MicroEcon Flashcards
(240 cards)
1
Q
Economics
A
Study of how societies should allocate scarce resource among unlimited wants and competing ends
2
Q
Diff. between positive and normative economics
A
Positive: the way things are (factual statements)
Normative: the way things should be (opinions for the future)
3
Q
Cause of scarcity
A
Unlimited desire for goods and services exceeds the limited ability, resources and time to produce said goods and services
4
Q
Factors of Production
A
- Capital (aka. physical capital): manufactured goods necessary in the production process. eg. equipment, tools, building, etc.
- Labor (aka. human capital): the employees and the workers who use their physical and mental capabilities (with the knowledge and skills earned through training and experience) to contribute to the production process
- Entrepreneurship: the ability to identify opportunities, coordinate the production, and ability to accept risk in order to pursue reward
- Natural Resources/Land: Stuff in nature that can be used in the productive process
5
Q
Opportunity Cost
A
Value of the best alternative that was sacrificed for the current situation
6
Q
PPF Graph (Pg. 54) – Define the A, B and C
A
A = not possible given the limitations in resources B = inefficient use of resources since some resources would go to waste C = Most efficient use of two resources
7
Q
Efficiency
A
The usage of all resources as productively as possible
8
Q
Law of Increasing Opportunity Cost. Why does it occur?
A
As more resources are dedicated toward a specific good A, the opportunity cost increases because materials that were specialized for the trade-off is also used to produce the good A.
9
Q
Given a PPF graph, find the average opportunity cost of the good on the x-axis
A
abs(∆y/∆x)
10
Q
Given a PPF graph, find the average opportunity cost of the good on the y-axis
A
abs(∆x/∆y)
11
Q
Slope of PPF
A
abs(∆y/∆x)
12
Q
When is the PPF a line as opposed to a curve?
A
When the resources used for two goods is not specialized at all and is interchangeable (this is an exception to the law of increasing opportunity cost because the slope does not increase as more resources are given to a specific good.
13
Q
Diff. between consumer and capital goods
A
Consumer goods are used directly by the consumer and bought in a retail or consumer market whereas capital goods are used to produce other goods
14
Q
Relationship between capital goods and future growth and consumer goods and future growth
A
As more is invested in capital goods, there would be more future growth.
As more is invested in consumer goods, there would be less future growth.
If all resources are used for consumer goods, there would be negative future growth because nothing is invested in the goods that are required to produce more goods in the future (capital goods)
15
Q
Capital v. Consumer Graph (Pg. 56) – What does point A, B and C represent
A
Point A leads to considerable future growth
Point B leads to limited future growth
Point C would lead to no future growth
16
Q
Economic trade-off
A
Anything of value that is sacrificed for the current investment or situation
17
Q
Specialization and its purpose
A
Specialization is when each player in an economy specializes at a good or service due to division of labor.
It enables each person to focus all of their resources on one task they can be better at, increasing overall productivity.
18
Q
2 categories of economic advantages. Which advantage is relevant when specializing?
A
Absolute: a player can produce a unit of good at fewer resources than another player. IOW, given the same resources, a player can produce more
Comparative: a player can produce a unit of good at a lower OC than an other player
Players benefit from specialization only due to the existence of comparative advantage
19
Q
Consumption Possibilities Frontier. If specialization is applied, how does ot relate to PPF?
A
Demonstrates the possibilities at which consumers can consume. If beneficial specialization is applied, CPF would exceed PPF
20
Q
Terms of trade. How do you find it.
A
A trade agreement that aims to reap the benefits of specialization. It should be between the OC of both players.
- Draw a table countries as 1st column and the goods as the 1st row
- Calculate the OC of country A while producing 1 unit of good A
- Calculate the OC of country A while producing 1 unit of good B
- Repeat steps 2 and 3 for country B
- The country w/ the lowest OC for each good should produce the respective good
- The terms of trade is the OC between the OCs of both the countries
21
Q
Demand Curve. What is it based on?
A
Graph that displays the relation between the quantity a person demands at a certain price. It reflects marginal utility for each increment of the good.
22
Q
Demand schedule
A
Table that displays the relation between price and the quantity demanded
23
Q
Law of diminishing marginal utility
A
With each incremental unit of a good, the additional utility gained from it would decrease
24
Q
Law of demand. What causes it?
A
As price increase, the quantity demand decreases. Therefore, the quantity demanded is inversely proportional to price of the good. This phenomenon is caused by the law of diminishing marginal utility. Since with each incremental unit the additional utility decreases, the customer is willing to pay less for it.
25
How do you find the market demand curve, given multiple other demand curves.
Add the demands at a certain price. Plot the sum demand at the total market demand graph at the same price.
26
What is the premise of most supply and demand models?
The market is perfectly competitive — many firms sell the same product and there is little barrier for entering or exiting the market
27
Supply curve. Supply schedule
Displays the relation between price and the quantity supplied on a graph (curve) or in a table (schedule)
28
Law of Supply. What causes it?
As price increases, sellers would be willing to supply more (sell more at greater price; sell less at lower price) Price is directly proportional to quantity supplied. It reflects the marginal cost.
29
Law of Increasing Marginal Cost
As the quantity supplied increases, the incremental cost of producing a unit of good increases because with additional input, the OC increases since the resources could’ve been used elsewhere. And due to an increased opportunity cost, more price revenue is needed to produce a good.
30
Market supply curve
How much all the sellers in the market are willing to sell at a given price point. Add the multiple quantities supplied at a certain price point. Plot the sum of the quantities supplied at the price point.
31
Equilibrium point
Aka market clearing price — Point of intersection between the supply and demand curves. It is the price at which the quantity sellers are willing to supply = the quantity the buyers are willing to buy
32
Surplus
Quantity supplied > Quantity demanded
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Shortage
Quantity supplied < Quantity demanded
34
What does the economic theory price say about the quantity supplied and the quantity demanded?
Over time, both would gravitate toward the equilibrium point.
35
Difference between the quantity supplied and supply
Quantity supplied is dependent on the price and displays how much a supplier is willing to supply at a given price.
Whereas supply itself refers to the range of quantity supplies and it displays how much a supplier CAN supply based on market conditions. A positive change in supply means the amount supplied at a given price increases while a negative change in supply means
36
Is supply directly or inversely proportional to input costs?
Inversely; as costs such as wages, rent, other income increases, supply decreases
37
Is supply directly or inversely proportional to improvements in technology?
Directly; since tech results in efficient and more productive ways of supplying, enabling the supplier to supply more quantity at a certain price
38
Is supply directly or inversely proportional to expectations of prices in the future?
