Textbook keywords Flashcards
Price ceiling
A legal maximum on the price at which a good can be sold
Price floor
A legal minimum on the price at which a good can be sold
tax incidence
The manner in which the burden of tax is shared among the participants in a market
Welfare economics
The study of how the allocation of resources affects economic well being
Willingness to pay
The max amount the buyer will pay for that good and measures how much that buyer values the good
Consumer surplus
measures the benefits participating in the market
the amount a buyer is willing to pay minus the amount the buyer pays for it
The consumer surplus represents
The area below the demand curve and above the price level
Producer surplus
measures the benefits sellers receive from participating in a market
amount a seller is paid minus the cost of production
total surplus
consumer surplus plus producer surplus, a measure of society’s economic well being
cost
value of everything a seller must give up to produce a good
efficiency
maximising the total surplus/ getting the max amt of benefits from the scarce resources
equality
shows how the resources are divided among the members of a society
Internalizing the externality
altering incentives so that people take into account the external effects of their actions
Market based policy:
Corrective taxes and subsidies
Tradable pollution permits
Corrective taxes
taxes enacted to deal with the effects of externalities (an ideal one = external benefit/ cost)
Corrective tax is better than regulations due to ____________
a lower cost to the society
How are corrective taxes diff from other taxes?
They do not distort incentives and move the allocation of resources away from the social optimum. In fact, they move the allocation of resources closer to the social optimum, raising revenue for the govt, enhance economic efficiency
Why is gasoline taxed so heavily ?
Congestion/ accidents and pollution
Using corrective tax, the supply curve
is perfectly elastic as firms can pollute as much as they want by paying tax
Using pollution permits, the supply curve is
perfectly inelastic as the quantity of pollution is fixed by the number of permits
The types of private solutions to solve externalities
- moral codes and social sanctions
- charities
- involve in multiple types of business
- get the interested parties to enter into a contract
- merge businesses together
Transaction costs
costs that parties incur in the process of agreeing to and following thru on a bargain
Why private solutions don’t work?
- Bargaining simply breaks down
- the num of interested parties is too large, and coordinating becomes costly
- transaction costs occur
Common resources
are rival in consumption but not excludable (e.g. fish in ocean)
Club goods
are excludable but not rival in consumption (e.g. satellite TV)
Free rider
a person who receives the benefit of a good without paying for it
some important public goods
national defense, basic research, fighting poverty
Cost-benefit analysis
an estimation to measure the total costs and benefits of the project to society as a whole
some important common resources
clean air and water
congested roads
fish, whales and other wildlife
toll
a corrective tax on the externality of congestion
Markets work best for which type of goods
Private goods
How to limit the use of common resources ?
use regulations and corrective tax
Total revenue
The amount that the firm receives for the sale of its output
Total cost
The amount that firm pays to buy inputs
Profit
total revenue- total cost
explicit cost
costs that require firm to pay out some money
implicit cost
costs that do not require a cash outlay
Economic profit
total revenue - (implicit and explicit cost)
Accounting profit
total revenue- explicit cost
Economic profit is always __________ than accounting profit
smaller
As the number of workers increases, the marginal product ___________
declines
Diminishing marginal product
The marginal product of an input declines as the quantity of that input increases
The production function getting flatter, total cost curve getting steeper
Fixed costs
do not vary with the quantity of output produced
Variable costs
changes as the firms alters the quantity of output produced
Marginal cost
The increase in total cost that arises from an extra unit of production
Many costs are _________ in the short run but ___________ in the long run.
fixed, variable
Economies of scale
long run average total cost rises as output increases
Diseconomies of scale
long run average total cost declines as output increases
Constant returns to scale
Long run average total cost does not vary with the level of output
Efficient scale
The quantity of output that minimizes average total cost
Asymmetric information
some people are better informed than others
moral hazard
tendency of a person who is imperfectly monitored to engage in dishonest/ undesirable behavior
adverse selection
problem arising when sellers know more compared to buyers. Thus buyers run a risk of being sold a good of low qty
Ways used to tackle asymmetric information
signalling and screening
How are people not rational at times?
overconfidence, give too much weight to a small num of vivid observations, reluctance to change minds (confirmation bias)
How are people not rational at times?
overconfidence, give too much weight to a small num of vivid observations, reluctance to change minds (confirmation bias)
Are economic models meant to replicate reality ?
False, instead showing the essence of the problem at hand
