3101 Int Micro Flashcards Preview

Economics > 3101 Int Micro > Flashcards

Flashcards in 3101 Int Micro Deck (120):
1

positive analysis vs normative analysis

Positive analysis is describing relationships of cause and effect. Normative is examining questions of what ought to be.

-Economists try to do positive analysis, try to explain how it works, not what ought to be done.

2

Economic Rationality

Assumptions of a model that participants are behaving rationally:
- non-random behavior
- agents have common, simple objectives
- agents avoid emotion-driven decisions

3

microeconomics

Deals with the behavior of small/single/individual economic actors.

Examples: consumers, employers, employees, investors, or business firms

-The word micro comes from the Greek word mikrós, which means small.

4

market

A market is the collection of buyers and sellers that, through their actual and potential interactions, determine the price of a product or the set of the product.

It is defined by the BUYERS, SELLERS, and the range of products that should be included in a particular market

5

extent of a market

Boundaries of a market, both geographical and in terms of the range of products produced and sold within it

6

supply curve

Relationship between the quantity of a good that producers are willing to sell and the price of the good.

7

demand curve

Relationship between the quantity of a good that consumers are willing to buy and the price of the good.

8

substitutes

Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other.

Examples:Snickers-Butterfinger, Bayer Aspirin-aspirin

9

complements

Two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other.

10

equilibrium price

Price that equates the quantity supplied to the quantity demanded. Often called the market clearing price.

11

market mechanism

Tendency in a free market for prices to change until the market clears.

-also known as the invisible hand

12

surplus

Situation in which the quantity supplied exceeds the quantity demanded.

13

shortage

Situation in which the quantity demanded exceeds the quantity supplied.

14

When is the Supply-Demand Model useful?

Assumption: At any given price, a given quantity will be produced and sold.

This assumption is useful only if a market is at least roughly competitive.

-In a competitive market both sellers and buyers should have little market power— i.e., little ability individually to affect the market price.

15

elasticity

Percentage change in one variable resulting from a 1-percent increase in another.

16

price elasticity of demand

Percentage change in quantity demanded of a good resulting from a 1-percent increase in its price.

Formula: E= (P/Q) x (dQ/dP)

17

Demand curve that is a straight line.

linear demand curve

18

completely inelastic demand

Principle that consumers will buy a fixed quantity of a good regardless of its price.

-It is a vertical line

19

infinitely elastic demand

Principle that consumers will buy as much of a good as they can get at a single price, but for any higher price the quantity demanded drops to zero, while for any lower price the quantity demanded increases without limit.

-It is a horizontal line

20

income elasticity of demand

Percentage change in the quantity demanded resulting from a 1-percent increase in income.

-same formula as price elasticity but replace p with i.

21

cross-price elasticity of demand

Percentage change in the quantity demanded of one good resulting from a 1-percent increase in the price of another.

22

price elasticity of supply

Percentage change in quantity supplied resulting from a 1-percent increase in price.

23

How are elasticities defined in terms of numbers?

inelastic, if |E| 1
unit elastic, if |E| = 1

24

durable goods

A durable good is used over time rather than being completely consumed in one use. Durable goods are often called hard goods.

Example: Car

25

theory of consumer behavior

Description of how consumers allocate incomes among different goods and services to maximize their well-being.

26

3 Basic Assumptions about Preferences

1. Completeness: We assume that preferences are complete. In other words, consumers can compare and rank all possible baskets.

2. Transitivity: if a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C.

3. More is better than less

27

market basket

List with specific quantities of one or more goods. We often call the market basket a bundle of goods.

28

indifference curve

Curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction.

indifference map: Graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent.

29

marginal rate of substitution (MRS)

Maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good. It is the magnitude of the slope of an indifference curve.

Formula= -^C/^F?

30

diminishing marginal rate of substitution

Indifference curves are usually convex (bowed inward). We assume that most indifference curves have diminishing marginal rates of substitution.

-The term convex means that the the slope of the indifference curves increases (i.e. becomes less negative) as we move down along the curve.

31

perfect substitutes

Two goods for which the marginal rate of substitution of one for the other is a constant.

-The lines in a graph look like this \

32

perfect complements

Two goods for which the MRS is zero or infinite; the indifference curves are shaped as right angles |_.

33

Good for which less is preferred rather than more

"bad"

34

utility

Numerical score representing the satisfaction that a consumer gets from a given market basket

35

utility function

Formula that assigns a level of utility to individual market baskets

36

ordinal utility function vs cardinal utility function

ordinal generates a ranking of market baskets in order of most to least preferred.

cardinal describes by HOW MUCH(#) one market basket is preferred to another.

