Microeconomics - ECO 304K MEGA REVIEW - UT Austin

capital

the tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services; 1/4 factors of production

economics

the social science that studies the CHOICES that individuals, businesses, governments, and entire societies make as they cope with SCARCITY and the INCENTIVES that influence and reconcile those choices; the subject has 2 parts

efficiency

achieved when available resources are used to produce goods and services at the lowest possible cost and in the quantities that give the greatest possible value or benefit

entrepreneurship

the human resource that organizes land, labor. and capital; 1/4 factors of production

equity

fairness; a dimension of social interest

factors of production

economists' term for productive resources that produce goods and services; grouped into 4 categories (land, labor, capital, & entrepreneurship)

globalization

the expansion of international trade, borrowing and lending, and investment

goods

physical objects

goods and services

the objects that people value and produce to satisfy human wants

human capital

the knowledge and skill obtained from education, on-the-job training, and work experience that the quality of labor depends on; it expands over time

incentive

a reward that encourages an action or a penalty that discourages on (Ex. prices)

labor

work time and work effort (mental and physical) that people devote to producing goods and services; its quality depends on human capital; 1/4 factors of production

land

natural resources used to produce goods and services (can be renewable, recyclable, or nonrenewable); 1/4 factor of production

macroeconomics

the study of the performance of the national economy and the global economy

microeconomics

the study of the choices that individuals and businesses make, the way these choices interact in markets, and the influence of goverments

scarcity

our inability to get everything we want; is universal

self-interest

a choice made because you believe it is the best one available for you

services

tasks performed for people

social interest

a choice that leads to an outcome that is the best for society as a whole; has two dimensions of efficiency and equity (fairness)

monopolistic competition

a common form of an industry (market) structure characterized by a large number of firms, no barriers to entry, and product differentiation

product differentiation

a strategy that firms use to achieve market power; accomplished by producing goods that differ from others in the market

horizontal differentiation

products differ in ways that make them better for some people and worse for others

vertical differentiation

a product difference that, from everyone's perspective, makes a product better than rival products

behavioral economics

a branch of economics that uses the insights of psychology and economics to investigate decision making

commitment device

actions that individuals take in one period to try to control their behavior in a future period

payoff

the amount that comes from a possible outcome or result

expected value

the sum of the payoffs associated with each possible outcome of a situation weighted by its probability of occuring

fair game/fair bet

a game whose expected value is zero

diminishing marginal utility

the more of any one good consumed in a given period, the less incremental satisfaction is generated by consuming a marginal or incremental unit of the same good

expected utility

the sum of the utilities coming from all possible outcomes of a deal, weighted by the probability of each occurring

risk-averse

refers to a person's preference of a certain payoff over an uncertain one with the same expected value

risk-neutral

refers to a person's preference for an uncertain deal over a certain deal with an equal expected value

risk-loving

refers to a person's preference for an uncertain deal over a certain deal with an equal expected value

asymmetric information

one of the parties to a transaction has information relevant to the transaction that the other party does not have

adverse selection

a situation in which asymmetric information results in high-quality goods or high-quality consumers being squeezed out of transactions because they cannot demonstrate their quality

market signaling

actions taken by buyers and sellers to communicate quality in a world of uncertainty

moral hazard

arises when one party to a contract changes behavior in response to that contract and thus passes on the costs of that behavior change to the other party

mechanical design

a contract or an institution that aligns the interests of two parties in a transaction. ex: a piece rate creates incentives for a worker to work hard, just as his or her superior wants; a co-pay in health care encourages more careful use of healthcare as insurance company wants

externality

actions of one party impose costs or benefits on a second party

marginal social cost (MSC)

the total cost to society of producing an additional unit of a good or service. ___ is equal to the sum of the marginal costs of producing the product and the correctly measured damage costs involved in the process of production

marginal private cost (MPC)

the amount that a consumer pays to consume an additional unit of a particular good

marginal damage cost (MDC)

the additional harm done by increasing the level of an externality-producing activity by one unit. if producing product X pollutes the water in the river, ___ is the additional cost imposed by the added pollution that results from increasing output by one unit of X per period

coase theorem

under certain conditions, when externalities are present, private parties can arrive at the efficient solution without government involvement

injuction

a court order forbidding the continuation of behavior that leads to damages

liability rules

laws that require A to compensate B for damages that A imposed on B

public goods (social or collective goods)

goods that are nonrival in consumption and their benefits are nonexcludable

nonrival in consumption

a characteristic of public goods: one person's enjoyment of the benefits of a public good does not interfere with another's consumption of it

nonexcludable

a characteristic of public goods: once a good is produced, no one can be excluded from enjoying its benefits

free-rider problem

a problem intrinsic to public goods: because people can enjoy the benefits of public goods whether or not they pay for them, they are usually unwilling to pay for them

drop-in-the-bucket problem

a problem intrinsic to public goods: the good or service is usually so costly that its provision generally does not depend on whether any single person pays

optimal level of provision for public goods

the level at which society's total willingness to pay per unit is equal to the marginal cost of producing the good

