Midterm 2 Flashcards

(120 cards)

1
Q

budget constraint (or budget line)

A

shows the possible combinations of two goods that are affordable given a consumer’s limited income

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2
Q

total utility

A

the satisfaction a consumer gets from consuming some quantity of a good or service; also, it’s the total satisfaction from consuming all the goods and services an individual purchases.

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3
Q

utility

A

the term economists use to describe the satisfaction or happiness a person gets from consuming a good or service.

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4
Q

calculate marginal utility

A

MU=change in total utility/change in quantity

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5
Q

diminishing marginal utility

A

the common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit

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6
Q

marginal utility

A

the additional utility provided by one additional unit of consumption

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7
Q

calculate marginal utility per dollar

A

marginal utility per dollar=marginal utility/price

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8
Q

consumer equilibrium

A

the combination of goods and services that will maximize an individual’s total utility

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9
Q

marginal utility per dollar

A

the additional satisfaction gained from purchasing a good given the price of the product; MU/Price

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10
Q

factors of production (or inputs)

A

resources that firms use to produce their products, for example, labor and capital

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11
Q

firm

A

an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs.

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12
Q

production

A

the process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs

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13
Q

Marginal product

A

additional output of one more worker;
MP=ΔTP/ΔL

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14
Q

fixed inputs

A

factors of production that can’t be easily increased or decreased in a short period of time

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15
Q

long run

A

period of time during which all of the firm’s inputs are variable

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16
Q

production function

A

mathematical equation that tells how much output a firm can produce with given amounts of inputs

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17
Q

short run

A

period of time during which at least one or more of the firm’s inputs is fixed

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18
Q

variable inputs

A

factors of production that a firm can easily increase or decrease in a short period of time

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19
Q

profit

A

the difference between total revenues and total costs
Profit = Total Revenue – Total Cost

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20
Q

calculate Total Revenue

A

Total Revenue = Price x Quantity

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21
Q

accounting profit

A

total revenues minus explicit costs, including depreciation

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22
Q

economic profit

A

total revenues minus total costs (explicit plus implicit costs)

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23
Q

explicit costs

A

out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials

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24
Q

implicit costs

A

opportunity cost of resources already owned by the firm and used in business, for example, expanding a factory onto land already owned

