econ 2

central planning

single official responsible for allocating limited resources, but too much info + too few incentives

speculation

attempt to profit from future price changes; may not always be correct, but have incentive to be right + smooths price fluctuations

futures market

markets for future delivery/purchase of good

spot market

current market price

price ceiings

prevent prices from rising above certain lvl + can cause shortages (CANNOT be surplus)

price floors

prevent prices from falling below certain lvl + can cause surpluses (CANNOT be shortage)

rent control

regulation that prevents rents from rising to equilibrium (price ceiling whose effects worsen over time)

wage subsidy

costs gov money but increases employment from Qm→Qs + reduces social safety net payments

earned income tax credit

low-income, low-wage workers receive non-refundable tax credits; no dis-employment effect (it’s subsidy to hire low-wage workers) + wages can still adjust

price support programs

in place for agricultural commodities; govs maintain higher prices by buying surplus, restricting supply, subsidizing exports

tariff

tax on imports

quota

quantity limit on imports

general agreement on trade + tariffs and world trade organization

international agreements that lowered tariffs + trade barriers

protectionism

shields domestic industries from foreign competitions by restricting imports + international trade

market failure

when 3rd parties bear significant share of costs/benefits, market quantity is not efficient; DOESNT mean business failure

externalities

costs/benefits to 3rd party from transaction

coase theorem

helps identify source of market failure; if transaction costs low + property rights well-defined, parties can bargain to efficient solution

private cost

paid by consumer/producer (2 parties to transaction)

external cost

imposed on 3rd party as result of transaction (externalities)

social surplus

total surplus (consumer, producer, 3rd parties)

neg externalities

some production costs being shifted to 3rd parties; market failure, market price too low + output too high

pos externalities

consumption/production of good benefits 3rd party to transaction; market failure, market price too high + output too low

command + control

gov agencies that say what you can/can’t do

pigouvian tax

placed on any market activity that generates neg externality

pigouvian subsidy

placed on any market activity that generates pos externality

theory of firm

pricing, output, entry + exit decisions made by firm in competitive industry

perf competition

no barriers to entry/exit of firms, product similar/identical across sellers; as result, firms relative to market = price-takers (also applies to buyers), large # firms, demand curve horizontal

profit maximization

choosing Q to maximize profits

explicit costs

things that must be paid for

implicit costs

things that don’t require outlay of money

avg cost

all units produced

marginal cost

cost of last unit produced

external benefit

when economic action creates unintended positive effect on 3rd party