EFB231 End of Sem Exam Prep

Accounting Profit

Total revenue minus accounting costs, including explicit costs and accounting depreciation.

Economic Profit

Total revenue minus opportunity cost, which includes both explicit and implicit costs.

Opportunity Cost

The sum of Explicit costs and Implicit costs, including normal profit and economic depreciation. It represents what a firm must give up to use a factor of production.

Normal Profit

The minimum level of profit a firm needs to cover all its costs, including the opportunity cost of resources, to remain in business. It is the cost of entrepreneurship.

Fixed Input

An input that does not change in quantity when output changes in the short run.

Variable Input

An input that changes in quantity when output changes.

Total Product (TP)

The total quantity of a good produced in a given period.

Marginal Product (MP)

The change in total product that results from a one-unit increase in the quantity of labor employed.

Average Product (AP)

The total product per worker employed; also known as labor productivity.

Law of Decreasing Marginal Returns

Occurs when the marginal product of an additional worker is less than the marginal product of the previous worker.

Total Fixed Cost (TFC)

Costs that do not vary as output varies and must be paid even if output is zero.

Total Variable Cost (TVC)

Costs that are zero when output is zero and vary as output varies.

Total Cost (TC)

The sum of TFC and TVC at each level of output. (TFC + TVC = TC)

Marginal Cost (MC)

The change in total cost that results from a one-unit increase in total product.

Average Total Cost (ATC)

Total cost per unit of output; equals Average fixed cost (AFC) + Average variable cost (AVC) (TC/Q = TFC/Q + TVC/Q)

Economies of Scale

Occurs when a firm’s output increases as average total cost decreases, often due to greater specialization of labor and capital.

Constant Returns to Scale

Exists when a firm’s output increases as average total cost remains constant, often achieved by replicating existing production facilities.

Diseconomies of Scale

Exists when a firm’s output increases as average total cost increases, often due to difficulties in coordinating and controlling a large enterprise.

Price taker

The firm is a price taker and cannot influence the price of the good or service that it produces.

MR = P

In Perfect Competition, marginal revenue equals price.

TR - TC

Total revenue minus total cost, determines profit maximizing output.

MR = MC

Marginal analysis, determines profit maximizing output.

If MR > MC

The firm should increase output.

If MR < MC

The firm should reduce output.

P < ATC

If firm shuts down, it faces a loss equivalent to total fixed costs per day.

Firm’s Supply Curve

Firm’s supply curve is the same as the MC curve at prices above the minimum point of AVC.

Short Run Market Equilibrium

Economic profits

Long Run Market Equilibrium

Normal or Zero-economic profits

Monopoly

A market with one seller, no close substitutes, and barriers to entry.

How Monopoly Arises

No close substitutes, Barriers to entry.

Natural Monopoly

Economies of Scale

Legal Monopoly

Govt franchises/licenses, Utilities; Casinos.

MR = MC

The profit maximization condition.

Monopoly and Perfect Competition

Underproduction creates a deadweight loss, consumer surplus shrinks, producer surplus expands

Key idea behind price discrimination

Convert consumer surplus into economic profit.

Discriminating among groups of buyers

The firm offers different prices to different types of buyers, based on things like age, employment status or some other easily distinguished characteristic.

Monopolistic Competition

A market structure with many firms selling differentiated products.

Oligopoly

A market structure with a small number of firms.

Product Differentiation

Making a product different from other similar products.

Short Run Equilibrium (Monopolistic Competition)

The point where marginal revenue equals marginal cost, determining output and price in the short term for a monopolistically competitive firm; can result in profit or loss.

Long Run Equilibrium (Monopolistic Competition)

The point where firms earn zero economic profit due to entry and exit of firms in the industry.

Game Theory

A tool used to analyse strategic behaviour that recognises mutual interdependence and takes account of the expected behaviour of others.

Nash Equilibrium

An equilibrium in which each player takes the best possible action given the action of the other player.

Cartel

A group of firms acting together to limit output, raise price, and increase economic profit.

Market Concentration

The extent to which a small number of firms account for a large percentage of the market.

Interdependence (Oligopoly)

The profit earned by each firm depends on the firm’s own actions and on the actions of the other firms.

GDP (Gross Domestic Product)

The market value of all the final goods and services produced within a country in a given time period.

Consumption expenditure (C)

Expenditure by households on consumption goods and services.

Investment (I)

The purchase of new capital goods and additions to inventories.

Government expenditure (G)

Expenditure by all levels of government on goods and services.

Net exports of goods and services (NX)

The value of exports of goods and services minus the value of imports of goods and services.

