econ midterm #2

Statutory burden

The legal responsibility for paying a tax, as assigned by the government.

Economic burden

The actual loss of income or purchasing power caused by a tax.

Taxes = NEGATIVE ______

subsidies

Subsidies = NEGATIVE _____

taxes

per-unit tax (t) FORMULA

t = Pd-Ps

tax revenue

wedge between price paid by consumer and earned by sellers

tax revenue FORMULA

t x Qe

Tax incidence

How the economic burden of a tax is divided between buyers and sellers.

tax incidence rests more heavily on the

relatively inelastic group

Equity

Fairness in how economic benefits, costs, and resources are distributed.

Economic efficiency

Using resources to maximize total economic surplus.

Economic surplus

The combined benefits buyers and sellers receive from participating in a market.

Efficient outcome

An outcome maximizing total surplus with no unrealized mutually beneficial trades.

Efficient production

Producing goods at the lowest possible cost using available resources and technology.

Efficient allocation

Distributing resources among uses to maximize overall value to society.

Efficient quantity (Qeff)

The quantity at which marginal benefit equals marginal cost (MB = MC) and min ATC occurs

Market failure

When a market fails to allocate resources efficiently.

Market power

The ability of a firm to influence the price of its product.

Imperfect competition

A market structure where firms have some market power rather than being price takers.

Product differentiation

Making a product seem distinct from competitors through features, quality, or branding.

Firm demand curve

A curve showing the quantity a specific firm can sell at different prices.

Marginal revenue (MR)

The additional revenue earned from selling one more unit.

Total revenue (TR)

The total money a firm receives from selling its output.

Output effect

The change in revenue from selling additional units as output increases.

Total cost (TC)

The total economic cost of producing a given quantity of output.

Profit (π)

Total revenue minus total cost: π = TR - TC.

Economic profit

Total revenue minus all explicit and implicit costs, including opportunity costs.

Accounting profit

Total revenue minus explicit costs like wages, rent, and materials.

Statutory vs. Economic Burden

Government assigns statutory burden; market conditions determine economic burden.

Economic vs. Accounting Profit

Economic profit subtracts opportunity costs; accounting profit does not.

Efficiency vs. Equity

Efficiency concerns maximizing total surplus; equity concerns fairness.

Total economic costs (TC)

All production costs, including explicit costs and implicit opportunity costs.

Total fixed costs (TFC)

Costs that do not change with output in the short run.

Total variable costs (TVC)

Costs that change directly with the quantity produced.

Average total cost (ATC)

Total cost per unit produced: ATC = TC / Q.

Average total revenue (ATR)

Total revenue divided by quantity sold; equals price for a single-price firm.

Short run (SR)

A period in which at least one input is fixed, such as factory size.

Long run (LR)

A period long enough for all inputs and productive capacity to be adjusted.

Free entry

Firms can enter a market without significant legal or economic barriers.

Free exit

Firms can leave a market without significant barriers or prohibitive costs.

Barriers to entry

Obstacles making it difficult for new firms to enter a market.

Switching costs

Costs incurred when changing from one product, brand, or provider to another.

Game theory

The study of strategic decisions where outcomes depend on other players' choices.

Strategic interaction

A situation where one firm's decision depends on or affects other firms' choices.

Payoff table

A grid showing outcomes and rewards for combinations of players' decisions.

Best response

The action giving a player the highest payoff given the rival's choice.

Nash equilibrium

A state where each player chooses their best response to the other's choice.

Per-unit tax (t)

A fixed tax applied to each unit bought or sold (e.g., $2/coffee).

Positive analysis

An objective, testable statement describing what is or will happen.

Normative analysis

A value-based statement or opinion about what ought to happen.

Perfect competition

Market with many buyers/sellers, identical products, free entry/exit, and price takers.

Monopoly

A market with a single seller and high entry barriers.

Oligopoly

A market dominated by a small number of mutually interdependent large firms.

Monopolistic competition

Market with many firms selling differentiated products with free entry and exit.

Discount effect

Price reduction on earlier units when lowering price to sell more units.

Consumer surplus (CS)

The difference between what buyers are willing to pay and what they pay.

Consumer surplus (CS) ON THE GRAPH

area below D-curve and above Pe

Producer surplus (PS)

The difference between price received and the seller's minimum acceptable price.

Producer surplus (PS) ON THE GRAPH

area above S-curve & below Pe

Total surplus (TS)

The sum of consumer surplus and producer surplus: TS = CS + PS.

Deadweight loss (DWL)

The total surplus lost due to market inefficiency or output restrictions.

Efficient scale of production

The output level that minimizes average total cost.

Average fixed cost (AFC)

Fixed cost per unit of output: AFC = TFC / Q.

Average variable cost (AVC)

Variable cost per unit of output: AVC = TVC / Q.

Marginal cost (MC)

The change in total cost from producing one additional unit.

Profit margin

Percentage of total revenue remaining as profit: (π / TR) × 100%.

Formula: Total Revenue

TR = P × Q

Formula: Marginal Revenue

MR = ΔTR / ΔQ

Formula: Profit

π = TR - TC

Formula: Profit Margin

Profit Margin = (π / TR) × 100%

Formula: Total Cost

TC = TFC + TVC

Formula: Average Total Cost

ATC = TC / Q = AFC + AVC

Formula: Average Fixed Cost

AFC = TFC / Q

Formula: Average Variable Cost

AVC = TVC / Q

Formula: Marginal Cost

MC = ΔTC / ΔQ

Formula: Total Surplus

TS = CS + PS

Rule for Efficient Quantity

MB = MC

Marginal Benefit (MB)

the additional benefit gained from purchasing an additional unit, measures WTP

Rational Rule for Buyers

Buy until P = MB

Rational Rule for Markets

Produce until MB = MC (Qeff)

Rational Rule for Sellers

Sell until P = MC

DWL with price controls?

YES

DWL with tax?

YES

DWL with changes in supply or demand?

NO

objective of a firm

profit maximization

Max profit FORMULA

MR - MC

slope of ATC at max profit

0

if MR > MC

produce more to increase quantity to minimize costs

if MR < MC

produce less to reduce quantity to minimize costs

Rational Rule for Entry

enter if profit > 0 (TR > TC or P > ATC)

Rational Rule for Exit

exit is profit < 0 (TR < TC or P < ATC

Firm demand curve in perfect competition is

HORIZONTAL/perfectly elastic

Firm demand curve in imperfect competition is

downward-sloping

ATC position when PC firm profit > 0

BELOW MC

ATC position when PC firm profit < 0

ABOVE MC

ATC position when PC firm profit = 0

intersects MC at breakeven point (P = MC)

Short run PC Firm S curve

approximately MC

Long run PC firm S curve

None

LR adjustment for PC firms when profit < 0

Market exit leads to lower number of sellers, so price rises to min ATC and LR equilibrium returns to 0

LR adjustment for PC firms when profit > 0

Market entry leads to higher number of sellers, so price falls to min ATC and LR equilibrium returns to zero