MicroEconomics
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86 terms
Terms | Definitions |
|---|---|
 A Beautiful Mind | The Nash equilibrium is used in this movie |
| Normative Analysis | What should be. Should the government provide free prescription drugs to senior citizens. |
| Positive Analysis | How it is. |
| Factors of Production | Natural resources, Labor, Physical Capital, Human Capital |
| Ceteris Paribus | All other things being equal or held constant |
| Marginalize | What happens if 1 more unit is produced? Changes: Cost, Revenue |
| Marginal change in cost | C(Q+1) - C(Q) |
| Demand curve | Downward sloping (Negative relationship) |
| Law of Demand | Quantity demanded increases and price decreases |
| Market Demand Curve | Aggregation of individual Demand curves |
| Supply Curve | Upward sloping |
| Law of Supply | Quantity supplied increases as price increases |
| Positive Relationship | 2 variables move in the same directions |
| Negative Relationship | 2 variables move in the opposite directions |
| Opportunity Cost | Cost of going to college: includes wages you lose by going to school instead of working |
| Law of increasing opportunity costs | As output increases for 1 good on production possibility curve, the opportunity cost of a additional units of other goods will be greater. |
| Production possibilities curve | Shows the possible combinations of products that an economy can produce , given that is productive resources are fully employed and efficiently used. (Shaded areas are attainable) |
| Voluntary exchange | Party A and party B are Both better off (Student/College) |
| Self sufficiency | Each of us could produce everything for themselves |
| Marginal Benefit | Additional benefit resulting from a small increase in activity |
| Marginal Cost | Additional cost resulting from a small increase in some activity |
| Marginal Principle | Increase level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which they equal each other. |
| Price below market equilibrium | Excess demand/Shortage |
| Price above market equilibrium | Excess supply/Surplus |
| Principle of diminishing returns | Output is produced with 2 or more inputs, and we increase 1 input while holding the other inputs fixed |
| Real nominal principle | What matters to people is the purchasing power of their money |
| Nominal Value | Face value of $. |
| Real Value | What money can actually buy |
| Market supply curve | Price & Quantity supplied. Positively sloped |
| Normal good | An increase in income increases demand. New clothes or Movies |
| Inferior good | An increase in income decreases demand. Homemade coffe or DVD's |
| Substitutes | 2 goods in which an increase in $ of 1 increases demand of another. Taco $ goes up, switch to pizza instead |
| Complements | 2 goods which a decrease in $ of 1 increases demand of another. Pizza + Lemonade, Lemonade goes down, increase demand in pizza. |
| Price elasticity of demand | Measure of the responsiveness of quantity demanded to changes in price. |
| Elastic demand | Price elasticity > |1|. % change in quantity > % change in price. Relationship between price and total revenue is negative. |
| Inelastic demand | Price elasticity < |1|. % change in quantity < % change in price. Relationship between price and total revenue is positive. |
| Unit elastic demand | Price elasticity = 1. % change in quantity = % change in price. Total revenue does not vary with price. |
| Perfectly elastic demand | Price elasticity of demand = infinite, demand drops to zero with an increase in price, demand curve is horizontal |
| Perfectly inelastic demand | Price elasticity of demand = 0, demand does not change with change in price, demand curve is vertical |
| Demand is relatively elastic if... | There are many substitutes, A long time passes, Fraction of the consumer budget is large, Product is a luxury |
| Demand is relatively inelastic if... | There are few substitutes, A short time passes, Fraction of the consumer budget is small, Product is a necessity |
| Perfectly inelastic supply | Price elasticity of supply = 0 |
| Price Ceiling | Max price set by government. Encourages consumers to buy more and producers to produce less. |
| Price Floor | Minimum price set by government. Encourages consumers to buy less and producers to produce more. |
| Deadweight loss from taxation | Difference between total burden of tax & the amount of revenue collected by the government. |
| Utility | Satisfaction experienced from consuming a good |
| Util | One unit of utility |
| Total Utility | How happy you are. |
| Marginal Utility | Change in total utility from one additional unit of a good |
| Law of Diminishing Marginal Utility | As the consumption of a particular good increase, marginal utility decreases |
| Equimarginal Rule | Pick the combonation of the 2 where marginal benefit per dollar for the 1st activity = marginal benefit per dollar for the 2nd activity. |
| If the firms fixed cost increases by $3000 due to a new government regulation... | The average variable cost curve shifts upward |
| A firm will not shut down in the short run as long as at the point where... | P>AVC |
| A firms marginal cost curve above the average variable cost curve is also... | The firms short-run supply curve |
| If the market demand decreases for a good sold in a perfectly competitive market, firms in the market... | Will receive a lower price for their product |
| In a long-run equilibrium for a competitive firm, economic profits... | Will be zero |
| A constant cost industry is one in which... | Input prices do not change as output changes in the long-run |
| Not a characteristic of a monopoly.. | Price Taker |
| What is an example of a barrier to entry? | The government grants licenses to taxicab drivers, without which it is illegal to operate a taxicab. |
| Monopoly may arise due to.. | A patent, network externalities and large economics of scale |
| Government allows firms to engage in price discrimination unless it... | Drives rival firms out of business |
| When a second firm enters a monopolistic market... | Market price will drop |
| When there are just a few firms in the industry, the industry structure is most likely to be.. | An oligopoly market |
| Cartel | A group of firms that coordinate their pricing decisions |
| In general, the quantity of output in an oligopoly market is.. | Lower than in perfect competition |
| A dominant strategy is one that... | Is the best choice under all conditions |
| A low price guarantee on a car stereo leads to... | Higher prices for consumers |
| Limit Pricing occurs when a firm sets price... | So low that other firms are prevented from entering the market |
| Monopolistic competition | Many firms, differential product type, Elastic demand curve, nor barriers to entry, Ex. Toothbrush |
| Perfect Competition | Many firms, Homogenous product type, perfectly elastic demand curve, no barriers to entry, Ex. Corn |
| Oligopoly | Few firms, Homogenous or different product type, more elastic than monopoly demand curve, Barrier to entry (Gov. Limit), Ex. Air Travel |
| Monopoly | One firm, Unique product type, Typically downward sloping demand curve, barriers to entry, Ex. Local Electric |
| Marginal product of labor | Change in output from one additional unit of labor |
| Explicit cost | Opportunity cost of resources employed by a firm that takes the form of cash payments |
| Total product curve | Shows the relationship between the quantity of labor & the quantity of output produced. Ceterus Paribus |
| Relationship between marginal cost and average cost | When marginal cost is less than the average cost, the average cost is falling and when marginal cost exceeds average cost, the average cost is rising. |
| Indivisible input | Cannot scale down to produce a smaller quantity of output. Ex. Railroad tracks |
| Economies of scale | Situation in which the long run average cost of production decreases as output increases |
| Minimum efficient scale | Output at which scale economies are exhausted |
| Diseconomies of scale | Long run average cost of production increases as output increases. 2 reasons why. 1. Coordination problems 2. Increasing input costs |
| Price Taker | A buyer or seller that takes the market price as given |
| Price Maker | Able to affect the price |
| Firm specific demand curve | Curve showing relationship between price charged by specific firm & the quantity a firm can sell |
| Shut down price | = Average Variable Cost |
| Herfindahl-Hirschman Index (HHI) | Squaring the market share of each firm and then summing the resulting #'s |
| Nash Equilibrium | Outcome of a game in which each player is doing the best he or she can, given the action of the other player |
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