Economics 1021 Exam (from quizlet)

Externality

A cost or a benefit that arises from production and that falls on someone other than the producer; or a cost or benefit that arises from consumption and that falls on someone other than the consumer.

Marginal Private Cost

the cost of producing an additional unit of a good or service that is borne by the producer

Marginal External Cost

the cost of producing an additional unit of a good or service that falls on people other than the producer

Marginal Social Cost

the marginal cost incurred by the entire society - the sum of marginal private cost and marginal external cost

Property Rights

legally established titles to the ownership, use and disposal of factors of production that are enforcable in the courts

Coase Theorem

the proposition that if property rights exist, if only a small number of parties is involved and if transaction costs are low, then private transactions are low

Transaction Costs

The opportunity cost of conducting a transaction

Pigovian taxes

Taxes that are used as an incentive for producers to cut back on an activity that creates an external cost.

Marginal Private Benefit

The benefit from an additional unit of a good or service that the consumer of that good or service receives.

Marginal External Benefit

the benefit from an additional unit of a good or service that people other than the consumer enjoy

Marginal Social Benefit

the marginal benefit enjoyed by society

Public Provision

a public authority that receives its revenue from the government produces the good or service

Subsidy/ Voucher

A payment that the government makes to private producers

patent/copyright

a government sanctioned exclusive right granted to the inventor of a good, service or productive process to produce, use and sell the invention for a given number of years

Oligopoly

a market structure in which natural or legal barriers prevent the entry of new firms and only a small number of firms compete

Game Theory

A tool for studying strategic behaviour that takes into account the expected behaviour of others and the recognition of mutual interdependence

Payoff Matrix

a table that shows the payoffs for every possible action by each player for every possible action by each player

Nash Equilibrium

the decision to take the best possible action given the action of the other player

Duopoly

a market structure in which there are only two producers who compete

Collusive Agreement

an agreement between two or more producers to restrict output, raise the price and increase profits

Monopolistic Competition

A market structure in which
- a large number of firms compete
-each firm produces a differentiated product
-firms compete on product quality, price and marketing
-firms are free to enter and exit

The Four Firm Concentration Ratio

the percentage of the value of sales accounted for by the four largest firms in an industry (found by the total of the four firms divided by the total sales in the market)

HHI Ratio

the square of the percentage market share of each firm summed over the largest 50 firms (or all firms if less than 50)

Price in Monopolistic Competition

Firms maximize profit by producing the quantity at which MR=MC and charging the highest price the market is willing to pay (demand curve at that quantity)

Price in Monopolistic Competition (Long Run)

in the long run, firms produce an output where price equals average total cost and exceeds marginal cost (makes zero economic profit)

Monopoly

a market with a single firm that produces a good or service for which no close substitute exists and is protected by a barrier that prevents entry into the market

Legal Monopoly

entry is restricted by the granting of a public franchise, government license, patent or copyright

Natural Monopoly

economies of scale enable one firm to supply the entire market at the lowest possible cost

Single Price Monopoly

a firm that must sell each unit of its output for the same to all of its customrs

Price Discrimination

the practice of selling different units of a good or service for different prices

Marginal Cost Pricing Rule

sets price equal to marginal cost - this is efficient but leaves the company incurring an economic loss

Average Cost Pricing Rule

sets price equal to average total cost - this Is still inefficient and the firm makes zero economic profit

Profit maximizing Point

When the firm produces where MR=MC and the price at the demand curve at that quantity

Rate of Return Regulation

a firm must justify its price by showing that its returns on capital doesn't exceed a specified target

Price Cap Regulation

this is a price ceiling - a rule that specifies the highest price the firm is permitted to set

Perfect Competition

industry in which:
- many firms sell identical products to many buyers
- there are no restrictions to entry into the industry
- established firms have no advantage over new ones
- sellers and buyers are well informed about prices

Price taker

firms in perfect competition are price takers - they cannot influence the price of a good service

Total revenue

the price of output multiplied by the number of units of output sold

Marginal Revenue

the change in total revenue that results from a one-unit increase in the quantity sold

Shutdown Point

the output and price at which the firm just covers its total variable costs

Short Run market supply curve (perfect competition)

shows the quantity supplied by all the firms in the market at each price when each firms plant and the number of firms remain the same

The short run

a time frame in which the quantity of at least one factor of production is fixed

The long run

a time frame in which the quantities of all factors of production can be varied

Diminishing Marginal Returns

occur when the marginal product of an additional worker is less than the product of the previous worker

Law of Diminishing Returns

as a firm uses more of a variable factor of production, with a given quantity of a fixed factor of production, the marginal product of the variable factor eventually diminishes

The Average Cost Curves

1. MC intersects ATC and AVC at their minimum points
2. MC < AC -- AC decreases
3. MC > AC -- AC increases
4. MC = AC - AC at minimum

