Micro Final Answers for Flashcards
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When the federal government crafts environments policies that make it less expensive for firms to follow green initiatives,
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the policies are consistent with economic incentives
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Three Key economic ideas
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people are rational, people respond to economic incentives, and optimal decisions are made at the margin
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Margin analysis
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a form of analysis that involves comparing marginal benefits and marginal cost
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economics
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the study of the choices people make to attain their goals, given their scarce resources
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marginal benefit equals
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marginal cost
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Scarcity
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on of the basic facts of life that people must make choices as they try to attain their goals. this is an unavoidable fact
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centrally planned economy
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economy in which the government decides how economic resources will be allocated
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market economy
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in which the decisions of households and firms interacting in markets allocate economic resources.
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Societies organize their economies in two main ways to answer the three questions of what how, and who?
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centrally planned and market
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productive efficiency
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occurs when a good or service is produced at the lowest possible cost
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allocative efficiency
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occurs when production is in accordance with consumer preference
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opportunity cost
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the highest valued alternative that must be given up to engage in an activity
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trade offs force society to make choices, particularly when answering the following three fundamental questions:
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1. what goods are services will be produced? 2. how will the goods and services be produced? 3. who will receive the goods and services produced?
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positive analysis
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concerned with what is (measures the cost and benefits of different courses of action)
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normative analysis
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concerned with what ought to be
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microeconomics is the study of
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how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices
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production possibilities frontier
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a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology
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absolute advantage
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refers to the ability to produce more of a good or service using the same amount of resources
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comparative advantage
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refers to the ability to produce a good or service at a lower opportunity cost (basis for trade)
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one of the great benefits of trade is
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that it makes it possible for society to become better off by increasing both its production and its consumption
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household
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consists of all the individuals in a home
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firms
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are the suppliers of goods and services
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circular-flow diagram
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see how participants in markets are linked
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entrepreneur
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someone who operates a business, bringing together the factors of production-labor, capital,and natural resources-to produce goods and services.
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a free market exists
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when teh government places few restrictions on how a good or a service can be produced or sold or on how a factor of production can be employed
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product markets
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markets for goods
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Factor markets
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are markets for for factors of production-labor, capital, natural resources, and entrepreneurial ability
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property rights
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the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.
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centeris paribus
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all else equal
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as the price decreases the quantity demend
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increases
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according to the law of demand
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there is an inverse relationship between price and quantity demanded
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normal good
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when income increases, demand for a normal good increases
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inferior good
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when income increases, the demand for an inferior good falls
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substitutes
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goods are used for the same purposes (coke and pepsi)
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comlimentary
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good are used together (peanut butter and jelly)
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market price is determined by?
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both supply and demand
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a decrease in price affect the quantity demanded, not demand
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true
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compare the price elasticity of demand for pepper with the price elasticity of demand for food, the price elasticity of demand for pepper is likely
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more inelastic because pepper tends to represents a smaller fraction of a consumers budget
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suppose gasoline has few close substitutes available, if so then an increase in the price of gasoline will likely
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decrease the quantity of gasoline demanded by a relatively small amount
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compare the price elasticity of demand for water with the price elasticity of demand for wine?
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the price elasticity of demand for wine is likely relatively more elastic because wine is luxary
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the price elasticity of supply is affected by
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the passage of time
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suppose a professional basketball game is to be played at a suburban arena, which increases demand for parking on the night of the game?
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the supply of parking will be more elastic and the price of parking will increase by relatively small amount the night of the game
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over the past 30 years the price of oil has been relatively unstable, fluctuating between 11 and well over 100 per barrel. which of the following potentially contributes to oil price instability.
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oil prices are relatively unstable because the price elasticity of supply for oil is inelastic
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suppose a consumer is trying to decide how much to spend on food and how much to spend on all other(non-food) consumption. the economic model of consumer behavior predicts that the consumer will?
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choose the combinations of food and nonfood consumption that makes her as well off as possible from among combinations of food and nonfood items she can afford
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what role does utility play in the economic model of consumer behavior?
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when modeling consumer behavior, utility reflects the enjoyments a consumer receives from consuming a particular set of goods and services
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the study of situation in which people make choices that do not appear t be economically rational
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behavioral economics
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why might consumers not act rationally?
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fail to ignore sunk cost
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endowment effect
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being unwilling to sell a vase for a price that is greater than the price you would be wiling to pay to buy the vase if you didn't already own it
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In consumer decision making sunk costs should
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be ignored
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what is technology?
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the process a firm uses to turn inputs into outputs of goods and services
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examples of technological change?
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1. being able to produce the same output using fewer inputs. 2. being able to produce more output using the same inputs. 3. a decline in the quantity of output that can be produced from a given quantity of inputs
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short run
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at least one of the firms inputs is fixed
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long run
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the firm is able to vary all its inputs, adopt new technology, and change the size of its physical plant
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which of the following is true of the relationship between the average product of labor and the marginal product of labor?
