ECO.FINALS.REVIEWER.docx PDF

**Demand for Labor** -- When producing goods and services, businesses require labor and capital as inputs to their production process. \- Demand for labor is a concept that describes the amount of demand for labor that an economy or firm is willing to employ at a given point in time. **Productivit...

**Demand for Labor** -- When producing goods and services, businesses require labor and capital as inputs to their production process. \- Demand for labor is a concept that describes the amount of demand for labor that an economy or firm is willing to employ at a given point in time. **Productivity of an Input** -- The amount of output produced per unit of that input. **Input** **Markets** -- Inputs are demanded by a firm if household demand the good or service produced by that firm. \- Those seeking employment will supply them labor in exchange for wages. **Land Markets** **Demand-Determined Price** -- The price of a good that is in fixed supply; it is determined exclusively by what firms and households are willing to pay for the good. **Pure** **Rent** -- The return to any factor of production that is in fixed supply. **Marginal Product of Labor** -- The additional output produced by 1 additional unit of labor. **Marginal Revenue Product** -- The additional revenue a firm earns by employing 1 additional unit of input. \- The revenue produced by selling the good or service that is produced by the marginal unit of labor. **Law of Diminishing Marginal Returns --** Employing an additional factor of production causes a relatively smaller increase in output. Diminishing returns occur in the short run when one factor is fixed. **Derived Demand** -- Demand for resources (inputs) that is dependent on the demand for the outputs those resources can be used to produce. **Productivity of an Input** -- The amount of output produced per unit of that input. **Factor of Substitution Effect** -- The tendency of firms to substitute away from a factor whose price has risen and toward a factor whose price has fallen. **Output Effect of a Factor Price Increase (decrease) --** When a firm decreases (increases) its output in response to a factor price increase (decrease), this decreases (increases) its demand for all factors. **Demand Determined Price** -- The price of a good that is in fixed supply; it is determined exclusively by what households and firms are willing to pay for the good. **Pure Rent --** The return to any factor of production that is in fixed supply. **Demand for Outputs** -- If product demand increases, product price will rise and marginal revenue product (factor demand) will increase---the MRP curve will shift to the right. If product demand declines, product price will fall and marginal revenue product (factor demand) will decrease---the MRP curve will shift to the left. **The Quantity of Complementary and Substitutes Inputs** -- The production and use of capital enhances the productivity of labor and normally increases the demand for labor and drives up wages. **The Prices of Other Inputs** -- When a firm has a choice among alternative technologies, the choice it makes depends to some extent on relative input prices. **Technological Changes** -- The introduction of new methods of production or new products intended to increase the productivity of existing inputs or to raise marginal products. **Capital** -- Those goods produced by the economic system that are used as inputs to produce other goods and services in the future. **Tangible Capital** -- Material things used as inputs in the production of future goods and services. The major categories of physical capital are: - nonresidential structures, - durable equipment, - residential structures, and - inventories of inputs and outputs that firms have in stock. **Social Capital** -- Capital that provides services to the public. **Intangible Capital** -- Nonmaterial things that contribute to the output of future goods and services. **Goodwill** -- Form of intangible capital in which a firm invests in advertising to establish a brand name. **Human Capital** - A form of intangible capital that includes the skills and other knowledge that workers have or acquire through education and training and that yields valuable services to a firm over time. **Capital Stock** -- For a single firm, the current market value of the firm's plant, equipment, inventories, and intangible assets. **TWO FLOWS OF CAPITAL STOCK** **1. Investment** - a flow that increases the stock of capital. These are new capital additions to a firm's capital stock. Although capital is measured at a given point in time (a stock), **Investment** is measured over a period of time (a flow). The flow of investment increases the capital stock. **2. Depreciation** -- The decline