MicroEconomics

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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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