Final Exam Cheat Sheet - Coase Theorem if transaction costs are low and property rights are well defined then producers and consumers will negotiate to

Final Exam Cheat Sheet - Coase Theorem if transaction costs...

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Coase Theorem: if transaction costs are low and property rights are well defined then producers and consumers will negotiate to find the efficient price that can be agreed upon by both parties Pigouvian Taxes: a tax on a good with external cost Pigouvian Subsidies: subsidy on a good with external benefits Tradable Permits: setting a maximum quantity A 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 tax Profit = π = Total Revenue – Total Cost Total 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 cost Accounting Profits: total revenue minus explicit costs only Total 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 = price Marginal Cost: the change in total cost from producing an additional unit MC = ∆TC/∆Q Keep producing additional units as long as Marginal Revenue > Marginal Costs Average Cost: the sum of each cost per unit divided by total number of units AC=TC/Q Profit =(P-AC)*Q Profit Maximization: MR=P=MC Invisible Hand: Properties: By maximizing profits and producing where P=MC firms minimize total costs By maximizing profits and responding to profits in market or industry, firms are assuring that resources are moving to their most productive use and the balance of industries is efficient Cost Minimization: Overall costs will be lowered when MCA = MCB if MC at all firms is equal Determination of Output of Various Industries: Balance of industries Π = 0, resources will move in or out of industries until π = 0 In a competitive industry, π = 0 is temporary Economic profits get “competed away” Creative destruction implies churning of turnover of firm Elimination Principle: above normal profits are eliminated by entry and below normal profits are eliminated by exit This 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+%∆Q Absolute Value of Elasticity Name Price and Total Revenue E < 1 Inelastic Move together E > 1 Elastic Move opposite E = 1 Unit Elastic Are 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

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