Microeconomics Midterm II

Marginal Benefit (MB)

the extra benefit a buyer gets from one more unit. The demand curve shows MB.

Marginal cost (MC)

the extra cost to a seller of producing one more unit. The supply curve shows MC (with no externalities).

Consumer surplus (CS)

willingness to pay minus price paid. It’s the area under demand and above the price.

Producer surplus (PS)

price received minus the minimum price the seller would accept. It’s the area above supply and below the price.

Total surplus (TS)

CS + PS, the total gain from trade.

Efficient outcome

the quantity where MB = MC. Total surplus is as large as it can be.

Deadweight loss (DWL)

the total surplus lost when output is not at the efficient quantity.

Gains from exchange

the benefit both sides get when a trade happens at a price between the buyer’s value and the seller’s cost.

Triangle area formula

½ × base × height. Base = Q*. CS height = D-intercept − P*. PS height = P* − S-intercept.

Inverse curve

a curve written as P = … (for example, Q = 100 − 2P becomes P = 50 − 0.5Q).

Short run

a period in which at least one input is fixed.

Long run

a period in which all inputs are variable, so there are no fixed costs.

Total product (TP)

total output

Marginal product (MP)

extra output from one more worker (ΔTP ÷ ΔL).

Diminishing marginal product

with a fixed input, each additional unit of the variable input eventually adds less output than the one before.

Fixed cost (TFC)

cost that doesn’t change with output. It’s still positive at Q = 0.

Variable cost (TVC)

cost that changes with output. It equals 0 at Q = 0. With labor only, TVC = wage × workers.

Total cost (TC)

TFC + TVC.

Average fixed cost (AFC)

TFC ÷ Q. It always falls as Q rises.

Average variable cost (AVC)

TVC ÷ Q.

Average total cost (ATC)

TC ÷ Q, which also equals AFC + AVC.

Marginal cost (MC)

the change in total cost from one more unit (ΔTC ÷ ΔQ). Fixed cost doesn’t affect it.

MC and MP link

with a constant wage, MC = wage ÷ MP. When MP falls, MC rises.

MC–ATC rule

if MC < ATC, ATC is falling. If MC > ATC, ATC is rising. MC crosses ATC at ATC’s minimum. The same rule applies to AVC.

Economies of scale

long-run average cost falls as output expands.

Constant returns to scale

long-run average cost stays flat as output expands.

Diseconomies of scale:

long-run average cost rises as output expands.

Explicit costs

actual money payments (wages, rent, materials).

Implicit costs

opportunity costs of resources the owner already has (forgone salary, forgone interest on own funds).

Accounting profit

total revenue − explicit costs.

Economic profit

total revenue − explicit costs − implicit costs. It’s always ≤ accounting profit.

Total revenue (TR)

price × quantity.

Externality

a cost or benefit that falls on someone outside the transaction and isn’t reflected in the price.

Negative externality

an unpriced cost imposed on a third party.

Marginal external cost (MEC)

the extra cost an outsider bears from one more unit of production.

Marginal private cost (MPC)

the cost the producer actually pays for one more unit.

Marginal social cost (MSC)

the full cost to society of one more unit. MSC = MPC + MEC.

Marginal private benefit (MPB)

the benefit to the buyer of one more unit.

Marginal social benefit (MSB)

the full benefit to society of one more unit. With no external benefit, MSB = MPB.

Market quantity (Qm)

where MPB = MPC. The market uses private curves.

Efficient quantity (Q*)

where MSB = MSC.

Overproduction

with a negative externality, Qm > Q*. The price is too low.

DWL (negative externality)

½ × (Qm − Q*) × MEC.

Pigouvian tax:

per-unit tax equal to MEC. It moves the market to Q*.

Tax revenue vs. DWL

tax revenue (t × Q) is a transfer to the government. DWL is lost surplus. They are not the same thing.

Command-and-control

a regulation that sets an emissions limit or required technology. Weakness: inflexible.

Market-based policies

emissions taxes and tradable permits. Both let firms with low cleanup costs cut more.

Tradable permits

a cap on total emissions, with firms trading allowances. It needs a credible cap and enforcement.

Coase theorem

with clear property rights and low transaction costs, parties can bargain to the efficient outcome. Who holds the rights affects who pays whom, not efficiency.

Transaction costs

the costs of reaching and enforcing a bargain. If they’re high, Coase bargaining fails.

Positive externality

an unpriced benefit that goes to a third party (vaccinaton, education, R&D).

Marginal external benefit (MEB)

the extra benefit an outsider gets from one more unit.

MSB (positive externality)

MPB + MEB.

Underprovision

with a positive externality, Qm < Q*. The market produces too little.

DWL (positive externality)

½ × (Q* − Qm) × MEB.

Subsidy

a per-unit payment equal to MEB. It moves the market to Q*.

Innovation externality

social returns to new ideas exceed private returns. Policies include patents, research grants, tax credits, and public research. The tradeoff is rewarding innovators vs. limiting access to the new ideas.

Excludable

it’s possible to keep nonpayers from using the good.

Nonexcludable

it’s impossible or too costly to keep nonpayers from using the good.

Rival

one person’s use reduces what’s available for others.

Nonrival

one person’s use doesn’t reduce what’s available for others.

Private good

excludable and rival (pizza).

Public good

nonexcludable and nonrival (tornado siren, national defense).

Common resource

nonexcludable and rival (groundwater, open-access fishery).

Club good

excludable and nonrival until congested (streaming service, gym).

Free rider

someone who benefits from a good without paying for it. Free riding leads to underprovision of public goods.

Overuse of common resources

each user ignores the cost they impose on others, so the resource is overused.

Public good fix

government provision paid for by taxes. Cost: the tax burden and the difficulty of choosing the right quantity.

Common resource fixes

quotas or permits, usage fees, property rights, or community rules. Cost: monitoring and enforcement.