Inversely; If the prices are expected to increase in the future, suppliers would decrease the quantity supplied now so that they can supply more for a higher price later; if the prices are expected to decrease in the future, suppliers would increase the quantity supplied at the current higher price
39
Is supply directly or inversely proportional to the number of sellers?
Directly; The higher number of suppliers, the more quantity would be supplied at the same price at a given point since the total market supply is the summation of all quantity supplied at a given price
40
Is supply directly or inversely proportional to the price of a substitute in production?
Substitute in production - a good you can produce that uses the same raw materials as the good you are producing. When two goods are substitutes of each other, you can produce one or the other.
Indirect; since if the price of one substitute goes up, the supplier will supply more of the more pricey good and less of the good that brings in less revenue
41
Is supply directly or inversely proportional to the price of a joint product?
Joint product (complement) - the production of one makes the production of other possible
Directly; if the price of a joint good gets higher, the supplier would supply more of thar good which implies an increase in supply of its joint good
42
Is supply directly or inversely proportional to taxes?
Indirectly ; Since if a supplier has to pay less taxes for a product, they would supply more of it
43
Is supply directly or inversely proportional to subsidies?
Subsidies - an incentive provided by the gov to a create a product
Direct; More incentive to create the product means a supplier could produce more of the product at a given price
44
Is supply directly or inversely proportional to restrictive regulation?
Inversely; If there are less restrictions to making a product, it would be cheaper to make it which would enable a supplier to produce more quantity at a given price
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Acronym for factors that cause a shift in supply
```
R = resource cost
O = other goods cost (joint and substitutes)
T = taxes, regulation and subsidies
T = tech advancements
E = expectations of future price
N = number of suppliers in a market
```
46
3 questions of economics
What goods and services will be produced?
How much of each input would be used to produce each good.
Who will receive the final product?
47
Allocative efficiency. How do you achieve it?
Allocative efficiency (efficient in output) that the output reflects the needs and wants of the consumers
Since the output can be measured in the marginal cost and the needs and wants can be measured in marginal benefit (the additional amount of dollars the consumer is willing to pay for the additional good), in allocative efficiency, MC = MB (aka marginal value) = Equilibrium Price
48
Technical Efficiency. How do you achieve it?
Technical efficiency (efficiency production) is achieved when the cost minimization product condition is applied (in which input a is capital where cost is rent and input b is labor where cost is the wage)
(Marginal Physical Product of Input A)/(Marginal Physical Product of Input B) = (Cost of Input A)/(Cost of Input B).
Or
(Marginal Physical Product of Input A)/(Cost of Input A) = (Marginal Physical Product of Input B)/(Cost of Input B)
In both these cases, more bang per buck is preferred since if the ratio on the A-side is higher, more should be invested on the input A, and if more is invested in input A, due to the law of diminishing marginal productivity, the ratio on the input A would decrease. So on and so forth, until both sides produce the optimal and maximum bang/buck.
49
Distributive Efficiency. How do you achieve it?
Distributive efficiency (efficiency in exchange) holds that the consumer who places the highest value on a good receives that good. It is achieved when:
(Marginal Utility of Good A)/(Price of Good A) = (Marginal Utility of Good B)/(Price of Good B)
Or
(Price of Good A)/(Price of Good B) = (Marginal Utility of Good A)/(Marginal Utility of Good B) -- a way to interpret this is that in a perfect world, a consumer is willing to pay $x for good A for every dollar spent on good B because he is getting x amount of Marginal Utility from good A for every additional unit of Marginal Utility from good B
50
Marginal Rate of Substitution. How does it relate to distributive efficiency?
(Marginal Utility of Good A)/(Marginal Utility of Good B) or how much marginal utility is a person getting from good A for each additional marginal utility from good B
Distributive efficiency is achieved when the marginal rate of substitution is equal for everyone
51
Marginal Product. How do you calculate it?
Marginal (physical) product is the additional output per period when an additional unit of input is added, holding all other inputs constant. It can be found through the equation
MP (sub input) = ∆TP/∆Input (change in total product for every unit changed in the input)
(Product=physical output, not dollars)
52
Relation between Marginal Product and Total Product Curve
The directions of TPC and MP are the same because marginal product is the slope of the total product curve
When the MP is increasing, the slope of the TP is increasing. When MP is decreasing, the slope of the TP is decreasing. When MP is 0, the slope of the TP is 0
53
Law of diminishing marginal returns
As input increases, the marginal return -- the output produced for each additional unit of input (slope of the total product curve -- eventually decreases, cetris parabus
54
Average Product. How do you calculate it
AP = Total Product/Total Input (how much does each unit of input produce on avg.)
55
How does the AP relate to the MP on the Output per Worker and Output Additional Worker vs. the Quantity of Labor Hours graph?
When the MP > AP, the AP increases
| When the MP
56
Relation between the AP and the TPC
The AP = the TPC (Total Product/Input)
57
Fixed vs. Variable Costs
Total Fixed costs -- costs that do not change with the amount of output like rent
Total Variable costs -- costs that change with the amount of output like the cost of equipment, workers, ingredients, etc.
58
How do you find the total costs?
Total Fixed Costs + Total Variable Costs = Total Costs
59
What is the general shape of fixed costs on a cost v. quantity graph?
It is a line since the fixed cost says the same regardless of the quantity of the outputs
60
What is the general shape of total variable costs on a cost v. quantity graph?
Increasing since more output requires more workers, capital, etc.
61
What is the general shape of total costs on a cost v. quantity graph?
Increasing; since more output requires more inputs like workers, capital, etc.
62
What is the general shape of marginal costs on a cost v. quantity graph?
U-shaped; although at the first few quantities, specialization and productivity increases (decreasing the costs for each additional output and thereby, increasing the amount of output per input -- marginal returns), in the latter quantities, the marginal costs increases due to the law of increasing marginal costs and the law of decreasing marginal returns
63
What is the general shape of average variable costs on a cost v. quantity graph? How do you identify the lowest point on the curve?
U-shaped; although at the first few quantities, specialization and productivity increases (decreasing the costs for each additional output), in the latter quantities, the variable costs increases since the cost per worker increases. The lowest point is when the average variable costs intersects the marginal costs.
64
What is the general shape of average variable costs on a cost v. quantity graph? How do you identify the lowest point on the curve?
U-shaped; although at the first few quantities, specialization and productivity increases (decreasing the costs for each additional output; thereby, resulting in more outputs per unit inputs -- marginal returns), in the latter quantities, the variable costs increase since the cost per worker increases due to law of increasing marginal costs and decreasing marginal returns. The lowest point is when the average variable costs intersect the marginal costs.
65
What is the general shape of average total costs on a cost v. quantity graph?
