Chapter 3 - Benefits and Costs, Supply and Demand Flashcards
Economic theory is ___________.
Abstract
What is the Aggregate Demand Curve?
The summation of a number of individual demand curves.
Define Benefit:
To be better off.
Benefits are measured by ______________.
willingness to pay (WTP)
What is WTP?
Willingness to pay
Define Externalities (on test):
When A’s consumption or production activity has an indirect effect on other members of society that is not internalized by A.
What are opportunity costs?
The cost of producing something that consists of the maximum value of other outputs, we could have produced had we not used the resources to produce the item in question.
How is opportunity cost measured?
By the market value of inputs used up in production.
What are two key types of costs?
Private and Social
Define Private Costs;
The costs of an action are the costs experienced by the party making the decisions leading to that decision.
Define Social Costs:
Costs of an action are all of the costs of the action, no matter who experiences them.
True or False: Social costs include private costs.
True
What do we use to summarize cost information?
Cost Curves
What is a Cost Curve?
A geometric representation of the costs of producing something
In the case of WTP, what two costs are differentiated?
- Marginal Costs
- Total Costs
What type of curve do we use to find the Total Production Costs?
Magical Cost Curves
What is a key determining factor of the marginal cost curve?
- Technology used in production
- Price of inputs
- Time
What is an important generic characteristic of all marginal cost curves?
That at first they may decline, but they will always increase as output becomes large enough.
What is the most important factor affecting the shape of MC curves?
Technology
Why is technology important to environmental economics?
Because technological change can provide ways to produce goods and services with fewer environmental side effects.
What is R&D?
Research and Development
Define the Equimarignal Principle:
A rule that describes how consumers and businesses allocate resources to maximize satisfaction or profit
What is a key factor in determining the supply behaviour?
The marginal cost of production
True or False: The marginal cost curve essentially acts as a supply curve?
True
What is the Aggregate Supply Curve made up of?
The sum of the individual supply curves of all firms within the group.
Define WTP:
Value of a good to a person is what they are willing and able to sacrifice for it.
What does a diminishing WTP result in a graph?
A downward sloping demand curve
Total Benefits = ____________
Total WTP
How do we measure the opportunity cost?
The total value of inputs used up in the production.
What do shadow prices measure?
What the costs would be if the market for an input operated perfectly.
