ECON Final Flashcards
Efficient Resource Allocation Methods
- Market Price: market defines value of a resource in terms of $ impacting willingness to pay allocating scarce resources
- ex. sell labor and buy g+s - Majority Rule: majority of voters choose how resources resources are allocated for big societal decisions, works best for decisions that affect lots of people & self-interest must be suppressed to use resources efficiently
- ex. Taxes between public & private use, defense or healthcare - Command: command system allocates resources by the order of authority, works well in organizations with clear lines but bad in an entire economy
- ex. boss decides labor time & tasks - Contest: allocates resources to winner(s), works well when efforts of “players” are hard to monitor & reward directly
- ex. sporting, Oscars - First-Come First-Served: resources allocated to those first in line, works well when scarce resources can just serve one person at a time in a sequence
- ex. Supermarkets, restaurants - Lottery: allocate resources to those coming up lucky on some gaming system, works well when there is no effective way to distinguish among potential users of a scarce resource
- ex. state lotteries, casinos - Personal Characteristics: allocate resources to those with the “right” characteristics (education, behavior, beauty, old friend), can be used in discriminatory/racist/sexist ways
- ex. Marriage, scholarship, employment - Force: allocating resources effectively through threat, theft, robbery for survival, works well if all other methods fail
- ex. War, establishing legal framework poor vs rich, theft
Value vs Price vs Cost
Value=what we get, Price=what we pay+producer receives, Cost=what producer gives up (Firm distinguishes between Price & Cost)
Individual Demand vs Market Demand
Individual Demand: price vs quantity demanded relationship of one person
Market Demand: price vs quantity demanded relationship of all buyers in a market, horizontal/quantity sum of individual demand curves
Consumer Surplus + Expenditure - Individual vs Market vs Specific Quantity
Individual Consumer surplus: benefit received from good in excess of the expenditure on it, (Value-Price)/quantity bought, triangle above market price
Individual Expenditure: amount paid, area of rectangle below market price
Market Consumer Surplus + Expenditure: horizontal/quantity sum of individual CS + Exp, triangle below market price
Consumer Plus on a Specific Quantity of good: individual value - market price of good, vertical/price difference
Marginal Benefit vs Marginal Cost + Graph components
Marginal Benefit: value/max price willing to pay of one more unit of a good or service, represented by demand/MB curve
Marginal Cost: minimum price that firm is willing to accept for one more unit of a good or service, represented by supply/MC curve
Total Producer Surplus + Production Cost - Individual vs Market vs Specific Quantity
Individual Producer Surplus: amount received from sale of good in excess of the production cost on it received from (price received-min supply price) over quantity sold, area of triangle below market price and above supply curve
Market Producer Surplus: horizontal/quantity sum of individual PS
Production Cost: cost of producing good, space below market price = rectangle-PS triangle
Producer Surplus at a Specific Quantity: market price - marginal cost, vertical price difference
Individual Supply vs Market Supply
Individual Supply: price vs quantity of good supplied by one producer
Market Supply: price vs quantity of good suppliedby all producers, horizontal/quantity sum of individual supply curves
Efficient vs Inefficient Allocation of Resources on Graph + Impact on Production
Equal to the Equilibrium Quantity: MSC=MSB, Q supplied= Q wanted, society is happy, total surplus is maximized (CS+PS)
Left/Less than the Equilibrium Quantity: MSB>MSC = accumulative benefit to produce more
Right/More than the Equilibrium Quantity: MSB<MSC = excess production=accumulative cost, reduce production to be used for something else
Market Failure: any point not on market equilibrium, inefficient outcome, too little UP or too much produced OP
2 Types of Economists
Classical: no interruptions, forces push economy, may be delayed
Caines: interruptions needed, how long do forces take, provide money to speed up process
The Invisible Hand
Competitive markets send resources to their highest valued use in society. Consumers & producers pursue their own self-interest & interact in markets. Market transactions generate an efficient highest valued use of resources
Market Failure Reasons
- Price Regulations: put a block of price adjustments & lead to underproduction
- Quantity Regulations: limit the amount that a farm is permitted to produce also leads to underproduction
- Taxes: taxes on suppliers
- P+tax = rises cost & supply decrease UP - Subsidies: government gives funds to producers to make more