U-shaped; although at the first few quantities, specialization and productivity increases (decreasing the costs for each additional output; thereby, increasing the amount of output per unit input -- marginal returns), in the latter quantities, the total costs increases since the cost per input increases due to the law of increasing marginal cost and decreasing marginal return. The lowest point is when the average total costs intersects the marginal costs.
66
Find Total Costs given ATC and quantity
Since ATC=TC/Q
| TC=ATC*Q or the area of the ATC v. Q graph
67
Marginal Cost. What is its relation to the Total Cost Curve and the Total Variable Cost Curve
It is the additional cost of producing one additional increment of output.
MC=TCC=∆TC/∆Q (change in cost per incremental unit)
Since the ratio of the TC to Q is the same as TVC to Q, MC = ∆TVC/∆Q
68
Marginal Cost. What is its relation to the Total Cost Curve and the Total Variable Cost Curve
It is the additional cost of producing one additional increment of output.
MC=TCC=∆TC/∆Q (change in cost per incremental unit)
Since the ratio of the TC to Q is the same as TVC to Q, MC = ∆TVC/∆Q
69
Long-Run v. Short-Run
In Short-Run, 1) at least one factor of production or input is fixed (In a simple capital-labor model, the fixed one is the capital while the labor can change) and 2) the firms cannot enter or leave an industry
In Long-Run, 1) none of the inputs are fixed (everything is variable) and 2) a firm can leave a market
70
Long-Run Average Cost v. Short-Run Average Cost
The total, average and marginal costs are higher in the short run since the fixed input (often, capital) in the short-run is most likely more or less than the cost-minimization amount. Whereas in the long-run the previously fixed-input during the short-run is variable and can therefore be adjusted to the cost-minimization amount.
71
Relation between economies of scale and LRAC. Why does this phenomenon occur?
Economies of scale: the ability of a firm to mass-produce at a lower cost in the long-run
Therefore, the long-run average cost curve slopes negatively in economies of scale (which means the cost per unit decreases over time.
This occurs due to 3 reasons:
1. Increasing returns to scale (specialization, sourcing etc.)
2. Improvement in technology that becomes economically efficient when mass-producing outputs
3. Costs of one-time inputs (think copyrights etc.) are spread out over a larger amount of outputs.
72
Relation between diseconomies of scale and LRAC
the LRAC is increasing as output increases
2 possible reasons this occurs include:
1. Coordination issues: more people = more coordinating
2. More expensive inputs and other resources
3. Decreasing returns to scale
73
Increasing Return to Scale. What kind of firm in relation to cost does it result in.
Output increases more than the increase in inputs in the long-run which contributes economies of scale
Leads to decreasing cost firm
74
Decreasing Return to Scale. What kind of firm in relation to cost does it result in?
Output increases proportionally less than the increase in inputs which leads to higher costs and thereby, diseconomies to scale.
Leads to increasing cost firm.
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Constant Return to Scale
Output increases exactly proportionally to the increase in the amount of inputs
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Diminishing Marginal Returns
The output increased due to an additional unit of input (only one input is increased while the others stay constant) -- marginal returns -- is less than the output increase when the previous unit of input was added -- marginal return for the previous input. This is a short-run phenomenon.
77
Increasing Cost Industry. How does it relate to the long-run supply curve?
An industry that experiences an increase in the avg. production cost in relation to output increase due to increase in the price of inputs caused by an increase in demand.
Increasing long-run supply curve
Timeline: demand for an input increases because producers want to mass-produce an output -> price increases -> cost increases -> increasing cost industry
78
Constant Cost Industry. How does it relate to the long-run supply curve?
An industry that does not experience an increased avg. production cost with an increase in output. This is because the industry only uses a small fraction of the raw material that it does not impact the demand or the price of the material.
Horizontal long-run supply curve
79
Decreasing cost industry. How does it relate to the long-run supply curve?
An industry that experiences decreasing average production cost with an increase in output. This is because as the demand for input increases (due to a need to make more outputs), the mass production of inputs occur, leading to lower prices.
Decreasing/negative long-run supply curve
80
Productive Efficiency. When does it occur
The firm is producing at the lowest unit cost where MC=AC
81
Economies of Scope. Why do they occur?
When the production of a good reduces the average production cost of another. Think of this as multiple products sharing the same cost. This occurs when:
1. two goods are complementary
2. multiple goods share research and development costs and distribution networks
82
Perfect/Pure Competition. How does it relate to productive and allocative efficiency?
A theoretical market structure where supply and demand determines the price and the quantity of goods sold. It is the benchmark for productive and allocative efficiency
83
What are the characteristics of perfect competition?
- many sellers with each seller only having a small market share (contrary to a monopoly where the entry or exit of a firm has a huge impact)
- little to no barriers to entry or exit for both sellers and buyers
- identical products (so that every seller sells at the same rate and at the same production capacity as every other)
- firms = price takers (who have to accept the price set by the market and can sell as much as they want at that specific price)
- buyers have complete and perfect information about the product (if a seller was to rise the price, the buyers could easily buy from another seller)
84
Economic Profits. Term for when economic profits = 0. What does it mean?
Total Revenue - Total Cost (both implicit like OC and explicit like rent)
Normal Profits/Breaking Even mean economic profits = 0. It means that the return = the cost
85
Accounting Profits
Total Revenue - Explicit Costs
86
Long-run economic profits in a perfect competition
0 since if there is a profit in the market (ATC< MR), more sellers enter the market increasing the supply and lowering the price. If there is a loss in the market (ATC>MR), sellers would leave the market, increasing the price.
87
Relation between demand for a good and the demand of an input (factor of production)
Directly proportional; Demand goes up -> More people are willing to pay a higher price -> more sellers plan on selling the good -> increased demand in the factor market due to the increased number of sellers
88
Total Revenue. How do you calculate it?
amount of money earned from the sale of a good
| total revenue = quantity of output * price/output
89
Marginal Revenue. How do you calculate it?
amount of money earned from the sale of one more unit of a good.
