Econ Exam 2 Flashcards
Consumer surplus and example
the amount of benefit consumers derive from paying less then they are willing and able to pay for a commodity (product is $3 but consumer would be willing and able to pay up top $10, the consumer surplus is $7)
Marginal Benefit
additional benefit to a consumer from consuming one more unit of a commodity, the demand curve is the marginal benefit cause it shows the amount consumers would be willing and able to pay for one more unit of item.
Producer surplus
The amount of benefit producers derive from selling their product for more then they are willing and able to sell for, EX) if a it takes $3 for a producer to make a product but can sell for $10 the producer surplus is $7
Marginal Cost
the increase in cost to a firm from producing one or more unit of output, supply curve is the marginal cost because it shows the lowest prices producers are willing and able to sell and item.
What does the equilibrium show
the the marginal benefit and marginal cost are the same and a economically efficient level of output. At equilibrium economic surplus is maximized.
Economic Surplus
the sum of consumer surplus and producer surplus
PS+CS=ES
Deadweight loss
the loss of economic surplus resulting from a market not being at a competitive equilibrium
IF the government imposes a price floor then…
consumer surplus has shrunk
Tax incidence
the actual division of the burden of a tax between buyers and sellers in a market
taxes and inelastic and elastic demand
if demand is perfectly inelastic then the consumers bore all. if it is elastic the sellers bore more of the taxes
Externalities
costs or benefits that accrue to parties outside of (external to) the economic transaction
these parties are usually ignored by the transacting parties
negative externality examples
Factory polluting water… they make tires which then imposes a negative externality on fishermen, noise from a factory, gasoline admissions
how does the government help negative externalities
the government could intervene to help try and correct the negative externality with taxes, regulations or property rights assignment. Adding on taxes to a firm that is polluting the river makes it more expensive for suppliers to make tires which will then make the tire company make less tires which then leads to less pollution
Pigouvian taxes
taxes that are imposed to help align the private and social costs
Coase theorem
under ideal economic conditions, where there is a conflict of property rights, the involved parties can bargain or negotiate terms that will accurately reflect the full costs and underlying values of the property rights at issue, resulting in the most efficient outcome.
what curve does negative externalities shift
supply curve to left(marginal private cost -> marginal social cost)
what curve does positive externalities shift
demand curve to right(marginal private benefit -> marginal social benefit)
Examples of positive externalities
if a firm was able to recycle trash to produce its tires at no extra cost. This helps stop to pollution of rivers which is a positive effect on society. carpooling, locating close to work, live in campus, education, vaccinations
how to help positive externalities
the government can subsidize production. This means they can give them tax breaks, payments, or other economic support
Public goods
nonrivalry and nonexcludability goods
rivalry goods
A’s consumption of a good means that B cannot consume the good
Excludability goods
the ability to exclude someone from a consuming a good
Private goods
goods that are both rival and excludable. A good were you can exclude them from consuming a good and one persons consumption of this good means another person cannot consume it.
Example of rival and excludable good
a private good like food, clothes,
Common resource and example
a good that is a rival but not excludable. if Joe cuts down a tree then Jane cannot use that tree now but no one has property rights of the forest and trees
natural monopolies and example
goods that are excludable but not rival. example is cable TV, I am excluded if I don’t pay for it but if I am watching it it does not prevent anyone else from watching cable tv.
Public goods and example
goods that are both non rival and non excludable. for example a blue sky, a street light, national defense, public tv
what can happen to nonexclutable goods
free riding because you cannot exclude people from consuming the good who has not paid for it
What can change a nontrivial good to a rival good
crowding, for example college or a drinking fountain
indy indépendance
it does not matter if the buyer or selling is taxed but the burden depends on the elasticity of demand
budget equation when you cannot borrow
B>or equal to PyQy+PxQx
budget equation when you can borrow
B= Pp*Qp+Pm+Qm
slope of the budget line
-Px/Py
Budget line definition
a line that shows the amount of goods X and Y that would be possible to purchase, based on the prices of X and Y and the consumers budget
budget line equation
Y= -Px/Py + B/Py
As prices rise in my consumption bundle
real incomes fall
as prices fall in my consumption bundle
real incomes rise
If a price of one good increase that means my budget line would
shift on only one axis to the left
Whenever the budget constraint is closer to the origin
there is a decrease in real income
equation to graph the x and y intercept on a budget graph
budget/ price of good x or y
Real incomes increase when
you can afford more
real income decreased when
you can afford less
If your whole budget increases then
the whole curve shifts right parallel to the original curve
Business firm
an organization owned and operated by private individuals the specialize in production
Production
a process of combining inputs to make outputs
Example of Inputs going into an output
glass, tires, metal, sound system -> production processs -> car
Sole proprietorship
a firm owned by a single individual
Partnership
a firm owned and usually operated by several individuals who share profits and bear personal responsibility of any loses
corporation
a firm owned by those who buy a share of stocks and whose liability is limited to the amount of their investment in the firm. This allows a business to grow but also lets people be apart of the corporation (buying a share of apple)
Advantages of a sole proprietorship and partnership
simple to set up, limited bureaucracy, owner of firm is also a manager, single taxation (taxed only once, profits of firm are considered part of the household)
Disadvantages of sole proprietorship and partnership
difficult to raise funds, hard to continue after owner dies or retires, full liability of owner to any loss, law suit, etc (comes for house or car or etc)
Advantages of a corporation
easier to raise funds, easier to continue after a death or retirement, limited liability.
disadvantages of a corporation
difficult top set up, more bureaucracy (more paperwork, corporate obligations, etc), dual taxation, incentives of managers may not be the same as owner.
