Exam 2 Flashcards
Externality
The uncompensated impact of one person’s actions on the well-being of a bystander
Pigou’s approach
Corrective tax
Coase theorem
Private parties can fix whatever externalities are in play by bargaining without cost to themselves over allocation of resources
Public goods
Goods that are available to everyone without exclusion or limit
Free rider problem
Free to use them but they need to be maintained. Private owner will not pay to maintain because it’s expensive so government steps in
Common resources
Resources that are available to everyone without exclusion but are limited
Tragedy of the commons
That’s the sheep eating up all the grass in the place that’s owned by nobody but everybody uses
Accounting profit versus economic profit
Accounting profit is total profit - explicit costs. Economic profit is total profit - (explicit + implicit costs)
Explicit costs
Everything you pay out; money for workers, supplies, rent, etc
Implicit cost
What you give up; money you could be earning doing a different job, time that could be spent on other things, etc
Cost curves for a typical firm have:
Marginal cost, average total cost, average variable cost, averaged fixed cost
Total cost curves in the short and long run
Average total cost in the short run with a small, medium, and large factory; average total costs in the long run, economies of scale, diseconomies of scale, constant returns to scale
Profit maximization for a competitive firm curve
Marginal cost, average total cost, average variable cost, and market price which is a straight horizontal line
Competitive firms short run supply curve
Marginal cost, average total cost, average variable cost, and shut down price
Competitive firms long run supply curve
Marginal cost, average total cost, exit price/point
