Microeconomics Flashcards

Terms Definitions
What does the supply demand graph look like for a monopoly?
When a monopolistic firm produces at the quantity that maximizes revenue, will the firm use resources efficiently or inefficiently and will its price be higher or lower than in a competitive environment?
Inefficient & higher price
What is the consumption function?
The relationship between changes in personal disposable income and consumption.
What is a natural monopoly?
One that exists because of increasing economies of scale
What is the elasticity of supply?
The percentage change in quantity supplied of a product when the price changes.
In a perfectly competitive market, where is profit maximized?
Where MC = MR.
Remember that MR "curve" is a horizontal line--no differences in price regardless of quanity produced.  MC curve is upward sloping.  At the point of intersection, ATC & AVC are at their lowest, so profit is highest.
Under Monopolistic Competition what determines whether a firm makes a profit or not?
Price relative to Average Total Cost. Profit if P > ATC
What is income elasticity of demand?
It measures the change in quantity demanded of a product given a change in consumer income.
What is the price elasticity of demand?
It measures that sensitivity of demand to a change in the product's price.
When does market equilibrium occur?
At the intersection of the demand and supply curve where all goods supplied will be sold.
Describe the interrelationships of firms in an oligopoly.
Tend to affect each other. One firm lowering prices (especially) leads to other firms lowering prices; in the extreme this leads to a "price war."Because of the issues with prices firms tend to compete on things other than price such as service or quality
What is the shape & characteristics of a demand curve in monopolistic competition? Explain
downward sloping b/c of product differentiation & highly elastic b/c of existence of close substitutes
What is the cross-elasticity of demand?
It measures the change in demand for a good when the price of a related or competing product is changed.
what happens to marginal costs over time? Where does the MC curve cross the ATC and AVC curves?
Marginal costs are the cost of the next unit and so depend on what's happening w/variable costs.  Since variable costs eventually suffer inefficiencies andrise, so do marginal costs. MC curve has its low near the orgin (before ATC and AVC reach their lows); it crosses these other two curves at their lowest point
What is the law of diminishing returns? does it apply to supply or demand?
Applies to supply (there's the law of diminishing marginal utility for demand).  This law says that because variable costs eventually begin to rise because of dis-economies of scale, returns eventually diminish as your company grows larger
Point of profit maximization in monopolistic competition?
MR = MC, as long as P > AVC
What are the two ways in which government intervention can alter market equilibrium?
A price ceiling or a price floor.
What is the effect of a price floor?
Too many goods will be produced causing overproduction.
What profit outcomes are possible in the short run and in the long run under monopolistic competition?
Short run can lose $, profit, or break even, but in the long run firms will always break even
What does the result of the price elasticity of demand equation indicate?
If great than 1, demand is elastic; if less than 1, demand is inelastic; if 0, demand is unitary.
At what point does a monopoly set its price? Do prices in monopolies tend to rise or fall?
A monopoly sets its price where MR = MC.
Prices in a monoply tend to DECREASE b/c the demand curve is dowward sloping--to sell more the firm has to lower its price.
Population Increases
demand increases
Income Increases
demand increases 
tax philosophies
ability to pay-progressivebenefits principle-if you didnt use it you dont have to pay(property,water,tolls)
long run
all resources are variable
A government order prohibiting the movement of merchant ships into or out of its ports
two or more businesses independently trying to win the business of a third party
low supply, causing high demand, prices go up
Marginal analysis
the comparison of “additional” benefits to the “additional” costs
the characteristics of a population with respect to age, rac, and gender.
The willingness and ability of buyers to purchase different quanitites of a good at different price during a specific time period.
Average Variable Cost
Variable Cost divided by quantity
Normative Economics
A perspective on economics that incorporates subjectivity within its analyses. It is the study or presentation of "what ought to be" rather than what actually is. Normative economics deals heavily in value judgments and theoretical scenarios. It is the opposite of positive economics.
Derived Demand
demand for inputs is “derived” from the demand for the outputs that require those inputs.