in an asset's economic value over time. **CAPITAL** **ASSET** -- can depreciate because it wears out physically or becomes obsolete. **Capital** **Market** -- The market in which households supply their savings to firms that demand funds to buy capital goods. **Bond** -- A contract between a borrower and a lender, in which the borrower agrees to pay the loan at some time in the future, along with interest payments along the way. **Financial** **Capital** **Market** -- The part of the capital market in which savers and investors interact through intermediaries. **TYPES OF FINANCIAL MARKET** **Capital Market** -- Provides long term financing (subdivided into primary and secondary). a\. **Stock** **Market** - provide financing through the issuance of shares or common stock. b\. **Bond** **Market** -- provide financing through the issuance of bonds. **Money** **Market** -- provide short term debt financing and investment. **OTHER TYPES OF FINANCIAL MARKET** 1. **COMMODITY** **MARKETS** -- facilitate the trading of commodities. 2. **DERIVATIVES** **MARKETS** -- provide instruments for the management of financial risk. 3. **FUTURE** **MARKETS** -- provide standardized forward contracts for trading products at some future date. 4. **INSURANCE** **MARKETS** -- facilitate the redistribution of various risks. 5. **FOREIGN** **EXCHANGE** **MARKETS** -- facilitate 6. the trading of foreign exchange. **Capital** **Income** -- Income earned on saving that have been put to use through financial capital markets. **FORMS OF CAPITAL INCOME** A. **Interest** -- The payments made for the use of money. 1\. **Interest** **Rate** -- A fee paid annually expressed as a percentage of the loan or deposit. B. **Profits** 2\. Stock -- A share of stock is an ownership claim on a firm, entitling its owner to a profit share. 3\. **Profits** -- The excess of revenues over cost in a given period. **Corporations** -- Are firms owned by shareholders who usually are NOT otherwise connected with the firms. \- They are appointing **Board** **of** **Directors** to manage the firm. **STOCK (COMMON)** -- An ownership claim on a firm, entitling its owner to a profit share. When *profits* *are* *paid* *directly* *to* *shareholders*, the *payment* is called **DIVIDEND**. **Dividend** -- Payment made to shareholder of a corporation. **Expected** **Rate** **of** Return -- The annual rate of return that a firm expects to obtain through a capital investment. **Imperfectly** **Competitive** **Industry** -- An industry in which individual firms have some control over the price of their output. **Market** **Power** -- An imperfectly competitive firm's ability to raise price without losing all of the quantity demanded for its product. **Pure** **Monopoly** -- An industry with a single firm that produces a product for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profits. **Barriers** **to** **Entry** -- Factors that prevent new firms from entering and competing in imperfectly competitive industries. **Natural** **Monopoly** -- An industry that realizes such large economies of scale in producing its product that single-firm production of that good or service is most efficient. **Patent** -- A barrier to entry that grants exclusive use of the patented product or process to the inventor. **Network** **Externalities** -- The value of a product to a consumer increase with the number of that product being sold or used in the market. **Rent-Seeking Behavior** -- Actions taken by households or firms to preserve positive profits. **Government** **Failure** -- Occurs when the government becomes the tool of the rent seeker and the allocation of resources is made even less efficient by the intervention of government. **Public Choice Theory** -- An economic theory that the public officials who set economic policies and regulate the players act in their own self-interest, just as firms do. **Price Discrimination** -- Charging different prices to different buyers. **Perfect Price Discrimination** -- Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit. **Partial** **Equilibrium** **Analysis** -- The process of examining the equilibrium conditions in individual markets and for households and firms separately. **General** **Equilibrium** -- The condition that exists when all markets in an economy are in simultaneous equilibrium. **Efficiency** -- The condition in which the economy is producing what people want at least possible cost. **Market** **Failure** -- Occurs when resources are misallocated, or allocated inefficiently. The result is waste or lost value. **SOURCES OF MARKET FAILURES** 1\. **Imperfect** **Markets** **Imperfect** **Condition** -- An industry in which single firms have some control over price and competition. Imperfectly competitive industries give rise to an inefficient allocation of resources. **Monopoly** -- An industry composed of only one firm that produces a product for which there are no close substitutes and in which significant barriers exist to prevent new firms from entering the industry. **2. Public Goods** **Public** **Goods, or Social Goods** -- Goods or services that bestow collective benefits on members of society. Generally, no one can be excluded from enjoying their benefits. The classic example is national defense. **Private Goods** -- Products produced by firms for sale to individual households**.