Define the Production Possibilities Frontier?
Is the boundary between those combinations of goods and services that can be produced and those that cannot.
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What points on the PPF are attainable?
All of the points inside the PPF.
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What points on the PPF are unattainable?
All points outside of the PPF.
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Define Opportunity Cost?
The highest valued alternative forgone.
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What is the formula for Opportunity Cost?
The decrease in the quantity produced of one good / The increase in the quantity produced of another good.
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Define Marginal Cost?
Is the opportunity cost of producing one more unit.
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How do you work out marginal cost?
As the quantity of products produced increases, the PPF gets steeper and the marginal cost of a unit increases.
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Define marginal benefit?
is the benefit received from consuming one or more units of it.
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What is the marginal benefit curve?
A curve that shows the relationship between the marginal benefit from a good and the quantity consumed of that good.
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What does marginal benefit measure?
how much people are willing to pay for an additional unit. The most you are willing to pay for a unit is its marginal benefit.
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Define Economic Growth?
An expansion of production possibilities is called economic growth.
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What causes economic growth?
A technological change and capital accumulation.
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define capital accumulation?
the growth of capital resources which includes human capital.
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producing only one good or a few goods/.
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define comparative advantage?
a person has a comparative advantage in an activity if that person can perform the activity at a lower opportunity cost than anyone else.
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define absolute advantage?
a person who is more productive than others. A person who has a absolute advantage does not have a comparative advantage in every activity.
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define property rights?
the social arrangements that govern the ownership, use and disposal of anything that people value.
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define a competitive market?
a market that has many buyers and sellers, so no single buyer or seller can influence the price.
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define relative price?
the ratio of one price to another. a relative price is an opportunity cost
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how do you calculate relative price?
money price of a good / money price of all goods
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define quantity demanded?
the amount that consumers plan to buy during a given time period at a particular price.
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define the law of demand?
other things remaining the same, the higher the price of a good, the smaller the quantity demanded; and the lower the price of a good, the greater is the quantity demanded.
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define substitution effect?
when the price of a good rises, other things remaining the same, its relative price- its opportunity cost rises.
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what happens to marginal benefit when the quantity available increases?
its falls and the highest price that someone is willing and able to pay falls along the demand curve.
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Define a change in demand?
when any factor that influences buying plans other than the price of the good changes, there is a a change in demand.
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define expected future prices?
if the expected future price of a good rises and if the good can be stored, the opportunity cost of obtaining the good for future use is lower today than it will be in the future when the price has increased.
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define income effects?
when the price of a good rises and other influences on buying plans remain the unchanged, the price rises relative to incomes.
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refer to the relationship between the price of a good and the quantity demanded.
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define the demand curve?
shows the relationship between the quantity demanded of a good and its price when all other influences on consumer planned purchases remain the same.
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define a normal good?
where demand increases as income increases.
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define an inferior good?
demand decreases as income increases.
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define a movement along the demand curve?
if the price of a good changes but no other influences of buying plans change, we illustrate the effect as a movement along the demand curve.
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what happens if demand increases?
if demand increases the demand curve shifts RIGHTWARD.
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What happens when demand decreases?
The demand curve shifts LEFTWARD.
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define quantity supplied?
the amount that producers plan to sell during a given time period at a particular price.
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define the law of supply?
other things the remaining, the higher the price of a good, the greater is the quantity supplied; the lower the price of a good, the smaller the quantity supplied.
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define the minimum supply price?
tell us the lowest price at which someone is willing to sell another unit. This lowest price is marginal cost.
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what happens when the quantity produced increases?
the lowest price at which someone is willing to sell one more unit rises along the supply curve.
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define expected future prices?
if the expected future price of a good rises, the return from selling it in the future is higher than it is today. Supply decreases today and increases in the future.
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define number of suppliers?
the larger the number of firms that produce a good, the greater is the supply of that good. As firms enter an industry, the supply of that good increases. As firms leave the industry, the supply decreases.
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what does a increase in supply mean?
The supply curve will shift rightward.
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what does a decrease in supply mean?
the supply curve will shift leftward.
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a situation in which opposing forces balance each other (price balances the plans of buyers and sellers)
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define the equilibrium price?
is the price in which the quantity demanded equals the quantity supplied.
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define the equilibrium quantity?
is the quantity brought and sold at the equilibrium price.
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is a measure of the responsiveness of quantity demanded of a good to a change in its price, other things remaining the same.
