Econ- 1

people use all information available as they act to achieve their goals, weighing costs and benefits of each action only choosing which cost weights out

customers firmly respond to economic incentives

decisions are not all or nothing but involve doing a little more/less of an activity; the optimal decision is to continue any activity up until the point where the marginal benefit equals the marginal cost

because wants are unlimited, but the ability to satisfy those wants is limited; societies and individuals cannot have everything they want, so they have to make choices of what to have and what not to have

what goods and services will be provided, how will they be produced, who will receive the goods; In a pure market economy, almost all of these decisions are made by the decentralized interaction of buyers and sellers in markets, but government plays a significant role in the allocation or resources

occurs when a good or service is produced at the lowest possible cost

what is produced reflects consumer preferences; every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it

efficiency is producing goods and services that people want at the lowest cost; equity= fairness, concept that can differ dramatically from person to person the redistribution of income hampers efficiency because it reduces incentives to produce

Incentive for firms to be allocatively efficient >> producing goods that consumers demand << and productively efficient >> producing those goods and services at the lowest cost<< is PROFIT; if a firm is not allocatively efficient and productively efficient then it will eventually suffer losses and go out of business

to make a complicated world seem simple enough to be understood and analyzed so that questions about it can be answered

shows all that attainable combinations of two produces that may be produces with available resources and existing technology combinations of goods are the PPC are on the frontier because all available resources are being utilized; fewest resources used to produce a given amount of product. points inside the PPC are inefficient because the max. output is not being obtained from the available resources

increasing marginal opportunity costs means that as more and more of a product is make, the opportunity cost of making each unit rises

positive >> concerns with what is; deals with how the economy actually behaves normative >> concerns with what ought to be; economics is mainly concerned with positive analysis- conceptualizing and measuring the costs and benefits of different courses of action; decision makers (voters and government officials) can use the trade-offs and costs and benefits identified by positive economic analysis in normativly deciding what course of action should be taken

households and firms households as consumers are of greatest importance in determining what good and services are produced firms make a profit only when they produce goods and services valued by customers. Only the goods that consumers are willing and able to purchase are provided

private property rights are rights of indiviuals or firms to the exclusive use of their property including the right to buy or sell; if individuals or firms believe that property rights are not well inforced they will be reluctant to risk wealth by opening new business; enforcement of property rights and contracts is vital for the functioning of the economy

metaphor used by Adam Smith to explain that people acting in their own self interest may actually promote the interest of society as a whole; market system works by leading each person, motivated by self interest, to produce goods and services demanded by other people

secure property rights would enable resources owners to use their resources in more efficient ways because they would spend less time on activities like guarding their property; property owners would be more able to fiance business by borrowing money using property as collateral for a loan

when analyzing the relationship between two variables - such as price and quantity demanded - other variables must be held constant

1- changes in the prices of related goods, substitutes or complements 2- changes in income 3-changes in taste 4-changes in population 5-changes in expected future prices

holding everything else constant, an increase in prices will cause an increase in the quantity supplies, and a decreasein price causes a decrease in the quantity supplied -main variables that will cause a supply curve to shift >change in prices of products used to make the product >technological change >changes in the prices of substitutions in production >changes in expected future prices >changes in the number of firms

situation where the quantity demanded equals the quantity supplied

when the quantity demanded is greater then the quantity supplied; surplus is when the quantity demanded in less then the quantity supplied

if the current price is above equilibrium the quantity supplied will be greater then the quantity demanded and there will be a surplus

surplus causes the market price to fall toward equilibrium; if the current price is below eq. then the quantity demanded will be greater then the quantity supplied >> and there will be a shortage....> a shortage causes the market price to rise toward the eq.

firms will raise the prices that they charge, quantity supplied will increase, quantity demanded will decrease, equilibrium will be reached at a higher price

implies that the quantity supplied is greater then the quantity demanded

demand curve right = eq. price and eq. quantity increase supply curve left = eq. price rises but the eq. quantity falls

cost or benefit that affects someone who is not directly involved in the production or consumption of a good or service

happens when there is an externality; private cost of producing electricty includes the costs of the fuel and running the power plant; social costs includes adding to pollution

occurs when the marinal benefit to consumers of the last unit produced is equal to its marginal cost of production, and where the sum of comsumer surplus and producer surplus is maximized; externalities generally reduce economic efficiency because buyers and firms ignore the external cost or benefit >> which leads to either overproduction of the good if there is an external cost, or underproduction of the good

