Final Flashcards
externality
when a person engages in an activity that influences the well-being of bystander but neither pays nor receives compensation for effect
positive externality example
restoration of historic buildings, research new technologies
negative externality example
pollution from cars, noise from barking dogs
internalise an externality
altering incentives so people take into account external effects of actions
effect of subsidies on externaity
internalises externality
patent protection
protect rights of inventors by giving them exclusive use of invention for period
excludability
can you prevent people from using good
rivalrous
does one person’s use of a good affect another’s ability to use
private goods
excludable, rivalrous - ice cream
club goods
excludable, non-rivalrous - fire protection
common resources
not excludable, rivalrous - fish in ocean
public goods
not-excludable, non-rivalrous - national defense
free rider
reaps benefit without paying
cost-benefit analysis
study that compares costs/benefits to society of providing public good
goal of firm
maximise profits
total revenue
amount firm receives for sale of output
total cost
market value of inputs a firm uses in production
opportunity cost
all those things that must be forgone to acquire that item
cost of production
includes opportunity costs (implicit costs)
explicit costs
input costs that require outlay of money by firm
implicit costs
input costs that do not require outlay of money by firm
economic profit
TR-(explicit+implicit costs)
accounting profit
TR-explicit costs
production function
relationship between Q inputs and Q outputs
marginal product
increased output that arises from additional unit of input
diminishing marginal product
as number of workers increases, MP declines because too crowded, etc.
MC
deltaTC/deltaQ
fixed costs
costs that do not vary with Q outputs and incurred even if firm sells nothing
variable costs
costs that vary with Q output
AC
TC/Q
AFC
FC/Q
AVC
VC/Q
ATC
TC/Q
MR
deltaTR/deltaQ
profit max when MR>MC
increasing Q raises profit
profit max when MR
decreasing Q raises profit
profit max
MC=MR
exit
LR decision to leave market, no costs
sunk cost
committed+cannot be recovered, irrelevant to decision, e.g. FC
profit in competitive market
(P-ATC)*Q
why do firms stay open if no profit?
covers implicit costs
natural monopoly
single firm can produce at lower costs than large number of firms e.g. electricity
price discrimination
selling same good at different prices to different buyers
negative externality graph
positive externality graph
graph showing effect of subsidy on externality
