Principles Of Microeconomics Ch 1-13

Front 1

Positive and Normative Statements

Back 1

Positive Statements are statements that can be made based on empirical data.
Normative Statements are based on a persons beliefs or value systems.

Front 2

Micro vs Macro

Back 2

Micro - studies decisions made by people and firms and their outcomes;
Macro - studies major components of the whole economy

Front 3

Scarcity

Back 3

Economics is the study of the allocation of resources based on the scarcity we all face.

Front 4

3 fundamental Q's of economics?

Back 4

What (to produce); How (to produce); For whom (to produce?)

Front 5

4 ways to organize society?

Back 5

Command / Custom / Cooperation / Competition

Front 6

Law of Increasing Costs

Back 6

Law of increasing costs: as an economy's production level of any particular item increases, its per unit cost of production rises.

Front 7

Factors of Production

Back 7

Land, Labour, Enterprise and Capital

Front 8

Ceteris Paribus

Back 8

Other things equal, or remaining the same

Front 9

Why is the Demand Curve downward sloping?

Back 9

Substitution Effect
and the Income Effect

Front 10

Substitution Effect

Back 10

The substitution of one product for another as a result in a change in their relative prices

Front 11

Income Effect

Back 11

The effect a price change has on peoples ability to purchase (lower prices = more real income = more product)

Front 12

Compliments and Substitute Products

Back 12

Two ways products can be related;
Substitute Products (coffee and tea)
Complimentary Products (Skis and Ski Boots)

Front 13

Inferior Products and Normal Products

Back 13

Inferior - Demand increases with decrease in real income
Normal - Demand increases with increase in real income

Front 14

Causes for a change in Market Demand?

Back 14

1. Consumers Preferences
2. Consumers Incomes
3. Price of Related Products
4. Expectations of future prices/incomes
5. The size of the market or income and age distribution

Front 15

Causes for a change in Market Supply?

Back 15

1. Price of resources
2. Business taxes
3. Technology
4. Prices of substitutes in Production
5. Future expectations of suppliers
6. # of suppliers

Front 16

Four possible combinations of simultaneous change in Demand and Supply?

Back 16

1. +S, +D = +Q, ?P
2. -S, -D = -Q, ?P
3. +D, -S = ?Q, +P
4. -D, +S = ?Q, -P

Front 17

Price Ceilings

Back 17

(Like Rent Control) Create shortages, and force the use of other form of allocation using: first come, first serve; sellers preference; and rationing.

Front 18

Price Floors

Back 18

(Like Price Controls / Minimum Wage) Create surplus, and must then be:
-stored
-converted to another product
-sold abroad
-given away
-destroyed

Front 19

What causes a Vertical Demand Curve?

Back 19

Inelastic Demand or products that invite customers to 'conspicuously consume' (upward sloping demand cure)

Front 20

Price Elasticity of Demand

Back 20

Inelastic if coefficient is less than 1;
Elastic if coefficient is greater than 1.
Perfectly inelastic = 0 (Vertical Demand Curve)
Perfectly elastic = infinity (Horizontal Demand Curve)

Front 21

Determinants of Price Elasticity (of Demand) are..?

Back 21

1. the number of substitutes available
2. the percentage of the income spent on the product; and
3. the time period involved in the measurement

Front 22

Price Elasticity - 4 applications?

Back 22

1. Consumers pay a larger portion of a sales tax the inelastic the demand curve
2. Gov'ts raise a great deal of revenue from excise taxes on products with high inelastic demand (cigarettes)
3. any attempt to crack down on crime by focusing on the supply of illegal drugs will likely increase crime;
4. a good harvest for farmers is not always good news for the group

Front 23

Elasticity of Supply depends primarily on the time period involved with the result that:

Back 23

1. The supply is perfectly inelastic in the market period
2. supply is inelastic, but not perfectly so in the short run,
3. supply is elastic in the long run.

