Midterm 2 Content Flashcards
We want to be on a point on ppf where MC and MB curves _______?
Cross
An____________occurs when we produce the quantity of an item where its marginal cost equals its marginal benefit
Efficient Allocation
What does being on the ppf mean?
Production Efficiency On frontier–production efficiency—>fully utilizing all resources
If MB>MC then _______
increase production
If MC>MB then ______________production
decrease
A demand curve is what kind of curve?
Marginal benefit curve
Marginal cost curve is the _______curve
Supply curve *way to remember MICK’S
Being at the intersection of MC and MB is equivalent to being at what?
The intersection of the demand and supply curve
What is consumer surplus?
The difference between what a consumer actually pays for an item and what he/she is willing to pay.
Where is consumer surplus located?
area under a demand curve and above price line
Where is total revenue located in terms of consumer surplus?
it’s the price times the quantity
What is producer surplus?
the difference between the price a producer actually gets for a commodity and the minimum price the producer would have been willing to supply the quantity for which just follows the supply curve
Minimum price a producer must receive to produce?
marginal cost of production
the supply curve is equal to?
the marginal cost curve
Where is producer surplus measured?
area above the supply curve and under the price line
Where do the most efficient allocation resources come at?
Equilibrium price where supply and demand curves cross in competitive markets
Why is where the supply and demand curves cross the most allocatively efficient point?
Largest total area of consumer surplus along with the producer surplus
What is deadweight loss?
-the loss of consumer or producer surplus -**loss which is no one’s gain–loss in total surplus area**
Underproduction occurs when?
-loss of the area of consumer surplus and producer surplus when production is at Q instead of Qe (Q is a smaller quantity)
What are 3 factors that cause deadweight loss?
- price ceilings and price floors 2. taxes, subsidies, quotas 3. monopoly power
What does a price ceiling do?
Puts an upper limit or maximum value on price Designed to hold price down
When is a price ceiling effective?
-Pc less than pe leads to excess demand or shortage Qd-Qs
What are 3 non price rationing mechanisms?
- Queue rationing 2. Rationing by Sellers Preferences 3. Coupon Rationing
What are non price rationing mechanisms?
-when prices are held artificially below their Equillibrium values, loose their rationing function (ie determining who gets what)
What happens when non price rationing mechanisms are implemented?
Black markets usually emerge.
What is a black market in terms of economics?
-when commodities are sold illegally at prices above the official controlled price
What do price floors do?
-Put a lower limit on prices or minimum value on price -designed to hold prices up
When are price floors effective?
-when price floor > pe -leads to excess supply or surplus Qs-Qd
A minimum wage is an example of?
a price floor
Rent controls are example of?
a price ceiling
If a market produces less than or more than equilibrium quantity________?
some consumer and producer surplus will be lost
when supply > demand then-
excess labor hours unemployment
an effective price or rent control causes a __________?
deadweight loss
When rent controls are placed…_______________shortages are worse?
long run
Incidence of Tax on sellers: Who pays the tax?
refers to how the burden of a tax is divided between the seller and the consumer or who actually pays what portion of the tax decrease in sales due to sales tax
What does incidence depend on?
elasticity of the supply and demand curve
The more inelastic the demand_____________
the more the buyer pays tax wise
If demand is perfectly inelastic_____________
the buyer pays the entire tax
The more elastic the demand is______________
the more the seller pays
If demand is perfectly elastic?
the seller pays the entire tax
A perfectly elastic lines is?
horizontal
A perfectly inelastic line is?
vertical
The more inelastic supply is_____________
the more the seller pays
If supply is perfectly inelastic, _______
the seller pays the entire tax
The more elastic supply is?
The more the buyer pays
If the supply is perfectly elastic?
the buyer pays all of the tax
water is a ______supply
perfectly inelastic supply
-Agricultural Markets have ___________demand
inelastic demand-
Supply curves shift frequently in agricultural markets because of changes in weather.
- the major impact is felt on prices
- prices fluctuate widely in agricultural markets
1.Price Support Program: Involves
Inventory Holding
Government picks an expected “normal” equilibrium level of price and output and tries to stabilize prices at a corresponding level.
