Master all AP Microeconomics graphs with this comprehensive study guide. This guide covers supply and demand curves, production possibilities, cost curves, and market structure diagrams.
Q: Production Possibilities; U is inefficient
Answer: The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it; derived whenever the price a consumer actually pays is less than they are prepared to pay.
Q: Production Possibilities; x is impossible
Answer: A legal minimum price that a product cannot be sold below– creates surplus.- The more elastic d and s are, greater the surplus= greater gov’t spending= greater taxesPrice may also be set above the natural market price. A price floor, which is also referred to as a minimum price, sets the lowest level possible for a price.
Q: Production Possibilities; right shift indicates economic growth
Answer: A PPF shows all the possible combinations of two goods, or two options available at one point in time.Opportunity cost can be illustrated by using production possibility frontiers (PPFs) which provide a simple, yet powerful tool to illustrate the effects of making an economic choice. Describes the maximum amount of one good that can be produced for every possible level of production of the other good
Q: market equilibrium
Answer: Economic growth has two meanings:Firstly, and most commonly, growth is defined as an increase in the output that an economy produces over a period of time, the minimum being two consecutive quarters.The second meaning of economic growth is an increase in what an economy can produce if it is using all its scarce resources. An increase in an economy’s productive potential can be shown by an outward shift in the economy’s production possibility frontier (PPF).
Q: consumer surplus
Answer: In a free market economy, resources are allocated through the interaction of free and self-directed market forces. This means that what to produce is determined consumers, how to produce is determined by producers, and who gets the products depends upon the purchasing power of consumers.
Q: producer surplus
Answer: Is the allocation of scarce resources by government, or an agency appointed by the government. This method is referred to as central planning, and economies that exclusively use central planning are called command economies. In other words governments direct or command resources to be used in particular ways.
Q: increased demand = higher price and quantity
Answer: Demand curves generally have a negative slope. There are at least three accepted explanations of why demand curves slope downwards:The law of diminishing marginal utilityThe income effectThe substitution effect
Q: decreased demand = lower price and quantity
Answer: All societies face the economic problem, which is the problem of how to make the best use of limited, or scarce, resources. The economic problem exists because, although the needs and wants of people are endless, the resources available to satisfy needs and wants are limited.
Q: increased supply = lower $ and higher #
Answer: NIFTS
Q: decreased supply = higher $ and lower #
Answer: PPTTEN
Q: price floor; causes a surplus
Answer: Equilibrium price is also called market clearing price because at this price the exact quantity that producers take to market will be bought by consumers, and there will be nothing ‘left over’. This is efficient because there is neither an excess of supply and wasted output, nor a shortage – the market clears efficiently. This is a central feature of the price mechanism, and one of its significant benefits.
Q: perfect competition at equilibrium
Answer: An increase in demand shifts the demand curve to the right, and raises price and increase the quantity supply.
Q: perfect competition making a profit
Answer: A decrease in demand shifts the demand curve to the left and reduces price and decreases the quantity supplied.
Q: perfect competition making a loss
Answer: An increase in supply shifts the supply curve to the right, which reduces price and increases the quantity demanded.
Q: perfect competition in a “shut down” position
Answer: A decrease in supply shifts the supply curve to the left, which raises price but reduces the quantity demand.
Q: monopoly making a profit
Answer: Producer surplus is the additional private benefit to producers, in terms of profit, gained when the price they receive in the market is more than the minimum they would be prepared to supply for. In other words they received a reward that more than covers their costs of production.
Q: monopoly making a loss
Answer: Economic welfare is the total benefit available to society from an economic transaction or situation.Economic welfare is also called community surplus. Welfare is represented by the area ABE in the diagram below, which is made up of the area for consumer surplus, ABP plus the area for producer surplus, PBE.
Q: supply and demand for labor
Answer: A Lorenz curve shows the % of income earned by a given % of the population. A ‘perfect’ income distribution would be one where each % received the same % of income. The further the Lorenz curve is from the 45 degree line, the less equal is the distribution of income.