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whenever the marginal product of labor is greater than the average product of labor, the average product of labor must be increasing
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a firm might experience economies of scale because?
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as a firm expands, it may be able to borrow money more inexpensively
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a market is perfectly competitive if?
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it has many buyers and many sellers, all of whom are selling identical products, with no barriers to new firms entering the market
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the supply curve for a firm in a perfectly competitive market in the short run is?
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that firms marginal cost curve for prices at or above variable cost
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in a perfectly competitive industry in the long run?
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new firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses
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in the long run, perfectly competition
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results in allocative efficiency because firms produce where price equals marginal cost
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if the demand for oranges increases, then the market
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will supply additional oranges because producers seek the highest return on their investments
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in the long run, perfectly competition
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results in productive efficiency because firms enter and exit until they break even where price equals minimum average cost
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in the long run, monopolistically competitive firms
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may continue to earn profit by reducing cost
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monopolistically competitive firms
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are not productively efficient because they do not produce at minimum average total cost and they are not allocatively efficient because they produce where price is greater than marginal cost
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one way in which monopolistically competitive markets and perfectly competitive markets differ is that in long-run equilibrium, monopolistically competitive firms
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charge a price greater than marginal cost
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one possible effect of advertising is to
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increase profits by shifting the demand curve for the product to the right
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a firm might use brand management to?
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to postpone the time when they will no longer be able to earn economic profits
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trademarked brands are threatened by
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their names becoming so widely used for a type of product that they no longer are associated with a specific company (thermos)
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firms might use marketing to
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design their product
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owners and managers control some of the factors that make a firm successful such as?
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the firms ability to produce its product at a lower average cost than competitors
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oligopolies exist due to
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barriers to entry
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most economists believe that a four-firm concentration ratio of _____ than _____ percent indicates that and industry is an oligopoly
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greater, 40
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four firm concentration ratio
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is flawed in that it does not measure competition between industries
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in oligopolies, the government might
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impose barriers to entry with a tariff to limit foreign competition
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The aluminum company of american (ALcoa)
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has had almost exclusive ownership of bauxite, which is a key input
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suppose the two countries form a cartel. what is the cooperative equilibrium?
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the cooperative equilibrium is for one to produce a low output and the other to produce a low output
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cartel
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a group firm that collide to restrict output to increase prices and profits
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cooperative equilibrium?
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an equilibrium in a game in which players cooperate to increase their mutual payoff
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nash equilibrium
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a situation in which each firm chooses the best strategy, given the strategies chosen by other firms
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non cooperative equilibrium
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an equilibrium in a game in which players do not cooperate but pursue their own self interest
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in game theory
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rules determined what actions are allowable, players employ strategies, payoffs that are the results of the interactions among the players strategies
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game theory in economics?
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the rules of the game include production function, a stragety is a firm maximizing profits, and the payoffs are the profits
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what is the subgame-perfect equilibrium?
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for the GM to offer a low price and for Securitex to accept the offer
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electronic encyclopedias
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served as a superior product to heavy, bulk printed encyclopedias
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the competitive forces in the five competitive forces model does not include?
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the allocative efficiency of producers
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how might an exisiting firm deter entry of new firms? an existing firm might?
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build a larger store to produce more output
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when is a firm a monopoly, or a monopolies only theoretical concepts that do not exist?
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a firm is a monopoly if it can ignore other firms prices
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De Beers of south africa was essentially a monopoly because?
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it had almost exclusive control of the worlds supply of diamond deposits, used to make diamond jewelry
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how might the government affect whether a firm is a monopoly?
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the government could grant a firm a public franchise, making it the exclusive legal provider of a good or service
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network externalities
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create barriers to entry because if a firm can attract enough customers initially, it can attract additional customers as it products value increases by more people using it, which attracts even more customers.
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the government issues patents
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to encourage firms to spend moeny on the research and development necessary to create new products
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how long do patents last?
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20 years from the date the product is invented
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an example of public franchise is?
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a firm is the sole. government-designed provider of electricity, and an example of a public enterprise is the government directly providing sewage service
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a firm is likely to be a monopoly if?
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economist of scale are so large that the firm has a natural monopoly
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a monopoly demand curve
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is the dame as the demand curve for the product
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compared to monopolies, perfectly competitive markets are?
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more economically efficient because they result in more economic surplus
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the loss in efficiency due to market power is?
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small because firms with substantial market power are rare
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market power results in
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economic profits that ca be spent on research to develop new products
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economies of scale
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the situation when a firms long run average costs fall as it increases output
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what is the governments policy on collusion in the united states? explain the rationale for this policy.
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In the united states the government makes collusion illegal with antitrust laws because monopolies reduce economic efficiency
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how do economists identify the relevant market?
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the relevant market has been identified if a price increase results in higher profits: otherwise, the markets is too narrow
