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Coase Theorem
the argument of economist Ronald Coase that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities
Command and Control Approach
An approach that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices.
Common Resource
a good that is rival but not excludable
Excludability
the situation in which anyone who does not pay for a good cannot consume it
Externality
A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
Free Riding
benefiting from a good without paying for it
Market Failure
A situation in which the market fails to produce the efficient level of output.
Pigovian Taxes and Subsidies
government taxes and subsidies intended to bring about an efficient level of output in the presence of externalities
Private Benefit
The benefit received by the consumer of a good or service.
Private Cost
The cost borne by the producer of a good or service.
Private Good
A good that is both rival and excludable.
Property Rights
The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it
Public Good
A good that is both nonrivalrous and nonexcludable.
Rivalry
The situation that occurs when one person's consuming a unit of a good means no one else can consume it
Social Benefit
The total benefit from consuming a good or service, including both the private benefit and any external benefit.
Social Cost
The total cost of producing a good or service, including both the private cost and any external cost.
Tragedy of the Commons
The tendency for a common resource to be overused.
Transactions Costs
The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.
Cross-price elasticity of demand
Elasticity Demand
A good's price elasticity of demand is a measure of how sensitive the quantity demanded is to its price.
Elasticity
An economic concept used to measure the change in the aggregate quantity demanded of a good or service in relation to price movements of that good or service
Income Elasticity of Demand
Inelastic Demand
When a good has people not react to changes in a good's price change very much, and they buy close to the same quantity at many different prices.
Perfectly Elastic Demand
When the demand of a product is entirely based on the price of the product, and the quantity over price is 1.
Perfectly Inelastic Demand
Demand does not change regardless of the price, but this really never exists.
Price Elasticity of Demand
Price Elasticity of Supply
Total Revenue
Price x Quantity
Voluntary export restraint (VER)
An agreement negotiated between two countries that places a numerical limit on the quantity of a good that can be imported by one country from the other country
Quotas
A numerical limit imposed by a government on the quantity of a good that can be imported into the country.
Tarrifs
A tax imposed by a government on imports
Behavioral Economics
The study of situations in which people make choices that do not appear to be economically rational.
Budget Constraint
The limited amount of income available to consumers to spend on goods and services.
Endowment Effect
The tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it.
Income Effect
The change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding all other factors constant.
Law of Diminishing Marginal Utility
The principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time
Marginal Utility
The change in total utility a person receives from consuming one additional unit of a good or service.
Network Externality
A situation in which the usefulness of a product increases with the number of consumers who use it.
Opportunity Cost
The highest valued alternative that must be given up to engage in an activity.
Substitution Effect
The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power.
Sunk Cost
A cost that has already been paid and cannot be recovered.
Utility
The enjoyment or satisfaction people receive from consuming goods and services.
Average Fixed Cost
Fixed Cost/Quantity
Average Product of Labor
Total Output/Quantity of Workers
Average Total Cost
Total Cost/Quantity or AVC + AFC
Average Variable Cost
Variable Cost/Quantity
Constant Returns to Scales
The situation when a firm's long-run average costs remain unchanged as it increases output.
Diseconomies of Scale
The situation when a firm's long-run average costs rise as the firm increases output.
Economies of Scale
The situation when a firm's long-run average costs fall as it increases output.
Explicit Cost
A cost that involves spending money.
Fixed Cost
Costs that remain constant as output changes.
Implicit Cost
A nonmonetary opportunity cost.
Law of Diminishing Returns
The principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline.
Long Run
The period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant.
Long-Run Average Cost Curve
A curve showing the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed.
Marginal Cost
The change in a firm's total cost from producing one more unit of a good or service.
Marginal Product of Labor
The additional output a firm produces as a result of hiring one more worker.
Minimum Efficient Scale
The level of output at which all economies of scale are exhausted.
Production Function
The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs.
Short Run
The period of time during which at least one of a firm's inputs is fixed.
Technological Change
A change in the ability of a firm to produce a given level of output with a given quantity of inputs.
Technology
The processes a firm uses to turn inputs into outputs of goods and services.
Total Cost
The cost of all the inputs a firm uses in production.
Variable Costs
Costs that change as output changes.
Cost Minimization
MPL/wage= MPC/rent
Is the graph of MB upward-sloping or downward-sloping
downward-sloping, like a demand curve
Is the graph of MC upward-sloping or downward-sloping
upward-sloping, like a supply curve
What is the equation to maximize benefit?
MB ≥ MC
What is the equation to tell if Marginal Utility is maximized?
Midpoint Formula
Note
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