Microeconomics final exam

Monopoly regulation

Regulation of markets where one firm dominates.

Natural monopoly

A market situation where one firm can supply the entire market demand at a lower cost than multiple firms, making competition impossible.

Marginal cost-pricing

A product or service is priced at the cost of producing just one additional unit.

Average cost-pricing

Prices are set to cover the total cost per unit (fixed + variable costs).

Allocative efficiency

An economic state where resources are distributed to produce the mix of goods and services that society most desires.

Negative externality

An economic cost imposed on an unrelated third party, not involved in a transaction, as a byproduct of someone else's production or consumption.

Positive externality

An economic benefit that an economic activity imposes on a third party, not involved in a transaction, leading to overall social welfare.

Asymmetric information

One party in a transaction has more or better information than the other party.

Moral hazard

One party takes on more risk because they know another party will bear the cost of potential losses.

Adverse selection

A market problem from asymmetric information where one party in a deal knows more about the true quality or risk of something than the other.

Public good

Non-rivalrous and non-excludable good or service that benefits everyone.

Rivalrous good

Where one person's consumption reduces the availability or benefits for another person.

Excludable good

Where you can prevent people from using the good if they don't pay for it.

Free rider problem

An economic issue where individuals benefit from a public good or service without contributing their fair share.

Progressive tax

Tax rate increases as the taxable amount increases.

Proportional tax

Applies the same tax rate to all taxpayers, regardless of their economic status.

Regressive tax

Takes a larger percentage of income from low income earners than from high income earners.

Marginal tax rate

The amount of additional tax paid for every additional dollar earned as income.

Average tax rate

The percentage of your total income that you pay in taxes.

Tax bracket

A specific range of taxable income that is subject to a corresponding tax rate.

Scarcity

The state of being scarce or in short supply of something.

PPB

Product possibility boundary. Shows the maximum output combinations of 2 goods an economy can produce with fixed resources.

Factors of production

Resources used to produce goods and services, frequently divided into the basic categories of land, labour, and capital.

Methodology

The systematic study of the principles and methods economists use to analyze economic data.

Normative statements

Depend on value judgements and cannot be evaluated solely by a recourse to facts.

Positive statement

Do not involve value judgements. They are statements about matters of fact.

Fallacy of composition

The mistaken belief that what is true for an individual must also be true for the whole group or economy.

Characteristics of perfect competition

Many small firms selling identical products, larger number of buyers and sellers, homogeneous products, free entry and exit, perfect information.

Price elasticity of demand

Demand is elastic when quantity demanded is quite responsive to changes in price.

Income elasticity of demand

Measures how much the demand for a product changes when consumers' income changes.

Cross elasticity of demand

Less than 0 (negative) means the 2 products are complements; more than 0 (positive) means the 2 products are substitutes.

Diminishing marginal utility

As you consume more units of a good, the extra satisfaction you get from each additional unit decreases.

Economic profit

Subtracts both implicit and explicit costs.

Accounting profit

Only subtracts explicit costs.

Opportunity cost

The value of the next best alternative you don't choose when making a decision.

Marginal cost

The cost added by producing one additional unit of a good or service.

Shut down price

Lowest market price a business can accept in the short run.

Breakeven price

Total revenue equals total costs.

Price taker

A firm in a competitive market that has no control over price and must accept the market rate.

Price setter

A firm with market power that can influence or set its own prices above marginal cost.

Economies of scale

The cost advantages a business gains as they increase production.

Deadweight loss

The economic inefficiency and lost welfare that occurs when a market isn't at its natural supply-demand equilibrium.

A term used in normative economics to describe a reduction of economic surplus for society.

Consumer surplus

The difference between the highest price a consumer is willing to pay for a good and the actual price they pay.

Producer surplus

The extra money producers make by selling a product at a higher price than they minimum price they would need.

Marginal revenue

Revenue from the sale of one more unit of production.

diminishing returns to an input

When an increase in the quantity of an input, holding the levels of other inputs and the production technology constant, leads to a decline in the marginal product of that input.

Marginal product

The additional quantity of output that is produced by one more unit of input holding all other inputs and the production technology constant.

Price discrimination

When a firm sells different units of product at 2 or more different prices to different buyers for reasons not associated with difference in cost.

Fixed cost

A cost that does not depend on the quantity of output produced.

Cartel

Organization of producers who agree to act as a single seller to maximize joint profits.

Average fixed costs

The fixed cost per unit of output.

Natural entry barriers

Exists when production in an industry is characterized by economies of scale.

P=MC

The condition for profit maximization by a firm in a perfectly competitive market.

P>MC

This inequality holds when a single price monopoly produces it’s profit maximizing output.

Minimum efficient scale

The smallest output at which LRAC reaches it’s minimum.

Average revenue

Total revenue divided by quantity.

Patent laws

These reward innovation but create entry barriers.

Average product

The amount of output produced per unit of input.

Division of labour

The breaking up of production processes into a series of specialized tasks, each done by a different worker.

Income effect

The change in the quantity of a product demanded resulting from a change in real income.

Specialization of labour

The specialization of individual workers in the production of a particular good or service.

Price ceiling

The maximum permissible price that can be charged for a particular good or service.

Price floor

The minimum permissible price that can be charged for a particular good or service.

Perfectly competitive market

A market where no individual supplier has a significant influence on market price of a product.

Endogenous variable

A variable that is explained within theory.

Substitution effect

The change in the quantity of a product demanded resulting from a change in its relative price

Barter

Goods and services are traded directly for other goods and services.

Exogenous variable

A variable that is determined outside of theory.

Circular flow of income and expenditure.

A model of the economy in which exchanges are represented as flows of money, goods, and services.

Nash equilibrium

A stable situation in a game where each player chooses the best strategy for themselves, assuming everyone else's strategy is fixed, meaning no one has an incentive to unilaterally change their move because they can't get a better outcome by acting alone.

Prisoners dilemma

Shows how two rational individuals acting in self-interest often choose a path that leads to a worse outcome for both than if they had cooperated.

Giffon good

People buy more of it when the price increases. It is an inferior good.

Positive correlation

X and Y move in the same direction/

Negative correlation

X and Y move in opposite directions.

The post hoc fallocy

The incorrect assumption that because event A happens, event B must also happen.

Flow

A deficit

Stock

A debt