Econ Terms in this set | Course Paper

Terms in this set (105)

Opportunity Cost the value of the next best choice

Shirking (problems)

solution

incentives to work less intensively

solutions:

hierarchical firms

boards

compensation tied directly to production

(commission)

Transaction costs

(problems)

solution

market transactions are costly ( inputs)

solutions:

intermediaries

specializations

contracts

money

firms

“Common Property Problem“ common property leads to overuse

solution:

property rights–>

creates future interest:

1. less intensive

2. less rapidly

3. more productive

Equi Marginal rule marginal costs = to marginal benefits

MBa/MCa = MBb/MCb = MBc/MCc

changes in demand not directly related to change in price

SHIFT

changes in quantity demanded directly related to price change

MOVEMENT

Causes for changes in demand 1. changes in income

2. changes in preferences

3. changes in transaction costs

4. changes in expectations

5. changes in price of related commodity

Causes for changes in supply 1. changes in the prices if inputs

2. technological innovations

3. organizational innovations

4. changes in the price of related outputs

5. changes in trans. costs

6. changes in expectations about the future

irrelevancy of Sunk Costs sunk costs cannot be be recovered therefore they

are irrelevant in making future decision

Marginal Willingness to Pay 1. the quantity an individual is willing to purchase at

each price

2. the amount of money an individual is willing to pay

for an additional amount at each level of

consumption

What is supply (SR) 1) a “picture” of diminishing returns

2) a way of measuring marginal cost (MC)

or, alternatively, the cost of producing an additional

or marginal unit

3) the price necessary to induce suppliers to provide

a given quantity to the market

Upgrade to remove ads Only $2.99/month

Demand Elasticity measures the degree of substitution that occurs as

the market price changes

1) if demand is elastic, an increase in price will lower

total expenditure and a decrease in price will

increase total expenditure (demanders can find

lots of substitutes if the price increases)

2) if demand is inelastic, an increase in price will

increase total expenditures and a decrease in price

will decrease total expenditures (demanders

cannot find many substitutes if the price increases)

Income Elasticity the responsiveness of demand or supply to changes

in income

Cross price Elasticity the responsiveness of demand or supply to changes

in price of another commodity

Estimating Elasticity of Demand

1) substitution is “easy” = elasticity will be “high”

2) substitution is “hard” = elasticity will be “low”

= %change in Q/

% change in P

1) arc

2) point-slope

3) percentages

4) relationship between direction of price change

and change in TE (or TR)

5) thinking about substitutes

Supply (long run)–

entering forms “look” like

existing firms

long-run supply will be perfectly elastic (flat) at the

minimum ATC

(this is constant returns to scale or constant long run

costs)

Supply (long run)–

entering firms have lower costs

than existing firms

if so, long-run supply will be downward sloping

• (this is increasing returns to scale or decreasing

long-run costs)

• “old” firms will have to come to look like “new” firms

or exit

Supply (long run)–

entering firms may have higher

costs than existing firms

if so, long-run supply will be upward sloping

• (this is decreasing returns to scale or increasing

long-run costs)

• “old” firms will earn “rents“

Efficiency the amount demanders are willing to pay for

MWTP = p* = MC

additional output is equal to

the cost of producing additional output

role of prices 1. allocate commodities among competing

demanders:

• provide incentives for suppliers to use capital more

(or less) intensively

• provide incentives for demanders to substitute

2. convey information:

• among suppliers

• among demanders

• between suppliers and demanders

3. “shock absorbers”

price level + how is it measured price level is the relationship between quantity (

demanded or output supplied) and prices at each

point

measured by:

1. CPI

2. PPI

3. GDP deflator

(measured from a base of 100 not dollars)

inflation+ how is it measured a positive percentage change corresponding to an

increase in price level

measured by price indices

deflation+ how is it measured negative percentage change corresponding to a

decrease in price level

measured by price indices

disinflation + how is it measured a decrease in the rate of inflation

CPI =( Current Price of the Basket / Base Price of the

Basket ) x 100

problems with measuring price

level with CPI

1.does not accurately reflect what happens to the

price of any particular good