Q: perfectly competitive demand for labor
Answer: A subsidy of B – C (U – S) would provide the necessary incentives for universities to supply Q1 places, and for students to take-up this number. If funded in this way, students would contribute part of the real cost of their education by paying C, which is equivalent to the private benefit they expect to derive, and ‘society’, would contribute a further part of the cost of education (B – C) equivalent to the external benefit which is derived by society. This subsidy would be funded through taxation.
Q: Production Possibility Frontier (PPF)
Answer: A price ceiling may be set to prevent price from rising beyond a predetermined level. A price ceiling will only have an effect on the market if it is set below the prevailing market clearing price. A price ceiling is also called a maximum price.A legal maximum price that a product cannot be sold above– creates shortage.- The more elastic d and s are, greater the shortage- Can create black market
Q: Economic Growth using a Production Possibility Frontier (PPF)
Answer: Benefits someone receives when not involved in the activity- Means there is an underallocation for those resources in the market- Solution is a subsidy for producer- Supply curve will hopefully shift to Dprivate at Qsociala benefit obtained without compensation by third parties from the production or consumption of sellers or buyers. Example: A beekeeper benefits when a neighboring farmer plants clover. An external benefit or a spillover benefit.
Q: Market Economic System
Answer: Negative affects someone when not involved in production of activity- Means there is an overallocation for those resources in the market- Solution is a tax on the one who produces the negative costsa cost imposed without compensation on third parties by the production or consumption of sellers or buyers. Example: a manufacturer dumps toxic chemicals into a river, killing the fish sought by sports fishers; an external cost or a spillover cost
Q: Command Economic System
Answer: A market in which a single firm is the only buyer- Wage (labor supply) curve is upward sloping- Marginal factor cost now greater than wage
Q: Demand Curve
Answer: equilibrium where MC=MRbreak even where MC=MR=ATCshutdown where P<AVCP=MC=MR
Q: The economic problem
Answer: profit maximization where MC=MRProfit where MC=MR lines up with the demand (P-ATC)*QP>MR=MC
Q: The determinants of demand
Answer: short-run = has positive economic profitlong-run= break evenProfit= where ATC lines up with demand where MR=MCbarriers to entry are low and many firms compete by selling similar, but not identical, products.
Q: Determinants of supply
Answer: A market in which control over the supply of a commodity is in the hands of a small number of producers and each one can influence prices and affect competitors. A market structure in which a few large firms dominate a market.
Q: Market equilibrium
Answer: Responsiveness of quantity to price
Q: Demand shifts to the right
Answer: Changes in quantity are relatively large when price is changed. Often occurs for luxury goods or goods that can be purchased easily elsewhere.Ex: iPods or Sprite
Q: Demand shifts to the left
Answer: Changes in quantity are relatively small when price is changed. Often occurs for necessities that people are willing to pay for even at a high price.Ex: Vaccinesabs value of Ed is less than 1Describes demand that is not very sensitive to price changes
Q: Supply shifts to the right
Answer: Changes in quantity respond perfectly to price (I.e. The percentage change in quantity will equal the percentage change in price)
Q: Supply shifts to the left
Answer: Straight horizontal line. Quantity responds enormously to changes in price.price elasticity of demand is infinite, small change in price brings a huge change in quantity demanded
Q: Producer surplus
Answer: ∆%Quantity/ ∆%Price
Q: Economic welfare
Answer: ∆%Qd/ ∆%PMeasures normal (Lux/nec.) vs. inferior
Q: The Lorenz curve
Answer: ∆%Qd/ ∆%IncomeMeasures normal (Lux/nec.) vs. inferior based on consumer income
Q: Subsidies
Answer: ∆%QdX/ ∆%PYMeasures comp vs. sub
Q: Price Ceiling
Answer: QDemanded is less than QSupplied.Price will fall.(Will always return to equilibrium in the long run)
Q: Side by side Firm and Market Perfect Competition(LR/Profit/Loss)
Answer: QDemanded exceeds QSupplied.Price will rise.(Will always return to equilibrium in the long run)
Q: Single Price Monopoly (LR/Profit/Loss)
Answer: When d=MC
Q: AFC/AVC/ATC/MC
Answer: – Increases as quantity moves further from equilibrium
Q: Positive Externality
Answer: INDIRECT relationship between price and quantity demanded.
