ECON 101

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mct
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179862
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ECON 101
Updated:
2012-12-11 22:00:17
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Part Two
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Between first and second midterm (oct 2 - 23)
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  1. Income Elasticity of Demand
    Measures the responsiveness of quantity to changes in income. Measures the size of the shift in the demand curve.
  2. Cross Price Elasticity
    Measures the responsiveness of demand of good A to a change in the price of good B
  3. Elasticity of Supply
    Measures the responsiveness of quantity supplied to a change in price
  4. Consumer Behaviour - theory of demand
    • How do consumers make decisions? When  discussing a good, it is a good at this time and this location...
    • Preferences -
    • Assumption 1: completeness: when facing a choice between any two bundles of goods, a consumer can rank them so that one and only one of the following relationships is true: the consumer prefers the first bundle to the second, prefers the second to the first, or is indifferent between them
    • Assumption 2: Transitivity: If a consumer prefers X to bundle Y and prefers bundle Y to bundle Z, then the consumer must prefer bundle X to bundle Z (doesn't work for groups over 2 or kids)
    • Assumption 3: Nonsatiation: Ceteris paribus, more of a commodity is preferred than less of it.
  5. Utility
    The satisfaction, happiness, or need fulfillment that consumers receive from the goods and services they consume
  6. 'Util'
    The measurement that they tried to use to measure utility
  7. Marginal Utility
    The change in utility that results from an incremental change in consumption of a good or service.
  8. The Law of Diminishing Marginal Utility
    The greater is the amount consumed of a good or service, the smaller is the increase in the consumption of that good.  Or, the more consumed of a good, the smaller is the marginal utility.  The less of the good consumed, the greater is the marginal utility
  9. Consumer's Objective
    The consumer wants to maximize her/his utility subject to her/his level of income
  10. Consumer Equilibrium
    The consumer equilibrium is defined as those levels of the quantities such that the consumer's utility is maximized.  A conumer equilibrium is achieved when the consumer has no incentive to reallocate her/his budget or to buy a different bundle of goods
  11. Consumer's Surplus
    The consumer's surplus is the amount the consumer is willing to pay minus the amount the consumer has to pay.  It is a mesure of the the benefits the consumer gets by buying a commodity in the market and paying only one price
  12. Sole Proprietorship
    • Business is owned by a single person
    • Adv: Easy to form and easy to dissolve; all decision making power resides with the owner; and only taxed once, business profits are subjest to income tax
    • Disadv: Unlimited Liability, creditors has access to personal assets
  13. Partnership
    • Business owned by two or more people
    • Adv: Easy to form; only taxed once; permits specialization
    • Disadv: Each partner has unlimited liability
  14. Corporation
    • A corporation is a legal entity that may conduct business in its own name, just like an individual
    • Adv: Large corporations are well positioned to raise large amounts of money; each shareholder has limited liability
    • Disadv: Double taxation; Principle Agent Problem
  15. Bonds (debt financing)
    • One method of corporate financing
    • A bond is a legal claim against the corporation. It represents a debt
    • The return to a bond is the interest rate which must be paid whether the corporation makes profit or not.
    • Bondholders are not owners of the corporation, rather they are creditors  In general, they have no say in the corporation's operations
    • Bonds usually have a maturity date at which time the bondholers are repaid the face value of the bond
  16. Stocks (Equity Financing)
    • A method of corporate financing
    • A stock is called a chare
    • It represents ownership is the corporation
    • All corporations must issue stocks
    • Stockholders have a right to a portion of the company's profits, called dividends
    • They are not however, assured of a fixed rate of return on their stocks
    • Holders of common stock elect the company's board of directors and thus have some say in the company's operations.  Holders of preferred stock do not have a vote but get preferential treatment in the payment of dividends.
