ECON Midterm 2 (KEY THINGS TO REMEMBER: Theory of the Firm, Imperfect Information, Financial Markets, Intro to Macroeconomics)

Firm

A producer that combines inputs of labor, capital, and raw or finished material to produce outputs.

Perfect Competition

Many firms all trying to sell identical products. (ex. Farms)

Monopoly

Only ONE firm is selling the product, faces no competition.

Monopolistic Competition

Many firms selling similar products, but not identical. (restaurants, hardware)

Oligopoly

Few firms selling identical products

How do you get Profit. (equation)

Total revenue - total costs

What are the Types of costs? Describe. (2)

Explicit costs - actual payments, out-of-pocket expenses (ex. wages, space)
Implicit costs - Opportunity cost of using resources that the firm owns.

What are the Types of Profit? (2)

accounting profit - (total revenue - explicit cost) (cash concept)
economic profit - (total revenue - total cost) (explicit & implicit)

What are the factors of Production? (5)

Natural Resources (NR)
Labor (L)
Capital (K)
Technology (T)
Entrepreneurship (E)

Variable and Fixed Inputs

Variable - Increased or decreased easily in the short run
Fixed - Cannot be increased or decreased easily in the short run

What are the different types of monopolies? (3)

Natural Monopoly - Marginal costs for adding a new consumer is nearly 0
Research control - Company owns the resource
Legal Monopolies - Gov't creates barrier to entry

What do Trademarks/Patterns and Copyrights do?

Gives companies a monopoly on an idea temporarily.

Market Structure

Characteristics of an industry that defines firm's likely behavior and performance.

What are Mergers and Acquisitions?

Mergers - two firms become one firm
Acquisitions - one firm purchasing another

What is the Four-firm ratio and HHI?

Four-firm ratio - The percentage of total sales of the top 4 firms in the industry
HHI - Summarizes the squares of market share for each firm

What does it mean if the HHI is:
1500>
1500-2500
2500<

1500> - Competitive Market
1500-2500 - Moderately Concentrated
2500< - Highly Concentrated

What do command and control regulations require firms to do?

To purchase additional equipment for antipollution purposes

What's the problem with command and control regulations? (4)

1. Pushes cost onto consumer
2. Firm has no incentive to reduce emissions beyond standard set
3. It's inflexible
4. Subject to lobbying from firms

What does a Market-Based solution create?

It creates incentives to allow flexibility to firms in reducing pollution

What are some Market-Based solutions? (2)

Pollution Tax
Carbon Permits/Credits

What does it mean for a good to be excludable?

A seller can prevent the use of a good if a person did not pay for it

Rival in Consumption

One person's consumption prevents or decreases others ability to consume the same good.

What is a Free-Rider Problem?

When the non-excludability of a good leads to an undersupply of the good. (ex. National defense. If you don't pay taxes then you can see an undersupply in defense)

What is the Tragedy of the Commons?

The depletion of a common resource due to individually rational behavior, leading to collective consumption

What is Asymmetric/Imperfect Information?

When two parties involved in a transaction have an unequal amount of information.

How is reputation involved with Asymmetric/Imperfect information?

High Rep - Dealerships. They're known, charge higher prices.
Low Rep - Mechanics w/ cars in front of shop. Charge lower prices
No Rep - Craigslist Ads. Very low Prices.

What are some mechanisms to reduce Asymmetric/Imperfect information risks, regarding cars? (4)

Money Back Guarantees
Warranties
Service Contracts
Websites (Carfex, Angie's List)

What are some mechanisms to reduce Asymmetric/Imperfect information risks, regarding the Labor Market? (%)

References (personal)
Past Employment/Experience
Background Checks
Interviews
Overall Credentials

What are some mechanisms to reduce Asymmetric/Imperfect information risks, regarding the Financial Market? (3)

Credit Score/FICO
Collateral (what tangible assets do you have?)
Cosigner

What are some mechanisms to reduce Asymmetric/Imperfect information risks, regarding Investors? (4)

Portfolio --> ROI
Personal Connections
Reputation
License

What is insurance?

a product that mitigates the effects of a single invested event, financially

What are Premiums, in regards to the Insurance Market?

regular payments on your insurance policy, determined based on "risk group"

What are the two problems that insurance companies face? Explain, with solutions

Moral Hazard Problem - People engage in risky behavior after purchasing insurance. (Solution - Fraud Prevention Service, Copays, Coinsurance)
Adverse selection - Insurance buyers have information about their health risk that the company doesn't know. (Solution - Risk groups, Require people to buy insurance)

How do firms Raise Capital in Financial Markets? (5)

Venture Capital
Loans/Lines of Credit
Firm Profits
Issue Bonds
Issue Stock

What are the THREE factors to supply capital?

Expected rate of return
Risk the return
The investments' Liquidity

Explain Checking accounts, Savings accounts, and Certificates of Deposit(CD), in terms of interest and liquidity.