Marginal Revenue = ∆TR/∆Q
90
Average Revenue
Average Revenue = TR/Q
91
Relation of price, marginal revenue, and average revenue in a perfect competition
```
Since price (P) is set by the market and the sellers can sell as much as they want at the specific price:
P = MR = AR
```
92
Identify the following in graph A on Pg. 85
1) Break-even points
2) Profits
3) Losses
1) where TR = TC
2) where TR > TC
a) Maximum Profit is when the TR-TC is at the highest or where the slope of TR = slope of TC (MR=MC)
3) where TC > TR
a) Maximum Loss is when the TR-TC is at the lowest or when the TC-TR is the highest
93
Find the profit-maximization point through a Profit v. Quantity based on graph A (pg. 85)
y-axis = profit
x-axis = quantity
1) Subtract the total cost from the total revenue at different quantities
2) Plot the dollar amount on the specific quantities
3) The quantity at which the profit is highest is the profit maximization point
4) The quantity at which the profit is lowest is the loss-maximization point
94
Use Fig. 8 (Pg. 86) to find the following
1) Average Profit at Q*
2) Total Profit at Q*
1) Price (which is equal to MR and AR) - AC*
2) Since Avg. Profit = Total Profit/Q
Total Profit = Avg. Profit * Q
Total Profit = (Avg. Revenue (Price) - Average Cost (at Q*)) * Q
95
Shutdown Decision
A firm's decision to temporarily halt sales. Occurs when the Price does not cover the avg. variable cost
96
What impact does the following have on the firm? (Fig. 9 Pg. 87)
1) P>ATC
2) AVC
1) When price greater than the Average Total Cost, most quantity is sold; ideal state
2) When the price less than the Average Total Cost, a lesser quantity is sold because the marginal cost intersects the marginal revenue at a lower quantity; therefore, losses are incurred
3) The firm temporarily leaves the market (shutdowns) because the revenue cannot even cover the variable costs let alone the fixed costs. The firm would only have to pay the fixed costs which is loss minimization.
97
Why do firms choose to not shut down when the AVC
The firm has two options:
1) Shutdown and not have any variable costs but not bring enough revenue to cover the fixed costs
2) Not shutdown but continue production while incurring variable costs. The revenue can be used to cover all of the VC and some of the FC
Since covering some fixed costs is better than covering none, the firm would choose to operate at a loss
98
What are the characteristics of a Monopoly in respect to?
1) # of Firms
2) Barriers to Entry
3) One Firm's Influence on the Market
4) Differences Between Products
5) Long-Run Economic Profits
6) Firms are price-takers or price-makers?
1) One
2) Prohibitive
3) Complete
4) Each product is completely unique
5) 0 to positive
6) price-makers
99
Monopoly
The only supplier of a completely unique good.
100
Role of barriers in monopoly. What are some examples of such barriers?
Barriers to entry are necessary for a monopoly to continue being a monopoly.
Barriers may include:
- exclusive licenses like patents (that would make a firm's good be completely unique and avoid any hint of homogeneity among other firms)
- control of resources (these enables the monopoly to prevent other firms from having access to the resources)
- economies of scale and other cost advantages that allows a monopoly to make goods cheaper than other firms
- network externalities (the more people uses a good like social media, the better it is)
101
Demand curve in a monopoly. Why does this occur?
Unlike in perfect competition where due to various substitutes the demand curve is horizontal, the demand curve is downward sloping for a monopoly because there are no substitutes.
102
Marginal revenue in a monopoly. Why does this occur?
In a perfect competition marginal revenue is the same as the price (since the supplier can sell as much as he wants to in a given price).
In a monopoly, the marginal revenue's slope is 2 times than the demand curve (and lies halfway between the demand curve and the verticle access) because a firm has to lower their prices to sell one more unit.
MR=Pf-(Q*(Pi-Pf)) --- f stands for the increment item while i stands for items before the incremental items. Marginal revenue is the price for the quantity final (Pf) minus the quantity (that would've been sold at a higher price) (Q) times the decrease in revenue that resulted from the addition of an item (Pi-Pf)
103
Elasticity of the demand of a monopolistic firm in the following scenarios:
1) MR = 0
2) MR = +
3) MR = -
1) 1
2) >1
3) <1
104
Where is the monopoly most profitable?
Where MC=MR
105
How do you calculate profit for a monopoly?
(Price - Average Cost)* Quantity
106
Price Discrimination. What are its requirements?
Charging different customers different prices w/out the differences in prices being proportional to the differences in the cost
Requirements:
1. The firm must have market power. This implies that 1) only firms w/ downward-sloping demand curves can price discriminate and 2) perfectly competitive firms are price takers and therefore, can't discriminate
2. Buyers w/ different elasticity must be separable
3. Firms should be able to prevent the resale of goods so that those who are paying a lower price cannot resell it to those who are paying a higher price
107
How is a price discriminate monopoly different from a non-price discriminate monopoly? Why?
In a non-price discriminate monopoly, the slope of the MR=2*slope of the demand curve whereas in a price discriminate monopoly, the slope of the MR = the slope of the demand curve.
This is because every buyer pays the amount s/he will be able to pay (perfect price discrimination -- every buyer pays the max amount possible) so the seller would be able to sell the quantity at any price the seller wants to and there would buyers to it. Therefore, unlike the non-price discriminate monopoly where to sell an additional unit, the firm has to lower the price of the unit itself as well as the price of all the units before that, a price discriminate monopoly would only have to lower the price of the incremental unit itself w/out subtracting the price difference lost if they would've sold at a previous quantity which makes the additional amount gained from a quantity equal to the price.
108
Compare the following characteristics of a price discriminate monopoly and a non-price discriminate (pure) monopoly:
1) Demand & MR
2) Productive & Allocative efficiency
3) Economic Profits
4) Consumer Surplus (difference between the price the consumers are willing to pay and the price they pay)
Pure; Price Descriminate
1) MR decreases at 2* the slope of the Demand curve; MR=Demand curve
2) Inefficient; Efficient
3) Smaller; Larger
4) Yes; None
109
Relation between price and elasticity in a price discriminate monopoly
Inverse; as elasticity increases, the price decreases
110
What are the characteristics of a Monopolistic Competiton in respect to?
1) # of Firms
2) Barriers to Entry
3) One Firm's Influence on the Market
4) Differences Between Products
5) Long-Run Economic Profits
6) Firms are price-takers or price-makers?
1) Many (less than perfect competition, more than oligopoly)
2) low (more than perfect competition, less than oligopoly)
3) Some (more than perfect competition, less than oligopoly)
4) Differentiated
5) 0
6) price-makers
111
Monopolistic Competition
Like a competition, they have long-run 0 economic profits but like a monopoly, they have differentiated products and are, therefore, price makers with their MR≠D
112
Difference between the Price v. Quantity graphs of Short-Run v. Long-Run Monopolistic Competition
In the short-run, there are profits to be made and when the MC=MR, the ATC < the Price
In the long-run, other firms would see that the monopolistic competition has a profit and they would enter the market. This would cause the demand of the particular firm to decrease (due to the existence of substitutes) to the point where the ATC=P when the MR=MC, making the economic profit 0.
Note: In both cases, the MR is lower than the demand curve
113
What are the characteristics of an Oligopoly in respect to?
1) # of Firms
2) Barriers to Entry
3) One Firm's Influence on the Market (Market Power)
4) Differences Between Products
5) Long-Run Economic Profits
6) Firms are price-takers or price-makers?
