Econ Test 2 Review

price ceiling

maximum price allowed by law

effects of a price ceiling

shortages, reduction of product quality, wasteful lines, loss gains from trade, and misallocation of resources

rent control

price ceiling on rental housing

is rent control worse in the short run or long run

gets worse in the long run

price floor

minimum price allowed by law

effects of a price floor

surpluses, lost gains from trade, wasteful increases in quality, and misallocation of resources

minimum wage is an example of what and creates what

price floor and creates a surplus of labor = unemployment

deadweight loss created by a price floor represents what

economic inefficiency created by this intervention

what happens when a price ceiling is set above market price or price floor is set below market price

nothing happens

efficient equilibrium

price and quantity that maximizes social surplus

pigouvian tax

tax on a good with external costs

pigouvian subsidy

subsidy on a good with external benefits

how does a pigouvian tax fix a negative externality

increases marginal private cost making it equal to marginal social cost

using a subsidy to correct positive consumption externality would be ideally set equal to what

marginal external benefit evaluated at socially efficient quantity ( want to get to social benefit and the external benefit is the missing piece)

if there is two equal externalities at once…

there is not enough information to say what the result will be

in a competitive market, producers are… and in a monopoly market producers are what…

“price takers'“ and “price setters”

in a competitive market, what does the demand curve look like with a small producer in a much larger market

perfectly elastic demand curve

difference between accounting profit and economic profit

accounting profit does not take into account opportunity cost (implicit costs)

2 profit formulas

total revenue- total cost or (price- ac) x Q

to maximize profit, what needs to be true

MR= MC (also MR is equal to the price)

in a competitive firm, if price is greater than MC what should they do with production?

increase production until MC= price

when do firms enter the industry

when price is greater than average costs

when do firms exit the industry

when price is less than average costs

when should firms shut down immediately

when price is below average variable cost

what should firms do when price is above avc but below ac

continue in short run but exit in long run

when minimizing total costs with 2 firms, how much should they produce

never produce all outputs from only one firm, set outputs of 2 firms so MC are equal

elimination principle

above normal profits are eliminated by entry, and below normal profits are eliminated by exit

when does the invisible hand not work

when prices don’t signal, markets are not competitive (entry is limited), or commodities are public goods

firms with market power have what kind of demand curve

downward-sloping (decrease prices if they increase output)

how to control a natural monopoly

price controls

what is antitrust in a monopoly setting

stopping companies from merging or breaking up companies

how do monopoly prices and output levels differ from the competitive industry

prices are higher and output is less

economies of scale

advantages of large-scale production that reduce average cost as quantity increases

natural monopoly

when a single firm can supply the entire market at a lower price than other firms (ex: water company)

binding vs. non-binding price controls

binding has an external effect but non-binding has no effect

perfectly competitive industry in short and long run (efficiency)

short run: allocatively efficient and long run: allocatively efficient and productively efficient

what’s profit in the long run

when MC= ATC (ATC is minimized)

in the short run, sunk costs = what?

fixed costs

decrease prices but increase total revenue means MC __ MR

MC < MR