EC 205 Final Exam Lecture and Book Terms and formulas

total revenue

P x Q

P

total revenue/Q

total profit

total revenue - total costs

-assume this is total economic profit

competitive market (perfectly competitive)

a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker

-the market has many buyers and many sellers

-the good offered by the various sellers are largely the same

price takers

buyers and sellers in competitive markets must accept the price the market determines

average revenue

total revenue divided by quantity sold

total revenue/Q

marginal revenue

the change in total revenue from an additional unit sold

Theory of Perfect Competition

-many sellers/firms in the market

-product is identical/homogenous

-freedom of entry and exit

Because the firms’ marginal-cost curve determines the quantity of the good the firm is willing to suplly at any price…

the marginal-cost curve is also the competitive firm’s supply curve

shutdown

a short-term decision not to produce anything during a specific period because of current market conditions

exit

refers to a long-run decision to leave the market

the firm shuts down in the revenue that it would earn from producing is…

less than its variable costs of production

-shut down if TR < VC

-shut down if TR/Q < VC/Q

-shut down if P < AVC

sunk cost

a cost that has already been committed and cannot be recovered

the firm exits the market if the revenue it would get from producing is…

less than its total cost of production

-exit if TR < TC

-exit if TR/Q < TC/Q

-exit if P < ATC

-enter if P > ATC

the competitve firm’s long-run supply curve is the portion of its marginal-cost curve that lies…

above the average-total-cost curve

Profit

=TR-TC

=(TR/Q-TC/Q)xQ

=(P-ATC)xQ

the process of entry and exit ends only when…

price and average total cost are driven to equality

in the long-run equilibrium of a competitive market with free entry and exit…

firms operate at their efficient scale

becasuse firms can enter and exit more easily in the long run than int the short run…

the long-run supply curve is typically more elastic than the short-run supply curve

competitive firm

price taker

monopoly firm

price maker

monopoly

a firm that is the sole seller of a product without close substitutes

natural monopoly

a type of monopoly that arises because a single firm can supply a good or service to an entire market at a lower cost than could two or more firms

ways a monopoly can exist

-firm owns a key resource

-government regulation

-government contract (US post office)

-patent

-the production process

average revenue

the amount the firm receives per unit sold

marginal revenue

the amount of revenue that the firm receives for each additional unit of output

a monopolist’s marginal revenue is…

less than the price of its good

the monopolist’s proft-maximizing quantity of output is determined by the…

intersection of the marginal-revenue curve and the marginal-cost curve

in competitive markets…

price equals marginal cost

price discrimination

the business practice of selling the same good at different prices to different customers

perfect price discrimination

a situation in which the monopolist knows exactly each customer’s willingness

-sellers know each buyer’s reservation or maximum price

imperfect price discrimination

seller isn’t able to determine consumer’s reservation prices, but able to determine different consumer markets (seniro discounts)

horizontal mergers

those between two firms in the same market

ex: coca cola and pepsi

vertical mergers

those between frims at different stages of the production process

antitrust laws

-statutes aimed at curbing monopoly power

-give the ogvernment tools to promote competition

microeconomics

the study of how households and firms make decisions and how they interact in markets

macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

gross domestic product (GDP)

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

-measured quarterly in the US

final goods

sold to the ultimate user

intermediate goods

sold for resale

gross domestic product (GDP)

all finals goods and services prodcued with a nation’s borders

gross ational product (GNP)

all final goods and services produced by domestic firms

consumption

spending by households on goods and services, with the exception of purchases of new housing

investment

spending on businss capital, residential capital, and inventories

government purchases

spending on goods and services by local, state, and federal governments

net exports

spending on domestically produced goods by foreigners (exports) minus spending on foriegn goods by domestic residents (imports)

GDP: C + I + G+ NX (exports-imports)

-C (consumption): consumer spending

-I (investment): spending from firms (busness, corporations) on equipment, inventory, etc.

