ECON 402 UNH Final Exam

Cost-Benefit Principle

an economic concept that states that an action should only be taken if the benefits are greater than the costs

Opportunity Cost

when a decision is made, the value of the next best alternative is the cost of that decision

Marginal Principle

individuals make decisions on purchases based on the additional utility they will receive from each unit.

Interdependence

a system by which many companies and nations are economically dependent upon each other

Framing Effect

a cognitive bias that occurs when people's choices are influenced by how information is presented

Production Possibility Frontier

an economic model that illustrates the maximum combinations of two goods that can be produced using available resources and technology

Law of Demand

when the price of a good or service increases, the quantity demanded decreases, and vice versa

Diminishing Marginal Benefit

Each additional unit yields a smaller marginal benefit than the previous unit

Marginal Benefit

the maximum amount a consumer is willing to pay for an additional unit of a product or service

Normal Good

A good which higher income causes and increase in demand

Inferior Good

A good for which higher incomes cause a decrease in demand

Complement Goods

Goods that go together

Substitute Goods

Goods that replace each other

Congestion

When a good becomes less valuable when more people use it

Network

When a good becomes more valuable when more people use it

Law of Supply

The tendency for the quantity supplied to higher when prices are higher

Price Takers

Someone who decides to charge the prevailing price and whose actions do not affect the prevailing price

Variable Costs

Those costs, labor and raw material, that vary with the quantity of output

Fixed Costs

Those costs that don't vary when you change quantity of output

Marginal Product

The increase in output that arises from an additional unit of an input, like labor

Diminishing Marginal Product

The marginal product of an input declines as you use more of the input

Supply Shift Factors

-Input Prices

-Productivity and Technology

-Prices of Related Outputs

-Expectations

-The Types and Number of Sellers

Markets

A setting bringing together potential buyers and sellers

Market Economy

Each individual makes their production and consumption decisions

Planned Economy

Centralized authority makes production and allocation decisions

Equilibrium

The point at which there is no tendency for change (Quantity Supplied=Quantity Demanded)

Shortage

When quantity demanded exceeds the quantity supplied

Surplus

When quantity demanded is less the quantity supplied

Signs of Disequilibrium

-Queuing

-Bundling of Extras

-Secondary Markets

Demand Shift Factors

-Income

-Preferences

-Related Goods

-Expectations

-Congestion and Networking Effects

-Types and Number of buyers

Price Elasticity of Demand

A measure of how responsive buyers are to price changes. It measures the percent change in Quantity demanded that follows from a price change.

4 Categories of Elasticity

-Perfectly Inelastic Elasticity=0 Quantity Demanded doesn't Change

-Inelastic Quantity is smaller Elasticity<1 Quantity Demanded Changes Less

-Elastic Quantity is larger Elasticity>1 Quantity Demanded change more

Perfectly Elastic Elasticity=Infinity Quantity Demanded changes infinitely

Statutory Burden

The burden of being assigned by the gov. to send a tax payment

Economic Burden

The burden created by the change in after-tax prices faced by buyers and sellers

Tax Incidence

The division of Economic burden of a tax between buyers and sellers

Price Ceiling

A maximum price that sellers can legally charge

Binding Price Ceiling

When the price ceiling is below the equilibrium

Non-Binding Price Ceiling

When the price ceiling is above the equilibrium

Price Floor

A minimum price that sellers can legally charge

Binding Price Floor

When the price floor is above the equilibrium

Non-Binding Price Floor

When the price floor is below the equilibrium

Quantity Regulations

Min or max on quantity that can be sold

Mandate

Requirement to buy or sell min amount of a good

Quota

A limit on the max

Positive Analysis

Describe what IS happening, explaining what, or predicting what will happen

Normative Analysis

Prescribes what SHOULD happen, which involves value judgments

Economic Efficiency

An outcome is more efficient if it yields more Economic Surplus

Economic Surplus

Total benefits minus total costs from a decision

Efficient Outcome

Maximize Economic Surplus

Consumer Surplus Formula

Marginal Benefit - Price

Producer Surplus

Price - Marginal Cost

Total Surplus

(Marginal Benefit - Price) + (Price - Marginal Cost) = Total Surplus

Marginal Cost

The cost of producing one additional unit of a product or service

Deadweight Loss

How far economic surplus falls below the efficient outcome

Externality

A side effect of an activity that affect bystanders whose interests aren't taken into accoun