Q: Negative Externality
Answer: DIRECT relationship between price and quantity supplied.
Q: Labor Market (Firm and Market)
Answer: The change in quantity demanded resulting from a change in the consumer’s purchasing power (or real income).
Q: Monopsony
Answer: The more one consumes of a good, the less additional utility that last unit consumed provides, therefore consumers are only willing to buy additional units of a good if the price decreases.
Q: LRATC
Answer: The extra revenue produced by one more unit of labor. MRP = change in total revenue/ change in labor
Q: Product Possibilities Curve
Answer: – Works opposite way of a tax
Q: Perfect Competition
Answer: 1) Tastes of consumers2) Income of consumers3) Number of consumers4) Expectations of consumers5) Related goods’ prices (Subs/Comps)6) Special Circumstances (Nature)
Q: Monopoly
Answer: 1) Subsidies (Out) and Taxes (In)2) Technology3) Other manufactured goods’ prices4) Resource costs5) Expectations of future prices6) Number of suppliers
Q: Monopolistic Competition
Answer: Happiness gained from consumption of a certain amount of a good
Q: Oligopoly
Answer: Additional utility received or lost by consumption of the next good∆TotalU/ ∆Q- Constantly diminishing
Q: Excess demand
Answer: MUa/Pa = MUb/Pb = MUc/Pc…
Q: Excess supply
Answer: Additional income of selling one more good- In PC, MR=P=AR=D
Q: Consumer and producer surplus
Answer: opportunity cost of producing one more unit of a good∆TVC/∆Q- Initially falls due to specialization- MC= ATC or MC= AVC at respective minimums (MC is least when costs are least)- Forms “checkmark”
Q: Price elasticity of demand
Answer: – Shut down when TVC exceeds revenue to minimize loss (loss will only be TFC)Short run: MC above SDP is the supply curve for each PC firmLong run: Firms see profit and will continue to enter market, shifting S right until MC=MR=P=ATC= No profit!
Q: Elasticity
Answer: TC/Q- Form “U-Shape” with ATC being x=AFC higher than AVC
Q: Elastic
Answer: TVC/Q- Form “U-Shape”TVC/Q- Form “U-Shape”
Q: Inelastic
Answer: Costs that do not vary with changes in short-run output, paid even when output is 0
Q: Unit Elastic
Answer: Costs that change with variations in output. If output is 0, TVC= 0.
Q: Perfectly Elastic
Answer: All that is given up in choosing to produce one good over another (next-best option); best alternative sacrificed for chosen alternative
Q: Basic Elasticity Formula
Answer: Buildings, machines, technology, and tools needed to produce goods and services.
Q: Price Elasticity of Demand (|a|)
Answer: Products and services that satisfy human wants directly
Q: Income Elasticity of Demand (+/-)
Answer: Subjective statementsEx: There should be less unemployment.
Q: Cross-Price Elasticity (+/-)
Answer: Objective statementsEx: Unemployment is at 4.5% this year.
Q: Surplus
Answer: 1) Capital2) Land3) Labor4) Entrepreneurship
Q: Shortage
Answer: 1) Substitutes- Necessity/ luxury often refers to relative supply (or lack of) substitutes2) Income3) Time
Q: Socially Optimal/Allocatively Efficient
Answer: Only TIME.Inelastic in short run (changes harder to make in order to supply more)Elastic in long run (more changes made over longer period of time)
Q: Deadweight Loss
Answer: Total revenue minus total explicit costs (purchased)
Q: Law of Demand
Answer: Marginal decrease of cost, advantages of larger firms (Falling LRAC); Factors that cause a producer’s average cost per unit to fall as output rises- Specialization and efficiency
Q: Law of Supply
Answer: Can occur when Long-Run AC is constant over a variety of plant sizes (Nearly flat LRAC)
Q: Income Effect (Affects slope of demand curve)
Answer: Can occur if a firm becomes too large (rising LRAC)- Less efficient due to poor management, communication, etc
Q: Law of Diminishing Marginal Utility (Affects slope of demand curve)
Answer: Market Shares of top 4 firms added- Higher is closer to monopoly- Lower approaches perfect competition- Max is 100%
Q: Marginal Revenue Product
Answer: Sum of the squares of the top 50 firms’ market shares- Higher is closer to monopoly- Max is 10 000
Q: Subsidy
Answer: Goods for which demand increases as consumer income increases (AKA Superior Goods)
Q: Factors that Shift Demand Curve (NPFs)
Answer: Goods for which demand decreases as consumer income increases (Includes fast food, cheap clothes, etc.)
