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88 Cards in this Set
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as the quantity produced increases
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each additional unit costs more and more to produce
marginal cost increases |
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marginalism
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the additional cost of each additional unit
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the supply curve says that the profit maximizing quantity rises
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as the price rises.
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the supply curve says it is only profitable to produce more
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only at high prices.
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the supply curve says that the price must rise
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for it to be profitable to produce more
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supply curve: the price must be higher to
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cover the increased costs. to make production more profitable
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The law of diminishing returns
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as additional units of labor are added to fixed plant and equipment, each additional worker adds less and less to total output.
adds to the short run, not the long run. |
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if the law of diminishing returns was not true
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then all of the worlds output of cars could be produced in a single plant. All of worlds wheat could be grown on a single acre
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Marginal physical product
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the addition to total output added by an additional worker
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as additional units of labor are added to fixed plant and euquipment
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marginal physical product declines
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As each additional worker adds less and less,
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each additional unit costs more and more
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changes in cost
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change supply; not when the price changes
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market supply
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the total quantity supplied byall firms at every price
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quantity supplied
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a specific quantity at a specific price. when price changes, quantity supplied changes
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supply
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the quantity supplied at every price. the entire supply curve
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the supply curve slopes upward because
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the quantity produced at every price is the profit maximizing quantity. profit maximizing quantity rises as the price rises.
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no buyer wants or benefits
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from a low price at which he cannot buy
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each buyres interest is the lowest price
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at which he can buy what he wants.
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No seller wants or benefits from
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a price in which he can not sell
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Every sellers interest is in the highest price
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at which he can sell all he wants
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both buys and sellers benefit from
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price equilibrium
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when anything other than price changes,
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supply changes
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when there is an increase in supply
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quantity supplied at every price increases and vice versa
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law of supply: cost reductions
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increase supply. at each quantity cost per unit is less, and price required to maximize profits is less
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when costs fall
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the firm maximizes profits at a lower price for an specific quanityt
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why costs fall:
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price of factors falls
technological advance |
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costs increases
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reduce supply
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cost increase reduce supply: at each quantity
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cost per unit is higher. Price required to make production profitable is higher
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cost increases reduce supply: why costs rise
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price of factors rise
not because of technological regression |
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The law of supply and demand
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at the market the price of any good or service, Quantity demanded equals quantity supplied. the market price will be the equilibrium price.
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Price above equilibrium in law of supply and demand
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quantity sellers want to sell exceeds quantity buyers want to buy.
Buyers can buy all they want. sellers cant sell all they want surplus |
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surplus
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quantity supplied exceeds quantity demanded
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price above equilibrium: inventories accumulating
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sellers incurring unnecessary costs: storage costs
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Price above equilibrium: sellers cut price
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get back balance
price bid down in competition cellers can increase sales by cutting price. quantity demanded increase quantity supplied decreases |
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price below equilibrium
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quantity buyers want to buy exceeds quantity sellers want to sell
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price below equilibrium:
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sellers can sell all they want to sell
buyers cannot buy all they want to buy |
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shortage
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quantity demanded exceeds quantity supplied
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in position of a shortage, sellers can
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raise their prices and sell more at the same time.
incresae profits eliminate shortage price rises quantity demanded decreases quantity supplied increases |
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equilibrium price:
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stability:a balance of forces
if not there, forces push in that direction if there, no forces causing further change |
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equilibrium price: quantity supplied = quantity demanded
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buyers can buy all they want at that price
sellers can sell all they want at that price no frustrated or dissapointed buyers or sellers everyone is satisfied |
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at equilibrium
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no one has any incentive to change
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conflicting interests of buyers and sellers
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sellers want to sell at the highest price possible, and buyers want to buy at the lowest price possible.
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conflicting interests of buyers and sellers resolved.
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no buyer wants a low price that they cannot buy. No sellers has interest in high price that they cannot sell
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interests of buyers and sellers are the same:
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both benefit from price. no necessarily true at equilibrium price.
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when do buyers think a price is too high?
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when it has gone up
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when do sellers think a price is to low?
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when they are making losses or below normal return
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normal profit is
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avg rate of return for profit of a business
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increase in demand
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short run.
chicken farming inventories fall and sellers raise price and sell more price and quantity exchanged increase |
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decrease in demand
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cattle ranching
inventories accumulate and producers compete down price price falls, quantity decreases, and losses appear |
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increase in supply
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costs fall and sellesr want to sell more
cut price and increase quantity quantity increases, demand decreases |
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decrease in supply
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long run
costs rise and sellers want to sell less raise price and reduce quantity. the capacity to produce decreases price increases and quantity decreases |
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demand increases and supply decreases
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price increases and the quantity cannot be determined
the inflation case |
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inflation case
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rising income gives a higher demand. costs rise and labor rises.
std of living falls and people become discouraged |
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Milton Friedman
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"inflation is always and everywhere a monetary phenomenon"
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milton friendman's quote means
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to fast of growth in money supply. To much money choosing to few goods
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if the market price= the market ceiling
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nothing happens
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the market price cannot be
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above the price ceiling. reduces price
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the drawback to price ceiling is
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shortages
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price control results in
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lower prices= shortages
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price cant legally go below
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the price floor
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in new york, rent control
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exceeds equilibrium price
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supply decreases, rising costs
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reduce a supply, and makes rising wages for labor
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shortages lead to rationing by store owners (3)
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first come first served
limit quantity per customer save for best customers |
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shortages:Govt. rationing by rationing tickest
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to buy, need money + ticket
need money + permission by the government. not in a free country |
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problems with govt. rationing
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1. how many tickest issued for each product? has to be guesses
2.who gets the tickets? who needs gas the most: police, doctors, cripples |
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in a rationing ticket shortage
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a larger suppler of tickets than supply is better: shortage
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need versus production
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more production means more income, more goods
more needs means more tickets, means more goods. Production can be measured and need cannot= corruption |
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people with friend in the government
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influence peddling
political pull corruption |
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number of burueacrats used to administer and enforce rationing tickets durring WW2
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300,000
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black markets
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price above legal price ceiling
pay the illegal, free market price. much higher price than in abscence of controls |
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black markets: severely limit quantities available
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1. total quantity produced shrinks, reduces supply
2. some sold at controlled price 3. risks of sellers, breaking the law |
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incentives for black market
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victims wants to be victimized
police state: absolute tyranny "murder in the streets of saigon" |
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Usuall price controls are established by
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freezing prices
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it is important to suprise people when you are goin to freeze prices because
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otherwise they would raise thier prices in advance
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two things the government cannot freeze
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taste
deposits of raw materials |
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one thing the government will not freeze
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gov. spending
demand keep son inscreasing |
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price controls take the pressure of what off the gov.?
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inflation
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inflation is caused by
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the gov. printing money and then spending it.
caused by their expansion of money |
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total demand increases: more workers hired at frozen wages
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causes the total wage bill to rise.
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when tastes change during a price freeze
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shortages appear for goods for which demand increases
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during a price freeze, supply goes on decreasing
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deposits of raw materials used up
takes time to raise prices |
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during a price freeze, some businesses are caught with prices below costs
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they go out of business because of this
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controls cause a waste of supplies
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output is sold to soon
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prices of goods the gov. dares not to freeze
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commodity goods like oil wheat, corn, soy beans, coal cotton
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commodity goods
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basic materials of which everything is made
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what do speculators do
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they allocate supplies over time
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without speculation
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the selling price would be below the price.
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with price controls
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price cannot rise to cover storage costs.
speculators sell their stock then |