65 Cards in this Set
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Economic profit
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Total revenue- explicit cost- implicit cost
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Accounting profit
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Total revenue- explicit cost
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Profit
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=total revenue- total cost
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Normal profit
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The opportunity cost of capital. Equivalent to implicit cost
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Market structure
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The number and relative size of firms in an industry
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Perfect competition
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A market in which no buyer or seller has market power *low entry barrier *no firm has any market power
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Monopolistic competition
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Many firms, a little market power
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Oligopoly
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A few firms, considerable market power
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Short run
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Characterized by fixed cost *cant change anything
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Long run
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*A period of time that we can change inputs *long run average cost- as plant size gets larger , each plants ATC curve has a lower min point
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Economics of scale
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Reductions in minimum average costs that come through increases in the size of plants and equipment
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Diseconomies of scale
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If the plant size gets too big, long run AC begins to rise
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Production function
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A technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs
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Law of diminishing returns
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The marginal physical product of a variable input declines as more of its employed with a given quantity of other (fixed) inputs
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Marginal cost
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The increase in total cost associated with one unit increase in production = change in total cost/ change in output
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Total cost
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The market value of all resources used to produce a good or service *everything that your business has to pay out =fixed cost + variable cost
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Fixed cost
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Cost of production that don't change when the rate of output is altered ( rent, electricity) * do not increase as output increases
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Variable costs
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Cost of production that change when the rate of output is altered * with how many units you produce
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Average total cost
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Total cost divided by the quantity of output in a given time period * ATC= TC/q
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Average total cost
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Total cost divided by the quantity of output in a given time period * ATC= TC/q
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Average fixed cost
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Total fixed cost divided by the quantity of output in a given time period *AFC=FC/q
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Average variable cost
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Total variable cost divided by the quantity of output in a given time period *AVC =vc/q
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Falling AFC
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As output increases AFC decreases rapidly. Any increase in output will lower AFC
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U shaped AVC
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AVC decreases at first hits a minimum and then rises as output increases
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U shaped ATC
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At low output, falling AFC dominates and ATC decreases. As output increases, rising AVC begins to dominate. ATC hits a min then begins to rise
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Production decisions
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* a firms goal is to maximize profits, not revenue *the goal is to find the output that maximizes profit *never produce a unit of output that yields less revenue than it cost * as output increases marginal cost increases P>MC = add profit P
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Profit maximization rule
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Produce at that rate of output where marginal revenue equals marginal cost Perfectly competitive firms, P>MC (increase output and profits will grow) P
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Determinates of supply
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The price of factor inputs Technology Expectations Taxes and subsidies
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Supply shifts
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If any determinant of supply changes the supply curve shifts * a change that lowers cost will cause curve to shift right * a change that raises cost will cause curve to shift left
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Characteristics of perfect competition
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* many firms, all small * perfect information * identical products * profit maximized at MC=P * low barrier to entry and exit * zero economic profit
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Optimal mix of output
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The most desirable combination of output attainable using existing resources, technology, and social values
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Market failure
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An imperfection in the market mechanism that prevents optimal outcomes Sources of market failure: Public goods Externalities Market power Inequality
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Private good
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A good or service whose consumption by one person excludes consumption by others
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Public good
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A good or service whose consumption by one person does not exclude consumption by others
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Free rider dilemma
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The communal nature of public goods may cause some consumers to try for a free ride
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Free rider
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An individual who reaps direct benefits from someone else's purchase (consumption) of a public good
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Government failure
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Government intervention fails to improve economic outcomes and may worsen outcomes
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Public choice
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A theory of public sector behavior emphasizing rational self interest of decision makers and voters
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Income taxes
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The largest single source of government revenue Progressive tax system As income rises, tax rate rises
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Social security tax
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A regressive tax system As income rises, tax rate falls
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Corporate taxes
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Usually passed on to the customer in higher prices A progressive tax system
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Excise taxes
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Imposed on a specific good or service Some are imposed to discourage production and consumption of these goods
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Property tax
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Major source of local tax A regressive tax , since poorer people devote a larger portion of their income to housing costs
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Sales tax
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Major source of local tax A regressive tax, since poorer people tend to spend all their income while richer people do not
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Externalities
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A two party transaction occurs, but there are costs borne by a third party
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Positive externality
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Third party benefits because of market transaction Government should intervene Ex: vaccines
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Negative externalities
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Third parties are hurt because of market transaction Ex: pollution
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Market power
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The ability of a firm to manipulate the price of a good in a market
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Income redistribution
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Reduces the inequality in incomes Provides a minimum amount of merit goods
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Merit good
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A good society believes everyone is entitled to some minimal quantity of
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Opportunity cost of taxation
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Measured by the private sector output sacrificed when government employs scarce factors of production
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In-kind income
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Goods and services received directly ( not via a market transaction) Ex: food stamps, Medicaid, housing subsidies
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Progressive tax
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A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate…
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Vertical equity
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People with higher incomes should pay more taxes than people with lower incomes
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Horizontal equity
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People with equal incomes should pay equal taxes
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Tax incidence
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Where the real burden of a tax falls
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Proportional tax system
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The percentage of income going to taxes is the same no matter what the income
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Transfer payment
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Paid out by government to people who have determined to be eligible to receive the payment
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Marginal physical product (MPP)
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The change in total output associated with one additional unit of input
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Economic cost of production
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The opportunity cost of production
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Lorenz curve
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Graphic illustration of the cumulative size distribution of income, it contrasts complete equality with the actual distribution of income
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Poverty gap
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The shortfall between actual income and the poverty threshold
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Optimal mix of output
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The most desirable combination of output attainable with existing resources, technology, and social values
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Proportional tax
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Tax that levies the same rate on every dollar income
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Regressive tax
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Tax rates fall as income rises. Ex: social security taxes
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ECON 202: STUDY GUIDE