Econ 102 - Test 2

Consumer Surplus

The difference between what a buyer is willing to pay and what they actually pay. It's the area under the demand curve and above the price.

Producer Surplus

The difference between what a seller is paid and their cost. It's the area above the supply curve and below the price.

Tax Revenue

The government's income from a tax.

Tax Revenue Formula

Tax × Quantity sold after tax

Deadweight Loss (DWL)

The lost total surplus from trades that no longer happen because of the tax.

Tax Incidence

Who really pays the tax. The more inelastic side (buyer or seller) bears more of the tax burden.

Welfare Implications

Taxes shrink consumer and producer surplus and create deadweight loss. They reduce efficiency.

Taxation and Deadweight loss Graphically

CS is above price, PS is below price, Tax makes a wedge between what buyers pay and sellers receive, DWL is a triangle showing lost trades

Externalities

Effects on bystanders

Positive Externalities

Helps others (education, vaccines)

Negative Externalities

Hurts others (pollution, smoking)

Negative Welfare Implications

too much produced

Positive Welfare Implications

not enough produced, Market equilibrium is not efficient

Caps

Set a limit (ex: pollution limit). Reduces harm directly.

Pigouvian Tax

Tax = size of the negative externality. Makes firms pay for the harm.

Tradable Permits

Government gives pollution permits and lets firms trade them. Limits total harm but allows flexibility.

Externalities Advantages/Disadvantages

Taxes: Efficient but politically tough, Caps: Simple but not flexible, Permits: Efficient and flexible, but complex to set up

Excludability

Can you stop someone from using it? People can be prevented from using a good.

Rivalry

One person's use of a unit of a good reduces another person's ability to use it

Private Goods

Excludable + rival (e.g. pizza)

Public Goods

Not excludable or rival (e.g. national defense)

Common Goods

Not excludable, but rival (e.g. fish in ocean)

Club Goods

Excludable, not rival (e.g. Netflix)

Free Rider Problem

People benefit from public goods without paying, so they get under provided.

Solutions

Government provides public goods, taxes fund them. For common goods: use permits, quotas, or property rights.

Curve Shape

MC is U-shaped due to rising marginal costs, ATC and AVC U-shaped because of spreading fixed costs then rising variable costs

Perfect Competition Short Run Assumptions

Many firms, identical products, price takers, free entry/exit

Perfect Competition Short Run Profit Rule

Produce where MR = MC (in PC, P = MR)

Perfect Competition Short Run Firm Decision

Stay open if P ≥ AVC, Shut down if P < AVC

Perfect Competition Short Run Profit

(P - ATC) × Q

Perfect Competition Short Run Graph

Horizontal demand curve for firm, profit/loss shown by rectangle between ATC and price

Perfect Competition Long Run

Firms enter/exit → profits go to zero

Perfect Competition Long Run Equilibrium

P = MC = minimum ATC

Monopoly

one company or person is the only one selling the product or service, there is no competition

Monopoly Profit Rule

MR = MC, but price is set from the demand curve

Monopoly Equilibrium

Lower quantity, higher price than perfect competition

Monopoly Profit

(Price - ATC) × Quantity

Monopoly Welfare Implication

Creates DWL because Q is too low and P is too high

Monopoly Graph

Downward-sloping demand and MR, MC intersects MR, price from demand curve

Oligopoly

Market structure in which only a few sellers offer similar or identical products, interdependent decisions

Oligopoly Firms Want

To act like a monopoly (collude), but may cheat

Oligopoly Collusion

Agreement among firms about quantities to produce or prices to charge

Nash Equilibrium

Each firm chooses the best strategy it can, given the strategies chosen by the others. No one has an incentive to change their decision on their own.

Oligopoly Relation to Firms

Firms don't cooperate if they expect the other will cheat → leads to lower prices than monopoly

Monopolistic Competition

Many firms, slightly different products, free entry/exit

Monopolistic Competition Welfare Implication

Not perfectly efficient

In Monopolistic Competition

Firms don't produce at minimum ATC (excess capacity)

Monopolistic Competition Profit

(P - ATC) × Q

Monopolistic Competition Long Run

New firms enter → demand for each firm falls → zero economic profit

Inelastic

hard to substitute. (ex. A specific medicine for a certain disease)

Elastic

easy to substitute. (ex. Nyquil and melatonin both put u to sleep.)

Willingness to pay

the amount that both customers will pay, usually the one who proposed a cheaper price

Antitrust laws

Laws that make it illegal for firms to conspire to raise prices or reduce production