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Financial Management > Econ Final Flash Cards > Flashcards

Econ Final Flash Cards

1
Q

What was the earliest form of exploitable energy

A

human muscle power

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2
Q

Where does the term horsepower from

A

exploitable animal power used for thousands of years as an early form of energy

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3
Q

What was the world’s first nuclear generator

A

Oak Ridge, TN 1940s

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4
Q

What is the primary tool economist use to measure net benefit of any market outcome

A

economic efficiency

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5
Q

How is economic efficiency defined in Principles of Micro

A

an economy is efficient if all opportunities to make some people better off without making other people worse off have been exhausted
- when all gains from trade have been exhaused
- when total economic surplus has been maximized

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6
Q

what is private efficiency

A

maximizing the net economic benefit to only those involved in an economic transaction/ activity

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7
Q

what is social efficiency

A

maximizing the net economic benefit to society as a whole

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8
Q

what does social efficiency take into account

A

an individuals net personal net benefit and the impact on society as a whole

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9
Q

What does an economists perfect world look like

A

market equilibrium is defined by maximum net benefit to society

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10
Q

Who write the famous theory of the invisible hand

A

Adam Smith

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11
Q

What is the First Theorem of Welfare Economics

A

a market equilibrium is only socially efficient if and only if:
- there is perfect competition
- property rights are well defined
- consumers and producers all display perfectly rational behavior
- there are no information asymmetries
- there are no transactions costs
- there are no externalities

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12
Q

When does market failure occur

A

when any of the first theorem of welfare economic principles are not met

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13
Q

What is the most extreme type of market power

A

monopoly

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14
Q

What does a monopolist do

A

reduces production and charges higher prices compared to the socially efficient market quantity and price

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15
Q

Is the monopoly equilibrium socially efficient

A

No, even though the market is in equilibrium, the monopoly equilibrium is not socially efficient in the sense that the net benefit to society is not maximized

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16
Q

What is an example of a monopoly in the energy markets

A

Standard Oil Company, they controled 91% of global crude oil production in 1904

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17
Q

what is an oligopoly

A

a market structure in which there are a few producers with strong market power

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18
Q

What is a cartel

A

when a group of oligopolists collude with each other and cooperate in order to control the market price

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19
Q

What is an energy example of a oligopoly/ cartel

A

OPEC (Organization of Petroleum Exporting Countries)

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20
Q

What does OPEC stand for

A

Organization of Petroleum Exporting Countries

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21
Q

What is an exception to the rule that markets must be perfectly competetive

A

when a production process is characterized by economies of scale

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22
Q

what is economies of scale

A

means that long-run average cost per unit of output decreases as the quantity produce increases

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23
Q

what is a natural monopoly

A

if a production process displays economy of scale then a single firm can supply the entire market at the lowest cost to society

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24
Q

What is an energy example of economies of scale

A

electric power, natural gas, water & sewage companies like Georgia Power

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25
Q

What does property rights entail

A

a bundle of entitlements defining the owner’s rights, privileges, and limitations for use of the resource

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26
Q

what are the three main characteristics of well-defined property rights

A
  1. exclusivity
  2. transferability
  3. enforceability
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27
Q

What does the exclusivity property right characteristic mean

A

all benefits and costs of owning and using the resource accrue to the owner, and only to the owner, either directly or indirectly by sale to others

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28
Q

what does the transferability property right characteristic mean

A

all property rights should be transferable from one owner to another through voluntary exchange

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29
Q

what does the enforceability property right characteristic mean

A

property rights should be secure from involuntary seizure or encroachment by others

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30
Q

What type of goods violate the condition that property rights must be well-defined

A

public goods like the interstate highway system, national defense

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31
Q

what are the two key characteristics of public goods

A
  1. non-excludability
  2. non-rival
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32
Q

what does non-excludable mean

A

no one can be excluded from consuming the good

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33
Q

what does non-rival mean

A

one person consuming the public good does not reduce the amount available to others

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34
Q

how do consumers and producers have to behave

A

rationally, market failure occurs when consumers or producers do not behave rationally

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35
Q

what happens when people do not behave rationally

A

net benefits are not maximized, and market efficiency is undermined

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36
Q

what does asymmetric information mean

A

when one party knows something about the good/ service that the other party does not know

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37
Q

what are the two broad categories of information asymmetry

A

moral hazard and adverse selection

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38
Q

what does moral hazard mean

A

when one party cannot perfectly monitor the other’s actions

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39
Q

adverse selection

A

when one party cannot know the other party’s “type” the latter may present false information about its type (classic “Lemons problem”

