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Economics > EXAM > Flashcards

EXAM Flashcards

1
Q

opportunity cost

A

highest valued alternative that must be given up to get it

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2
Q

margin

A

where decisions are made

compare benefit with cost

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3
Q

marginal cost

A

opportunity cost of an increase in an activity

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4
Q

shift in demand curve (demand increase)

A

right shift

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5
Q

shift in demand curve (demand decrease)

A

left shift

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6
Q

unit elastic

A

1

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7
Q

inelastic

A

-1

necessity goods

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8
Q

elastic

A

+1

luxury goods

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9
Q

price ceiling

A

above equilibrium no change

bellow equilibrium- deadweight loss

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10
Q

economic depreciation

A

fall in value of firms capital

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11
Q

foregone interest

A

opportunity cost of production

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12
Q

tech efficiency occurs when

A

firms produce a given output at least cost

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13
Q

proprietorship

A

single owner with unlimited liability

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14
Q

measure of concentration

A

% total in the industry
0- prefect comp
100- monopoly

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15
Q

economies of scale

A

when producing a unit of a good falls as its output rate increases
Economies of scale are features of a firm’s technology that lead to falling long-run average cost as output increases

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16
Q

short run time frame

A

a time frame in which quantity of at least one factor of production is fixed
capital, land and entrepreneurship
labour- vital factor of production
short run decisions are easily reversed

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17
Q

long run time frame

A

-time frame in which the quantities of all factors of production can be varied
-long run period in which the firm can change its plant (any tools used, not labour)
not easily reversed decision
-past expenditure on a plant has no resale value (sunk cost), irrelevant to firm’s current decision
–only costs that influence change

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18
Q

to increase output i short run firms must increase the quantity of labour employed

A

relationship between output + quantity of labour

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19
Q

total product =

A

maximun output that a given quantity can produce

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20
Q

marginal product of labour=

A

the increase in total product resulting from a one unit increase in the quantity of labour employed with all other inputs remaining the same.

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21
Q

average product

A

tells us how productive workers are on average

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22
Q

firms total cost (TC)

A

is the cost go ALL the factors of production it uses

we separate total cost into total fixed cost and total variable cost

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23
Q

total fixed cost (TFC)

A

cost of the firms fixed factors

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24
Q

total variable cost (TVC)

A

cost of firms variable inputs

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25
Q

average fixed cost (AFC)

A

total fixed cost per unit of output

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26
Q

average variable cost (AVC)

A

total variable cost per unit of output

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27
Q

average total cost (ATC)

A

total cost per unit of output

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28
Q

Diseconomies of scale

A

are features of a firm’s technology that lead to rising long-run average cost as output increases.
A firm experiences economies of scale up to some output level.
Beyond that output level, in this example it moves into diseconomies of scale.

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29
Q

Minimum efficient scale

A

is the smallest quantity of output at which the long-run average cost reaches its lowest level.

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30
Q

Classifying markets by degree of competition:

A

number of firms
freedom of entry to industry
nature of product (differentiation?)
nature of demand curve (elasticity; pricing power)

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31
Q

Perfect competition is a market in which:

A
  • Many firms sell identical products to many buyers
  • There are no restrictions to entry into the market
  • Established firms have no advantages over new ones
  • Sellers and buyers are well informed about prices
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32
Q

Long-Run Equilibrium

A

occurs in a competitive market when economic profit and economic loss have been eliminated and entry and exit have stopped.

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33
Q

monopoly

A 
A monopoly is a market with a single firm that produces a good or service for which no close substitute exists 
How Monopoly Arises:
Monopoly arises for two key reasons:
No close substitute
Barrier to entry

There are three types of barriers to entry:
Natural monopoly
ownership of crucial input
legal constraints

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34
Q

For a single-price monopoly:

A
  • Marginal revenue is less than price at each level of output
  • Will never produce an output in the in-elastic range of its demand curve
  • Will produce an output level at which Marginal Revenue (MR) = Marginal Cost (MC)
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35
Q

single price monopoly

If price elasticity of demand >1

A

→ As price falls TR rises (MR is positive)

36
Q

single price monopoly

If price elasticity of demand <1

A

→ As price falls TR also falls (MR is negative)

37
Q

single price monopoly

If price elasticity of demand =1

A

→ Total revenue is a maximum (MR = 0)

38
Q

rent seeking

A
  • Pursuit of wealth by capturing economic rent.
  • Example: Investment by pharmaceutical companies in heavily branding the drug prior to its patent ending to differentiate it from generic drugs and retain monopoly power.
  • Rent seekers pursue their goals in two main ways:
  • Buy a monopoly transfers rent to creator of monopoly (example: trading of taxi licenses).
  • Create a monopoly uses resources in political activity (example: donations by alcohol and tobacco companies to prevent legislations)
39
Q

Price discrimination

A

is the practice of selling different units of a good or service for different prices

To be able to price discriminate, a monopoly must:

