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Econ - 2nd Midterm
Terms in this set (77)
Competitive Firms and Markets
- product being sold is similar across sellers
- many buyers and sellers, each is small relative to the total market
- it is costless to enter or exit the market
- profit maximization (aim to earn most profits that they can)
Total Profits = ...
total revenue - total cost
Total Revenue = ...
Price * Quantity
all implicit and explicit costs incurred from producing a certain quantity of good
Costs of Production
Variable, fixed, total, marginal
Variable costs (VC)
cost associated with the variable factors of production; change as level of output changes
Fixed Costs (FC)
cost associated with the fixed factors of production; does not change as level of output changes
Total Costs (TC)
sum of all payments of inputs (fixed+variable)
Marginal Cost (MC)
change is TC divided by the change in output; change in total cost from producing an additional unit
Firms should keep producing as long as...
Marginal Revenue > Marginal Cost right up until MR=MC (because firms are price takers MR=price)
Marginal Revenue (MR)
change in total revenue from selling an additional unit
average profit per unit multiplied by quantity
(P-AC) * Q
Profit is POSITIVE when...
Profit is NEGATIVE when...
Profit is ZERO when...
Firms enter an industry when...
there are profits and P>AC
sum of consumer and producer surplus
No one can be made better of without making someone else worse off
Invisible hand directs MANAGERS to...
pursue their own self-interests and results in the most efficient (least cost) production allocation
To maximize profits each firm adjusts it output until...
P=MC (profit = marginal costs)
Q1 decreases and Q2 increases, so total costs decreases
Q1 increases and Q2 decreases, so total costs decreases
total costs are minimized
The invisible hand directs firms to...
seek out profits and results in resources being allocated to their highest value of use
_________ are key to the invisible hand
something interfering with the ability of prices to allocate results in inefficiency
Dead Weight Loss
reduction in social surplus resulting from a market intervention
addresses the issue of a "fair" distribution of resources across society
Free trade maximizes...
total production in a world of scarce resources
Production Possibility Curve
shows the relationship between maximum production of one good for a given level of production of another good
give up one thing to get another; loss of one good divided by gain of another good
ability of one economic agent to produce at a lower opportunity cost than another; sacrifices less to make one more good
As long as the slope of the PPC among producers differs...
each producers will have a comparative advantage in the production of something
when an economic agent can produce more output than another with the same resources
producing only one good for which a producer has a comparative advantage
The Price of a Trade
when the two trading parties agree on terms of a trade that they will both benefit from; exchange rate of one good for another
good produced domestically and shipped to another country or state
good produced in another country or state but is sold domestically
Sources of Comparative Advantage
Proximity to transportation hubs
Concentration of expertise
for a community of many people is a smooth curve that is bowed from the origin
fixed in the short run, can shift in the long run
Main Determinants or Shifters of a PPC
natural resources, population growth, technology, education, work habits, labor force experience, the relative abundance of labor and physical capital inputs, climate
In the past 50 years, the US has...
increased its presence in global markets, become rather dependent on imported crude oil, and witnessed the rise of China as the world's top exporter
International trade creates...
winners and losers; people will rationally disagree about the desired level of net exports
________ and _________ in the global market determine the world price
Determinants of Trade between countries
comparing a country's domestic price to the world price
If the domestic price is ABOVE the world price...
the country will become an importer of the good
If the domestic price is BELOW the world price...
the country will become an exporter of the good
In trade, the winners and losers will change but...
the overall well-being is increased; winner could have to compensate the losers
Arguments on Free Trade...
national security concerns, fear of globalization, environmental and resource concerns, infant industry arguments
National Security Concerns
worry of being too dependent on others in wartime and this may try to become more self-sufficient
Fear of Globalization
worry that increased globalization will replace unique cultures with an increasingly homogeneous set of sores and brands
Environmental and Resource Concerns
foreign producers will cut corners by polluting the environment or threatening endangered species by expanding the market for rare or banned animal products (such as ivory)
Infant Industry Arguments
young firms may be especially vulnerable when competing with well established rivals, a government may protect an "infant industry" until it can exploit scale economies (learn by doing)
view that governments should control trade due to the harmful effects of free trade
Effects of Tariffs
to protect domestic producers from foreign trade, a government can levy an import tariff on imported goods
Because tariffs raise the domestic price, they...
hurt domestic consumers, help domestic producers, all the government to collect some tariff revenue, and create a dead weight loss.
occur when economic activity result in a spillover cost or benefit and the market price does not catch it
Externalities lead to a.....
dead weight loss (DWL)
impose an additional cost on society that is not explicitly recognized by the buyers and sellers; tend to "overproduce a bad thing"
Negative DWL triangle...
points to the left, suggesting a reduction in output
private decision makers ignore the positive spill over effects on the by standers; tend to "under-produce a good thing
Positive DWL triangle...
points to the right; suggesting an increase in output
this externality does not create markey inefficiency because market transactions affect other people but do so only through the market price; there are no external costs or benefits; you just dont value it that much at that price
Solution to externalities
decision makers needs to acknowledge and take into account the external costs and benefits; "internalize the externality"
Private Solutions to Externalities
bargaining, doing the right thing
The Course Theorem
one party is given property rights and transactions costs are not prohibitively high, then private negotiations between effected parties may be able to reach an efficient solution
___________ is a good tool for social solutions to externalities
Government Solution to Externalities
setting standards, harnessing market forces (taxes and subsidies)
reward those who generate positive externalities
penalize those who generate negative externalities
Government Regulation: Command-and-Control Policies
government can directly set limits or require firms to apply certain technologies to reduce externalities
ex) pollution limits, pollution reducing technology
Government Regulation: Market-Based Approaches
tinker with incentives so that optimizing actors will voluntarily choose the desired action
Corrective Taxes and Subsidies
government can implement the optimal output level by manipulation marginal costs (or benefits) by using a corrective tax (or subsidy) that is set equal to the marginal external cost (or benefit)
Pigouvian Taxes or Subsidies
designed to induce agents to produce positive externalities to increase quantity toward socially optimal level
equal to marginal external cost (differnce between S and MEC)
equal to marginal social benefit (difference between demand curve and MEB)
This set is often in folders with...
Econ - Chapter 1
Econ - Chapter 2
Econ - Chapter 4
Econ - Chapter 5
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