Chapter 6
What are the 2 types of Price Controls? and what do they do
Price Ceiling- The maximum price one can set
Price Floor- The lowest price one can set
What are externalities?
Positives or negatives coming from the market that affects a third party
What is the difference between ordinal and cardinal utility? and which do economists use?
Ordinal utility means that we can rank goods in order but can't say by how much more we like it than the other
While Cardinal utility means that we can rank goods and KNOW by how much more we like it
Economists use Ordinal Utility as it is much harder to figure out how much more we like something than another but we can tell when we like something over another thing
What is Explicit and Implicit costs? How do we use them when we calculate Accounting and Economic Profit?
Explicit Costs- Tangible, out of pocket costs (labor wages)
Implicit costs- not actual costs, rather the opportunity costs that we miss out on (renting land to others)
Accounting profit= Revenue- Explicit costs
Economic profit= Revenue-Explicit costs-Implicit
or
EP=Accounting profit-Implicit costs
What are the conditions needed for a competitive market?
Many buyers and sellers, similar (identical) goods, free entry and exit, everyone is a price taker
What are the 2 types of Price Ceilings? What do they mean?
Binding and Non-binding
Binding- restricts the amount of output a company can put (shortage)
Non-Binding- Above equlibrium meaning that it doesn't matter to the firm
What are the 3 costs in Externalities? What do they mean? What is their formula?
Internal(private) costs, External Costs, Social Costs
Internal(private) costs- costs absorbed by the firm (Market Quantity)
External Costs- unaccounted for costs that affect others (pollutuion for neg externality)
Social Costs- the efficient point of production; absorbing the externality (Efficient Quantity)
MSC=MPC+MEC
What do consumers preferences have to be in order to represent them in a utility function? what do they mean?
Consumers preferences must be complete and transitive
Complete means that they can always rank the goods
Transitivity eliminates cyclical preferences ( If A>B and B>C then A>C)
What is diminishing marginal product? What is the formulas?
Occurs when successive increases in inputs are associated with a slower rise in output
(e.g cooks in a kitchen)
Q=F(K,L)
MPL= change in Q/ change in L
MPK=Change in Q/Change in K
What is the profit maximizing rule?
MR= Change in TR/ Change in Q
MC= Change in TC/ Change in Q
MProfit= Change in profit/ Change in Q or MProfit=MR-MC
Profit maximizing is choosing an output leve in which MR=MC
If MR>MC produce more till MR=MC
MR<MC don't produce that unit
at profit Max P=MR=MC
In the long-run Supply and Demand curves become more elastic, what happens to a binding price ceiling?
What are property rights? What do they help with?
Property rights establish who is the owner of the area and to have the ability to exercise control over a resource
Property rights help with Coase Theorem, by establishing property rights we can see who is in need of solving a problem when it arises (e.g fishery and polluting firm)
What is the last dollar rule? (e.g "bang per buck")
MUx/Px=MUy/Py
Allocating ones income by choosing goods that give you the most utility per dollar spent
goal is to reach the above formula; ergo bang per buck
How do we calculate Total costs, Total Revenue? the 2 ways to calculate Profits? the 2 ways to calculate Average total costs? Marginal Costs?
TC=VC+FC
TR=P*Q
Profit=TR-TC or Profit=(P-ATC)*Q
ATC=TC/Q or ATC=AVC+AFC
MC= Change in TC/ change in Q
When and where does a firm decide to shut down? Exit the market?
A firm decides to shut down in the short run when AVC>P
A firm decides to exit the market in the long run when its ATC>P
What are the 2 types of price floors? what do they mean? What about in the long-run?
Binding and non-binding
Binding- is above the equilibrium forcing firms to pay more with less demand (Surplus) (e.g unemployment)
Non-binding- below the equilibrium point resulting on it not changing anything
In the long-run the curves will be more elastic resulting in a larger surplus
How can we differentiate between private and public goods?
Whether they are rivalrous and excludable or not
What is the tangency rule?
-(Px/Py)=MRS
MRS is usually negative
What are some of the differences in the graphs of short run and long run? At what point does both graphs reach Q efficient?
Short run has fixed costs separating the ATC and AVC, while long run has no fixed costs resulting in one curve which is ATC=AVC
At the lowest point in which the marginal cost intersects the ATC and AVC
What are sunk costs? what is the sunk cost fallacy?
Sunk costs are unrecoverable costs that have been incurred as a result of past decisions
The sunk costs fallacy is considering the sunk costs when making new decisions at the margin
What is Price-Gouging? does it have any consequences?
Price-Gouging is the adding of price-ceilings during emergencies, to make sure people can acquire them.
Some of the consequences is that it can lead to a shortage after the emergency, it will lead to people buying more than they need to resell them for a higher price as the demand is high.
What is a cost-benefit analysis? Is it easy to do this?
It is a process to determine whether the benefits of providing a public good outweigh the costs
It is not a simple process as people might misrepresent the value of the good to them
What is utility maximization? What is the budget equation
Px*X+Py*Y=M
y=M/Py-((Px*X)/Py)
M stands for budget (could be I as well)
What does returns to scale show us? what are the 3 types and what do they say?
Returns to Scale (RTS) shows us the effect on output when we increase production
Constant, increasing, decreasing RTS
Constant RTS- doubling both K & L doubles Q
Increasing RTS- Doubling K&L more than doubles Q
Decreasing RTS- Doubling K&L increases Q by less than double
Would firms ever operate at a loss, if so in which run?
Firms would operate at a loss in the short run as long as they can cover some of their fixed costs which lies above their Variable costs
In the long run as they have no fixed costs (everything is able to be adjusted) meaning that if their is a sense of loss the firm would rather exit the market