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Externality
The cost or benefit that affects a party who did not choose to
incur that cost or benefit
TERM 2
Negative Externality
DEFINITION 2
Example: pollutionLeads to overuseLeads to market failure
TERM 3
Positive Externality
DEFINITION 3
Example: gardening, educationLeads to underuseOccurs
when the action of a single party or multiple parties create a
benefit for someone who is not part of the action or
transaction
TERM 4
Coase Theorem
DEFINITION 4
When the parties affected by externalities can negotiate
costlessly with one another, an efficient outcome results no
matter how the law assigns responsibility for damagesAn
efficient outcome no matter what
TERM 5
Property
Rights
DEFINITION 5
Grant owners the right to exclusive use
Efficient Laws
Places the burden of adjustment to externalities on those
who can accomplish it at the least cost
TERM 7
If a factory emits pollution and it is costly to
negotiate with the factory owners,
DEFINITION 7
the factory owners should be liable since it is costly to
negotiate, the party creating the negative externality should
be liable
TERM 8
Tragedy of the commons
DEFINITION 8
If people make their choices independently but their actions
create negative externalities for others, they are likely to
overuse a resource and deplete it in the long run
TERM 9
The best way to deal with negative
externalities according to Pigou is to
DEFINITION 9
tax the externalitiesA pigou tax offsets one market distortion
by another to achieve the efficient outcome
TERM 10
If transaction costs are high, the best way to
deal with positive externalities is to
DEFINITION 10
subsidize themthere won't be a private agreement and the
resource will be under usedA subsidy creates an incentive to
greater use
The market demand for labor is
steeper than the horizontal summation of individual firms
demand for labor
TERM 17
If a worker is on the backward-bending part of
her labor supply curve
DEFINITION 17
she wants to work fewer hours if the wage increases
TERM 18
An increase in the minimum wage is most
likely to
DEFINITION 18
decrease employment of unskilled workers because it is a
price floor and creates excess supply (unemployment)
TERM 19
The labor supply curve of an individual worker
can be backward-bending because
DEFINITION 19
the income effect exceeds the substitution effect
TERM 20
The market supply of labor in any industry
DEFINITION 20
is always upward sloping since higher wages attract people
form other industries
Results of a persistent employer
discrimination in a competitive market
The employer could earn a higher return on capitalThe
employer has higher labor costs than competitorsThe
employer has less productive employeesThe employer will
go out of business
TERM 22
Proponents of a higher minimum wage often
assume that demand for unskilled labor and
opponents often assume it is
DEFINITION 22
Unskilled labor is highly elastic and it is assumed highly
elastic
TERM 23
If two candidates get the same score on a
productivity test, there is competitive
pressure to
DEFINITION 23
pay a higher wage to the person from the group with higher
average productivity
TERM 24
If a productivity test is not perfectly accurate,
the best estimate of a worker's productivity
DEFINITION 24
is between the test score and their group's average
productivity
TERM 25
Real Capital
DEFINITION 25
Refers to production equipmentie a printing press
Higher interest rates reduce demand for
loanable funds since
they make capital projects less profitable
TERM 32
Higher interest rates do what to the supply of
loanable funds and the demand for loanable
funds
DEFINITION 32
Increase supplyDecrease demand
TERM 33
A higher inflation
rate
DEFINITION 33
increases the nominal interest rate because it is a function of
the real rate
TERM 34
Peak load pricing is designed to
DEFINITION 34
shift demand from peak periods to off-peak periods
TERM 35
Oligopoly
DEFINITION 35
A market structure in which there are only a few
sellersDecisions of one firm influence decisions of other firms
Cartel agreements often break down because
Firm's have an incentive to exceed their agreed-upon
outputs
TERM 37
A set of strategies is a Nash equilibrium
if
DEFINITION 37
no player can gain by changing their strategy on his or her
own
TERM 38
A player's strategy is dominant if
DEFINITION 38
it yields a payoff to the player that is at least as large as that
obtained from any other strategy choice, regardless of the
actions of other playersHigher pay off no matter what the
other player chooses
TERM 39
Cartel Pricing
DEFINITION 39
Collusionwith collusion, firms coordinate and collectively act
as a monopolyis illegal by lawUnder the Sherman Act
TERM 40
Collusion works best if
DEFINITION 40
it is easy to detect cheatingthere are only 2 firms
colludingthere are many periods with no definite ending
What is true about a monopoly?
