ECON 201: Introduction to Microeconomics, Final, Oregon State University

Social surplus

Producer surplus + consumer surplus

Price control

Government restriction on the price of a good/service

Deadweight loss

Decrease in social surplus from a market distortion

Gross domestic product (GDP)

market value of final goods/services produced in a country over a given period of time

Equity

distribution of resources across society ("fairness")

Price floor

A min price set above the equilibrium line

Price ceiling

A max price set below the equilibrium line

Ineffective price floor

Below equilibrium, doesn't protect against too low of prices, too much deadweight loss

Ineffective price ceiling

Above equilibrium price, too much deadweight loss

Production possibilities curve (PPC)

shows relationship between maximum production of o good for a given level of production for another good

Comparative advantage

When a firm/individual/country can produce a good at a lower opportunity cost compared to other producers

Absolute advantage

When a producer can make more of a good than other producers when given the same amount of resources

Terms of trade

negotiated exchange rate of goods for goods

Import vs Export

imports are produced abroad but sold domestically, exports are produced here but sold elsewhere

Net importer

imports are worth more than exports over a given time period

Protectionism

Idea that free trade can be harmful and government intervention is needed to control trade

Tariffs

Taxes on goods/services transported across political boundaries

Externality

When an economic activity has either a spillover cost or benefit for a bystander

Pecuniary externality

When a market transaction affects other people only through market prices

Internalizing an externality

When an economic agent fully accounts for the costs and benefits of his actions

Coase Theorem

Private bargaining will result in an efficient allocation of resources

Command-and-control regulation

Government either directly restricts the level of production or mandates the use of certain technologies

Market-based regulatory approach

Internalizes externalities by harnessing the power of market forces

Pigouvian tax

A tax designed to induce agents who produce negative externalities to reduce quantity toward the socially optimal level

Pigouvian subsidies

Designed to induce agents who produce positive externalities to increase quantity toward the socially optimal level

Non-excludable good

Impossible to exclude other people from using the good

Non-rival good

A good whose consumption by one person doesn't prevent consumption by other people

Public good

Non-rival and non-excludable good

Club good

Non-rival but excludable

Common pool resource goods

Rival and non-excludable

Free-rider problem

someone without incentive to pay doesn't pay because not paying doesn't decrease/prevent consumption

Private provision of public goods

Private citizens make contributions to the production or maintenance of a public good

Tragedy of the commons

When common pool resources are exploited and overused

Budget deficit

Tax revenues do not cover government spending

Budget surplus

Tax revenue exceeds government spending

Payroll tax

aka social insurance tax, comes from a worker's wages

Excise taxes

Taxes paid when purchasing a specific good

Sales tax

Paid by the buyer as a percentage of the sale price of an item

Transfer payments

When the government gives part of its tax revenue to some individual or group

Progressive tax system

Higher tax rates on those earning higher incomes

Average tax rate

Total taxes paid divided by total income for a household

Marginal tax rate

How much of the last dollar earned is paid out in tax

Proportional tax system

Household pay the same percent of income as taxes regardless of income level

Regressive tax system

Lower tax rates for higher incomes

Tax incidence

How the burden of taxation is distributed

Regulation

Government making actions to influence the market outcomes, such as quantity traded of a good, its price, or its quality

A cap or maximum price of a good

Price ceiling

Lower limit on the price of a good

Price floor

Government failures

Inefficiencies caused by a government's intervention

Equity-efficiency trade-off

Trade-off between ensuring an equitable allocation of resources (equity, fairness, everyone gets some) and increasing social surplus or total output (efficiency, avoiding waste/loss)

Welfare state

Set of welfare/insurance/regulation/etc programs operated by the government (ie. unemployment benefits, healthcare)

Consumer sovereignty

Choices made by a consumer reflect true preferences, and outside forces (i.e. govt) should not interfere with these choices

Paternalism

Consumers do not always know what is best for them, and the government should encourage them or induce them to change their actions

Value of marginal product of labor

Contribution of an additional worker to the firm's revenues

Price-makers

Sellers that set the price of a good

Market power

Ability of sellers to affect prices

Monopoly

Industry structure where only one seller provides a good or service that has no close substitutes

Barriers to entry

Provide a seller with protection from potential competitors entering the market

Legal market power

Occurs when a firm obtains market power through barriers to entry created not by the firm itself, but by the government

Patent

Privilege granted to someone by the government, allowing someone the sole right to produce and sell a good

Copyright

Exclusive right granted by government to the creator of a literary or artistic work

Natural market power

Occurs when a firm obtains market power through barriers to entry created by the firm itself

Network externalities

Occur when a product's value increases as more consumers begin to use it

Natural monopoly

Exists when one firm in a market can provide a good/service at a lower cost than two or more other firms

Price discrimination

When firms charge different consumers different prices for the same good or service

First-degree price discrimination (perfect price discrimination)

When a firm charges each buyer exactly his willingness to pay

Second-degree price discrimination

When consumers are charged different prices based on the characteristics of their purchase

Third-degree price discrimination

When price varies based on a customer's attributes

Antitrust policy

Aims to regulate and prevent over competitive pricing

Efficient, or socially optimal price

Price set at marginal cost

Fair-returns price

Price set at average total cost

Payoff matrix

A representation of the payoffs for each action a player can make

Simultaneous move games

Players pick their actions at the same time

Best response

When a player's strategy is the optimal strategy when taking the other player's strategy as given

Dominant strategy

The best response to every possible strategy of the other player(s)

Dominant strategy equilibrium

A combination of strategies where every strategy is a dominant strategy

Nash equilibrium

A strategy combination where each strategy is a best response to the strategies of others

Zero-sum game

One player's loss is another's gain, so the sum of the payoffs is zero

Extensive-form game

Representation of games that specifies the order of play

Game tree

An extensive-form representation of a game

Backward induction

Solving an extensive-form game by first considering the last mover-s decision in order to deduce the decisions of all previous movers

First-mover advantage

When the first player act in a sequential game gets a benefit from doing so