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Flashcards in Exam 1 Review 1 Deck (23):

Gains from Exchange

A Way of coordinating competing interests, allows the market to be driven by the invisible hand


Transaction Costs

The opportunity costs of using productive resources in making trades rather than producing. "Anything that will lower the costs of transacting will increase the output available for other users." If transaction coast increase, you're less willing to pay for the good (to accommodate the shift in the real cost), which shifts the demand curve to the left.


"Common Property"

(Fish) A problem occurs when overuse of a resource occurs when additional users of that resource cannot be excluded, either because the cost of doing so are high or because ownership rights are not clearly specified.


Property Rights

Without the knowledge that you can use whatever you are purchasing/making in the future, you won't have any incentive to take care of it or do anything to improve it, property rights give you an investment in the future of the good.


Rules Governing Contracting

Government makes people keep their promises and stop opportunistic behavior


Marginal Unit

The last or additional unit Ex. The last ice cream cone eaten


Marginal Benefit (MB)

How much benefit, satisfaction, or utility is gained from one additional unit


Marginal Cost (MC)

How much it costs to produce/consume the last unit


Equi-marginal Rule

Maximization is reached when MB1/MC1 = MB2/MC2. When comparing how much should be consumed or produced of two products


Short Run Equilibrium

the price where the amount demanders are willing to purchase just equals the amount that suppliers are willing to provide to see


Long run Equilibrium

The price at which economic profits are equal to zero


Supply Elasticity

Percentage change in quantity supplied when the market price changes by a small percentage amount


Long run Equilibrium

When profits = 0, and when there are no incentives for firms to enter or to leave the market. When entering firms expect the profits to be 0


Efficiency (Static or Allocative)

If firms are price takers (i.e. the market is perfectly cometitive) and if there are no consumption or production externalities then the market equilibrium is efficient because the amount demanders are willing to pay for additional output is just equal to the cost of producing additional output *That is, "one dollar's worth of scarce resources is used to produce output that individuals are willing to pay exactly one dollar for"


When is Efficiency achieved?

1) Maximizing demanders choose Q so that p* = MWTP
2) Maximizing suppliers choose Q so that p* = MC
Therefore MWTP = p* = MC
Therefore MWTP = MC


What is the role of prices?

-Allocate commodities among competing demanders
-Provide incentives for suppliers to use capital more (or less) intensively
-Provide incentives for demanders to substitute
-Convey information: Among suppliers/demanders, between suppliers and demanders
-"Shock Absorbers"


What is the role of Profits?

-Encourages exit and entry within a market (entry can either mean new firms entering or existing firms expanding)
-Allocate capital across different markets
-Provide incentives for capital to move to markets where economic profits are positive
-Provide incentives for capital to move from markets where economic profits are negetive



If the price of one commodity increases, the demand for the other decreases



Period of time over which a firm's capital stock is fixed; a firm can increase its output only by employing more labor and other resources together with the same amount of capital.



Firm is free to acquire or sell its fixed resource: Capital; output can be increased by either using capital more intensively or by acquiring additional capital


Increasing Returns to Scale/Scale Economics

When a firm increases all inputs, the increase in output is proportionally greater than the increase in inputs; decreased long-run average costs


Constant Returns to Scale

Output changes in proportion to any change in inputs; no efficiency gains from becoming larger; average costs at their minimum will be the same for a large or smaller firm


Decreasing Returns to Scale

When a firm increases all inputs, the increase in output is proportionally less than the increase in inputs; increased long-run average costs