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75 Cards in this Set

  • Front
  • Back


Cost or benefit from either production or consumption that falls on someone other than the producer or consumer

Negative externality

imposes external cost

Positive externality

provides an external benefit

Examples of Negative Production Externalities

Logging, Airplane Noise, and Pollution

Examples of Negative Consumption Externalities

Smoking, and Loud Parties

Examples of Positive Externalities

Flu vaccination

Marginal Social Cost

Marginal Cost incurred by the entire society

MSC Formula

MSC=Marginal Cost + Marginal external cost

Marginal Cost is borne by

the producer

External Cost is borne by

other than the producer

When is it efficient?


Marginal Social Cost = Marginal Benefit

Coase Theorem

If property rights exist and only small # of people and low transaction costs, then it is efficient.

MSB formula

MSB = MB + Marginal external benefit


Use by one person decreases # available for others


Possible to prevent someone from enjoying the benefits

Public Goods

Non-Rival, and Non-Excludable

Common Resources

Rival, and Non-Excludable

Natural Monopoly

Non-Rival, and Excludable

Private Goods

Rival and Excludable

Memorize the Chart for private good etc.
Graph for MSC
Graph for MSB

Examples of Private Goods

Food, Drink, Car, House

Examples of Common Resources

Fish in the ocean, the atmosphere

Examples of Natural Monopoly

Internet, and Cable

Examples of Public Goods

National Defense, and The Law

Demand curve for public goods

Summed vertically

Demand curve for private goods

Summed Horizontally

Tragedy of Commons

Overuse of a common resource when its users don't conserve

Short Run

time-frame in which quantities of some resources are fixed.

Marginal Product formula


Change in Total Product divided by Change in Quantity of Labor

Total Product

Total quantity of a good produced in a given period

Increasing Marginal Returns

Additional worker exceeds the marginal product of the previous worker

Decreasing Marginal Returns

Additional workers marginal product is less than the previous worker

Graph of Average costs
What equals what?

Space between AVC and ATC are the same as AFC.

Long run

All costs are variable

Economies of Scale

Average Total Cost falls as output increases

Diseconomies of Scale

Average Total Cost rises as output increases

Constant Returns to Scale

Average Total Cost is constant

Long Run Average Cost Curve
Take the lowest portions of all ATC curves

Price Taker

Can't influence the price

4 Characteristics of Perfect Competition

1. No Barriers to entry

2. No Advantage

3. Identical Products

4. Well informed buyers and suppliers


No close substitute

Barrier to Entry

Monopolistic Competition

Slightly different products


Almost identical products

Small number of firms

Marginal Revenue in Perfect Competition


Shutdown Point

Both at minimum AVC

Supply Curve of Shutdown point
Upload Photo.

Entry to Long Term

Entry increases supply and lowers the price and increase in demand raises price.

Supply and Demand Curves shift to the Right.

Exit from Long Term

Exit decreases supply and raises price and decrease in demand lowers price.

Supply and Demand Curves shift to the Left.

Monopoly Barriers

Natural Monopoly



Demand and Marginal Revenue Curve in a Monopoly
Monopoly produces a deadweight loss

When demand is elastic Marginal Revenue is


When demand is inelastic Marginal Revenue is


Difference between private cost and social cost?

Private cost only considers cost borne by producers

Property rights force

Marginal Private Cost to = Marginal Social Cost

If a firm pollutes a river the government can...

Impose a pollution tax that equals the Marginal external cost

If marginal external cost is $10 per ton, and firm is unregulated then...

Marginal Social Cost will be $10 more than Marginal Benefit

Possible solutions to Tragedy of Commons

Setting Production Quota

Granting Individual Transferable Quotes

Establishing Property Rights to the Resource

The U-Shape reflects

Increasing and Decreasing Marginal Returns

How to find Fixed Cost

The Cost at 0 workers

How to find Variable Cost

Total Cost - Fixed Cost

To maximize profits make

Price = Marginal Cost

A perfectly competitive firm will survive if it has

price at least equal to AVC

Short Run to increase profit must

Increase Labor Quantity

If producing a good creates pollution in an unregulated market then marginal social cost is

greater than equilibrium price

Diseconomies of scale can occur from

Management difficulties as the firm increases its size

A perfectly competitive firm can sell all of

its output at market price

Elasticity of Perfectly competitive firms

Perfectly Elastic because they are price-takers

If a firm shuts down the price is

less than minimum AVC

Based on figure, the firms marginal product curve slopes upward at levels of output between _________ and the firms average product curve slopes upward at levels of output between ________
0 and 4.0, 0 and 7.0

When marginal revenue is positive, total revenue __________ when output increases and demand is __________

Increases; Elastic

Christy's Haircuts, faces the demand schedule shown above. What is marginal revenue of the 25th haircut

To maximize its profit, a perfectly competitive firm produces so that _______ and a single-price monopoly produces so that _________.

MR = MC; MR = MC