Principles of Microeconomics: Welfare, Taxation, Externalities, Production Costs, Competitive Markets, and Public Goods

Comprehensive vocabulary flashcards covering key microeconomic concepts from Chapters 7, 8, 10, 11, 14, and 15, including welfare economics, deadweight loss, taxation, externalities, costs of production, competitive firm supply decisions, and the classification of public goods and common resources.

Welfare Economics

The study of how the allocation of resources affects economic well-being.

Willingness to Pay (WTP)

The maximum amount that a buyer will pay for a good, measuring how much that buyer values the good.

Consumer Surplus (CS)

The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it ($\text{CS} = \text{WTP} - P$), measuring the benefit buyers receive from participating in a market.

Marginal Buyer

The buyer who would leave the market first if the price were any higher.

Cost

The value of everything a seller must give up to produce a good, including opportunity costs, which measures a seller's willingness to sell.

Willingness to Sell (WTS)

The lowest price accepted by a seller for one unit of a good or service.

Producer Surplus (PS)

The amount a seller is paid for a good minus the seller's cost of providing it ($\text{PS} = P - \text{cost}$), measuring the benefit sellers receive from participating in a market.

Marginal Seller

The seller who would leave the market first if the price were any lower.

Total Surplus

The sum of consumer surplus and producer surplus ($\text{Total Surplus} = \text{CS} + \text{PS}$), representing the value to buyers minus the cost to sellers.

Efficiency

The property of a resource allocation of maximizing the total surplus received by all members of society.

Equality

The property of distributing economic prosperity uniformly among the members of society.

Benevolent Social Planner

A hypothetical all-knowing, all-powerful, well-intentioned dictator used to evaluate whether market allocations are economically desirable.

Market Power

A type of market failure where a single buyer or seller (or small group) controls market prices, making markets inefficient.

Deadweight Loss (DWL)

The fall in total surplus that results from a market distortion, such as a tax.

Tax Wedge

The gap driven by a tax between the price buyers pay and the price sellers receive, which raises the buyer price, lowers the seller price, and reduces market quantity.

Tax Revenue

The amount collected by the government from a tax, equal to the tax per unit multiplied by the quantity sold ($T \times Q$).

Laffer Curve

A curve showing the relationship between the size of a tax and tax revenue, where revenue initially increases with tax size but eventually decreases as the tax becomes sufficiently large.

Externality

A type of market failure that arises when an action by an individual influences a bystander's well-being and no compensation is paid for that effect.

Negative Externality

An external effect whose impact on a bystander is adverse, causing the market equilibrium quantity to exceed the socially optimal quantity.

Positive Externality

An external effect whose impact on a bystander is beneficial, causing the market equilibrium quantity to be lower than the socially optimal quantity.

Social Cost

The full cost to society of producing a good, which includes both the private cost incurred by sellers and the external cost imposed on bystanders.

Social Value

The full value to society of consuming a good, which includes both the private value to buyers and the external benefit conferred upon bystanders.

Internalizing the Externality

Altering incentives so that people take into account the external effects of their actions (e.g., through taxes on negative externalities or subsidies on positive externalities).

Command-and-Control Policies

Government regulations that dictate behavior directly by requiring or forbidding specific behaviors, such as setting maximum pollution levels or mandating specific technologies.

Corrective Tax (Pigovian Tax)

A market-based tax designed to induce private decision makers to take into account the social costs that arise from a negative externality, ideally set equal to the external cost.

Tradable Pollution Permits

A market-based policy allowing firms to trade the right to emit pollution, which concentrates pollution reduction among firms with the lowest abatement costs.

Coase Theorem

The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own regardless of the initial distribution of rights.

Transaction Costs

The costs that parties incur in the process of agreeing to and following through on an economic bargain.

Total Revenue (TR)

The amount a firm receives for the sale of its output, calculated as price multiplied by quantity ($\text{TR} = P \times Q$).

Total Cost (TC)

The market value of the inputs a firm uses in production, equal to the sum of explicit and implicit costs ($\text{TC} = \text{FC} + \text{VC}$).

Profit

A firm's total revenue minus its total cost ($\text{Profit} = \text{TR} - \text{TC}$).

Explicit Costs

Input costs that require a direct outlay of money by the firm, such as paying wages or rent.