Positive Externality

Benefits Bystanders

Negative Externality

Harms Bystanders

Corrective Tax

A tax designed to induce people to take account of the negative externalities they cause

Corrective Subsidy

A subsidy designed to include to induce people to take account if the positive externalities

Non-Excludable Good

When someone CANNOT be easily excluded from using something

Excludable Good

When someone CAN be easily excluded from using something

Non-Rival Good

When one person's use DOES NOT subtract from another's

Rival Good

When one person's use DOES subtract from another's

Free-Rider Problem

When someone can enjoy the benefits of a good with out bearing the cost

Marginal Private Cost

The extra cost paid by sellers from producing one extra unit

Marginal External Cost

The extra cost imposed on bystanders from producing one extra unit

Marginal Social Cost

Marginal External Cost + Marginal Private Cost

The Socially Optimal Quantity

The Quantity that is most efficient for society as a whole, including the interests of buyers, sellers, and bystanders

Private Information

When one party to a transaction knows something the other doesn't. Also referred to as asymmetric information

Lemons-Problems

The tendency for the mix of goods to be skewed toward more low-quality goods when buyers can't observe quality

Moral Hazard

The actions you take because they are not fully observable and you are partially insulated from their consequences

Principle Agent Problem

The problems that arise when a principal(boss) hires an agent(employee) to do something on their behalf, but principal cannot perfectly observe the agents actions

Solving Moral Hazard Problem

-Make hidden actions observable by monitoring

-Provide complements that go with the actions you want

-Give people a stake in the outcome

-Government rules and social norms

-Pick the right kind of agents

Solutions to Adverse Selection of Sellers

-Third-party verifiers

-Sellers can signal their products quality(An action to creditably convey private information)

-Government

Adverse Selection of Buyers

The tendency for the mix of buyers to be skewed toward more high-cost buyers when sellers don't know buyers type

Solutions to Adverse Selection of Buyers

-Use information related to the buyers likely costs

-Offer different contracts so buyers sort themselves(Effectively Relieving Private Information)

-Government

Perfect Competition

Markets where (1) all businesses sell an identical good and (2) there are many sellers and buyers, each which are small relative to the size of the market

Market Power

The extent to which a sellers can charge a higher price without losing many sales to competing businesses

Monopoly

When there is only one seller in the market

Oligopoly

A market with only a handful of large sellers

Monopolistic Competition

A market with many small businesses competing, each selling differentiated products

Product Differentiation

Efforts by sellers to make their products differ from those of their competitors

Imperfect Competition

A market featuring a few competitors, but sufficiently limited competition that sellers still have some market power

Firm Demand Curve

Illustrates how the quantity that buyers demand from an individual business or firm varies as it changes the price it charges

Marginal Revenue

The additional revenue from selling one more unit

Collusion

An agreement to limit competition

Five Insights to Imperfect Competitions

-Having more competitors leads to less market power

-Market power allows independent pricing

-Product differentiation gives market power

-Imperfect competition among buyers

-Choices depend on actions of other businesses

Natural Monopolies

A market in which it is cheapest for a single business to service the market

Economic Profit

Total Revenue - Explicit Financial Costs - Opportunity Costs

Accounting Profit

Total Revenue - Explicit Financial Costs

Average Profit

Total Revenue/Quantity=Price

Average Cost

Totals Costs/Quantity=(Fixed Costs/Quantity) + (Variable Cost/Quantity)

Profit Margin

Price/Average Revenue - Average Cost

Barriers to Entry

Obstacles that make it difficult for new suppliers to enter a market

Switching Costs

An impediment that makes it costly for customers to switch

Goodwill

Customer Loyalty

Network Effects

More people adopt product ←→ More useful product

Unique Cost Advantages (Supply Side)

-Learning by Doing

-Mass Production

-Research & Development

-Supplier Relationships

-Limiting Access to Inputs