Variations Over the Business Cycle

Question 1

Long run supply line

Answer 1

supply is determined by demand

Question 2

Market period

Answer 2

level of supply is fixed

Question 3

Marginal productivity (MP)

Answer 3

the amount of input required to create each additional unit of output

Question 4

Marginal cost (MC)

Answer 4

why the supply line slopes up; inverse relationship with marginal productivity
Graphs

Question 5

Normal return

Answer 5

the cost of staying in business; more than money

Question 6

Cost structure

Answer 6

1. Shifts marginal costs up
2. Direct relationship with marginal cost
3. Causes supply to shift up or down
4. Price of inputs into production
5. Level of technology can lower cost
6. Environment of production (e.g. farming)

Question 7

Entry and exit

Answer 7

supply shifts to the right as new firms enter the market

Question 8

Average cost (AC)

Answer 8

1. Measure that distributes costs evenly among units
2. Margin moves faster than the average
3. Margin pulls the average in its direction
4. Marginal cost cuts average at the minimum average cost

Question 9

Profit (𝛑)

Answer 9

1. 𝛑=total revenue(TR)-total cost (TC)
2. 𝛑=(P-AC)xQ
3. Wanted but not necessary to stay in business
4. Signals market is favorable for suppliers

Question 10

Profit and competition

Answer 10

𝛑 may lead to more competition, therefore a decrease in price Innovation for a competitive edge

Question 11

Naturally occurring market power

Answer 11

1. Given naturally, not a coincidence
2. Everyone has some natural gift, but not all pay off in the market
3. Rare gifts that yield increases in demand in product markets and small factor markets with low substitution possibilities are more valuable
4. Payoff is not guaranteed

Question 12

Scale of production

Answer 12

1. Size of the process of production
2. Increase in this leads to an increase in all factor outputs in the same proportion to expansion of production
3. Returns to scale- degree to which a change in the scale of production changes the level of output (decreasing, constant, increasing)
4. Increasing returns to scale lead to scale economies
5. Scale economies create market power and few can break into the market to compete

Question 13

Artificially created market power

Answer 13

created market power- man-made or not naturally occurring

Question 14

Patent

Answer 14

not natural, comes from the government; marketable commodity that can be bought up

Question 15

Rent maintenance

Answer 15

sustaining a return to power

Question 16

Rent-seeking

Answer 16

preventing a loss in market power

Question 17

Social institutions

Answer 17

socialization can limit competition (e.g. race, gender)

Question 18

Market failure

Answer 18

when a market does not work smoothly and quickly to what needs to be done

Question 19

Pure public goods

Answer 19

non-partitionable and non-excludable goods; free-riding can cause failure

Question 20

Externalities

Answer 20

property rights rae either not assigned or enforceable (e.g. air, water) and no market forms

Question 21

Negative externalities

Answer 21

activity that imposes negative effects (e.g. pollution); market failure results from a private actor not taking all costs into effect

Question 22

Positive externalities

Answer 22

activity increases positive effect

Question 23

Risk externality

Answer 23

possible negative impact for some associated with a risk (e.g. drunk driving, genetic engineering)

Question 24

Expansion

Answer 24

the phase of the business cycle during which output is increasing

Question 25

Recession

Answer 25

the phase of the business cycle during which output is falling

Question 26

Depression

Answer 26

a deep and prolonged recession

Question 27

Through

Answer 27

turning point in the business cycle between recession and expansion

Question 28

Peak

Answer 28

turning point in the business cycle between expansion and recession

Question 29

Recovery

Answer 29

when GDP begins to increase after a contraction ad a trough in the business cycle