Microeconomics Final

What is economics?

A study of how resources are allocated

What is economics based on?

A social science focused on optimal choices under scarcity

What is scarcity?

Resources are limited, therefore choices are made

How do we making choices?

Through purposeful behavior

What is purposeful behavior?

Acting intentionally to maximize happiness

What is happiness often referred to in economics?

Utility

What is utility maximization?

Consumers aim to be as happy as possible

What do we use to measure utility?

Marginal analysis

What is marginal analysis?

Comparing additional costs vs. benefits

What is the decision rule?

The rational choice would be to choose where marginal benefit > marginal cost

What is an opportunity cost?

The value of the next best alternative given up

What are examples of opportunity costs?

Attend football bow game and skipping two days of work ($600 opportunity cost)

Attending class instead of earning wages

Government spending (roads vs. schools)

What is the law of demand?

As the price of something goes up, consumers will buy less of that product

How are price and quantity demanded related

Negatively/ inverse

What does the demand curve look like?

Downward sloping

What is the law of supply?

Producers want to supply more at a higher price

What is supply?

What suppliers want to produce/ supply

What type of relationship is the law of supply?

Positive

What does the supply curve look like?

It slopes upward

What does the law of supply and law of demand curves create on the graph?

A big X

Where is the equilibrium?

Where the supply and demand curves intersect

What is equilibrium?

Intersection of supply and demand curves

What is surplus?

More is being supplied/ produced than what people want to buy/ is being demanded

What is a shortage?

Quantity demanded is higher than quantity supplied, we want more than what producers are selling

What can cause supply and demand shifts?

Price changes, determinants, and simultaneous shifts

What do price changes do to the curve?

Causes movement along the curve because quantity changes

What can shift the demand curve?

Income and substitutes

What can shift the supply curve?

Production efficiency and costs

What are examples of simultaneous shifts?

Supply decreases, demand decreases, then price will increase and quantity will be indeterminate

What does price elasticity of demand measure?

Buyers’ responsiveness to price changes

What is elastic demand?

Sensitive to price changes and large change in quantity

What is inelastic demand?

Insensitive to price changes and small changes in quantity demanded

What are most of the products that we talk about in economics?

Private goods

What are public goods?

Goods with non- rivalry and non- excitability

What are examples of public goods?

Military protection, streetlights, and weather warning systems

What are public goods founded by?

Government or public entities

What are positive externalities?

Spillover benefits associated with a product that accrues to people who consume it

What is an example of a positive externality?

Education

What is a negative externality?

Spillover costs

What is a spillover cost?

Total costs of producing a product is greater or exceeds the cost wanted by the producer

What is an example of spillover cost?

Pollution

What is the spectrum of competition?

Perfect competition with very large number of sellers in producing a standardized product

What will you have on the other end of spectrum of competition?

Pure monopoly where there is one seller and barriers to entry

How many firms are in pure competition?

A very large number of firms

What type of product is produced in pure competition?

Standardized products

In pure competition, is there control over price?

No, there is no control over price

In pure competition, what are the conditions of entry?

Very easy conditions of entry with no obstacles

Is there nonprice competition in pure competition?

No

What are examples of pure competition?

Financial markets, agricultural products, and raw materials

How many firms are in monopolistic competition?

Many

What type of products are in monopolistic competition?

Differentiated products

Is there control over price in monopolistic competition?

Some control over price, but within rather narrow limits

What are the conditions of entry in monopolistic competition?

Relatively easy conditions of entry

Is there nonprice competition in monopolistic competition?

Yes, considerable emphasis on advertising, brand names, and trade marks

What are examples of monopolistic competition?

Restaurants, gyms, gas station, retail trade, dresses, and shoes

How many firms are in oligopoly?

Few firms

What type of products are in oligopoly?

Differentiated products

Is there control over price in an oligopoly?

Limited control over price

Why is there limited control over price in an oligopoly?

Mutual interdependence is considerable with collusion

Are there obstacles to entry in an oligopoly?

Yes, significant obstacles to entry

Is there nonprice competition in an oligopoly?

Typically a great deal of nonprice competition, particularly with product differentiation

What are examples of oligopolies?

Airlines, automobiles, wireless service providers, space travel, and waste disposal

How many firms are in a pure monopoly?

One

What type of products are in a pure monopoly?

Unique product with no close substitutes

Is there control over price in monopoly?

Yes, considerable control

What are the barriers to entry in an oligopoly?

Blocked entry

Is there any nonprice competition in a pure monopoly?

Mostly public relations and advertising

What are examples of pure monopoly?

Local utilities and patented pharmaceuticals

What are characteristic of pure competition?

Many sellers, standardized product, price taker with no control over price, no barriers to entry nor exit

What does the supply and demand curve look like for perfect competition?

They will set the price where supply and demand intersect

What are characteristics of a pure monopoly?

Swingle seller: a sole producer, no close substitutes: unique product, price maker: control over price, blocked entry: strong barriers to entry

What does pure monopoly curve always look like?

Marginal revenue line is always below the demand curve because each additional product we sell we have to sell it at a cheaper price

Where will we graph marginal cost curve of a pure monopoly?

Where marginal revenue = marginal cost

What can we see on pure monopoly graph?

Where quantity demanded hits the demand curve it tells us the price and quantity demanded, if we graph our average total cost we can see economic profit, and with profit per unit we can find where average total cost intersects the quantity line

What are characteristics of monopolistic competition?

Relatively large number of sellers, product differentiation, easy entry and exit, no price competition like advertising reduces competition in pricing power

What will firms do in long run in the monopolistic competition firm?

Firms will produce the quantity where marginal revenue equals marginal cost, however firms will enter and exit the industry based on if there is economic profit existing

In monopolistic competition, what will firms do if economic profit exists in the long run?

More firms will enter the industry causing us to shift demand to where profits fall to zero

In monopolistic competition, what will firms do if there are economic losses?

They will exit the industry which will shift demand to the right and cause losses to shrink, which will continue until the price settles where it equals average total cost at marginal revenue = marginal cost output level

What happens at the point where ATC is at marginal revenue = marginal cost output level?

The monopolistic competition firm will earn a normal profit and a long run equilibrium is established

What are characteristic of oligopoly market?

Few large producers and limited control over price

What is the few large producers aspect in oligopoly?

There can be homogenous oligopoly and differentiated oligopoky

What is the limited control over price aspect of oligopoly?

Strategic behavior, mutual dependence, and entry barriers and mergers

What is mutual interdependence in an oligopoly?

One firm’s behavior affects the other firm’s behavior

What are examples of mutual interdependence in an oligopoly?

Game theory, prisoners dilemma, and Nash equilibrium

In the short run, when will a firm shut down?

If price (P) < average variable cost (AVC)

In the long run, the what must firms cover?

Average total cost (ATC)

In the long run, when will firms exit the industry?

If Price (P) < Average Total Cost (ATC)