The only supplier of the goodThe good produced by a
monopolist has no close substitutesMonopolies either arise
from barriers to entry/exit or existing monopolists create
barriers for entry to preserve their market power
TERM 47
Patents create monopolies by restricting
DEFINITION 47
entryPatents make it illegal for other firms to sell the same
product without the permission of the patent holder
TERM 48
Natural Monopoly
DEFINITION 48
Characterized by economies of scaleLong run average cost
curve is downward slopingThe firm can supply the entire
market at a lower cost than could two or more firmsThe firm
is protected by barriers to entryIt is cheaper for just one
producer to provide the entire market output
TERM 49
For a monopoly, the industry demand curve is
the firm's
DEFINITION 49
demand curve because since a monopolist serves the whole
market, the industry demand curve is the firm's demand
curve
TERM 50
Marginal revenue to price for a monopolist
DEFINITION 50
MR is less than priceSelling one more unit requires lowering
the price
A monopoly is characterized
by
a downward sloping demand curve since industry is the
demand for the monopolist's product
TERM 52
Sources of a monopoly
DEFINITION 52
Exclusive control of important inputsEconomies of
scaleNetword economiesPatents
TERM 53
Optimal conditions for the monopolist
DEFINITION 53
MR=MCMR intersect MC from abovePrice>AVC
TERM 54
MR curve for a monopolist who can perfectly
price discriminate
DEFINITION 54
it would be equal to the demand curve because it reflects
consumers willingness to pay
TERM 55
If the demand curve is a straight line, the MR
curve for a monopolist is
DEFINITION 55
a straight line with the same vertical intercept and double the
slope
Conditions for the profit-maximizing output in
the short run
MC curve is upward slopingP=MCP>minimum of
AVCP>minimum of ATC
TERM 62
If minimum of AVC
DEFINITION 62
keep operating in the short run and shut down in the long
run
TERM 63
A profit-maximizing firms chooses a level of
output such that
DEFINITION 63
MC=P
TERM 64
For a profit-maximizing firm in a perfectly
competitive market, the price could mean
DEFINITION 64
it equals: average revenueit equals: marginal revenueit
equals: marginal cost
TERM 65
If the market price is below the average
variable cost curve, the firm should
DEFINITION 65
shut down in the short run since the price does not cover
variable costs
The demand curve facing the individual firm
in a perfectly competitive market is
horizontal
TERM 67
The elasticity of supply in the long run
DEFINITION 67
is greater than in the short run
TERM 68
Zero economic profit for the profit-maximizing
firm implies in the short run that
DEFINITION 68
P=minimum of ATC=MC
TERM 69
What is an argument why competitive
markets are beneficial for society?
DEFINITION 69
P=MCP=minimum of LACeconomic profit=
TERM 70
The short-run industry supply curve is
DEFINITION 70
flat
Isoquants for the produciton funciton of a
perfect subsititue
Straight isoquants
TERM 77
Law of Diminishing Returns
DEFINITION 77
Fir a typical production process, output may initially increase
at an increasing rate as the variable input is increased, but
will eventually start to increase at a decreasing rate
TERM 78
The marginal product of labor
DEFINITION 78
specifies the additional output obtained from adding one
more unity of laboris the slope of the total product curve in
the short runis the derivative of output with respect to labor
TERM 79
Average product of labor increases in output
in the short run whenever marginal product of
labor
DEFINITION 79
is greater than average product of labor
TERM 80
Labor productivity starts falling
where
DEFINITION 80
average product of labor and marginal product of labor
intersect
When allocating given resources between two
production processes, we should move
resources until the
marginal products of both processes are equal
TERM 82
The marginal rate of technical
substitution
DEFINITION 82
is the absolute value of the slope of the isoquantthe ration of
marginal productsthe rate at which one input can be
replaced by the other while leaving output unchanged
TERM 83
A production function in which doubling all
inputs more than doubles output exhibits
DEFINITION 83
increasing returns to scale
TERM 84
Isoquants of perfect compliments
DEFINITION 84
L-shaped isoquants
TERM 85
Returns to scale tell us what happens to
output when
DEFINITION 85
all inputs are changed in the same proportion
What cost is fixed in the short fun
fixed costsbut they can vary in the long run
TERM 92
Unions favor a higher minimum wage
because
DEFINITION 92
it would create more demand for unioized labor
TERM 93
Diseconomies of scale occur when
DEFINITION 93
average costs rise in output in the long run
TERM 94
In an industry with falling long-run average
costs curves, we expect to see
DEFINITION 94
the emergence of a natural monopoly
TERM 95
If the ration of marginal product to input price
is lower for capital than labor
DEFINITION 95
the firm can reduce costs by using more labor and less
capital
The sum of fixed and variable costs is known
as
total cost
TERM 97
With zero output, the short-run total cost
equals
DEFINITION 97
fixed costs while long-run total cost equals zero
TERM 98
The average fixed cost
curve
DEFINITION 98
decreases in outputOutput increases as AFC falls
TERM 99
Marginal Cost
DEFINITION 99
is the cost of producing one more unit of output
TERM 100
When marginal cost is less than average total
cost
DEFINITION 100
average total cost falls in output