- P-subsidy = lowers cost & supply increase OP - Externalities: cost or benefit that the actions of producer’s have on 3rd party, although production can be production efficient, but not societally efficient
- Positive Externality = Underproduction
- Negative Externality = Overproduction - Public Goods: benefits everyone, no one can be excluded, thus less satisfying → Underproduction
- Freeriding: it is in everyone’s self-interest to avoid paying for a public good - Common Resources: resources owned by no one but can be used by everyone → Overproduction
- Tragedy of Commons: it’s in everyone’s self interest to ignore they costs of their own use of a common resource that fall on others = huge use of resources - High Transaction Cost: costs of services that enable a market to bring buyers & sellers together, too higher → underproduction
- Monopoly: a firm that is a sole provider of a good or service with the self-interest to maximise its profit setting a price to achieve this goal → produces too little & Underproduces
Rent Ceiling + When is it Efficient + Inefficiency + Unfair
Rent Ceiling (R): price ceiling in the housing market
Ineffective above market equilibrium, market will operate at equilibrium legally
Effective below market equilibrium, market consequences
Legal price cannot eliminate the shortage other mechanisms operate:
- Increase in potential loss from search activity: time spent looking for someone with whom to do business, costly,
- Black markets: illegal market that operates alongside a legal market where a price ceiling or other restriction is imposed. Illegal arrangements are made between renters & landlords at rents above the rent ceiling or unregulated market
Inefficiency of Rent Ceiling = Shortage
- Marginal Social Benefit>Marginal Social Cost = QD>QS=shortage
- Deadweight loss arises, producer surplus & consumer surplus shrinks
- Increase in potential loss from increased search activity
Rent Ceilings are Unfair
- Blocks voluntary exchange, generally does not benefit the poor as wealthy offer the highest profit
- Rent ceiling decreases quantity of housing & scarce housing is unfairly allocated by Lottery (the lucky)
First-come first-served (to those with greatest foresight & get their names on the list first)
Discrimination (housing to friends, family members, selected race, sex or political status)
Price Ceiling/Cap
Regulation that makes it illegal to charge above a maximum price
Minimum Wage + When is it Efficient + Inefficiency + Unfair
Minimum Wage: price floor applied to labor markets
Ineffective: below equilibrium, market will operate at legal equilibrium
Effective: above equilibrium, market consequences
Inefficiency of Minimum Wage - Unemployment:
- Effective min wage is set above equilibrium → QS>QD quantity of labor supplied by workers exceeds the quantity demanded by employers
- Quantity of labor decreases
- Surplus of labor/workers → unemployment (inefficient outcome)
- Less workers are hired than within an unregulated labor market
- Marginal social cost of labor to workers (leisure forgone)>Marginal social benefit from labor (value of goods produced)
- Full Loss Increases: DWL rises + Potential loss from increased job search increases → decreasing workers’ & firms’ surplus
Minimum Wage isn’t Fair:
- Increases the unemployment of rate of low-skilled younger workers as they lack job experience & wages have increased
- Government needs to create more job opportunities
Rent Ceiling + Min Wage Long - Draw Graph
1. Formulate 4 equations
2. Effective or Ineffective
3. At Rceil or Wmin=# What is QD & QS. Surplus or Shortage → effect?Unemployment of people or hours
4. DWL
5. Potential loss of search activity
6. Consumer & Producer Surplus
7. Is it fair?
- Isolate for Q or P
- Equilibrium Qe Pe, Rent Ceiling/Min Wage efficient or inefficient above or below equilibrium
- Sub in Rceil or Wmin in Q equations. Depending on which is greater QD or Qs, surplus or shortage, find difference
- Area of arrow point triangle from Qs to Qe
- Rectangle between CS & PS
- Area of top and bottom triangles
- Blocks voluntary exchange, generally does not benefit the poor as wealthy offer the highest profit
Rent ceiling decreases quantity of housing & scarce housing is unfairly allocated by Lottery, First-come first-served, discrimination
Minimum Wage isn’t Fair
Increases the unemployment of rate of low-skilled younger workers as they lack job experience & wages have increased
Government needs to create more job opportunities
Government Actions
- Price Cap/Rent Ceiling
- Price Floor/Min Wage
- Tax
- Production Quotas + Subsidies
Tax + Tax Revenue + Tax Incidence
Taxes: fee added onto price
Direct: income tax
Indirect: GST, goods & services
Tax Revenue: tax x QS
Tax Incidence: division of tax between sellers & buyers, how much for who as government places tax on sellers who in turn pass tax on buyers
-Buyer Tax Paid=Additional price paid by buyers=original price-price after tax
- Seller Tax Paid=Tax Imposed-Buyer Tax Paid