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25
private enterprise
the ownership of businesses by private individuals
26
revenue
income from selling a firm’s product; defined as price times quantity sold
27
marginal cost
he additional cost of producing one more unit; mathematically, MC=ΔTC/ΔQ .
28
factor payments
what the firm pays for the use of the factors of production-includes raw materials, rent, wages and salaries, interest and dividends, and profit for entrepreneurship
29
fixed cost
cost of the fixed inputs; expenditure that a firm must make before production starts and that does not change regardless of the production level
30
total cost
the sum of fixed and variable costs of production
31
variable cost
cost of production that increases with the quantity produced; the cost of the variable inputs
32
average total cost
for any quantity of output, total cost divided by the quantity of output
33
average variable cost
for any quantity of output, variable cost divided by the quantity of output
34
profit margin
at a given level of output, the difference between price and average cost; also known as average profit average profit=price−average cost
35
production technologies
alternative methods of combining inputs to produce output
36
constant returns to scale
expanding all inputs proportionately does not change the average cost of production
37
economies of scale
the long-run average cost of producing output decreases as total output increases
38
diseconomies of scale
the long-run average cost of producing output increases as total output increases
39
leviathan effect
when a firm gets so large that it operates inefficiently, experiencing diseconomies of scale
40
long-run average cost (LRAC) curve:
shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology
41
short-run average cost (SRAC) curve:
the average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs
42
market structure
the conditions in an industry, such as number of sellers, how easy or difficult it is for a new firm to enter, and the type of products that are sold
43
perfect competition
market structure where each firm faces many competitors that sell identical products so that no firm has any market power
44
price taker
firms in a perfectly competitive market; since no firm has any market power they must take the prevailing market price as given
45
marginal revenue
the additional revenue gained from selling one more unit of output marginal revenue = change in total revenue/change in quantity
46
profit-maximizing rule for a perfectly competitive firm
produce the level of output where marginal revenue equals marginal cost MR > MC → you’re still making a profit → make more! MR < MC → it costs more to make than you earn → stop!
47
If Price > ATC
Firm earns an economic profit
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If Price = ATC
Firm earns zero economic profit
49
If Price < ATC
Firm earns a loss
50
break-even point:
the level of output where price just equals average total cost, so profit is zero, level of output where the marginal cost curve intersects the average cost curve at the minimum point of AC
51
short run outcomes
- price < minimum average variable cost, then firm shuts down - price > minimum average variable cost, then firm stays in business
52
shutdown point
level of output where the marginal cost curve intersects the average variable cost curve at the minimum point of AVC; if the price is below this point, the firm should shut down immediately
53
constant cost industry
an industry whose technology is such that there is no advantage to size; a large firm faces the same average costs as a small firm does.
54
entry
the long-run process of firms entering an industry in response to industry profits
55
exit:
the long-run process of firms reducing production and shutting down in response to industry losses
56
long-run equilibrium
where all firms earn zero economic profits producing the output level where P = MR = MC and P = AC
57
zero economic profits
a firm is covering all of its cost, including the opportunity costs of its capital; i.e. normal accounting profits
58
long-term outcomes
If price > ATC, the firm is making economic profit If price < ATC, the firm is losing money If price = ATC, the firm is breaking even
59
allocative efficiency
when the mix of goods being produced represents the mix that society most desires; at P = MC or lowest possible average cost
60
productive efficiency
given the available inputs and technology, it’s impossible to produce more of one good without decreasing the quantity of another good that’s produced; At minimum ATC
61
barriers to entry
the legal, technological, or market forces that may discourage or prevent potential competitors from entering a market
62
monopoly
a situation in which one firm produces all of the output in a market
63
copyright:
a form of legal protection to prevent copying, for commercial purposes, original works of authorship, including books and music
64
deregulation
removing government controls over setting prices and quantities in certain industries
65
intellectual property
the body of law including patents, trademarks, copyrights, and trade secret law that protect the right of inventors to produce and sell their inventions
66
legal monopoly
legal prohibitions against competition, such as regulated monopolies and intellectual property protection
67
natural monopoly
economic conditions in the industry, for example, economies of scale or control of a critical resource, that limit effective competition
68
patent
a government rule that gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time
69
predatory pricing
when an existing firm uses sharp but temporary price cuts to discourage new competition
70
trade secrets
methods of production kept secret by the producing firm
71
trademark
an identifying symbol or name for a particular good and can only be used by the firm that registered that trademark
72
marginal profit
profit of one more unit of output, computed as marginal revenue minus marginal cost
73
Monopoly Graph
- Demand curve = downward slope, shows price people will pay - Marginal Revenue (MR) = steeper downward slope below demand - Marginal Cost (MC) = upward slope - TC curve = upward slop monopolists PRODUCE where MR=MC, but they CHARGE PRICES at that point on DEMAND
