Chapter 10, 11, 16, 12, and 13
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| Externality | The uncompensated impact of one person’s actions on the well-being of a bystander
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| If the impact on the bystander is adverse, we say that there is a _ externality. | negative
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| If the impact on the bystander is beneficial, we say that there is a _ externality. | positive
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| In either a beneficial or adverse situation, decision makers fail to take account | external effects of their behavior
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| The demand curve for a good reflects | The value of that good to consumers, measured by the price that the marginal buyer is willing to pay
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| The supply curve for a good reflects | The cost of producing that good
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| In a free market | the price of a good brings supply and demand into balance in a
way that maximizes total surplus
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| Total surplus | The difference between the consumers’ valuation of the good and the sellers’ cost of producing it
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| Internalizing an externality | Altering incentives so that people take account of the external effects of their actions.
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| Positive externality | The social value of the good is greater than the private value, and the optimal quantity will be greater than the quantity produced
in the market
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| Negative externality | The social cost exceeds the private cost paid by producers
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| When an externality causes a market to reach an inefficient allocation of resources, the government can respond in two ways | 1. Command-and-control policies regulate behavior directly.
2. Market-based policies provide incentives so that private decision makers will choose to solve the problem on their own
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| Command-and-Control Policies (Regulation) means externalities | Can be corrected by requiring or forbidding certain behaviors.
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| Externalities can be internalized through | The use of taxes and subsidies
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| Corrective tax | A tax designed to induce private decision makers to take account of the social costs that arise from a negative externality.
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| 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.
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| Transaction costs | The costs that parties incur in the process of agreeing and following through on a bargain.
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| Excludability | The property of a good whereby a person can be prevented from using it
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| Rivalry in consumption | The property of a good whereby one person’s use diminishes other people’s use
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| Private goods | Goods that are both excludable and rival in consumption.
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| Public goods | Goods that are neither excludable nor rival in consumption
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| Common resources | Goods that are rival in consumption but not excludable.
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| Club goods | Goods that are excludable but not rival in consumption
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| Public goods and common resources each create | Externalities because they have, value yet have no price because they are not sold in the marketplace. These external
effects imply that market outcomes will be inefficient in the absence of government involvement or private resolutions.
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| Free rider | A person who receives the benefit of a good but avoids paying for it.
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| Cost-benefit analysis | A study that compares the costs and benefits to society of providing a public good.
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| Tragedy of the Commons | A parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole
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| The goal of a firm is to | Maximize profit.
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| Total revenue | The amount a firm receives for the sale of its output
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| Total revenue formula | Total Revenue = Price Quantity
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| Total cost | The market value of the inputs a firm uses in production
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| Profit | Total revenue minus total cost.
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| Opportunity cost | The cost of something is what you give up to get it
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| The costs of producing an item must include | all of the opportunity costs of inputs used in production (implicit and explicit)
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| explicit costs | input costs that require an outlay of money by the firm
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| implicit costs | Input costs that do not require an outlay of money by the firm
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| explicit costs | Input costs that require an outlay of money by the firm
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| The total cost of a business is | The sum of explicit costs and implicit costs
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| Economic profit | Total revenue minus total cost, including both explicit and implicit costs
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| Accounting profit | Total revenue minus total explicit cost
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| If implicit costs are greater than zero | Accounting profit will always exceed economic profit
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| Production function | The relationship between quantity of inputs used to make a good and the quantity of output of that good.
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| Marginal product | The increase in output that arises from an additional unit of input
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| Formula for marginal product of labor | change in output / change in labor
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| Diminishing marginal product | The property whereby the marginal product of an input declines as the quantity of the input increases.
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| Average total cost | Total cost divided by the quantity of output
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| Average fixed cost | Fixed costs divided by the quantity of output.
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| Average variable cost | Variable costs divided by the quantity of output.
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| marginal cost | the increase in total cost that arises from an extra unit of production
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| Marginal cost formula | change in total cost / change in output
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| Average total cost curve | U-shaped
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| Marginal Cost curve | Rising
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| Efficient scale | The quantity of output that minimizes average total cost
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| The Relationship between Marginal Cost and Average Total Cost | When marginal cost is less than atc, atc is falling,
-When marginal cost is greater than atc, atc is rising.
-The marginal-cost curve crosses the atc at minimum atc.
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| economies of scale | The property whereby long-run average total cost falls as the quantity of output increases
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| diseconomies of scale | the property whereby long-run average total cost rises as the quantity of output increases
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| constant returns to scale | the property whereby long-run average total cost stays the same as the quantity of output changes
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