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Micro Economics > Chapeters 9-12 > Flashcards

Chapeters 9-12 Flashcards

1
Q

What role does the World Price play in determining trade?

A

When the price of a good within a country differs from the world price, then there is an incentive for that country to enter the international market for the good.

If the world price is higher than the domestic price, the producers have incentive to export the good.

If the world price is lower than the domestic price, the consumers will have an incentive to import the good

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2
Q

What is the risk to domestic customers is there of exporting a good?

A

Exporting a good causes the domestic price to rise, which hurts domestic consumers but helps domestic producers.

However, the gains of the sellers are greater than the losses of the buyers and total surplus rises.

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3
Q

What risk does importing a good pose to domestic producers?

A

Importing a good causes the domestic price to fall, hurting domestic producers but helping domestic customers.

The gains from the consumers are greater than the losses by the producers, causing total surplus to rise.

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4
Q

Define World Price?

A

The price of a good that prevails in the world market for that good.

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5
Q

Why is trade beneficial to countries?

A

It allows them to specialize in what they do best.

Trade raises the economic well being of a nation in the sense that the gains of the winners exceed the losses of the losers.

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6
Q

What does it mean if a country is a Price Taker?

A

The take the world price of a good as given.

They are too small to cause a shift in the price.

Canada is considered a price taker (accounts for less than 2% of world GDP)

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7
Q

Define Tariff

A

A tax on good produced abroad and sold domestically

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8
Q

Other than tariffs, what is another way nations can restrict international trade?

A

By putting limits on how much of a good can be imported.

Import quotas reduce the quantity of imports, raise the domestic price of the good, decrease the welfare of domestic consumers, increase the welfare of domestic producers and cause deadweight losses

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9
Q

What is the difference between a tariff and an Import Quota (trade limit)

A

A tariff raises revenue for the government, whereas an import quota creates surplus for those who get the licenses to import.

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10
Q

What are the “other” benefits of trade?

A
  1. Increased variety of goods
  2. Lower costs through economies of scale
  3. Increased competition
  4. Enhanced flow of ideas
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11
Q

What are the five arguments for restricting trade?

A
  1. The jobs argument
  2. The National security argument
  3. The infant industry argument
  4. The unfair-competition argument
  5. The Protection as a bargaining chip argument
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12
Q

Define Externality

A

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

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13
Q

Give examples of a negative externality

A

A pulp mill that emits dioxin

Noise pollution (concert, barking dog)

Exhaust from cars

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14
Q

Give an example of a positive externality?

A

When you consume education you get a private benefit. But there are also benefits to the rest of society. E.g you are able to educate other people and therefore they benefit as a result of your education. (positive consumption externality)

A farmer who grows apple trees provides a benefit to a beekeeper. The beekeeper gets a good source of nectar to help make more honey. (positive production externality)

If you walk to work, it will reduce congestion and pollution; this will benefit everyone else in the city.

Historic buildings

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15
Q

What does the height of the demand curve demonstrate?

A

The willingness to pay of the marginal buyer. The value to the consumer.

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16
Q

What does the height of the supply curve represent?

A

The cost to the marginal seller. The cost to the producer of the last unit of a good.

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17
Q

Define Social Cost

A

The cost of the unit plus the costs of the bystanders affected

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18
Q

What is the Social Cost curve?

A

The curve that is above the supply curve because it takes into account the external costs imposed on society. The difference between these two curves reflects to cost of pollution emitted.

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19
Q

Define Internalizing the externality

A

Alter incentives so that people take account of the external effects of their action

Gives buyers and sellers in the market an incentive to take into account the external effects of their action

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20
Q

What impact does a negative externality have on the market?

A

Leads markets to produce larger quantity than is socially desirable.

To remedy the problem, the government can internalize the externality by taxing goods that have negative externalities

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21
Q

What impact does a positive externality have on the market?

A

Positive externalities lead markets to produce a smaller quantity than is socially desirable.

Governments can internalize the externality by subsiding goods that have positive externalities

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22
Q

Give an example of a negative externality and a positive externality

A

Negative externality - Aluminum factory, pollutants

Positive externality - Education

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23
Q

MT1

Which of the following is NOT a characteristic of a perfectly competitive market?

A

A - Similar product
B - Market Power
C- Numerous Sellers
D - Numerous Buyers

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24
Q

Define Command and Control Policies

A

Government can remedy an externality by making certain behaviours either required or forbidden.

