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Micro Econ > Exam 2 > Flashcards

Exam 2 Flashcards

1
Q

What are price controls?

A

Government mandated minimum or maximum prices

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2
Q

What is a price ceiling?

A

A legal maximum price

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3
Q

What are the dangers of a price ceiling?

A

If put too low (binding price ceiling) it could lead to a shortage, with consumers wanting more than sellers can supply at price

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4
Q

Give an example of price ceiling?

A

Rent control

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5
Q

What is a price floor?

A

A legal minimum price

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6
Q

What are the dangers of a price floor?

A

If too high (binding price floor) it could lead to a surplus, with suppliers supplying more than consumers want.

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7
Q

What is an example of price floors?

A

Minimum wage

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8
Q

What are two price supports used to protect farmers?

A

Offer to purchase policy
Marketing board policy

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9
Q

Explain the offer to purchase policy?

A

Government imposes a price floor and then purchases surplus output from farmers

-consumers pay more, taxpayers pay for excess surplus

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10
Q

Explain the marketing board policy?

A

A policy which allows producers to choose total quantity supplied by using quotas

-consumers pay more
-new producers must pay to purchase the quotas
-harder for foreign producers to export

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11
Q

What is tax imposition?

A

A tax imposed on a particular commodity or service

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12
Q

What is tax incidence?

A

Division of the burden of a tax between the buyer and seller

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13
Q

What is the effect of price elasticity on tax incidence?

A

The steeper, the less elastic supply or demand is. The more inelastic, the more the tax incidence falls on that side.

Ex: tax burden on smokers is higher because of dependence

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14
Q

What is consumer surplus?

A

The difference between the market price and the individuals valuation

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15
Q

What is producers surplus?

A

The difference between the market price and the sellers reservation price

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16
Q

How to calculate producer/consumer surplus?

A

Look at the area of the triangle below d curve for CS and above s curve for PS

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17
Q

What is total surplus?

A

CS + PS

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18
Q

Why does a competitive market generate the maximum possible “total surplus”?

A

Because it is an efficient allocation of resources that results in the highest CS and PS and leaves no scope for financial improvement for participants. Demand = supply

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19
Q

What is deadweight loss?

A

Measure of the inefficiency that results from a market distortion such as tax. Raises the cost of production, results in leftward shift. Measured by triangle between original supply and demand curve and new equilibrium.

20
Q

How does elasticity affect dead weight losses?

A

The more elastic the demand or supply curve is; the bigger the deadweight loss from a tax is.

21
Q

Give an example of elasticity and dead weight loss

A

Tax on smokers (chat gpt)

22
Q

What is the connection between tax size and tax revenue

A

Demand:
-Inelastic: increase in tax = increase in tax revenue

-Elastic: increase in tax = decrease in tax revenue

Supply:
-Inelastic: increase in tax = decrease in tax revenue

-Elastic: increase in tax = increase in tax revenue

23
Q

What is the law of diminishing returns?

A

-an economic concept that states that as more and more units of a variable input are added to a fixed input, the marginal product of the variable input will eventually decrease, so long as everything else (equipment, capital) stays the same

24
Q

How does diminishing marginal product cause increasing marginal cost?

A

Because if the firm can’t produce as much it will need to buy more equipment, thus increasing marginal cost

25
Q

What is the difference between ATC and MC?

A

Average total cost tells us the cost of a typical unit of output if total cost is divided evenly over all the units produced. Marginal cost tells us the increase in total cost that arises from producing an additional unit of output.

26
Q

What shape is ATC?

A

U-shaped average total cost (decreasing average fixed cost, increasing average variable cost)

27
Q

What is the relationship between MC and ATC?

A

When marginal cost is below average total cost, average total cost is decreasing. When marginal cost is above average total cost, it is increasing.

28
Q

What is efficient scale?

A

the quantity of output that minimizes average total cost

29
Q

What is the long run? What is the short run?

A

-the “long run” refers to a period of time in which all inputs in the production process are variable
-In the short run, firms can adjust their production level only by varying the usage of their variable inputs, such as labor and raw materials.