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40
Q

what do transaction costs do

A

they can prevent mutually beneficial trades from occurring, leading to inefficient outcomes

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41
Q

what are the three main categories of transaction costs

A

search and information costs
bargaining and legal costs
monitoring and enforcement costs

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42
Q

what does search and information costs mean

A

opportunity cost of time/ effort spent gathering and analyzing information

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43
Q

what does bargaining and legal costs mean

A

can be significant for major capital investments like energy infastructure

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44
Q

what does monitoring and enforcement costs mean

A

complex transactions typically require highly detailed contracts, which must be monitored and enforced

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45
Q

when do externalities occur

A

when individual actions result in economic costs or benefits not take into account by the market

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46
Q

what is an example of a good externality

A

good street lighting at night reduces crime

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47
Q

what is an example of a negative externality

A

burning fossil fuels generates pollution and carbon emission

48
Q

when can government intervention improve society’s welfare

A

when markets do not achieve efficiency

49
Q

examples of market intervention to correct market failure

A

anti-trust laws, provision of public goods

50
Q

what does equity mean

A

roughly synonymous with fairness

51
Q

is economics concerned with equity or efficiency

A

efficency

52
Q

what is the meaning of sustainability

A

development that meets the needs of present generations without compromising the ability of future generations to meet their needs

53
Q

what are the two conditions of sustainability

A

dynamic efficiency and intergenerational equity

54
Q

what does dynamic efficiency mean

A

maximizing the flow of social net benefits over time

55
Q

what does intergenerational equity mean

A

future generations are at least as well off as the current generation; total economic surplus is not declining over time

56
Q

what does weak sustainability mean

A

assumes some natural capital can be substituted for by other forms of capital over the long-run

57
Q

what does strong sustainability mean

A

assumes other forms of capital are not long run substitutes for natural capital

58
Q

How is the demand curve different from the inverse demand curve

A

both curves depict the exact same relationship between price and quantity demanded

59
Q

what does a normal good mean

A

if income increases, then all else equal quantity demanded will increase, expect a positive sign on the demand equation

60
Q

what does a substitute good mean

A

if price of substitute rises, then all else equal quantity demanded will rise, so we expect positive sign in demand equation

61
Q

what does a complement good mean

A

if price of a complement rises, then all else equal quantity demanded will fall, so we expect a negative sign in the demand equation

62
Q

what do elasticities do

A

measure the responsiveness of quantity demanded to changes in a good’s price

63
Q

price elasticity of demand

A

ratio of the percentage change in quantity demanded to the percentage change in price

64
Q

income elasticity of demand

A

ratio of the percentage change in quantity demanded to the percentage change in consumer income

65
Q

cross price elasticity of demand

A

the ratio of percentage change in quantity demanded to the percentage change in price of substitute or complement good

66
Q

what happens to demand for SUV’s when gas price falls

A

demand increase - demand curve shifts out (right)

67
Q

what is consumer surplus

A

measure of net economic benefit of consumption

68
Q

how to calculate consumer surplus

A

difference between consumers willingness to pay for a good and the price they actually pay

area below demand curve, above price, up to quantity demanded

69
Q

what is the first order condition with supply

A

p - C’(Q)=0
p= C’(Q)
p = MC(Q)

70
Q

how does marginal cost relate to output production

A

marginal cost increases as output decreases

71
Q

what does C’‘(Q)>0 assumption tell us

A

total costs are increasing at an increasing rate,

ie. diminishing marginal returns to factors of production

72
Q

what is producer surplus

A

measure the net economic benefit of production

73
Q

how to calculate producer surplus

A

difference between the price the producer receives for a good and the minimum willingness to accept price

area below price, above supply curve, up to the quantity supplied

74
Q

what does market equilibrium imply

A

under perfect competition automatically maximizes social welfare, or total economic surplus

75
Q

What is Average Total Cost

A

ATC is total cost (TC) divided by output (Q), or equal to sum of average fixed cost (AFC) and average variable cost (AVC)

ATC= TC / Q

76
Q

what does increasing returns to scale yield

A

economies of scale, fewer inputs are needed per unit of output as sale increases, reducing average cost

77
Q

what does decreasing returns to scale yield

A

diseconomies of scale, more inputs are needed per unit of output as scale increases, increasing average cost

78
Q

where is the monopoly profit maximizing condidtion

A

MR = MC

79
Q

what is a free rider

A

someone who enjoys benefit of public good but does not pay an efficient amount for their consumption of it

80
Q

What is the samuelson condition for efficent public good provision

A

marginal cost for providing the public good should equal the sum of the private marginal benefits

