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Ed/es>1=
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elastic
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Microeconomics
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Individual Decision Making
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DEMAND CHANGE:
TIPSE
TASTE INCREASE
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demand increase
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economic profits
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total rev-econ opp cost
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Explicit
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Shows exact relationship between variables
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Capital
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Goods used to make other goods
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Economics and Efficiency
(maximize unlimited wants)
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Full employment
Full production
Production efficiency
Allocation efficiency
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accounting profit =
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revenue - explicit cost
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elastic
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consumers are highly responsive to price changes; more horizontal
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budget line
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shows the consumption bundles available to a consumer who spends all of his or her income
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opportunity Cost
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What you sacrifice to get something
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expansion path
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curve passing through points of tangency between firms isocost and isoquant lines
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Determinants of demand
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Tastes and preferences
Number of buyers
Incomes
Prices of related goods
Expectations
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Government Agencies that enforce anti-trust laws
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FTC and DOJ
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P<= AVC
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cannot cover cost. shut down point.
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Facilitating practices
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actions by oligopolistic firms that can contribute to cooperation and collusion even though the firms do not formally agree to cooperate
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Economic theory
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evolves from a hypothesis that accumulates favorable results after continued testing against the facts
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Elasticity
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is a measure of reponsiveness. It measures how sensitive an economic variable is to a change in anouther economic variable
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Because of their large-scale level of production, pure monopolists over-allocate resources to their industry by producing beyond the P=MC output
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FALSE
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Normative
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The economic of what should be. This is economics where one's opinion is offered.
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Sunk Cost
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Expenditure that has been made and cannot be recovered. Because it cannot be recovered it should not influence the firms decisions. No alternative use = No opportunity cost. (Ex. R & D)
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merit goods
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society deems everyone should have a minimum of this
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People who impacted/shaped economics
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Adam Smith
David Ricardo
John Stuart Mill
Karl Marx
John Mayhard Keynes
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DEMAND CHANGE:
TIPSE
Substitute/Compliment
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Sub price increase = increase in demand
com price increases = drop in demand
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what is left over from accounting profits after a firm has subtracted its implicit cost
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Economic Profits
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fixed cost
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costs that do not vary with output
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Principle of Substitution
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The principle that methods of production will change if relative prices of inputs change with relatively more of the cheaper input and relatively less of the more expensive input being used
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Equilibrium Quantity
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(1) The quantity demanded and supplied at the equilibrium price in a competitive market; (2) the profit-maximizing output of a firm
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Utility
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The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services).
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normative analysis
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analysis of what ought to be. conclusion based on opinion or value judgements do not advance one's understanding of events...hmmmm
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An economy will always operate at some point on its production possibilities curve
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FALSE
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Diseconomies of Scale
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The situation when a firm's long-run average costs rise as the firm increases output
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Production Possibility frontier
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Shows the trade-offs a country must make if it is already using all its productive resources but wants to make more of one good. In general, societies can not go past their production possibility frontier. Being with PPF is a waste of resources Points along the curve describe the opportunity cost between two goods
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Total Revenue
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the amount a firm receives for the sale of its output
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Economic System
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The way in which society decides what goods to produce, how to produce them, and for whom the goods will be produced.
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Which type of Cost is zero when production is zero?
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Variable Cost
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Long run
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any period of time where all inputs are variables
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Traditional Economy
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An economy in which behaviour is based mostly on tradition
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Appreciation
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An increase in the value of the dollar relative to the currency of another nation, so a dollar buys a larger amount of the foreign currency and thus of foreign goods.
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Comparitive advantage
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the ability to produce a good or service at a lower opportunity cost that someone else
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average fixed cost
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the fixed cost per unit of output
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Normal Good
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A good for which an increase in income increases demand
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profit maximizing rule
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if P > MC, increase production; if P
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Fallacy of Composition
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what is good for the individual is good or true for the group or society.
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What is product differentiation?
