Micro Economics Test #2

Front 1

marginal benefit

Back 1

additional benefit gained from consuming one more unit of a good.

Front 2

Marginal cost

Back 2

the additional cost of producing one more unit of a good

Front 3

efficiency

Back 3

occurs when marginal benefit=marginal cost and the sum of consumer and producer surplus is maximized

Front 4

consumer surplus

Back 4

the difference between the maximum price someone is willing to pay and the actual price he or she does pay.

Front 5

producer surplus

Back 5

the difference between the market price and the minimum price a seller is willing to accept.

Front 6

inefficiency

Back 6

occurs when marginal benefit does not equal marginal cost and there is a misallocation of resources.
Sources:
1. price ceilings/floors
2.taxes/tariffs/quotas
3.monopoly
4. externalities
5.public goods

Front 7

impact on efficiency

Back 7

taxation results in a deadweight loss

Front 8

deadweight loss

Back 8

reduction in consumer and producer surplus that results when production is inefficient

Front 9

price ceilings

Back 9

maximum legal price set by gov. below the equilibrium price

Front 10

price floors

Back 10

a minimum legal price set by gov. above the equilibrium price.

Front 11

externality

Back 11

a cost or benefit that affects someone who is not directly involved in the production or consumption of a good or service. ex: spillover effect, 3rd party effect

Front 12

negative externality

Back 12

pollution

Front 13

positive externality

Back 13

vaccinations, education

Front 14

inefficiencies

Back 14

goods that generate negative externalities are overproduced.

Front 15

solutions to the problem of externalites

Back 15

1. public policy solutions
a. tax negative externalities (pigorian tax)
b. subsidize positive externalities
c. regulation (envir. protection
2. Private solution
a. coase theorem- emphasizes the need for clearly defined property rights.

Front 16

public good

Back 16

good or service that is non rival and non excludable
ex. national defense, law enforcement, uncongested highways.

Front 17

non-rival

Back 17

a good who's consumption by one person does not diminish it's availability for others
ex. watching movie at theatre doesn't take away from other people watching.

Front 18

non-excludable

Back 18

a good hat is very difficult or costly to exclude non payers from consuming; once provided everyone can enjoy the benefits.
ex. free rider

Front 19

common resource

Back 19

a resource that is non-excludable but rival.
ex. congested highways, fish/whales/wildlife

Front 20

short run

Back 20

a period of time in which at leas one resource is fixed in amount

Front 21

long run

Back 21

a period of time in which all resources are variable.

Front 22

production

Back 22

the process of converting resources into output

Front 23

average production (AP)

Back 23

output per worker

Front 24

marginal product (MP)

Back 24

additional output produced when one more worker is hired

Front 25

Law of diminishing Returns

Back 25

as the amount of a variable resource increases relative to fixed resources after a certain point the marginal product of the variable resource will decrease.

Front 26

total fixed cost (TFC)

Back 26

costs that do not vary or change with the level of output produced.

Front 27

total variable cost (TVC)

Back 27

costs that do vary or change with the level of output produced.

Front 28

average fixed cost (AFC)

Back 28

fixed cost per unit of output

Front 29

average variable cost (AVC)

Back 29

total fixed cost per unit of output

Front 30

average total cost (ATC)

Back 30

total cost per unit of output

Front 31

economies of scale

Back 31

cost per unit decrease as output increases and doubling inputs will more than double outputs

Front 32

constant returns to scale

Back 32

costs per unit remain constant as output increase and doubling inputs will double output.

Front 33

diseconomies of scale

Back 33

costs per unit increase as output increases and doubling inputs will less than double output.

Front 34

perfect competition

Back 34

market structure made up of many firms producing identical products.
-no barriers to entry- long run more firms aloud to enter
-price takers- a firm that has no control over $ of its output.

Front 35

marginal revenue

Back 35

additional revenue that is earned from selling one more unit of output

Front 36

shut down rule

Back 36

if price is above average variable cost then continue to operate.
if price is below average variable cost then shut down