Econ Midterm Notes 2

Chapter 8

• What are externalities?: When the market system fails to produce an efficient level of output because of these side effects even if the economy is competitive it’s still possible that the market system fails

• What are positive externalities?: When benefits spill over to an outside party who is not involved in producing or consuming the good bc the private market supplies too little of the good in question. Ex: Education

• What are negative externalities?: When costs spill over to an outside party who is not involved in producing or consuming the good. Ex: pollution, if the firm uses clean air in production and returns dirty air to the atmosphere

• How are both externalities caused?: By economic agents-producers and consumers-receiving the wrong signals

• Why is deadweight loss associated with underproduction?: Too little of the good is produced because producers are unable to collect payments from all those who benefit from the good or service, the market has a tendency to underproduce (under allocation of resources)

• What is a technology spillover?: A positive externality. One’s firm research and production can spill over to increase another firm’s access to technological advances. Technology spills are difficult to measure. Patent protection is one way to deal with technology spillovers: the firm that makes a technological breakthrough can capture most of the profits

• What are the two methods society can correct for market failure to capture positive externalities?: Subsidies: government produces either give refunds to individual who receives an inoculation or provide an incentive for businesses to give their employees “free inoculations at the office. Regulation: the government could pass this requiring each person to get an inoculation, shift the demand curve rightward toward the efficient level of output.

  • Self-regulation: sometimes externality problems can be handled by individuals without the intervention of the government. Self-regulation is also applied to positive externalities. Ex: philanthropists: frequently donate money to public and private schools

• When can decisions on the desirable combination of goods to consume be made properly?: When considering: additional cost, additional benefit of increased consumption of all goods

• What is one approach to dealing with externalities?: Require private enterprises to produce their outputs in a manner that would reduce negative externalities

• What is another approach to dealing with externalities?: Taxes, internalize external costs and allows the relatively efficent private sector to operate according to market forces in a manner that takes socially important spillover costs into account. Objection: difficult to measure externalities with any precision

• What are transferable pollution rights? And what effect does it have on firms?: The government issues this that gives the holder the right to discharge a specified amount (smaller than the uncontrolled amount) of pollution into the air. Firms then have the incentive to lower their levels of pollution because they can sell their permits if they go unused

Barriers to Entry

1. For a monopoly to persist, it must be virtually impossible for other firms to overcome barriers to entry

2. Barriers to entry

   1. Legal barriers

   2. Economies of sales

• Compare and contrast perfectly competitive firms' demand curve and monopolists' demand curve

• Section 13.3 Exhibit 2, Total Revenue”: D, A, Qm, 0 that whole section

  • C, B, Qm, 0 (the area that represents the total cost)

• If you're covering AVC

• Some argue that a lack of competition retards the technological advance

• Two major approaches to dealing with the monopoly problem: antitrust policies, regulation

• Market power: Price discrimination is possible only with market power.

• Difficulty in Reselling: For price discrimination work, the purchaser buying the product…

• The strong correlation between education learning and earnings

• Government can help the less affluent by using government revenues

• Taxes on the emission of polluting firms are primarily intended to: Encourage firms to pollute less

• An ideal corrective tax: Forces a firm to internalize the externality

• If compliance standards are too stringent: The marginal social cost of pollution reducation may outweigh the marginal social benefit of pollution reduction

• An advantage that corrective taxes and tradable emissions permits have over compliance standards if that the former: Makes it in the interest of firms to reduce pollution in the most efficent manner possible

• Transferable pollution rights: Rights are given to a firm to discharge a specific amount of pollution; their transferable nature creates incentive to lower pollution leve

• What is coase theorem?: Benefits are greater than the costs for some course of action (ex: environmental cleanup), potential transactions can make some people better off without making anyone worse off. Where property rights are defined in a clear-cut fashion, and externalities are internalized if transaction costs are low. Can lead to optimal allocation of resources if private parties can bargain at relatively low costs

