Question Answer
Buying at a low price in one market and selling at a high price in another Drives prices towards each other Arbitrage
a way to measure opportunity for arbitrage in markets Purchasing Power Parody
when marginal cost does NOT equal marginal benefit is there a chance for arbitrage Yes
When world price is higher who is in favor of free trade? Producers
When world price is lower who is in favor of free trade? Consumers
What is a tax on imports? A Tariff
What is consumer surplus? The area below the demand curve but above the going price, aggregated over all trades made
What is producer surplus? The area above the supply curve but below the going price, aggregated over all trades made
Foreign sellers selling to the U.S are… Importers
What is forgone interest? Funds used to buy capital that could have been used for some other purpose, and in their next best use, they would have earned interest
Quantity Produced (Q) / Labor (L) = Average Product
change in Q / change in L = Marginal Product (MP) [decreasing function of L]
Marginal product of an additional worker is less than the marginal product of the previous worker Diminishing Marginal Returns
MP X price sold for = Marginal Revenue Product (MRP) or Value of MP (VMP)
Total Variable Cost (TVC) + Total Fixed Cost (TFC) = Total Cost (TC)
change in TC / change in Output (Q) = Marginal Cost (MC)
TC / Q = Average Total Cost (ATC)
Fixed Cost (FC) / Q = Average Fixed Cost (AFC)
What is the benchmark used to measure other markets? Perfect Competition
The time frame in which the quantity of at least one factor of production is fixed Short Run
The time frame in which the quantities of ALL factors of production can be varied Long Run
A past expenditure on a plant that has NO resale valueex) car will not be worth as much if you try to resell it (depreciation) Sunk Cost
cost of land, capital, and entrepreneurship cost that you will incur without producing a single product (when output is zero) Fixed Cost
Double all inputs and output more than doublescost per unit gets smaller Increasing Returns to Scale
double all inputs and output also doubles Constant Returns to Scale
double all inputs and output less than doublescost per unit gets larger Decreasing Returns to Scale
Diminishing marginal returns is a long run or short run concept Short Run Concept
Decreasing returns to scale is a long or short run concept Long Run Concept
Smallest output at which long run average cost reaches its lowest level Minimum Efficient Scale
Price X Quantity = Total Revenue (TR)
Cost X Quantity = Total Cost (TC)
TR – TC = Total Profit (TP)
The break even point is the… Lowest Possible ATC
The shut down point is the… Minimum AVC
When MC increases the MP… Decreases
Marginal Benefit (MB) is… The Market Price
Profit maximizing output is when… MC = MB
Characteristics of perfect competition are… many buyers and sellersno restrictions to entry and exit from the marketidentical productsno firm has an advantage over anotherwell informed buyers and sellers