Relationship between product curves and cost curves

1. Marginal Product decreases - marginal cost increases
2. Average Product increases - average cost decreases
3. AP decreases - AVC increases
4. AP at its max - AVC is at min

Long Run Average Cost Curve

the relationship between the lowest attainable average total cost and output when both the plant size and labor are varied

Economies of Scale

features of a firms technology that lead to falling long-run average cost as output increases

Diseconomies of Scale

features of a firms technology that lead to rising long-run average cost as output increases

Constant returns of scale

features of a firms technology that lead to constant long-run average cost as output increases

Minimum efficient scale

the smallest quantity of output at which long-run average cost reaches its lowest level

Budget Line

describes a households limits to its consumption choices

Indifference Curve

a line that shows the combinations of goods among which a consumer is indifferent

marginal rate of substitution

the rate at which a person will give up good Y to get an additional unit of good X and at the same time remain indifferent

Diminishing Marginal rate of Substitution

the general tendency for a person to be willing to give up less of good Y to get more of good X as the quantity of good X increases

Price Effect

the effect of a change in the price on the quantity of a good consumed - leads to the budget line rotating outwards

Income effect

the effect of a change in income on consumption

Substitution Effect

the effect of a change in price on the quantity bought when the consumer remains indifferent between the original situation and the new one

Price Ceiling

a regulation that makes it illegal to charge a price higher than a specified level - must be set below equilibrium to be effecient

Rent Cieling

Creates a housing shortage, increased search activity and a black market

Price Floor

a regulation that makes it illegal to trade at a price lower than a specified level - must be set above the equilibrium to be effective

Division of tax and elasticity

1. perfectly inelastic demand - buyer pays the entire tax
2. Perfectly Elastic Demand - seller pays entire tax
3. Perfectly inelastic supply - seller pays entire tax
4. Perfectly Elastic Supply - buyer pays entire tax

consumer surplus

the excess of the benefit received from a good over the amount paid for it -- when people buy something for less than it is worth to them

producer surplus

the excess of the amount received from the sale of a good or service over the cost of producing it

Deadweight Loss

the decrease in consumer surplus and producer surplus that results from an inefficient level of production

Utilitarianism

a principle that states we strive to achieve "the greatest happiness for the greatest number"

The big tradeoff

recognizing the cost of making income transfers - a tradeoff between efficiency and fairness

Symmetry Principle

the requirement that people in similar situations be treated similarily

Price Elasticity of Demand

a units- free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers plans remain the same

Elasticity and Price Elasticity of Demand

1. Price Elasticity = 0 (Perfectly Inelastic)
2.Price Elasticity = 1 (unit Elastic Demand)
3. Price Elasticity less than 0 (Inelastic Demand)
4. Price Elasticity = infinity (Perfectly Elastic Demand)
5. Price Elasticity greater than 0 (Elastic Demand)

Cross Elasticity of Demand

a measure of the responsiveness of the demand for a good to a change in the price of a substitute of compliment

Outcomes of Cross Elasticity

Substitute = cross elasticity positive
Complement = cross elasticity negative

Income Elasticity of Demand

measure of responsiveness of the demand for a good to a change in income

Outcomes of Income Elasticity

Greater than 1 = normal good, income elastic
Positive and less than 1 = normal good, income inelastic
Negative = inferior good

Elasticity of Supply

measures the responsiveness of the quantity supplied to a change in the price of a good

Competitive Market

a market that has many buyers and sellers, no buyer or seller can influence the price

Relative Cost

the ratio of one price to another - also the opportunity cost

quantity demanded

the amount of a good or service that consumer plan to buy in a given time period at a particular price

Law of Demand

other things remaining the same, the higher the price of a good the smaller the quantity demanded, and the lower the price the greater the quantity demanded

Normal Good

demand increases as income increases

Inferior Good

demand decreases as income increases

Substitute

A good that can be used in place of another good -- if the price of a substitute rise people buy less of the substitute and more of the other good

Compliment

A good that is used in conjunction (with) with another good- if the price of a donut, a compliment of coffee rises, people buy less coffee

Quantity Supplied

the amount that producers plan to sell during a given period of time at a particular price

Law of Supply

other things remaining the same, the higher the price of a good the greater is the quantity supplied, the lower the price the smaller quantity supplied

Production Possibilities Frontier (PPF)

the boundary between those combinations of goods and services that can be produced and those that cant

Production Efficiency

happens when we produce goods at the lowest possible cost - occurs at all points on the PPF

Allocative Efficiency

when goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit

Comparative Advantage

the person that can perform the activity at a lower opportunity cost than anyone else

Absolute Advantage

occurs when a person is more productive than others

Scarcity

our inability to satisfy all our wants

Microeconomics

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

Macroeconomics

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

tradeoff

an exchange - giving up one thing to get something else

Rational Choice

compares costs and benefits and achieves the greatest benefit over cost of the person making the choice

opportunity cost

the highest-valued alternative that we give up to get something