CFA lvl 1 econ 2
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78 terms
Terms | Definitions |
|---|---|
 profit maximization | occurs where MC == MR |
| perfect competition | price-taker market; each firm takes market price & has no control over it. Faces horizontal demand curve (perfectly elastic) |
| assumptions of perfect competition | identical product, large # of firms, small firms relative to market, no barrier to entry. Market demand curve is normal, but individual demand curves are flat: if they increase price, competition takes the addnl output |
| economic profit | when p > atc (profits greater than average total cost) |
| short-run supply curve for FIRM | MC curve above AVC (need picture!) |
| short-run supply curve for COMPETITIVE MARKET | horizontal sum of all marginal cost curves of all firms in industry |
| short-run vs long-run: 1) increase in demand SHORT run | increase in price, but also expansion (increased supply) |
| short-run vs long-run: 2) decrease in demand SHORT RUN | prices decrease, but firms decrease output/go out of business |
| short-run vs long-run: 3) long-run equilibrium | economic profit MUST BE zero |
| short-run vs long-run: 4) permanent demand incrase | if positive profits, then new firms enter, supply increases. long run == prices return to original level, but quantity consumed is increased |
| short-run vs long-run: 5) permanent improvement in technology | ATC goes down; price eventually falls to point of new minimum ATC. |
| monopoly definition | single seller w no substitutes; high barriers to entry. price-setter. |
| monopoly single-price strategy | max profit where MR = MC. Price is above MC and ATC. Produces where demand is elastic (demand is always elastic when MR >0) |
| monopoly price-discrimination | separate consumers into groups; must prevent re-selling between groups. increases profit for firm & decreases consumer surplus. Total output is up. Perfect price discriminatin = charging EACH consumer their exact willingness to pay (MR = D = MB = MC, so leads to EFFICIENT OUTCOME) |
| natural monopoly | when economies of scale always go down, permits natural monopoly due to technical efficiency., but also incurs allocative INefficiency |
| Monopolistic competition 4 standards | 1) large number of firms; each has little price control 2) differentiated products (but close substitutes) -- demand curve highly elastic 3) compete on price, quality, marketing 4) low barriers to entry |
| monopolistic comp short-run/long-run | short run profit maximization; long-run = new firms and P= ATC (zero profit). Need product innovation/development for short-term profits, but will face long-term competition |
| monopolistic comp efficiency | NOT allocatively efficient, but close |
| Oligopoly: 5 conditions | 1) small number of rivals 2) strong interdependance among sellers 3) economies of scale for each producer 4) higher barriers to entry 5) products may be differentiated OR similar |
| oligopoly: KINKED demand curve | different reaction to price increase/cuts (demand dies if you raise price)price increase met with ela |
| oligopoly: dominant firm model | One firm usually a price-setter, the others are price-takers |
| demand & supply in factor (input) markets | demand ultimately determined by demand for final output |
| Marginal revenue product (MRP) | change in Total Revenue due to change in use of input: MRP = dTR/d_input. by definition, MRP = MP x MR |
| MRP in labor | MP_L = MP_L x MR. marginal benefit of labor is equal to the wage., so demand for labor == marginal product of labor |
| Elasticity of Labor Demand | 1) long run: Dl more elastic due to greater substitution possibilities 2) more labor intensive = greater elasticity of labor demand 3) more easily capital can substitute for labor,l the more elastic is the demand |
| Labor Supply | trade off between income & leisure. happiness from leisure, but opportunity cost of leisure = foregone wages |
| labor substitution effect | higher wages = more labor supplied |
| income effect on labor | greater the income, greater demand for all goods (including leisure; greater demand for leisure == higher cost of working = less labor supplied |
| population effect on labor | ! duh |
| technological change effect on labor | ! impacts labor supply |
| labor union | restrict supply of labor. higher wages + smaller number of workers = inefficient. long run effect = fewer workers, higher wage |
| monopsony | hiring 1 more worker = need to pay all workers more (think small town w only 1 big plant). long run effect = fewer workers, lower wage. |
| physical capital | stop of real eq. demand for for physical capital is MRP |
| financial capital | mainey raised from selling securities to purchase physical capital. if demand for physical capital increases, so does demand for financial capital. |
| marginal revenue production - capital (MRP_c) | production from capital takes place over many periods, to MRP is the present value of all furutre MRP. Firm chooses MRP = price of capital |
