Econ 200 Final

Autarky

an economy that is self-contained and doesn’t engage in trade with outsiders. the economy neither exports nor imports goods

Imports

Goods or services produced elsewhere, consumed domestically

Exports

Goods or services consumed elsewhere, produced domestically

Tariff

tax targeted at certain imports, the purpose is to reduce the quantity of imports to protect domestic producers

Quota

a limit on the amount of a particular good that can be imported

Quota rents

the additional revenue earned by those who are allowed to import goods

Externality

a cost or benefit to a third party that results from the production of consumption of a product or service. (unintended effects upon others, spillover effects)

Market failure

a situation in which the market fails to produce the efficient level of output

Private benefit

the benefit received by the consumer of a good or service

Social benefit

the total benefit from consuming a good or service

The Coase Theorem

the idea that private parties can solve the externality problem and reach the socially efficient output through private bargaining requires (1) enforceable assigned property rights, (2) low transaction costs, (3) full information about costs and benefits

Transaction costs

the costs in time and other resources parties incur in the process of agreeing to and carrying out an exchange of goods or services (the time spent gathering information, cost of negotiation, legal fees to close a transaction, cost of enforcing an agreement).

Pigouvian taxes

Increase efficiency while bringing in tax revenue, allowing for inefficiency-causing taxes in other markets to be reduced. Known as the double-dividend of taxation

Opportunity cost (review)

the true cost of a choice is the value you could have gained by choosing the next best alternative instead. Always a #

Trade off (review)

What I have to give up in order to gain something else.

a technology in economics

the process by which a firm transforms inputs into outputs

positive technological change

When a firm improves its ability to turn inputs into outputs

Firm Production

The firm takes inputs and produces the goods and/or services it sells. Y = f(K, L). Y = amount of input, f(.) = production function, K = capital input, L = Labor input

Profit

a firms goal in producing output is to maxmimize profit. Profit - Total revenue - Total cost

Total Revenue

the amount a firm receives from the sale of its output. Total revenue = Quantity x price

Total cost

the amount that a firm pays for input used to produce outputs

the short run

a period of time during which at least one of a firms input is fixed

the long run

no inputs are fixed, the firm can adopt a new technology or scale up or down any inputs

variable cost

costs that vary depending on how much is produced

fixed costs

costs that don’t change according to how much is produced

Explicit costs

costs that involve spending money. ex. wages, replacement of depricated capital, materials, rent, etc.

Implicit costs

Opportunity costs for firms. ex. salary as entrepreneur has to give up his current job in order to open his new business

Accounting profit

When companies report profits, they provide accounting profits and they may be misleading indicators of how businesses are doing

Economic profit

used to account for implicit costs

Production function

the relationship between the inputs employed and the maximum output of the firm

marginal product

the increase in output that is generated by an additional input.

• MP = change total output / change input

The average product

the total production divided by the amount of input

• AP = total output / total input

minimum efficient scale

the lowest level of output at which all economies of scale are exhausted

Market Structures

models of how the firms in a market interact with buyers to sell their output

Perfectly competitive market

a market with many buyers and sellers, identical products sold by each firm, and no barriers to new firms entering the market.

average revenue

total revenue divided by the quantity of the product sold

marginal revenue

the change in total revenue from selling one or more unit of a product

What is profit maximization?

The main goal of a firm, firms choose the output quantity that maximizes profit

What is productive efficiency?

Producing a good at the lowest possible cost

What is allocative efficiency?

Producing where marginal benefit to consumers equals marginal cost of production

Monopoly

a market structure consisting of a firm that is the only seller of a good or service that does not have a close substitute

Natural Monopoly

a market where a single firm can produce the entire market’s quantity demand at a lower cost than multiple firms

Price discrimination

The practice of charging customers different prices for the same good

first degree price discrimination

when a seller charges each individual consumer the maximum price they are willing to pay for each unit of a good or service

second degree price discrimination

offering different prices for different quantities

third degree price discrimination

offering different prices to different groups of consumers

monopolistic competition

describes a market with many firms that sell similar but differentiated goods and services

product differentiation

firms that have an interest in persuading that their products are a unique practice

Exiting

if a firm is losing money in monopolistic

duopoly

if there are two firms in the market and both make identical (or nearly identical) products