1) Few
2) high (Less than monopoly but more than Monopolistic or Perfect Competition)
3) Substantial (Less than monopoly but more than Monopolistic or Perfect Competition)
4) Same or different
5) Positive or 0
6) Price-makers
114
Oligopoly
An industry w/ a small number of firms selling standardized or differentiated products
115
What unique factor does oligopoly have to consider while making marketing decisions?
Reactions of the other few firms in the oligopoly
116
What are the steps a non-price discriminatory firm (of all market structures) follow to maximize profit?
1. Find where MR = MC
2. Draw a line straight down to the quantity axis to find the optimal quantity to produce, q*
3. Draw a line straight up from the quantity to the demand curve to determine the highest price p* that can be charged for q*
4. If p* is below AVC, shutdown; if not, produce at q* and sell at p*
5. Profit = p*-ATC and Total profit = (p*-ATC) x q*
117
Strategic Decision Making
A firm makes a choice but the consequences of that decision is based on factors unknown to the decision maker
118
Game theory
Study of the strategic decisions of economic players in anticipation of their rivals' actions
119
Payoff Material
4x4 Matrix that visualizes all possible options for oligopolies (pg. 94 to 97)
120
Dominant Strategy
Strategy (going high or low) which would maximize profits and minimize lows regardless of the other firm's decisions
121
Dominant Strategy Equilibrium
When both firms in an oligopoly follow a dominant strategy. Type of nash equillibrium
122
Nash Equilibrium/Prisoner's dilemma
When both firms in an oligopoly decide an option that would make them happy given the other person's choice. However, they both would've been happier if they both chose an alternative.
123
Difference between demand and quantity demanded
Quantity demanded is dependent on the price and displays how much a buyer is willing to buy at a given price.
Whereas demand itself refers to the range of quantity demanded and it displays how much a buyer CAN buy based on market conditions. A positive change in demand means the amount demanded at a given price increases while a negative change in demand means the quantity demanded at a given price decreases.
tldr: quantity demanded changes based on the price whereas demand changes due to an increase or decrease in consumption where a buyer is willing to pay more or less for the same amount of quantity
124
Is demand directly or inversely proportional to a positive change in taste/preferences?
Directly; if a customer grows to like a product more, they would be willing to pay more for the same quantity
125
Is demand directly or inversely proportional to a price of a substitute good?
Substitute in consumption - a good that provides an identical function as another good and fulfills the same needs/wants
Directly; if the price of a substitute A goes up, more buyers would buy substitute B because it satisfies the same want/need at a cheaper price
126
Is demand directly or inversely proportional to a price of a complement?
Complements in consumption -- goods that provide the most utility when consumed together (eg. milk and cookies)
Inversely; as the price of a complement A goes down, people would buy more of complement A and complement B because it goes well with complement A
127
Is demand directly or inversely proportional to an increase in income (applies to normal goods)?
Normal good -- a good whose consumption increases as the buyers' income increases (eg. better clothes)
Directly; as income increases, people would have more disposable income to buy the normal good
128
Is demand directly or inversely proportional to income (applies to inferior goods)
Inferior good -- a good which is consumed more when income decreases and is consumed less when income increases at which point a buyer buys a normal good(eg. low-quality clothes)
Indirectly; as people earn more, they would buy less of the inferior good and more of the superior normal good
129
Is (market) demand directly or inversely proportional to the number of buyers?
Directly; Since total quantity demanded at a price is determined by adding the quantity demanded of all buyers in a market, more buyers = more quantity demanded is added to create the market demand curv
130
Is demand directly or inversely proportional to expected future income?
Directly; since the buyers are expecting to get more money, they would be more inclined to spend more
131
Is demand directly or inversely proportional to expected future prices?
Indirectly; since if the buyer believes the price is going to go up, s/he is going to try to buy as much as possible at the current (lower) price
132
Is demand directly or inversely proportional to expected surplus/shortage?
Indirectly proportional to the expected amount of good in the future; if the buyer believes s/he can buy more later, s/he would buy less now and if the buyer believes they cannot buy more later, s/he would buy more now to satisfy the needs in the future too (think how expected toilet paper shortage led to increased demand)
133
Is demand directly or inversely proportional to lower taxes/higher subsidies?
Directly; the buyer would buy more if they have to pay fewer taxes on a good and higher subsidies means they would get more incentive for buying a good, so they would buy a good
134
Is demand directly or inversely proportional to regulations that promote use?
Directly; more laws are instituted saying a buyer should buy something, the more buyers/citizens are going to buy the good
135
Acronym for factors that cause a shift in demand
T -- tastes and the preferences of consumers
R -- prices of Related goods (substitutes and compliments)
I -- Income of buyers
B -- the number of Buyers in the market
E -- Expectation for the future prices and income
136
How do you determine the impact of either demand or supply curve shifts on the price and quantity?
1. mark the equilibrium price initial on the graph
2. graph the shift
3. mark the equilibrium price final on the graph
4. if the Q final > Q initial, the quantity increased; if the P final > P initial, price increased and vice versa
137
Impact on price and quantity if demand decreases?
price and quantity decreases
138
Impact on price and quantity if demand increases?
price and quantity increases
139
Impact on price and quantity if supply increases?
price decreases while quantity increases
140
Impact on price and quantity if supply decreases?
price increases while quantity decreases
141
How do you determine the impact of both demand and supply curve shifts on the price and quantity?
1. mark the equilibrium price
2. graph the demand shift
3. note the changes in the quantity final and the price final and how it changed from the quantity initial and the price initial
4. graph the supply shifts from the parent graphs
5. note the changes in the quantity final and the price final and how it changed from the quantity initial and the price initial
6. compare results from step 3 and 5;
Price
a) if the price increased for one and decreased for another, the price is indetermined
b) if the price increased for both, the price increased
c) if the price decreased for both, the price is decreased
Quantity
a) if the quantity increased for one and decreased for another, quantity is indetermined
b) if the quantity increased for both, the quantity increased
c) if the quantity decreased for both, the quantity is decreased
142
How much of a good will a consumer buy-in relation to marginal utility?
If marginal utility is measured in the amount a consumer is willing to pay and the marginal utility provided by each additional item decreases, the consumer would purchases until the marginal utility < the price. In other words, the consumer won't buy one more unit of a good if he has to pay for the good more than the utility he gains from the good.
143
How does the demand curve relate to the marginal utility?
