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88 Cards in this Set
- Front
- Back
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price ceiling
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a legal maximum on the price at which a good can be sold
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price floor
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a legal minimum on the price at which a good can be sold
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binding
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when the price that balances supply and demand is above the price ceiling or below the price floor
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when the government imposes a binding price ceiling on a competitive market, what arises?
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a shortage
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when the government imposes a binding price floor on a competitive market, what arises?
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a surplus
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true or false: taxes on buyers and taxes on sellers are equivalent
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true
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tax incidence
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the manner in which the burden of a tax is shared among participants in a market
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welfare economics
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the study of how the allocation of resources affects economic well-being
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willingness to pay
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the max amount that a buyer will pay for a good
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consumer surplus
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the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
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marginal buyer
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the buyer who would leave the market first if the price were any higher
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consumer surplus area on a graph
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the area below the demand curve and above the price in a market
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cost
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the value of everything a seller must give up to produce a good
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producer surplus
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the amount a seller is paid for a good minus the seller's cost of providing it
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producer surplus area on a graph
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the area below the price and above the supply curve in a market
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=total surplus
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value to buyers-cost to sellers=?
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efficiency
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the property of a resource allocation of maximizing the total surplus received by all members of society
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equity
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the fairness of the distribution of well-being among the members of society
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deadweight loss
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the fall in total surplus that results from a market distortion, such as a tax
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they prevent buyers and sellers from realizing some of the gains from trade
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taxes cause deadweight losses because...
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the greater the deadweight loss of a tax
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the greater the elasticites of supply and demand...
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underground economy
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illegal economic activity such as the drug trade or working at jobs that pay "under the table" to evade taxes
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world price
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the price of a good that prevails in the world market for that good
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price takers
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take the world price of a good as given
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tariff
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a tax on goods produced abroad and sold domestically
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=total surplus
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value to buyers-cost to sellers=?
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efficiency
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the property of a resource allocation of maximizing the total surplus received by all members of society
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equity
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the fairness of the distribution of well-being among the members of society
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deadweight loss
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the fall in total surplus that results from a market distortion, such as a tax
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they prevent buyers and sellers from realizing some of the gains from trade
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taxes cause deadweight losses because...
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the greater the deadweight loss of a tax
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the greater the elasticites of supply and demand...
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underground economy
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illegal economic activity such as the drug trade or working at jobs that pay "under the table" to evade taxes
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price takers
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take the world price of a good as given
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externality
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the uncompensated impact of one person's actions on the well-being of a bystander
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internalizing the externality
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altering incentives so that people take account of the external effects of their actions
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technology spillover
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the impact of one firm's research and production efforts on other firms' access to technological advance
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industrial policy
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government intervention in the economy that aims to promote technology-enhancing industries
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The Coase Theorem
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the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
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transaction costs
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the costs that parties incur in the process of agreeing to and following through on a bargain
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corrective tax
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a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality
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excludability
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the property of a good whereby a person can be prevented from using it
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rivalry in consumption
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the property of a good whereby one person's use diminishes other people's use
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private goods
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goods that are both excludable and rival in consumption
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public goods
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goods that are neither excludable nor rival in consumption
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common resources
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goods that are rival in consumption but not excludable
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free rider
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a person who receives the benefit of a good but avoids paying for it
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cost-benefit anaylsis
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a study that compares the costs and benefits to society of providing a public good
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tragedy of the commons
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a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole
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industrial organization
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the study of how firms' decisions about prices and quantities depend on the market conditions they face
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total revenue
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the amount a firm receives for the sale of its output
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total cost
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the market value of the inputs a firm uses in production
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profit
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total revenue minus total cost (P=TR-TC)
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explicit costs
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input costs that require an outlay of money by the firm
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implicit costs
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input costs that do not require an outlay of money by the firm
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economic profit
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total revenue minus total cost, including both explicit and implicit costs
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accounting profit
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total revenue minus total explicit cost
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production function
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the relationship between the quantity of inputs used to make a good and the quantity of output of that good
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marginal product
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the increase in output that arises from an additional unit of input
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diminishing marginal product
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the property whereby the marginal product of an input declines as the quantity of the input increases
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total cost curve
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shows the relationship between the quantity of output produced and the total cost of production
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fixed costs
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costs that do not vary with the quantity of output produced
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variable costs
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costs that do vary with the quantity of output produced
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average total cost
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total cost divided by the quantity of output
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average fixed cost
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fixed costs divided by the quantity of output
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average variable cost
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variable costs divided by the quantity of output
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marginal cost
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the increase in total cost that arises from an extra unit of production
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change in total cost/change in quantity
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=formula for marginal cost
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efficient scale
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the quantity of output that minimizes average total cost
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economies of scale
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the property whereby long-run average total cost falls as the quantity of output increases
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diseconomies of scale
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the property whereby long-run average total cost rises as the quantity of output increases
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constant returns to scale
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the property whereby long-run average total cost stays the same as the quantity of output changes
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market power
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if a firm can influence the market price of the good it sells it has this
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competitive market
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a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
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average revenue
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total revenue divided by the quantity sold
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marginal revenue
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the change in total revenue from an additional unit sold
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marginal revenue
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the change in total revenue from an additional unit sold
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sunk cost
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a cost that has already been committed and cannot be recovered
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P<ATC
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firm should exit the market if...
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P>ATC
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firm should enter the market if...
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(P-ATC)xQ
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Profit=
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monopoly
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price maker- a firm that is the sole seller of a product without close substitutes
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natural monopoly
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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
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competitive firm
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P=MR=MC
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monopoly firm
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P>MR=MC
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where the demand curve and the marginal-cost curve intersect
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the socially efficient quantity is found....
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by trying to make monopolized industries more competitive, by regulating the behavior of the monopolies, by turning some private monopolies into public enterprises, or by doing nothing at all
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what are the 4 ways that policymakers in the government can respond to the problem of monopoly?
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price discrimination
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the business practice of selling the same good at different prices to different customers
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perfect price discrimination
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a situation in which the monopolist knows exactly the willingness to pay of each customer and can charge each customer a different price
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