Implicit Costs

Input costs that do not require an outlay of money by the firm, such as the opportunity cost of the owner's time or financial capital.

Economic Profit

Total revenue minus total opportunity costs, including both explicit and implicit costs ($\text{Economic Profit} = \text{TR} - \text{Explicit Costs} - \text{Implicit Costs}$).

Accounting Profit

Total revenue minus total explicit costs, which exceeds economic profit because it ignores implicit costs.

Production Function

The relationship between the quantity of inputs used to make a good and the quantity of output produced of that good.

Marginal Product

The increase in output that arises from an additional unit of input, holding all other inputs constant.

Marginal Product of Labor (MPL)

The increase in output obtained from hiring an additional unit of labor ($\text{MPL} = \frac{\Delta Q}{\Delta L}$).

Diminishing Marginal Product

The property whereby the marginal product of an input declines as the quantity of that input increases, causing the production function to become flatter.

Fixed Costs (FC)

Costs that do not vary with the quantity of output produced, incurred even if the firm produces zero output.

Variable Costs (VC)

Costs that vary directly with the quantity of output produced.

Average Fixed Cost (AFC)

Fixed costs divided by the quantity of output ($\text{AFC} = \frac{\text{FC}}{Q}$).

Average Variable Cost (AVC)

Variable costs divided by the quantity of output ($\text{AVC} = \frac{\text{VC}}{Q}$).

Average Total Cost (ATC)

Total cost divided by the quantity of output ($\text{ATC} = \frac{\text{TC}}{Q} = \text{AFC} + \text{AVC}$), representing the cost of a typical unit of output.

Marginal Cost (MC)

The increase in total cost that arises from an extra unit of production ($\text{MC} = \frac{\Delta \text{TC}}{\Delta Q}$).

Efficient Scale

The quantity of output that minimizes average total cost, located where the marginal cost curve intersects the average total cost curve.

Economies of Scale

The property whereby long-run average total cost falls as the quantity of output increases, often due to specialization among workers.

Constant Returns to Scale

The property whereby long-run average total cost stays the same as the quantity of output changes.

Diseconomies of Scale

The property whereby long-run average total cost rises as the quantity of output increases, typically caused by coordination problems in large organizations.

Competitive Market

A market with many buyers and sellers trading identical products, such that each participant is a price taker and firms can freely enter or exit.

Price Taker

A buyer or seller in a competitive market who must accept the equilibrium market price as given.

Average Revenue (AR)

Total revenue divided by the quantity sold ($\text{AR} = \frac{\text{TR}}{Q}$); for competitive firms, $\text{AR} = P$.

Marginal Revenue (MR)

The change in total revenue from an additional unit sold ($\text{MR} = \frac{\Delta \text{TR}}{\Delta Q}$); for competitive firms, $\text{MR} = P$.

Shutdown

A short-run decision not to produce anything ($Q = 0$) during a specific period of time due to current market conditions, occurring when $P < \text{AVC}$.

Exit

A long-run decision to leave the market permanently, which eliminates all costs (both fixed and variable), occurring when $P < \text{ATC}$.

Sunk Cost

A cost that has already been committed and cannot be recovered, which rational decision makers ignore when choosing future courses of action.

Zero-Profit Condition

The state in long-run competitive equilibrium where free entry and exit drive economic profit to zero, characterized by $P = \text{MC} = \min(\text{ATC})$.

Excludability

The property of a good whereby a person can be prevented from using it.

Rivalry in Consumption

The property of a good whereby one person's use diminishes another person's ability to use the same unit of the good.

Private Goods

Goods that are both excludable and rival in consumption, such as food or clothing.

Public Goods

Goods that are neither excludable nor rival in consumption, such as national defense or basic research.

Common Resources

Goods that are rival in consumption but not excludable, such as ocean fish, clean water, or congested non-toll roads.

Club Goods

Goods that are excludable but not rival in consumption, such as cable television or uncongested toll roads.

Free Rider

A person who receives the benefit of a good but avoids paying for it, creating a market failure that prevents private markets from supplying public goods.

Cost-Benefit Analysis

A study that estimates and compares the total costs and benefits to society of providing a public good without market price signals.

Tragedy of the Commons

A parable illustrating why common resources are used more than is desirable from the standpoint of society as a whole because individuals neglect external costs.