ABM 1041 Mizzou final review

microeconomics

The study of how people make decisions when faced with limited resources.

macroeconomics

looks at the economy as a whole

Scarcity

Resources are not able to satisfy all of our wants and resources are not just money but also time, land, and natural resources.

opportunity cost

whatever must be given up to obtain some item

what four key assumptions can we make about peple

1. people aren't stupid

2. More is better than less

3. More-more is less-better

4. People respond to incentives

Cost-Benefit principle

People behave in ways to make themselves better off by pursuing options that have a higher expected benefit than expected cost.

Opportunity-Cost principle

We have to give up things to get what we want.

Marginal question

Should my next purchase be blank or blank?

The Marginal Principle

Economists believe that people make decision on the margin.

Rational Rule

If something is worth doing, keep doing it until your marginal benefits equal your marginal costs.

The interdependence Principle

The best choice depends on your other choices, the choices of other people, the market, and expectations of the furture.

goal of models

The goal is to provide good predictions, not perfect realism.

positive statement

Face that does not have to be true

Normative statement

Opinion that can't be proven right or wrong

quantity demanded

The amount demanded at each price

Law of Demand

Price and quantity have an inverse relationship. When prices rise quantity demand falls and when price falls quantity demand rises. ALWAYS TRUE.

Income Effect

as price of good goes up, people will cut expenses from other goods and services.

Substitution Effect

If price of a good goes up, may start to purchase something else similar.

Diminishing Marginal Benefit

Most important, the more people consume a good, the less people will spend the. next unit of that good.

Rational Rule

Consumers will buy up to but not over

cost > benefit

Market demand

The market demand is the sum of each individual demand curve.

Factor that shift demand curves

Income, Preferences, Price of related good, Expectations, Congestion and network effects, and The type and number of buyers

Expectations

The anticipations of consumers, firms, and others about future economic conditions.

Network Effect

The fact that more people use a good or service makes it more useful, and thus raises demand.

Congestion Effect

The fact that more people use a good or service makes it less useful, and thus reduces demand.

Quantity supplied

The amount demanded at each price.

Law of Supply

Price and quantity supplied have a positive relationship. When prices rises, quantity supplied rises and when price falls, quantity supplied falls.

Why does supple slope upward?

More expensive to produce more and constrained physical production space.

Rational rule for sellers

tells us that sellers should sell one more item if the price is greater or equal to the marginal cost.

Market supply

The sum of three individual supply curves.

Factors that shift the supply curve

Imput prices, Productivity and technology, Prices of related outputs, Expectations, and The type and number of sellers.

Market

Any setting that brings together potential buyers and sellers.

key to markets

Do not need to be official or organized.

labor demand

employers

labor supply

employees

Demanders of labor

Producers goods and services

What do demanders of labor do?

Buy your time with money and benefits

competitive market

The firm pays the market wage.

Marginal revenue product

Tells how much product they are able to renovate and how much extra revenue will one more worker bring.

Income Effect

Higher income makes leisure more attractive.

Substitution effect

Higher wages make work more attractive.

Intensive margin

the number of hours each worker decides to supply.

Extensive margin

The number of people in the workforce (labor market).

Labor demand shifts

Changes in demand for the output, changes in the price of capital, better management or productivity gains, changes in non-wage benefits, subsides, and taxes.

Market labor supply shifts

Changes to the wage in other occupations, changes to the number of potential workers, changes to the benefits of not working, changes to non-wage benefits, subsides, or income taxes.

Perfect competitions

Very large # sellers, homogeneous product, no entry barriers, and price takers

Monopolistic competition

Many sellers, heterogenous product, increasingly high barriers, and price makers

Oligopoly

A few sellers, heterogeneous product, increasingly higher barriers, and price makers

Monopoly

One seller, heterogeneous product, insurmountable barriers, and price makers.

Most firms exist in the middle of

monopolistic competition and oligopoly

Which two firms are generally put together as imperfectly competitive?

monopolistic and oligopoly

Five key insights into imperfect competition

1. Market power allows you to pursue independent pricing strategies.

2. More competitors leads to less market power.

3. Successful product differentiation gives you more market power.

4. Imperfect competition among buyers gives them bargaining power.

5. Your best choice depends on the actions that other businesses make.

The output effect

Says that in order to get one more customer, the firm needs to lower the price to attract that customer.