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define price elasticity of demand?
equals the percentage change in quantity demanded / the percentage change in price.
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define income elasticity of demand?
measures the responsiveness of demand to a change in income, other things remaining the same.
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what is the income elasticity for a normal good?
the income elasticity is positive.
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what is the income elasticity for a inferior good?
the income elasticity is negative.
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define the cross elasticity of demand?
measures the responsiveness of demand for one good to a change in the price of a substitute or a complement, other things remaining the same.
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what is the cross elasticity of demand with respect to the price of a substitute?
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What is cross elasticity of demand with respect to the price of a complement?
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define rent ceiling?
the maximum rent that can be legally charged.
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what happens if rent ceiling is set above the equilibrium price?
has no effect.
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what happens if rent ceiling is set below equilibrium price?
it creates a housing shortage, increases search activity and creates a black market. inefficient and unfair.
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what happens if a minimum wage is set below the equilibrium price?
has no effect.
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what happens if a minimum wage rate is set above the equilibrium wage rate?
creates unemployment and increases search activity. it is inefficient.
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what happens if demand and supply are perfectly elastic?
sellers pay the entire tax.
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what happens if demand and supply are perfectly inelastic?
buyers pay the entire tax.`
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define a production subsidiary?
it is like a negative tax. it lowers the price and leads to inefficient overproduction.
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define economic accounting?
economists measure a firms profit to enable them to predict the firms decisions (maximize economic profit).
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how do you calculate economic profit?
total revenue - total cost (with total cost measured as the opportunity cost of production).
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define opportunity cost of production?
is the value of real alternatives forgone.
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define implicit rental rate?
the firms opportunity cost of using the capital it owns. the implicit rental rate has 2 components: economic depreciation and forgone interest.
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define economic depreciation?
the fall in the market value of a firms capital over a given period.
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how do you calculate economic depreciation?
market price at the beginning - market price of capital at the end.
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define normal profit?
the return to entrepreneurship is profit.
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define perfect competition?
many firms that sell an identical product, many buyers and no restrictions on the entry of new firms in the industry.
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define monopolistic competition?
large number of firms compete by making similar but slightly different products. the product differentiation gives an element of monopoly power.
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small number of firms compete.
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one firm that produces a good for which no close substitute exists.
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define measures of concentration?
the percentage of total revenue in an industry accounted for by the five firms with the largest value of sales. the range is from 0 (perfect comp) to 100 (monopoly).
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define economies of scope?
when a firm uses it specialized and expensive resources to produce a range of goods.
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define short run?
is the time frame in which the quantity of at least one fact of production is fixed.
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how easily are short run decisions reversed?
short run decisions are easily reversed. the firm can increase or decrease its output in the short run by increasing or decreasing the labor it hires.
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define long run?
is a time frame in which the quantities of all factors of production can be varied.
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how easy are long run decisions reversed?
long run decisions are not easily reversed. once a decision is made the firm must live with it for some time.
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how do you describe the relationship between output and the quantity of labor employed?
Three concepts: total product, marginal product and average product.
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define totala product?
is the maximum output that a given quantity of labor can produce. Each increase in employment brings an increase in total product.
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define the marginal product of labor?
is the increase in total product resulting from a one unit increase in the quantity of labor employed with all other inputs remaining the same.
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define average product?
tells us how productive workers are on average.
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how do you calculate average product?
total product / the quantity of labor employed.
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define the total product curve?
separates the attainable output levels from those that are unattainable.
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which points on the total product curve are efficient?
the points on the TP curve are technologically efficient.
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define marginal product curve?
marginal product is shown midway between the quantities of labor to emphasize that it is the result of changing the quantity of labor.
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define diminishing returns?
occurs when the marginal product of an additional worker is less than the marginal product of the previous worker.
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define the law of diminishing returns?`
as the number of new employees increase, the marginal product of an additional employee will at some point be less than the marginal product of the previous employee.
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define the production function?
is the relationship between the maximum output attainable and the quantities of both labor and capital
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how does diminishing returns occur?
occurs as the quantity of capital increases.
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define marginal product of capital?
is the change in in total product / the change in capital employed (when the amount of labor employed is constant.
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define long run average cost curve?
the relationship between the lowest attainable ATC and output, when both the product size and labor are varied.
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what happens to the LRAC when economies of scale are present?
the LRAC slopes downward.
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what happens to the LRAC when diseconomies of scale are present?
the LRAC slopes upward.
