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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
Pareto efficiency
not possible to reallocate resources to make at least one person better off without making anyone else worse off
25
Laissez Faire
the policy letting market allocate resources without government's intervention
26
Market imperfection
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
27
equity
fairness of distribution of wellbeing in society
28
price ceiling (bind, not, eg)
legal maximum price
29
price floor
legal minimum price
30
purpose of taxes
to raise revenue for public projects to reduce consumption of certain goods
31
type of taxes
direct taxes: taxes on income indirect taxes: taxes on expenditure 1. specific tax 2. Ad valorem tax
32
impact of tax
taxes discourage market activity buyers and sellers share the burden of tax buyers pay more and sellers receive less
33
do buyers and sellers equally share burden of tax?
depends on price elasticity of supply and demand falls more heavily on the side of the market that is less price elastic
34
subsidies
opposite to tax government pays producers for each unit sold (or pays consumers for each unit bought)
35
excludable goods
have to pay and prevent someone from using
36
non-excludable goods
doesn't have to pay can't prevent others from having benefits
37
rival goods
private consume, others can't use
38
non-rival goods
public consume, everyone freely use the consumption of one party doesn't affect the consumption of other party
39
4 types of goods
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
cost-benefit analysis
a study that compares that costs and benefits to society of providing a (public) good
41
optimal quantity of public good
marginal social benefit gained from an extra unit provided is equal to the marginal cost of providing that extra unit
42
common resources
non-excludable and rival
43
tragedy of commons
if the use of common resources is unregulated and individuals only act in their self-interest, common uses will tend to be overused
44
merit goods
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
de-merit goods
generate private or social costs that are not fully taken into account by the consumers and tend to be over-consumed
46
Efficient tax system
small welfare losses and small administrative burdens
47
cost of taxation
welfare loss ( reduced market activity) administrative burden (resources spent on tax payment and collection)
48
goal of tax system
1. efficiency : minimize cost of taxation 2. equity: a fair distribution of tax burden among population
49
DWL
welfare loss that results from a market distortion such as tax
50
what determines DWL
price elasticity of supply and demand>> more inelastic>> smaller DWL
51
Laffar curve
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
tax incidence
a manner in which the burden of the tax is shared among market participants
53
Assumptions of SEM
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
factors affecting individual demand
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
determinants of individual supply
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
Limitation of CS
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
CS meaning
buyer's welfare from participating in a market
58
PS meaning
seller's welfare from participating in a market
59
Economics
manage scarce resources by making decisions to fulfill unlimited desires and demand
60
microeconomics
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
macroeconomics
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
market power
the ability of a single person or firm to influence market price
63
positive statement
attempts to describe the world as it is they are called descriptive analysis and can be tested and confirmed or refuted
64
normative statement
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
competitive markets
there are many buyers and sellers so that each has negligible impact on market price perfectly competitive market>. monopolistically competitive>> oligopolistic>> monopolistic
66
market demand
the amount of a good that all buyers are willing and able to purchase within a given time period
67
Demand changes
price changes >> movement along the demand curve non-price determinant changes >> shift of the demand curve
68
Market equilibrium
the price that balances quantity supplied and quantity demanded the intersection of supply and demand curve
69
SEM
explain consumer behaviours (why consumers buy certain bundles of goods)
70
budget constraint
depicts the limit on the consumption "bundles" that a consumer can afford
71
slope of budget constraint
Relative Price of goods - Px/Py
72
value
the worth to an individual of owing an item
73
utility
satisfaction derived from the consumption of a product
74
marginal utility of consumption
the increase in utility that the consumer gets from an additional unit of that good
75
diminishing marginal utility
a tendency for the additional satisfaction from consuming extra units of a good to fall
76
two axioms
transitivity axiom completeness axiom: the axiom of comparison
77
axiom of comparison
given any two bundles of goods, a consumer can clearly state a preference for one over the other or be indifferent between them
78
axiom of transitivity
given any three bundles of goods, ....
79
bundle
combination of two goods
80
indifference curve
a curve that shows consumption bundles that give the consumer the same level of satisfaction
81
Indifference curve properties
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
marginal rate of substitution
the rate at which a consumer is willing to trade one good for another negative slope of indifference curve
83
two extreme examples of indifference curves
perfect substitutes (two goods with straight line indifference curves) MRS= constant perfect complements (two goods with right angles indifference curve) MRS= 2:1
84
optimization
point where the highest indifference curve and the budget constraint are tanget
85
consumer's optimal choice
IC=BC
86
slope of indifference curve
MRS
87
substitution effect
move along IC
88
income effect
shifts IC (to higher or lower)
89
Giffen goods
a good that violates the law of demand
90
the engel curve
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
if demand is perfectly price elastic
no CS
92
Opportunity cost =
cost of chosen option + forgone value of best alternative option
93
binding price ceiling
for the last unit sold, PC = cost to producers

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