value and price

A

value is what we get and price is what we pay

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11
Q

how are marginal benefit and demand related

A

value of one more good is the marginal benefit of that good, we measure value by the maximum someone is willing to pay to obtain the good, demand is also willingness to pay so demand curve is MB curve

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12
Q

what is individual demand vs market demand

A

individual demand is how much of a good a single person demands at a given price and market demand is the horizontal sum of all individual demands in a market at a given price

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13
Q

what is consumer surplus

A

the excess of the benefit received from a good over the price paid for it

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14
Q

how is consumer surplus calculated

A

the marginal benefit(value) of a good minus its price summed over the quantity bought. this is the area under the demand/MB curve but over the price

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15
Q

what is cost and price

A

cost is what the producer gives up and price is what the producer receives

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16
Q

how are marginal cost and supply related

A

cost of producing one more unit of a good is the marginal cost, MC is the minimum price a firm is willing to accept for a good, supply is also minimum supply-price, supply curve is MC curve

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17
Q

what is individual and market supply

A

individual supply is the quantity a single firm produces at a given market price and market supply is the horizontal sum of all firms quantities produced at a given price

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18
Q

what is producer surplus

A

the excess of the amount received over the cost of producing

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19
Q

how is producer surplus calculated

A

price received for a good minus cost of a good summed over the quantity produced. is is the area under the price but above the supply/MC curve

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20
Q

why is competitive equilibrium efficient

A

competitive equilibrium is where demand is equal to supply which is also where MC is equal to MB meaning total surplus is maximized and allocative efficiency is achieved

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21
Q

what is market failure

A

when markets are inefficient and either under or over produce

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22
Q

what happens in under production

A

marginal benefit exceeds marginal cost and a deadweight loss is created shrinking total surplus

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23
Q

what happens in over production

A

marginal cost exceeds marginal benefit and a deadweight loss is created shrinking total surplus

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24
Q

what are the sources of market failure

A

taxes and subsidies, price and quantity regulations, externalities, public goods and common resources, monopoly, high transaction costs

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25
Q

how do taxes and subsidies lead to ineficiency

A

taxes decrease price received and increase price paid leading to underproduction, subsidies decrease price paid and increase price received leading to overproductsion

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26
Q

how do externalities lead to ineficiency

A

external costs lead to overproduction and external benefits lead to underproduction

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27
Q

how do public goods and common resources lead to ineficiency

A

it is in everybody’s interest to not pay for public goods(free-rider problem) leading to underproduction. it is in everybody’s interest to use common resources leading to overproduction

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28
Q

How do monopolies lead to ineficiency

A

It is in the controlling firms best interest to increase scarcity leading to underproduction

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29
Q

how do high transaction costs lead to ineficiency

A

transaction costs lead to underproduction

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30
Q

how is fairness determined

A

fair results mean that everybody ends up with equal resources(utilitarianism). fair rules means that people in similar situations are treated similarly

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31
Q

what are the two rules that are argued to create fairness

A

there must be enforced laws that establish and protect private property. private property must be transferred from one to another by only voluntary exchange

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32
Q

what is a price ceiling/cap

A

a regulation making it illegal to charge more than a certain price for a good or service

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33
Q

what do price ceilings create

A

illicit markets, increased search activity, shortages

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34
Q

how do price ceilings create ineficiency

A

price ceilings below the equilibrium make MB exceed MC creating a deadweight loss and an area of potential loss from increased search activity

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35
Q

are price ceilings fair

A

not according to fair rules because it blocks voluntary exchange and not according to fair results because resources are not allocated any more to the poor than they were

36
Q

what is a price floor

A

a regulation making it illegal to trade at a price under a specified level

37
Q

how do price floors create ineficiency

A

a price floor above the equilibrium creates a surplus of labour and a deadweight loss as well as potential losses from increased search activity

38
Q

what is tax incidence

A

the division of the tax burden between buyers and sellers

39
Q

what does a tax on sellers do

A

shifts the supply curve left increasing price paid by buyers, decreasing price received by sellers, and decreasing quantity boght

40
Q

what does a tax on buyers do

A

shifts the demand curve left increasing the price paid by buyers, decreasing the price received by sellers, and decreasing the quantity bought

41
Q

what is a tax wedge

A

the concept that no matter who the tax is imposed on the outcome is the same regarding tax incidence. the equilibrium quantity becomes the point where the vertical gap between supply and demand equals the tax

42
Q

how does a tax create ineficiency

A

a tax decreases quantity bought and causes marginal benefit to exceed marginal cost creating a deadweight loss, shrinking total surplus, and creating an area of tax revenue

43
Q

what determines tax incidence

A

elasticity. tax is entirely on buyers when demand is perfectly inelastic or supply is perfectly elastic, and tax is entirely on sellers when supply is perfectly inelastic or demand is perfectly elastic

44
Q

what is the benefits principle

A

whoever receives the most benefit from government services should pay the most tax

