1
Q
price ceiling
A
a legally determined maximum price that firms may charge
2
Q
price floor
A
a legally determined minimum price that firms may receive
3
Q
what happens to the amount of economic surplus when the Gov imposes a price ceiling or floor?
A
the economic surplus in a market is reduced
4
Q
consumer surplus
A
the difference between the highest price a consumer is willing to pay and the price they actually pay
5
Q
marginal benefit
A
the additional benefit to a consumer from consuming one more unit of a good
6
Q
producer surplus
A
the difference between the lowest price a firm is willing to accept for a good and the price they actually receive
7
Q
marginal cost
A
the additional cost to a firm from producing one more unit of a good
8
Q
equilibrium in a competitive market results in what?..
A
an economically efficient level of output where MB=MC
-the greatest amount of economic surplus (or net benefit to society)
9
Q
economic surplus
A
the sum of the consumer surplus and producer surplus
10
Q
deadweight loss
A
the reduction in economic surplus resulting from a market not being in competitive equilibrium
11
Q
economic efficiency
A
MB=MC and where the sum of consumer surplus and producer surplus is at a maximum
12
Q
consumers can lobby for a price _______ and producers can lobby for a price _______
A
consumers lobby for price ceiling
producers lobby for price floor
13
Q
total benefit - cost = ?
A
consumer surplus
14
Q
when does deadweight loss occur?
A
when the market is not in equilibrium
15
Q
P* x Q* = ?
A
total revenue
16
Q
when MB is higher than MC, what happens?
A
shortage
17
Q
when MC is higher than MB, what happens?
A
surplus
18
Q
black market
A
a market in which buying and selling take place at prices that violate Gov regulations (price floor or ceiling)
19
Q
3 things happen when the Gov imposes price controls…
A
1) some people win
2) some people lose
3) there is a loss of economic efficiency
20
Q
why does the Gov tax the producer and not consumers?
A
the producer taxes consumers at the time of purchase in which producer then pay to Gov. If they did not do this, consumers would not pay taxes on their own
21
Q
tax incidence
A
the actual division of the burden of tax between buyers and sellers in a market
22
Q
what does a steep demand curve imply?
A
that consumers are willing to pay almost any price for the good
23
Q
why do the producers take some of the burden of tax? for example, $0.10 tax on gas, you pay $0.08, the producer pays $0.02
A
producers take some burden of tax to keep demand high
-taking some burden of tax is cheaper than losing consumers
24
Q
externality
A
a benefit or cost that effects someone who is not directly involved in the production or consumption of a good
25
example of a positive externality?
schooling or medication
| -others benefit from one person's hardwork
26
example of a negative externality?
pollution
| -others take the burden of one's actions
27
private cost
the cost borne by the producer
28
social cost
the total cost of producing a good that includes both the private cost & any other external costs (like compensating those that live on the lake your factory is polluting)
29
private benefit
the benefit received by the consumer of a good
30
social benefit
the total benefit from consuming a good that includes both private benefit & any other external benefits
31
when there a ______ externality, goods are being overproduced
negative
32
when there a ______ externality, goods are being underproduced
positive
33
market failure
a situation in which the market fails to produce an efficient level of output
34
property rights
the rights individuals have to the exclusive use of their property including the right to buy or sell it
35
externalities and market failures can be a result of what..?
incomplete property rights or insufficient enforcement of those rights
36
The Coarse Theorem states what?
if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities
37
it can be expensive to pollute if you don't own the property rights, why?
because the polluter (a factory) must pay those effected by the pollution if they own the property rights
ex) a house at the end of a river that a factory is polluting
38
it can be expensive to live near pollution if you don't own the property rights, why?
because those effected by the pollution must may the factory to reduce or stop pollution since they don't own the property rights
ex) the house at the end of the river must pay the factory to reduce dumping in the river
39
is there an optimal level of pollution?
yes, because we cannot live with zero emissions
| MB=MC
40
transaction costs
the costs in time and other resources that parties incur in the process of agreeing to an exchange of goods
41
the Gov can do what with taxes that'll effect externalities?
