International Trade: Chapter 19

International Trade (Chapter 19)

• Net exports represent the value of a nation's total exports minus the value of its total imports.
• Trade balance is the difference between a country's total exports and total imports.
• Trade surplus occurs when a country's exports exceed its imports.
• Trade deficit arises when a country's imports exceed its exports.
• Comparative advantage is the ability to produce a good or service at a lower opportunity cost than another producer.
• Protectionism is the practice of shielding a country's domestic industries from foreign competition through tariffs, quotas, and other trade barriers.
• Tariffs are taxes imposed on imported goods or services.
• Quotas are limitations on the quantity of goods that can be imported into a country.
• Trade barriers are often justified to protect infant industries.
• Infant industries are new industries that require protection until they can compete on their own.
• Dumping occurs when a country or company exports a product at a price below the price it normally sells for in its domestic market.

Chapter 7

• Externalities are costs or benefits that affect a third party who did not choose to incur that cost or benefit.
• Market failure occurs when the market does not allocate resources efficiently.
• The optimal level of pollution is where the marginal benefit of reducing pollution equals the marginal cost.
• Internal costs are the expenses that a business incurs based on its own activities.
• External costs are the costs associated with a business activity that are not borne by the business itself but are instead imposed on others in society.
• Social costs includes both the private cost and external costs to society
• The third-party problem occurs when those not directly involved in a transaction experience externalities.
• A negative externality is a cost that is suffered by a third party as a result of an economic transaction.
• External benefits are the positive effects an activity imposes on an unrelated third party.
• A positive externality is a benefit that is received by a third party as a result of an economic transaction.
• Internalizing the externality alters incentives so that people take account of the external effects of their actions.
• Negative externalities can be corrected through regulation, taxes, or subsidies
• Positive externalities can be corrected through subsidies, or public provision
• Property rights are the exclusive rights to possess and use a resource.
• A good is excludable if a person can be prevented from using it.
• A good is rival if one person's use of it diminishes others' use.
• Non-excludable goods make it impossible to prevent people who have not paid for them from using the good
• Nonrivalrous goods can be consumed by one person without preventing another person from consuming the good
• Private goods are both excludable and rival.
• Public goods are neither excludable nor rival.
• The free-rider problem occurs when people benefit from a good without paying for it, leading to underproduction of that good.
• Common resource goods are rivalrous but not excludable.
• Club goods are excludable but not rivalrous.

Chapter 8

• Profit is the difference between total revenue and total cost.
• Total revenue is the total amount of money a firm receives from selling its goods or services.
• Total cost is the total expense incurred in producing a good or service, including both explicit and implicit costs.
• Implicit costs are the opportunity costs of using resources already owned by the firm.
• Explicit costs are the direct, out-of-pocket payments for resources used in production.
• Accounting profit is total revenue less explicit costs.
• Economic profit is total revenue less both explicit and implicit costs.
• Output is the quantity of goods or services produced.
• Factors of production are the resources used to produce goods and services, such as labor, capital, and raw materials.
• Inputs are the resources used in the production process
• A production function is the relationship between the quantity of inputs a firm uses and the quantity of output it produces.
• Marginal product is the increase in output that arises from an additional unit of input.
• Diminishing marginal product is the property whereby the marginal product of an input decreases as the quantity of the input increases.
• The short run is a period of time in which some inputs are fixed.
• The long run is a period of time in which all inputs are variable.
• Fixed costs are costs that do not vary with the quantity of output produced.
• Variable costs are costs that vary with the quantity of output produced.
• Total cost is the sum of fixed and variable costs.
• Average total cost (also average cost) is total cost divided by the quantity of output.
• Average variable cost is variable cost divided by the quantity of output.
• Average fixed cost is fixed cost divided by the quantity of output.
• Marginal cost is the increase in total cost that arises from an extra unit of production.
• It is important to understand the cost curves for Total Cost, Variable Cost, and Fixed Cost.
• Also know the cost curves for Marginal Cost, average total cost, average variable cost, and Average fixed cost.
• It is important to understand the relationship between average cost and marginal cost.
• Graph the costs and recognize their curves
• Scale refers to the size of a business or production process.
• Efficient scale is the output level that minimizes average total cost.
• Economies of scale occur when long-run average total cost decreases as output increases.
• Constant Returns to Scale occur when long-run average total cost stays the same as output increases.
• Diseconomies of scale occur when long-run average total cost increases as output increases.
• The long run average total cost curve shows the lowest average cost at which a firm can produce each quantity of output in the long run.
• Increasing returns to scale refers to when output increases at a higher rate than the rate of increase in inputs.
• Decreasing returns to scale refers to when output increases at a lower rate than the rate of increase in inputs.

Competitive Markets (Chapter 9)

• Characteristics of a competitive market include many buyers and sellers, homogeneous products, and free entry and exit.
• A price-taker is a buyer or seller who cannot affect the market price.
• Free entry and exit refers to the ability of firms to enter or leave the market without restriction.
• Profit is the difference between total revenue and total cost.
• The profit-maximizing rule states that firms should produce at the level where marginal revenue equals marginal cost.
• Marginal revenue is the change in total revenue from selling one more unit.
• Marginal cost is the change in total cost from producing one more unit.
• To find the price, quantity, and profit for a competitive firm, set marginal revenue equal to marginal cost and solve for quantity.
• Complete a table and use it to to find the profit-maximizing quantity and profit for a competitive firm
• Be able to graph a competitive firm earning a profit, a loss, and zero profit.
• Be able to graph marginal revenue, marginal cost, and average total cost.
• Know how to calculate marginal revenue, marginal cost, and average total cost