Front 24

Income Elasticity

Back 24

Causes a shift in the demand Curve as a result of a change of income. A negative coefficient indicates an inferior product, a positive coefficient less than 1 indicates a necessity, and a positive coefficient more than one indicates a luxury.

Front 25

Cross-Elasticity of Demand

Back 25

Percentage change in the Q demanded of one products as a result of a percentage change in price of another product.
Positive elasticity = substitute product
Negative = Complimentary product

Front 26

Marginal Utility

Back 26

The amount of extra satisfaction from consuming one more unit of product.

Front 27

Law of diminishing Marginal Utility

Back 27

states that the extra satisfaction derived from one more unit of a product declines as more of that product is consumed.

Front 28

Optimal Purchasing Rule

Back 28

When the MU per dollar spent is the same.

Front 29

Diamond / Water Paradox

Back 29

Realization that consumers purchasing decisions are based on marginal utility not total utility.

Front 30

Consumer Surplus

Back 30

The difference between what a consumer is willing to pay (marginal utility per $) versus the cost.

Front 31

Price Discrimination

Back 31

Charging different prices to different groups based on:
- Consumers with different demands
- No ability to resell the product
2 main forms: Discrimination among units purchased (BOGO offers) and Discrimination among buying groups (ex, movies, some willing to pay more).

Front 32

Explicit Cost vs Implicit Cost

Back 32

Explicit Cost = Cost actually paid out in money
Implicit Cost = Cost that doesn't require an actual expenditure of money

Front 33

Normal Profit vs Economic Profit

Back 33

Normal Profit = The minimum profit that must be earned to keep the entrepreneur in business (TR-EC)
Economic Profit = Revenue over and above ALL costs including Normal Profit (TR-EC+IC)

Front 34

AP will..

Back 34

rise if MP is above it;
fall if MP is below it.

Front 35

MP is at a maximum when..

Back 35

MC is at a minimum.

Front 36

AP is at a maximum when..

Back 36

AVC is at a minimum.

Front 37

MC = ATC

Back 37

indicates economic capacity

Front 38

MC = AVC

Back 38

indicates the most productive output

Front 39

MC / AVC / ATC decrease IF..

Back 39

-input prices fall
-productivity increases

Front 40

Economic Capacity is..

Back 40

always below physical capacity and occurs when ATC is at a minimum.

Front 41

Law of Diminishing Returns..

Back 41

as more of a variable input is added to a fixed input in the production process, the resulting increase in output will at some point begin to diminish. (Assuming that at least one input is fixed = short run).
Even when diminishing returns set in, the total product continues to rise, however the rate increase falls.

Front 42

MP = AP

Back 42

Point of Maximum Productivity

Front 43

Long Run

Back 43

Has NO fixed inputs, used for planning.

Front 44

LRAC

Back 44

Long Run Average Cost curve

Front 45

Constant Returns to Scale

Back 45

The situation in which a firms output increases by the same percentage as the increase in its inputs.
Minimum cost (lowest points) connected the LRAC are horizontal.

Front 46

Economies of Scale

Back 46

Cost advantages achieved as a result of large-scale operations (cheaper to run larger firms).
- Division of Labour, Management Specialization, and Machine specialization.

Front 47

Increasing Returns to Scale

Back 47

The situation in which a firm's output increases by a greater percentage than do its inputs.

Front 48

Pecuniary Economies

Back 48

-Lower Costs of Borrowing
-Bulk buying and selling
-selling by-products
-lower cost of advertising

Front 49

DISECONOMIES of scale

Back 49

Bureaucratic inefficiencies in management that result in decreasing returns to scale..

Front 50

Decreasing Returns to Scale

Back 50

The situation in which a firms output increases by a smaller percentage than its input.

Front 51

Four Major Types of Markets?

