microeconomics unit 2 final review

Tax Incidence and Elasticity of Demand

-The more inelastic the demand, the larger is the buyers' share of the tax. -Perfectly inelastic demand: buyers pay entire tax -Perfectly elastic demand: sellers pay entire tax

Perfect Competition Graph Characteristics

1. At ATC = MC: Breakeven point/LR Equilibrium -anywhere above this point is positive economic profit and firms enter in the LR. 2. At AVC = MC: Shutdown Point -anywhere below this point, firms shut down in SR and firms exit in LR. 3. Area between Shutdown and Breakeven Point: firms operate in the SR and exit in the LR.

External Benefit vs External Cost

1. External Benefit: a benefit that effects someone other than the seller or the buyer of a good. Leads to underproduction. 2. External Cost: a cost that effects someone other than the seller or the buyer of a good. Leads to overproduction.

Increasing Marginal Returns vs. Diminishing Marginal Returns

1. Increasing Marginal Returns: When the marginal product of a worker exceeds the marginal product of the previous worker. -Arise from increased specialization and division of labor. 2. Diminishing Marginal Returns: When the marginal product of a worker is less than the marginal product of the previous worker. -Arise because each additional worker has less access to capital and less space in which to work.

Why the Average Total Cost Curve Is U-Shaped

1. Spreading total fixed cost over a larger output: AFC curve slopes downward as output increases. 2. Eventually diminishing returns: the AVC curve slopes upward and AVC increases more quickly than AFC is decreasing.

Taxes vs. Subsidies

1. Taxes increase the prices paid by buyers and lower the prices received by sellers. Taxes decrease the quantity produced and can lead to underproduction. -Buyers always pay higher price. 2. Subsidies lower the prices paid by buyers and increase the price received by sellers. Subsidies increase the quantity produced and can lead to underproduction.

Price Ceiling or Price Cap

A government regulation that makes it illegal to charge a price higher than a specified level

Minimum Wage

A price floor in the labor market. -Creates an inefficient allocation of labor resources because at the quantity of employment marginal social benefit exceeds marginal social cost.

Economic Loss

At profit-maximizing level of output, (ATC - MR) * Q

Producer Surplus

The excess of the amount received from the sale of a good or service over the cost of producing it. -Formula: Price - Marginal Cost. -It is measured by the area above the supply curve and below the market price.

Consumer Surplus

The excess of the benefit received from a good over the amount paid for it. -Formula: Marginal Benefit - Price. -It is measured by the area under the demand curve and above the price paid, up to the quantity bought.

Total Cost

The sum of fixed and variable costs

Deadweight Loss

The total loss of producer and consumer surplus from underproduction or overproduction

Marginal Returns

Total product (units per hour) / Labor (# of workers)

Rent Ceiling

When a price ceiling is applied to a housing market -When set below the equilibrium rent, it creates a housing shortage, increased search activity, and a black market.

The marginal cost curve slopes downward at low outputs because of ___. The marginal cost curve eventually slopes upward because of ___.

greater specialization and division of labor; the law of diminishing returns

When some firms exit a perfectly competitive market in which firms are incurring economic losses, the market supply curve shifts ___ and the market price ___.

leftward; rises

In a perfectly competitive market, in increase in market demand ___.

raises the price in the short run and attracts new firms in the long run.

A firm's minimum efficient scale is the ___.

smallest quantity of output at which long run average cost reaches its lowest level. -If the LRAC is U-shaped, the minimum point identifies the minimum efficient scale output level.

The obstacles to achieving an efficient allocation of resources in a market economy include:

taxes and subsidies, externalities, monopoly, and public goods.

In economics, the long run is the time frame in which ___, and the short run is the period of time in which ___.

the quantities of all factors of production can be varied; the quantities of one or more factors of production are fixed.

When a tax is imposed on a good, the more elastic the demand for that good, ___.

the smaller is the amount of the tax paid by buyers.