Microeconomics Final Exam Terms

Opportunity Cost

explicit costs + implicit costs

Normal Goods

increase in demand as income increases

Inferior Goods

decreases in demand as income increases

Substitutes

if the price of good x gooes up, the demand for y will go up

Complements

if the price of x goes up, the quanityt demanded of y goes down

What happens to price and total revenue when a good is inelastic

prie goes up, total reveue goes up

What happens to price and total revenue when a good is elastic

the price goes up the total revenue goes down

Positive Profits

p> atc

Normal Profits

p = atc

Negative Profits

p < atc

Two Responses to Negative Profits

if p>avc, then loss minimize

if p<avc, shut down

Negative Externality

supply-side market failure

social supply is above private supply

external costs that are passed on to society

supplier doesn’t bare responsibility for these costs

Positive Externatlity

demand side market failure

market fails to inclde the willingness of third parties who receive the external benefit

Perfectly Competitive

many firms, each of whch selld the exact same product all are price takers

P = MR = MC

P = min ATC

make norma profit in the long run

Monopoly

one producer with no product differentiation

p= ATC, not minimum ATC, P>ATC, P> MC

Oligopoly

a few producers with slightly differentiated products

Game Theory

the study of behavior in situations of interdependece, a way of predicting outcomes in strategic situations like oligopolies

Nash Equilibrium

the result when each player in a aeme chooses the action that maximizes their payoff given the actions of other players

Dominant Strategy

a strategy that is a player’s best action regardless of the action taken by the other player. Depending on the payoffs, a player may or may not have a dominant strategy

Collusive Strategy

each firm has an incentive to cheat and produce more

Two Principle outcomes L successful collusion or behaving noncooperatively by cheating

Monopolistically Competitive

many producers with differentiated products

Where do all types of markets produce?

where MR=MC

Economic Profit

total revenue - explicit costs - implicit costs

Accounting Profit

Total revenue - explicit costs

Economies of scale

increasing returns to scale, long-run average total cost decreases as output increases

Constant returns to scale

the long-run average total cost stays constant as output increases

Diseconomies of scale

decreasing returns to scale

long run average total cost increases as output increases

Foreign Direct Investment

an investment made by a company in one county in the business interest of another country

Vertical FDI

involves a company investing in a different stage of the supply chain in a different country

Vertical FDI (Backward)

upstream: establishing or acquiring facilities that produce inputs

Vertical FDI (Forward)

downstream: establishing or acquiring facilities that distribute and sell outputs

Horizontal FDI

duplicating hometown production in a foreign country with all stages being produced abroad, either offshore or outsource

Offshoring

relocating work in a foreign country and establishing business operations overseas

Outsourcing

hiring an external company or acquiring business assets in another country

Absolute Advantage

being able to produce more of a good at any price

Comparative Advantage

being able to produce a good at a lower rate than another country

• when you have comparative advantage with a good, you produce more of it

Mutually Beneficial Terms of Trade

two countries benefit from specializing in the production of different goods

Hecksher-Olin Model

if you have a lot of factors in a country, you creat products that use those factors

When is equilibrium in an autarky?

when price and quantity are equal

What happens when the world price is below the autarky?

country will import, producer surplus increases, consumer surplus decreases

What happens when the world price is above the autarky?

country will export, producer surplus decreases, consumer surplus increases

What are the effects of a tariff?

consumer surplus increases

What is the difference between a tariff and quota?

A tariff has government revenue while a quota has quota rent

Sunk Cost

a cost that has been incurred and can’t be recovered

Mental Accounting

the habit of mentally assigning dollars to different accounts so that some dollars are worth more than others

Bounded Rationality

making a choice that is close to but not exactly the one that gives you the best payoff

Loss Aversion

the willingness to sacrifice some economic payoff to avoid a potential loss

Status Quo Bias

the tendency to avoid making a decision altogether

Public Goods

non-excludable and non-rival in consumption

Private Goods

excludable and rival in consumption

Common Resource

nonexcludable and rival in consumption

Artificially Scarce Good

escludable and non-rival in competition

Free-Rider Concept

people using public goods that they don’t pay for

Public Assistance Programs

means tested and have to qualify to be in it (medicaid)

Social Insurance Program

a non-means-tested
program that guarantees retirement income to older
Americans and provides benefits to disabled
workers and “survivor benefits” to family members
of workers who die. It’s supported by the payroll
tax

In Kind Benefits

a benefit in the form of goods or services

Monetary Benefits

a benefit in the form of money

Public (Government-Run) Insurance

medicare and medicaid

Private Insurance

each member of a large group pays an amoutn to a private company annually to pay for most of the medical expenses of the group

Gini coefficient

a coefficient that measures income inequality in a country (measured 0-1) the higher it is, the more inequality there is

Why does the US pay more for healthcare than other countries?