Example - It is a crime to dump poisonous chemicals in the water supply. Therefore government institutes a command and control policy that prohibits this act altogether

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25
Q

Define Market Based Policy

A

Provide incentives so that price decision makers will chose to solve the problem on their own

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26
Q

Define Corrective Taxes

A

Taxes enacted to correct the effects of negative externalities (also called Pigovian taxes)

27
Q

Define Coase Theorem

A

If private parties can bargain over the allocation of resources at no costs, the the private market will always solve the problem of externalities and allocate resources efficiently

28
Q

Define transaction costs

A

The costs that parties incur in the process of agreeing to and following through on a bargain

29
Q

Chapter 10 Summary

A

When a transaction between a buyer and a seller directly affects a third party, the effect is called an externality. If an activity yields negative externalities such as pollution, the socially optimal quantity in a market is less than the equilibrium quantity. If an activity yields positive externalities, such as technology spillover, the socially optimal quantity is greater than the equilibrium quantity

Governments pursue various policies to remedy the inefficiencies caused by externalities. Sometimes the government prevents socially inefficient activity by regulating behaviour. Other times it

30
Q

Define Excludability

A

The property of a good whereby a person can be prevented from using it

31
Q

Define rival in consumption

A

One person’s use of the good diminishes another person’s ability to use it

32
Q

Define Private Goods

A

Goods that are both excludable and rival

Example - Ice cream cone is excludable because it is possible to prevent someone from eating one, you just don’t give it to her. It is also a rival in consumption because if one person eats it, another person can not eat the same cone.

33
Q

What are the Four Types of Goods?

A

Private Goods
Club Goods
Common Resources
Public Goods

34
Q

Define Public Goods

A

Goods that are neither excludable nor rival

Example - Tornado siren in a small town. Once the sired sounds it is impossible to prevent any single person from hearing it. When one person gets the benefit of the warning, she does not reduce the benefit to anyone else.

35
Q

Define Common Resources?

A

Goods that are rival but not excludable

Example - Fish in the ocean are rival in consumption. When one person catches a fish, there are fewer fish for the next person. Yet fish are not an excludable good because given the size of the ocean it is difficult to stop fishermen from taking fish out of it

36
Q

Define club goods

A

Club goods are excludable but not rival in consumption

Example - Fire protection in a small town. It is easy to exclude someone from using this good. The fire department can just let her house burn down.

37
Q

Which two goods are not excludable?

A

Public goods and Common Resources

Because people cannot be prevented from using these goods, they are available to everyone free of charge.

38
Q

Define Free Rider

A

A person who receives a benefit from a good but avoids paying for it.

Example - Fireworks display

Because people would have an incentive to be a free rider, it would fail to produce an efficient outcome.

39
Q

Give three examples of a Public Good

A

National Defence
Basic Research
Fighting Poverty

40
Q

Give three examples of a Common Resource

A

Clean air and water
Congested Roads
Fish, whales and other wildlife

41
Q

Define Benefits Principle

A

The idea that people should pay taxes on the benefits they from government services

Example - Fuel Tax

42
Q

Define Explicit Costs

A

Input costs that require an outlay of money by the firm

Example - Wages of staff

43
Q

Define Implicit Costs

A

Input costs that do not require an outlay of money by the firm

Example - Wages lost from doing another job (Caroline as the computer programmer, instead of a baker)

44
Q

Define Economic Profit

A

Total revenue minus total cost, including both explicit and implicit costs

45
Q

Define accounting profit

A

Total revenue minus total explicit cost

46
Q

Define production function

A

The relationship between quantity of inputs used to make and the quantity of output of that good

47
Q

Define marginal product

A

The increase in output that arises from an additional unit of input

48
Q

Diminishing Marginal Product

A

The property whereby the marginal product of an input declines as the quantity of the input increases

Example - Selling more requires more employees, congestion accounts for less production

49
Q

Fixed Costs

A

Costs that do not vary with the quantity of output produced

Example - rent

50
Q

Variable costs

A

Costs that do vary with the quantity of output produced

Example - coffee beans, milk, cups, etc

51
Q

Average total cost

A

Total cost divided by the quantity of output

52
Q

Average fixed cost

A

Fixed cost divided by the quantity of output

53
Q

Average variable cost

A

Variable costs divided by the quantity of output

54
Q

Marginal cost

A

The increase in total cost that arises from an extra unit of production

55
Q

How do you determine Average total cost

A

It is the sum of average fixed cost and average variable cost

Example - Rent plus coffee beans, cups, milk, etc

56
Q

True of False - Averaged Fixed cost always declines as output rises because the fixed cost is spread over a larger number of units?

A

True

57
Q

True or False - Average variable costs typically rise as output increases because of diminishing marginal product?

A

True

58
Q

Efficient Scale

A

The quantity of output that minimizes average total cost

The bottom of the U scale

59
Q

True or False - Average total cost will always fall until it meets marginal cost?

A

True - The marginal cost curve cross the average total cost curve at its minimum

It will to begin to rise after meeting the Marginal cost point

60
Q

What are the three properties that are important to remember with a cost curve?

A
  1. Marginal cost eventually rises with the quantity of output
  2. The average total cost curve is U-Shaped
  3. The marginal cost curve crosses the average total cost curve at the minimum of average total cost
61
Q

Economies of Scale

A

The property whereby long run average total cost falls as the quantity of output increases

62
Q

Diseconomies of Scale

A

The property where by long run average total cost rises as the quantity of output increase

63
Q

Constant Returns to Scale

A

The property whereby long run average total cost stays the same as the quantity of output changes

64
Q

What are the two characteristic of a competitive market?

A
  1. There are many buyers and sellers in the market

2. The goods offered by the various sellers are largely the same

Micro Economics (2 decks)

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