question

Economics

answer

The study of how people, firms, and societies use their scarce productive resources to best satisfy their unlimited material wants.

question

Resources

answer

Factors of production, 4 categories: labor, physical capital, land/natural resources, and entrepreneurial ability

question

Scarcity

answer

The imbalance between limited productive resources and unlimited human wants

question

Opportunity Cost

answer

The most desirable alternative given up as the result of a decision

question

Marginal Benefit (MB)

answer

The additional benefit received from the consumption of the next unit of a good or service

question

Marginal Cost (MC)

answer

The additional cost incurred from the consumption of the next unit of a good or a service

question

Marginal Analysis

answer

The rational decision maker chooses an action if MB ≥ MC

question

Law of Increasing Costs

answer

The more of a good that is produced, the greater the opportunity cost of producing the next unit of that good

question

Absolute Advantage

answer

Exists if a producer can produce more of a good than all other producers

question

Comparative Advantage

answer

Exists if a producer can produce a good at lower opportunity cost than all other producers

question

Specialization

answer

When firms focus their resources on production of goods for which they have comparative advantage

question

Productive Efficiency

answer

Production of maximum output for a given level of technology and resources. All points on the PPF are productively efficient

question

Allocative Efficiency

answer

Production of the combination of goods and services that provides the most net benefit to society. The optimal quantity of a good is achieved when the MB = MC of the next unit and only occurs at one point on the PPF

question

Economic Growth

answer

Occurs when an economy's production possibilities increase. This can be a result of more resources, better resources, or improvements in technology.

question

Market Economy (Capitalism)

answer

An economic system based upon the fundamentals of private property, freedom, self-interest, and prices

question

Law of Demand

answer

Holding all else equal, when the price of a good rises, consumers decrease their quantity demanded for that good

question

Absolute prices

answer

The price of a good measured in units of currency

question

Relative Prices

answer

The number of units of any other good Y that must be sacrificed to acquire good X. Only relative prices matter

question

Substitution Effect

answer

The change in quantity demanded resulting from a change in the price of one good relative to other goods

question

Income Effect

answer

The change in quantity demanded that results from a change in the consumer's purchasing power (or real income)

question

Determinants of Demand

answer

Consumer income, prices of substitute and complementary goods, consumer tastes and preferences, consumer speculation, and number of buyers in the market all influence demand

question

Normal Goods

answer

A good for which higher income increases demand

question

Inferior Goods

answer

A good for which higher income decreases demand

question

Substitute Goods

answer

Two goods are consumer substitutes if they provide essentially the same utility to consumers

question

Complementary Goods

answer

Two goods are consumer complements if they provide more utility when consumed together than when consumed separately

question

Law of Supply

answer

Holding all else equal, when the price of a good rises, suppliers increase their quantity supplied for that good

question

Determinants of Supply

answer

Costs of inputs, technology and productivity, taxes/subsidies, producer speculation, price of other goods that could be produced, and number of sellers all influence supply

question

Market Equilibrium

answer

Exists at the point where the quantity supplied equals the quantity demanded

question

Shortage

answer

Excess demand; a shortage exists at a market price when the quantity demanded exceeds the quantity supplied

question

Surplus

answer

Excess supply; exists at a market price when the quantity supplied exceeds the quantity demanded.

question

Total Welfare

answer

The sum of consumer surplus and producer surplus

question

Consumer surplus

answer

The difference between your willingness to pay and the price you actually pay. It is the area below the demand curve and above the price

question

Producer surplus

answer

The difference between the price received and the marginal cost of producing the good. It is the area above the supply curve and under the price

question

Price elasticity

answer

Ed = (%dQd)/(%dP). Ignore negative sign

question

Price elastic demand

answer

Ed > 1, meaning consumers are price sensitive

question

Price inelastic demand

answer

Ed < 1

question

Unit elastic demand

answer

Ed = 1

question

Perfectly inelastic

answer

Ed = 0, no response to price change

question

Perfectly elastic

answer

Ed = ∞, infinite change in demand to price change

question

Determinants of elasticity

answer

Substitutes, cost as percentage of income, and time to adjust to price changes all influence price elasticity

question

Total Revenue

answer

TR = P * Qd

question

Total Revenue Test

answer

Total revenue rises with a price increase if demand is price inelastic and falls with a price increase if demand is price elastic

question

Income Elasticity

answer

Ei = (%dQd good X)/(%d Income)