Q: Factors that Shift Supply Curve (NPFs)
Answer: Firms can expand or reduce plant capacity, therefore supply is highly price elastic.- Economic profit will= 0 (break even)
Q: Total Utility
Answer: Indirect opportunity costs
Q: Marginal Utility
Answer: Direct, purchased, objective costs
Q: Maximizing Utility
Answer: The ability to produce more of a given product using a given amount of resources
Q: Marginal Revenue
Answer: The ability to produce a good at a lowerthan another producer
Q: Marginal Cost
Answer: Production of maximum output for a given level of technology and resources
Q: Shut-Down Decision
Answer: Occurs when an economy’s PPC increases due to one or more of the following:1) Increase in quantity of resources2) Increase in quality of current resources3) Advancements in technology
Q: Average Total Cost
Answer: 1) Private property2) Freedom to produce, purchase, and sell resources3) Competition4) Self-interest5) Prices
Q: Average Variable Cost
Answer: Sum of consumer and producer surpluses– free market equilibrium provides maximum combined gain to society
Q: Total Fixed Cost
Answer: A per-unit tax levied on a particular good or service – federal excise tax on gasoline.1) Increase government revenue2) Decrease consumption of harmful goodTax * New Quantity- Creates loss of efficiency (MB>MC),
Q: Total Variable Cost
Answer: As successive units of a variable resource are added to a fixed resource, beyond some point the marginal product falls.
Q: Opportunity Cost
Answer: 1) Many small independent producers and consumers2) Produce a standardized product3) No barriers to entry or exit4) Firms are “price takers”Example: Agriculture- d=p=MR=AR
Q: Capital Goods
Answer: – Firm will have perfectly elastic (horizontal) demand curve– changing price will infinitely affect its demand- Market will not necessarily have perfectly elastic demand curve but changes in firm will not affect market
Q: Consumer Goods
Answer: – Cannot change price, only output- TC and TR will continually increase- Choose level where MC=MRTπ= Equ. Quantity * (P-ATC)TR= Equ. Quantity * Equ. PriceTC= Equ. Quantity * (TR-Tπ)
Q: Normative Economics
Answer: – Never leave Qe! OR DIE.- When P=ATC, π=0- At Qe…- If MC<ATC, loss (ATC will not hit d curve)- If MC>ATC, profit
Q: Positive Economics
Answer: Entry of new firms shifts the cost curves for all firms upward
Q: The 4 Factors of Production
Answer: Entry of new firms shifts the cost curves for all firms downward- Takes longer for profit to be eliminated- Lower LR price than constant
Q: Factors Affecting Demand Elasticity
Answer: 1) Single producer2) No close substitutes3) Barriers to Entry4) Market Power– “Price Maker”
Q: Factors Affecting Supply Elasticity
Answer: 1) Legal barriers (Ex. patents)2) Economies of Scale (Larger firms do better)3) Control of key resources
Q: Accounting Profit
Answer: – D is downward sloping (normal)- MR < P- Operates left of the midpoint (elastic upper range of demand)
Q: Economies of Scale
Answer: MC=MR- Find revenue max price and continue until you hit demand- Also when you hit ATC-Profit= Pmax@d * Qmax
Q: Constant Returns to Scale
Answer: Selling at a different price to different consumers, can be achieved if:1) Monopoly pricing power exists2) Able to identify different groups of consumers3) Able to prevent resale between consumers
Q: Diseconomies of Scale
Answer: 1) Large number of firms2) Differentiated products3) Easy entry or exit
Q: four-firm concentration ratio
Answer: Demand continues to shift leftward until just tangent under ATC- DWL equal to triangle: d= ATC,-> d=MC -> MR=MC
Q: Herfindahl Index
Answer: 1) Few large producers2) Product can be standard or differentiated3) Entry barriers4) Mutual interdependence
Q: Normal Goods
Answer: Market in which firms purchase the factors of production from households
Q: Inferior Goods
Answer: Change in total cost when an additional unit of a resource is hired, other things constant.(Usually, MRC= wage)
Q: In the Long-Run…
Answer: Demand for industrial products and services is driven by demand for consumer products and services.- Demand for product rising causes price to rise- The MRPL goes up, so the hiring of labor at the current wage goes up