• What is private good?: A good with rivalrous consumption and excludability. Ex: cheeseburger, food, clothing, cars, and houses

• What is a public good?: A good that is nonrivalrous in consumption and nonexludable. Ex: national defense (everyone enjoys the benefits of national defense). Another source of market failure. As used by economists, this term refers not to how these particular goods are purchased-by a government agency rather than some private economic agent-but to the properties that characterize them

• What is a free ride problem?: Someone who derives benefits from something not paid for

• What is a common resource?: A good that is rival in consumption and nonexlucadable. Ex: fish (in the vast ocean waters rival because fish are limited-a fish taken by one person is not available for others). And they are nonexcludable because prohibitively costly to keep anyone from catching them-almost anyone with a boat and a fishing rod could catch one

• What is a club good?: Goods that are nonrival in consumption and excludable. Ex: country clubs and tennis clubs

• What is asymmetric information?: When the available information is initially distributed in favor of one party relative to another in an exchange. Ex: customer buying used car and seller knowing more information

• What is adverse selection?: A situation where an informed party benefits in an exchange by taking advantage of knowing more than the other party

• What is moral hazard?: Taking additional risks because you are insured, thus lowering the cost to you of taking those risks

Chapter 9

• What is mandatory spending?: Government spending that is committed for the long run. Ex: social security, medicare, medicaid

• What is discretionary spending?: Includes programs that can be altered on an annual basis, when the government proposes a new budget. Ex: ports, bridges, defense spending

• What is a progressive tax?: Tax designed so that a larger percentage of taxable income is taken as taxable income increases. Those with higher incomes pay a greater portion of their income in taxes

• What is a regressive tax?: A tax designed so that a smaller percentage of taxable income is taken as taxable income increases (payroll tax). FICA

• What is a excise tax?: A sales tax on individual products such as alcohol, tobacco, and gasoline. Most unfair

• What is a proportional tax?: A tax that charges all income earners the same percentage of their income. Also known as a proportional tax

• What is the ability-to-pay principle?: The belief that those with the greatest ability to pay taxes should pay more than those with less ability pay

• What is vertical equity?: The concept that people with different levels of income should be treated differently

• What is the benefits-recieved principle?: The individuals receiving the benefits are those who pay for them. Ex: gasoline tax: the more miles one drives on the highway, the more gasoline used and the more taxes collected

• What is public choice theory?:The application of economic principles to politics

• What is the median voter model?: A model that predicts candidates will choose a position in the middle of the distribution

• What is rational ignorance?: Lack of incentive to be informed

• What is special interest groups?: Groups with an intense interest in particular voting issues that may be different from that of the general public

• What is logrolling?: Exchanging votes to get support for legislation

Chapter 10

• What is the substitution effect?: A consumer’s switch to another similar good when the price of the preferred good increases

• What is the income effect?: The reduction in quantity demanded of a good when its price increases because of a consumer’s decreased purchasing power

• What is diminishing marginal utility?: A good’s ability to provide less satisfaction with each successive unit consumed. Ex: a second ice cream

• What is utility?:A measure of the relative levels of satisfaction consumers get from consumption of goods and services

• What is util?: One unit of satisfaction

• What is total utility?: Total amount of satisfaction derived from the consumption of a certain number of goods and services. Ex: eating whole pizza

• What is marginal utility?: Extra satisfaction generated by consumption of an additional good or service during a specific time period. Ex: eating another slice of pizza

• What is consumer equilibrium?: To achieve maximum satisfaction-consumers have to allocate income in such a way that the ratio of the marginal utility to the price of the goods is equal for all goods purchased.

