micro econ test 2 oregon state

Marginal Benefit > Marginal Cost:

The quantity sold is less than the equilibrium quantity.

Marginal Benefit < Marginal Cost:

The quantity sold is greater than the equilibrium quantity.

Optimal Decision Rule:

An activity should be increased until marginal benefit equals marginal cost.

Demand Curve:

Represents the marginal benefit received by buyers.

Supply Curve:

Represents the marginal cost faced by sellers.

Consumer Surplus:

The difference between what a buyer is willing to pay and what they actually pay.

Producer Surplus:

The difference between the market price and the minimum price a seller is willing to accept.

Total Producer Surplus:

The area above the supply curve and below the market price.

Sarah’s Consumer Surplus:

Henry and Cassidy Surplus:

Henry’s CS: $9, Cassidy’s PS: $3

Deadweight Loss (DWL):

The difference between the actual total surplus in a market and the maximum possible total surplus.

Market Failure:

Occurs when the market fails to allocate resources efficiently, typically when marginal social benefit ≠ marginal social cost.

Import Quota Impact:

Increases the price of domestic goods for consumers.

Price Controls (Long-Term Effects):

Have a larger effect in the long run as supply and demand become more elastic.

Tax Wedge:

A gap created between the price consumers pay and the price sellers receive due to a tax.

Deadweight Loss from Tax:

Occurs unless the tax causes no change in the equilibrium quantity.

Tax Burden and Elasticity:

The more inelastic the demand, the more buyers bear the tax burden.

Most Tax Passed to Consumers:

Occurs in markets where demand is highly inelastic (e.g., Fish with demand elasticity of 0.12).

Efficient Tax Placement:

Inelastic supply and demand minimize deadweight loss and maximize tax revenue.

Positive Consumption Externality:

Occurs when marginal social benefit exceeds marginal private cost.

Effect of Positive Externality on Quantity:

Market equilibrium quantity is less than the socially optimal quantity.

Negative Production Externality:

Occurs when marginal social cost exceeds marginal private cost (e.g., pollution from coal mining).

Internalizing a Negative Externality:

Producers' marginal costs should be increased by the value of the external cost.

Efficient Market Condition:

Exists when there are no external effects (positive or negative).

Property Rights and Economic Surplus:

Well-defined property rights lead to higher total economic surplus.

Coasian Solution:

A private agreement between parties to solve externality problems (e.g., beekeepers renting out bees to farmers).