37

Constraints that consumers face as a result of limited incomes.

budget constraints

38

budget line

All combinations of goods for which the total amount of money spent is equal to income

39

budget constraint equation

I = p1X + p2X

(750 = 25x + 50y)

40

Which 2 conditions must be satisfied to maximize utility?

1. the indiference curve must have the same slope as the budget line
2. The indifference curve must be on the budget line

41

What determines the slope of the indifference curve and what determines the slope of the budget line

Remember MRS=Pf/Pc
so the slope of the indifference curve is determined by MRS, the slope of the budget line is determined by the price(ratio)

-

42

revealed preference

If a consumer chooses one market basket over another, and if the chosen market basket is more expensive than the alternative, then the consumer must prefer the chosen market basket.

43

Satisfaction is maximized when...

the marginal benefit is equal to the marginal cost.

-the benefit associated with the consumption of one additional unit of food must be equal to the cost of the additional unit of food.

44

marginal benefit

Benefit from the consumption of one additional unit of a good.

45

marginal cost

Cost of one additional unit of a good.

46

marginal utility

Additional satisfaction obtained from consuming one additional unit of a good

47

diminishing marginal utility

Principle that as more of a good is consumed, the consumption of additional amounts will yield smaller additions to utility

48

equal marginal principle

Principle that utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure across all goods.

MUx/Pf = MUy/Py

49

What determines your intertemporal budget?

• Yearly income: may vary across years
• Spending: portion of income consumed in a given year
• Investment: interest accrued on income carried over
• Borrowing: spending next year’s income (interest-bearing loan)

50

How to construct the budget constraint?

CH3 pg 116 and example page 126

51

price-consumption curve

Curve tracing the utility-maximizing combinations of two goods as the price of one changes.

52

individual demand curve

Curve relating the quantity of a good that a single consumer will buy to its price.

53

income-consumption curve

Curve tracing the utility-maximizing combinations of two goods as a consumer’s income changes.

54

inferior good

A good for which the increase of a person’s income leads to less consumption.

-example:ramen

55

engel curve

Curve relating the quantity of a good consumed to income.

56

substitution effect

Change in consumption of a good associated with a change in its price, with the level of utility held constant.

57

income effect

Change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant.

58

Total Effect of a change in price=

Substitution Effect + Income Effect

59

giffen good

Good whose demand curve slopes upward because the (negative) income effect is larger than the substitution effect.

60

market demand curve

Curve relating the quantity of a good that all consumers in a market will buy to its price.

61

isoelastic demand curve

Demand curve with a constant price elasticity

62

speculative demand

Demand driven not by the direct benefits one obtains from owning or consuming a good but instead by an expectation that the price of the good will increase.

63

consumer surplus

Difference between what a consumer is willing to pay for a good and the amount actually paid.

64

network externality

When each individual’s demand depends on the purchases of other individuals.

65

bandwagon effect

Positive network externality in which a consumer wishes to possess a good in part because others do.

66

snob effect

Negative network externality in which a consumer wishes to own an exclusive or unique good.

67

theory of the firm

Explanation of how a firm makes cost-minimizing production decisions and how its cost varies with its output.

68

Production decisions of a firm depend on:

1. Production Technology
2. Cost Constraints
3. Input Choices

69

factors of production

Inputs into the production process (e.g., labor, capital, and materials).

70

production function

Function showing the highest output that a firm can produce for every specified combination of inputs.

q = F(K, L)

71

what is the short run vs the long run

Period of time in which quantities of one or more production factors cannot be changed is short, in long any/all can be changed.

72

fixed input

Production factor that cannot be varied/changed, in the short run. If it can be changed it is variable input.

73

average product

Output per unit of a particular input.

q/L

-In general, the average product of labor is given by the slope of the line drawn from the origin to the corresponding point on the total product curve.

74

marginal product

Additional output produced as an input is increased by one unit.

^q/^L

-In general, the marginal product of labor at a point is given by the slope of the total product at that point

75

law of diminishing marginal returns

Principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease.

-crowded classroom

76

labor productivity

Average product of labor for an entire industry or for the economy as a whole

77

stock of capital

Total amount of capital available for use in production.

78

technological change

Development of new technologies allowing factors of production to be used more effectively

79

isoquants

Curve showing all possible combinations of inputs that yield the same output.

80

isoquant map

Graph combining a number of isoquants, used to describe a production function.

81

marginal rate of technical substitution (MRTS)

Amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant.