  17. Bull Market
    General upward trend in stock prices
  18. Bear Market
    General downward trend in stock prices
  19. Outputs
    Products that arise from production
  20. Inputs
    Factors that are used to produce goods and services
  21. Classifying Inputs in Production Theory
    • Labour: (human capital)
    • Natural Resources (Raw material)
    • Captial (Buildings, machinery, equipment)
    • Entrepreneurship (Contribution of the owners)
  22. Classiging inputs: Production Theory (agian)
    • Fixed input: input where the quantity cannot be changed within the time period
    • Variable input: input where the quantity can change within the time period
  23. Short run
    Time period in which at lest one input is fixed
  24. Long Run
    Time period in which all inputs are variable
  25. Total Product (TP)
    TP=Q
  26. Marginal Product (MP1)
    The change in total product resulting from the incremental change in the use of one input, holding all other inputs constant
  27. The Law of Dminishing Marginal Returns
    As more of an input is added to production, holding the quantities of all other inputs constant, the resulting increase in the quantity of output will eventually diminish
  28. Accounting Costs
    Include actual expenditures and deprecation expenses for capital equipment.  Accounting costs are explicit costs
  29. Implicit costs
    Costs incurred when an alternative is sacrificed, the opportunity costs
  30. Economic costs
    • Are the firm's explicit costs are always greater than accounting costs
    • Economic costs = accounting costs + oppurtunity costs
  31. Fixed Costs (in the short run)
    Costs that do not change as the qunatity of output changes
  32. Variable costs (in the short run)
    Costs that change as output changes
  33. Marginal Cost
    The change in total costs resulting from an incremental change in output
  34. The marginal Average Rule (applied to average costs)
    • If MC>ATC, then the average total cost is rising
    • If MC<ATC, then the average total costs if falling
    • If MC=ATC, then the average total cost is at its minimum
  35. Costs in the Long Run
    In the long run, all costs are variable
  36. 4 Market Structures
    • Perfect Competition
    • Monopoly
    • Monopolistic Competition
    • Oligopoly
  37. Equilibrium of a Profit Maximizing Firm
    • Decision by the firm (or firms) to choose price and outputs is one decision.
    • Once the firm (or firms) chooses outputs, it has also choosen price
  38. Choosing a Profit Maximimizing Output - Short Run
    • Rule 1: A firm should produce only if total revenue is equal to or greater than total variable cost
    • Rule 2: A firm is in a profit maximizing position if marginal cost equals marginal revenue
  39. Perfect Competition
    • All firms in the market sell a homogeneous product
    • Consumers and producers know the nature of the product being sold and the prices charged by each firm
    • There are many buyers and sellers in the market for this product
    • The industry is characterized by freedom of entry and freedom of exit
    • Individual firms are price takers  That is, an individual firm has no power to influence the market through which its product it being sold
  40. Shut-down rule
    • If P < AVC, the firm should produce 0 and profits = - FC
    • If P > AVC, continue on to the next steps
  41. Profit Maximation for an individual firm in a perfectly competitive market
    Any firm Maximizes profit at the quantity where MR=MC.  But for a perfectly competitive firm, P=MR.  Therefore we can say a perfectly competitive firm maximizes profits at the quantity where P=MC
  42. Finding the Profit Max. Outputs for a perfectly competitive firm
    • Find the quantity where P = MC, call this quantity q*
    • At this quantity, q*, get the value of AVC
    • Check the shut-down rule
    • Find the ATC associated with the q*
    • Calculate the max. profits using pi = (P-ATC)q*
  43. Long Run Equilibrium in a Perfectly Competitive Market
    • In the long run, all costs are variable
    • In the long run, firms can exit or enter the market
    • Long run: pi > 0 induces entry of new firms
    • Entry continues until pi = 0
    • In a perfectly competitive market, the long run equilibrium occurs at the quantity where individual firms earn pi = 0, or where P=MC=ATC
  44. Constant Cost Industry
    Industry where per unit costs do not change as firms enter or exit
  45. Competitive Analysis
    • Consumers' Surplus=what the consumers are willing to pay - what the consumers have to pay
    • Producers' Surplus=what the producers are paid - what the producers are willing to accept.
    • Claim: Perfect competition maximizes (PS + CS)

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