• What is behavioral economics?: A field of economics that incorporates insight from human psychology into the models of economic

• What is compartmentalizing?: They are storing the gift and the money earned from hard work in different parts of the brain

• What is anchoring?: Another framing bias: people will often tend to make their decisions based on pieces of information they are already given

• What is the endowment effect?: When we own something, we typically value it more than other people do

Chapter 11

• What is explicit costs?: The opportunity cost of production that require a monetary payment

• What is implicit costs?: The opportunity cost of production that do not require a monetary payment

• Profits: The difference between total revenues and total costs

• Accounting profits: Total revenues minus total explicit costs

• Economic profits: Total revenues minus explicit and implict costs

• Sunk costs: Costs that have been incurred and cannot be recovered

• Short run: A period too brief for some production inputs to be varied

• Long run: A period over which all production inputs are variable

• Production function: The relationship between the quantity of inputs and the quantity of outputs produced

• Total production (TP): The total output of a good produced by the firm

• Marginal product (IMP): The change in total output of a good that results from a one-unit change in input

• Fixed costs (FC): Costs that do not vary with the level of output

• Variable costs: Costs that vary with the level of output

• Total cost (TC): The sum of the firms fixed costs and variable costs

• Average total cost (ATC): A per-unit cost of operation; total cost divided by output

• Average fixed costs (AFC): A per-unit measure of fixed costs; fixed costs divided by output

• Average variable cost (AVC): A per unit measure of variable costs; variable costs divided by output

• Marginal cost (MC): The change in total costs resulting from a one-unit change in output

• economies of scale: economies that occur in an output range where LRATC falls as output increases

• diseconomies of scale: diseconomies that occur in an output range where LRATC rises as output expands

• constant returns to scale: returns that occur in an output range where LRATC does not change as output varies

• average revnue (AR): total revenue divided by the number of units sold AR=TR/q

• marginal revnue (MR): the increase in total revenue resulting from a one-unit increase in sales

• profit maximizing level of output: a firm should always produce at the output where MR=MC

• Short run supply curve: the portion of the MC curve above the AVC curve

• short run market supply curve: the horizontal summation of the individual firms supply curves in the market

• constant-cost industry: an industry where input prices (and cost curves) do not change as industry output changes

• increasing-cost industry: an industry where input prices rise (and cost curves rise) as industry output rises

• decreaing cost industry: an industry where input prices fall (and cost curves fall) as industry output rises

• productive efficency: where a good or service is produced at the lowest possible cost

• allocative efficency: where P=MC and production will be allocated to reflect consumer preferences

• monopoly: the single supplier of a product that has no close substitute

• natural monopoly: a firm that can produce at a lower cost than several smaller firms can

• average cost pricing: setting price equal to average total cost

• price discrimination: the practice of charging different consumers different prices for the same good or service

• in-kind transfers: transfers in the form of goods and services instead of money, including food stamps, school lunch programs, housing subsidies, and Medicad, among others

• Job-entry discrimination: when a worker is denied employment on the basis of some biological feature, such as sex or race, apart from differences in productivity

• wage discrimination: when a worker is given employment at a wage lower than that of other workers, based on something other than productivity

• poverty rate: the percentage of the population who fall below the poverty line

• poverty line: a set of money income thresholds, established by the federal government, that vary by family size, and used to detect who is poor; if a family’s total income is less than the established family threshold, then that family, and every individual in it, is considered poor

• cash transfers: direct cash payments such as welfare, Social Security, and unemployment compensation

• Supplemental Security Income (SSI): a welfare program designed for the most needy, elderly, disabled, and blind

• Temporary Assistance for Needy families (TANF): a welfare program designed to help families that have few financial resources

• earned income tax credit (EITC): a welfare program that allows the working poor to receive income refunds that can be greater than the taxes they paid during the last year

• means-tested income transfer program: a program in which eligibility is dependent on low income, food stamps, Medicad, and housing subsidies are examples of means-tested income transfer programs

• the price effect: the monopolist received additional revenue from the new unit sold

• the output effect: but less revenue on all the units it was previously was selling

• no price effect for the perfectly competitve firm