Econ Exam 2 Flashcards
Positive Economics
Words/Statements that are objective and verifiable –> “what is”
Normative Statements
Involves a value judgement –> “what ought to be”
Efficient Outcome
The outcome that yields the largest possible economic surplus
Consumer Surplus
The difference between how much you are willing to pay for something and how much you actually pay for something
Willingness to Pay
The maximum price at which a consumer would buy a good
Deadweight Loss
Measures how far economic surplus falls below the efficient outcome
Rational Rule for Markets
To increase economic surplus, produce more of an item if the marginal benefit of one more is greater than, or equal to, its marginal cost
Market Failure
When the forces of supply and demand lead to an inefficient outcome
Absolute Advantage
The ability to carry out a task more efficiently than other people
Comparative Advantage
The ability to carry out a task at a lower opportunity cost than other tasks
Opportunity Cost of a Task
How much of an alternative good you can produce if you don’t do this task
Trade Costs
The extra costs that are incurred as a result of buying or selling overseas rather than domestically
Relative Abundance
Sell what you have a lot of, buy what you don’t have much of
Specialized Skills
Even when land, labor, and capital are all similar, better production techniques will lower your opportunity costs –> “learn by doing”
World Supply
Total quantity of a good supplied by all manufacturers around the world, at each price
World Demand
Total quantity of a good demanded by all buyers around the world, at each price
Domestic Demand Curve
The quantity of goods that all domestic buyers plan to buy at each price
Domestic Supply Curve
illustrates the quantity of goods that domestic producers plan to sell at each price
Externality
The benefit or cost received by someone not directly involved in production or consumption of a good
Positive Externalites
side effect that benefits bystanders
Negative Externalites
side effect that harms bystanders
Private Marginal Cost
The cost to the producer of an additional unit
Private Marginal Benefit
The benefit to the consumer from an additional unit
External Marginal Cost
The cost of an additional unit that is imposed on people other than the producer
External Marginal Benefit
The benefit of an additional unit that is imposed on people other than the consumer
Marginal Social Cost
All marginal costs, no matter who pays them
Marginal Social Benefit
All marginal benefits, no matter who gets them
Socially Optimal Quantity
The quantity that is most efficient for society as a whole
Rational Rule for Society
Produce more of an item as long as its marginal social benefit is at least as large as the marginal social cost
Nonrival Good
A good where consumption by one person does not diminish the amount available for someone else
Nonexcludable Good
A good people cannot easily be prevented from consuming, even if they did not pay for it
Public Goods
Goods that are both nonrival and nonexcludable
Club Good
A good that is excludable but nonrival in consumption
Perfect Competition
Lots of sellers with standardized products
No market power
Monopoly
Only one seller, raising prices won’t lose customers
Most market power
Monopolistic Competition
Differentiated Products, only one seller of a certain style of product
Oligopoly
A few large sellers of similar products
Market Power
The ability to raise prices without losing many sales to competing sellers
Firm Demand
The quantity demanded from individual firms
Market Demand
Quantity demanded from all firms
Rational Rule for Sellers with Market Power
Sell one more of an item if marginal revenue is greater than or equal to marginal cost
Cartel
Cooperation among firms to increase profit relative to non-cooperative eqilibrium
Collusion
An agreement to limit competition
Natural Monopoly
A market in which it is cheapest for a single business to service the market