81
Q

what does a Pigouvian tax to correct negative externalities do

A

causes market participants to “internalize” the externality

t=MEC(Qso)

82
Q

non-renewable resource meaning

A

mineral and fossil fuel resources found in finite supply in the earth’s crust; there is a fixed stock of the resource

83
Q

current reserves meaning

A

known stock of the resource that can profitably extracted at current prices

84
Q

potential reserves

A

stock of the resource that may become profitably extractable if prices rise high enough

85
Q

undiscovered reserves

A

unspecified deposits of mineral-bearing material believed to exist on the basis of geological data and theory

86
Q

resource endowment

A

the natural occurrence of resources within a country or region

87
Q

marginal user cost definition

A

opportunity cost of extracting/ using a resource today, which is that it will not be available to use in future

88
Q

what is a backstop resource

A

a substitute for depletable resource

89
Q

when does a backstop resource begin being consumed

A

at the point where the total marginal cost of extracting the depletable resource exceeds the marginal cost of producing the backstop resource

90
Q

what are external costs

A

costs not account for by either the marginal production or user costs

91
Q

how do external costs affect the switching time to a backstop resource

A

switching point would come sooner

92
Q

what is the theory of endogenous risk

A

in which the probabilities of different outcomes are themselves affected by the choices we make

93
Q

is oil a renewable resource?

A

No, it is considered non-renewable because it is not regenerated in the earth’s crust at a rate fast enough to keep up with current rate of human consumption

94
Q

what is absolute scarcity

A

finite amount of oil resources available, therefore if we keep using it we will run out

95
Q

what is relative scacity

A

as oil becomes relatively more scare than other resources, its price will rise, incentivizing us to adapt in various ways

96
Q

how many countries are in OPEC

A

12 countries

97
Q

Founding members of OPEC

A

Iran, Iraq, Kuwait, Saudi Arabia, Venezuela

98
Q

Two countries that have terminated OPEC membership

A

Indonesia and Gabon

99
Q

what does OPEC to do keep prices favorable

A

by controlling the vast majority of world’s oil resources, they can restrict production to keep price high

100
Q

competitive fringe

A

the dominant firm takes advantage of small firms by setting the price, becomes the price leader

101
Q

3 classifications of natural gas

A
  1. Conventional vs unconventional
  2. wet vs dry
  3. sweet vs sour
102
Q

Conventional natural gas meaning

A

found in large subterranean accumulations or reserves, easy to extract

103
Q

unconventional natural gas meaning

A

not found in large accumulations, more difficult to extract. Trapped in rock formations with low permeability

104
Q

wet vs dry natural gas meaning

A

wet gas contains high levels of natural gas liquids like ethane, butane…

105
Q

sweet vs sour natural gas meaning

A

sour gas contains sulphur, sweet gas does not

106
Q

1938 Natural gas act

A

enacted by congress to regulate new long-line interstate pipelines

granted power to Federal Power Commission

107
Q

1942 - 1978 Wellhead Price Controls

A

4 rationales for wellhead price controls
- need for comprehensive regulatory framework
- anti-competitive behavior of oil companies
-lack of competition in natural gas production markets
- a shift of price differential rents from producers to consumers

FPC ruled that sales from producers to affiliated interstate pipelines would be subject to federal oversight

108
Q

1954 Phillips Petroleum vs State of Wisconsin

A

Supreme Court decision required FPC to begin regulating wellhead prices on all field sales

109
Q

1978 Natural Gas Policy Act

A

created Federal Energy Regulatory Committee (FERC) to oversee changes ushered by NGPA, phased out wellhead price controls on new supplies

110
Q

Benefit of 1978 Natural Gas policy Act

A

-market demand did not increase as much as predicted
-addition of new customers to pipeline and utility delivery networks
-interstate gas supplies increased by more than increase in production

111
Q

Consequences of partial wellhead price decontrol

A

new contracts negotiated prices that were still too high to be supported by the market, resulting in excess supply

112
Q

Name of pricing structure for Gas pipelines

A

two-part tariff

113
Q

description of two-part tariff for gas pipelines

A

firm customers subscribe to a portion of the pipelines capacity

fixed monthly fee per unit of subscribed capacity (called an access or reservation fee)

variable charge per unit of gas shipped (usage charge)

both are regulated

114
Q

spot price arbitrage

A

implies difference between the Hub and City gate spot price must equal the transportation charge

115
Q

what do firm customers do if they do not utilize their capacity

A

the ship gas or release it to other shippers to use

unregulated transportation charge from this

Financial Management (2 decks)

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