Back 51

1. Perfect Competition
2. Monopolistic Competition
3. Oligopoly
4. Monopoly

Front 52

Perfect Competition

Back 52

- No single producer or consumer can effect the price or quantity produced (price-takers).
-Must be a large number of buyers/sellers and all must be small in relation to the whole market
-no preference shown
-easy entry/exit for new firms
-the same market info available for all

Front 53

Institution of Private Property

Back 53

Private Ownership of productive resources. The desire for wealth = big incentive for people to work hard and be innovative (without private property, the gov't would have to provide incentives/rewards in order to promote economic efficiency).

Front 54

Competitive Firm will MAXIMIZE PROFIT when..

Back 54

total revenue - total cost is highest
MR = MC

Front 55

Marginal Profit = change in total profit divided by Q

Back 55

Marginal Profit = the additional economic profit from the production and sale of an extra until of output. MProfit varies because MC for each unit produced is different

Front 56

If MR > MC

Back 56

Produce MORE

Front 57

If MC>MR

Back 57

Produce LESS

Front 58

Break-even Price and Shutdown Price (Competitive firm)

Back 58

Price < AVC - shutdown
Break-even output where TR=TC, AC=P

Front 59

Lassiez-Faire

Back 59

Adam Smith, "A truly competitive market runs best without intervention."

Front 60

Will Competitive Markets make economic profit in the LONG RUN?

Back 60

No.

Front 61

Productive Efficiency / Allocative Efficiency

Back 61

Productive Efficiency = production f an output at the lowest possible average cost (P = minimum AC)
Allocative Efficiency = the allocation of scare productive resources toward the production of goods & services that society values most. (P = MC)

Front 62

5 Benefits of a Competitive Market

Back 62

1. Encourages Innovation
2. productively efficient
3. allocatively efficient
4. costless system
5. offers economic freedom

Front 63

5 Ways a Competitive Market can FAIL

Back 63

1. it may create gross income and wealth inequalities
2. it can be quite unstable
3. it cannot prevent the rise of monopolies
4. unable to provide public goods
5. ignores external costs and benefits.

Front 64

External Costs/Benefits

Back 64

Costs dealt with by: Legislative Controls, imposing per unit taxes, selling permits.
Benefits by providing public/quasi-public goods.

Front 65

Day Care example for external benefits

Back 65

A subsidy to day care workers = raise the Q traded and lower $;
or, A subsidy to parents, which would raise Q traded and RAISE the $.

Front 66

Nonrival
Public Goods
Non-excludable

Back 66

Nonrival - one persons consumptions does not reduce the amount available to others
Public Goods - goods or services that benefits are not affect by the number of users, which no one can be excluded
Non-excludable - it is impossible to prevent non-buyers from enjoying the benefits (lighthouse)

Front 67

Monopoly

Back 67

Market where there is a single producer, of one product for which there is no close subsitute.
Barriers to Entry
Can determine EITHER the $ or Q but not both
Profit MAXIMIZED when MC=MR
Breakeven when AC=AR, TC=TR

Front 68

Barriers to Entry

Back 68

1. Technical Barriers = monopolist is sole owner of resource or technology in order to produce product
2. Legal barriers = prevent other firms from competing in a particular industry by force of law (Crown Corp of Canada)
3. Economic Barriers - extensive start-up costs (automobile industry).

Front 69

Monopolies criticized for:

Back 69

1. being able to make economic profit indefinitely
2.being productively /allocatively inefficient
3. producing less / charging more
4. creating a more unequal distribution of income and wealth within a society
5. Using price discrimination

Front 70

Benefits of Monopolies:

Back 70

Economies of scale = lower costs
Natural Economies = being able to produce at a lower cost than competing firms.
Research and Development
Can offer better salaries and working conditions to employees.

Front 71

How to control the Monopolist?

Back 71

1. Taxation (Profits Tax/ Monopoly Sales Tax)
2. Price Setting (Socially optimum price = the price that produces the best allocation of products from society's point of view/ Fair Return Price = a price where the firm will earn normal profits only P=AC)
3. Nationalization = gov't removes them from private ownership by nationalization.

