Rutgers Introduction to Microeconomics Final

Value in diversity: Consumers gain from the increased diversity of products.

Consumers gain from the increased diversity of products.

competitive market

has many buyers and sellers of the same good or service, none of whom can influence the price.

supply and demand model

a model of how a competitive market behaves.

demand curve

shows the quantity demanded at various prices.

quantity demanded

the quantity that buyers are willing (and able) to purchase at a particular price.

Important demand shifters

Changes in the prices of related goods or services
Changes in income
Changes in tastes
Changes in expectations
Changes in the number of consumers

Two goods are substitutes

if a decrease in the price of one leads to a decrease in demand for the other (or vice versa).

A normal good:

Demand increases when income increases (and vice versa).

Two goods are complements

if a decrease in the price of one good leads to an increase in the demand for the other (or vice versa).

supply curve

shows the quantity supplied at various prices.

An inferior good:

Demand decreases when income increases (and vice versa).

quantity supplied

the quantity that producers are willing and able to sell at a particular price.

elastic

when an increase in price reduces the quantity demanded a lot (and vice versa).

inelastic.

When the same increase in price reduces quantity demanded just a little

Total revenue

price times quantity demanded (sold).
TR = P × Q

Factor intensity

a measure of the quantity of a factor used in comparison with other factors.

Factor abundance:

the supply of a factor of production relative to other factors.

Exporting industries

produce goods and services that are sold abroad.

Import-competing industries

produce goods and services that are also imported

Policies that limit imports trade protection/protection.

Policies that limit imports

tariff

a tax levied on imports.

Infant industry

New industries need a temporary period of protection to develop.

International trade agreements

treaties in which a country promises to reduce import tariffs in return for a promise by the other country to do the same.

EU (European Union)

a customs union among 27 European nations.
Global trade agreements

NAFTA (North American Free Trade Agreement)

a trade agreement between the United States, Canada, and Mexico.

WTO (World Trade Organization)

oversees international trade agreements and rules on disputes between countries over those agreements.

Offshore outsourcing:

hiring people in another country to perform various tasks.

Utility

value or satisfaction from consumption.

Sweatshop labor fallacy

It's easy to get outraged about the low wages paid to the person who made your shirt, harder to appreciate how much worse off that person would be if denied the opportunity to sell goods in rich countries' markets.

Marginal utility (MU)

the change in utility from consuming an additional unit.

Diminishing marginal utility

Each additional unit of a good adds less to utility than the previous unit.

Diminishing marginal utility

Each additional unit of a good adds less to utility than the previous unit.

The substitution effect (of a change in the price of a good)

the change in the quantity consumed of that good as the consumer substitutes the good that has become relatively cheaper for the good that has become relatively more expensive.

Giffen good

a hypothetical inferior good for which the income effect outweighs the substitution effect and the demand curve slopes upward.

The income effect (of a change in the price of a good)

the change in the quantity consumed of a good that results from a change in the consumer's purchasing power due to the change in the price of the good.

Production

the process of turning inputs into outputs.

production function

the relationship between the quantity of inputs a firm uses and the quantity of output it produces.

A fixed input

an input whose quantity is fixed for a period and cannot be varied.

A variable input

an input whose quantity the firm can vary at any time.

The long run

the period in which all inputs can be varied.

The short run

the period in which at least one input is fixed

total product curve

shows how the quantity of output depends on the quantity of the variable input for a given quantity of the fixed input.

Marginal product

the change in output resulting from a one-unit increase in the amount of labor input (ΔQ/ΔL)

A variable cost

a cost that depends on the quantity of output produced. It is the cost of the variable input.

marginal product of an input

the additional quantity of output that is produced by using one more unit of that input.
MPL = =

MPL = change in quantity of output generated by one additional unit of labor.

A fixed cost

a cost that does not depend on the quantity of output produced. It is the cost of the fixed input.

total cost

producing a given quantity of output is the sum of the fixed cost and the variable cost of producing that quantity of output.