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define constant returns to scale?
are features of a firms technology that keep ATCs constant as output increases.
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what happens to the LRAC curve when constant returns to scale are present.
the LRAC is horizontal.
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define the minimum efficiency scale?
is the smallest quantity of output at which LRAC reaches its lowest level.
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what are the concepts used to describe the relationship between output and cost?
total cost, marginal cost and average cost.
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define total cost?
is the cost of all factors of production
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define total fixed cost?
is the cost of the firms fixed factors e.g renting machines (quantities of fixed factors dont change as output changes).
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define total variable cost?
cost of the firms variable inputs e.g labor (total variable cost changes as total product changes
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define marginal cost?
is the change in total cost resulting from a one unit increase in output.
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how do you calculate marginal cost?
change in total cost / change in output
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why does marginal cost decrease?
it decreases at low outputs because of economies from greater specialization. but i eventually increases due to the law of diminishing returns.
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define average cost?
cost per unit of output.
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what happens when marginal cost is less than average cost?
average cost is decreasing.
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what happens when marginal cost exceeds average cost?
average cost is increasing.
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a technological change that increases productivity shifts the total product, marginal product and average product curve upward.
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what are the characteristics of perfect comp?
many buyers and sellers, no restrictions on entry, no advantage for established firms.
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how does perfect competition arise?
it arises if the firms minimum efficient scale is small relative to the market demand for the good.
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define price taker?
a firm that cannot influence the market price because its production is n insignificant part of the total market.
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how do you calculate total revenue?
price x quantity
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how do you calculate marginal revenue?
change in total revenue that results from a one unit increase.
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in perfect competition...
the firms marginal revenue = the market price
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what is the demand curve for perfect competition?
a horizontal line at the market price, the same as the frims marginal revenue curbe
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what happens if marginal revenue exceeds the marginal cost?
the extra revenue from from selling one more unit exceeds the extra cost incurred to produce it.
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what happens if marginal revenue is less than marginal cost?
the extra revenue from selling one more unit is less than the extra cost incurred to produce.
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how do you calculate economic loss?
total fixed cost + (average variable cost - price) x quantity
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define short run supply curve?
a perfectly competitive firms supply curve shows how its profit maximizing output varies as the market price varies.
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what is a perfectly competitive firms profit?
in the LR equilibrium, economic profit is zero, there is no entry or exit.
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in long run equilibrium...
consumers pay the lowest possible price and marginal social benefit = marginal social cost.
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what are the characteristics of a monopoly?
single supply power, no close substitutes, high barriers of entry, price discrimination.
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how does a monopoly maximise profit?
by producing the output t which MR = MC and by changing the max price that consumers are willing to pay.
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define single price monopoly?
charges a high price and produces a smaller quantity than a perfectly competitive market. it restricts output and creates a dead weight loss.
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what does total loss that arises from a monopoly equal?
dead weight loss + cost of resources devoted to rent seeking.
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define price discrimination?
an attempt by the monopoly to covert consumer surplus into economic profit.
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what does price = to average cost enable?
the firm to cover its costs but it is inefficient
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what are the characteristics of monopolistic competition?
large number of firms competing, each produces a different product, compete on quality and price and firms are free to enter and exit.
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when firms make economic profit..
new firms enter the market. this entry lowers prices and eventually eliminates economic profit.
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when firms incur economic loses...
firms leave the industry. This exit increases prices and eventually eliminates economic loss.
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in the LR equilibrium...
firms neither enter nor leave the industry and the firms in the industry make zero economic profit.
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define excess capacity?
if it produces below its efficient scale, which is the quantity at which ATC is a minimum.
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define mark up?
amount by which the price exceeds MC
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when are resources in in monopolistic competition used efficiently?
when marginal social benefit = marginal social cost.
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what are the characteristics of oligopoly?
lies between monopoly and monopolistic competition, small number of firms compete, natural or legal barriers to entry.
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because of a small number of firms...
each firms actions influence the profits of the other firms, they are interdependent.
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define a cartel?
firms which collude to limit output, raise price and increase economic profit.
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define game theory?
studies the strategic behavior of firms and recognizes their interdependence.
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define nash equilibrium?
the bets outcome based on the other persons actions, for both of you.
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explain the prisoners dilemma payoff matrix?
use this game to understand oligopoly as it shows the potential actions of other firms.
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define a collusive agreement?
firms can comply or cheat.
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define cooperative equilibrium?
in which the players make and share the monopoly profit.