Q: Implicit Costs
Answer: – Product demand- Productivity (affected by:)1) Quantity of resources2) Technology progress3) Quality of variable resources- Price of other resources1) Substitute: SE and OE2) Complement: When machinery and labor are complements, they will have a direct relationship
Q: Explicit Costs
Answer: The change in quantity demanded resulting from a change in the price of one good relative to the price of other goods.when consumers react to an increase in a good’s price by consuming less of that good and more of other goods
Q: Absolute Advantage
Answer: Non-rival and non-excludable, consumption available to many
Q: Comparative Advantage
Answer: Some people receive benefit regardless of what they gave up
Q: Productive Efficiency
Answer: Costs of production that affect people who have no control over how much of a good is produced
Q: Economic Growth
Answer: – Dprivate will be lower than Dpublic- Spillover benefits exist at the point where Dpublic meets supply and extends down to Dprivate- Market price is where Dprivate meets supply
Q: Market Economy: Defining Characteristics
Answer: Space between equality and Lorenz curve-AreaA/(AreaA+AreaB)- Closer to 0= More equal
Q: Total Welfare
Answer: – Ability- Human capital- Discrimination- Preferences- Market power- Luck and connections
Q: Excise Tax
Answer: Constant tax rate regardless of income
Q: Law of Diminishing Marginal Returns
Answer: Tax rate falls as income rises
Q: Characteristics of Perfect Competition
Answer: study of choices individual/businesses make, the way those choices interact in markets, and the influence of governments
Q: PC: Market vs. Firm
Answer: 1. What to produce?2. How to produce?3. For whom to produce?
Q: PC Profit Maximization
Answer: exchange of giving up one thing to get another
Q: PC Profit Max. Pt 2
Answer: examining the effects of additions/subtractions to a current situation and the trade-offs represented
Q: Increasing Cost Industry
Answer: a testable statement about “what is” or “how something works”
Q: Decreasing Cost Industry
Answer: opinionated statement about “what ought to be”
Q: Characteristics of Monopoly
Answer: while certain variables change we assume all other things are unchanged–this must be true to be tested for economic analysis
Q: Barriers to Enter Monopoly
Answer: fixed resources, fully employed resources, technology unchanged
Q: In a Monopoly…
Answer: giving up one things for another v. the value
Q: Profit Max. in Monopoly
Answer: Economically: a difference in resources either not equally suited or having different productivity in producing one good compared to anotherMathematically: an increase of opportunity cost as result from differences in resources
Q: Price Discrimination
Answer: the benefits of consuming one more unit of a good/service
Q: Characteristics of Monopolistic Competition
Answer: when marginal cost is equal to marginal benefit
Q: Long-run Monopolistic Competition
Answer: as the downward slope
Q: Characteristics of Oligopoly
Answer: causes outward shift
Q: Factor Market
Answer: 1. number of buyers2. taste and preferences3. income4. expectations of buyers5. prices of related goods in consumption
Q: Marginal Resource Cost
Answer: a good jointly consumed with another
Q: Derived Demand
Answer: 1. # of sellers2. change in technology3. change in resources and input price4. expectations of producers5. price of related goods produced
Q: Determinants of Resource Demand
Answer: when the abs value of Ed is greater than 1, change in qty is greater than that of price
Q: Substitution Effect
Answer: abs value of Ed is equal to 1
Q: Public Goods
Answer: price increases in an inelastic range of demand curve
Q: Free-Rider Problem
Answer: price increases in an elastic range of demand curve
Q: Spillover Costs
Answer: estimating price elasticity of demand by observing change in total revenue resulting from change in price
Q: Graphing Private/ Public Goods
Answer: How much of a good or service a producer is willing and able to produce at different prices.