The discount effect

Says that if the firm lowers the price for the next customer, they need to lower the price for all of their customers.

The problem with market power

This may not be desirable from consumers' perspectives, but if it isn't, strictly, inefficient. The reason why market power is undesirable is that they raise the price by restricting the quantity.

Patents

licenses that give an inventor the exclusive right to make, use, or sell an invention for a set period of time. They provide beneficial incetive to innovate companies.

Governments often seek to rein in market power to protect customers how

1. Laws that ensure competition thrives.

2. Laws that minimize the harmful ways the business might exploit their market power.

Competition policy

refers to the set of laws that ensure that markets remain competitive.

colluding

In business, where several businesses (or countries) make agreements among themselves which benefit them at the expense of either rival businesses or customers.

Price ceilings

Are maximum prices set by the government for particular goods and services that they believe are being sold at too high of a price and thus consumers need some help purchasing them.

Natural monopolies

are special cases where it is better for society to have one provider of the good or service.

Why do we have natural monopolies

due to large fixed costs in production and they require a policy to keep the output price in check.

What often happens to entrepreneurs?

They create a new market, enjoy temporary monopoly power, and then lose it as new entrants come in.

What determines long-run profitability?

The degree market power, and the barriers to entry.

What is the accounts job?

Determine where money is going within the business and determine if the business has more money at the end of the year than they spent.

Accounting profit

Total revenue - explicit financial costs

Economic profit

Total revenue-explicit financial costs-Implicit financial costs

Average revenue

Total cost/quantity = Average fixed cost/ quantity + Average variable cost/ quantity

marginal cost ingnores _, but average cost does not.

fixed costs

Examples of fixed costs

factories, machines, and office buildings (things that do not change as production levels change).

Implicit opportunity costs are included in _

fixed costs

Variable costs _ due to falling marginal product.

rise

Profit margin

Price- Average cost

In the short run

firms face a fixed set of competitors and a fixed production capability. their job is to outcompete this set of competitiors.

In the long run

All inputs are variable and the number and type of competitors can change. This is not in a set amount of time.

A positive economic profit

means that companies are making enough to cover not only their explicit costs, but also their implicit costs.

What happens to market share of existing firms already in the market when new firms enter.

goes down

What happens to market share of existing firms already in the market when firms exit the market.

goes up

What happens when economic profit is positive

firms will enter and profit will fall

What happens when economic profit is negative

Firms will exit and profits will rise

In the long run price =

Average cost

Barrier to entry

prevent firms from being able to enter a market and are the only protection that firms have against zero economic profit in the long run.

Four varieties barrier entry's can come in

1. Demand-side

2. Supply-side

3. Regulatory

4. Deterrence

Switching costs

locks consumers into the product that they are currently using.

Reputation

also keeps customers from wanting to pick a new entrant

Nework effects

also makes it harder for consumers to move

Firms can also create barriers to entry by developing _

a superior cost structure

A superior cost structure can come in a variety of ways such as

Learning by doing, economies of scale, research and development, relationships with suppliers, access to key imputs

_ and _ give the holder the exclusive ability to produce and sell a specific product.

Patents and copyrights

Licenses

limit who can sell a product or provide a service

Final type of barriers to entry is _

entry deterrence strategies

Entry deterrence strategies

Build excess capacity , which makes it easier to fight off entrants.

What should an entrepreneur do?

Build their own network, find their own cost advantages, and find regulations that can help them enter.

Price Discrimination

a pricing strategy where the firm charges different consumers different prices

Examples of price discrimination

Senior citizens, student discounts, matinee prices, scholarships, coupons

What two things does a successful price discrimination do?

1. Charges higher prices to those who will pay them

2. Offers selective discounts to induce new consumers to buy

conditions for price discrimination

1. Your business has market power

2. You can prevent resale

3. You can target the right prices to the right customers

Most firms that price discriminate do so by setting up _

group pricing

Why would firms do group pricing?

individual's reservation price is unknown, so the firm uses membership in a group as proxy for willingness to pay.

Two big ideas to group pricing.

1. Charge higher prices to groups that value the product more.

2. Charge lower prices to groups that are especially price sensitive.