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79 Cards in this Set
- Front
- Back
Define: private good
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-Principle of rival consumption
-Only 1 person can consume at once |
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Define: public good
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Many people can benefit at the same time
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What are the two requirements for public goods?
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1. Non-rival=one person's consumption doesn't detract from anthers (interstates, radio)
2. Non-excludable=can't keep people from accessing good (radio--can't prevent you from listening) |
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Define: club goods
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Can keep you out if you don't have membership (ex. cable, TV, gym)
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Define: common resources
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Not excludable, but rival (ex. fishing)
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What are the two types of good in between public and private?
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Common resources and club goods
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How do we find market (society's) demand for public goods?
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Since multiple users benefit at the same time, society's demand curve is found by vertically adding individual demand curves
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What is an example that involves market demand for public goods?
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-Public good of police protection
-Community's demand for police car? Add up individual values |
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What are the problems with the provision of public goods?
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1.Consumers know they can benefit from the good whether or not they pay for it (free riders)
2.Little incentive for private firms to provide public goods, hard to profit if you can't keep out non-paying customers |
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What is the solution to the problem of public goods?
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Government provides public goods, power to tax generates revenue
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Define: free riders
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Use service w/o paying for good
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What is the equation for profit?
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Total revenue (PxQ)-total cost
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What are two types of costs?
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1.Explicit=imput cost that requires outlay $ from firm
2.Implicit=does not require outlay of $ (pop. cost using building for pizza rather than bagels) |
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Define: accounting profit
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Total revenue-explicit costs
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Define: economic profit
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Total revenue-(explicit+implicit costs)
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Define: production function
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Relationship between inputs and maximum output
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Define: marginal product (MP)
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Increase in output when 1 additional input is used
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What is the MP equation?
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ChangeQ/change input
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Define: diminishing MP
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MP declines as quality of input increases
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What are the types of cost?
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1.Total fixed cost (TFC)=costs that does not vary w/ production (ex. equipment)
2.Total variable cost (TVC)=costs that vary w/production level (ex. flour, labor) 3.Total costs (TC)=TFC + TVC 4.Marginal cost (MC)=amount TC changes when output changes (changeTC/changeQ) 5.Average fixed cost (AFC)= TFC/Q 6.Average variable cost (AVC)= TVC/Q 7.Average total cost (ATC)= TC/Q |
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What does MC look like?
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U-shape, initially decreasing, later rises (MP is increasing and then decreasing)
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What is TFC?
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-Total fixed cost
-Cost that does not vary w/ ovulation -Ex. equipment |
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What is TVC?
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-Total variable cost
-Costs that vary w/ production level -Ex.flour, labor, utility bills |
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What is TC?
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-Total cost
-TFC+TVC |
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What is MC?
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-Marginal cost
-Amount TC changes when output changes -ChangeTC/changeQ -U-shape |
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What is AFC?
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-Average fixed cost
-TFC/Q -Continuously decreasing |
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What is AVC?
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-Average variable cost
-TVC/Q -U-shape |
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What is ATC?
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-Average total cost
-U-shape |
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Define: short run (SR)
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At least one input is fixed (cannot change)
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Define: long run (LR)
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All inputs can be changed
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How do firms determine what size their business should be?
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-Depends on anticipated rate of production
-Look at short run because in long run there is an infinite # of choices for shop size |
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Define: LRATC
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Represents the minimum unit cost of producing any given rate of output
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Define: (perfectly) competitive market
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Market structure where the decisions of the individual buyers and sellers do not impact the market price
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What is necessary for a competitive market?
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-Large # of buyers and sellers
-Homogeneous product (same product) -No barriers to entry or exit -All relevant information is freely accessible |
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Define: price-takers
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Firms in perfectly competitive market
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What do price takers do?
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Takes market price and sells any desired quantity at that price
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What are types as revenue?
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1.Total revenue (TR)= price per unit X # of units sold (PxQ)
2.Marginal revenue (MR)= amount TR changes when Q changes (MR=changeTR/changeQ) 3.Average revenue (AR)= TR/Q |
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Where is it most rational to produce?
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Where profit is the largest
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When MR>MC...
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-This unit brings in more revenue than it's cost of production
-Adds to profit |
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When MR<MC...
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-This hit brings in less revenue than it's cost of production
-Causes us to lose $, negative profit |
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What is the limit for rational production?