failure of the market to produce the efficient level of output; externalities, public goods, and common resources all cause market failure

externalities generally arise because of incomplete property rights or from the difficulty in enforcing property rights

market failures = unregulated market will result in more than the economically efficient amount of development of farmland; inefficient land allocation refers to the conversion of farmland into developed land >> because the market fails to take into account the external cost of the loss of farmland and inefficiently large quantity of land is developed

quanity at which the marginal cost of eliminating another unit just equals the marginal benefit from eliminating it; the economically efficient quantity of pollution isn't zero in most casts; eliminiating all pollution would incur costs that are greater than the benefits

if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities; parties invovled in an externality have an incentive to reach an efficient solution because the benefits from reducing an externality are often greater than the costs

transaction costs are the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services; private solutions to the problem of externalities are most likely when it is easy to define and enforce property rights when the costs of making a deal are low

Yes, assuming that the marginal benefit does not drop to zero before all of that type of pollution is eliminated

if marginal benefits are greater then marginal costs pollution reduction will make society better off, but if marginal costs is greater then marginal benefit reducing pollution will make society worse off

aims to bring about an efficient level of output in the presence of externalities, tax is set equal to the marginal external costs, whcih is the difference between the marginal social cost and the marginal private cost; the subsidy is set equal to the maringal external benefit, which is the difference between the marginal social benefit and the marginal private benefit

the producer or consumer that creates the externality bears of recieves the costs or benefits of the externality; a tax equal to the cost of a negative externality will cause producers to internalize the negative externality and a subsidy equal to the benefits of a positive externality will cause consumers to internalize a positive externality; a private solution along the lines of the coase theorem would also internalize an externality

economicsts prefer tradable emissions because they allow pollution to be reduced at the lowest cost; the firm that can reduce pollution cheaply will do so and sell its right to emit pollution to another firm whose costs of reducing pollution are high; the command and control approach is generally much costlier because it forces firms to adopt expensive methods of pollution control

when the government imposes quantitative limits on the amount pollution firms are allowed to emit or require firms to install specific pollution control devices; quantitive limits per power plant and specific control devices can be very costly

managers might favor cap and trade system of tradable emission allowances because the federal government would cap the total amount of air pollution emissions and power plant managers would be free to buy and sell the allowances; power plants that could reduce emissions at a low cost would do so and sell their allowances to power plants that could only reduce emissions at a hgih cost

when one person's consuming a unit of a good means that no one else can consumer it; when anyone who doesn't pay for a good cannot consumer it; good that are rival but noexcludable are public goods; goods that are nonrival but excludable are quasi-public goods

public goods are nonrival and nonexcludable; any can get this good without paying for it once it has been produced; attempting to "free ride" in this matter, there is often little incentive for firms to supply the good, because they can't cover their costs if people don't pay for the good and can lead to market failure

tendency of a common resource to be overused; it can be avoided if there is a way to block overuse; one method is to give someone or some group a property right to the resource, which would give the person or group the incentive to use it efficiently, however this doesn't work well if the person or group cannot easily enforce the property right

because whales are a common resource, the absence of agreements among governments to control whaling

price elasticity = (% change in quant. demanded)(%change in price)

inelastic, food is a necessity and the demand for necessities tends to be less elastic than the demand for luxuries

most important determinant of the price elasticity of demand is usually the availablity of substitutes for the product

if the demand is inelastic, an increase in price will increase revenue because the price will increase proportionally mroe than the quantity sold will decrease

if revenue increases when price falls, the demand must be elastic

elasticity = (%change in quantity/%chance in price). range of elasticity: (-3/10)= -.03 to (-5/10) = -0.5 demand for cigarettes is inelastic, if price increase revenue will also increase

cross-price elasticity of demand equals the percentage chane in quantity demanded of one good divided by the percentage change in the price of another good; if the cross-price elasticity is negative, then the goods are complements, if it is positive then they are substitutes

income elasticity equals the percentage change in the quantity demanded divided by the percentage change in income; if the income elasticity is greater than 0, then the good is normal, if it is less than 0 then the good is inferior. goods with income elasticities between 0 and 1 are often called necessities, goods with incomes elasticities greater than 1 are often called luxuries

a. and c. are substitutes, so the cross-price elasticities will be positive; b. and d. are complements so the cross-price elasticities will be negative

during a recession, falling consumer incomes can cause firmselling luxury goods (w/ i.e. greater then 1) to experience the largest decline in sales; falling consumer incomes can cause firms selling inferior goods (w/ i.e. of demand less then 0) to see their sales increase the most

main determinant of the price elasticity of supply is time; the longer the time period the more firms are able to adjust to a change in price; we would expect that as the time period increases the price elasticity of supply will increase >> an exception to this rule is products that require use of a resource that is in fixed supply, such as wine from a particular region in France

a longer period of time allows farmers to respond to an increase in demand; for example by planting more trees, this means that the supply curve is more elastic in the long run so that the response in price to an increase in demand is lower in the long run