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is the process of distinguishing the differences of a product or offering from others, to make it more attractive to a particular target market.
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Relative Price
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The ratio of the money price of one commodity tot he money price of another commodity; that is, a ratio of two absolute prices
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Index fund
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a mutual fund that tries to match the performance of a broad market index
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Personal distribution of income
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The manner in which the economy’s personal or disposable income is divided among different income classes or different households or families.
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elastic demand
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PED1
and demand curve is not steep. leads to larger change in quantity demanded with change in price.
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Law of supply
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Firms produce less of a good as its price falls and more of a good as its price increases
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Implicit Costs (For making a chair)
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What's your Opportunity Cost? What's the next best thing you could've been doing?
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When demand is inelastic, a decrease in price will cause....
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a decrease in total revenue
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Define Post Hoc Fallacy
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Idea that the first event causes the second event to occurex: sending christmas cards causes christmas
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How do you find the optimal bundle using the tangency condition?
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1. use (QRxPR)+(QMxPM)=N
where N stands for income, R represents one good and M represents another good
2. to find the slope of the budget line, divide its vertical intercept by its horizontal intercept, the vertical intercept is the point where all income is spent on one good (QR=0), solve for QM and then do the opposite to solve for QR
3. slope of the buget line = -(vertical intercept)/(horizontal intercept)
((N/PM)/(N/PR))=-(PR/PM)
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Change in Quantity Demanded
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A change in the amount of a product that consumers are willing and able to purchase because of a change in the product’s price.
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what are some Limits to Monopoly Power
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the government or from the market itself
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What is the formula for Income Elasticity?
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% change in QD/ % change in income
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If the absolute value of the price elasticity of demand is greater than one
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then we say the demand for this good is elastic
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total revenue(TR)
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p*q
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Tariff
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tax on imported good
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consumption
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household spending. housing, transportation, food, entertainment, and other goods and services. $6.7tril in 2000
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Ceteris Paribus
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other things being equal.
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Demand Curve
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A curve illustrating demand.
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MR
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difference between next levels of TR
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INCENTIVES
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when changes in the available opportunities offer rewards to those who change their behavior
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Disparate treatment
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different treatment of individuals because of their race, sex, color, religion, or national origin
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Rational People
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people who systematically and purposefully do the best they can to achieve their objectives.
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Rule of reason-
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Only combinations and contracts unreasonably restraining trade are subject to actions under the antitrust laws and that size and possession of monopoly power are not illegal.
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tit-for-tat
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a strategy for the repeated prisoner's dilemma, in which players cooperate on the first move, them mimic the other partners last move, for each successive move
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Economics
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Social science that deals with people & their decisions. Scarce resources & unlimited wants.
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Economy Sources:
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land, labor, capital & human capital
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Simultaneous Consumption
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The same-time derivation of utility from some product by a large number of consumers.
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Cost minimization
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An implication of profit maximization that firms choose the production method that produces any given level of output at the lowest possible cost
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Characteristics of Competitive Markets
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many firms/many buyersidentical productsno barriers to entryeveryone is well informed
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propertyrights
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the rights individuals or firms have to theexclusive use of their property, the right to buy or sell it.
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Compensating wage differential-
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wage premium to compensate for undesirable work.
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Price elasticity of supply
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Measures the responsiveness of quantity supplied to changes in price
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Total-Revenue Test
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A test to determine elasticity of demand between any two prices: Demand is elastic if total revenue moves in the opposite direction from price; it is inelastic when it moves in the same direction as price; and it is of unitary elasticity when it doesn't change when price changes.
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Utility-Maximizing Rule
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The principle that to obtain the greatest utility, the consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility.