the Gov can impose a tax to help internalize the negative externality & regain an efficient level of output
>MSC-MPC=tax
ex) Pigovian taxes
42
Pigovian taxes and subsidies
Gov taxes and subsidies intended to bring about an efficient level of output in the presence of externalities
43
the Gov can give a _____ to internalize a positive externaity and a ______ to internalize a negative externality
subsidy for positive
| tax for negative
44
there are 2 approaches to pollution, what are they?
command & control approach and market based approach
45
command & control approach
the Gov imposes quantitative limits on the amount of pollution firms are allowed to emit, or sets out requirements for firms to install specific pollution control devices
46
market based approach
the Gov identifies an acceptable level of emissions and issues or sels a number of permits equal to this amount
>firms may buy or sell "cap or trade policy"
>cheaper than command & control approach
>firms may pollute different amounts as long as they have the right number of permits
47
there are 4 categories of goods:
1) private good
2) public good
3) quasi-public good
4) common resources
48
private goods are...
| example?
both rival and excludable
| ex) food
49
public goods are..
| example?
both nonrival and nonexcludable
| ex) national defense
50
quasi-public goods are..
| example?
nonrival and some excludable
| ex) cable TV
51
common resources are..
| example?
rival but not excludable
| ex) cutting down trees
52
what does it mean for a good to have rivalry?
one person consuming a unit of that good means no one else can consume it
53
what does it mean for a good to be excludable?
anyone who does not pay for that good cannot consume it
54
freeriding
benefiting from a good without paying for it
55
what does it mean for a good to be nonrival?
one person's consumption does not interfere with another person's consumption
56
what does it mean for a good to be nonexcludable?
it's impossible to exclude others from consuming that good whether they pay for it or not
57
determine the market demand for a private good by..
adding up quantity of good demanded by each consumer at each price
58
determine the market demand for a public good by..
adding up the price each consumer is willing to pay for the same demand
59
tragedy of commons
the tendency for a common resource to be overused
| -negative externality (lack of clearly defined property rights & enforcement)
60
elasticity
a measure of how much one economic variable responds to changes in another economic variable
61
price elasticity of demand
| -how is it measured?
the responsiveness of the quantity demanded to a change in price
> %change in quantity demanded/% change in price
62
what is the midpoint formula?
(Q2-Q1) (P2-P1)
------------- =X ------------- =Y
(Q1+Q2)/2 (P1+P2)/2
then X/Y = elasticity
63
inelastic demand
% change in Q E
64
unit-elastic demand
% change in Q = % change in P
| ==> E=1
65
elastic demand
% change in Q > % change in P
| ==> E>1 in absolute value
66
perfectly elastic demand
quantity demanded is infinitely responsive to the price
> horizontal line on graph
> any change in price will fall to zero
67
perfectly inelastic demand
quantity demanded is completely unresponsive to price
> vertical line in graph
> price does not change quantity demanded
68
5 key determinants of price elasticity of demand
1) availability of substitutes
2) passage of time
3) luxuries vs. necessities
4) definition of market
5) share of that good in consumer's budget
69
more substitutes, more time passed, luxuries, narrow market & large share of a consumer's budget are _____(more/less) elastic?
more elastic
70
goods for which there are few substitutes (gas, health insurance, cigarettes) & broadly defined goods (bread, beer) are price ______
inelastic
71
specific brands (Coca-Cola, Raisin Bran) are price ____
elastic
72
total revenue
the total amount of funds received by a seller of a good
| TR= unit price X number of units sold
73
a flatter demand curve is _______
| a steeper demand curve is _______
```
flatter= more elastic
steeper= more inelastic
```
74
inelastic demand: price & TR move in the _____ direction
same
75
elastic demand: price & TR move in the _____ direction
opposite
76
unit-elastic demand: price & TR move in the _____ direction
** they have no effect on one another
77
cross price elasticity of demand
% change in q. demanded of good#1 / % change in price of good#2
78
the cross price elasticity will be...
positive for ______
negative for _____
zero for _____
positive for substitutes
negative for complements
zero for unrelated goods
79
income elasticity of demand
a measure of the responsiveness of q. demanded to changes in income
% change in q. demanded/% change in income
80
if income elasticity is positive but less than 1..
