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47 Cards in this Set
- Front
- Back
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Reasons for Instituting Barriers to trade
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1) protection of infant industires
2) anti-dumping (if proven) 3) defense 4) protection of domestic jobs |
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utility
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the satisfaction derived from consuption of a good measured in units called utils
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proxy
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variable substituted in; here it is price, ie the maxiumum willingness to pay
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Marginal utility formula
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change in total utility/change in quantity
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Reasons for a Monopoly
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1) by law
2) by patent if you've created some technology 3) control of a scarce resource 4) a natural monopoly-- it alone can provide a good more efficiently 5) technical superiority 6) very large sunk costs |
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optimal decision
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most efficient decision, best decision under the cirucmstances
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factors of production
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1) land
2) capital-- K 3) Labor (L) Entrepreneurship |
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Returns of each factor of production
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Land-- Rent
Labor-- W + S Capital-- Interest Entrepreneurship-- Profit |
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Draw a spectrum of market organization
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goes from centrally planned to market driven economy
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productive efficiency
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are you proare you producing at the lowest possible cost?
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allocative efficiency
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when reouces are being put towards different goods and services, do they represent consujmer prefernces
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Three realistic assumptions of economists
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1) people are rational
2) people respond to incentives 3) the optimal decision is made at the margin |
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margin
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the cost or the benefit from consuming or producing one extra unit of the item
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ceteris paribus
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holding all else constant
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Types of demand shifters
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1) tastes and fashions
2) related goods 3) income 4) demographic changes 5) expectations |
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Income as a demand shifter
+ shifts ? - shifts ? |
+ shifts demand curve right because people's purchasing power increases with normal goods. With inferior goods, it shifts left.
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The law of supply
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As price goes up, quantity goes up. As price goes down, quanity goes down.
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Supply Shifters
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1) Input costs (costs of production)
2) Technology 3) Number of sellers |
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For a price ceiling to be effective, it must be
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below the equilibrium
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For a price floor to be effective, it must be
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above the equilibrium
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Identify consumer and producer surplus on a graph.
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Consumer surplus is the area above equilibrium under the demand curve. Producer surplus is the area below equilibrium over the surplus curve.
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As a tax increases, dead weight loss
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increases continuously.
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Elasticity
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responsiveness of one variable to the change in the other
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Price elasticity of demand
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measures how much quantity demanded responds when you change price; elasticity of demand with respect to price
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inelastic
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not much responsive to a price change
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TPP
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Total production
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MPP
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change in total production over change in input
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Law of diminishing marginal returns
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given that the facility stays the same size, the more you put in there, the less output over time you will end up receiving
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MRP
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Marginal revenue product; for each additional worker, how much revenue are they giving you?
MRP=MPP*Price at quantity |
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Cross Price Elasticity of Demand
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when you change the price of one good, how does it change the quantity demanded of another good?
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cross price elasticity of demand is ___ for complements and _____ for substitutes
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- for Complements (raise the price of X, and the price of Y falls)
+ for Substitutes (raise the price of X, and the price of Y rises) |
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Summary of elasticity with respect to price
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o |ED,P | < 1 Relatively inelastic
o |ED,P | = 1 Unit Elastic o |ED,P | > 1 Relatively elastic |
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Summary of elasticity with respect to income
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o ED,Y > 0 Good is normal
o ED,Y < 0 Good is inferior |
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Summary of elasticity with respect to another good
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o EDx, Py >0 Substitutes
o EDx, Py <0 Complements |
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If demand is more inelastic than supply, the _______ eats the tax.
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Consumer
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If demand is more elastic than supply, the _______ eats the tax.
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Producer
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Comparative advantage
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one country is more efficient at producing a good or service
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Optimal rule when consuming one good
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1) MU=P; NMU-P=0
2) NTU is maximized 3) Where the price line intersects the demand curve (that is MU) |
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NMU means
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the consumer surplus for that one unit; the summation of the NMU is the total consumer surplus.
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indifference curve
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takes all the bundles where an individual is equally satisfied by and then plots them on a graph; in terms of utility, ever bundle on the curve is equal
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Properties of Indifference Curves
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1) Downward Sloping
2) Bowed inward 3) Higher ICs better than Lower ICs 4) ICs cannot cross; they are parallel to each other |
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Budget Constraint
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every possible bundle she can afford; the points form a straight line
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Rule for maximizing budget constraints
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the indifference curve must be tangent to the budget constraint
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Two equations for optimizing conditions of an indifference curve and BC
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|MRS|=|Px/Py|
Px*X + Py*Y=I |
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Advantages of International Trade
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Consumers-- wider variety of goods and lower prices
Producers-- cheaper inputs or factors of production; can get more customers because they have access to a wider market; can concentrate on producing one good more efficiently |
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welfare means
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consumer or producer surplus
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The key assumption is that after trade, prices
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equalize
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