Ch 9-10, 13-14

Front 1

Pw

Back 1

the world price of a good, the price that prevails in world markets

Front 2

Pd

Back 2

domestic price without trade

Front 3

If Pd < Pw

Back 3

The country has a comparative advantage in the good. Under free trade, the country exports the good.

Front 4

If Pd > Pw

Back 4

The country does not have a comparative advantage. Under free trade, the country imports the good.

Front 5

Tariff

Back 5

A tax on imports

Two effects:

-Increase domestic production, decrease domestic consumption. More of the good is produced by the higher-cost domestic producers.

-Less is consumed --> lower gains from trade

Front 6

Protectionism

Back 6

Policy of restraining trade through quotas, tariffs, or other regulations which burden foreign (but not domestic) producers

Front 7

Import quota

Back 7

A quantitative limit on imports of a good

Front 8

Externality

Back 8

The uncompensated impact of one person's actions on the well-being of a bystander

Front 9

Private cost

Back 9

A cost paid by the consumer or producer

Front 10

External cost

Back 10

A cost paid by people other than the consumer or the producer trading in the market

Front 11

Social cost

Back 11

The cost to everyone, the private cost plus the external cost

Front 12

Social surplus

Back 12

Consumer surplus + producer surplus + everyone else's surplus

Front 13

Efficient Equilibrium

Back 13

The price and quantity that maximize social surplus

Front 14

Efficient Quantity

Back 14

The quantity that maximizes social surplus

Front 15

Internalizing the externality

Back 15

Altering incentives so that people take account of the external effects of their actions

Front 16

Private value

Back 16

The value to buyers (the prices they are willing to pay)

Front 17

External benefit

Back 17

The value of the positive impact on bystanders

Front 18

Corrective tax

Back 18

A tax designed to induce private decision-makers to take account of the social costs that arise from a negative externality

Front 19

Pigouvian Tax

Back 19

A tax on a good with external costs

Front 20

Pigouvian Subsidy

Back 20

A subsidy on a good with external benefits

Front 21

Transaction Costs

Back 21

All the costs necessary to reach an agreement

Front 22

Explicit cost

Back 22

Requires an outlay of money, such as paying wages to workers

Front 23

Implicit cost

Back 23

Does not require a cash outlay, such as the opportunity cost of the owner's time

Front 24

Accounting profit

Back 24

Total revenue - total explicit costs

Front 25

Economic profit

Back 25

Total revenue minus total costs (both explicit and implicit)

Always less than accounting profit b/c counts more costs

Front 26

Production Function

Back 26

Shows the relationship between the quantity of inputs used to produce a good and the quantity of output of that good

Front 27

Marginal Product

Back 27

The increase in output arising from an additional unit of that input, holding all other inputs constant

Front 28

Diminishing Marginal Product

Back 28

The marginal product of an input declines as the quantity of the input increases (other things equal)

Front 29

Marginal Cost (MC)

Back 29

The increase in total cost from producing one more unit

MC = change in TC / change in Q

Front 30

Fixed Cost

Back 30

Do not vary with the quantity of output produced

Front 31

Variable Cost

Back 31

Varies with the quantity produced

Front 32

Total Cost (TC)

Back 32

= FC + VC

Front 33

Average total cost (ATC)

Back 33

Total cost divided by the quantity of output

ATC = TC / Q

Front 34

Efficient scale

Back 34

The quantity that minimizes ATC

Front 35

Economies of scale

Back 35

Occur when increasing production allows greater specialization: workers more efficient when focusing on a narrow task

Front 36

Diseconomies of scale

Back 36

Due to coordination problems in large organizations

Front 37

Shutdown

Back 37

A short-run (SR) decision not to produce anything because of market conditions

Front 38

Exit

Back 38

A long-run (LR) decision to leave the market

Front 39

Sunk Cost

Back 39

A cost that has already been committed and cannot be recovered

Front 40

Long-run equilibrium

Back 40

The process of entry or exit is complete - remaining firms earn zero economic profit

In the long run, P = minimum ATC

Front 41

Monopoly

Back 41

A firm that is the sole seller of a product without close substitutes

Front 42

Cause of monopolies (3)

Back 42

1. A single firm owns a key resource

2. The government gives a single firm the exclusive right to produce a good.

3. Natural monopoly

Front 43

Natural monopoly

Back 43

A single firm can produce the entire market Q at lower cost than could several firms