4. Gains from Trade, 5. Externalities and Public Goods, 6. Factors of Production, 7. Monopoly

Production Possibilities Curve (PPC)

[Or “Frontier” in other textbooks] - is a graphical representation of the production schedule. Shows the relationship between maximum production of one good for a given level of production of another good

Opportunity Cost

what you give up to produce one additional good

Comparative Advantage

is the ability of an individual, firm, or country to produce a certain good at a lower opportunity cost than other other producers

Absolute Advantage

is the ability of an individual firm or country to produce more of a certain good than other competing producers given the same amount of resources

Export

any good that is produced domestically but sold abroad

Import

is any good that is produced abroad but sold domestically

Tariff

are taxes levied on goods and services transported across political boundaries

Externality

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service

(Marginal) Private Benefit (MPB)

The benefit received by the consumer of a good or service

(Marginal) Private Cost (MPC)

The cost born by the producer of a good or service

(Marginal) Social Benefit (MSB)

The total benefit from consuming a good or service, including both the private benefit and any external benefit

(Marginal) Social Cost (MSC)

The total cost of producing a good or service, including both the private cost and any external cost

Excludable

The situation in which anyone who does not pay for a good cannot consume it

Non-Excludable

means that it is impossible to exclude others from consuming the good, whether they have paid it or not

Rival

The situation that occurs when one person’s consuming a unit of a good means no one else can consume it

Non-Rival

means that a one person’s consumption does not interfere with another person’s consumption

Private Good

A good that is both rival and excludable

Public Good

A good that is both non-rival and non excludable

Common Resource

(or “Common-Pool Resource Good”) - A good that is rival but not excludable

Club Good

(or Quasi-Public Good; and this corresponds to a “Natural Monopoly” market structure) - a type of good that is excludable (meaning you can prevent people from using it) but non-rivalrous (meaning one person's use doesn't diminish the availability for others)

Tragedy of the Commons

The tendency for a common resource to be overused

Free Rider / Free-Rider Problem

Benefiting from a good without paying for it

Coase Theorem

The argument that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities

Marginal product (MP)

the additional output produced by adding one more unit of a specific input (like labor), while keeping all other inputs constant

Marginal product of labor (MPL)

is the increase in a firm’s revenues created by hiring an additional laborer

Value of the marginal product of labor (VMPL)

[The extra V is to be unambiguous whenever the output is in dollars, with the extra L is to be unambiguous whenever the input is labor.] - What MPL is called whenever it is explicitly in dollars. MPL can thus refer to marginal product of actual stuff, like cups of coffee

Human capital

is tools of the mind, the stuff in people’s heads that makes them productive

Compensating wage differential

(or just “compensating differential”) - A compensating differential is a difference in wages that offsets differences in working conditions

Residual Demand Curve

Demand curve of an individual perfectly competitive producer ( Straight horizontal line)

Price Discrimination

many monopolists find that they can increase their profits by selling the same goods to different customers for different prices : they practice price discrimination. Sellers engage in this when they charge different prices to different consumers for the same good.

Perfect Price Discrimination

(also known as “first-degree price discrimination”) - takes place when a monopolist charges each consumer his or her willingness to pay, the maximum the consumer is willing to pay. Also called “first degree price discrimination”

Quantity Effect

One more unit is sold, increasing total revenue by the price at which the unit is sold

Price Effect

In order to sell that last unit, the monopolist must cut the market price on all units sold. This decreases total revenue

Natural Monopoly

a market where one company can provide a product or service more cheaply than multiple companies

Monopolistic Competition

a market structure where many companies sell similar but not identical products. It's a type of imperfect competition that combines aspects of monopolies and perfect competition