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Microeconomics 25 Wednesday, November 1, 2006

# Microeconomics 25 Wednesday, November 1, 2006 - selling a...

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Wednesday, November 01, 2006 Microeconomics MARKET FOR POLLUTION = Buy and sell pollution permits Eliminating pollution comes at a very high opportunity cost PUBLIC GOODS EXCLUDABILITY is the property of a good where by an individual can be prevented from using it RIVALRY is the property of a good whereby one person’s use diminishes other peoples’ use. Private goods are excludable and rival Public goods are non excludable and non rival EXAMPLE – Highway snow removal FREE RIDER PROBLEM is when a person receives the benefit of a good but avoids paying for it. Government can assume responsibility of snow removal and charge each of its citizens with part o the cost (in the form of a tax). COMMON RESOURCES - NO EXCLUDABLE - RIVAL EXAMPLE – FISHERY Can’t prevent people from fishing in the ocean If one person catches a fish, another person can’t catch the same fish THEORY OF THE FIRM FIRM is an organization that attempts to earn profits for its owners by producing and

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Unformatted text preview: selling a good or service o Objective = make money(maximize profit) • INDUSTRY is a group of firms operating in same market PROFIT = TR – TC TWO MEASURES OF COST 1. EXPLICIT COSTS are costs that are easy to see (ex. Land) a. Require and outflow of money 2. IMPLICIT COSTS are the opportunity cost of the owner’s resources. a. Do not require a cash payment Wednesday, November 01, 2006 EXAMPLE TR = \$200,000 Labor cost = \$70,000 Explicit Cost Raw materials = \$30,000 Opportunity cost of the owners time = \$50,000 Opportunity cost of using the building = \$40,000 Implicit Cost Opportunity cost of owners starting funds = \$10,000 \$200,000 \$70,000- \$30,000 \$100,000 Accounting Profit (only Includes Explicit Costs) \$50,000 \$40,000- \$10,000 Economic Profit (considers Explicit and Implicit Costs) ECONOMIC PROFIT = 0 Normal Profit Owner is doing just as well as he could if he were to pursue his next best opportunity...
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Microeconomics 25 Wednesday, November 1, 2006 - selling a...

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