question

Luxury

answer

Ei > 1

question

Necessity

answer

0 < Ei < 1

question

Cross-Price Elasticity of Demand

answer

Ex,y = (%dQd good X) / (%d Price Y). If Ex,y > 0, goods X and Y are substitutes. If Ex,y < 0, goods X and Y are complementary

question

Price Elasticity of Supply

answer

Es = (%dQs) / (%dPrice)

question

Excise Tax

answer

A per unit tax on production results in a vertical shift in the supply curve by the amount of the tax

question

Incidence of Tax

answer

The proportion of the tax paid by the consumers in the form of a higher price for the taxed good is greater if demand for the good is inelastic and supply is elastic

question

Dead Weight Loss

answer

The lost net benefit to society caused by a movement away from the competitive market equilibrium

question

Subsidy

answer

Has opposite effect of an excise tax, as it lowers the marginal cost of production, forcing the supply curve down

question

Price floor

answer

A legal minimum price below which the product cannot be sold. If a floor is installed at some level above the equilibrium price, it creates a permanent surplus

question

Price Ceiling

answer

A legal maximum price above which the product cannot be sold. If a floor is installed at some level above the equilibrium price, it creates a permanent shortage

question

Law of Diminishing Marginal Utility

answer

The marginal utility from consumption of more and more of that item falls over time

question

Constrained Utility Maximization

answer

For one good, constrained by prices and income, a consumer stops consuming a good when the price paid for the next unit is equal to the marginal benefit received

question

Utility Maximizing Rule

answer

MUx / Px = MUy/Py or MUx/MUy = Px/Py

question

Accounting Profit

answer

The difference between total revenue and total explicit costs

question

Economic Profit

answer

The difference between total revenue and total explicit and implicit costs

question

Explicit costs

answer

Direct, purchased, out-of-pocket costs paid to resource suppliers provided by the entrepreneur

question

Implicit costs

answer

Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur

question

Short run

answer

A period of time too short to change the size of the plant, but many other, more variable resources can be changed to meet demand

question

Long Run

answer

A period of time long enough to alter the plant size. New firms can enter the industry and existing firms can liquidate and exit

question

Production function

answer

The mechanism for combining production resources, with existing technology, into finished goods and services

question

Fixed inputs

answer

Production inputs that cannot be changed in the short run. Usually this is the plant size or capital

question

Variable inputs

answer

Production inputs that the firm can adjust in the short run to meet changes in demand for their output. Often this is labor and/or raw materials

question

Total Product of Labor (TPL)

answer

The total quantity, or total output of a good produced at each quantity of labor employed

question

Marginal Product of Labor (MPL)

answer

The change in total product resulting from a change in the labor input. MPL = dTPL/dL, or the slope of total product

question

Average Product of Labor (APL)

answer

Total product divided by labor employed. APL = TPL/L

question

Total Fixed Costs (TFC)

answer

Costs that do not vary with changes in short-run output. They must be paid even when output is zero.

question

Total variable costs (TVC)

answer

Costs that change with the level of output. If output is zero, so are TVCs.

question

Average Fixed Cost (AFC)

answer

AFC = TFC/Q

question

Average Variable Cost (AVC)

answer

AVC = TVC/Q

question

Average Total Cost (ATC)

answer

ATC = TC/Q = AFC + AVC

question

Economies of Scale

answer

The downward part of the LRAC curve where LRAC falls as plan size increases. This is the result of specialization, lower cost of inputs, or other efficiencies of larger scale.

question

Constant Returns to Scale

answer

Occurs when LRAC is constant over a variety of plant sizes

question

Diseconomies of Scale

answer

The upward part of the LRAC curve where LRAC rises as plant size increases. This is usually the result of the increased difficulty of managing larger firms, which results in lost efficiency and rising per unit costs.

question

Perfect competition

answer

Characterized by many small price-taking firms producing a standardized product in an industry in which there are no barriers to entry or exit

question

Profit Maximizing Rule

answer

All firms maximize profit by producing where MR = MC

question

Break-even Point

answer

The output where ATC is minimized and economic profit is zero

question

Shutdown Point

answer

The output where AVC is minimized. If the price falls below this point, the firm chooses to shut down or produce zero units in the short run

question

Perfectly competitive long-run equilibrium

answer

Occurs when there is no more incentive for firms to enter or exit. P=MR=MC=ATC and profit = 0

question

Normal Profit

answer

Another way of saying that firms are earning zero economic profits or a fair rate of return on invested resources