Checking - Low interest/High Liquidity
Savings - Higher interest/Low Liquidity
Certificate of Deposit - Highest Interest/Highest Liquidity

Types of Bonds(2), explain.

Treasury/Municipal Bonds - Low risk/Rare default
Corporate Bonds - High Yield/Junk Bonds High Interest/High probability of Default

Types of Stocks (2), explain

Dividend - Direct Payment. Based on performance of the company
Capital Gain - Buying a stock low, and selling it for a higher price

What are Mutual Funds?

Diversified portfolios of stocks, bonds, and other financial products. Low-Cost

What is Household Equity?

Monetary value the owner has after selling the house and repaying debts

What are some other tangible assets? (4)

Gold
Commodities
NFTs
Collectibles

What is Macroeconomics?

Adding up economic activity of all households and businesses in the economy

What are the Goals of Macroeconomics? (3), explain.

Economic Growth - determines the standard of living
Low Unemployment - when people aren't working, we waste resources. Results in lower amounts of goods and services produced.
Low Inflation - (inflation)Overall sustained price increases

What are the Macroeconomic Models? (2)

Keynesian Model
Neoclassical Model

What are Policy Tools and Fiscal Policies?

Policy Tools - monetary policies, managing many supply and interest rates
Fiscal Policies - changes in government

Measuring GDP is done in two ways, GDP as : Components of ____ and ____

Demand
Supply

What are the Components of Demand?(4)

Consumption(C)
Business Spending(I)
Gov't Spending(G)
Spending on Net Exports (NX) (Subtract imports from exports X-M)

Equation for GDP

GDP=C+I+G+NX
OR
GDP=C+I+G+(X-M)

What are the Components of Supply? (5)

Durable Goods - long-lasting goods(Cars, appliances)
Nondurable Goods - short-lived goods(food, clothing)
Structures - Homes, offices, buildings, malls
Services - education, healthcare, legal
Inventories - Goods produced, but not yet sold

GDP as Components of Supply and Demand are equal to each other. What is the Problem with that? and what is the Solution?

Problem - Double Counting
Solution - use FINAL number of good and service, exclude intermediate goods

What are the other ways of Measuring growth?(2) (Equation

Gross National Product(GNP) : GDP + income reciepts from abroad - income payments from abroad
Net National Product(NNP) : GNP - depreciation of capital

What is Nominal and Real GDP?

Nominal - measuring GDP in actual price that exists at the time
Real - Adjusting nominal GDP for inflation

GDP Price Deflator (Equation)

(Nominal GDP/Real GDP) x 100

Real GDP (Equation)

Normal GDP/(Price Level/100)

GDP Growth Rate (Equation)

((GDPₜ-GDPₜ₋₁)/GDPₜ₋₁) x 100

What are the types of declines in GDP? (2) Explain.

Recession - short-term decline in GDP, usually followed by increases of unemployment
Depression - long-term decline in GDP (3+ years)

GDP Per Capita (Equation)

GDP/Population

What is the hypothesis of Convergence(AKA: The Catch-up effect)?

Per capita GDP in low income countries tend to grow faster than high income countries.

What are Sticky Prices?

How easily prices change in the face of a demand shock

What are the Main Factors of Production in an Economy? (4)

Labor Productivity(L) - the value that each employed person creates per unit of their input
Human Capita (H) - accumulated knowledge and experience
Technological Change (A) - Innovation & Invention
Physical Capital (K) - includes infrastructure, equipment used by firms

Production Function (Equation)

Y=F(L,H,K,A)

Hidden Unemployment (2)

Under Employed - overqualified for a job
Discouraged Workers - stopped looking for jobs

Labor Force Participation Rate (Equation)

((Employed+Unemployed/Total Adult Population) x 100)

What is Cyclical Unemployment?

Variation in unemployment due to the rising & falling of Economic Conditions

Arguments for why why wages are sticky downward? (3)

Implicit Contrast
Adverse Selection
Efficiency Wage

Compound Growth Rate (Equation)

GDP x (1+ Annual Growth Rate) # ᵒᶠ ʸᵉᵃʳˢ

(pretend that the # ᵒᶠ ʸᵉᵃʳˢ is like an exponent, idk what happened my computer is tweaking)

What is Productivity? What is Labor Productivity?

Productivity - value or revenue generated that each input produces in a given amount of time
Labor Productivity - the value of output from one worker produced in a given amount of time

Human and Physical examples of Capital Deepening

Human - more education/experience
Physical - better equipment

What is : employed, unemployed, out of the labor force, and labor force

Employed - currently working for pay
Unemployed - Out of work, but actively looking for work
Out of the Labor Force - Out of payed work, not looking for work
Labor Force - Employed & unemployed

Unemployment rate (Equation)

(unemployed people/total labor force) x 100