Front 72

IMPERFECT COMPETITION

Back 72

market structure in which producers are identifiable and have some control over price (Oligopoly and Monopolistic Competition).

Front 73

Product Differentiation

Back 73

The attempt by a firm to distinguish its product from that of its competitors.
Pros: provides consumer with vital info, enhances competition, lowers $, finances mags and TV shows.
Cons: mostly uninformative/wasteful, it encourages concentration within industries, raises $ to the detriment of consumers

Front 74

Monopolistic Competition

Back 74

-Many Small firms that act independently of eachother
- There IS freedom of entry
- Some control over price
- Each firm sells a differentiated product
Max Profit: MR=MC / Long run, firm only makes normal profits.
- Not efficient / excess capacity

Front 75

Franchising

Back 75

Attempt to raise profit by controlling entry.
Pros: Bulk purchasing, national ads, and Brand identification.

Front 76

Blocked Entry as result of Gov't Policy

Back 76

Quota's, ex taxi Licence

Front 77

Oligopoly

Back 77

-Dominated by few large firms
- Entry by new firms is difficult
- non-price competition widely practiced
-each firm has significant control over price
- mutual interdependence between firms

Front 78

Game Theory

Back 78

a method of analyzing behaviour that highlights mutual interdependance and NASH equilibrium (a situation where each rival chooses the best actions given the anticipated actions of the others).

Front 79

Collusion

Back 79

Agreement to set Price among suppliers OR the Q that will be produced
Different ways to collude: Geographically (divide up areas), client lists, agreement of Quota.
Illegal.

Front 80

Non - Collusive Oligopoly

Back 80

Price Leadership - price fixing w/o collusion
Kinked Demand Curve

Front 81

Inter temporal Price Discrimination

Back 81

Where consumers are grouped based on elasticity of demand (high initial price for those willing to pay, later lowered for others).
Mixed Bundling (restaurants bundling mixed goods)
Coupons/Rebates

Front 82

Monopsony

Back 82

Market structure in which there is only one buyer

Front 83

Increases in labour productivity as a result of..

Back 83

technological change, increases in the nation's capital stock, and is closely related to the long run demand for labour, and the real wages of canadians.

Front 84

Real wage

Back 84

nominal wage / price level

Front 85

Trade Unions benefit members by..

Back 85

increasing demand for their work, raising their nominal wages, and improving working conditions.

Front 86

Wage Differentials exist because

Back 86

-variation in the level of human capital between individuals
-risk
-unpleasant jobs
-attractive non-pecuniary benefits
-discrimination in labour markets

Front 87

Economic Rent

Back 87

It is the return to a factor over and above the factor's transfer earnings

Front 88

2 Questions facing natural resource market

Back 88

1. What is the best rate of exploitation of a nonrenewable resource?
2. How best to regulate common property resources such as wild fish?

Front 89

Voluntary Trade

Back 89

Both Parties must benefit

Front 90

Theory of Absolute Advantage vs Comparative Advantage

Back 90

Absolute Advantage = Adam Smith, Nations should specialize in producing goods and services for which they have an advantage.
Comparative Advantage = the advantage that comes from producing at a lower opportunity cost than others are able to do (David Ricardo)

Front 91

Free Trade Benefits

Back 91

1. Lower Prices
2. Higher Incomes
3. A greater variety and quality of products
4. Increased competition.

Front 92

Trade Restrictions

Back 92

Tariffs/Quotas:
-Increase the domestic prices of a product that is imported, and reduce the Quantity traded of that product.
Exhange Controls
Voluntary Exports Restrictions

Front 93

Four Arguments against Free Trade

Back 93

1. Strategic Industry (Military, healthcare)
2. Infant Industry (new firms/industries don't have a chance)
3. cultural identity
4. lower environmental and labour standards argument