Econ Flashcards
Key elements of economic analysis?
Axiom, Assumption, deductions, results, compare against data
Characteristics of a good economic model?
Transparent & infallible reasoning. Reasonable predictive power, and simplicity
Normal good
you consume more of it with higher income
ex. designer clothing, ski vacations
Inferior good
demand for good rises when income falls (bus rides
Complements
using more of one good requires more use of another good (printer and ink cartridge)
Substitutes
using more of one good, reduces the demand for another (Pepsi and Cola)
Market in perfect competition
no buyer/seller can affect price and every buyer/seller is a price taker
Market in imperfect competition
some buyer/sellers can affect price and some buyers/sellers are price setter (not parietal optimal)
If some buyer in a market is a price taker, which schedule is not defined?
Demand schedule
If some seller in a market is not a price taker, which schedule is not defined?
Supply schedule
Why is elasticity a more useful measure of curvature of demand and supply curves than slope?
Slope you cannot compare across goods and markets, elasticity is unites and you can compare across goods and markets
Price elasticity of demand
[Q(B) - Q(A)] / .5 [Q(A) +Q(B)]
________________________
[P(B) - Q(A)] / .5 [P(A) +P(B)]
Price elasticity of supply
[Q(2) - Q(1)] / .5 [Q(1) +Q(2)]
________________________
[P(2) - Q(1)] / .5 [P(1) +P(2)]
Demand for cotton is INELASTIC. If the price of cotton falls, what happens to the consumer spending on cotton?
Consumer spending goes down
Demand for beef is ELASTIC, if the price of beef increases, what happens to the consumer spending on beef?
It will stay the same
Equilibrium
State from which there is no tendency to change, you cannot trade out of equilibrium = INVISIBLE HAND
Market equilibrium
supply in the market is equal to demand
Price Adjustment rule of Walrasian Auctioneer
Excess demand - shut down market and raise the price and try again, keep going till equilibrium is reached
What is sold and what is bought as the price moves towards its new equilibrium?
Nothing, until equilibrium is reached
Excise tax - what do we assume about the tax revenue? What does this assumption imply?
If there is a tax revenue, it is not going back to the people who have given it. Assumption implies that the demand curve does not change
In which 2 cases do buyers bear the burden from an excise tax?
When demand is perfectly inelastic or supply is elastic
In which 2 cases do sellers bear the burden from an excise tax?
When demand is perfectly elastic or supply is inelastic
Price floor
always above the equilibrium - excess supply - surplus
Price ceiling
always below the equilibrium - market shortage - rent control
Pareto Improvement
if someone is better off and no one is hurt
Pareto Optimal
a situation in which and other situation would make someone worse off
1st welfare theorem
free trade for a competitive economy leads to a Pareto Optimal allocation
2nd welfare theorem
any pareto optimal situation can be achieved with an appropriate redistribution of income and free trade
2nd welfare theorem - how would a transfer/gift of goods be a better way to redistribute income (better than manipulate the market place)?
Manipulation in the market place will always lead to dead weight loss
positive externality
make others better off
negative externality
make others worse off
Coase’s theorem
an equilibrium with externalities will be pareto optimal regardless of who gets the property rights IF:
- Property rights are specified
- Free trade is permitted
- There is no transaction/bargaining cost
public good
all consumers who get utility from a good consume the same units
local public good
some consumers can be excluded
What is a normative issue in the world with a public good? Positive issue?
How mush of the good CAN we provide (economic) vs. How much of the good SHOULD we supply (political)
In an equilibrium, P & Q are…
the same!
When situation is pareto optimal, social benefits = social cost.
What is the criterion for the optimal provision of a good?
SB=SC - pareto optimal
SB>SC - build more
SB
possible changes that could achieve optimality in the market failure problem for a steel plant…
- Tax them -> waste
- Force them to clean the water (gov regulation)
- Internalization - firms merge
- Define property rights and allow free trade - who has the right to pollute/not be polluted on
Market failure
a situation that leads to an equilibrium that is not pareto optimal
Tax incident
sellers hurt to the extent Ps falls, buyers hurt to the extent Pd rises – cost to interfering in the market!
Taxes who had the burden?
burden depends on price elasticity of supply and demand
more elastic = less burden
less elastic = more burden
Rational person
a person is rational if he/she has some idea of his/her likes/dislikes and will act accordingly
Unemployment
willing and able to work, but cannot get work
price elasticity of a horizontal demand curve
vs
price elasticity of a vertical demand curve
infinity
0
normal vs inferior goods in a market
A good x is said to be normal if higher income causes higher demand for good x.
A good y is said to be inferior if higher income causes lower demand for good y.
exogenous variable
sufficiently important, but not determined int he model, value is constant, if value changes — there is a shock
endogenous variable
is one whose value is determined
within the model
