Test 2 Flashcards
linear demand curve
constant slope
elasticity varies
log linear demand curve
constant elasticity
slope varies
inelastic and total revenue
price increases, total revenue increases
elastic and total revenue
price increase, total revenue decreases
perfectly elastic chart
lots of substitutes
straight horizontal demand line
perfectly inelastic chart
not responsive to price change
straight vertical demand line
consumer preference order
completeness: can’t say “ i don’t know”
more is better
marginal rate of substitution: slope of indifference curve
transitivity
diminishing marginal rate of substitution
as you move down along the indifference curve, the amount of y you give up for x diminishes
market rate of subsititution
slope of budget line
consumer equilibrium
marginal rate of substitution and market rate of substitution are equal
3 different production functions
linear
leontief
cobb-douglas
marginal rate of technical substitution
slope of isoquant line
isoquant
combination of different levels of K and L to get same output
isocost
combinations of inputs that will cost the same amount
diseconomies of scales
LRAC increases as output increases
economies of scope
the cost of producing two types of output together is less than the total cost of producing each type seperately
cost complementary
marginal cost of one good decreases when the production of another good increases
EX: donuts and donut holes
transaction costs
searching costs
negotiation costs
specialized investment: site specificity, physical assets, human capital
spot exchange
one time transaction
no protection against opportunism or hold ups
pros: firm gets to specialize
con: no protection
contract
specific terms defined
reduces possibility of opportunism
pro: firm gets to specialize
con: costly to write, hard to cover all contingencies
vertical integration
firm produces its own inputs
no longer specializes
pro: no loner relies on other firms
con: must make all inputs and deal with costs associated
principal agent problem
solution: profit sharing
revenue sharing
piece rates
time clocks and spot checks
Site specificity
EX: electric power plants locate close to coal mine
firms build close to one another to minimize transportation costs
physical assets specificity
EX: specialized motor for lawn mower
equipment is specialized for a particular buyer and can not be adapted