Expenditure approach to measuring GDP

GDP = C + I + G + (X – M)

Real GDP

The value of the final goods and services produced in a given year expressed in the prices of the base year.

Nominal GDP

The value of the final goods and services produced in a given year expressed in the prices of that same year.

Goods and Services Omitted from GDP

Household production, underground economic activity, leisure time, and environmental quality.

Economic growth

A sustained expansion of production possibilities measured as the increase in real GDP over a given period.

Economic growth rate

The annual percentage change of real GDP.

Production Function

A relationship that shows the maximum quantity of real GDP that can be produced as the quantity of labour employed changes.

Full Employment

When the labour market is in equilibrium.

Labour productivity

The quantity of real GDP produced by one hour of labour.

What Labour Productivity Growth Depends On

Physical capital growth, human capital growth, and technological advances.

Physical capital growth

Increase in the stock of capital per worker.

Human capital growth

Accumulated skill and knowledge.

Technological advances

New technologies that increase output.

subsistence level, a population explosion eventually brings it back to the subsistence level. (Adam Smith, Thomas Robert Malthus, and David Ricardo)

The view that the growth of real GDP per person is temporary and that when it rises above the

Neoclassical Growth Theory (Robert Solow)

Technological change induces saving and investment that make capital per hour of labour grow.

New Growth Theory

The theory that our unlimited wants will lead us to ever greater productivity and perpetual economic growth.

Working-age population

The total number of civilians aged 15 years and over.

Not in the labor force

Includes those in school full-time, retired from work, and discouraged job seekers.

Unemployment Rate

The percentage of people in the labor force who are unemployed.

Labor Force

The number of people employed plus the number unemployed.

Labor Force Participation Rate

The percentage of the working-age population who are members of the labor force.

Marginal attached workers

Persons available for work but stopped looking due to repeated failure to find a job.

Discouraged worker

A person available for work but has stopped looking for a job because of repeated failure to find one.

Under-employed

Part-time workers who want full-time jobs.

Frictional unemployment

Unemployment due to normal job turnover; always exists.

Structural unemployment

Unemployment due to a mismatch of skills and available jobs.

Cyclical unemployment

Unemployment that fluctuates over the business cycle, increasing during recessions and decreasing during expansions.

Full employment (Natural Unemployment rate)

Occurs when the unemployment rate equals the natural unemployment rate, where cyclical unemployment is zero.

Natural unemployment rate

Frictional and structural unemployment.

Potential GDP

The value of real GDP when the economy is at full employment.

Output gap

Real GDP minus potential GDP, expressed as a percentage of potential GDP.

Consumer Price Index (CPI)

A measure of the average of the prices paid by urban consumers for a fixed market basket of consumer goods and services.

Inflation rate

The percentage change in the price level from one year to the next.

Deflation

A situation in which the inflation rate is negative.

Quality change bias

Bias in the CPI due to difficulty in measuring changes in the quality of goods.

Commodity substitution bias

Bias in the CPI when consumers substitute towards goods that have become relatively cheaper.

Outlet substitution bias

Bias in the CPI when consumers shift their patronage from one retail outlet to another.

New goods bias

Bias in the CPI arising from the failure to quickly include new goods in the market basket.

Nominal wages

The wage measured in current dollars.

Real wage

The wage measured in the dollars of a given reference base year.

Nominal interest rate

The dollar amount of interest expressed as a percentage of the amount loaned.

Real interest rate

The nominal interest rate adjusted to remove the effects of inflation.

Aggregate Supply-Aggregate Demand (AS-AD) Model

A model to explain how real GDP (RGDP) and price level are determined, how they interact, and business cycle fluctuations in RGDP and price level; also shows the relationship between unemployment rate and full employment.

Short-run Aggregate Supply (SAS)

The relationship between the quantity of real GDP supplied and the price level when the money wage rate, the prices of other resources, and potential GDP remain constant.

Long-run Aggregate Supply

The relationship between the quantity of real GDP supplied and the price level when the money wage rate changes in step with the price level to maintain full employment; equals potential GDP regardless of price level.

Aggregate Demand (AD)

The relationship between the quantity of real GDP demanded and the price level when all other influences on expenditure plans remain the same. AD = C + I + G + X - M

Demand-pull inflation

An inflation that starts because aggregate demand increases.

Cost-push inflation

When aggregate supply falls, the AS curve shifts leftward, and price increases due to factors such as oil price surges or increases in the cost of resources.

Aggregate Expenditure (AE) Model

Also known as the Keynesian model, it is the sum of planned consumption expenditure, planned investment, planned government expenditure, and planned net exports (exports minus imports); expenditures at a given price level.