ECON 2010 Midterm 2

price of a good that prevails in the world market for that good

domestic price < world price

• take world price as given
• usually: small economy, will not effect world markets

• 
• D = gains from trading

• 
• D = gains from trading

tax on imports

altering incentives so that agents take account of the external effects of their actions

• Command and Control
• Market-Based Solution

enforced regulations (only x pollutants, adopt y technology, etc)

• corrective tax: Pigouvian tax
• makes market produce at optimal level

• give pollutant permits
• govt auctions off pollution permits
• free trade between companies for permits
• *similar to Command/Control, but can trade

positive externality

tax (tau) = externality (e)

• if government gives property rights to someone
• let consumers bargain w/o transaction cost
• will reach optimal condition
• Coase Theorem

• property of a good whereby a person can be excluded from using it
• i.e. not air, not natl defense

property whereby one person's use diminishes other peoples' use

• excludable AND rivalry in consumption
• i.e. food, cothing, congested toll roads

• neither excludable NOR rivalry in consumption
• i.e. national defense, uncongested toll roads

• only rivalry in consumption
• i.e. fish, willife, natl resources

• only excludable
• i.e. cable tv, fire protection

person who receives benefits without payingq

parable that says why common resources are used more than desirable from the standpoint of a society as a whole

• Accounting - only explicit costs
• Economics - also takes into account implicit costs (i.e. opportunity costs)

amount firm receives for the sale of its product

relationship between quantity of inputs used to make a good and quantity of output

increase in output from an additional unit produced

• Line = total cost
• m = slope = marginal cost

costs that do not vary with the quanitty produced

costs that vary with the quantity produced

increase in total cost that arises from an extra unit produced

• where MC intersects ATC at lowest point
• (do not neccessarily produce there)

Fixed costs exist

Only variable costs

• competitive market
• monopoly
• MR = MC

increase production

decrease production

optimal production

• cost that has already been committed and cannot be recovered
• only short-run

• losses: TR
• saves: VC
• will only do so if VC > TR
• AVC x Q > P x Q
• AVC > P

• losses: TR
• saves: TC
• will only do so if TC > TR
• ATC x Q > P x Q
• ATC > P

Long Run Competitive Firms

firm that is sole seller of a product without suitable substitutes

• monopoly resources
• government regulation
• natural monopoly

• cheaper for one company to provide service then 2+ companies
• i.e. utilities

patents, copyrights, etc

• one firm owns all resources for making product
• i.e. DeBeers diamond mines

• Monopoly
• P > MR = MC

• MR = delta(TR) / delta(Q)
• = a - 2b Q
• =dTR/dQ

profit is affected by fixed/sunk costs

• MC curve
• Demand curve
• Halt Production: MC > D
• always produce less than Qo (society wants)

different prices for same product

• CS = 0
• PS = more
• no DWL
• Qo produced