Economic Concepts: Taxation, Externalities, and Monopoly

Deadweight Loss (DWL)

Reduction in total surplus due to market distortion.

Total Surplus (TS)

Sum of consumer surplus and producer surplus.

Consumer Surplus (CS)

Difference between willingness to pay and actual payment.

Producer Surplus (PS)

Difference between actual payment and minimum acceptable price.

Tax Revenue

Income generated from taxation on goods/services.

Price Elasticity of Supply

Responsiveness of quantity supplied to price changes.

Price Elasticity of Demand

Responsiveness of quantity demanded to price changes.

Inelastic Supply

Small quantity change with price change; steep supply curve.

Elastic Supply

Large quantity change with price change; flat supply curve.

Inelastic Demand

Small quantity change with price change; steep demand curve.

Elastic Demand

Large quantity change with price change; flat demand curve.

Laffer Curve

Illustrates relationship between tax rates and tax revenue.

DWL and Tax Size

DWL increases more than proportionally with tax size.

DWL Calculation Formula

DWL = ½ x (PB - PS) x (Qold - Qnew).

Tax Revenue Calculation

Tax Revenue = (PB - PS) * Qnew.

Impact of High Tax

Higher taxes significantly increase DWL and reduce revenue.

Impact of Low Tax

Low taxes have minimal effect on DWL and revenue.

Externality

Uncompensated impact of one person's actions on others.

Surplus-Maximizing Quantity

Quantity where total surplus is maximized.

DWL in Elastic Markets

Greater DWL when demand or supply is elastic.

DWL in Inelastic Markets

Smaller DWL when demand or supply is inelastic.

Tax Increase Effects

Increasing tax can raise or lower tax revenue depending on size.

Negative Externality

Costs imposed on third parties by production.

Positive Externality

Benefits received by third parties from production.

Social Cost

Private cost plus external cost of production.

Private Cost

Cost incurred directly by producers.

Socially Optimal Quantity (Qsocial)

Quantity accounting for external costs or benefits.

Socially Optimal Price (Psocial)

Price reflecting social costs or benefits.

Private Value

Value derived by consumers from consumption.

Explicit Cost

Direct monetary outlay for production.

Implicit Cost

Opportunity costs not involving direct payment.

Accounting Profit

Total revenue minus explicit costs.

Economic Profit

Total revenue minus total costs (explicit + implicit).

Marginal Product of Labor (MPL)

Change in output per additional labor unit.

Law of Diminishing Returns

Marginal product decreases as input quantity increases.

Fixed Cost (FC)

Costs that do not change with output level.

Variable Cost (VC)

Costs that vary directly with output level.

Total Cost (TC)

Sum of fixed and variable costs.

Average Total Cost (ATC)

Total cost divided by quantity produced.

Marginal Cost (MC)

Change in total cost from one additional unit.

Efficient Scale

Output level minimizing average total cost.

Short Run Costs

Costs with some fixed inputs.

Long Run Costs

Costs with all inputs variable.

Corrective Tax

Tax imposed to internalize negative externalities.

Corrective Subsidy

Subsidy provided to internalize positive externalities.

Economies of scale

Average Total Cost (ATC) decreases as Quantity (Q) increases.

Constant returns to scale

ATC remains constant as Quantity (Q) increases.

Diseconomies of scale

ATC increases as Quantity (Q) increases.

Perfect competition

Market structure with many buyers and sellers.

Price takers

Firms cannot influence market price.

Total revenue (TR)

Total income from sales, TR = P * Q.

Average revenue (AR)

Revenue per unit sold, AR = P.

Marginal revenue (MR)

Change in total revenue from selling one more unit.

Profit maximizing quantity

Quantity where Marginal Revenue (MR) equals Marginal Cost (MC).

Shutdown decision

Short-run choice to stop production temporarily.

Exit decision

Long-run choice to leave the market entirely.

Shutdown condition

Firm shuts down if Price (P) < Average Variable Cost (AVC).

Exit condition

Firm exits if Price (P) < Average Total Cost (ATC).

Sunk cost

Cost that cannot be recovered.

Profit calculation

Profit = (P - ATC) * Q.

Loss calculation

Loss = (ATC - P) * Q.

Short-run supply curve

SR curve reflects current market conditions.

Long-run supply curve

LR curve reflects zero economic profit.

Market supply assumptions

Identical costs and fixed number of firms in SR.

Long-run equilibrium

Condition where Price (P) equals minimum ATC.

Horizontal LR supply curve

Occurs if all firms have same costs.

Upward sloping LR supply curve

Occurs if costs change with firm entry/exit.

Economic Profit

Revenue minus all costs, including implicit costs.

Accounting Profit

Revenue minus explicit costs only.

Zero Profit Condition

Economic profit equals zero; accounting profit positive.

Short-Run Supply Curve Shift

New firms enter if existing firms earn profit.

Long-Run Equilibrium

Occurs when P equals minimum average total cost.

Demand Increase Effect

Short-run profit leads to long-run equilibrium restoration.

Upward Sloping LR Supply Curve

Firms have different costs or rising costs with entry.

Monopoly Definition

Sole seller of a product with no close substitutes.

Market Power

Ability to influence market price by a firm.

Barrier to Entry

Obstacles preventing new firms from entering a market.

Key Resource Ownership

Single firm controls essential resource, creating monopoly.

Government Grant

Exclusive rights like patents create monopolistic conditions.

Natural Monopoly

Single firm produces entire market quantity at lower cost.

Monopoly Demand Curve

Downward sloping due to price reduction for higher quantity.

Marginal Revenue (MR) in Monopoly

MR is less than price due to downward sloping demand.

Profit Maximizing Quantity

Occurs when marginal revenue equals marginal cost (MR=MC).

Monopoly Price

Price at profit maximizing quantity on demand curve.

Monopoly Profit Formula

(Price - ATC) multiplied by quantity sold.

Deadweight Loss (DWL)

Loss of economic efficiency when equilibrium is not achieved.

Price Discrimination

Selling same good at different prices to different buyers.

Perfect Price Discrimination

Monopolist charges each buyer their maximum willingness to pay.

Consumer Surplus (CS)

Difference between what consumers are willing to pay and what they pay.

DWL in Price Discrimination

Zero deadweight loss when monopolist captures all consumer surplus.

Antitrust law

Legal framework to promote competition.

Regulation

Government controls prices set by firms.

Natural monopolies

Firms with decreasing average total costs.

Marginal Cost (MC)

Cost of producing one additional unit.

Subsidy

Financial support to reduce losses.

Public ownership

Government ownership of resources and firms.

Deadweight Loss (DWL)

Loss of economic efficiency due to market distortion.

External cost

Cost imposed on third parties not involved.

Market equilibrium

Point where demand equals supply.

Social optimal production

Quantity where social costs equal social benefits.