econ theory

Question 1

When we think about economic theory, what are the basic assumptions we make about
individuals?

Answer 1

Individuals should have the freedom of choice.
Individuals will make choices by weighing costs and benefits, of their purchases, benefits outweigh the costs.
Individuals will seek to maximize utility (benefits or satisfaction you receive from consumption)

Question 2

What are the basic assumptions we make about firms?

Answer 2

Firms can enter and exit the market freely
Firms will compete
Firms will maximize profits

Question 3

What is demand? Law of demand?

Answer 3

An increase in price results in decrease of quantity demanded, and a decrease in price causes an increase in quantity demanded

Question 4

What is supply? Law of Supply?

Answer 4

An increase in a good’s price causes
an increase in quantity supplied and a
decrease in a good’s price results in a
decrease in quantity supplied

Question 5

What is equilibrium?

Answer 5

Point of utmost efficiency where quantity supplied equals quantity demanded.

Question 6

when does market failure occur?

Answer 6

when we are not in equilibrium

Question 7

Market failures?

Answer 7

1. Information asymmetry
2. Positive externalities
3. Negative externalities
4. Common pool resources
5. Public goods

Question 8

What is information assymetry?

Answer 8

One party in the transaction has more information than the other and can exploit that for their gain

Question 9

what can public policy do to address information asymmetry

Answer 9

Force the disclosure of information to affect demand.

Question 10

what are positive externalities?

Answer 10

When a market transaction generates
spillover effects (to those not in the
transaction) that are positive

Question 11

what can public policy do to address positive externalities?

Answer 11

Subsidize this kind of transaction to
increase demand

Question 12

what are negative externalities?

Answer 12

occurs when a market transaction
generates spillover effects (to those not in
the transaction) that are negative.

Question 13

what can public policy do to address negative externalities?

Answer 13

Leverage taxes or regulations to increase
the cost of the transaction. Or information
to decrease demand.

Question 14

what are common pool resources?

Answer 14

occurs when there are goods/resources where it is difficult to exclude people from using them but where consumption of the good/resource is competitive (and typically leads to the depletion of the good/resource)

Question 15

What can public policy do about common pool resources?

Answer 15

Manage the use of the goods/resources through taxation and regulation

Question 16

what are public goods?

Answer 16

Occurs when market forces are not likely to provide a needed good/service aka there is no incentive for private firms to provide.

Question 17

what can public policy do about public goods?

Answer 17

Directly provide the services (typically using taxpayer dollars).

Question 18

Define Rivalrous

Answer 18

(you having it,
takes it away from me having
it – property rights)

Question 19

Non-rivalrous

Answer 19

consumption levels don’t impact supply, everyone has access

Question 20

Excludable Definition

Answer 20

(in theory, you
could build a fence) Keep you from consuming something

Question 21

non-Excludable

Answer 21

can’t keep you from this good

Question 22

Non-rivalrous and non-Excludable Example

Answer 22

Public Goods
(lighthouses, national
defense, clean air)

Question 23

Rivalrous and non-Excludable Example

Answer 23

Common Pool Resources
(fishing, public parks)

Question 24

Rivalrous and Excludable Example

Answer 24

Private Goods
(cell phones, clothes, cars)

Question 25

non-Rivalrous and Excludable Example

Answer 25

Club Goods
(internet service, Patreon
membership)