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Econ test #2
Terms in this set (41)
The cost of all the inputs used in production
The cost of fixed inputs; does not vary with the quantity of output produced
Marginal cost=difference in total costs/the difference in outputs.
The increase in total cost that arises from producing one additional unit
Average total cost
Average total cost=total/quantity
ATC=average fixed cost+average variable cost
Average Fixed cost
Average fixed cost=fixed/quantity
AFC=avg total cost-avg variable cost
Average Variable Cost
Avg variable cost=variable/quantity
AVG=avg total cost-avg fixed cost
If a price ceiling is below the equilibrium price...
The price ceiling is binding. Quantity demanded exceeds quantity supplied
Legal maximum on price of good. Ex. Rent control
Legal minimum on price of good. Ex. minimum wage
If the price floor is above equilibrium price....
It is binding. Quantity supplied exceeds quantity demanded
When the government levies a tax on a good...
Equilibrium quantity of the good falls. Tax shrinks the market of good
Tax places wedge between price paid by buyers/received by sellers. When market moves to new equilibrium ...
Buyers pay more for good and sellers receive less. Buyers/sellers share tax burden. Tax burden doesn't depend on whether it is levied on buyers or sellers
Incident of tax depends on price elasticity of supply/demand...
Most of burden falls on side of market that's less elastic because that side can't respond as easily to the by changing the quantity bought or sold
Consumer surplus =....
Buyers willingness to pay - amount they actually pay. Measures benefit buyers get from participation in market.
Producer surplus =...
Amount sellers receive for good - production costs. Measures benefit sellers get from participating in market.
Seller who would leave market if price was lower
Allocation of resources that maximizes sum of consumer/producer surplus is said to be....
Efficient. Policy makers often concerned with efficiency/equality of economic outcomes
What does the equilibrium of supply and demand do?
Maximizes the sum of consumer and producer surplus. Invisible hand of market place leads buyers and sellers to
Allocate resources efficiently.
If a market failure such as market power (monopolies) or externalities (economic side effect (pollution)) happens..
Markets do not allocate resources efficiently
What is the goal of firms?
Maximize profit=total rev-total cost
When analyzing a firm's behavior it's important...
To include all the opportunity costs of production
Example of explicit opportunity cost....
Wages paid to workers
Example of implicit opportunity costs....
The wages the firm
Owner gives up by working at the firm rather than taking another job. Economic profit take both into account. Accounting only consider explicit costs
A firm's cost reflect it's...
Property of diminishing marginal product
A firm's production function gets flatter as the quantity of an input increases.
Do not change when the firm alters the quantity of output produces.
Change when the firm
alters the quantity of output produced
With the quantity of output.
First falls as output increases and then rises as output increases further.
The marginal cost curve....
Always crosses the avg total cost curve at the minimum of average total
A firm's cost depend on the...
Time horizon considered
Long run/Short run
Many costs fixed in short run and variable in long. When firm
Of production, avg total cost may rise more in short run than long
Firms/buyers that sell/buy products for a set price. Price of good equals both the firm's average revenue and it's marginal revenue.
to maximize profit a
firm chooses a quantity of output...
Such that marginal revenue equals marginal cost. Thus, the firm's marginal-cost curve is its supply curve
In the short run when a firm can't recover its fixed costs...
The firm will choose to shut down temporarily if the price of good is less than avg variable cost. Shut down TR<VC. Divide by Q
In the long run when the firm can recover both fixed and variable costs...
It will choose to exit if the price is less than avg total cost. EXIT =TR<TC. Divide by Q
In Markets with free entry and exit....
Profit is driven to zero in long run. In long run equilibrium all firms produce at the efficient scale, price = minimum of ATC, and the number of firms adjusts to satisfy Q demanded and this price
Changes in demand in short/long run in free enter/exit
Short: increase in demand increases prices and profits a decrease is opposite.
Long: the number of firms adjusts to drive market back to zero-profit equilibrium
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