Final Exam _1 Flashcards

Terms Definitions
If TU>0
Income effect
as wage rate rises you might want to work less because you can make what you did before or more and buy more
%^Q > %^P
Short Run Supply Curve (firm)
portion of the firms marginal costs curve that lies above AVC curve
Market Failure
situation where market does not provide the ideal or optimal amount of a good
free rider problem
-anyone who receives goods with paying for them
4 assumptions for wages to remain the same for everyone
-demand for every type of labor is the same-no special non pecuniary aspects to any job-all labor is homogeneous and can be trained for different types of employment at no cost-all labor is mobile at zero cost
Substitution effect
as you are offered a higher wage, you might want to work more hours to make more $
constant return to scale
inputs increased to some % and outputs increase to the same %, unit costs remain constant
Income Elasticity-Normal Good
Ey > 0
Individual Supply of Labor
-depends on the degree of the income and substitution effects for each person
assumptions monopolistic competitor
-many sellers and buyers-each firm produces and sells a slightly different product-easy entry and exit
Conditions for Long run competitive equilibrium
-no incentive for firms to enter /exit industry (Econ profit=0)-no incentive for firms to produce more or less output (firms produce at output where P=MC)-no incentive for firms to change plant size (SRATC=LRATC at quantity of output where P=MC)
Perfect comp... how many sellers?
MRP curve for a perfectly competitive firm
same as VMP curve b/c P=MR
Marginal Social Benefits MSB
4 firm concentration ratio
% of industry sales accounted for by 4 largest firms
Socially optimal amount (efficient amount)
Total Utility
total satisfaction one receives from consuming a particular quantity of a good
diseconomies of scale
inputs increased to some percent and outputs increase to less %, unit costs rise
^TC/ ^Q
Income ElasticityInferior Good
demand curve of monopolistic competitor
downward sloping
Monopoly (sellers)
one seller
Public Good
good that is non rivalry in consumption
Marginal Social Costs (MSC)
= Marginal Private Costs + Marginal External Costs=MPC+MEC
Fixed Costs
cost of fixed inputs, things that don't change as quantity changes
Economies of Scale
When inputs are increased by some % and outputs are increased by a greater %, causing unit costs to fall
If MPP goes up
MRP curve shifts right and vice versa
If P goes up
MRP curve shifts right and vice versa
negative externality
- person's or groups actions cause a cost felt by others-market overproduces
positive externality
person's or groups actions cause a benefit felt by others-market underproduces
Short Run- perfectly competitive firm shuts down when
P < AVC (<ATC)
non excludable
cannot be denied to people who do not pay for them
Four assumptions behind the theory of perfect competition
- many sellers and buyers, none of which is large in relation to total sales or purchases-each firm produces and sells homogenous product-buyers and sellers all have relevant information-easy entry and exit from industry
=^Q of output/ ^Q of the factor
Resource Allocative Efficency
P=MC, perfectly competitive firms are
Factor Price Taker
firm that can purchase all of the factor it wants at equilibrium price, horizontal supply curve of factor
If demand is elastic
as price increases TR decreases(Ed>1)
Price searcher firms (Monop, Monop comp, olig) MRP curve
lies below VMP curve b/c P>MR
=MR* MPP=^TR/^Q of the factor
adjusting for externalities
-persuasion-assignment of property rights-voluntary agreements-taxes and subsidies-regulations
side effect of an action that affects the well being of 3rd parties
Elasticity of Demand for Labor
E L = %^Ql/ %^W- the higher the elasticity demand is for that product the higher the elasticity demand for labor that produces that product and vice versa-the higher the labor cost total ratio, the higher the El and vice versa-more substitutes for labor = a higher El
%^Q = %^P
Unit Elastic
sunk costs
non refundable costs you've already invested
^TC/ ^Q of the factor
if demand is inelastic
as P increases TR increases(Ed
In short run firms maximize profit by producing when...
Income Elasticity
-responsiveness of Qd to changes in Income-Ey= %^Qd / %^I
Marginal Utility
^TU/ ^Q
^TC/ ^Q
2 factors require firm to purchase factors at a ratio where
- (MPP1/P1)= (MPP2/P2)
To make economic profits
excludable goods
goods that while non rivalrous can be denied to people if they do not pay for them
If MU is negative
less of the good
oligopoly (sellers)
few sellers
Elasticity of Demand formula
%change Quantity demanded / % change price demanded
Determinants for Price Elasticity of Demand
-More substitutes for a good-higher price elasticity of demand-More a good is considered a luxary instead of a necessity the higher the price Elasticity of Demand-the higher the % of one's budget goes to purchase a good the higher the price elasticity of demand-the more time that passes (w/o a price change) the higher the Price Elasticity of demand
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