Exam 2 Flashcards
Consequences from the imposition of a tariff
Consumer surplus of domestic producers declines Deadweaight loss arises from mutually beneficial transactions not taking place The government generates revenue Rise in price lowers consumer surplus and raises producer surplus
Allocating goods from waiting in line
Allocates the good to those with a low opportunity cost of time Allocates the good to people who value it highly Deadweight loss from waiting in line Deadweight loss from mutually beneficial transactions Anytime there is a wait accrues deadweight loss
Firm generates accounting profits
The firm covers its explicit costs Implicit - opportunity costs Explicit - Accounting sheet costs
Technological advance reduces the marginal cost
Consumer surplus will increase Price will fall from the supply cure shifting right
Implement a tax on an item
Item is a source of negative externalities The government wishes to raise tax revenue Negative externalities - too much is being produced
Negative externalities exist in markets because
There are additional costs to society that aren’t born by private parties Firms only bear the private costs associated with their production
A tax of $x generates a deadweight loss of?
Find a gap between supply and demand equal to x 1/2bh
If tax increased from x to y
Deadweight loss will increase Producer surplus will decrease Tax rev = Tax rate x Quantity Consumer/Producer surplus decreases when tax prices go up
With no tax a price floor below the equilibrium
A price of equilibrium
Contries who export a certain good
Offer it for a higher price than they would in the domestic market Enjoy higher consumer surpluses than they would without trade Have a comparative advantage in the good that they are exporting
Shifts in supply and demand
demand and price increase shift in demand curve
Coase Theorem
Transaction costs are low The number of parties involved is low Property rights are highly defined
Classification of goods
Non-excludable Rival Non-Exc, Rival - Common Exc, Rival - Private Non-Exc, Non-Riv - Public Exc, Non-Riv - Club Good
Open harvest of tuna, no release, rival in consumption
Tragedy of the commons Negative externality
Firm’s cost structure
Marginal cost always intersects average toatl cost at its minimum Marginal cost always intersects average variable cost at its minimum
Competitive firm selling at a price greater than the marginal cost
Increase the output Firms = price taker = Don’t set price Increase output till price = mc
Running at a loss of $1 million and continue to operate in the short run
Their fixed costs were greater than $1 million
Produce in the short run, but exit in the long run
Firms seek to maximize profits. They recognize that producing in the short run can allow them to cover a part of their fixed costs, but ultimately shut down when given the chance to change their fixed costs
Price Ceiling
legal maximum on the price at which a good can be sold
Binding Price Ceiling
price ceiling that is set below the equilibrium price Always creates a shortage
Price Floor
a legal minimum on the price at which a good can be sold
Binding Price Floor
price floor that is set above the equilibrium price
Price Controls on a Market
Equilibrium – Intersection of supply and demand Shortage exerts upward pressure on prices A surplus exerts downward pressure on prices
Rent Control
Landlords provide less maintenance under rent control Landlords may convert apartments to more profitable uses A shortage of units may leads renters to make under-the-table payments Alternative methods of rationing will emerge
Calculating Tax
Per-Unit Tax = Price Consumer Pay – Price Producers Receive
Effect of tax on buyers and sellers
Elasticity = ΔQ/ ΔP ΔQ = 100 x (P2-P1) / ((P2+P1)/2) The burden of tax falls more heavily on the less elastic side of the market
The Costs of Taxation
consuer Surplus Be - A+B+C Af- A
Producer Surplus Be - D+E+F Af - F
Tax Revenue Be - N/A Af - B+D
Deadweight Loss Be - N/A Af - C+E
Taxes and Welfare
Consumer surplus is the difference between the price a buyer is willing to pay and the price the buyer actually pays
Producer surplus is the difference between the price a seller receives and the minimum price the seller would be willing to accept
Tax revenues, deadweight loss, and demandelasticity
The more inelstic the demand the higher tax revenues and the lower the deadweight loss associated with a tax increase.