Identify and separate different buyer types
Sell a product that cannot be resold

40
Q

Monopoly Policy Issues

A
  • A single-price monopoly creates inefficiency due to under production
  • A price discriminating monopoly captures consumer surplus and converts it into producer surplus and economic profit
  • Monopoly encourages rent-seeking, which wastes resources
  • But monopoly brings benefits

Gains from Monopoly : Incentives to innovation

41
Q

Monopolistic competition is a market with the following characteristics:

A 
Large number of firms
Small Market Share
Limited market power
Ignore other firms
Collusion impossible
no barriers to entry and exit 
compete on marketting, quality and price
42
Q

Large Number of Firms:

MONOPOLISTIC COMPETITION

A

The presence of a large number of firms in the market implies:

(1) Each firm has only a small market share and therefore has limited market power to influence the price of its product. (2) Each firm is sensitive to the average market price, but no firm pays attention to the actions of the other firms and no one firm’s actions directly affect the actions of other firms.
(3) Collusion, or conspiring to fix prices, is impossible.

43
Q

Two key differences between monopolistic competition and perfect competition are:

A

Excess capacity
Markup
A firm has excess capacity if it produces less than the quantity at which ATC is a minimum.
A firm’s markup is the amount by which its price exceeds its marginal cost.

44
Q

Is Monopolistic Competition Efficient

A

Because in monopolistic competition P > MC, marginal social benefit exceeds marginal social cost.
So monopolistic competition seems to be inefficient.
But the markup of price above marginal cost arises from product differentiation.
People value variety but variety is costly.
Monopolistic competition brings the profitable and possibly efficient amount of variety to market.

45
Q

Innovation and Product Development

issues

A
  1. Innovation is costly, but it increases total revenue. Firms pursue product development until the marginal revenue from innovation equals the marginal cost of innovation.
  2. Efficiency and Product Innovation: Marginal social benefit of an innovation is the increase in the price that people are willing to pay for the innovation. Marginal social cost is the amount that the firm must pay to make the innovation. Profit is maximized when marginal revenue equals marginal cost. In monopolistic competition, price exceeds marginal revenue, so the amount of innovation is probably less than efficient.

With the innovation comes the requirement to inform as well as differentiate themselves from their competitors in the industry. So we would expect heavy advertising by these firms.

46
Q

what is an oligopoly?

A

The distinguishing features of oligopoly are

  • Natural or legal barriers that prevent entry of new firms
  • A small number of firms compete
47
Q

Game theory

A

is a tool for studying strategic behaviour, which is behaviour that takes into account the expected behaviour of others and the mutual recognition of interdependence.

48
Q

The prisoners’ dilemma game illustrates the four features of a game.

A

Rules
Strategies
Payoffs
Outcome

49
Q

Nash equilibrium

A

is a dominant strategy equilibrium, by which we mean the best strategy for each player is independent of what the other player does.
STABLE STATE!!!

50
Q

Excludable:

A

A good is excludable if only the people who pay for it are able to enjoy its benefits.
fish from a Scottish fish farm

51
Q

Non-excludable:

A

A good is non-excludable if everyone benefits from it regardless of whether they pay for it. The services of the London Metropolitan Police, fish in the North Sea, and a concert on television are examples.

52
Q

Rival:

A

A good is rival if one person’s use of it decreases the quantity available for someone else. A Brink’s truck can’t deliver cash to two banks at the same time. A fish can be consumed only once.

53
Q

Non-rival:

A

A good is non-rival if one person’s use of it does not decrease the quantity available for someone else. The services of London Metropolitan Police and a concert on television are non-rival.

54
Q

Private Goods:

A

A private good is both rival and excludable. A can of Cola and a fish on a Scottish fish farm are examples of private goods.

55
Q

Public goods :

A

A public good is both non-rival and non-excludable. A public good can be consumed simultaneously by everyone, and no one can be excluded from enjoying its benefits. National defense is the best example of a public good.

56
Q

Common Resources:

A

A common resource is rival and non-excludable. A unit of a common resource can be used only once, but no one can be prevented from using what is available. North Sea fish are a common resource. They are rival because a fish taken by one person isn’t available for anyone else. They are non-excludable because it is difficult to prevent people from catching them.

57
Q

Natural Monopoly Goods:

A

A natural monopoly good is non-rival and excludable. A special case of natural monopoly arises when the good or service can be produced at zero marginal cost. Such a good is non-rival. If it is also excludable, it is produced by a natural monopoly. The Internet and cable television are examples.

58
Q

Public Choice and Political Marketplace

Four groups of decision makers are:

A

Voters
Firms
Politicians
Bureaucrats

59
Q

Political Marketplace

A

Voters express their demand via votes. Voters and firms express their demand for policies via campaign contributions. Politicians express their supply of policies with proposals which they hope will attract votes.
Bureaucrats try to get the biggest possible budget for their departments (via taxes paid to the government). Bureaucrats use these funds to provide public goods and services.