Exports and imports as a share of the GDP are smaller for the U.S. than for most other industrialized countries; bc U.S. has a large and diverse economy, the gains from trading with other econmies probably aren't as great as they would be if the U.S. economy were smaller and less diversified like the economies of Belgium or South Korea

absolute advantage is the ability to produce more of a good or service than compeitiors whne using the same amount of resources; comparative advantage is the ability of an individual, a business or a country to produce a good or service at the lowest opportunity cost a country will often import goods in which it has an absolute advantage; eg. the U.S. could produce textiles such as sheets and towels with fewer resources than can China, but China can produce these goods at a lower oppertunity cost than the United States >> importing textiles from China frees up resources in the U.S. that the U.S. can use to produce other goods which it has a comparative advantage over

Absolute advantage is the ability to produce more of a good or service than competitors using the same amount of resources. Comparative advantage is the ability to produce a good or service at a lower opportunity cost than other producers. A country will often import goods in which it has an absolute advantage.

comparative advantage; developing toys and other products often requires large investments in capital and access to highly skilled designers, manufacturing toys can be done with relatively little capital and unskilled workers the U.S. has a comparative advantage in designing toys while China has a comparative advantage in the production of toys

Disagree. Bolivia MUST have a comparative advantage in producing at least one good; comparative advantage compares opportunity costs of producing goods between two countries; if the U.S. has a lower opportunity cost in one good, then it must have a higher opportunity cost in some other good, which would give Bolivia the comparative advantage in producing the other good

Though workers in the U.S. produce more output per hour than workers in Japan, indicating that the U.S. has an absolute advantage in production, japan must be able to produce goods it exports to the U.S. at a lower oppertunity cost than could the U.S.This gives Japan a comparative advantage in producing those products it exports to the U.S.

increases a country's consumption because it allows the country to specialize in the goods and services that it can produce at the lowest opportunity cost and trade for goods and services for which it has a higher oppertunity cost

Complete specialization would mean producing only one good, it is not typical for a country to completely specialize because not all goods and services are traded international, the production of most goods involves increasing opportunity costs, which means that before specialization is reached a country may have lost its comparative advantage in producing a good. Tastes for products differ across countries so different countries may have comparative advantages in different varieties of the same good.

climate and natural resources, relative abundance of various types of labor and capital, technology and know-how, and external economies

no, based on comparative advantage

1. many buyers and sellers 2. all firms are selling identical products 3. no barriers to firms entering the market

a price taker is a buyer or seller that is unable to affect the market price, because a firm in a perfectly competitive market is very small relative to the market, and because it is selling exactly the same product as every other firm, it can sell as much as it wants without having to lower its price. If the firm raises its price, the firm will sell nothing.

A price taker can sell as many unites are it wishes at the market price, P. By selling additional units, the firm recieves additional (or marginal) revenue of P. Because each unit is sold at P, the average revenue will also equal P, and we get the result P=MR=AR.

As long as MR > MC a firm should continue to expand production because doing so adds more to its total revenus than to its total cost, thereby increasing total profit. When a firm reaches the level of output at which marginal revenus equals marginal cost, it has reached the point where producing that unit of output will add as much to its total revenue as it does to its total cost, which means that total profit cannot be increased and therefore must be at a maximum.

in a perfectly competitive market, MR = P, making these two conditions equivalent

economic profits lead firms to enter an industry; economic losses lead firms to exit an industry.

yes, even in the long run, because it is earning as much as it would earn elsewhere- it is earning the average rate of return on investment.