tiebout hypothesis

an efficient mix of public goods is produced when local land/housing prices and taxes come to reflect consumer preferences just as they do in the market for private goods

oligopoly

form of industry (market) structure characterized by a few dominant firms. products may be homogenous or differentiated

five forces model

a model developed by Michael Porter that helps us understand the five competitive forces that determine the level of competition and profitability in an industry

concentration ratio

the share of industry output in sales or employment accounted for by the top firms

contestable markets

markets in which entry and exit are easy enough to hold prices to a competitive level even if no entry actually occurs

cartel

a group of firms that gets together and makes joint price and output decisions to maximize joint profits

tacit collusion

occurs when price- and quantity-fixing agreements among producers are implicit, as opposed to generally being explicit

price leadership

a form of oligopoly in which one dominant firm sets prices and all the smaller firms in the industry follow its pricing policy

duopoly (Cournot Model)

a two-firm oligopoly

game theory

analyzes the choices made by rival firms, people, and even govts when they are trying to maximize their own well-being while anticipating and reacting to the actions of others in their environment

dominant strategy

in game theory, a strategy that is best no matter what the opposition does

prisoner's dilemma

a game in which the players are prevented from cooperating and in which each has a dominant strategy that leaves them both worse off than if they could cooperate

Nash equilibrium

in game theory, the result of all players' playing their best strategy given what their competitors are doing

maximin strategy

in game theory, a strategy chosen to maximize the minimum gain that can be earned

tit-for-tat strategy

a repeated game strategy in which a player responds in kind to an opponents play

Celler-Kefauver Act

extended the govts authority to control mergers

Herfindahl-Hirschman Index (HHI)

an index of market concentration found by summing the square of percentage shares of firms in the market

imperfectly competitive industry

an industry in which individual firms have some control over the price of their output

market power

an imperfectly competitive firm's ability to raise price without losing all of the quantity demanded for its product

monopoly

an industry with a single firm in which the entry of new firms is blocked

oligopoly

an industry in which there is a small number of firms, each large enough so that its presence affects prices

monopolistic competitors

firms that differentiate their products in industries with many producers and free entry

pure monopoly

an industry with a single firm that produces a product for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profits

natural monopoly

an industry that realizes such large economies of scale that single-firm production of that good or service is most efficient

patent

a barrier to entry that grants exclusive use of the patented product or process to the inventor

network externalities

the value of a product to a consumer increases with the number of that product being sold or used in the market

rent-seeking behavior

actions taken by households or firms to preserve economic benefits

government failure

occurs when the govt becomes the tool of the rent seeker and the allocation of resources is made even less efficient by the intervention of govt

public choice theory

an economic theory that the public officials who set economic policies and regulate the players act in their own self interest, just as firms do

price discrimination

charging different prices to different buyers for identical products

perfect price discrimination

occurs when a firm charges the maximum amount that buyers are willing to pay for each unit

rule of reason

criterion introduced by the SC in 1911 to determine whether a particular action was illegal ("unreasonable") or legal ("reasonable") within terms of the Sherman Act

Clayton Act

passed by Congress in 1914 to strengthen the Sherman Act and clarify the rule of reason , the act outlawed specific monopolistic behaviors such as tying contracts, price discrimination, and unlimited mergers

Federal Trade Commission (FTC)

created by Congress in 1914 to investigate the structure and behavior of firms engaging in interstate commerce, to determine what constitutes unlawful "unfair" behavior, and to issue cease-and-desist orders to those found in violation of antitrust law

partial equilibrium analysis

the process of examining the equilibrium conditions in individual markets and for households and firms separately

general equilibrium

the condition that exists when all markets in an economy are in simultaneous equilibrium

efficiency

the condition in which the economy is producing what people want at least possible cost

pareto efficiency/optimality

a condition in which no change is possible that will make some members of society better off without making some other members of society worse off

consumer surplus (review)

the difference between the maximum amount that buyers are willing to pay for a good and it's current market price

producer surplus (review)

the difference between the current market price of a good and the full cost of producing it; in a way it is a measure of profitability

market failure

occurs when resources are misallocated, or allocated inefficiently. the result is waste or lost value

sources of market failure

imperfect market structure or noncompetitive behavior; the existence of public goods; the presence of external costs and benefits; imperfect information

public goods

goods and services that bestow collective benefits on member of society; generally, no one can be excluded from enjoying their benefits; ex: national defense

externality

a cost of benefit imposed or bestowed on an individual or a group that is outside, or external to, the transaction

imperfect information

the absence of full knowledge concerning product characteristics, available prices, and so on

breaking even

the situation in which a firm is earning exactly a normal rate of return

shutdown point

the lowest point on the average variable cost curve. when price falls below the minimum point on AVC, TR is insufficient to cover variable costs and the firm will shut down and bear losses equal to fixed costs

short-run industry supply curve

the sum of the marginal cost curves (above AVC) of all the firms in an industry

economies of scale

an increase in a firm's scale of production leads to lower costs per unit produced