econ exam 2

  1. consumer surplus - definition
    amount by which total benefits to consumers from consuming a good exceed total expenditures on the good
  2. net benefit - application
    • total benefit of activity minus opportunity cost; the triangle of marginal benefit (negative slope showing the change in benefit of each item for each extra item) and the marginal cost (positive slope showing the benefit of item given up for each item of using the other item)
    • eg. for each hour of study in economics you get a total benefit of 0, 14, 24, 30, 32, 32 which is the marginal benefit of 14, 10, 6, 2, 0 at a cost of studying something else at a total cost of 0, 2, 8, 18, 32, 50, which gives a marginal cost of 2, 6, 10, 14, 18
  3. MU/P - application 5 questions
    • marginal utility per dollar of each good purchased
    • also referred to as consumer equilibruim
    • MU/P of product 1 = MU/P of product 2 = MU/P of any product
  4. subtitution effect - definitional
    change in a consumers consumption of a good in response to an relative price change
  5. income effect - defininational
    change in the amount consumed of a good due to change in buying power, ability to purchase, due to price change of the good
  6. law of diminishing marginal utility - definitional
    this tendency of marginal utility to decline beyond some level of consuption during period (where you no longer value the wanted item due to enough consumstion
  7. total utility - 2 application
    the amount of pleasure given by 1 or more items consumed 0 items give 0TU 1 item gives 36TU 2 items give 64 TU change in TU/change in item gives marginal utility between 0 & 1 MU is 36 between 1 and 2 gives 28 MU
  8. average fixed cost - definitional
    • AFC is total fixed cost divided by total output or quantity
    • AFC = TTC/Q
  9. average variable costs - definitional
    • total variable cost divided by total output
    • AVC = TVC/Q
  10. economies of scale - definitional
    the decrease in per unit costs as the quanitity of production increases and all resources are variable
  11. average total cost - 1 application
    total cost of production / total quantity of output produced
  12. marginal cost - 1 application
    change in total cost / change in quantity
  13. marginal product - 2 applications
    change in quantity / change in variable factor (like labor)
  14. economies of scale - 1 application
    decline of LRAC as level of production increases
  15. economic profits - 2 definitional
    • difference between TR and TC (total revenue and total cost) and is maximized when marginal revenue equals marginal cost
    • Is found by multiplying economic profit per unit & # of units produced
    • includes total cost includes opportunity cost
  16. economic profit per unit - definintional
    difference between price & average total cost includes opportunity cost in total cost
  17. accounting profits - application
    difference between total cost and total revenue when total cost includes only the explicit costs (change that must be paid for in the factors of production and includes estimated depreciation, does not include opportunity cost
  18. perfect competition examples - definitional
    model of the market based on the assumption that a large number of firms produce identical goods consumed by a large number of buyers
  19. perfect competition characteristics - 4 definintional
    • all goods are identical
    • large # of buyers and sellers
    • case of entry & exit
    • complete information of buyers and sellers
  20. marginal revenue - application
    • the increase in total revenue frone a one unit increase in quantity; includes slope of total revenue curve
    • AR = TR/Q = (P)(Q) / Q = P = MR
  21. Price = marginal cost - definitional
    • Price = marginal cost
    • basically when the price = marginal cost then you are at the breakeven point
    • the point at which economic profit = zero (ATC)
  22. oligopoly examples - definitional
    a market structure characterized by few firms, either standardized or differentiated products, & difficult entry (price maker)
  23. concentration ratio - 3 application
    • % of output accounted for by the largest firms in the industry
    • higher the concentration the more the firms account rival's behavoir
    • lower the concentration the more industry reflects characteristics of monopolistic competors or perfect competition
  24. HHI (Herfindahl-Hirschaman Index)
    sum of the square of the % share of each firm in an insutry
  25. product differentiation
    products are differernt enough that the producing firms exercise "mini monopoly over their product
  26. monopolistically competivitve examples - definintational
    • large # of firms
    • products produced are differentiated in different firms
    • entry & exit occur easily
  27. oligopoly characteristics - defininational
    each firm can affect the market by each firm's choices that are dependent on the choices of other firms (interdependent)
  28. Monopolistic Competitive vs. oligopoly - comparision
    both have differentiated products but oliopoly has few firms & difficult entry while mc has many firms and easy entry
  29. brand name
    makes demand less elastic and enable firms to earn higher profits
  30. price discrimination - definitional
    situation in which a firm charges different prices for the same good or service to different consumers, even though there is no difference in cost to the firm of suppling these consumers
  31. monopoly m. r. - definitional
    • the marginal revenue curve of a monopoly is downward sloping and lying below the regular demand curve
    • as firms enter the mr curve shifts to the left until mr is less than economic profit and earning a loss
  32. imperfect competition
    market structure with more than one firm in an industry in which at least 1 firm is the price setter
  33. kinked demand - definitional
    The demand curve if competitors follow the price decrease creating a new demand curve that is "kinked" at the current price
  34. perfect competition - definitional
    model of the market based on the assumption that a large number of firms produce identical goods consumed by a large number of buyers
  35. monopoly - definitional
    a firm that is the only producer of a good or service for which there are no close subsitutes and for which entry by potential rivals is prohibitively difficult
  36. PC vs. monopoly - market comparision
    • PC has large # of sellers & buyers producing homogenouse goods and easy entry
    • monopoly has large # of buyers but only 1 seller, entry blocked
  37. PC vs. monopoly - demand & marginal revenue curves comparision
    • PC is horizontal line at market price
    • monopoly has market demand curve but mr is below makret demand
  38. PC vs. monopoly - price comparision
    • PC is price takers and equals marginal cost
    • monopoly is price setter and price is greater than mc
  39. PC vs. monopoly - profit maximization comparision
    • PC - produces where MC = MR
    • monopoly - produces where MC = MR & charge corresponding price on demand curve
  40. PC vs. monopoly - profit comparision
    • PC - entry forces economic profit to zero in long run
    • monopoly - can sustain economic profit in long run
  41. PC vs. monopoly - efficiency comparision
    • PC - equilibrium solution is efficient because P = MC
    • monopoly - equilibrium solution is inefficient because P > MC
Card Set
econ exam 2
econ exam 2