| supply of capital | current income, expected future income, interest rates. Suply curve of capital has positive slope |
| renewable natural resource | replaced after its used; supply curve is Fixed (vertical, perfectly inelastic) |
| non-renewable natural resource | total stock exists, use in any period is called flow supply (perfectly elastic at a price = present value of expected price in NEXT period) |
| economic rent | income received over and above to induce them to supply. Usually opportunity cost; so econ rent = actual income - opp cost |
| bus cycle: Expansion/contraction/recession | expansion when real GDP is increasing. contraction = real GDP decreasing. Recession = contraction lasting "more than a few months" -- 6 months or more |
| unemployed person (3 categories) | willing to be working, must fall into 1 of 3 categories: 1) looking for jobs past 4 weeks 2) waiting to be called back from previous job 3) waiting to start new job in next 30 days |
| 3 labor market figures: | 1) unemployment rate: unemployed / labor force 2) labor force participation = labor force / working-age pop 3) employment to pop ratio = people employed / working-age pop |
| unemployment rate & bus cycle: | UR moves inverse of bus cycle |
| labor force participation rate & bus cycle | LFPR moves inverse of bus cycle |
| employment to pop ratio & bus cycle | moves SAME direction as bus cycle |
| aggregate hours | totals hours worked by ALL employed persons during year. moves same direction as bus cycle |
| real wage rate | wage received above inflation; equals amount of goods and services wage money can buy. |
| frictional unemployment | due to normal turnover in labor market |
| structural unemployment | when individuals do not have correct skills for current (often new) structure of economy |
| cyclical unemployment | unemployment related to bus cycle (inverse relationship) |
| natural rate of unemployment | when cyclical unemployment = zero. also called "full employment". happens when GDP = potential GDP |
| potential GDP | GDP when employment = full employment |
| CPI & inflation rate | CPI = (basket cost this year / basket cost in BASE year ) * 100 inflation = (CPI this year - CPI last year) / CPI last year |
| CPI bias | 1) good news bias 2) quality change bias 3) product (commodity bias) 4) retail outlet bias |
| Long run aggregate supply (LAS) | relationship between Q supplied of real GDP at potential GDP. Movements along LAS involve only changes in prices of inputs and final goods/services -- perfectly vertical / inelastic! |
| Short Run Aggregate Supply curve (SAS) | short-run relationship between GDP and Price level when wages, input and potential GDP remain constant. Positive slope so firms require higher price |
| Potential GDP and Aggregate Supply | LAS and SAS change when GDP changes, ie quantity of labor, change in capital, or improvement in technology |
| Aggregate Demand | Y = C + I + G (X - M) consumption + investment + gov't + net exports |
| wealth effect on AD | if prices increase, real wealth decreases (loss of purchasing power so individuals consume less) |
| substitution effect on AD | price increases accompanied by high interest rates, reducing consumption & investment |
| 4 changes to AD | 1) Expectations: AD greater w expected income, inflation, or profits 2) fiscal policy: tax cuts increase demand as households increase consumption 3) monetary policy: increase in money supply = lower interest rates, Hs borrow and consume more, firms invest more 4) World economy: increase in foreign incomes = demand for X and greater AD. When exhange rates make domestic currency weaker, more X and less M |
| short run macro equilibrium | real GDP demanded = real GDP supplied; intersection of SAS and AD |
| long-run macro equil | real GDP = potential GDP. AD = LAS = SAS |
| economic growth and LAS | LAS shifts to the right |
| inflation and AD | inflation happens when increase in AD greater than increase in LAS |
| changes in AD | GDP fluctuates around potential GDP; if AD up, short-run real GDP up and prices up; then workers demand grater wages shifting the SAS up to intersect LAS. In the end, back at potential GDP but higher prices |
| business cycle and AD | AD and SAS change, but money wages don't respond quickly enough |
| real GDP < potential GDP | Okun gap/recessionary gap |
| real GDP > potential GDP | inflationary gap / above full-time employment |
| Keynesian AD | shifts from changing expectations |
| Keynesian AS (agg supply) | downward prices are sticky, easy that SAS rightward shift doesn't happen |
| Keynesian Policy response | gov't interventian (obama!); left alone we won't move back to equil |
| Classical AD | driven by tech changes |
| Classical AS | wages flexible & self correcting |
| Classical policy response | taxes disincentivise & should be reduced |
| Monetarist AD | economy is self-correcting so long as monetary policy doesn't get in the way |
| Monetarist AS | wages downward sticky, gov't intervention needed |
| Monetarist Policy Response | taxes low, increase money supply slow & steady |
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