Buyers Pay Tax: price rises by the full amount of the tax
Buyers and Sellers Share: price rises by a lesser amount than the tax
Sellers Pay Tax: price doesn’t rise at all
Tax Imposed on Seller vs Buyer
Tax Imposed on Seller: supply line shifts left, decreases in supply, price incr. for same quantity
- S+tax=supplies+tax
Tax Imposed on Buyer: demand line shifts left, demand decreases, price willing to pay decreases for same quantity
- D-tax=price-tax
Tax Incidence stays the same no matter imposed on seller or buyer
Tax Incidence & Elasticity of Demand vs Supply + Draw Graphs
Tax incidence depends on elasticities of demand & supply, the steeper the line for D (more inelastic demand) or the more flat the line for S (more elastic supply) the more tax paid by buyers
Perfectly inelastic demand: buyers pay the entire tax, they have must buy good no matter the price
Perfectly elastic demand: sellers pay entire tax, very competitive market so seller must pay all the tax
Perfectly inelastic supply: sellers pay entire tax, must sell quantity of resources already made
Perfectly elastic supply: buyers pay entire tax, supply of resources malleable no rush to sell everything
Intervention in Markets for Farm Products
Production Quota: upper limit to the quantity of a good that maybe produced (rent ceiling)
- Inefficient Set Below Equilibrium:
Marginal social benefit=market price increases
Marginal social cost has decreased
Production is inefficient & producers have an incentive to cheat
Subsidy: payment made by government to a produce (opposite of tax) causes overproduction loss for society
- Inefficient Overproduction: marginal social benefit = market demand price decreases. Marginal social cost increases, exceeding marginal social benefit
Imports + Exports + Driver
Imports: g+s bought from other countries
Exports: g+s sold to other countries
National Comparative Advantage: ability of a nation to produce or perform g+s at a lower opportunity cost than any other nation
Import Question - Draw Graph
1. How much Canadians produce, consume how much should be imported
- Consumer & Producer Surplus with no trade
- Who are losers & winners = compares before & after consumer vs producer surplus
- Is the country losing or gaining = compare total surplus, by how much?
Imported good lowers in price.
- QD-QS
- Area of CS Top Triangle, PS Bottom Triangle
- CSAT-CSBT vs PSAT-PSBT
- (TSAT=CSAT+PSAT)-(TSBT=CSBT+PSBT)
Import Tariff - Draw Graph
- Suppose Tariff=#, How much produced domestically (QS), consumed (QD)
- Total PriceATariff rest of world (ROW)
- After Tariff Import Quantity
- Total Tariff Revenue
- Total SurplusFree Trade
- Losers & Winners Consumers, Producers, Society
- DWL = Loss From Tariff
- Ranking 3 types of trade by most beneficial to society
Import Tariff: Pw rises, tax on imported good to promote domestic producers and earn government revenue
- Produced domestically Qs, Consumed domestically QD
- WP+Tariff
- QD-Qs
- Tariff x QAT
- CSAT+ PSAT + TR
- Compare CSAT-CSBT & PSAT-CSBT, TSAT-TSBT
- Canadian consumers lose (higher P lower Q bought), Canadian producers gain (cost of producing lower than P so more shirts produced), Society loses from arising deadweight loss (production costs increased and decreased imports) - TSFree Trade-TSAT
- Free trade, tariff, domestic
Import Quota - Draw Graph
- Supply Source, domestic or ROW
- Domestic Supply
- Profit for importer
- DWL
- Winners & Losers Consumer, Producer, Society
Import Quota: maximum quantity units that can be imported in a given period
- If PDom<Pw($5), supply will come from domestic → QS stays same
If PDom > Pw($5), supply will come from domestic & ROW for Quota# unit → QS=___+Quota#
- Qe-1
- Area of small square
- Area of 2 small triangles
- Compare CSAQ-CSBQ & PSAQ-PSBQ, (TSAQ=CS+PS+Importer Profit)-TSBQ(=CS+PS+Importer Profit)
- Canadian consumers lose (higher P lower Q bought), Canadian producers gain (cost of producing lower than P so more shirts produced), Society loses from arising deadweight loss (production costs increased and decreased imports)
Export Question = Draw Graph
- How much Canadians will produce, consume and exported
- CS, PS, TS no Trade
- Winners & Losers Consumer, Producer Society
Increases price of an exported good.
- QS(produced)-QD(consumed)
- Area of CS top triangle, PS bottom triangle, TS(CS+PS)
- Compare CSAT-CSBAT vs PSAT-PSBAT
- Producers gain (higher P for same Q=more revenue), Consumers lose (more expensive)
Overall Societal Gain = TS Free Trade - TS No Trade
Export Restrictions
Subsidy: payment by government for a domestic producer of an exported good, production cost decreases so domestic supply increases → domestic over production, international underproduction creating DWL
Others: health, safety restrictions
Price Ceiling/Cap vs Price Floor
Price Ceiling/Cap: regulation that makes it illegal to charge above a maximum price
Price Floor: regulation that makes it illegal to trade lower than minimum price