-G (government purchases): spending from government

-NX (net exports): exports-imports

nominal GDP

the production of goods and services valued at current year prices

real GDP

the production of goods and services valued at constant prices (calculated in base year prices)

GDP deflator

a measure of the price level calculator as the ratio of nominal GDP to real GDP times 100

(nominal GDP/real GDP) x 100

inflation

a situation in which the economy’s overall price level is rising

inflation rate

the percentage change in some measure of the price level from one period to the next

inflation rate in year 2= ((GDP deflator in year 2-GDP deflator in year 1)/ GDP deflator in year 1) x 100

National Bureau Economic Research (NBER) agency reporting economic data

real personal income, employment, industrial production, retial and manufacturing sales, real GDP

NBER business cycle dating committee

decides start and end of recessions, peaks and troughs of business cycles

business cycles

expansions and contractions of real GDP

recession

contraction in real GDP

GDPI population

GDD person (GDP per capita)

-best measure of well-being among nations

consumer price index (CPI)

a meaure of the overall cost of the goods and services bought by a typical consumer

-track the price of the market basket over time and store in the index

(price of basket of goods and services in current year/price of basket in base year) x 100

Bureau of Labor Statistics

calculates the value of the CPI market basket monthyl which gves us a monthly inflation rate. It tries the majroity of goods purchased by a typical household, and weight more heavily items pruchase more

inflation rate

the percentage change in the price index from the preceding period

((CPI in year 2- CPI in year 1)/CPI in year 1) x 100

core CPI

a measure of the overall cost of consumer goods and services excluding food and energy

producer price index (PPI)

a measure of the cost of a basket of goods and services sold by domestic firms

GDP deflator reflects the prices of all goods and service produced domestically…

while the CPI reflects the prices of all goods and services bought by consumers

indexation

the automatic correction by law or contract of a dollar amount for the effects of inflation

nominal interest rate

stated interest rate

real interest rate

adjust for inflation

nominal interest rate-inflation

GDP per capita

-production/output per person

-income per person

productivity

the quantity of goods and services produced from each unit of labor

physical capital

the stock of equipment and structure that are used to produce goods and services

human capital

the knowledge and skills that workers acquire through education, training, and experience

natural resources

the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits

technological knowledge

society’s understanding of the best ways to produce goods and services

determinants of labor productivity

-physical capital per worker

-human capitol per worker

-natural resources per worker

-technology per worker

government policies for ecnomic growth (GDP per capita)

-encourage saving and investment

-investment from abroad

-foster education

-promote good health

-maintain property rights and political stability

-free trade

diminishing returns

the property whereby the benefit from an extra unit of an input declines as the quanity of the input increases

catch-up effect

the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich

foreign direct investment

foreign purchase of domestic physical assets

foreign portfolio investment

foreign purchase of domestic financial assets

brain drain

a country’s educate leave to find better opportunities (often poorer countries)

economic research shows that increased immigration and population leads to…

economic growth and increases in income (GDP)

international monetary fund (IMF)

provides loans to countries in financial crises, government deficits, other financial needs

General Agreement on Tarriffs and Trade/World Trade Organization (GATT/WTO)

promotes free trade, provides forum for countries with trade disputes

world bank

providers loans to low and middle income countries for needed

financial institutions

-administer the market for money in the form of a loanable funds market

two types: financial markets and financial intermediaries

financial markets

financial institutions through which savers can directly provide funds to borrowers

-bond market and stock market

bond market

market where corporations and federal, state, and local governments sell their bonds

bond

-a certificate of indebtedness to a corporation or government

-principal and interest

term

length of the bond

credit risk

probability the borrower may fil to repay principal and interest (default)

municipal bonds

issues by state and local governments

-municipal bond holders not required to pay federal income taxes

junk bonds

bonds issues by corporations with high credit risk

credit agencies

assess an institution’s risk with a credit rating

standard and poor’s and moody’s

two main US credit agencies as recognized by the US Securities and Exchange Commission (SEC)

-lower credit rating, institution generally must pay a higher interest rate on bonds

Securities and exchange comission (SEC)

agency of the federal government responsible for enforcing regulations in financial markets

stock market

market wher public corporations sell their stock

stock

ownership or equity in a firm for dividends and/or capital gains

sell bonds

debt finance

sell stocks

equity finance

stock indeces

sample of stocks to describe and forecast market trends

Dow Jones Industrial Average

index of 30 significant stocks traded on the NYSE and NASDAQ