Demand curve is the points when marginal utility is represented as price is the y-axis and the incremental quantities are represented as the quantity demanded on the x-axis
144
Total Utility
Addition of all marginal utilities gained from a certain # of quantities
145
Relation between Marginal Utility and the Total Utility v. Quantity graph
Marginal Utility is the slop of the Total Utility v. Quantity graph
MU=∆TU/∆Q
146
MU when the TU is at the max on the TU v. Q graph
0
147
Consumer Surplus. Given a price v. quantity graph w/ demand and supply curves, calculate it
The utility a consumer gets over what they paid for
Consumer Surplus = area of the triangle created by the demand curve and the price = (1/2)(Equillibrium Quanitity)(The Price when no quantity is demanded - the Equillibrium Price)
148
Producer Surplus. Given a price v. quantity graph w/ demand and surplus curves, calculate it
The price a seller gets over what they were willing to sell it for
Producer Surplus = area of the triangle created by the supply curve and the price = (1/2)(Equillibrium Quanitity)(the Equillibrium Price-The Price when no quantity is supplied)
149
Does the price correspond to the total or marginal utility?
Marginal
150
Elasticity
A measure of how responsive consumers are to changes in a product
151
Price Elasticity of Demand. What does elastic and inelastic goods mean?
A measure of how responsive consumers are to a price change in a product
E = abs(∆Q%/∆P%) In other words, how much does the quantity demanded change for a change in a single percent of price.
When the customers buy significantly more or less with a change in price, the good is elastic and when the customers do not change their buying amount based on changes in price, the good is inelastic
152
Is the price elasticity of demand directly or inversely related to the proportion of a person's income spent on the good?
Directly; because if a consumer already spent a great deal of their income on a good and the price of the good goes up, they would be less willing to use that good whereas if a consumer only spends a small amount on a good, they won't mind paying a little more.
This also indicates that the higher the price range of a good, the more elastic it would be.
153
Is the price elasticity of demand directly or inversely related to the number of substitutes?
Directly; because if consumers have other similar options, they would stop buying a certain good with little change in price, opting for the cheaper good whereas if there is no similar products on the market (think insulin), consumers would have no choice but to buy the higher price good (making the good inelastic)
154
Is the price elasticity of demand directly or inversely related to the importance of a good?
Indirectly; because if a good is very important (think insulin), people would have no choice but to buy it regardless of price whereas if a good is not important (think like a cruise), people would not use/buy it with a little change in price?
155
Is the price elasticity of demand directly or inversely related to the ability to delay the purchase of the good?
Directly; if a consumer has more time to find substitutes or find a way to live life without a good, they would delay the purchase of a good if the price increases; however, if they are under a time constraint and they need the good, they won't bother about the price change
156
Acronym for factors that impact elasticity
P: Proportion of the good's price to income
A: Availability of good substitutes
I: Importance of the good
D: ability to Delay the purchase of the good
157
3 equations for price elasticity
General: E = ∆Q%/∆P% = ((Qf-Qi)/Qi) / ((Pf-Pi)/Pi)
A more precise equation factors in the average change
E = ∆Q%/∆P% = ((Change in Quatnity)/(Average QUantity)) / ((Change in Price)/(Average Price)) = ((Qf-Qi) / ((Qf+Qi)/2) ) / ((Pf-Pi) / ((Pf+Pi)/2))
E=(∆Q/∆P)(Pi/Qi) is also an accurate equation
158
Elastic v. Unit Elastic v. Inelastic in terms of price and quantity
If the % change in Q > % change in P (E>1), the good is elastic
If the % change in Q < % change in P (E<1), the good is inelastic
If the % change in Q = % change in P (E=1), the good is unit elastic
159
Elastic v. Inelastic in terms of luxury and necessity
```
Luxury = goods with ELASTIC demand since people would stop buying a luxury (think a cruise) if its price increases
Necessity = goods with INELASTIC demand since people would not be able to stop buying a necessity (think insult) if its price increases
```
160
Relation between elasticity and the slope of the demand curve
Slope of the demand curve = ∆P/∆Q
Elasticity = (∆Q/Qi) / ((∆P/Pi) = (∆Q/∆P)(Pi/Qi)
Elasticity = inverse of slope demand curve * price/quantity
161
Do the following demand curves mean perfectly elastic or inelastic (Pgs. 119 & 120)
1) Completely Horizontal
2) Completely Vertical
3) Straight-line demand curve
1) Perfectly elastic since any change in price would cause the quantity demanded to be 0 (often the case with goods with many substitutes like fruits and vegetables)
2) Perfectly inelastic since no change in quantity regardless of the change in price (often the case for a life-saving necessity like insulin)
3) Varies; Infinity (elastic) at the beginning and 0 at the end where the midpoint has an elasticity of 1
162
The impact on total revenue in the following cases:
1) Good is elastic and price increases (quantity decreases)
2) Good is elastic and price decreases (quantity increases)
3) Good is inelastic and price increases (quantity decreases)
4) Good is inelastic and price decreases (quantity increases)
5) Good is unit elastic and price increases (quantity decreases)
TR = P*Q
1) TR decreases
2) TR increases
3) TR increases
4) TR decreases
163
Income Elasticity of Demand. How do you calculate it?
Percent change in quantity demand as a result of percent changes in income
E = %∆Q/%∆Income
164
Normal v. Inferior Goods
Normal goods: goods that are purchased less of when a person's income increases; usually luxury stuff
Inferior goods: goods that are purchased more of when a person's income decreases
165
Determine whether the product is inferior or normal based on its income elasticity
If the elasticity is +, it means the quantity demanded % increases per positive change in income % which means the good is normal because people buy more of it when income increases
If the elasticity is -, it means the quantity demanded % decreases per positive change in income % which means the good is inferior because people buy less of it when income increases
166
Crross Price Elasticity of Demand. How do you calculate it?
Percent change in quantity demanded as a result of percent change in the price of another good
E = %∆Q/%∆Price of a good
167
Compliments v. Substitutes in relation to good x
Compliments: goods that are used as complements to good x (think of gas and car).
Substitutes: goods that can substitute good x (think people replacing their need for meat when the price of burgers go up with chicken). As the price goes up, the quantity demanded of the substitute decreases which increase the usage of the cheaper good x.
168
Determine whether the product is compliment or substitute based on its cross price elasticity
If the elasticity is -, the good is a complement since as the price of the complement goes up, the quantity demanded for the complement decreases which leads to a decrease in the quantity demanded of the product
If the elasticity is +, the good is a substitue since as the price of the substitute goes up, the quantity demanded for the substitute decreases which leads to a increase in the quantity demanded of the product
169
Elasticity of Supply. How do you calculate it?
Percent change in the quantity supplied per percent change in the price
E = %∆Q supplied/%∆Price of a good
170
Does the elasticity of supply increase or decrease over time?
Increase since over time, the suppliers have more opportunities to change the quantity supplied based on the price
171
What is demand and supply in the context labor market?