Price Support Program Actions
If Output = Q2 , then the government
•
–BUYS Q2 – QE
If Output = Q1, then the government
SELLS QE – Q1
- Subsidy Programs
(A) Subsidizing Units Produced
•Subsidy of $20 per ton
–The equilibrium quantity
increases.
–The equilibrium price
falls.
–The farmer receives
more on each
ton sold—
$50 a ton .
Use of “Target Prices” – Subsidizing Prices
- Lets free market work, but guarantees that farmers will receive a certain “Target Price”
- Government makes up any differences with a subsidy payment.
- Production Limits & Quotas
- Intended to prevent surpluses of crops from occurring
(A) Acreage Controls: Farmers are restricted in how many acres they can cultivate
- Shifts supply curve to left
- Price rises, but there is a deadweight loss
(B) Production Quotas
•Production Quotas
–A production quota limits
total production to 40
million tons a year.
–The equilibrium quantity
decreases to this amount.
–The price rises to $50
a ton and marginal
cost falls to $20 a ton.
-Get Deadweight Loss
- Subsidies:
- •Production Limits & Quotas:
higher output, lower prices to consumers
lower output, higher prices to consumers
–And Deadweight Losses
Utility
Satisfaction or Pleasure; Want-Satisfying Power
Marginal Utility (MU):
The last extra bit of utility a consumer gets from consuming the last extra unit of the item.
* Value is determined by?
marginal utility from last unit consumed
Law of Diminishing Marginal Utility:
The more you consume of a certain good, the less you value additional units of it.
Answer to paradox about diamonds and water came from joining
the notion of utility to the notion of the last unit consumed.
- The Marginal Utility of the last unit consumed of water is very low because we consume so much, although the Total Utility we get from water consumption is high.
- But such a small quantity of diamonds is consumed that the Marginal Utility from their last unit is still high.
•Remember MU declines as we consume more.
•Remember that it is ________, not ________ that determines the value or price of an item.
Marginal Utility not total utility
Cardinal Approach
– Exact Numbers
- can’t use this with utility
Ordinal Approach
– Rank Order
- this is used with utility
What is the goal of the consumer?
To maximize
Total Utility
Condition To Maximize Total Utility or To Reach
Consumer Equilibrium (a stable situation):
Assuming you spend all your income, you should allocate your income so that the following holds: MU per dollar spent on commodity #1 should be the same as the MU per dollar on commodity #2 (and the same for all goods).
mu1/mu2=p1/p2
Intuitively, if an avocado costs 3 times as much as a banana, the last avocado consumed should bring the consumer 3 times the happiness as the last banana
T/F
T
What must consumer do to restore equilibrium?
- Can NOT change prices
- Must change MU by altering consumption
- Want: MUA/MUB = 4 (i.e., raise this ratio)
- Must either raise numerator or lower denominator
So: When PA goes up, QD of good A should go down.
T/F
True
To Raise Numerator: If consume LESS of good A, MUA increases
To Lower Denominator: If consume MORE of good B, MUB
decreases.
True
the Law of Diminishing Marginal Utility is one thing that explains_______
the negative slope of a demand curve.
What are the 3 Things that underlie a Demand Curve?
- The Law of Diminishing Marginal Utility
- Substitution Effect
- Income Effect
SID
Budget line will let us determine
what is feasible for a consumer to purchase given her/his income and the prices of goods.
-on or below the budget line
When the price of one good changes relative to the price of another good, we say we have had a change in ____________
RELATIVE PRICE
p1/p2 has changed
•
•WHEN RELATIVE PRICES CHANGE, THEN WE GET A ________ OF THE BUDGET LINE – THE SLOPE CHANGES.
rotation
Parallel Shifts
(1) If income changes or
(2) If both prices change in the same proportion —–then we get a parallel shift of the budget line.
In these cases, there has been no change in relative prices.
Consumption Possibilities
–An change in the household’s
income brings a parallel shift
of the budget line.
