Econ1: Chapter 7

Socially Optimal Quantity

quantity that maximizes total economic surplus

Allocative function of price

changes in prices direct resources away from overcrowded markets that are undeserved

Rationing function of price

changes in prices distribute scarce resources to those consumers who value them the most highly

Equilibrium

no further opportunities for gain are available to individuals

Responses to Economic Profit and Losses in the Long Run

-In the short run firms may be stuck making an economic loss -In the long run firms can enter or exit the market *Firms will enter when economic profit is positive *Firms will exit when economic profit is negative

Socially Optimal Allocation

-is an efficient allocation -cannot change the allocation to help some people without harming others -if inefficient: you can find a transaction that will make at least one person better off without harming anyone else. (Total economic surplus=not maximized) (Not all gains from trade have been exploited)

Negative Implications of Rent Controls

1. Bribe landlords to get apts. 2. Quality of apts. deteriorates 3. Long waiting list

Impact of Taxes:Summary

1. Increase amount consumers pay 2. Decrease amount sellers receive 3. Decrease equilibrium quantity 4. Deadweight loss 5. Fall consumer surplus 6. Fall producer surplus

Negative Implications of Minimum Wages

1. Lower employment levels 2. Increased job search activity due to unemployment 3. Black Market Employment: Working under the table 4. Discrimination

Market Equilibrium is only efficient when?

1.Markets are perfectly competitive 2.Supply curve captures all of the costs (and benefits) to production 3.Demand curve captures all of the benefits (and costs) to consumption

Accounting Profit

Accounting Profit = total revenue - explicit costs

Economic Profit

Economic Profit = total revenue -explicit costs - implicit costs

Tax on Consumers

Lowers the benefit of the good or service by the amount of the tax

Normal Profit(Implicit Costs)

Normal Profit = Accounting Profit - Economic Profit

Implicit Costs

Opportunity cost of the resources supplied by the firm's owner EX: OC of the owner's time and talent EX: OC of the capital owned by the firm

Price Ceiling and Rent Controls

Price Ceiling: maximum allowable price specified by law (Rent Controls)

Price Floors and Minimum Wages

Price Floor: minimum allowable price specified by law (Minimum Wages)

Tax on Producers

Raises the cost of production by the amount of the tax

How to measure society's economic well being?

Total Surplus

Intervention in an efficient market typically leads to?

deadweight loss

Intervention in an inefficient market can help achieve?

efficiency by getting rid of deadweight loss

Goverments impose taxes to?

generate revenue or to discourage certain kinds of behavior

Equity

tax goods with low Ed or Es then provide income support for low income population

Invisible Hand Theory

the actions of independent, self-interested buyers/sellers will often result in most efficient allocation of resources EX: Lines at grocery store, lanes of traffic on the freeway, stock prices, cost saving innovations

Explicit Costs

the actual payments that a firm makes to its factors of production

What does it mean when Equilibrium Outcome is socially optimal?

the equilibrium outcome maximizes total economic surplus