Eco Exam

Opportunity Cost

how much you give up of one good to get more of the other good

OC = give up of good B / give up of good A

ppf

all combinations of goods that use all resources fully and efficiently

slope

change in y / change in x

• straight line = constant opp cost

• bowed out = increasing opp cost

Absolute advantage

which of the two entities can produce more of a given good

• You can have AA in both goods,

Comparative advantage

• which of two entities produces the good at the lower opportunity cost

• they cannot have the CA in both goods

Specialization

entities will produce the good for which they have the CA = lower OC

Terms of Trade

the price of one good in terms of the other, and for both sides to gain it has to sit between the two opportunity costs of that good (eg. wont trade for something that you have a lower OC in)

Explicit cost

• an outlay of money

Implicit cost

• the value, in dollar terms, of the benefits foregone by making that choice

Opportunity cost (def)

implicit + explicit costs

Accounting profit

• revenue - explicit cost

Economic profit

revenue - explicit costs - implicit costs

Solution to how-much decisions

choose the maximum quantity such that marginal revenue is greater than or equal to marginal cost

Utility

measure of satisfaction one gets from consumption of goods

budget constraints

total spending (price of G x Q) cant be more than budget

Marginal rate of transformation

• how much of the Y axis good you’d give up to produce one more unit of the X axis good

• price of y axis good / price of the x axis good

• also = slope of BC

Marginal utility per dollar def

marginal utility of good X / price of good Y

Indifference curve

• all of the bundles of goods that give the same total utility

Utility maximization with indifference curves

• where the indifference curve is tangent to the budget constraint OR

• where marginal rate of substitution = marginal rate of transformation

Nash Eq

• outcome where each player is best responding to the other players response

• the circle where both numbers are circled

Dominant and dominated strategy

Dominant: a strategy a player always chooses, regardless of what the other player chooses

Dominated: a strategy a player never chooses, regardless of what the other player chooses

Pareto-efficient outcomes

• there is no other outcome that makes one player better and the other player not worse

• cant be pareto dominated by any other outcomes

simultaneous game

• games where players dont know what the others do when making their chocie

Sequential games

games in which players learn what previous decisions were

Shortage

price below eq price - excess demand

Surplus

price above eq price, excess supply

Producer surplus

• area above supply, below price

Consumer surplus

area above price, below demand

total surplus

area above price, below demand

Price celling

maximum price that can be charged

below the eq price

Price floor

• minimum price that can be charged

• above the eq price

Tax incidence

who bears the burden of the tax

fraction of the tax each side pays

Tax revenue

number of units sold with the tax x per unit tax

Deadweight loss

• loss of the total surplus from intervention, area between the eq quantity and the new quantity

• above supply below demand

Total cost

Fixed cost + variable cost

Average total cost, fixed cost, variable cost

total cost - total cost / quantity

fixed cost - fixed cost / quantity

variable cost - variable cost / quantity

profit max condition

• the max quantity such that marginal revenue is greater than/equal to marginal cost

isoprofit curve

all price and quantities that give the same profit

Price = ATC + profit/quantity

for isoprofit curve, Profit = 0

Curve = ATC (revenue just covers total cost)

for isoprofit curve, Fixed cost minus curve

revenue just covers variable cost, same as shutting down

for isoprofit curve, profit greater then zero

Curve above ATC

for isoprofit curve, profit less than zero

Curve below ATC

Perfect Competition (traits)

many number of firms

homogenous produce

price takers

marignal revnue is = price

free entry and exit of market, firms enter or leave until profit is zero in the long run

Perfectly competitive market short run

• Quantity: where marginal revenue equals marginal cost - gives the firm the most profit

• Profit: firms quantity times price (minus average total cost at that quantity)

• Market quantity: firms quantity times the number of firms

Perfectly competitive market - long run

• profit = 0

• firms quantity & market price: where marginal cost equal average cost

• Number of firms: market quantity divided by firms quantity

Monopolistic competition traits

Many firms

Slight product differentiation

Monopolistic short run

Monopolistic quantity: Marginal revenue = marginal cost

Price: A-B x quantity

Profit: Quantity x price - average total cost (at that quantity)

Monopolistic long run

profit falls to zero

Monopoly traits

one singular firm

no product differentiation

price maker

extremely high barriers

Monopoly calculating it

Demand: price equals A-B x quantity; A is the price when quantity is zero / B is how much the price drops for each extra unit

Marginal revenue: A-2B x quantity

Oligopoly traits

Few firms

no product differentiation

firms chocies affect each other

• use game theory; find the NE

Market failure

• When a market cannot allocate resources efficiently.

Externalities

When the production or consumption of a g+s by the buyer or seller affects a third party

Negative externalities

Marginal social cost > marginal private cost

socially optimal has lower quantity, higher price

negative externalities deadweight loss

• between the market eq and the socially optimal quantity, above marginal social benefit and below marginal social cost

Negative externality fix (pigouvian tax)

• price on demand curve at social optimal quantity - price on supply curve at social optimal quantity

• = marginal external cost at social optimal quantity (how much to tax)

Positive externality

marginal social benefit > marginal private benefit

socially optimal has higher quantity, higher price

Positive externalities deadweight loss

between the socially optimal quantity and the market eq quantity

above marginal social benefit and below marginal social cost

Positive externality fix (pigouvian subsidy)

price on supply curve at socially optimal quantity - price on the demand curve at the socially optimal quantity = marginal external benefit at the socially optimal quantity

Public goods

• non rivalrous non excludable

• people can use it without paying, no private benefit, therefore market dosent provide it

• eg. street lights

Public goods fix

government provision: gov supplies the good itself and pays for it with taxes

Asymmetric information

information cannot be shared completely between buyers and sellers

cant judge true quality of value, so trades happen at wrong P/Q or not at all

3 main markets of asymmetric information: lemon markets

• prospective buyers have no info about the quality of any car that is for sale expect avg sale previous day

• leads to unravelling (less cars sell, avg decreases everyday)

• dosent exist if true characteristics are known

3 main markets of asymmetric information: adverse selection

• buyer hides cost of production from seller, through hidden attributes that affect the COP for the seller

• eg. health insurance

3 main markets of asymmetric information: moral hazard

• buyer can change COP for seller in the future, that is hidden today for the seller

• eg. health insurance, doing reckless activity

Fix to asymmetric information

mandatory disclosures, regulation and standards