MRTS = −Change in capital input/change in labor input
= ^K/^L , for a fixed level of q

-Teacher said it was MPl/MPk

82

constant returns to scale vs increasing returns to scale vs decreasing returns to scale

Situation in which output doubles when all inputs are
doubled. F(aK, aL) = aF(K,L)

Situation in which output more than doubles when all inputs are doubled. F(aK, aL) > aF(K,L)

Situation in which output less than doubles when all inputs are doubled. F(aK, aL)

83

accounting cost

Actual expenses plus depreciation charges for capital equipment

84

economic cost

Cost to a firm of utilizing economic resources in production

85

opportunity cost

Cost associated with opportunities forgone when resources are not put to their best alternative use.

opportunity costs = economic costs

86

sunk cost

Expenditure that has been made and cannot be recovered

87

total cost

Total economic cost of production, = fixed costs + variable costs




88

fixed cost

Cost that does not vary with the level of output and that can be eliminated only by shutting down.

89

variable cost

Cost that varies as output varies

90

average total cost (ATC)

Firm’s total cost divided by its level of output.

91

average fixed cost(AFC) and average variable cost
(AVC)

Fixed cost divided by the level of output and Variable cost divided by the level of output.

92

user cost of capital/price of capital

Annual cost of owning and using a capital asset, equal to economic depreciation plus forgone interest.

User Cost of Capital = Economic Depreciation + (InterestRate)(Value of Capital)

93

rental rate of capital

Cost per year of renting one unit of capital.

94

isocost line

Graph showing all possible combinations of labor and capital that can be purchased for a given total cost.

95

expansion path

Curve passing through points of tangency between a
firm’s isocost lines and its isoquants.

96

economies of scale

Situation in which output can be doubled for less than
a doubling of cost.

97

iseconomies of scale

Situation in which a doubling of output requires more
than a doubling of cost.

98

cost-output elasticity(EC)

the percentage change in the cost of production resulting from a 1-percent increase in output.

-(6 pg 42)

99

product transformation curve

Curve showing the various combinations of two different outputs (products) that can be produced with a given set of inputs.

100

economies of scope

Situation in which joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single product.

101

diseconomies of scope

Situation in which joint output of a single firm is less than could be achieved by separate firms when each produces a single product.

102

degree of economies of scope (SC)

Percentage of cost savings resulting when two or more products are produced jointly rather than Individually.

SC = C(q1) + C(q2) - C(q1, q2) / C(q1, q2)

103

What are the 3 assumptions of Perfectly Competitive Markets?

1. Price Taker: firm that has no influence over market price and thus takes the price as given.

2. Product Homogeneity: Products of all of the firms in a market are perfectly substitutable with one another. Thus, no firm can raise the price of its product above the price of other firms without losing most or all of its business.

3. Free entry (or Exit): condition under which there are no special costs that make it difficult for a firm to enter (or exit) an industry.

104

profit

Difference between total revenue and total cost.

ii(q) = R(q) - C(q)

105

A perfectly competitive firm should choose its
output so that?

marginal cost equals price.

MC(q*) = MR = P

-see 7 pg 14, where MC crosses AR/MR/P is the spot

106

producer surplus

Sum over all units produced by a firm of differences
between the market price of a good and the marginal
cost of production.

107

long-run profit maximization

The long-run output of a profit-maximizing competitive
firm is the point at which long-run marginal cost equals the price.

108

zero economic profit

A firm is earning a normal return on its investment—i.e., it is doing as well as it could by investing its money elsewhere.

109

In a market with Entry and Exit, a firm enters when...

...when it can earn a positive long-run profit and exits when it faces the prospect of a long-run loss.

110

long-run competitive equilibrium

All firms in an industry are maximizing profit, no firm has an incentive to enter or exit, and price is such that quantity supplied equals quantity demanded.

111

economic rent

Amount that firms are willing to pay for an input less the minimum amount necessary to obtain it.

-In competitive markets, in both the short and the long run, economic rent is often positive even though profit is zero.

112

Producer Surplus in the Long Run

In the long run, in a competitive market, the producer surplus that a firm earns on the output that it sells consists of the economic rent that it enjoys from all
its scarce inputs.

113

welfare effects

Gains and losses to consumers and producers.

114

deadweight loss

Net loss of total (consumer + producer) surplus.

115

price support

Price set by government above free-market level and maintained by governmental purchases of excess supply.

116

Limits on the quantity of a good that can be imported.

Import Quota

117

Tax on an imported good.

Tariff

118

economic efficiency

Maximization of aggregate consumer and producer surplus.

119

market failure

Situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers.

120

Two important instances in which market failure can occur:

1. Externalities: action taken by either a producer or a consumer which affects other producers or consumers but is not accounted for by the market price.

2. Lack of Information