60
Q

Political Equilibrium

A

In a political equilibrium the choices of voters, firms, politicians and bureaucrats are compatible … and no group can see a way of improving its position by making a different choice.

61
Q

A mixed good

A

is a private good the production or consumption of which creates an externality.

62
Q

An externality is

A

a cost (external cost) or a benefit (external benefit) that arises from the production or consumption of a private good and that falls on someone other than its producer or consumer.

63
Q

Inefficiencies that Require Public Choices:

A

Public choices must be made to:
Provide public good and mixed goods
Conserve common resources
Regulate natural monopoly

64
Q

The Free-rider Problem:

A

A free rider enjoys the benefits of a good or service without paying for it.
Because no one can be excluded from the benefits of a public good, everyone has an incentive to free ride.
Public goods create a free-rider problem – the absence of an incentive for people to pay for what they consume.
The value of a private good is the maximum amount that A person is willing to pay for one more unit of it.
The value of a public good is the maximum amount that ALL the people are willing to pay for one more unit of it. To calculate the value placed on a public good, we use the concept of marginal social benefit.

65
Q

principle of minimum differentiation is

A

the tendency for competitors to make themselves similar so as to appeal to the maximum number of clients (voters).
e.g mcdonalds and burger king

66
Q

Rational ignorance is the

A

decision by a voter not to acquire information about a policy or provision of a public good because the cost of doing so exceeds the expected benefit. For voters who consume but don’t produce a public good, it is rational to be ignorant about the costs and benefit. For voters who produce a public good, it is rational to be well informed. When the rationality of uninformed voters and special interest groups is taken into account, the political equilibrium results in overprovision of a public good.

67
Q

Three devices that the government can use to achieve a more efficient allocation of resources in the presence of external benefits are:

A

Public production
Private subsidies
Vouchers

68
Q

An externality is

A

a cost or benefit that arises from production and falls on someone other than the producer, or a cost or benefit that arises from consumption and falls on someone other than the consumer.

A negative externality imposes an external cost.

69
Q

The Coase theorem

A

is a proposition that if property rights exist, if only a small number of parties are involved, and if transactions costs (defined below) are low, then private transactions are efficient.
There are no externalities because all parties take into account the externalities involved.
The outcome is independent of who has the property rights.

70
Q

The tragedy of the commons is

A

the overuse of a common resource that arises when its users have no incentive to conserve it and use it sustainably

71
Q

The three main methods used to achieve the efficient use of a common resource are:

A

Property rights
Production quotas
Individual transferable quotas (ITQs)

72
Q

GDP or gross domestic product

A

is the market value of all final goods and services produced in a country in a given time period.

73
Q

intermediate good

A

is an item that is produced by one firm, bought by another firm, and used as a component of a final good or service.

74
Q

total expenditure equation (GDP)

A

c+i+g+(X-m)

75
Q

Real GDP is

A

the value of final goods and services produced in a given year when valued at valued at the prices of a reference base year.

76
Q

Nominal GDP

A

is the value of goods and services produced during a given year valued at the prices that prevailed in that same year.

77
Q

A business cycle is

A 
a periodic but irregular up-and-down movement of total production and other measures of economic activity. 
Every cycle has two phases:
1  Expansion
2  Recession
and two turning points:
1  Peak
2  Trough
78
Q

Unemployment results in:

A

Lost incomes and production

Lost human capital

79
Q

The working-age population is divided into two groups:

A

16-64, no hospital/inst care
1 People who are economically active – have a job or are willing and able to take a job
2 People who are economically inactive – do not want a job
The workforce is the sum of employed and unemployed workers.

80
Q

The unemployment rate is the

A

percentage of the workforce that is unemployed.
The unemployment rate is
(Number of people unemployed ÷ Workforce) 100.

81
Q

The Employment Rate

A

The employment rate is the percentage of working-age people who have jobs.
The employment rate equals (Number of people employed ÷ Working-age population) 100.

82
Q

Frictional Unemployment

A

Frictional unemployment is unemployment that arises from normal labour market turnover.

The creation and destruction of jobs requires that unemployed workers search for new jobs.

Increases in the number of people entering and re-entering the workforce and increases in unemployment benefits raise frictional unemployment.

83
Q

Structural Unemployment

A

Structural unemployment is unemployment created by changes in technology and foreign competition that change the skills needed to perform jobs or the locations of jobs.

Structural unemployment lasts longer than frictional unemployment.

84
Q

Cyclical Unemployment

A

Cyclical unemployment is the higher than normal unemployment at a business cycle trough and lower than normal unemployment at a business cycle peak.

A worker laid off because the economy is in a recession and is then rehired when the expansion begins experiences cyclical unemployment.

85
Q

why inflation and deflation are problems

A

Redistributes income
Redistributes wealth
Lowers real GDP and employment
Diverts resources from production

86
Q

Aggregate supply is

A

the relationship between the quantity of real GDP supplied and the price level.

Economics (4 decks)

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