MicroEconomics Exam 2 Rutgers PRUSA

Price Ceiling

creates persistent shortages

Price Floor

creates persistent surplus. minimum wage is popular example

Elasticity

General measure of responsiveness that can be used to respond to price changes and other variables

Perfectly Elastic

Horizontal line, Q supplied changes infinte w/ any price

Perfectly Inelastic

Vertical Line, Q supplied does not change w/ any price

Unit Elastic

when the percentage change in price and quantity demanded are the same. Equal to 1

Price Elasticity of Demand

Percentage change in Q

/

Percentage change in P

Price elasticity of Supply

Percentage change in S

/

Percentage change in P

Income Elasticity of Demand

Percent change in Demand

/

Percentage change in income

Cross-Price Elasticity of Demand

% change in Qd for good 1

/

% change in price of good 2

Progressive Taxing

higher-income people pay a higher percentage of their income in taxes (the average tax rate increases with income) than lower-income people

Regressive Taxing

a tax where the poor pay a higher percent of their income than the rich . (like sales tax)

Proportional Taxing

"flat tax" ,where everyone pays the same percentage

Explicit Costs

An Outlay of money. Out of pocket Costs- wages, salaries, rent, Materials

Implicit Costs

The measurement by the value, in terms of dollars, of benefits that are foregone. Loss of income. Opportunity Cost

Accounting Profit

Revenue - Explicit Costs

Economic Profit

Revenue - Explicit Costs - Implicit Costs

principle of "either-or" decision making

choose the activity with the positive economic profit.

Marginal Cost (MC)

The additional cost incurred by producing one more unit of that good or service.

Marginal Benefit

the extra benefit of adding one unit

Decreasing marginal benefit

When output gradually starts to slow down. Short Run Phenom. Can occur when too many variable inputs are put in

Bounded rationality

Occurs because the effort needed to find the best economic payoff is costly

Risk aversion

Causes individuals to sacrifice some economic payoff in order to avoid a potential loss

mental accounting

Dollars are valued unequally

Variable Costs

Easy to vary in quantity. ex. Number of rags used daily, Amount of workers working at a time, wages he pays workers. LONG TERM BASIS, Any input can be changed

Fixed Costs

Cost does not change based on quantity of output produced. ex. Lease for building, price of water hose, price of machinery. SHORT TERM BASIS, Costs of certain inputs are set

Diminishing returns to an input

When its marginal product declines as more of the input is used, holding the quantity of all other inputs fixed. More and more of Variable input must be used to produce an additional unit of output.

minimum-cost output

the quantity of output at which the average total cost is lowest—the bottom of the U-shaped average total cost curve.

long-run average total cost curve

shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output

Shut down price

when below minimum average variable cost(short-run)

Single Competitive Firm

how much you make doesn't change the market price. horizontal demand curve

monopolistic competition

Has market power and faces downward sloping D curve

Game Theory

The study of how people behave in strategic situations

Nash Equillibrium

A situation in which economic participants interacting with each other chose their best strategy given the strategies that all others have chosen.

Dominant strategy

An action that is always the best regardless of the other player's actions

Prisoners' Dilemma

A game that illustrates why cooperation is difficult even when it is mutually beneficial