The concept of “returns to scale” describes the rate of increase in production relative to the associated increase in the factors of production in the long run. In other words, it describes how effectively and efficiently—in other words, profitably—a particular company or business is producing its goods or services.
Allocative efficiency is the level of output where the price of a good or service is equal to the marginal cost (MC) of production. Allocative efficiency is achieved when goods and/or services are distributed optimally in response to consumer demands (that is, wants and needs), and when the marginal cost and marginal utility of goods and services are equal.
Moral hazard is a set of circumstances in which one individual or entity has the ability to take a risk because another individual or entity we’ll have to deal with any negative outcomes. Moral hazard specifically refers to the risk that exists when two parties lack equal knowledge of actions taken following an existing agreement.
A price floor or a minimum price is a regulatory tool used by the government. More specifically, it is defined as an intervention to raise market prices if the government feels the price is too low. In this case, since the new price is higher, the producers benefit. For a price floor to be effective, the minimum price has to be higher than the equilibrium price.
The equimarginal principle is an important idea in the economic subfield of managerial economics. It is otherwise known as the “equal marginal principle” or the “principle of maximum satisfaction.” The equimarginal principle states that consumers choose combinations of various goods in order to achieve maximum total utility.
Subsidies are defined as a form of support given to producers of a product that helps to reduce the cost of production. This has the intended effect of increasing the production and consumption of that product. Goods that governments want to increase the use of are subsidized; these include important services and institutions like education and healthcare, among others.
Externalities are defined as those spillover effects of the consumption or production of a good that is not reflected in the price of the good. More specifically, negative externalities are the costs or harmful consequences experienced by a third party when an economic transaction takes place (i.e. when a good is either produced or consumed).
When consumers’ income limits their consumption behaviors, this is known as a budget constraint. In other words, it’s all of the many combinations of goods/services that consumers are able to purchase in light of their particular income as well as the current prices of these particular goods/services.
The wealth effect is the economic phenomenon in which individuals spend more when stock prices increase and, as a result, equity portfolios are increasing in value. They do so because their sense of the reliability of their wealth is increasing. Thus, increases in consumer spending are directly correlated to increases in the value of stock portfolios.