question

Constant cost industry

answer

Entry (or exit) of firms does not shift the cost curves of firms in the industry

question

Increasing Cost Industry

answer

Entry of new firms shifts the cost curves for all firms upward

question

Decreasing Cost industry

answer

Entry of new firms shifts the cost curves for all firms downward

question

Monopoly

answer

The least competitive market structure, characterized by a single producer, with no close substitutes, barriers to entry, and price making power

question

Market power

answer

The ability to set the price above the perfectly competitive level

question

Natural Monopoly

answer

The case where economies of scale are so extensive that it is less costly for one firm to supply the entire range of demand

question

Monopoly long-run equilibrium

answer

Pm > MR = MC, which is not allocatively efficient and dead weight loss exists. Pm > ATC, which is not productively efficient. Profit > 0 so consumer surplus is transferred to the monopolist as profit

question

Price discrimination

answer

The practice of selling essentially the same good to different groups of consumers at different prices

question

Monopolistic competition

answer

A market structure characterized by a few small firms producing a differentiated product with easy entry into the market

question

Monopolistic competition long-run equilibrium

answer

Pmc minimum ATC so outcome is not efficient, but profit = 0.

question

Excess Capacity

answer

The difference between the monopolistic competition output Qmc and the output at minimum ATC. Excess capacity is underused plant and equipment

question

Oligopoly

answer

A very diverse market structure characterized by a small number of interdependent large firms, producing a standardized or differentiated product in a market with a barrier to entry

question

Four-firm concentration ratio

answer

A measure of industry market power. Sum the market share of the four largest firms and a ratio above 40% is a good indicator of oligopoly

question

Non-collusive oligopoly

answer

Models where firms are competitive rivals seeking to gain at the expense of their rivals

question

Collusive oligopoly

answer

Models where firms agree to mutually improve their situation

question

Cartel

answer

A group of firms that agree not to compete with each other on the basis of price, production, or other competitive dimensions. Cartel members operate as a monopolist to maximize their joint profits

question

Marginal Revenue Product (MRP)

answer

Measures the value of what the next unit of a resource (e.g., labor) brings to the firm. MRPL = MR x MPL. In a perfectly competitive product market, MRPL = P x MPL. In a monopoly product market, MR < P so MRPm < MRPc.

question

Marginal Resource Cost (MRC)

answer

Measures the cost the firm incurs from using an additional unit of input. In a perfectly competitive labor market, MRC = Wage. In a monopsony labor market, the MRC > Wage

question

Profit Maximizing Resource Employment

answer

The firm hires the profit maximizing amount of a resource at the point where MRP = MRC

question

Demand for Labor

answer

Labor demand for the firm is MRPL curve. The labor demanded for the entire market DL = ∑MRPL of all firms

question

Derived Demand

answer

Demand for a resource like labor is derived from the demand for the goods produced by the resource

question

Determinants of Labor Demand

answer

Product demand, productivity, prices of other resources, and complementary resources

question

Least-Cost Rule

answer

The combination of labor and capital that minimizes total costs for a given production rate. Hire L and K so that MPL / PL = MPK / PK or MPL/MPK = PL/PK

question

Monopsonist

answer

A firm that has market power in the factor market (a wage-setter)

question

Private goods

answer

Goods that are both rival and excludable. Only one person can consume the good at a time and consumers who do not pay for the good are excluded from consumption

question

Public goods

answer

Goods that are both nonrival and nonexcludable. One person's consumption does not prevent another from also consuming that good and if it is provided to some, it is necessarily provided to all, even if they do not pay for that good

question

Free-Rider Problem

answer

In the case of a public good, some members of the community know that they can consume the public good while others provide for it. This results in a lack of private funding and forces the government to provide it

question

Spillover benefits

answer

Additional benefits to society not captured by the market demand curve from the production of a good, result in a price that is too high and a market quantity that is too low. Resources are underallocated to the production of this good

question

Positive externality

answer

Exists when the production of a good creates utility for third parties not directly involved in the consumption of production of the good

question

Spillover costs

answer

Additional costs to society not captured by the market supply curve from the production of a good, result in a price that is too low and a market quantity that is too high. Resources are overallocated to the production of this good

question

Negative externality

answer

Exists when the production of a good imposes disutility upon third parties not directly involved in the consumption or production of the good

question

Marginal Productivity Theory

answer

The philosophy that a citizen should receive a share of economic resources proportional to the marginal revenue product of his or her productivity

question

Marginal tax rate

answer

The rate paid on the last dollar earned. This is found by taking the ratio of the change in taxes divided by the change in income

AP Microeconomics – Flashcards

Unlock all answers in this set

Haven't found what you were looking for?

Search for samples, answers to your questions and flashcards