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In a Continuous Setting
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Marginal Benefit = Marginal Cost
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marginal cost
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the change in total cost resulting from a one-unit change in output; the change in total cost divided by the change in output, or MC=
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Non-Cooperative Outcome
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An industry outcome reached when firms maximize their own profit without cooperating with other firms
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Derived demand
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demand stemming from what a resource can produce, not demand for the resource itself
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Private Property
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individuals and firms own and control land, capital, and other property
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economic varible
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something measureable that can have 2 different values ex. the wages of software programers
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Standard Oil case (1911)-
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found guilty of monopolizing the petroleum industry through abusive and anticompetitive actions. Is every monopoly in violation of section 2 of the Sherman Act of just those created or maintained by anticompetitive actions?
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Complements
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Two goods that are related in such a way that an increase in the price of one good decreases the demand for the other good.
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change in Qd
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point to point movement along single demand curve. just price changes
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when does MUx/Px = MUy/Py?
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at the optimal consumption bundle
where the two curves cross on a graph of marginal utility per dollar of the two goods over quantity of the goods
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Rule #5
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When the total curve is increasing at a decreasing rate, the marginal curve is falling
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Marginal Product (MP)
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The additional output produced when 1 additional unit of a resource is employed (the quantity of all other resources employed remaining constant); equal to the change in total product divided by the change in the quantity of a resouce employed.
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Profit is maximized when ___ = ___
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MR = MC
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Supply Schedule
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A schedule showing the amounts of a good or service that sellers will offer at various prices during some period.
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If the marginal revenue is less than the marginal cost in a perfect competition, what should the firm do?
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produce more
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economic efficiency
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a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of produciton and in which the sum of consumer surplus and producer surplus is at maximum
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Total fertility rate-
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the average number of children that a woman is expected to have during her lifetime.
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Increasing returns to scale
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Situation in which output more than doubles when all inputs are doubled.
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Marginal Utility per Dollar Spent
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the additional utility from spending one more dollar on a good or service
am I better off by spending another dollar and, if so, by how much?
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Inverted-U Theory Of R&D
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A theory saying that, other things equal, R&D expenditures as a percentage of sales rise with industry concentration, reach a peak at a four-firm concentration ratio of about 50 percent, and then fall as concentration further increases.
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Increasing Returns (to scale)
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A situation in which output increases more than in proportion to inputs as the scale of a firm's production increases. A firm in this situation is a decreasing-cost firm
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Diminishing marginal product
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the point where MPL is no longer increasing, but actually decreasing
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Per cent of budeget
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Less expensive items tend to have more inelastic demand
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Opportunity-cost ratio (the domestic exchange ratio)-
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An equivalency showing the number of units of two products that can be produced with the same resources.
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price ceiling
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gov't set max price for a good; if set below EP = shortage
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MARGINAL COSTy=mx + b
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the slope of the horizontal good the mc of the vertical good is the inverse of the slop of the horizontal good I1/slopeI
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What Will Be Produced?
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The goods and services created at a continuing profit will be produced. Those producing at a continuing loss will not
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the labor market and minimum wage
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*a decrease in the demand for low-skilled labor lowers the wage rate and reduces employment*lower wage rate encourages ppl w low skills to acquire more skills, in long run raises wages for low-skilled labor*a min wage set above the equilibrium wage rate creates unemployment*minimum wage hits low-skilled young ppl hardest
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Average Total Cost (ATC)
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the sum of the average fixed cost plus the average variable cost.
ATC = AFC + AVC
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Production Function - Special Case - Perfect Substitutes
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When the isoquants are straight lines, the MRTS is constant. Thus the rate at which capital and labor can be substituted for each other is the same no matter what level of inputs is being used.
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The particular price that results in QS being equal to QD is the best price because...
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it maximizes the combined welfare of buyers and sellers
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If marginal utility per dollar spent on X is high than marginal utility per dollar spent on Y then what should the consumer be comsuming more off and what should they consume less of?
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they should consume less of Y and more of X
by spending more on X they can add a large number of utils to their total utility; meanwhile by spending less on Y they will decrease a small number of utils from their total utility because marginal utility per dollar spent is higher for good X than for good Y
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