TC = FC + VC

Average variable cost

variable cost per unit of output produced
ATC = VC/Q

Average total cost (often referred to simply as average cost)

total cost per unit of output produced
ATC = TC/Q

Average fixed cost

fixed cost per unit of output produced
ATC = FC/Q

The spreading effect

The larger the output, the more output over which fixed cost is spread, leading to lower average fixed cost.

The diminishing returns effect

The larger the output, the more variable input required to produce additional units, which leads to higher average variable cost.

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.

price- takers.

their actions have no effect on price.

Free entry and exit

New producers can easily enter into an industry and existing producers can easily leave that industry.

Market share

the fraction of the total industry output accounted for by that producer's output.

Optimal output rule

Profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost.

Standardized product (aka "commodity")

Consumers regard different sellers' products as equivalent.

Break-even price

a price-taking firm is the market price at which it earns zero profit.

Marginal revenue

change in total revenue generated by an additional unit of output.
MR = ΔTR/ΔQ
For price-taking firms, MR is simply the good's market price.

Shut-down price

minimum average variable cost.

Market power

the ability of a firm to raise prices.

Monopolist

a firm that is the only producer of a good with no close substitutes.
(An industry controlled by a monopolist is known as a monopoly)

patent

gives an inventor a temporary monopoly in the use or sale of an invention.

copyright

gives the creator of a literary or artistic work sole rights to profit from that work.

A quantity effect

One more unit is sold, increasing total revenue by the price at which the unit is sold.

A price effect

To sell the last unit, the monopolist must cut the market price on all units sold. This decreases total revenue.

Public (government) ownership

But publicly owned companies are often poorly run.

Price regulation

A price ceiling imposed on a monopolist does not create shortages if it is not set too low.

Deregulation (away from government-regulated rates)

popular as a way to increase competition and reduce electricity prices

Large up-front fixed costs

deterred many would-be new generators

Incumbent firms could now manipulate the market

Plants were shut down during peak demand hours to raise prices.

single-price monopolist

It offers its product to all consumers at the same price.

Some firms practice price discrimination

They charge different prices to different consumers for the same good.

Imperfect competition

No one firm has a monopoly, but producers can affect market prices.

Duopoly

an oligopoly consisting of only two firms.

cartel

an agreement by several producers to restrict output in order to increase their joint profits.

Game theory

the study of behavior in situations of interdependence; a way of predicting outcomes in strategic situations like oligopolies.

Collusion

firms cooperating to raise each others' profits.

Nash equilibrium (also known as noncooperative equilibrium)

the result when each player in a game chooses the action that maximizes his or her payoff given the actions of other players, ignoring the effects of his or her action on the payoffs received by those other players.

Noncooperative behavior

Firms ignoring the effects of their actions on each others' profits.

Tit for tat

a strategy of playing cooperatively at first, then doing whatever the other player did in the previous period.

prisoner's dilemma

When each firm has an incentive to cheat but both are worse off if both cheat

A dominant strategy

a strategy that is a player's best action regardless of the action taken by the other player. Depending on the payoffs, a player may or may not have a dominant strategy.

Antitrust policies

efforts undertaken by the government to prevent oligopolistic industries from becoming or behaving like monopolies.

tacit collusion

unspoken agreements

price war.

When collusion breaks down and prices collapse

product differentiation

an attempt by a firm to convince buyers that its product is different from the products of other firms in the industry.

nonprice competition

Oligopolists often avoid competing directly on price through advertising and other means instead.

price leadership

one firm sets its price first, and other firms then follow

Value in diversity

Consumers gain from the increased diversity of products.

Competition among sellers

Entry by more producers reduces the quantity each existing producer sells.

Monopolistic competition

a market structure that's a little like monopoly and a little like perfect competition. Specifically:
many competitors
products similar but not identical
free entry into and exit from the industry in the long run

excess capacity

They produce less than the output at which average total cost is minimized.

Nonrival

More than one person can consume the same unit of the good at the same time.
Example: digital music

Private goods

excludable and rival

"Informative" advertising

price, quality and availability information

Nonexcludable

People who don't pay cannot be easily prevented from using a good.
Example: national defense

Public goods

nonexcludable and nonrival.

Excludable

People who don't pay can be easily prevented from using a good.
Example: jeans