ECON Exam 2 Vocab

Consumer Surplus

the difference between maximum willingness to pay and the price actually paid

Producer Surplus

the difference between the price received by the seller and the seller’s reservation price

Total Surplus

Consumer surplus plus producer surplus

Sales Tax

tax on purchases, levied on buyers

Excise Tax

tax on a specific commodity, levied on sellers

Progressive Income Tax Structure

marginal tax rate increases as income increases

Regressive Income Tax

marginal tax rate decreases as income increases

Flat Tax

marginal tax rate stays the same at every income level

Fixed Inputs

the level of these inputs does not vary with level of input

Variable Inputs

level of these inputs vary with the level of input

TP

total output given the level of the variable input

AP

on average the number of units of output produced per unit of variable input

MP

change in total product from hiring one more unit of variable input holding all else constant

Law of Diminishing Marginal Returns

when more and more of a variable input added to a set level of other inputs results in smaller and smaller amounts of additional output produced, without it all the world’s food would be grown in a single pot

Fixed Costs

only exist in the short run, it is the cost of inputs that cannot be varied

Variable Costs

costs of the variable inputs

TFC

cost of all fixed inputs

TVC

cost of all variable inputs

TC

TFC+TVC

ATC

TC/ quantity of output, on average how much was spent to produce each unit of output

AFC

TFC/ quantity of output, on average how much was spent on fixed inputs per unit of output

AVC

TVC/ Quantity of output, on average how much was spent/ unit of variable inputs

MC

change in total cost from producing one more unit of output

Sunk Costs

a cost once incurred can never be recovered in decision, ignore sunk costs. Going forward, look at marginal costs and benefits.

Economies of Scale

the falling portion of the long run average total cost curve

Profit Maximization

is the goal of the firm that guides every decision

Accounting Profit

total revenue-accounting cost(explicit)

Economic Profit

total revenue-total costs(explicit and implicit)

Profit

is a payment to a factor of production, a payment for the service of combining land labor and capital

Competitive Model

model= abstract representation of reality what we don’t see: rivalry and time of market process. Large number of buyers and sellers, homogeneous product, no barriers to entry or exit, assume everyone has perfect information

Marginal Revenue

change in total revenue from selling one more unit of output

LR COMP Paradox

entry is motivated by positive economic profit but the entry of new firms drives economic profit back down to 0

LR Competitive Equilibrium

price equals minimum average total cost which yields productive efficiency and allocative efficiency

Barriers to Entry

forced by incumbent firm such as licenses, patent, brand name recognition, ownership of unique resources, network externalities, scale economies

Monopoly Model Assumptions

single seller of a unique product with no close substitutes, there are barriers to entry

Natural Monopoly

economies of scale are present throughout the entire relevant range of demand

Market can be defined by..

location or good

The Monopoly “Problem”

lower quantity yields higher price

Price Discrimination

selling the same good at different prices where the price differences aren’t reflections of different cost of production

Price Discrimination Requirements

must face downward sloping demand curve and must be able to prevent arbitrage

1st Degree PD

sells to each consumer at their maximum willingness to pay which captures all surplus

2nd Degree PD

lower price for a higher quantity purchased

3rd Degree PD

charging different prices to groups of consumers based on price elasticity of demand, the greater elasticity receives the discount

Reservation Price

minimum offered to make you sell it, the bottom point of the supply curve

Deadweight loss

fewer value-enhancing trades taking place