ECON 201: EXAM 2

welfare economics

the study of how the allocation of resources affects economic activity

consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it; benefits the buyer receives from participating in the market

producer surplus

the amount a seller is paid for a good minus the seller's cost of providing it

efficiency

the allocation of resources that maximizes total surplus

equality

distributing economic prosperity uniformly among the members of society

externality

a type of market failure that occurs when a person engages in an activity that influences the well-being of a bystander, but neither pays nor receives compensation for that effect

negative externality

impact on the bystander is adverse; market quantity greater than socially desirable

positive externality

impact on the bystander is beneficial; market quantity less than socially desirable

internalizing the externality

altering incentives so that people take account of the external effects of their actions (subsidies + taxes)

excludable goods

goods that are not accessible all the time

rival goods

One person's use of a unit of a good reduces another person's ability to use it

private goods

excludable and rival

public goods

non-excludable and non-rival

common resources

non-excludable but rival in consumption

club goods

excludable but not rival in consumption

free rider

an individual who receives the benefit of a good, but avoids paying for it

accounting profit

total revenue minus total explicit cost

economic profit

total revenue minus total cost, including both explicit and implicit costs

marginal product

the increase in output that arises from an additional unit of input

diminishing marginal product

the marginal product of an input declines as the quantity of the input increases

efficient scale

the quantity that maximizes ATC

MC < ATC

ATC is falling

MC > ATC

ATC is rising

short run

some inputs are fixed (the cost of these inputs are FC)

long run

all inputs are variable

economies of scale

ATC falls as Q increases

Constant returns to scale

ATC stays the same as Q increases

diseconomies of scale

ATC rises as Q increases

competitive market

many buyers and sellers; trading identical products