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ECON 202: EXAM 2
Economic profit |
Total revenue- explicit cost- implicit cost
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Accounting profit |
Total revenue- explicit cost
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Profit |
=total revenue- total cost
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Normal profit |
The opportunity cost of capital. Equivalent to implicit cost
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Market structure |
The number and relative size of firms in an industry
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Perfect competition |
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 |
Many firms, a little market power
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Oligopoly |
A few firms, considerable market power
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Short run |
Characterized by fixed cost *cant change anything
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Long run |
*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 |
Reductions in minimum average costs that come through increases in the size of plants and equipment
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Diseconomies of scale |
If the plant size gets too big, long run AC begins to rise
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Production function |
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 |
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 |
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 |
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 |
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 |
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 |
Total cost divided by the quantity of output in a given time period * ATC= TC/q
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Average total cost |
Total cost divided by the quantity of output in a given time period * ATC= TC/q
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Average fixed cost |
Total fixed cost divided by the quantity of output in a given time period *AFC=FC/q
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Average variable cost |
Total variable cost divided by the quantity of output in a given time period *AVC =vc/q
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Falling AFC |
As output increases AFC decreases rapidly. Any increase in output will lower AFC
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U shaped AVC |
AVC decreases at first hits a minimum and then rises as output increases
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U shaped ATC |
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 |
* 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 |
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 |
The price of factor inputs Technology Expectations Taxes and subsidies
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Supply shifts |
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 |
* 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 |
The most desirable combination of output attainable using existing resources, technology, and social values
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Market failure |
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 |
A good or service whose consumption by one person excludes consumption by others
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Public good |
A good or service whose consumption by one person does not exclude consumption by others
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Free rider dilemma |
The communal nature of public goods may cause some consumers to try for a free ride
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Free rider |
An individual who reaps direct benefits from someone else's purchase (consumption) of a public good
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Government failure |
Government intervention fails to improve economic outcomes and may worsen outcomes
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Public choice |
A theory of public sector behavior emphasizing rational self interest of decision makers and voters
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Income taxes |
The largest single source of government revenue Progressive tax system As income rises, tax rate rises
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Social security tax |
A regressive tax system As income rises, tax rate falls
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Corporate taxes |
Usually passed on to the customer in higher prices A progressive tax system
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Excise taxes |
Imposed on a specific good or service Some are imposed to discourage production and consumption of these goods
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Property tax |
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 |
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 |
A two party transaction occurs, but there are costs borne by a third party
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Positive externality |
Third party benefits because of market transaction Government should intervene Ex: vaccines
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Negative externalities |
Third parties are hurt because of market transaction Ex: pollution
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Market power |
The ability of a firm to manipulate the price of a good in a market
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Income redistribution |
Reduces the inequality in incomes Provides a minimum amount of merit goods
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Merit good |
A good society believes everyone is entitled to some minimal quantity of
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Opportunity cost of taxation |
Measured by the private sector output sacrificed when government employs scarce factors of production
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In-kind income |
Goods and services received directly ( not via a market transaction) Ex: food stamps, Medicaid, housing subsidies
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Progressive tax |
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. Reduces inequality but also affect efficiency
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Vertical equity |
People with higher incomes should pay more taxes than people with lower incomes
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Horizontal equity |
People with equal incomes should pay equal taxes
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Tax incidence |
Where the real burden of a tax falls
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Proportional tax system |
The percentage of income going to taxes is the same no matter what the income
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Transfer payment |
Paid out by government to people who have determined to be eligible to receive the payment
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Marginal physical product (MPP) |
The change in total output associated with one additional unit of input
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Economic cost of production |
The opportunity cost of production
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Lorenz curve |
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 |
The shortfall between actual income and the poverty threshold
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Optimal mix of output |
The most desirable combination of output attainable with existing resources, technology, and social values
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Proportional tax |
Tax that levies the same rate on every dollar income
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Regressive tax |
Tax rates fall as income rises. Ex: social security taxes
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