micro exam 3 Flashcards
private goods
excludable and rival
car, ice cream cones, clothing, congested toll roads
public goods
not excludable and not rival
tornado siren, national defense, non-toll uncongested roads, park
common resources
not excludable and rival
fish in ocean, fountain, environment
club goods
excludable and not rival
satellite TV, Netflix, fire protection, uncongested toll roads
externality
impact of one person’s actions on the well being of a bystander
negative: pollution, barking dogs, ugly houses
positive: restored buildings, vaccines, research
optimum
maximize the total welfare, smaller than market equilibrium quantity
how does the government correct market failure
internalizing the externality
incentives to people so they take account of external effects of their actions
patent law
protects rights of inventors from exclusive use of their inventions for a period of time
command and control policies
market-based policies
- regulate behavior directly
- uses an incentive to solve the problem on their own
free rider
person receives benefit from a good but avoids paying for it
excludability
rivalry
- property of a good, person can be prevented from using it
- property of a good, one person’s use diminishes other’s use
marginal tax rate
tax applied to each additional dollar of income
excise taxes
taxes on specific goods
deadweight loss
government taxes a good, people buy less of it
people respond to incentives
lump sum taxes
same amount to each person, most efficient, no equity
industrial organization
study how firm’s decision about prices and quantities depend on market conditions they face
assumption
goal of firm is max profit
explicit costs
implicit costs
- get a receipt, require an outlay of money by firms, a transaction
- opportunity cost, no outlay of money, ignored by accountants
total costs = explicit + implicit
production function
relationship between quantity of inputs used and quantity of output of that good, flatter as production rises
marginal product
increase in output that arises from additional units of inputs, slope of production function
diminishing marginal product
- marginal product of input declines as quantity of input increases
- production function gets flatter as more inputs are being used
fixed cost
variable cost
total cost
- costs do not vary with quantity of output produced, can change overtime, but not with output. ex: rent, salaries, cost of supplies
- cost vary with quantity output produced. ex: ingredients, salary by the hour, nights at a hotel
- fixed + variable
average fixed cost
average variable cost
- fixed divided by the quantity of output
- variable divided by the quantity of output
marginal cost
cost to make one more unit
change of total cost over change of output
average total cost
total divided by output
decisions in short and long run
fixed in the short run
variable in the long run
economies of scale
constant returns to scale
diseconomies
- long run average total cost falls as quantity of output increases, specialization
- long run average total costs stays the same as quantity output changes
- long run average total cost rises as quantity output increases, coordination problems
when does an external cost occur
the production or consumption of some good or service inflicts cost on a third party without compensation
the federal healthcare spending program that specifically targets the poor
medicaid
what do externalities consists of
both external costs and external benefits
when does an external benefit occur
some of the benefits derived from the production or consumption of some good or service are enjoyed by a third party
the tragedy of the commons happens when a growing number of sheep on the town leads to a destruction of the grazing resource. how to correct this problem
auction off a limited number of sheep grazing permits
why do some policymakers support a consumption tax rather than in income tax
a consumption tax encourages people to save earned income
as output rises the difference between ATC and AVC
falls
when the production function is at its peak, marginal output is
zero
when AVC is rising, ATC
may be rising
when output rises AFC
must fall
ATC is 100, MC is 90, and AVC is 80
ATC is falling and AVC is rising
ATC is 100, MC is 80, and AVC is 90
ATC is falling and AVC is falling
in the short run when output is zero
total cost is equal to fixed cost
when MC is rising but still below AVC
AVC is declining
