Microeconomics Ch. 9-12

Tariff

a tax imposed by a government on imports

Imports

goods and services bought domestically but produced in other countries

Exports

goods and services produced domestically but sold in other countries

What does it mean to buy American, and why would we have a program like that?

To protect jobs in America. Keep jobs from other countries, and increase jobs.

What are terms of trade?

The ratio of imports to exports

In order to protect a domestic industry from competition abroad, a government imposes import quotas and high tariffs on foreign-made goods this policy will most likely lead to?

A reduction in foreign competition and a weakening of the gains from international trade

Test question: are we in a trade surplus or deficit?

Trade Deficit over the last 50 years and hasn't crippled the economy

Comparative advantage

the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors

Opportunity cost

the highest-valued alternative that must be given up to engage in an activity

Absolute advantage

the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources

Autarky

a nation that does not trade with anyone

According to the principle of comparative advantage, what must be examined to determine whether two countries can gain from trade?

The opportunity costs of producing goods in each country

Terms of trade

the ratio at which a country can trade its exports for imports from other countries

Which country has an absolute advantage in one product? Which country has absolute advantage in the other product?

Trade is not based on absolute advantage but comparative advantage. Figure out comparative advantage for one of the country and product.

Climate and natural resources:

Some nations are better suited to particular types of production; particularly important for agricultural goods. Ex: bananas in Costa Rica vs wheat in the U.S.

Relative abundance of labor and/or capital:

Some nations have a lot of high or low-skilled workers, or relatively much or little infrastructure. Ex: China has many low-skilled workers vs relatively many high-skillled workers in the U.S

Technological differences:

Technologies may not diffuse quickly or uniformly. Ex: U.S. is strong in product technologies-the ability to develop new products; Japan is strong in process technologies, involving the ability to improve processes to make existing products

External Economies:

WRONG ANSWER

Firms that face competition from imported goods lose out when trade is allowed

These firms appear to deserve sympathy, especially when their workers start to lose their jobs

Utility

economists refer to the enjoyment or satisfaction that people receive from consuming goods and services

Marginal utility (MU)

the change in total utility a person receives when consuming one additional unit of a good or service. Remember in economics, "marginal" means "additional"

Diminishing marginal utility

the firms items consumed produce the most marginal utility, so the subsequent items give

Law of diminishing marginal utility

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time

Budget constraint

the limited amount of income available to consumers to spend on goods and services

Maximize Utility:

The process by which consumers decide how to allocate their limited income among different goods and services to achieve the greatest possible satisfaction (utility). A consumer maximizes utility when the marginal utility per dollar spent is equal across all goods and services.

Maximize Utility Equation:

MUa/Pa = MUb/Pb

Income effect

the change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding all other factors constant

If pizza is a normal good, the income effect of its price will

decrease will cause you to consume more pizza

If pizza is an inferior good, the income effect of its price will

decrease cause you to consume less pizza

Substitution effect

The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power

The basic activity of a firm to

use inputs to produce outputs

Technology

the processes a firm uses to turn inputs into outputs of goods and services

Technological change

a positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs

Short run

the period of time during which at least one of a firm's inputs is fixed. Ex: a firm might have a long-term lease on a factory that is too costly to get out of

Long run

the firm can vary all of its inputs, adopt new technology, and increase or decrease the size of its physical plant. "A long enough period of time that anything can be changed"

Variable costs

are costs that change as output changes

Fixed costs

costs that remain constant as output changes

Total cost

the cost of all the inputs a firm uses in production

TC = ?

TC= FC + VC

Explicit cost

a cost that involves spending money. Money comes out of your pocket

Implicit cost

a nonmonetary opportunity cost. What you're giving up

Production function

the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs

Marginal product of labor

the additional output a firm produces as a result of hiring one more worker

Law of diminishing returns

the principle states that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline

Average product of labor

the total output produced by a firm divided by the quantity of workers

Marginal cost

the change in a firm's total cost from producing one more unit of a good or service

When MC is above ATC

ATC is rising

When MC is below ATC

ATC is falling

Market structures

models of how the firms in a market interact with buyers to sell their output

Oligopolies

A few firms dominate the industry.

Price =?

average revenue = marginal revenue

Perfectly competitive market

there are many buyers and sellers, all firms sell identical products, and there are no barriers to new firms entering the market. These are Rare

Average revenue

total revenue divided by the quantity of the product sold

Marginal revenue

the change in total revenue from selling one more unit of a product

What is the difference between total costs and fixed costs?

variable costs

What is it called when the government puts a numerical limit on a quantity of a good that can be imported?

quota

If the marginal revenue exceeds the marginal cost, do we produce that unit?

Yes

If P > ATC, the firm is

making a profit

If P = ATC, the firm is

breaking even

If P < ATC, the firm is

making a loss

Productive efficiency

a situation in which a good or service is produced at the lowest possible cost

Allocative efficiency

a state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

True or false: the market demand curve in a perfectly competitive market slopes downward.

True

If we’re in perfect competition, one of the firms in the market decides to leave, what happens to the market supply curve

The market supply curve shifts to the left

Marginal rate of substitution (MRS):

is the rate at which the consumer is willing to trade off one product for another while keeping the consumer’s utility constant.

Budget constraint:

the amount of income he or she has available to spend on goods and services

Which of the following is a factor of production that generally is fixed in the short run?

a factory building

if four workers can produce 18 chairs a day and five can produce 20 chairs a day, the marginal product of the fifth worker is

2 chairs

the law of diminishing marginal returns

explains why the average total cost and marginal cost curves are u-shaped in the short run

in early versions of the 2009 stimulus bill, a “buy american” provision required

all manufactured goods bought with stimulus money to be made in the united states

a tariff makes

domestic producers better off

if joey kobayashi experiences diminishing marginal utility from eating hot dogs then

the additional satisfaction he receives from eating another hot dog will be less than the satisfaction he received from his eating his last hot dog.

what does the marginal rate of substitution measure

it measure the rate at which a consumer is willing to trade off one product for another while keeping utility constant

a consumer’s budget constraint is

the limited income that a consumer has to spend on goods and services 

Improvements in technology used to produce solar panels allow manufactures such as 1366 Tecnologies to produce

more output using the same inputs thereby reducing average total cost

which of the following statements best describes the economic short run

it is a period during which at least one of the firm’s inputs is fixed

which of the following are implicit costs for a typical firm

the opportunity cost of capital owned and used by the firm

Gertrude’s Stork’s Chocolate Shoppe normally employs 4 workers. when the Shoppe hired a 5th worker the Shoppe’s total output decreased thereofore, 

the marginal product of the 5th worker is negative