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BBA > ECO A > Flashcards

ECO A Flashcards

1
Q

Externalities

A

an uncompensated impact of one person’s or firm’s actions on the wellbeing of bystander

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1
Q

bystander

A

someone who neither pays nor receives any compensation for that effect

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2
Q

Eg of two externalities

A

negative externalities (co2 emission, cigarette smoking, loud music)
positive externalities (immunization, education, reserch)

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3
Q

Negative externalities

A

market produce larger quantity than what is socially desirable

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4
Q

Pigovian Taxes

A

tax to correct negative externalities, don’t create DWL

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5
Q

Positive externalities

A

market produce lower quantity than what is socially desirable

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6
Q

Subsidy

A

to correct positive externalities, don’t create DWL

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7
Q

Price elasticity of demand

A

A measure of how much the quantity demanded of a good responds to a change in the price of that good computed as a percentage change in quantity demanded divided by the percentage change in price

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8
Q

Interpret price elasticity of demand

A

given one percent change in the price of the good, the percentage change in the quantity demanded

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9
Q

5 types of elasticity (how strong or how weak)

A

> 1 elastic
<1 inelastic
=1 unit elastic
=0 perfectly inelastic
=infinity perfectly elastic

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10
Q

why we don’t measure elasticity simply by the slope of demand?

A

slope depends on units in which the quantity and price are measured- not ideal when you want to compare different goods or services

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11
Q

revenue and elasticity of demand

A

inelastic demand: increase in price» increase in total revenue
elastic demand: increase in price» decrease in total revenue
unit elastic demand» increase in price does not affect total revenue

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12
Q

what determines how elastic demand for a good is?

A
  1. Availablity of close substitutes
  2. Necessities vs luxuries
  3. definition of market
  4. proportion of income spent on good
  5. time horizon
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13
Q

Income elasticity of demand

A

a measure of how much the quantity demanded responds to a change in consumer’s income, computed as a percentage change in quantity demanded divided by the percentage change in income

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14
Q

eg of goods in income elasticity

A

normal goods- positive income elasticity
necessity- normal good with small income elasticity
luxuries: normal good with high income elasticity
inferior goods - negative income elasticity

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15
Q

Cross price elasticity of demand

A

a measure of how much the quantity demanded of a good responds to a change in price of related good, computed as a percentage change in quantity demanded divided by the percentage change in the price of the related good (don’t take absolute value)

positive&raquo_space; substitute
negative&raquo_space; complements
high» highly related
close to 0» unrelated

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16
Q

Price elasticity of supply

A

a measure of how much the quantity supplied of a good responds to a change in price of the good, computed as a percent change in quantity supplied by a percent change in price (depends on flexibility)

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17
Q

What determines how elastic supply for a good is?

A
  1. ease of soring inventory
  2. mobility of factors of production
  3. size of the firm or industry
  4. productive capacity
  5. time period
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18
Q

Welfare economics

A

how the allocation of resources affects economic well-being for everyone in the market as satisfied as possible

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19
Q

consumer surplus

A

buyer’s WTP - the amount the buyer actually pay

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20
Q

WTP

A

the maximum amount that the buyer is willing to pay for a good, it is a measure of the value of the good for that buyer

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21
Q

producer surplus

A

the amount the seller is paid - sellers’ cost

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22
Q

MC

A

increase in production costs when one additional unit is produced

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23
Q

conditions for efficient market

A
  1. the goods are consumed by buyers with highest WTP
  2. the goods are produced with lowest costs
  3. the quantity of goods produced maximizes the sum of CS and PS
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24
Q

Pareto efficiency

A

not possible to reallocate resources to make at least one person better off without making anyone else worse off

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25
Q

Laissez Faire

A

the policy letting market allocate resources without government’s intervention

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26
Q

Market imperfection

A

situations in which markets are not efficient
1. market power: the abillity of one single firm to influence market price (monopoly)
2. externalities: created when a market transaction affects individuals other than buyers and sellers in that market
3. public goods: when a good is non-rival and non-excludable, it will not be offered by private suppliers

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27
Q

equity

A

fairness of distribution of wellbeing in society

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28
Q

price ceiling (bind, not, eg)

A

legal maximum price

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29
Q

price floor

A

legal minimum price

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30
Q

purpose of taxes

A

to raise revenue for public projects
to reduce consumption of certain goods

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31
Q

type of taxes

A

direct taxes: taxes on income
indirect taxes: taxes on expenditure
1. specific tax
2. Ad valorem tax

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32
Q

impact of tax

A

taxes discourage market activity
buyers and sellers share the burden of tax
buyers pay more and sellers receive less

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33
Q

do buyers and sellers equally share burden of tax?

A

depends on price elasticity of supply and demand
falls more heavily on the side of the market that is less price elastic

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34
Q

subsidies

A

opposite to tax
government pays producers for each unit sold (or pays consumers for each unit bought)

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35
Q

excludable goods

A

have to pay and prevent someone from using

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36
Q

non-excludable goods

A

doesn’t have to pay
can’t prevent others from having benefits

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37
Q

rival goods

A

private consume, others can’t use

38
Q

non-rival goods

A

public consume, everyone freely use
the consumption of one party doesn’t affect the consumption of other party

39
Q

4 types of goods

A
  1. private goods - both excludable and rival
  2. public goods - neither excludable nor rival
  3. Natural resources - rival but not excludable
  4. club goods- excludable but non-rival
40
Q

cost-benefit analysis

A

a study that compares that costs and benefits to society of providing a (public) good

41
Q

optimal quantity of public good

A

marginal social benefit gained from an extra unit provided is equal to the marginal cost of providing that extra unit

42
Q

common resources

A

non-excludable and rival

43
Q

tragedy of commons

A

if the use of common resources is unregulated and individuals only act in their self-interest, common uses will tend to be overused