** **3. Externalities** **Externality** -- A cost or benefit resulting from some activity or transaction that is imposed or bestowed on parties outside the activity or transaction. **4. Imperfect Competition** **Imperfect** **Information** -- The absence of full knowledge concerning product characteristics, available prices, and so on. **HISTORY OF MARKET** **Market** - derived from the Latin "mercatus" or marketplace, **Marketplace --** comes from the word "mercari" or to trade. Prior to 1900, the word marketing was not used, instead **"trade", "commerce" and "distribution"** **Dr. Philip Kotler =** father of modern marketing. Josiah Go = known as one of the country's most respected marketing gurus in the Philippines. **Market** -- A public place where buyers and sellers make transactions of goods or services directly or indirectly with the following considerations. **Market** **Structure** -- Refers to the number of firms producing identical products. The general environment wherein the forces of supply and demand interact. It has two types (below). 1\. **Perfect** **Market** -- A market situation which consists of a very large number of buyers and sellers offering a homogenous product. (Output of 1 firm is indistinguishable from the output of another firm). 2\. **Imperfect** **Market** -- market situation wherein the conditions necessary for perfect competitions are not satisfied. There are few sellers which is enough to affect the market price. **FORMS OF IMPERFECT MARKET** 1\. **Monopoly** -- Greek word "monos" -- one; "polein" -- to sell ONE SELLER of goods and ONE PROVIDER of services to many buyers. There is only one producer. **CLASSIFICATIONS OF MONOPOLY** 1. **Natural** **Monopoly** -- a single firm can supply the entire market due to fundamental cost structure of the industry. 2. **Legal** **Monopoly** (**De** **Jure** **Monopoly**) -- The government grants to a private individual or firm over the product or services. **ex: water and electricity services** 3. **Coercive** **Monopoly** -- Form of monopoly whose existence as the sole producer and distributor of goods and services is by means of coercion (legal or illegal). 2\. **Oligopoly** -- Greek word "oligo" -- few; "polein" -- to sell. FEW SELLERS. Small number of firms in the market selling differentiated or identical products. **TYPES OF OLIGOPOLY** 4. **Pure** **Oligopoly** -- few sellers that produce identical products. The products sold are fairly homogenous. **Ex**: steel, cement, sugar, rice, cigars and other raw materials 5. **Differentiated** **Oligopoly** -- few sellers of differentiated products which have different value or quality. **Ex**: automobile industry, Cellular phone manufacturers, medicinal drugs, supermarkets 6. **Duopoly** - two producers exist in a given market. **Ex**: credit cards such as Visa and Mastercard broadcasting companies. **Monopolistic** **Competition** -- MANY SELLERS producing highly differentiated but not identical products. There is competition because many sellers offer products that are close, but not perfect substitute for each other. **Monopsony** -- Greek word "monos" -- single; "opsonia"-purchase market situation where there is only ONE BUYER of goods and services in the market. **Oligopsony** -- Greek word "oligoi" -- few; "opsonia"-purchase. Numerous suppliers are competing to sell their product to a small number or FEW BUYERS in the market. **Rent-Seeking Behavior** -- Actions taken by households or firms to preserve economic profits. **Government Failure** -- Occurs when the government becomes the tool of the rent seeker and the allocation of resources is made even less efficient by the intervention of government. **Public Choice Theory** -- An economic theory that the public officials who set economic policies and regulate the players act in their own self-interest, just as firms do. **Rule of Reason** -- The criterion introduced by the Supreme Court in 1911 to determine whether a particular action was illegal ("unreasonable") or legal ("reasonable") within the terms of the Sherman Act. **The Clayton Act and the Federal Trade Commission, 1914** **Clayton Act** -- Passed by Congress in 1914 to strengthen the Sherman