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
dedicated assets
EX: computer manufacturer established new assembly line to produce for large government buyer
if investment is profitable it is dedicated
human capital
workers learn specific skills, if skills are not transferable to other employees
profit sharing
compensation dependent upon profitability of firm
revenue sharing
compensation dependent upon revenues of firm, like tips and sales commission
EX: waiters
con: do not provide incentive to minimize costs
piece rates
based on the output
EX: typist is paid by the page he produces
con: quality control
time clocks and spot checks
time clocks: employee arrives on time, do not monitor effort
spot checks: verifies workers are present and their effort
pro: minimize cost of monitors
factors affecting own price elasticity
available subs: the more substitutes, the more elastic
time:the longer the time, the more elastic
expenditure share: the smaller the share of the budget a good has, the more inelastic
