Unit 3: Supply, Demand, Market Failures: Ch.4 Flashcards
What is Total Product
Total quantity of good or service produced with given quantity of inputs
Constant returns to Scale
Proportional increase/decrease in input = same in output
What is Diminishing Returns
Increase/decrease in 1 or more inputs = Smaller proportional output
What is Absolutely Diminishing Returns
increase in 1 or more input = DECREASE in output
What is Total Revenue
Price per unit x Quantity Sold
What is Marginal Cost
Cost of producing/consuming 1 more unit
What is Profit
Total Revenue - Total Cost
What is Opportunity Cost
Best alternative that is forgone when one makes a choice-what you have to give up to do something
What is Economic Profit
Profit above one’s next best alternative
What is Open Access Equilibrium
Point at which no further incentive to enter or exit market
NOT economically efficient
NOT ecologically sustainable
What is Normal Profit
Profits are 0
Suppliers are indifferent to their current supply or next best alternative as it is the same money they would make
What is the Economic Logic of Common Property Resources
-suppliers have free access to valuable resource
-underpriced resource will be overused
-resource priced at 0 will be squandered
What is Tragedy of the Commons
Common Property resources are overexploited
-no desire to conserve resource
-financial incentives promote expanded exploitation
What is Marginal Analysis
Compares marginal benefits to marginal costs
When does it make sense to increase production
Marginal Benefit > Marginal Cost
What is Marginal Revenue
Additional revenue obtained by selling 1 more unit
Change in Total Revenue/Change in Quantity
When is Economic Efficiency reached
When Marginal Revenue = Marginal Cost
Economic Efficient Outcome
Marginal Revenue = Marginal Cost
What policies are used to achieve efficient outcome
Government Intervention
-License Fee: makes any extra production beyond efficient production unprofitable (GVT profits)
-Quota: system of limiting access to a resource through restrictions on permissible harvest (Revenues remain with producers)
What are Individual Transferable Quotas
Tradeable rights to harvest a resource
What are some solutions to managing common property
-Privatization
-Users collectively devise own agreement
What are public goods
Available to all and not reduced by people’s use
Nonexcludable & Nonrival
-can suffer from free riders
-requires gvt involvement
Willingness to pay for Public Good
Not equal to Marginal Benefit
Generally will pay LESS
Economics of Public Goods
-market does not reflect preferences (rely on votes)
-taxes needed to pay for public goods
What is the Global Commons
Global common property such as oceans and atmosphere