Q: Gini Ratio
Answer: Consumer willingness and ability to buy products
Q: Sources of Inequality
Answer: A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product’s price.
Q: Proportional Tax
Answer: A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price
Q: Recessive Tax
Answer: The case where the quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero.Straight vertical line. Quantity will not respond no matter what the change in price is.price elasticity of demand is zero
Q: Microeconomics
Answer: the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold
Q: Three Fundamental Economic Questions
Answer: Ex,y = (%dQd good X) / (%d Price Y). If Ex,y > 0, goods X and Y are substitutes. If Ex,y < 0, goods X and Y are complementary
Q: Tradeoff
Answer: Income Elasticity of Demand: The income elasticity of demand measures the impact of a consumer’s income on his or her demand for a product. If the product is a normal good, the income elasticity of demand will be a positive number; if the product is an inferior good, the income elasticity of demand will be a negative number. If income has a strong impact on the consumer’s demand for the product, the income elasticity of demand will be a large number in absolute value; if income has a weak impact on the consumer’s demand for the product, the income elasticity of demand will be a small number in absolute value.
Q: Marginal Analysis
Answer: A measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price
Q: Positive Statement
Answer: The amount a seller is paid for a good minus the seller’s cost of providing it
Q: Normative Statement
Answer: Consumer Surplus + Producer Surplus
Q: Ceteris Paribus Assumption
Answer: A tax for which the percentage of income paid in taxes increases as income increases
Q: Assumptions of a PPF
Answer: A tax whereby people with lower incomes pay a higher fraction of their income than people with higher incomes.
Q: Tradeoff v. Opportunity Cost
Answer: a tax that is a constant amount (the tax revenue of government is the same) at all levels of GDP
Q: Why is the PPF always a bowed out shape?
Answer: a tax of a specific amount on each unit of a product sold
Q: Marginal Benefit
Answer: Ability or capacity of a good or service to be useful and give satisfaction to someone.
Q: Allocative Efficiency
Answer: the principle that our additional satisfaction, or our marginal utility, tends to go down as more and more units are consumed
Q: How is scarcity represented on a PPF?
Answer: the marginal utility from a good that results from spending one more dollar on it
Q: What effect does economic growth have on the PPF?
Answer: Input costs that require an outlay of money by the firm (e.g. rent). Money that actually leaves a firm in the productive process.
Q: Shift Factors of Demand (5)
Answer: Input costs that do not require an outlay of money by the firm (e.g. interest forgone on money used). The opportunity costs associated with a firm’s use of resources that it owns.
Q: Complementary Goods
Answer: Total revenue minus total cost, including both explicit and implicit costs
Q: Shift Factors of Supply (5)
Answer: Another way of saying that firms are earning zero economic profits or a fair rate of return on invested resources
Q: Elastic Demand
Answer: an input whose quantity is fixed for a period of time and cannot be varied
Q: Unit Elastic Demand
Answer: an input whose quantity the firm can vary at any time
Q: Total Revenue increases when….
Answer: A period of sufficient time to alter all factors of production used in the productive process – all inputs can be changed.
Q: Total Revenue decreases when….
Answer: A period during which at least one of a firm’s resources is fixed
Q: Total Revenue Test
Answer: shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input
Q: Supply
Answer: Extra output due to the addition of one more unit of input
Q: Demand
Answer: Costs that do not vary with the quantity of output produced
Q: Income Effect
Answer: Costs that vary with the quantity of output produced
Q: Price Elasticity of Demand
Answer: Fixed Cost + Variable Cost
Q: Perfectly Inelastic
Answer: The total cost divided by the quantity produced.
Q: Total Revenue
Answer: Fixed cost divided by the quantity of output
Q: Cross-Price Elasticity of Demand
Answer: A curve that indicates the lowest average cost production at each rate output when size or scale of the firm varies. It is also called the planning curve.
Q: Income Elasticity of Demand
Answer: A cost that has already been committed and cannot be recovered
Q: Price Elasticity of Supply
Answer: A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.