74
allocative efficiency
producing the optimal quantity of some output; the quantity where the marginal benefit to society of one more unit just equals the marginal cost where price = marginal cost (MC)
75
price discrimination
charging different prices to different customers for the same product
76
Why does a monopolist have to lower the price to sell more units?
Because they face a downward-sloping demand curve—to increase quantity sold, they must make the product cheaper so more people will buy it. Result: - Price drops for all units sold - So marginal revenue < price
77
acquisition
when one firm purchases another
78
antitrust laws
laws that give government the power to block certain mergers, and even in some cases to break up large firms into smaller ones
79
merger
when two formerly separate firms combine to become a single firm
80
concentration ratio
an early tool to measure the degree of monopoly power in an industry; measures what share of the total sales in the industry are accounted for by the largest firms, typically the top four to eight firms
81
four-firm concentration ratio
the percentage of the total sales in the industry that are accounted for by the largest four firms
82
Herfindahl-Hirschman Index (HHI)
approach to measuring market concentration by adding the square of the market share of each firm in the industry
83
market share
the percentage of total sales in the market
84
bundling
a situation in which multiple products are sold as one
85
exclusive dealing
an agreement that a dealer will sell only products from one manufacturer
86
minimum resale price maintenance agreement
an agreement that requires a dealer who buys from a manufacturer to sell for at least a certain minimum price
87
restrictive practices
practices that reduce competition but that do not involve outright agreements between firms to raise prices or to reduce the quantity produced
88
tying sales
a situation where a customer is allowed to buy one product only if the customer also buys another product
89
cost-plus regulation
when regulators permit a regulated firm to cover its costs and to make a normal level of profit
90
natural monopoly
economic conditions in the industry, for example, economies of scale, that limit effective competition
91
price cap regulation
when the regulator sets a price that a firm cannot exceed over the next few years
92
Dodd-Frank Act
legislation designed to protect consumers and end bailouts to lead to greater economic stability
93
regulatory capture
when the supposedly regulated firms end up playing a large role in setting the regulations that they will follow and as a result, they “capture” the people usually through the promise of a job in that “regulated” industry once their term in government has ended
94
Sarbanes-Oxley Act
legislation designed to increase confidence in financial information provided by public corporations to protect investors from accounting fraud
95
differentiated product
a product that its consumers perceive as distinctive in some way
96
imperfectly competitive
firms and organizations that fall between the extremes of monopoly and perfect competition
97
monopolistic competition
many firms competing to sell similar but differentiated products
98
product differentiation
any action that firms do to make consumers think their products are different from their competitors’
99
cartel
a group of firms that collude to produce the monopoly output and sell at the monopoly price
100
collusion
when firms act together to reduce output and keep prices high
101
cut-throat competition
oligopolistic outcome when firms decide to cut prices to capture market share; in the limit, this leads to zero economic profits
102
duopoly
an oligopoly with only two firms
103
game theory
a branch of mathematics that economists use to analyze situations in which players must make decisions and then receive payoffs based on what decisions the other players make
104
kinked demand curve
a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases
105
Nash equilibrium
solution to a game-theoretic scenario when no player has an incentive to change their decision, taking into account what the players have decided and assuming the other players don’t change their decisions.
106
prisoner’s dilemma
a game in which the gains from cooperation are larger than the rewards from pursuing self-interest
107
The assumptions of perfect competition imply that
Individuals in the market accept the market price as given.
108
The marginal revenue received by a firm in a perfectly competitive market
Is equal to the market price
109
A perfectly competitive firm will maximize profits when the
Marginal revenue equals marginal cost (MR = MC)
110
In perfect competition:
Price and marginal revenue are the same
111
A perfectly competitive firm will incur an economic loss but will continue to produce a positive quantity of output in the short run if the price is
Greater than average variable cost and less than average total cost
112
How should the government deal with a natural monopoly?
Impose a price ceiling to increase production and reduce economic profit.
113
When a natural monopoly exists, per-unit costs are:
Lowest when a single firm generates the entire output of the industry.
114
How are perfect competition and monopolistic competition different?
Monopolistic competition sells differentiated products, unlike perfect competition.
115
Firms in an oligopoly often
Oligopolists strategically consider competitors’ behavior (game theory stuff!).
116
Company X and company Z are planning to merge their business into one and are seeking regulatory approval. What is the most likely reasoning X & Z will use and present to support their planned merger
The newly created firm is able to take advantage of economies of scale.
117
A monopoly sees the demand curve for its product as ________ while the effective demand curve facing a perfectly competitive firm is ________
Monopoly = downward-sloping; Perfect competition = horizontal.
118
A perfectly competitive firm earns ZERO economic profit if
P = ATC.
119
A firm in an imperfectly competitive market engages in price discrimination primarily to
It’s to increase profits by capturing more consumer surplus.
120
Compared to single-price monopoly, price discrimination will tend to result in
lower deadweight loss