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Consumer surplus
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the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays.
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Producer surplus
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the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives
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Marginal cost
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the additional cost to a firm of producing one more unit of a good or service.
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efficiency in a market
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1. MB>MC
2. maximize economic surplus
2. maximize economic surplus
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Economic efficiency
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A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.
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deadweight loss
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The reduction in economic surplus resulting from a market not being in competitive equilibrium
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Price ceiling
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A legally determined maximum price that sellers can charge.
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Price floor
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A legally determined minimum price that sellers may receive.
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black market
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a market in which buying and selling take place at prices that violate government price regulations.
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per-unit taxes
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taxes assessed as a particular dollar amount on the sale of a good or service, as opposed to a percentage tax.
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tax incidence
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the actual division of the burden of a tax between buyers and sellers in a market.
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Tariff
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A tax imposed by a government on imports
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Imports
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Goods and services bought domestically but produced in other countries.
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Exports
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Goods and services produced domestically but sold in other countries.
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comparative advantage
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ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.
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Opportunity cost
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The highest-valued alternative that must be given up to engage in an activity.
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Absolute advantage
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The ability to produce more of a good or service than competitors when using the same amount of resources.
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autarky
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a situation in which a country does not trade with other countries
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terms of trade
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the ratio at which a country can trade its exports for imports from other countries
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Quota
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A numerical limit a government imposes on the quantity of a good that can be imported into that country.
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comparative advantage come from?
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Climate and natural resources
Relative abundance of labor and/or capital
Technological differences
External economies
Relative abundance of labor and/or capital
Technological differences
External economies
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External economies
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reductions in a firm's costs that result from an increase in the size of an industry. (eg: Silicon Valley)
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Free trade
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Trade between countries that is without government restrictions.
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Voluntary Export Restraints (VERs):
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Numerical limits negotiated between (VERs) countries on the quantity of a good imported by one country from another.
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World Trade Organization (WTO)
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An international organization that oversees international trade agreements.
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Protectionism
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The use of trade barriers to shield domestic firms from foreign competition.
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Dumping
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selling a product for a price below its cost of production
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externality
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a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
types: production (eg: pollution); consumption (eg: cigarette smoke), negative, positive (eg: college education)
types: production (eg: pollution); consumption (eg: cigarette smoke), negative, positive (eg: college education)
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social (cost/ benefit)=
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private (cost/benefit) + externalities
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market failure
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a situation in which the market fails to produce the efficient level of output
(negative externalities: overproduction, positive externalities: underproduction)
(negative externalities: overproduction, positive externalities: underproduction)
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coase theorem
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how private bargaining can lead to economic efficiency in a market with an externality
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property rights
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the rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it
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what can solve externality problems?
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property rights
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What solves negative externalities problems?
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Tax (negative externalities --> overproduction, tax --> reduce amount of production)
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What solves positive externalities problems?
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Subsidies (positive externalities --> underproduction, subsidies --> encourage production)
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Pigovian taxes and subsidies
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use of gov taxes and subsidies in bringing about an efficient level of output in the presence of externalities.
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command-and-control (Govt. intervention)
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a policy that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit, or requiring firms to install specific pollution control devices.
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tradable emissions permit (cap-and-trade)
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firms can trade emissions permits (firms with high costs of reducing pollution will buy permits from firms with low costs of reducing pollution, ensuring that pollution is reduced at the lowest possible cost.
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rivalry
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the situation that occurs when one person's consuming a unit of good means no one else can consume it
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excludability
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the situation in which anyone who does not pay for a good cannot consume it.
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four categories of goods
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adding horizontally the quantity
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constructing demand curve for private goods
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add up the price
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constructing demand curve for public goods
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the common resource tend to be overused
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tragedy of the commons
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undefined