Q: Perfectly Inelastic Supply
Answer: a firm that has market power in the factor market, i.e., a wage-setter.
Q: Perfectly Elastic Supply
Answer: something that prevents other firms from entering an industry. Crucial in protecting the profits of a monopolist. There are four types of barriers to entry: control over scarce resources or inputs, increasing returns to scale, technological superiority, and government-created barriers such as licenses.
Q: Producer Surplus
Answer: A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms
Q: Total Surplus
Answer: markets where individual buyers or sellers can control or influence the price
Q: Progressive Tax
Answer: The percentage of industry sales (or assets, output, labor force, or some other factor) accounted for by x number of firms in the industry.
Q: Regressive Tax
Answer: MR=MC
Q: Lump Sum Tax
Answer: the price where average revenue is equal to average variable cost. Below this price, the firm will shut down in the short run
Q: Per Unit Tax
Answer: An agreement among firms to divide the market, set prices, or limit production
Q: Utility
Answer: A group of firms that collude by agreeing to restrict output to increase prices and profits.
Q: Diminishing Marginal Utility
Answer: An approach to evaluating alternative strategies in situations where the outcome of a particular strategy depends on the strategies used by other individuals.
Q: Marginal Utility per Dollar
Answer: A model used to help show how two interdependent firms may rationally produce where both firms are worse off if collusion does not take place
Q: Explicit Cost
Answer: A strategy that is best for a player in a game regardless of the strategies chosen by the other players
Q: Implicit Cost
Answer: A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen
Q: Economic Profit
Answer: Laws designed to promote competition and fairness to prevent monopolies
Q: Normal Profit
Answer: The difference between the monopolistic competition output Qmc and the output at minimum ATC. Excess capacity is underused plant and equipment
Q: Fixed Input
Answer: A level of production in which the marginal product of labor decreases as the number of workers increases; (Gets less additional usefulness)
Q: Variable Input
Answer: The extra cost to society of producing an additional unit of output, including both the private cost and the external costs.
Q: Long run
Answer: The extra benefit or utility to society of consuming an additional unit of output, including both the private benefit and the external benefits.
Q: Short run
Answer: The “commons” is any shared resource, including air, water, energy sources, and food supplies. The tragedy occurs when individuals consume more than their share, with the cost of their doing so dispersed among all, causing the ultimate collapse—the tragedy—of the commons.
Q: Total Product Curve
Answer: The difficulty groups face in recruiting when potential members can gain the benefits of the group’s actions whether they join or not
Q: Marginal Product
Answer: A measure of income inequality within a population, ranging from zero for complete equality, to one if one person has all the income.
Q: Fixed Cost
Answer: Average total cost (ATC) is also called average cost or unit cost. Average total costs are a key cost in the theory of the firm because they indicate how efficiently scarce resources are being used. Average variable costs are found by dividing total fixed variable costs by output.
Q: Variable Cost
Answer: Firms achieve maximum profits when marginal revenue (MR) is equal to marginal cost (MC), that is when the cost of producing one more unit of a good or service is exactly equal to the revenue derived from selling one extra unit.
Q: Total Cost
Answer: Productive efficiency occurs when a firm is combining resources in such a way as to produce a given output at the lowest possible average total cost. Costs will be minimized at the lowest point on a firm’s short run average total cost curve.This also means that ATC = MC, because MC always cuts ATC at the lowest point on the ATC curve.
Q: Average Cost
Answer: The firm’s long run average cost shows what is happening to average cost when the firm expands, and is at a tangent to the series of short run average cost curves. Each short run average cost curve relates to a separate stage or phase of expansion.
Q: Average Fixed Cost
Answer: In the short run under perfect competition, firms can make super-normal profits or losses.
Q: U Shaped Total Cost Curve
Answer: However, in the long run firms are attracted into the industry if the incumbent firms are making supernormal profits. This is because there are no barriers to entry and because there is perfect knowledge. The effect of this entry into the industry is to shift the industry supply curve to the right, which drives down price until the point where all super-normal profits are exhausted. If firms are making losses, they will leave the market as there are no exit barriers, and this will shift the industry supply to the left, which raises price and enables those left in the market to derive normal profits.