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define *** for tat?
small penalty where they do what the opponent did last time.
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define trigger strategy?
severe punishment. a player cooperates if the other cooperates but plays the nash equilibrium after that.
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define sequential games?
one firm makes a decision at the first stage and the other at the second stage.
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define a contestable market?
a market in which firms can enter and leave so easily that firms face competition form potential entrants.
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define anti-trust law?
laws that regulate oligopolies to prevent them from becoming monopolies.
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define private choice?
is a decision that has consequences only for the person making it.
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define public choice?
is a decision that has consequences for many people and perhaps for an entire society.
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why do govs exist?
establish and maintain property rights, allocate scarce resources and redistribute income and wealth.
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define gov failure?
is a situation in which gov actions lead to inefficiency to either under provision or over provision.
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define political equilibrium?
when the choices of all the groups of decision makers are compatible, and no group can see a way
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define an excludable good?
a good is excludable if it is possible to prevent someone from enjoying its benefits.
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define a non-excludable good?
a good is non excludable if everyone benefits from it regardless of whether they pay for it.
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define a rival good?
a good is a rival if one persons use decreases the quantity available for someone else.
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define a non rival good?
a good is a non rival if one persons use does not decrease the quantity available for someone else.
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a private good...
is both a rival and excludable.
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a public good...
is both non rival and non excludable.
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a common resource...
is a rival and non excludable. a unit of a common resource can only be used once, but no one can be prevented from using what is available.
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natural monopoly good...
is non rival and excludable.
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define negative externalities?
arises when the social cost of production exceeds the private cost.
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define private cost of production?
cost that is born by the producer.
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define marginal private cost?
cost of producing an additional unit of a good that is borne by its producer.
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define external cost?
a cost of producing a good that is not borne by the producer but borne by other people.
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define marginal external cost?
cost of producing an additional unit that falls on people other than the producer.
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marginal social cost?
is the sum of marginal private cost and marginal external cost.
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how do you fix inefficiency?
establish property rights and tax or price pollution.
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define property rights:
legally established titles to the ownership, use and disposal of factors of production and goods that are enforceable in the courts.
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define abatement technology?
a production technology that reduces or prevents pollution.
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define the coase theorum?
the proposition that if property rights exist and the transaction costs of enforcing them are low.
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is the market value of all the final goods produced within a country in a given time period
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define a final good?
is n item that i bought by its final user during a specified time period.
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define an intermediate good?
is an item that is produced by one firm, bought by another firm and used as a component of a final good.
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household consumption expenditures.
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goods that are purchased by the government
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firms pay incomes to households
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total expenditure =
Y = C + I + G + X - M
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aggregate expenditure = aggregate income
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is the decrease in the value of a firms capital that results from wear and tear and obsolescent
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define the working age population?
is the total number of people aged 16-64 who are not in prison or hospital
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define economically active?
are people who have a job or are willing and able to take a job.
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define the unemployment rate?
is the percentage of economically active people who are unemployed.
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how do you calculate unemployment?
number of people unemployed / workforce x 100
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how do you calculate the employment rate?
number of people employed / working age population x 100
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define the economic activity rate?
the percentage of the working age population who are economically active.
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how do you calculate the economic activity rate?
workforce / working age population x 100
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define frictional unemployment?
the unemployment that arises from people entering and leaving the workforce and from an ongoing process of job creation and job destruction.
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define structural unemployment?
unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the location of jobs.
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define cyclical unemployment?
is the higher than normal unemployment at a business cycle trough and lower than normal unemployment at a business cycle peak.
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define natural unemployment?
unemployment that arises from frictions and structural change when there is no cyclical unemployment.
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define full employment?
the employment rate = natural unemployment rate
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define the output gap?
the gap between real GDP and potential GDP.
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what happens when the economy is at full employment?
the unemployment rate = the natural unemployment rate and real GDP = potential GDP, so the output gap is zero.
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when the unemployment rate is less than the natural unemployment rate...
real GDP is greater than potential GDP and the output gap is positive
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when the unemployment rate is greater than the natural unemployment rate...
real GDP is less than potential GDP and the output gap is negative.
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define price level?
the average level of prices and value of money.
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a persistently rising price level.
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a persistently falling price level.
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Other cards in this set
What points on the PPF are attainable?
All of the points inside the PPF.
What points on the PPF are unattainable?
Define Opportunity Cost?
What is the formula for Opportunity Cost?