The quantity (labor) is demanded by firms while the quantity (labor or other inputs) is supplied by people (in case of labor)
172
Relation between the demands of factors of production to the demands of a product itself
Direct; as the demand for a product increases, the demand for the causes of the product (factors of production) increases
173
Marginal Revenue Product of Labor. How does it relate to the wage?
How much an incremental worker is producing in outputs, usually measured in money
MRPL = (Marginal Product of Labor)*(Price per Output)
An employer, therefore, would be willing to pay an employee less than how much revenue he brings in (MRPL) and is indifferent to hiring a worker is the wage = MRPL
174
MRPL for a non-price discriminatory firm with market power
If a firm has market power, it has demand curves that slope down (unlike the elastic demand curve of a perfectly competitive firm)
MRPL = (Marginal Product of Labor)*(Price per Output - the losses from the previous units that could've sold at a higher price)
175
Law of Diminishing Marginal Return
The marginal return given by each additional unit of labor is lower than the last
176
Where does a firm want to hire as depicted in a Wage v. Labor Units graph?
Where wage intersect MRPL
177
What happens when the MRP shifts to the right?
The demand for labor would go up and more labor would be hired at a certain wage
178
Do firms decide the wage in a perfectly competitive market?
No, they are wage takers
179
What determines the market supply of the labor market?
Sum of all workers willing to work at a specific wage
180
Demand and Supply of the labor market in a perfectly competitive firm
Demand is downward-sloping since it is equal to the marginal revenue product which decreases with additional labor
Supply is elastic since the supply (laborers) can only be hired at the specific wage.
181
Monopsony
A firm that is the sole demander/purchaser of labor
182
Demand and Supply of the labor of a monopsony
Upward-sloping labor supply curve since more people are willing to work at better pay
Demand is downward-sloping since it is equal to the marginal revenue product which decreases with additional labor
183
Marginal Factor Cost. How is this different in a monopsony than in a perfectly competitive labor market?
Cost of hiring an incremental unit of labor.
In a perfectly competitive labor market, firms can hire as many laborers as they want to at the given price
In a monopsony, due to the upward-sloping supply of labor, MFC = Cost of hiring the xth workers + (Pf-Pi) where Pf= what each laborer is paid and Pi = what each laborer before x was paid
184
Where does a monopsony hire?
They hire where the Marginal Revenue Product = Marginal Factor Cost
(the wage is not where MRP = MFC, it is where the y of the supply is at at the quantity of labor when MRP = MFC)
185
How do unions increase wages?
- increase demand for labor by adding a union label which would result in favorable regulations, more sales, etc. which would increase the demand for the inputs
- decrease the supply of laborers
- negotiate higher wages
186
Featherbedding agreements
the requirement to hire more union members for tasks whether or not they are necessary or not for optimal production
187
Exclusive unionism. Is it applicable to unskilled workers?
Craft unions that decrease the supply of labor by restricting union memberships or by lobbying for child labor laws, immigration restrictions, compulsory retirement and occupational licensing.
No, since the labor supply for unskilled population does not deplete theoretically
188
Bilateral Monopoly
Where both the buyer (firms, in case of labor) and the seller (unions, in case of labor) are monopolies and the only ones that exist in a firm
189
Wage in a bilateral labor monopoly
Unions would demand the wage be set where MFC=MRP rather than where supply=wage. However, ultimately, depends on the bargaining power of unions and the firm's willingness to budge.
190
Communism. Pros and Cons?
System of government in which the government owns all the resources in society and answers the questions: what, how and who?
Pro: minimize imbalance through collective ownership of property
Cons: lack of incentives for extra effort, risk taking, innovation and vulnerability to corruption
191
Differences between socialism and communism
In socialism, the government only controls industries that are prone to market failure such as energy, education and health care.
Similarities: lack of incentive, goal of fair distribution
Differences:
- wages are determined by negotiations between the trade unions and managers rather than through the government controlling wages
- a single political party does not control the economy
192
Goal and incentive of capitalism
Profit
193
How do governments influence businesses in capitalism?
Price ceiling, price floor and taxes (for social services)x
194
Price Ceiling. Example
Artificial max. on the price of a good. It has to be less than the equilibrium price to go into effect. If it is more than the equilibrium price, the firm could just as well sell at the equilibrium price. Since the demand>supply there is a shortage
Eg. rent control where there is a maximum amount a landlord could demand
195
Queuing Cost
In a price ceiling, the demand > the supply creating a shortage of goods. This shortage would cause the buyers to wait (inline) for a long period of time. The cost of doing so is called the queuing cost.
196
Cause of black market
A black market is a result of a price ceiling where the demand>supple and the people are willing to pay more for a particular good than the price ceiling allows.
197
Price Floor. Example
Artificial min. on the price of a good. It has to be more than the equilibrium price to go into effect. if it is less than the equilibrium price, the price would eventually increase to the equilibrium level. Since the supply>demand, there is a shortage in goods when there is a price floor
Eg. Min. Wage, where the labor supplied > labor demanded, making the difference between the supply and the demand unemployed
198
How do taxes on a product influence the demand curve and the price?
It decreases the demand since the more the taxes, the fewer consumers would want to pay for it which would decrease the quantity demanded at every price point. This decreases the price
199
On a price v. quantity graph (pg. 141), how do taxes impact the producer and the consumer surplus?
It decreases producer and consumer surplus because a part of the surpluses made earlier are given as taxes to the government
200
Tax revenue in a price v. quantity graph where the demand shifts
Taxes = quantity * price
1) Find the shift in demand curve before taxes (di) to the shift in demand curve after taxes (df)
2) Mark the equilibrium point of the df
3 Mark the point in di directly above the df (same quantity as the equilibrium quantity of di but higher price)
4) (Step 3 - Step 2)*the equilibrium price = Tax Revenue
201
Deadweight/efficiency loss or excess burden of taxes. How do you calculate it?
The amount excess of the tax that neither contributes to the producer surplus or the consumer surplus
Deadweight loss = 0.5bh = 0.5*absolute value of the difference between the prices (at both demand or supply curves) at the equilibrium quantity after taxes are applied*change in the equilibrium quantities between the two demand (or supply) curves
202
Market Failure
When resources are not allocated efficiently and therefore, allocative efficiency is not achieved.
203
Causes of Market Failures
Imperfect information
Imperfect competition
Externalities
Public goods
204
Imperfect information. How can it be solved?
Buyers and/or sellers do not have complete knowledge about available markets, prices, products, customers, suppliers etc. This often causes the buyers to overpay or underpay for a good and a seller to overestimate or underestimate the demand for a good.
It can be solved through truth-in-advertising regulations, consumer information services, and market surveys
205
Imperfect competition. How does it create market failure?
