Economics Reviewer PDF
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This document contains economics concepts and explanations, including topics like consumer behavior, production, and cost structure. It defines key terms, describes various types of costs (explicit and implicit), and analyzes the relationship between them.
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behavioral economics a branch of economics that seeks to enrich the understanding of decision-making by integrating the insights of psychology and by investigating how given dollar amounts can mean different things to individuals depending on the situation budget constraint (or budget line) shows...
behavioral economics a branch of economics that seeks to enrich the understanding of decision-making by integrating the insights of psychology and by investigating how given dollar amounts can mean different things to individuals depending on the situation budget constraint (or budget line) shows the possible combinations of two goods that are affordable given a consumer’s limited income consumer equilibrium point on the budget line where the consumer gets the most satisfaction; this occurs when the ratio of the prices of goods is equal to the ratio of the marginal utilities. diminishing marginal utility the common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit fungible the idea that units of a good, such as dollars, ounces of gold, or barrels of oil are capable of mutual substitution with each other and carry equal value to the individual income effect a higher price means that, in effect, the buying power of income has been reduced, even though actual income has not changed; always happens simultaneously with a substitution effect marginal utility the additional utility provided by one additional unit of consumption marginal utility per dollar the additional satisfaction gained from purchasing a good given the price of the product;MU/Price substitution effect when a price changes, consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price; always happens simultaneously with an income effect total utility satisfaction derived from consumer choices Chapter 7 accounting pro t total revenues minus explicit costs, including depreciation average pro t pro t divided by the quantity of output produced; also known as pro t margin average total cost total cost divided by the quantity of output average variable cost variable cost divided by the quantity of output constant returns to scale expanding all inputs proportionately does not change the average cost of production diminishing marginal productivity general rule that as a rm employs more labor, eventually the amount of additional output produced declines diseconomies of scale the long-run average cost of producing output increases as total output increases economic pro t total revenues minus total costs (explicit plus implicit costs) economies of scale the long-run average cost of producing output decreases as total output increases explicit costs out-of-pocket costs for a rm, for example, payments for wages and salaries, rent, or materials fifi fi fi fi fi fi fi fi fi fi implicit costs opportunity cost of resources already owned by the rm and used in business, for example, expanding a factory onto land already owned long run period of time during which all of a rm’s inputs are variable long-run average cost (LRAC) curve shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the rm is choosing its production technology marginal cost the additional cost of producing one more unit; mathematically, marginal product change in a rm’s output when it employees more labor; mathematically, private enterprise the ownership of businesses by private individuals production the process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs production function mathematical equation that tells how much output a rm can produce - with given amounts of the inputs production technologies alternative methods of combining inputs to produce output revenue income from selling a rm’s product; de ned as price times quantity sold short run period of time during which at least one or more of the rm’s inputs is xed short-run average cost (SRAC) curve the average total cost curve in the short term; shows the total of the average xed costs and the average variable costs fi fi fi fi fi fi total cost the sum of xed and variable costs of production total product synonym for a rm’s output variable cost cost of production that increases with the quantity produced; the cost of the variable inputs variable inputs factors of production that a rm can easily increase or decrease in a short period of time Chapter 8 break even point level of output where the marginal cost curve intersects the average cost curve at the minimum point of AC; if the price is at this point, the rm is earning zero economic pro ts entry the long-run process of rms entering an industry in response to industry pro ts exit the long-run process of rms reducing production and shutting down in response to industry losses long-run equilibrium where all rms earn zero economic pro ts producing the output level where P = MR = MC and P = AC marginal revenue the additional revenue gained from selling one more unit market structure the conditions in an industry, such as number of sellers, how easy or dif cult it is for a new rm to enter, and the type of products that are sold perfect competition each rm faces many competitors that sell identical products fi fi fi fi fi fi fi fi fi price taker a rm in a perfectly competitive market that must take the prevailing market price as given shutdown point level of output where the marginal cost curve intersects the average variable cost curve at the minimum point of AVC; if the price is below this point, the rm should shut down immediately Chapter 9 allocative ef ciency producing the optimal quantity of some output; the quantity where the marginal bene t to society of one more unit just equals the marginal cost barriers to entry the legal, technological, or market forces that may discourage or prevent potential competitors from entering a market copyright a form of legal protection to prevent copying, for commercial purposes, original works of authorship, including books and music deregulation removing government controls over setting prices and quantities in certain industries intellectual property the body of law including patents, trademarks, copyrights, and trade secret law that protect the right of inventors to produce and sell their inventions legal monopoly legal prohibitions against competition, such as regulated monopolies and intellectual property protection marginal pro t pro t of one more unit of output, computed as marginal revenue minus marginal cost fi fi fi fi fi monopoly a situation in which one rm produces all of the output in a market natural monopoly economic conditions in the industry, for example, economies of scale or control of a critical resource, that limit effective competition patent a government rule that gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time predatory pricing when an existing rm uses sharp but temporary price cuts to discourage new competition trade secrets methods of production kept secret by the producing rm trademark an identifying symbol or name for a particular good and can only be used by the rm that registered that trademark CHAPTER 10 cartel a group of rms that collude to produce the monopoly output and sell at the monopoly price collusion when rms act together to reduce output and keep prices high differentiated product a product that is consumers perceive as distinctive in some way duopoly an oligopoly with only two rms game theory a branch of mathematics that economists use to analyze situations in which players must make decisions and then receive payoffs based on what decisions the other fi fi fi fi fi fi players make imperfectly competitive rms and organizations that fall between the extremes of monopoly and perfect competition kinked demand curve a perceived demand curve that arises when competing oligopoly rms commit to match price cuts, but not price increases monopolistic competition many rms competing to sell similar but differentiated products oligopoly when a few large rms have all or most of the sales in an industry prisoner’s dilemma a game in which the gains from cooperation are larger than the rewards from pursuing self-interest product differentiation any action that rms do to make consumers think their products are different from their competitors fi fi fi fi fi