45
Q

what is the ability to pay principle

A

the idea that whoever can pay the most taxes should pay the most taxes. reinforces the benefits principle

46
Q

what is a production quota

A

a regulation that sets a maximum on the amount that can be produced in a period

47
Q

what is a subsidy

A

a payment made by the government to a producer

48
Q

how do quotas create inefficiency

A

a quota below the equilibrium quantity decreases quantity produced making MB exceed MC making an incentive for producers to cheat

49
Q

how do subsidies create ineficiency

A

a subsidy increases the supply curve which increases quantity produced, increases cost, and decreases price meaning MC exceeds MB

50
Q

what is the budget line

A

the limits to a households consumption choices. the line that connects the most someone can buy of one product using all their income with the most they can buy of another product using all of their income

51
Q

what is the budget equation

A

expenditure = income

52
Q

what is real income

A

a persons income expressed int the quantity of an item they can purchase with al of their income

53
Q

what is relative price

A

the price of one good divided by another good. it is the magnitude of the slop of the budget line. it is how much of an item must be forgone to get an additional unit of another item and is an opportunity cost

54
Q

what is an indifference curve

A

a line that shows the combinations of two items in which a consumer is indifferent. always looking to move to a higher indifference curve as any point on a higher curve is preferred to any point on a lower curve

55
Q

what is marginal rate of substitution

A

the rate at which someone is willing to give up good y to get an extra unit of good x. it is the magnitude of the slope of the indifference curve

56
Q

what is the diminishing marginal rate of substitution

A

the general tendency for a person to be willing to give up less of good y to get one more good x while remaining indifferent as quantity of x increases

57
Q

what is the best affordable choice

A

the point on the budget line that is on the highest possible indifference curve. this is where relative price equals MRS

58
Q

what is the price effect

A

the effect of a change in price of a good on the quantity of the good consumed

59
Q

what is the income effect

A

the effect of a change in income on the quantity of a good consumed

60
Q

what is a firm

A

an institution that hires and organizes factors of production to produce and sell goods

61
Q

what is the difference between accounting profit and economic profit

A

accounting profit is total revenue minus total costs. economic profit is total revenue minus total costs with total costs being the opportunity cost of production

62
Q

what is a firms opportunity cost of production

A

sum of the cost of using resources bought in the market, owned by the firm, supplied by the firms owner

63
Q

why are resources bought in the market an opportunity cost

A

because the amount spent to purchase could have been spent on some other good or service

64
Q

why are resources owned by the firm and opportunity cost

A

could have sold capital and rented from another firm. the firm is implicitly renting from itself. the opportunity cost is called the implicate rental rate

65
Q

what is implicit rental rate made up of

A

economic depreciation and interest forgone

66
Q

why are resources supplied by the owner an opportunity cost

A

the profit an entrepreneurship can expect to make is normal profit and is an opportunity cost and the salary forgone is an opportunity cost

67
Q

what is the short run

A

the timeframe where at least one factor of production can not be changed. typically plant

68
Q

what is the long run

A

the timeframe where all factors of production can be changed

69
Q

what is a sunk cost

A

a cost that the firm can not get back

70
Q

how can a firm increase output in the short run

A

increase labour

71
Q

what are the three relationships between labour and output

A

total product, marginal product, average product

72
Q

what is the total product

A

the total of all product produced with a given amount of labour

73
Q

what is marginal product

A

the increase in total product that comes from an additional unit of labour

74
Q

what is average product

A

the average output coming from each unit of labour. the total product divided by units of labour

75
Q

what happens as labour increases

A

TP increases, MP increases then decreases, AP increases then decreases

76
Q

why does marginal product increase then decrease as labour increases

A

initial increase comes from specialization and division of labour, decrease comes from each additional worker having less capital to use and less space to work

77
Q

what is the law of diminishing returns

A

as a firm uses more of a variable input in a given quantity of fixed inputs, the marginal product of the variable input eventually decreases

78
Q

how are marginal and average product related

A

when MP exceeds AP, AP is increasing. when MP is less and AP, AP is decreasing. when MP intersects AP, AP is at its maximum

79
Q

what are the three cost concepts

A

Total cost, marginal cost, average cost

80
Q

how does technology affect cost and product curves

A

more efficient production will shift cost curves down and product curves up. if the firm uses more capital fixed costs will increase and variable costs will decrease.

81
Q

how do prices of factors of production affect cost and product curves

A

if prices increase cost curves will increase and shift. if fixed costs increase total cost and ATC will increase and marginal cost will not change. if variable costs increase TC, ATC and MC will all increase

82
Q

what is the production function

A

relationship between maximum output possible and quantities of both capital and labour

83
Q

what is marginal product of capital

A

the amount of additional product that is made for each unit increase in capital

84
Q

how are the size/amount of plant and long run ATC connected

A

the greater the amount of plant the greater quantity where ATC minimum is achieved

85
Q

what is the long run average cost curve

A

the relationship between the lowest attainable average total cost and output when both plant and labour are varried

86
Q
A

Micro Econ (3 decks)

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