A relatively less elastic demand implies that consumers are not highly responsive to changes in price, a tax on the good does not lead to a large change in quantity demanded
The Laffer curve
Deadweight loss can be seen as non lineare in magnitude
Welfare effects of free trade in an exporting country
Consumer surplus aboube the equilibrum price
Trade increases producer surplus
Winners and losers from free trade
Market price is less then international price import
Free-trade benefites
Enhanced flow of ideas
Lower costs through economies of scale
Increased competition
Increased variety of goods
Externalities
Externality – A firms activity that affects a third party, neither pays or receives compensation for the effect
Positive Externality – benefit that a third party receives from someone else’s economic activity
Negative Externality - a cost that a third party incurs from someone else’s economic activity
Efficiency in the presence of externalities
Market Equilibrium Quantity – The intersection of the private cost curve and the private value curve, private demand
Socially Optimal Quantity – The intersection of the social cost curve and the social value curve
The effect of negative externalities on the optimal quantityof consumption
Cost + negative externalities
Pigovian tax - A tax equal to the external cost would cause the socially optimal quantity to be produced
Understanding different policy options to correct for negativeexternalities
Command-and-control policy / Regulation – Remedies an externality by legally limiting a specific behavior by a specific entity
Tradable permit system – Remedies an externality by regulating general behavior
Corrective subsidy – Encourages behavior that has positive external effects
Corrective tax / Pigovian Tax – Discourages behavior that has negative external effects
The effects of property rights
Coase theorem, which asserts that as long as bargaining costs are low enough assigning property rights to one party will efficiently solve the problem of externalities
Private Solutions to Correct for Externalities
Private solutions –
Integration of different types of businesses
Contracts
Charities
Moral codes and social sanctions
Breakdown in Bargaining – One party holds out
Categories of goods
Nonexcludable – It is not possible to prevent an individual from using the good
Rival – Consumption of the good by one person decreases the ability of other people to consume the good
Contributions toward a public good
Each gain is the sum of the parts.
Tragedy of the Commons
occurs when people consume more of a common resource than society would desire
The best known solution to the Tragedy of the Commons is to convert a good from a common resource to a private good by making it excludable
Definition of economic costs
Explicit costs refer to all costs that require an outlay of money by the firm
implicit costs refer to all costs the firm incurs in production that do not involve any monetary transactions
Accounting profit = Total Revenue - Total Explicit Costs
Economic Profit = Total Revenue - Total costs
Inputs and Outputs
fixed input is a kind of input where the quantity cannot be changed in the short run
Variable input can be changed
marginal product of labor - Change in output when a person is added
Various measures of cost
Marginal cost is the cost of producing an additional unit
Fixed costs are costs that do not vary with the quantity of output produced
Total cost equals fixed cost plus variable cost
Average variable cost is equal to variable cost divided by the quantity produced
Average total cost is equal to total cost divided by the quantity produced
economies of scale
average total cost falls as it increases production
Characteristics of competitive markets
- There must be many buyers and sellers—a few players can’t dominate the market.
- Firms must produce an identical product—buyers must regard all sellers’ products as equivalent.
- Firms and resources must be fully mobile, allowing for free entry into and exit from the industry.
Demand cuve of Competitive firm (perfectly Elastic)
Equal to Marginal revenue curve
Average revenue curve
Profit maximization
Produce in the short run if the price is greater than the lowest average variable cost
Shutdown if below the avc
Deriving the shot-run supply curve
0 quantity if below avc
0 or x if on
x if above
Profits
Accounting profit is defined as total revenue minus the sum of all explicit costs
economic profit is defined as total revenue minus the sum of explicit costs and implicit costs
efficient scale - The level of production corresponding to the lowest average total cost
Competitive firms earn 0 economic profit in the long run
Monompoly Power
Exclusive Ownership of a Key Resource
Government-Created Monopolies
Economies of Scale
Price discrimination
the practice of selling the same good at different prices to different types of customers
