Variations Over the Business Cycle Flashcards
Long run supply line
supply is determined by demand
Market period
level of supply is fixed
Marginal productivity (MP)
the amount of input required to create each additional unit of output
Marginal cost (MC)
why the supply line slopes up; inverse relationship with marginal productivity
Graphs
Normal return
the cost of staying in business; more than money
Cost structure
- Shifts marginal costs up
- Direct relationship with marginal cost
- Causes supply to shift up or down
- Price of inputs into production
- Level of technology can lower cost
- Environment of production (e.g. farming)
Entry and exit
supply shifts to the right as new firms enter the market
Average cost (AC)
- Measure that distributes costs evenly among units
- Margin moves faster than the average
- Margin pulls the average in its direction
- Marginal cost cuts average at the minimum average cost
Profit (𝛑)
- 𝛑=total revenue(TR)-total cost (TC)
- 𝛑=(P-AC)xQ
- Wanted but not necessary to stay in business
- Signals market is favorable for suppliers
Profit and competition
𝛑 may lead to more competition, therefore a decrease in price Innovation for a competitive edge
Naturally occurring market power
- Given naturally, not a coincidence
- Everyone has some natural gift, but not all pay off in the market
- Rare gifts that yield increases in demand in product markets and small factor markets with low substitution possibilities are more valuable
- Payoff is not guaranteed
Scale of production
- Size of the process of production
- Increase in this leads to an increase in all factor outputs in the same proportion to expansion of production
- Returns to scale- degree to which a change in the scale of production changes the level of output (decreasing, constant, increasing)
- Increasing returns to scale lead to scale economies
- Scale economies create market power and few can break into the market to compete
Artificially created market power
created market power- man-made or not naturally occurring
Patent
not natural, comes from the government; marketable commodity that can be bought up
Rent maintenance
sustaining a return to power
Rent-seeking
preventing a loss in market power
Social institutions
socialization can limit competition (e.g. race, gender)
Market failure
when a market does not work smoothly and quickly to what needs to be done
Pure public goods
non-partitionable and non-excludable goods; free-riding can cause failure
Externalities
property rights rae either not assigned or enforceable (e.g. air, water) and no market forms
Negative externalities
activity that imposes negative effects (e.g. pollution); market failure results from a private actor not taking all costs into effect
Positive externalities
activity increases positive effect
Risk externality
possible negative impact for some associated with a risk (e.g. drunk driving, genetic engineering)
Expansion
the phase of the business cycle during which output is increasing
Recession
the phase of the business cycle during which output is falling
Depression
a deep and prolonged recession
Through
turning point in the business cycle between recession and expansion
Peak
turning point in the business cycle between expansion and recession
Recovery
when GDP begins to increase after a contraction ad a trough in the business cycle