–The slope of the budget line
doesn’t change because the
relative price doesn’t change.
If prices of both avocados and bananas double (or change in the same proportion by any amount), then we get a _______shift of the budget line.
parallel
What are explicit costs?
Resources bought or hired on the market
What must happen in order for a cost to be explicit?
money must change hands. wages to workers. paying for inputs
What are implicit costs?
costs where money does not change hands.
What are the two categories of implicit costs?
- Opportunity cost of capital resources by firms2. OC of “labor” resources supplied by owner
Implicit rental rate of capital has which categories?
- forgone interest on owner’s funds2. Economic depreciation on capital equipment
What’s an example of forgone interest on owner’s funds?
take money out of savings–no interest–economist thinks this has an opportunity cost $ not in savings– forgone interest– no money changed hands
Whats an example of Economic depreciation on capital equipment?
rent computers–rental company sustains depreciationdepreciation- equipment wears outeveryday the machine is used the value depreciates
What is an example of lost wages and salaries for labor supplied by the owner?
NAME?
What is an example of Opportunity cost of owner’s entrepeneurship?
opportunity cost of entrepreneurship management talent to your firm OC $ for running someone else’s company
What implicit cost does an accountant pay attention to?
depreciation -THIS WILL AFFECT THE COMPUTATION OF PROFIT
How do firms figure their costs and profits?
-economists consider costs in an opportunity cost sense*There’s a distinction between economic and accounting costs and economic and accounting profit
Why doesn’t an account regard all of the implicit costs?
not cost deductible
How is economic profit calculated?
TR- Total Economic Cost where economic cost includes all implicit costs.
Economic costs can be ____than accounting cost meaning?
greaterECONOMIC PROFIT MAY BE LESS THAN ACCOUNTING PROFIT
What are the three major types of business organizations?
- Proprietorship 2. Partnership3. Corporation (CPP)
A proprietorship has _____________ which extends to_____–
unlimited liability this extends to personal assetssingle person/ unit start a business-profit goes to a single owner, profit to single ownerif business fails and debts are incurred– creditors can take home, car, anything that is valuable.
What are the three different kinds of partnerships?
- Traditional2. Limited partnership3. Limited liability partnership
What does a traditional partnership entail?
each partner has joint unlimited liability each partner liable w/o limit for all debts contracted by partnership friend- owns 90%, gets 90% of the profit-but if business fails you’re responsible for 100% of the money.
What is limited partnership?
“limited” partners don’t have unlimited liability but they also have no say in running the firm-can only loose the money that they put into the business- can’t make operational decisions- want investors – gray area when someone does help with the decisions
What is a limited liability partnership?
- one partner is not liable for misconduct of another partner -all partners have a sayex: if there is debt because of embezzlement- “not liable” for losses
What are some features of a corporation?
NAME?
What is a disadvantage of a corporation?
multiple layers to taxes, subjected to moreCorporate profits tax plus income tax on dividends and capital gains tax for shareholders.
What is a Limited Liability Company?
-limited liability - loose $ invested, loose shares-can pass through taxes to personal income taxes -tax dodge
What is a S corporation?
owner takes part of return as wage and part as profit. Avoid SSI taxes
How is industry percentage divided between Corps, Partnerships, Proprietorships?
corps -20%partnerships-4%proprietorships- 75%
90% of revenue comes from?
Corporations
What are the 4 degrees on the Market Structure Spectrum?
- Perf Competition 2. Monopolistic Competition 3. Oligopoly4. Monopoly
How can market power be calculated?
- Conc ratio2. Herfindahl- Hirschman Index
What is concentration ratio?
A measure of market powerfraction of the total market sales controlled by the industry’s largest firms -top 4 firms in order of sales-see what fraction is accounted for
What is the HHI index?
the square of the percentage market share for each firm summed over the largest 50 firmsif only fourHHI=50^2+25^2+15^2
What is a variable resource?
ones that can be varied quickly and easily to increase or decrease output within a production unit (or plant of a given size)
What is an example of a variable resource?
labor
What is a fixed resource?