Act and clarify the rule of reason, the act outlawed specific monopolistic behaviors such as tying contracts, price discrimination, and unlimited mergers. **Federal Trade Commission (FTC)** -- A federal regulatory group created by Congress in 1914 to investigate the structure and behavior of firms engaging in interstate commerce, to determine what constitutes unlawful "unfair" behavior, and to issue cease-and-desist orders to those found in violation of antitrust law. **Oligopoly** -- A form of industry (market) structure characterized by a few dominant firms. Products may be homogenous or differentiated. **Five Forces model** -- A model developed by Michael Porter that helps us understand the five forces that determine the level of competition and profitability in an industry. **Concentration** **Ratio** -- The share of industry output in sales or employment accounted for by the top firms. **Contestable Markets** -- Markets in which entry and exit are easy. **Cartel** -- A group of firms that gets together and makes joint price and output decisions to maximize joint profits. **Price** **Leadership** -- A form of oligopoly in which one dominant firm sets prices and all the smaller firms in the industry follow its pricing policy. **Duopoly** -- A two-firm oligopoly where only two companies dominate the market. **Game Theory** -- Analyzes the choices made by rival firms, people, and even governments when they are trying to maximize their own well-being while anticipating and reacting to the actions of others in their environment. **Dominant** **Strategy** -- In game theory, a strategy that is best no matter what the opposition does. **Prisoners' Dilemma** -- A game in which the players are prevented from cooperating and in which each has a dominant strategy that leaves them both worse off than if they could cooperate. **Nash** **Equilibrium** -- In game theory, the result of all players' playing their best strategy given what their competitors are doing. **Tacit Collusion** -- Collusion occurs when price- and quantity-fixing agreements among producers are explicit. Tacit collusion occurs when such agreements are implicit. **Maximin Strategy** -- In game theory, a strategy chosen to maximize the minimum gain that can be earned. **Tit-for-Tat Strategy** -- A repeated game strategy in which a player responds in kind to an opponent's play. **Celler-Kefauver Act** -- Extended the government's authority to control mergers. **Herfindahl-Hirschman Index (HHI) --** An index of market concentration found by summing the square of percentage shares of firms in the market. **Monopolistic Competition** -- A common form of industry (market) structure in the United States, characterized by a large number of firms, no barriers to entry, and product differentiation. \- **Monopolistic competition** characterizes an industry in which many firms offer products or services that are similar, but not perfect substitutes. \- **Monopolistic Competition** is a form of competition that characterizes a number of industries that are familiar to consumers in their day-to-day lives. **Product Differentiation** -- A strategy that firms use to achieve market power. Accomplished by producing products that have distinct positive identities in consumers' minds \- The process of distinguishing a product or service from others to make it more appealing to a specific target market. \- It is a marketing strategy designed to distinguish a company\'s products or services from the competition. **How Do Firms Differentiate Products?** **Horizontal Differentiation** -- Products differ in ways that make them better for some people and worse for others. Different consumers have different preferences over characteristics. ***Ex: flavor, crunchiness*** **Vertical Differentiation** -- A product difference that, from everyone's perspective, makes a product better than rival products. \- Products differ according to a characteristic such that all consumers agree which product is better or worse. ***Ex: quality, efficiency*** **Pricing Power** -- As in a monopoly, firms in monopolistic competition are price setters or makers, rather than price takers. However, the firm's nominal ability to set their prices is effectively offset by the fact that demand for their products is highly price elastic. **Demand Elasticity** -- Due to the range of similar offerings, demand is highly elastic in monopolistic competition. In other words, demand is very responsive to price changes. **Behavioral Economics** -- A branch of economics that uses the insights of psychology and economics to investigate decision making. **Commitment Device** -- Actions that individuals take in one period to try to control their behavior in a future period. **KAININ DAW NG UTAK TO SABI NI MAAM**