As more farmers enter the industry, the market supply curve shifts to the right. This shift leads to a lower market price received by firms already in the industry, causing economic profit to be driven to zero in the long run. As more firms exit the industry, the market supply curve shifts to the left. This shift leads to a higher price received by firms remaining in the industry, resulting in these firms breaking even in the long run.

a monopoly is a firm that is the only seller of a good or service that does not have a close substitute; the firm can't have a monopoly if a close substitute for its product exists.

consumers could buy hardware on the internet or by driving to another town that has a hardware store, so no. Though because competition from on-line sellers and store in other towns may not be sufficient to eliminate your economic profits in the long run, you may have a monopoly in the broader sense of the term.

because it hopes that in the long run society will be better off, the potential profits to be earned by the temporary monopoly will encourage more rapid technological progress and will encourage risk-taking on the part of firms (pharma companies for example) that would otherwise not occur; competition still exists, but it focuses more on coming up with new products and processes

a firm that the government designates as the only legal provider of a good or service; it is doubtful that most public franchises are natural monopolies, if they were they wouldn't need the government to restrict their competition

A natural monopoly arises when one firm can supply the entire market at a lower average total cost than can two or more firms. In these cases, the firm doesn't need a special law or strategy to become a monopoly. The monopoly happens naturally.

USPS is not a good natural monopoly; if it were it wouldn't need a law banning competition. It would be able to provide mail delivery at a lower cost and chage a lower price then potential competitors so no one would want to enter the industry. If the current law banning competitors were removed, firms would likely enter this market.

the monopolist's demand curve is the market demand curve, the marginal revenue curve is derived from the demand curve; for a linear demand curve, the marginal revenue will be below the demand curve (and it is also twice as steep as the demand curve, because in absolute value, the slope of the marginal revenue curve will be twice the slope of the demand curve)

in the sense that if a monopolist raises price, it will lose some, but not all, of its customers, it does not take the price as given

Profit maximization is not the same thing as revenue maximization. TO maximize revenue, the firm would produce up to the point where marginal revenue is zero. Unless marginal cost is zero, this is a larger quantity than the quantity where marginal revenue equals marginal cost. Maximizing production could mean producing the physical maximum possible This is likely to be beyond the profit maximizing level of output.

the avowed purpose of antitrust laws is to eliminate collusion and promote competition among firms. The department of justice's antitrust division and the federal trade commission enforce these laws.

Charging a price equal to marginal cost means that output will equal the level at which marginal cost equals marginal benefit, which is the efficient level of output. Charging this price would mean that the typical regulated natural monopoly would suffer an economic loss as this price will be below average cost. If the regulator sets price to equal cost instead, some efficiency will be lost but the natural monopoly will stay in business and earn a normal profit

they are similar in that there are many firms and low barriers to entry; in PCM products are identical (wheat and wheat), in MCM products are similar but not identical (hair cuts and restaurant meals)

If it increases its price, customers will substitute away from QP's and buy something else- like burgers at Wendy's or Burger King. If MD's raises its prices, it won't lose all of its customers, howeverm because it is located more conveniently than other restaurants for some people and some people strongly prefer QP's.

All wheat farmers are selling identical goods. Coffeehouses do not sell identical goods. If a wheat farmer raises his prices above market price, he will lose his buyers. Starbucks can raise its prices because it is selling a product that is not identical to the products sold by other coffeehouses.

in a MCF, P > MR, a profit-maximizing monopolisticaly competitive firm producing where MR = MC will necessarily produce where P > MC.

new firms entering an industry cause the demand curves for the products of existing firms to shift to the left. Existing firms will be able to sell less at every price, so their profits will decline.

economic profits take into account opportunity costs, accounting profits do not. Economic profits typically will be smaller than accounting profits. If a firm as zero accounting profits, it will be experiencing an economic loss, while a firm with zero economic profits will have positive accounting profits.

High competition in an industry generall means lower prices for consumers. As more firms enter an industry, the demand for each individual firm's product decreases. The decrease in demand shifts the individual firm's demand curve to the left, which lowers the selling price, which is good for consumers. If the industry is monopolistically competitive, the firm's demand curve will eventually shift to the point where it is tangent to the average total cost curve. This is where price is equal to average total cost, which means the firm is breaking even, which compared to earning a profit, is bad for shareholders.

If consumers believe that all coffee is equal, they have no reason to choose Starbucks over McDonalds, and Starbucks would not be able to charge a higher price than any of its competitors.

Because it charges a price that is greater then its marginal cost.

monopolistic competition probably doesn't cause a significant loss in economic well-bring to society. The loss or gain can be measured by total economic surplus. Although monopolistically competitive firms reduce total economic surplus by producing less than the efficient amount (creating a deadweight loss) they also increase consumer surplus because people are willing to pay more for variety and for products that are more closely suited to their tastes.