In imperfect competition, the slope of the MR ≠ Demand Curve (it is -2x the slope of the demand curve)
The monopoly produce where marginal cost intersects marginal revenue (which is the most profitable point) and sells it at the price of the demand curve at the quantity where MR=MC as opposed to where demand intersects marginal cost (where allocative efficiency is achieved since demand is met)
Therefore, the monopoly price is higher than the competitive price and monopoly quantity is less than the competitive quantity which creates deadweight loss (pg. 143)
206
What is one positive attribute of a monopoly?
In order to be a monopoly, firms often invest in research ad development which results in innovation
207
Natural Monopolies
High fixed costs and other barriers to entries makes it virtually impossible for any other firm to exist in a market place and gives a considerable advantage to the monopoly (usually, the first supplier)
208
# Define the following on the graph on pg. 144:
1) Socially Optimal
2) Monopoly Price
3) Fair Return price Ceiling
1) Socially Optimal price is where the marginal cost is equal to the demand. This would be allocatively efficient and satisfy the needs of the people. However, in this case, the monopoly would need some financial aid since they would not be able to cover their average total cost since it is greater than the price where d=mc
2) Monopoly Price is the price of the demand curve where the quantity produced is where the MR=MC -- this is the most profitable for the monopolies; however, government regulators put a price ceiling underneath the Monopoly Price since it is way more expensive than the Socially Optimal Price
3) Fair Return Price Ceiling is where government regulators place the price ceiling so that the monopolies would not grossly overcharge the consumers and yet would be able to break even.
209
Interstate Commerce Commission (1887)
Oversaw and corrected abuses of market power in the railroad industry
210
Federal Trade Commission (1914)
Investigated the structure and conduct of firms engaging in interstate commerce
211
Sherman Act (1890)
attempts to monopolize commerce or restrain trade among states is illegal
212
Clayton Act (1914)
Strengthened Sherman Act; specified monopolistic behavior such as price discrimination, tying contracts, and unlimited mergers
213
Robinson-Patman Act (1936)
prohibited price discrimination based on differences in cost, differences in the marketability of a product, or a good faith effort to meet competition
214
Celler Kefauver Act (1950)
authorized the government to ban vertical mergers (mergers of firms at various steps in the production process from raw materials to finished products) and conglomerate mergers (combinations of firms from unrelated industries) in addition to horizontal mergers (mergers of direct competition)
215
Herfindahl-hirschman Index
Takes the market share of each firm in an industry as a percentage, squares each percentage and adds them all up. The more the HHI, the less the number of firms in the industry
216
n-firms concentration ratio
Sum of market shares of the largest n firm sin an industry where n can represent any numbers
Conclusion: n firms have a combined market share of x%
217
Externalities/Spillovers. What are the two types?
A cost or benefit to a third party (who did not intend the consequences) resulting from an action. It leads to market failure because those making the decisions are not aware of the full extent of their actions
Negative externality: an unintended consequence that harms others (spillover costs) which results in an overallocation of resources
Positive externality: an unintended consequence that benefits others (spillover benefits) which results in an under allocation of resources
218
Marginal Private Cost (pg. 146)
The cost to a buyer/seller for utilizing one more unit of a good; fixed
219
Marginal External Cost (pg. 146)`
The cost to individual(s) who did not decide to be influenced by the costs; increasing
220
Marginal Social Cost (pg. 146)
MPC + MEC = Marginal Social Cost demonstrates the cost to everyone in the society; increasing due to MEC
221
Where in the Negative Externality graph (Pg.146) is the most socially optimal quantity?
Where the Marginal Social Costs intersects the Marginal Benefit of the buyer/seller
222
How do negative externalities result in over-allocation of resources
Over allocation of resources: more goods are produced than what the market demands
Socially Optimal Quantity = where the marginal social costs intersect the marginal benefits of the buyer
Bought at Quantity = where the marginal private costs intersect the marginal benefit which is at a greater quantity than the socially optimal quantity (pg. 146)
223
Marginal External Benefit (pg. 147)
The benefit to individual(s) who did not decide to be influenced by the transaction; constant
224
Marginal Social Benefit (pg. 147)
MSB = Marginal Benefit of the buyer + Marginal External Benefit
225
Where in the Positive Externality graph (pg. 147) is the most socially optimal quantity?
The quantity where the Marginal External Benefit intersects the Marginal Private Costs; However, at this quantity, the marginal benefit of the buyer < price of the socially optimal quantity
226
How do positive externalities result in an under-allocation of resources?
Under allocation of resources: fewer goods are produced than what the market demands
The buyer would buy where the MPC = MB (pg. 147); however, the quantity of this intersection is lower than the socially optimal quantity
227
How do taxes and subsidies solve the issue of externalities?
Taxing negative externalities would increase the Marginal Private Cost, making the producers and buyers be fully aware of their actions
Subsidizing positive externalities would shift the MEB which would equate it with the marginal social benefit, giving them an incentive to produce at the socially optimal quantity
228
Public goods. Properties
Goods that benefit multiple individuals at the same time.
Nonrival: one person's consumption does not impact another person's consumption
Nonexcludable: the benefits of a good cannot be isolated from just certain people (think how the military protects the entire country, even those who are against it)
229
The demand curve for public goods
The demand of each individual's demand curve added vertically (add the various prices each individual is willing to pay at each quantity x)
230
Free rider. What is one solution?
An individual that aims to benefit from a public good without paying for it. Due to the non-excludable nature of public goods, being a free rider does not exclude a person from enjoying the benefits of a good.
Government can collect taxes from everyone who benefits from a public good and use it to produce the good
231
Lorenz Curve (pg. 149)
A curve that shows what cumulative % of families (left to right = poorest to richest) own the cumulative % of income
232
Gini Coefficient (pg. 149)
(The area between the Lorenz Curve and the Line of Perfect Equality) / (area of the triangle resulted from the Line of Perfect Equality)
The more unequal the society, the higher the gini coefficient
233
Poverty Line
Official benchmark of poverty
234
How do taxation methods impact inequality?
Progressive taxation aims to reduce inequality by making higher-income individuals pay more in taxes
Regressive taxation collects a larger percentage of tax revenue from families with smaller income
Proportional tax collects the same percentage of income from all families
235
Social Security
Provides cash benefits and health insurance (Medicare) to retires and disabled workers and their families
236
Public assistance/welfare
temporary assistance to low-income families
237
Supplemental Security Income
Assists poor elderly individuals with no assets and little to Social Security entitlement
238
Unemployment compensation
temporary assistance to unemployed workers
239
Medicaid
Health insurance and hospitalization benefits to low-income families
240
Supplement Nutrition Assistance Program (Food Stamps or Public Housing programs)
food and shelter for low-income families