-ones that cant be varied quickly or easily -the quantity of fixed resources determines the size of the plant-the collection of fixed resources is the firm’s plant
What is an example of a fixed resource?
Capitalfactory, machinery, -determines size of production unitcan’t vary quickly and easily
Short run?
long enough to alter the variable but not the fixed resources for production
Long-run?
long enough to alter both the variable and the fixed resources for production
Are there fixed resources in the long run?
No-everything can be altered in the long run.
T/F There is a particular amount of time attached to the long/ short run?
False- length in time varies for each industry simple industry- shoe repair- can double the size quicky- rent the space next to you- new equipment can be bought quickly. (maybe 1 month)1 month -complex- steel industry-new furnace needed- long time is required
What is industry?
NAME?
What is the hierarchy within an industry?
plants: factory, equipmentfirm: lots of plants, plants together- firms (create same one product) firms: form industry
What is a sunk cost?
- an asset that has no resale value, can’t recycle for raw materials, no used market=NO OPPORTUNITY COST. -it’s zero because there is no alternative option shouldn’t influence a business decision about what is currently the most profitable thing to do–sh
Short run cost is a ________concept? why?
short run concept most things can be recycled in the long run
What is the difference between psychologists and economists in terms of sunk cost?
-Psychologists-ticket to concert-1hr to get there-go w/o ticket-left at home and can’t get it back in time= you are paying 2X as much for the ticket now-economists-forget the sunk cost you are only paying the original amount for the ticket
What is a production function?
a technical math relationship that tells the max amt of output that can be produced with a given set of inputs-given the current state of technological knowledge TR=f(capital, land, labor)
What is average product? How is it calculated?
-product per unit of an input factor AP of labor: Total Product/# of labor inputsAP of capital: Total Product/# of capital inputs
What is marginal product? How is it calculated?
the chang/e in total product that comes from using an additional unit of a factor-
MPL=change in total product/change in labor.
(this is adding another worker and seeing how the product changes)
What does productivity measure?
Average product of labor (output per worker)
Law of Diminishing Marginal Returns
(Also called the law of Diminishing Marginal Product)
If additional units of a variable resource or input are added to a given quantity of fixed resources or inputs, eventually the marginal product of the variable input will decrease.
*Note that this is a short-run concept where there is a least one fixed factor.
If MP is above AP _________
® AP is rising
(2) If MP is below AP ___________
® AP is falling
If MP is equal AP _________
AP is peaking out
I. Total Costs (TC)
- whatever total cost is for any level of output
— sum of all costs
(A) Total Fixed Costs
— TFC (Overhead Costs)
— do not vary with output
— come from fixed inputs
(B) Total Variable Costs — TVC
— vary with output
— come from variable inputs
TC =
TFC + TVC
Average Total Costs (ATC)
Atc=TC/Q–
Total Cost Per Unit of Output
ATC=
AFC+AVC
Marginal Costs (MC) : Increase in Total Cost that results from an increase in output
MC=change in total cost/change in quanitiy
Which cost isn’t u-shaped?
AFC
(1) When marginal is below average ®
(2) When marginal is above average ® average is rising.
(3) When marginal is equal average ® average is at its lowest point.
average is falling.
2) When marginal is above average ®
(3) When marginal is equal average ® average is at its lowest point.
average is rising.
(3) When marginal is equal average
® average is at its lowest point.
When AVC is at its minimum,
AP will be at its maximum.
When MC is at a minimum,
MP will be at its maximum.
Long-Run Average (Total) Cost Curve
(No distinction between fixed and variable in Long-Run All Are Variable)
Plots the relationship between the lowest attainable Average (Total) Cost and output when both capital (or plant size) and labor can be varied.
* Qm is the most efficient point – doubly efficient:
(1) It represents the lowest possible costs for its production level (like all points on LRAC curve).
(2) It is the output level that has absolutely lowest costs of all output levels.
0 to Qmin:
Economies of Scale
Qmin Rightward:
Diseconomies of Scale
Minimum efficent scale
The lowest level of output at which long-run average cost reaches its lowest level.
