Final Flashcards
Four kinds of goods
- private goods
- club goods
- common resources
- public goods
Private goods
excludabe
rival in consumption
ie: clothing, congested toll rodes
Public goods
not excludable
not rival in consumption
ie: national defence, tornado siren
Common resources
not excludable
rival in consumption
ie: fish in the ocean, Crown land, congested non-toll roads
Club goods
excludable
not rival in consumption
ie: cable tv, fire protection, uncongested toll roads
Non-excludable
Producers cannot prevent particular individuals from enjoying its benefits.
Explicit costs
Input costs that require an outlay of money by the firm.
Implicit costs
Input costs that do not require an outlay of money by the firm.
Short-run
Time period where the number of firms in the industry and the amount of land and capital employed by existing firms towards the production of a good are fixed.
Long-run
Time period were all factors of production (FOP) are variable.
Monopoly
A market where one firm dominates the market for a good that has no substitutes and where significant barriers to entry exist.
Barriers to entry
Technical, competitive or cost-related impediments to joining a market and competing against the existing firms.
Natural monopoly
Occurs in a market where the lowest cost can be achieved when only one firm sells to the market. It is typically associated with large fixed start-up costs.
Price discrimination
Occurs when different prices are charged to different consumers for the same good by the same provider.
Marginal benefits
The additional utility or satisfaction derived by an increase or a decrease in the amount of an item consumed or an activity enjoyed.
Deadweight loss
The loss of welfare, utility or benefits to market participants, typically as a result of taxes, protectionist policies or externalities.
Shut-down rule
price of its output is less than its average variable cost of production.
(If the firms total losses exceed its total fixed costs, then the firm will minimise its losses by shutting down).
Monopolistic competition
A market is monopolistically competitive if there are many firms producing differentiated products and there are no barriers to entry.
Free Rider problem
A person who receives the benefit of a good but avoids paying for it
marginal changes
small incremental adjustments to a plan of action
inflation
an increase in the overall level of prices in the economy
cost-benefit analysis
A study that compares the costs and benefits to society of providing a public good.
Tragedy of the Commons
a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole
allocative efficeny
perfect amount of goods in market
fixed costs
costs that do not vary with the quantity of output produced
variable costs
costs that vary with the quantity of output produced
sunk cost
a cost that has already been committed and cannot be recovered
Economies of scale
when long-run average total cost falls as it increases production
Diseconomies of scale
when long-run average total cost increases as it increases production
Constant returns to scale
when it can increase production without changing long-run average total cost
Competitive market
A market in which there are many buyers and many sellers so that each has a negligible impact on the market price (price takers).
Three characteristics of economics
- There are many buyers and many sellers in the
market. - The goods offered by the various sellers are
largely the same. - Firms can freely enter or exit the market.
Exit
refers to a long-run decision to leave the market
Moral hazard
The tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behaviour
Agent
A person who is performing an act for another person,
called the principal
Principal
A person for whom another person, called the agent, is performing some act
Adverse selection
The tendency for the mix of unobserved attributes to become undesirable from the standpoint of an uninformed party
Signalling
An action taken by an informed party to reveal private information to an uninformed party
Screening
An action taken by an uninformed party to induce an informed party to reveal information
Two types of of asymmetric information
hidden action
hidden characteristic
Hidden action
employer doesn’t see the work and effort only the results
Hidden Characteristic
true condition of a product trying to be sold
Factors of production
the inputs to produce goods and services
3 most important inputs
- labour
- capital
- land
Market for factors of production
- differ from the markets for goods and services
- the demand for FP comes from the decision to supply goods
- “demand demand”
Competitive firms
- many firms
- some good
- free entry and exit
Monopolies
- has no competitors
- no perfect substitutes
- power to influence the price
Comp. firms
- take price as given
- choose level of output (Q)
Causes of Monopolies
barrier to entry
3 forms of barrier to entry
- monopoly owns a key resources
- natural resource - gov’t regulation
- copyrights
- patnets
- licenses - Natural Monopolies
- can supply the good at a lower cost
Price discrimination
- sell the same good at different prices
- monopoly is a price maker
- willingness to pay
- age, occupation, etc. disocunts
Imperfect price discirmination
2nd and 3rd degree
2nd degree
buy one get one 50% off
willingness to pay for the first unit is different than the 2nd
3rd degree
- segment the market and choices
- different ticket prices for children
- student pricing
Public Policy
- monopolies fail to allocate resources efficiently
- quantity too low
- price too high
- competition law
Regulation
- regulate prices
- subsidize the monopoly
- no incentive for monopoly to lower costs
Public ownership
- gov’t run monopolies
- “crown corporations”
- debated in news
profit formula
= total revenue (TR)
- total costs (TC)
variable cost
you sometimes have to pay this depending on the situation ex: penalty fee, attorney bill, seasonal workers
law of supply
The higher the price, the more producers are willing to supply
Total costs formula
= total variable costs
+ total fixed costs
Average Fixed Cost formula
(1) TFC÷Qs
(2) ATC − AVC
(Quantity supplied to market by producers)
Average Variable Cost formula
(1) TVC÷Qs
(2) ATC − AFC
Average Total Cost formula
= AVC (average variable cost)
+ AFC (average fixed cost)
Average Product formula
= TP (total )
÷ Units of Labor
Marginal cost formula
= ∆ in TC÷ ∆ in Qs
Total Cost formula
= TFC
+ TVC
Total Revenue formula
= P × Qs
Total Product formula
= TR
− TC
Average Revenue formula
= TR ÷ Qs
Marginal Revenue formula
= ∆ in TR
÷ ∆ in Qs
Tax revenue
= T× Q
Externality
The uncompensated impact of one person’s actions on the well-being of a bystander
Negative externalities
- For each unit of aluminum produced, the social cost
includes the private costs of the aluminum producers
plus the costs to those bystanders affected adversely
by the pollution. - Negative externalities lead markets to produce a
larger quantity than is socially desirable.
Positive externalities
- Although some activities impose costs on third parties, others yield benefits. For example, consider
education. - To move the market equilibrium closer to the social
optimum, a positive externality requires a subsidy. - Positive externalities lead markets to produce a
smaller quantity than is socially desirable
Demand curve
social cost curve
Quantity curve
social benefit curve
the government can respond to
externalities in one of two ways
- Command-and-control policies regulate behaviour directly.
- Market-based policies provide incentives so that
private decision makers will choose to solve the problem on their own
Command and control policies
- The government can remedy an externality by making certain behaviours either required or forbidden.
- It is a crime to dump poisonous chemicals into the water supply.
Corrective taxes and subsidies
- the government can use market-based
policies to align private incentives with social
efficiency - For instance, the government can internalize the
externality by imposing taxes on activities that have
negative externalities and subsidizing activities that
have positive externalities
Corrective taxes
Taxes enacted to correct the effects of negative externalities
Possible private solutions
- Moral codes and social sanctions.
- Charities.
- The self-interest of the relevant parties.
- Contracts.
Marginal product:
The increase in output that arises from an additional unit of input
Diminishing marginal product:
the marginal product of an input declines as the quantity of the input increases.
Variable costs:
Costs that do vary with the quantity of output produced
Coase theorem
if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