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We will not produce beyond where MR=MC (P=MC)
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Define: monopoly
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One seller of a unique product (no close substitutions)
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What are three types of monopolies?
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1.Local= fairly common, ex. only one movie theatre in a small town
2. Regional= utilities, schools 3. National and International= less common, absolute monopolies are rare but firms have a very large market share (patents, Microsoft) |
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What are reasons for monopolies?
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1.Resources are owned by one firm
2.Gov. regulation creates monopolies by giving 1 firm exclusive right to produce good (patent) 3.Production process in high cost and one firm produces at lower cost when serving the entire market instead of several firms that share the market |
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Define: natural monopolies
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Utilities= good example b/c large infrastructure cost
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Define: monopolist demand curve
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-The entire market demand curve
-Price searcher to find $ that maximizes profit |
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If monopolist charges a single price what will the firm do?
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The firm must lower the price to increase the quantity it sells
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What is different about the relationship between MR and price for the monopolist?
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MR does not equal Price, MR>price
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What's a general rule for monopolies?
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If D is linear (we always use linear), MR curve is also linear with the same vertical intercept but 2x slope of the Demand curve
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When Demand: P=100-50Q, what is MR?
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MR=100-100Q
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How does the monopolist determine what quantity to sell and what price to charge?
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-Price-searcher
-MR=MC (or as close as possible w/p MC>MR) |
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How do you find demand of monopolies?
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1.Find MR
2.Set MR=MC and solve for Qm 3.Plug in Q to find P |
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Do consumers like monopolies?
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No (compare surplus)
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What is the difference of surplus in competitive vs. monopolies?
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Less surplus in monopolies because DWL
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Why would we have monopolies if they are disliked by consumers?
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They are incentive for innovation--patents. This benefit is greater than the DWL
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Define: macroeconomics
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Economy as a whole, bigger unit (ex. USA, TN, South)
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Define: Gross Domestic Product (GDP)
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Market value of all final goods and services produced in a country w/in a year
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What are 4 countries with the highest GDP, and what is the amount of the highest?
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1.USA ($15 trillion)
2. China 3. Japan 4. Germany |
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How is the definition of GDP broken down?
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1.Market value= PxQ
2.Final= finished good in the hands of the final user (not an intermediate good) (bread) 3.Goods and services= ex. medical care, services big part today 4.Produced=GDP measures PRODUCTIONS, sales from used goods not included 5.W/in a country=production w/in domestic boarders 6.Year= rate of production w/in a given time period |
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What are the problems with GDP?
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1. Nonmarket production
2. Underground economy=ex. drugs, no pay jobs |
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How is the GDP growth rate calculated?
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(GDP2012-GDP2011)/GDP2011 x 100
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Define: nominal variables
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In current year prices, no adjusted for changes in prices
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Define: real variables
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Not in current year prices, in constant prices (are adjusted)
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How do you calculate nominal GDP?
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Current P x current Q
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How do you calculate real GDP?
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Base year P x current year Q
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Define: GDP deflator
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Measure of the price level (measures inflation rate)
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How is the GDP deflator calculated?
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NGDP/RGDP x 100
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Define: inflation
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An increase in general price level
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Define: deflation
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A decrease in general price level
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What is the inflation rate for the base year always?
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100
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How is the inflation rate calculated?
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(GDPdeflator year 2-GDPdeflator year one)/GDPdeflator year one
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Why are we concerned with inflation?
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Because we experience a decrease in purchasing power
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Define: purchasing power
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Value of money for buying goods/services
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Define: Consumer Price Index (CPI)
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Measure of overall cost of goods and services bought by a typical consumer, "basket of goods"
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What are the top 3 things a typical consumer spends money one? (in order)
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1.Housing
2.Transportation 3.Food |
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How is CPI calculated?
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(Cost of basket today/cost of basket in base year) x 100
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What are problems with CPI?
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1.Substitution bias=content of basket is fixed, if price doubles people would substitute away (Q would change), so CPI overstates inflation
2.Introduction of new products 3.Unmeasured quality changes |
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What is the difference between GDP and CPI?
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-GDP=all goods/services, goods/services currently produced, only domestic production
-CPI=basket of goods/services, basket is fixed, domestic consumption (includes imports) |
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How is CPI used to convert dollars from one year to another?
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Amount in 1966 x (CPI today/CPI 1966)
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