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Coase Theorem: if transaction costs are low and property rights are well defined then producers and consumers willnegotiate to find the efficient price that can be agreed upon by both partiesPigouvian Taxes: a tax on a good with external costPigouvian Subsidies: subsidy on a good with external benefitsTradable Permits: setting a maximum quantityA company can trade an allowable pollution amount for $ if they reduce their own pollution at a lower price than the first company. This is accepted because it does not affect the environment and still makes a profit.Command and Control: Raising prices and lowering consumption, this is hard to regulate because the way in which people reduce their consumption is varied (ex. electricity) better solved with a taxProfit = π = Total Revenue – Total CostTotal Revenue = P*Q, Total Cost = cost of producing a given quantity of output, Explicit Cost = cost that requires money to be used, Implicit Cost = cost that doesn’t not require money (ex. Opportunity cost)Economic Profits: total revenue minus total costs including implicit costAccounting Profits: total revenue minus explicit costs onlyTotal Cost = Fixed Costs (FC) + Variable Costs (VC)Marginal Revenue: the change in total revenue from selling an additional unit MR = ∆TR/∆Q for a firm in a competitive industry MR = priceMarginal Cost: the change in total cost from producing an additional unitMC = ∆TC/∆QKeep producing additional units as long as Marginal Revenue > Marginal CostsAverage Cost: the sum of each cost per unit divided by total number of unitsAC=TC/QProfit =(P-AC)*QProfit Maximization: MR=P=MCInvisible Hand: Properties:By maximizing profits and producing where P=MC firms minimize total costsBy maximizing profits and responding to profits in market or industry, firms are assuring that resources are moving to theirmost productive use and the balance of industries is efficientCost Minimization: Overall costs will be lowered when MCA= MCB if MC at all firms is equalDetermination of Output of Various Industries: Balance of industriesΠ = 0, resources will move in or out of industries until π = 0In a competitive industry, π = 0 is temporaryEconomic profits get “competed away”Creative destruction implies churning of turnover of firmElimination Principle: above normal profits are eliminated byentry and below normal profits are eliminated by exitThis is a tendency, markets are continually in flux-Elasticity = %∆Q/%∆P-Elasticity (Midpoint) = (∆Q/(Q1+Q2)/2)/ (∆P/(P1+P2)/2)-Elastic: More sensitive to the change in price-Inelastic: Less sensitive to change in price-Demand of Elasticity and Total Revenue: %R=%∆P+%∆QAbsolute Value of ElasticityNamePrice and Total RevenueE < 1InelasticMove togetherE > 1ElasticMove oppositeE = 1Unit ElasticAre unrelated-Perfectly Elastic: __ Perfectly Inelastic: |-Percent Change in Price:-Shift in Supply: %∆P=(-%∆S)/(|Ed|+ES)-Shift in Demand: %∆P=(%∆D)/(|Ed|+ES)-Determinants of Elasticity of Demand:-Elastic if…few substitutes, are necessities, are categories of