Perfect Competition:long run
profit __ 0
profit = 0
min ATC
Marginal Cost formula
A market
an institution or mechanism that brings buyers and sellers together
The enjoyment or satisfaction that a good or service gives (benefit or well-being)
The demand curve of a monopolistically competitive producer is less elastic than that of a purely competitive producer
Absolute Price
Price of the good in money terms
Implicit Cost
Does not require actual money payment, usually cause the resources are owned by the firms themselves.
perfect competition characteristics
1. many firms2. perfect info3. identical products4. low barriers to entry5. 0 economic profit6. all firms are price takers
Law of Demand
states that consumers will only demand/buy a product for which they have a need or want and that is set at a price they are willing and able to pay

allocates consumption of the good to the potential buyers who most value it (highest willingness to pay)
allocates sales to the potential sellers who most value that right to sell the good (lowest cost)
ensures that every consumer who makes a purchase values the good more than every seller who makes sale (mutually beneficial) 
ensure that every potential buyer who doesn't make a purchase values the good less than every potential seller who doesn't make a sale (so no mutually beneficially transactions are missed)
sunk costs
costs that have already been incurred and cannot be recovered.
If Marginal Cost (MC) > Average Total Cost (ATC), then ATC ___.
increase or decrease
Fixed Factor
An input whose quantity cannot be changed in the short run
Price Ceiling
A legally established maximum for a good or service
A market structure in which the number of sellers is so small the each seller is able to influence the total supply and the price of the good or service.
the amount of the good that people want is greater than the amount that is available
marginal product
the additional quantity of output that is produced by using one more unit of that input
Short run
The period of time during which at least one of a firm's inputs is fixed
Returns to Scale
Rate at which output increases as inputs are increased proportionately.
Economies of Scale
the property where the long-run average total cost falls as the quantity of output increases
Average Revenue
Total revenue from the sale of a product divided by the quantity of the product sold (demanded); equal to the price at which the product is sold when all units of the product are sold at the same price.
Moral hazard
when one party in a contract passes the risk or cost involved with their behavior on to the other party (insurance).
Venture Capital
That part of household saving used to finance high-risk business enterprises in exchange for shares of the profit if the enterprise succeeds.
Market Structure
All features of a market that affect the behaviour and performance of firms in that market, such as the number and size of sellers, the extent of knowledge about one another's actions, the degree of freedom of entry, and the degree of product differentiation
When marginal cost is less than ATC...
ATC is falling
Opportunity Cost
The amount of other products that must be forgone or sacrificed to produce a unit of a product.
If income elasticity of demand is less than zero the good is
an inferior good
variable input
an input whose quantity the firm can vary at any time
External Cost
A cost borne by someone other than the people directly involved in the transaction
mono/imp comp lr equil=?
mr=mc but p=atc but not at min
Price Taker
A seller (or buyer) of a product or resource that is unable to affect the price at which a product or resource sells by changing the amount it sells (or buys).
Federal Trade Commission (FTC)
A federal regulatory group created by Congress in 1914 to investigate the structure and behavior of firms engaging in interstate commerce, to determine what constitutes unlawful “unfair” behavior, and to issue cease-and-desist orders to those found in violation of antitrust law.
Break-even price
a price that is equal to the minimum point of the average-total-cost curve
Substitution Effect
A change in the quantity demanded of a consumer food that results from a change in its relative expensiveness caused by a change in the product’s price.The effect of a change in the price of a resource on the quantity of the resource employed by a firm, assuming no change in its output.
standardized product or commoditiy
when consumers regard the products of different producers as the same good.
Shape of a perfectly elastic demand curve
4. Completely horizontal. The flatter a demand curve is the smaller the price change that you need to radically change QD
Price Elasticity of Demand Formula
%change in QD / %change in P
Purely Competitive Labor Market
A resource market in which many firms compete with one another in hiring a specific kind of labor, numerous equally qualified workers supply that labor, and no one controls the market wage rate.
Resources, factors of production, or inputs
goods used to produce other goods--land, labor, and capital
In economics, a public good:
allows free riders to benefit from the good
free-rider problem for Public Goods
once a producer has provided a public good, everyone including nonpayers can obtain the benefit
A firm with a perfectly elastic demand curve has an
identical MR curve (MR = P)
What if Economic Profit is negative?
You're not doing as well as you could be and you should go with your other alternative
If the absolute value of the price elasticity of demand is less than one
then we day the demand for the good is inelastic
Implicit Costs
Opportunity Costs
Monopolistic Competition:
max profit, P __ MR
total revenue - total cost
If MR = MC...
max profit
Policy of treating a one-time expenditure as an annual cost spread out over some number of years.
Externalities of economic activity or processes upon those who are not directly involved in it
The entire relationship between the quantity of some commodity that producers wish to sell and the price of that commodity, other things being equal
Economizing Problem
The choices necessitated because society’s economic wants for goods and services are unlimited but the resources available to satisfy these wants are limited (scarce).
