Equilibrium
a market outcome where the quantity supplied equals the quantity demanded
Excess Demand
at the given price, the quantity demanded exceeds the quantity supplied (aka supply shortage)
Excess Supply
at the given price, the quantity supplied exceeds the quantity demanded (aka surplus)
Movement
when the price of the good being demanded/supplied changes
Demand Curve Shift
-income changes
-price of related goods change
-tastes change
-distribution of income changes
-population size changes
Supply Curve Shift
-price of inputs change
-technology changes
-goal of the firm changes
Substitutes
two goods for which an increase in the price of one good leads to an increase in demand for the other good
Complements
two goods for which an increase in the price of one good leads to a decrease in the demand of the other
Normal Good
>0
Luxury Good
>1
Necessity Good
0-1
Inferior Good
<0
Production Function
relationship between inputs and outputs--specifies the max output that can be produced using any given amount of inputs
Short Run
fixed factors can't be changed easily, only variable factors; the assumption of a fixed number of firms is appropriate for analysis of the ________, but not the LR
Long Run
all factors variable
Very Long Run
technology can change, altering objective of the firm
Fixed Factor
building size, amount of machines
Marginal Product
the increase in output that arises from an additional unity of input (change in TP/change of input); point of inflection in a production function
Average Product
average amount of goods produced per unit; maximum in a production function
Law of Diminishing Marginal Returns
eventually an additional unit of a variable factor will add less to the TP than the previous unit did
Price Elasticity of Demand
how quantity demanded is affected by price (% change in Q demanded/% change in price)
Elastic
> 1 (elasticity)
Inelastic
< 1 (elasticity)
Price Elasticity of Supply
how quantity supplied is affected by price (% change in Q supplied/% change in price)
Cross Price Elasticity
how price of y changes affects Q demanded of x (% change in Q demanded of x/% change in price of y)
Income Elasticity
as we get richer, how our demand for goods change (% change in Q demanded/% change of income) (inferior, luxury, necessity)
Steps for Equilibrium Analysis
1.) Decide whether event shifts supply or demand (or both)
2.) Decide which direction it shifts
3.) Use S-D graph to see how shift changes equilibrium
Law of Supply and Demand
claim that the price of any good adjusts to bring the Q supplied and Q demanded for that good into balance
Competitive Market
a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker; firms can freely enter/exit
Price Taker
in a perfectly competitive market, they must accept the price for which a good buys/sells for
Profit Maximization
MR = MC
Increase Output
MR > MC
Decrease Output
MR < MC
Marginal Cost Curve
competitive firm's supply curve
Sunk Cost
Cost that cannot be recovered during shut down
Shut Down
TR < ATC; P < AVC
ATC Is Increasing
MC > ATC
Accounting Profit
TR - total explicit cost
Explicit Cost
input cost that needs money by firm, Opportunity cost of resources employed by a firm that takes the form of cash payments
Implicit Cost
input cost that doesn't need money by firm
Long Run Average Cost Curve
lower envelope of SRAC curves
Economies of Scale
on left; LRAC falls as Q increases
Diseconomies of Scale
on right; LRAC increases as Q increases
Constant Economies of Scale
in middle; LRAC remains constant as Q increases
Perfect Competition Assumptions
-homogenous products
-customers have full information about product/price
-small producers compared to total output
-price takers with a horizontal demand curve
-free entry & exit
Buyer/Seller Actions
negligible impact on market price
Game Theory
study of interacting decision makers whose payoffs depend on the actions of both
Collusion
economic agents formally agree to coordinate their activities to increase their joint profit/benefit
Dominant Strategy
a strategy that's best for a player in a game regardless of the strategies chosen by the other players
Nash Equilibrium
a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all others have chosen
Focus Point
if one Nash equilibrium dominated the other, players may try to attain the best Nash equilibrium
Backwards Unraveling
the players' failure to sustain the cooperative outcome in a finitely repeated game, even for a single stage
Price Discrimination
charging different prices for the same product
Bundling
selling two or more products with a single bundled price
Mixed Bundling
when companies offer products priced individually and price together as a package
Reservation Price
price a consumer is willing to pay
Consumer Surplus
difference between the reservation price and the actual price they paid
Monopoly Facts
-when a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price
-AR=P for both competitive and monopoly firms
-a reduction in a monopolist's fixed costs wouldn't effect the profit-maximizing price or quanti
Natural Monopoly
a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms