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What should be. Should the government provide free prescription drugs to senior citizens.
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)
Increase level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which they equal each other.
Principle of diminishing returns
Output is produced with 2 or more inputs, and we increase 1 input while holding the other inputs fixed
2 goods in which an increase in $ of 1 increases demand of another. Taco $ goes up, switch to pizza instead
2 goods which a decrease in $ of 1 increases demand of another. Pizza + Lemonade, Lemonade goes down, increase demand in pizza.
Price elasticity > |1|. % change in quantity > % change in price. Relationship between price and total revenue is negative.
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
Max price set by government. Encourages consumers to buy more and producers to produce less.
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.
Law of Diminishing Marginal Utility
As the consumption of a particular good increase, marginal utility decreases
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 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
A constant cost industry is one in which...
Input prices do not change as output changes in the long-run
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.
Government allows firms to engage in price discrimination unless it...
Drives rival firms out of business
When there are just a few firms in the industry, the industry structure is most likely to be..
An oligopoly market
Limit Pricing occurs when a firm sets price...
So low that other firms are prevented from entering the market
Many firms, differential product type, Elastic demand curve, nor barriers to entry, Ex. Toothbrush
Many firms, Homogenous product type, perfectly elastic demand curve, no barriers to entry, Ex. Corn
Few firms, Homogenous or different product type, more elastic than monopoly demand curve, Barrier to entry (Gov. Limit), Ex. Air Travel
One firm, Unique product type, Typically downward sloping demand curve, barriers to entry, Ex. Local Electric
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.
Economies of scale
Situation in which the long run average cost of production decreases as output increases
Diseconomies of scale
Long run average cost of production increases as output increases. 2 reasons why. 1. Coordination problems 2. Increasing input costs
Firm specific demand curve
Curve showing relationship between price charged by specific firm & the quantity a firm can sell
Herfindahl-Hirschman Index (HHI)
Squaring the market share of each firm and then summing the resulting #'s
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