the good is a normal necessity
| ex) bread
81
if the income elasticity is positive but greater than 1..
the good is a normal luxury
| ex) caviar
82
if the income elasticity is negative..
the good is inferior
| ex) high fat meat
83
price elasticity of supply
the responsiveness of the quantity supplied to a change in price
% change in q. supplied/% change in price
84
technology
the process a firm uses to turn inputs into outputs
85
technological change
a change in the ability of a firm to produce a given level of output with a given number of inputs
-can be positive or negative
86
ex of positive technological change?..
rearrangement of factory, better training programs, more efficient machines, etc
87
ex of negative technological change?..
hiring less skilled workers, damage to the factory, etc
88
short run
the period of time in which at least one of a firm's inputs are fixed
89
long run
the time of time in which a firm can vary all its inputs (technological change)
90
total cost
| equation?
the cost of all the inputs a firm uses in production
| TC= FC+VC
91
variable cost
| ex?
costs that change as output changes
| ex) labour, raw materials, electricity
92
fixed cost
| ex?
costs that remain constant as output changes
| ex) rent, insurance, advertising
93
opportunity cost
the highest valued alternative that mus be given up to engage in an activity
94
explicit costs
monetary costs
| also called accounting costs
95
implicit costs
non-monetary opportunity cost
96
economic depreciation
the difference in the value of capital from one point to another (decrease in value over time)
97
economic costs =
implicit + explicit costs
98
production function
the relationship between a firm's inputs and the maximum amount of output those inputs can produce
-represents a firm's technology
99
equation for ATC?
ATC= TC/Q
100
as production begins to increase, what happens to the ATC? what shape does it form? why does this happen?
ATC initially falls then rises again to create a U shape
-the change in output production is effective to a certain point (the drop), but then works against itself when there is too much production as managers may not be able to coordinate the factory (the rise)
101
marginal product of labour
| -how is it calculated?
the additional output a firm produces from one additional worker
-calculated by the difference in total input from one number of workers to the next
102
an increase in MPL results from?
| a decrease in MPL results from?
increase: division of labour & specialization
decrease: law of diminishing returns
103
law of diminishing returns
a principle stating that at some point, adding more labour to the same amount of capital will decrease the MPL
-why? workers run into each other, some stand around
104
marginal cost
| equation?
the change in a firm's total cost from producing one more unit of a good
MC= change in TC/ change in Q
105
what does the relationship between MPL and MC look like?
when MPL rises, MC falls
| when MPL falls, MC rises
106
equation for AFC?
AFC= FC/Q
107
equation for AVC?
AVC= VC/Q
108
when MC is below ATC on the graph, ATC is ______
| when MC is above ATC on the graph, ATC is ______
MC below ATC= falling
| MC above ATC= rising
109
long run average cost curve
a curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run
110
in the long run, all costs are _______
variable, there are no fixed costs
111
economies of scale
when a firm's long run average costs decline with increased output
112
diseconomies of scale
when a firm's long run average costs increase with decreased output
113
constant returns to scale
when a firm's long run average costs remain unchanged with increased output
114
minimum efficient scale
the level of output at which all economies of scale are exhausted
115
what causes firms to experience economies of scale? (3)
1) specialization
2) large firms can purchase inputs at lower costs
3) large firms can have lower interest rates
116
what causes firms to experience diseconomies of scale?
mangers have a harder time coordinating production in larger plants
-bigger doesn't always mean better
117
isoquant
a curve that shows all combinations of two inputs that'll produce the same number of output
ex) capital and labour
118
marginal rate of technical substitution (MRTS)
the rate at which a firm is able to substitute one input for another while keeping output constant
119
isocost line
all the combination of two inputs that have the same total cost
120
equation for MRTS?
MRTS= change in C/ change in L
121
slope of an isocost line?
slope= WR/RP x -1
| wage rate and rent price of capital
122
equation for the point of cost minimization?
MPL/W = MPK/R
123
expansion path
a curve that shows a firm's cost minimizing combination of inputs for every level of output
124
cost minimization depends on two factors:
technology and price of inputs
Econ
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