1. Research and Development

2. Price Transparency

   1. there is none in the US, which would drive down prices, since all doctors could compete to have lower prices

Efficiency Wages

employers paying higher than minimum wage to keep skilled workers, have good productivity and efficiency and loyalty

Compensating Differentials

wages depend on how attractive or unattractive so unpleasant and unattractive jobs usually pay more

Market Power: Unions

organizations that try to raise wages and improve conditions for workers

Market Power: Monopsny

a market where a single buyer controls the market as the major purchaser of goods and services

Substitution Effect

a rise in the wage rate raises the opportunity cost of leisure which raises the incentive to work more, because leisure becomes more expensive than working

Income Effect

a rise in the wage rate makes you richer, which creates an incentive to work less and buy more leisure since leisure is a normal good

Asymmetry for every transaction

one party has more info than the other which i mitigates through screening and signaling and leads to adverse selection and moral hazard

tragedy of the commons

assigning property rights to resource goods, common resources are overused so you need to assign property rights to them, and sell the excess property to other people who need it

Economists’ defintion of rational behavior

individuals making choices that help them reach their goals

what happens to quantity and price when supply and demand increase?

quantity increases but price change is ambiguous

what happens to price and quantity when supply decreases and demand increases

price increases but quantity change is ambigious

what happens to price and quantity when supply increases and demand decreases

price decreases but quantity change is ambiguous

what happens to price and quantity when both demand and supply decrease

quantity decreases but price change is ambiguous

Price Ceiling

only binding below equilibrium, results in a shortage

Price Floor

only binding above equilibrium, results in a surplus

Price Elasticity of Demand

the measure of price responsiveness

• elastic when an increase in price reduces the quantity demanded a lot

• inelastic when an increase in price reduces quantity demanded a little

Formula of Price Elasticity of Demand

percent change in quantity demanded/ percent change in price

When is a firm profitable?

when MC and ATC intersects below marginal revenue

When is a firm at a loss?

When ATC and MC intersect above marginal revenue

Hwo do you calculate loss?

Multiply the quantity where MC and MR intersect by the difference in price from where the intersection of MR and MC lines up with ATC

How do you calculate profit?

multiply the quantity where MR intersect with MR by the difference in price from ATC to MR where MR and MC intersect

When is private marginal cost less than social marginal cost?

always

When is private marginal benefit less than social marginal benefit?

always

What does it mean when economic profit is greater than zero?

you are doing better than the next alternative

What does it mean when economic profit equals zero?

you are doing as well as you would do in the next best alternative

What does it mean when economic profit is less than zero?

you would do better by switching to a better alternative

Completeness

property that rules out the possibility that the consumer cannot decide which bundle is preferrable

Transitivity

if the consumer prefers a over b and b over c, then the consumer also prefers a over c

More is better

property that states that all else equal more of a commodity is better than less of it

Indifference curve

a curve that defines the combinations of two goods that give a consumer the same level of satisfaction

the consumer is indifferent as to which combination is purchased

Four Properties of Indifference Curves

1. indifference curves never cross

2. the further out an indifference curve lies, the higher the level of utility

3. indifference curves are down sloping

4. convex to the origin

Marginal Rate of Substitution

the rate at which a consumer is willing to substitute one food for another and still maintain the same level of satisfaction

What is the formula for the marginal substitution rate

negative change in good x/change in good y

Indifference Map

a series of indifference curves where each curve reflects different amounts of utlity

Optimal Employment Rule

the optimal choice is where marginal benefit is just equal to marginal cost VMPL=W, employ until the value of marginal product of capital equals the rental rate

How do you find the marginal product of labor/capital?

take the derivative of the function of labor/capital

Differences in ability

a higher-ability person generates a higher value of the marginal product that commands a higher price

Differences in the quantity of human capital

education and training

Adverse Selection

when info known by the first party to a contract or agreement is not known by the second and, as a result, the second party incurs a major cost