44
Q

merit goods

A

actual benefit of a good is higher than the value attached to it by the consumer but tend to be under-consumed

education: individual- career prospets, networks, learning
social benefits- stock of human capital in a country

45
Q

de-merit goods

A

generate private or social costs that are not fully taken into account by the consumers and tend to be over-consumed

46
Q

Efficient tax system

A

small welfare losses and small administrative burdens

47
Q

cost of taxation

A

welfare loss ( reduced market activity)
administrative burden (resources spent on tax payment and collection)

48
Q

goal of tax system

A
  1. efficiency : minimize cost of taxation
  2. equity: a fair distribution of tax burden among population
49
Q

DWL

A

welfare loss that results from a market distortion such as tax

50
Q

what determines DWL

A

price elasticity of supply and demand» more inelastic» smaller DWL

51
Q

Laffar curve

A

the inversed U-shaped relationship between tax rates and tax revenue
when taxes are decreased, more transactions take place and taxes are collected on more units, higher tax revenues

problem: not easy to know on which side of the curve an economy is

52
Q

tax incidence

A

a manner in which the burden of the tax is shared among market participants

53
Q

Assumptions of SEM

A
  1. buyers are rational
  2. more is preferred to less
  3. buyers seek to maximize their utility
  4. consumers act in self-interest and do not consider the utility of others
54
Q

factors affecting individual demand

A
  1. price of the good
  2. income
  3. price of related good
  4. tastes
  5. expectations
  6. advertising
    2-6= non-price determinants of good
55
Q

determinants of individual supply

A
  1. price of the good
  2. input prices
  3. technology
  4. expectations
  5. natural/ social factors
  6. profitability of other goods in production and prices of goods in joint supply
    2-6= non-price determinants
56
Q

Limitation of CS

A

1) buyers are not always rational, they may be willing to pay a high amount for something even if that something does not bring them economic welfare (e.g drug addicts)
2) WTP depends on income: a consumer with low income will have low WTP for goods even though that goods will bring her much happiness

57
Q

CS meaning

A

buyer’s welfare from participating in a market

58
Q

PS meaning

A

seller’s welfare from participating in a market

59
Q

Economics

A

manage scarce resources by making decisions to fulfill unlimited desires and demand

60
Q

microeconomics

A

study of individual behaviours- how consumers and firms make decisions and how they interact in specific markets and also impact of government on their choices and interaction

61
Q

macroeconomics

A

study of force and facts of economy as a whole, the effect on the aggregate economy of choices made by individuals, firms and governments

62
Q

market power

A

the ability of a single person or firm to influence market price

63
Q

positive statement

A

attempts to describe the world as it is
they are called descriptive analysis and can be tested and confirmed or refuted

64
Q

normative statement

A

above how the world should be
they are called prescriptive analysis and often include opinions, so not possible to test and confirm or reject

65
Q

competitive markets

A

there are many buyers and sellers so that each has negligible impact on market price

perfectly competitive market>. monopolistically competitive» oligopolistic» monopolistic

66
Q

market demand

A

the amount of a good that all buyers are willing and able to purchase within a given time period

67
Q

Demand changes

A

price changes&raquo_space; movement along the demand curve
non-price determinant changes&raquo_space; shift of the demand curve

68
Q

Market equilibrium

A

the price that balances quantity supplied and quantity demanded
the intersection of supply and demand curve

69
Q

SEM

A

explain consumer behaviours (why consumers buy certain bundles of goods)

70
Q

budget constraint

A

depicts the limit on the consumption “bundles” that a consumer can afford

71
Q

slope of budget constraint

A

Relative Price of goods
- Px/Py

72
Q

value

A

the worth to an individual of owing an item

73
Q

utility

A

satisfaction derived from the consumption of a product

74
Q

marginal utility of consumption

A

the increase in utility that the consumer gets from an additional unit of that good

75
Q

diminishing marginal utility

A

a tendency for the additional satisfaction from consuming extra units of a good to fall

76
Q

two axioms

A

transitivity axiom
completeness axiom: the axiom of comparison

77
Q

axiom of comparison

A

given any two bundles of goods, a consumer can clearly state a preference for one over the other or be indifferent between them

78
Q

axiom of transitivity

A

given any three bundles of goods, ….

79
Q

bundle

A

combination of two goods

80
Q

indifference curve

A

a curve that shows consumption bundles that give the consumer the same level of satisfaction

81
Q

Indifference curve properties

A
  1. higher indifference curves are preferred to lower ones
  2. indifference curves are downward sloping (left to right)
  3. indifference curves do not cross (parallel)
  4. indifference curves are bowed inward (convex)
82
Q

marginal rate of substitution

A

the rate at which a consumer is willing to trade one good for another

negative slope of indifference curve

83
Q

two extreme examples of indifference curves

A

perfect substitutes (two goods with straight line indifference curves) MRS= constant
perfect complements (two goods with right angles indifference curve) MRS= 2:1

84
Q

optimization

A

point where the highest indifference curve and the budget constraint are tanget

85
Q

consumer’s optimal choice

A

IC=BC

86
Q

slope of indifference curve

A

MRS

87
Q

substitution effect

A

move along IC

88
Q

income effect

A

shifts IC (to higher or lower)

89
Q

Giffen goods

A

a good that violates the law of demand

90
Q

the engel curve

A

describe how households expenditure depends on household income

as income rises, the proportion of income spent on food decreases whereas the proportion of income devoted to other goods such as leisure, increases

91
Q

if demand is perfectly price elastic

A

no CS

92
Q

Opportunity cost =

A

cost of chosen option + forgone value of best alternative option

93
Q

binding price ceiling

A

for the last unit sold, PC = cost to producers

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