Principle agent problem
when the principle(boss) and agent (workers) do not have aligned incentives or morals.
how do you help the principle agent problem
aligning the interests of both the principal and the agent and removing any conflict of interest. example giving a kid money for good grades, or a graded A-F system to get students to work are and study information.
Corporate head of directors set up
board of directors (12) -> CEO -> CFO, COO,CMO, CIO
Production function
for each different combination of inputs, the production function shows the maximum quantity of output a firm can produce over some period of time
Technology
method by which inputs are combined to produce a good or service
Fixed input
an input whose quantity must remain constant regardless of how much is produced. Example rent because it does not change
Variable input
an input whose usage can vary as the level of output varies. Examples are employment, raw materials, wages
Long run
time horizon long enough for a firm the vary all of its inputs. Ex, all costs are variable because costs can change over a long amount of time
Short run
time horizon over which at least one output does not vary, Ex some fixed costs, example a testing period for a company
Total product (Q)
maximum quantity of output that can be produced from a given from a given combination of outputs
Marginal Product of Labor (MPL)
change in total product caused by a one unit increase in labor input
MPL=change in quantity/change in labor
Average Product of Labor (APL)
Average amount of output produced by a worker
APL= Q/L
What are inputs of a computer lab
Labor (computer specialist)
Capital (office, desk, chairs, telephone, software)
What are the outputs of a computer lab
designed website
what happens when the marginal Product of Labor (MPL) is less then the Average Product of Labor(APL)
It brings the average down
we assume the following about preferences
people have preferences, they are logical, and more is preferred to less
Marginal Rate of Substitution (MRS)
Of good Y for good X tells the maximum amount of Y a consumer would be willing and able to give up for one more unit of X
When the MRS is declining it shows
the principle of diminishing marginal rate of substitution
As we move down and to the right along the indifference curve, the amount of Y we are willing to give up for one unit of X is caused by
satiation
the optimal point will conform to the following two conditions
On the budget line (the budget becomes a binding constraint)
on the indifference curve farthest from the origin
On a nice indifference curve were does the optimal bundle occur
tangency of the budget line
Corner solution
when a consumer has a extreme preference on a good (will be in the corner of the graph)
Quantity demand of a indifference curve is where on the graph
where the budget and indifference curve meets
Why would the production function increase by a increasing rate(increasing returns)
there could be gains from specialization or matching of the variable input and fixed input
Why would the production function increase by a diminishing rate or return
the gains from specializing and matching of variable input and fixed input are declining as it becomes more saturated
Example: if you are specializing and matching labor (variable input) and computers (fixed input) are declining because the office becomes saturated with workers (variable input) to the number of computers (fixed input)
Example: the production function would start to decrease if they added a 7th worker because of bureaucracy and lack of space may become so great that adding another worker may reduce the total output
Law of Diminishing Returns
as more and more of any input is added to a fixed amount of other inputs, the marginal product will start to decline
Sunk Cost
a cost that has been paid or must be paid regardless of any future action being considered
Example: deposit to go to USD
Explicit Cost
Money actually paid out for the use of inputs, you need to see the visible receipt and were money actually changes hands
Example: rent paid out, loans, interest paid, wages, salaries
Implicit costs
the cost of inputs for which there is no direct money payment, costs are actually given up but no money changes hands
Example: foregone rental income from ownership of a property or foregone interest income from lending or investing a sum of money, Owner contributes to costs for there own firm
What type of cost should not matter in a production decisions
sunk costs
What type of cost should matter in a production decision
implicit and explicit
Fixed cost
cost of fixed inputs
variable cost
cost of variable inputs
Total Cost equation
FC+VC=TC
Average fixed cost equation
FC/Q=AFC
Average variable cost equation
FV/Q=AVC
Average total cost equation
TC/Q=ATC
Marginal cost equation
change in TC/change in Q= MC
Fixed costs do not vary so the fixed cost is perfectly….
horizontal and positive
change in TC/change in Q= MC is also the
slope
If marginal cost is increasing the marginal production is
decreasing and vis versa
ATC=
AFC+AVC
The MC curve cuts the AVC and AFC curves at there what point
minimum point
is the long run total cost less then or greater then the total cost
less then or equal to the TC
Where is the minimum effect scale in the LRTC
at the minimum of the LRTC curve
Economies of scale
long run average total cost decreases as output increases (0 -> Q2) in an economy of scale there are many small firms in a economy
Diseconomies of scale
LRATC increases as output increases (Q2 or higher)
Constant returns to scale
when the LRATC is unchanged as output increase (flat)
Natural monopoly has many
room for only one firm and the LRATC curve and D curve will intersect
Oligopoly has
a market of few large firms
Example: If the demand is 100,000 and a firm can only produce 25,000 of a product then there is room for 4 firms
Market with coexisting small and large firms example
a orange grove, gap and Macys compared to local department stores (graph will look like a weird U were the bottom is horizontal for a second) n
Acounting costs
only considered explicit costs
Economic costs
consider both implicit and explicit cost
Profit equation
Total revenue -TC or Price*quantity-TC
Accounting profits
TR-accounting costs
Economic profits
TR- Economic costs
Largest profit occurs when
TC and TR are farthest away
In short run, forms need to be able to generate revenue that is
equal or greater then their AVC
In Long run, firms need to be able to generate revenue
equal or greater then their ATC