Barriers to free trade impair efficiency in the international allocation of resources
states that we should strive to achieve "the greatest happiness for the greatest number."*created by Bentham and Stuart Mill
isocost line
shows all possible combinations of labor and capital that can be purchased for a given total cost
rational person
someone with well-defined goals who tries to fulfill those goals as best he or she can
Factors of Production
Economic resources: land, capital, labor, and entrepreneurial ability
marginal cost =
change TC / change Q
the amount paid to shareholders on each share of stock owned
Market Intervention
Government also alters distribution of income by acting to modify the prices that are or would be established by market forces. Providing farmers with above-market prices for their output and requiring that firms pay minimum wages are illustrations of government interventions designed to raise the income of specific groups.
trade deficit
the situation that exists when imports exdeed exports
consumer surplus
the extra satisfaction or utility gained by consumers by paying a price that is lower than that which they are prepared to pay.
Market Supply Curve
A curve showing the relationship between price and quantity supplied by all producers together (everything else held fixed)
a collation of firms that agree to restrict output for the purpose of earning and economic profit
command economy
gov't controls every aspect of the economy
A market structure in which a few firms sell either a standardized or differentiated product, into which entry is difficult, in which the firm has limited control over product price because of mutual interdependence (except when there is a collusion among firms), and in which there is typically nonprice competition.
how total income in economies is allocated 
Rule #3
When the average curve is NEITHER rising nor falling (at a maximum or minimum) marginal equals averageEx: baseball, basketball averages
Variable Costs (VC)
costs that change as output changes.
Compensating Differences
Differences in the wages received by workers in different jobs to compensate for nonmonetary differences in the jobs.
Determinants of Demand
Factors other than price that determine the quantities demanded of a good or service.
Other-things-equal assumption
The assumption that factors other that those being considered are held constant; ceteris paribus assumption.
spending on capital goods to be used in producing goods and services
The interest rate is the price paid for the use of money
Rationing Device
Process by which we determine who gets what
Closed Economy
an economy that does not trade with other nations
production function
indicates the highest output q that a firm can produce for every specified combination of inputs- q=F(K,L)
Producer surplus
If you're offered $750 and you would have taken $500, you receive $250 more than your minimum price. This is a producer surplus.
marginal cost (MC)
show the change in total costs associated with a change in output by one unit, costs of producing one more unit of outputchangeTC/changeQ
Cross-Price Elasticity of Demand
the percentage change in quantity demanded of one good associated with a one percent increase in the price of another good
Perfect Competition
A market structure in which all firms in an industry are price takers and in which there is freedom of entry into and exit from the industry
The demand curve facing a competitive firm is _______, whereas the demand curve facing a monopolist is ________.
horizontal; downward sloping
Non-durable goods
A consumer good with an expected life (use) of less than 3 years.
Define Marginal Benefit
The benefit from consuming one more unit of a good and decreases as consumption of the good increases, also = the demand curve
In the long run a pure monopolist must produce at that output where average total cost is at a minimum
Price Elasticity of Demand
a measure of the responsiveness of quantity demanded to changes in price
A "perfectly" inelastic demand curve
means quantity demanded never changes regardless of price.
Retaining the Market Mechanism
Price Ceilings: a legal maximum that is set below the equalibrium
Quantity Demanded
The amount of a good or service that consumers want to purchase during some time period
For all competitive firms...
Average Revenue = Price of the good
What demand curve is the demand curve for monopolists the same as?
market demand curve
Imperfect competition
a situation in which there are only few sellers whose products are similar but not substitutes. The producers do not have a large enough share of the market to be important enough to influence the market.
risk neutral personrisk averse person
someone who would accept any gamble that is fair or bettersomeone who would refuse any fair gamble
What are the characteristics of Monopolistic Competition?
Number of firms: ManyControl over price: LimitedProduct differences: SomeBarriers to entry: LowExamples: Convenience stores
Absolute advantage is found by comparing different producers' ______________
input requirements per unit of output
price-taking firm's optimal output rule
says that a price-taking firm's profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced
What is Market Power?
the ability of a firm to alter the market price of a good or service.
We can use government sectors, non-profit sectors, and a legal system to
allocate goods and services in a preferred way
Total surplus is represented by the area below the...
demand curve and above the supply curve up to the equilibrium qty
If we have perfectly inelastic demand
there is no change in sum of CS+ PS
1. People face trade-offs
you must give up something to have something else, you can't have everything
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