30
Q

What are economies of scale and how do they arise?

A

Economies of scale refer to the cost advantages that a firm experiences as it increases its scale of production. In other words, as a firm produces more, its average cost of production decreases, leading to lower per-unit costs.
-arises due to marketing, specialization, technological advances

31
Q

What are constant returns to scale? How can you find them?

A

Constant returns to scale refer to a situation where a firm’s output increases proportionally to its increase in inputs, resulting in no change in average cost. In other words, if a firm doubles its inputs, its output also doubles, and its average cost per unit remains the same.
-To find if a firm is experiencing constant returns to scale, we can examine the relationship between the average cost (AC) and the total cost (TC) of production. If the AC remains constant as the firm increases its output, it is experiencing constant returns to scale.

32
Q

What are diseconomies of scale?

A

diseconomies of scale are when the average cost of production starts to increase as a firm produces more.

33
Q

What is a competitive market?

A

a market where an identical product is being bought and sold by many buyers and sellers.

34
Q

What are assumptions of a competitive market?

A

1-there are many buyers and sellers
2-products sold by firms in a perfectly competitive market are identical or very similar
3-Firms can enter and exit the market freely without any significant barriers to entry
4-All buyers and sellers in the market have perfect information about the prices and quality of goods being sold

35
Q

How will the demand curve look like in a competitive market’s firm?

A

It will be horizontal (perfectly elastic)

36
Q

How do calculate the average revenue and marginal revenue of a firm?

A

-Average revenue: total revenue divided by the quantity sold.

-Marginal revenue: the change in total revenue from an additional unit sold

37
Q

How does a competitive firm know how much to produce based on comparing MC and MR ?

A

when MC = MR

38
Q

What functions as the competitive firm’s supply curve?

A

Notice that the MC curve shows how much a competitive firm would sell at any given price. Therefore, the MC curve (as long as it is > AVC) is a competitive firm’s supply curve.

39
Q

How does a firm know whether to shut down or operate in the short run?

A

If the firm’s total revenue is greater than its variable costs, it should continue to operate in the short run, even if it is making losses. This is because by continuing to produce, the firm is at least covering its variable costs and is contributing something to its fixed costs, which it will have to pay regardless of whether it operates or shuts down.

On the other hand, if the firm’s total revenue is less than its variable costs, it should shut down in the short run to minimize its losses.

40
Q

Where is the break even point and shut down point on a graph?

A

Break even : MC = ATC
Shut down: MC = AVC

41
Q

How can you measure a competitive firm’s profit/loss in a graph

A

If the price (P) is greater than the average total cost (ATC) at the quantity of output (Q) produced by the firm, then the firm is making a profit

The profit per unit is equal to the difference between the price (P) and the average total cost (ATC) at that level of output

42
Q

What are three of a firm’s long-run decisions

A

-can change all inputs, so costs are variable
-firms can add or reduce capital and any other input that was fixed in the short-run.
-provides enough time for entrepreneurs to get out of any leases/rental contracts or other obligations. Thus they are free to close a business.

43
Q

What are the long-run’s decision to exit a market?

A

The firm exits the market if the revenue it would get from producing is less than its total costs.

TR < TC

44
Q

Why in the Long-Run, does each competitive firm makes Zero Economic Profit?

A

If the existing firms are making positive economic profits, new firms will keep on entering the business. This would cause the market supply to keep increasing …. Until all the positive economic profits are eliminated

45
Q

Why do competitive firms stay in business if they make Zero Economic Profits?

A

If economic Profit is zero, accounting profit is positive.

Since total cost includes all the opportunity costs of the firm, the accounting profit is positive even though the long-run economic profit is zero. As the accounting profit (i.e. benefit) equals cost (opportunity costs), firms may stay in business.

From the empirical perspective: in the real world, perfect competition does not exist, all the markets around us are imperfectly competitive meaning that many firms are earning positive economic profits even in the long run.

46
Q

Where is the supply curve located in a small run curve?

A

MC over AVC

47
Q

What is the short run equilibrium price?

A

WHEN MC = MR the last one

Micro Econ (2 decks)

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