econ_101_20150123003412 Flashcards
Scarcity
The problem of unlimited human wants and needs in a world with limited resources.
Economics
Examining how society allocates scarce resources.
Examples of allocation of scarce resources in Canada:
Public health care, education, welfare, infrastructure.
Going to a party the night before a midterm instead of studying is an example of which principle of economics?
People face tradeoffs.
Opportunity Cost
The cost of any item is what we give up to take it.
There is an unlimited number of things you can be doing other than what you are doing. However, the opportunity cost of something is the…
Next best option.
One principle of economics is “the cost of something is what you give up to get it”. Based on this principle, economics states that nothing in life is ___. The payment can be in the form of ___ or ___.
Free. Time, money.
Another principle of economics is that ___ people think at the ___.
Rational, margin.
What does “rational people think at the margin” mean?
People do the best they can given the constraints. Look at incremental changes to see if the benefits outweigh the costs.
When gas prices rise, the sales of SUV’s go down and the sales of small cars go up. This is an example of which principle of economics?
People respond to incentives.
In the principle “people respond to incentives”, the incentive can be ___ or ___.
Positive or negative.
Rather than be self-sufficient, one can specialize and trade for other goods. This illustrates which principle of economics?
Trade can make everyone better off.
What is a market?
A group of buyers and sellers, not necessarily in the same place.
One principle of economics states that “___ are a good way to organize economic activity.”
Markets
Organizing economic activity means knowing:
What to produce, how to produce, how much to produce, and who gets the product.
The invisible hand works through the ___ system.
Price.
The price system is the interaction between ___ and ___.
Buyers and sellers.
The price system reflects the ___/___ of the goods/service.
Cost/value.
In most cases, ___ guide households and firms to make decisions that further society’s well being.
Prices.
Who stated that “impersonal operation of prices bring people together”?
Milton Friedman.
Governments enforcing property rights is an example of which principle of economics?
Governments can sometimes improve market outcomes.
People are less likely to work, produce, invest, or purchase if there is a large risk of…
Their property being stolen.
Examples of what governments are responsible for economically:
Printing money, making sure companies don’t monopolize, taxation, labour laws.
One principle of economics states that “A country’s standard of living depends on its ability to…”
Produce goods and services.
Give examples that demonstrate that there is a huge variation of living standards across countries and over time.
Average income in rich countries is ten times the average income in poor countries. Canada’s standard of living is eight times larger than 100 years ago.
A principle of economics states that “prices rise when the government…”
Prints too much money.
Inflation
Increases the general level of prices.
Inflation is always caused by excessive growth in the quantity of money, thereby…
Decreasing its value.
The faster the government creates money, the greater the ___ ___.
Inflation rate.
In the short run, many economic policies cause inflation and unemployment to move in opposite directions. This demonstrates which economic principle?
Society faces a short-run trade-off between inflation and unemployment.
Economy, in Greek, means…
One who manages a household.
Efficiency
The property of society getting the most it can from its scarce resources.
Equity
The property of distributing economic prosperity fairly among the members of society.
Marginal Changes
Small incremental adjustments to a plan of action.
Incentive
Something that induces a person to act.
Market Economy
An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
Property Rights
The ability of an individual to own and exercise control over scarce resources.
Market Failure
A situation in which a market left on its own fails to allocate resources efficiently.
Externality
The impact of one person’s actions on the well-being of a bystander.
Market Power
The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.
Productivity
The quantity of goods and services produced from each hour of a worker’s time.
Business Cycle
Fluctuations in economic activity, such as employment and production.
What are the roles of an economist?
Scientist and policy adviser.
As a scientist, economists try to…
Explain how the world works.
As a policy adviser, economists try to…
improve the world.
Assumptions
Simplify the real complex world, making it easier to explain issues.
Model
Highly simplified representation of a more complicated reality.
Circular Flow Diagram
A visual model of the economy, which shows how dollars flow through markets among households and firms.
In a Circular Flow Diagram, there are two actors…
Households and firms.
In a Circular Flow Diagram, there are two markets…
Markets for goods and services, and markets for factors of production.
What are factors of production?
Resources used to produce goods and services.
In a Circular Flow Diagram, the role households play is…
They own the factors of production and sell/rent them to firms for income. In turn, they buy and consume goods/services.
In a Circular Flow Diagram, the role firms play is…
They buy or hire factors of production and use them to produce goods/services. In turn, they sell those goods/services.
What are the three factors of production?
Labour, land, and capital.
What is capital?
Buildings, machinery, and equipment.
What is Production Possibilities Frontier?
A graph that shows the combinations of the goods the economy can possibly produce given its available resources and the available technology?
Points on the PPF line are ___ and ___.
Possible and efficient.
Points under the PPF line are ___ and ___.
Possible but inefficient.
Points above the PPF line are ___.
Impossible.
Moving along the PPF line involves shifting ___ like labour from the production of one good to another.
Resources.
Society faces tradeoffs between…
The goods.
The slope of the PPF tells you…
The opportunity cost of one good in terms of the other.
How do you calculate slope?
Rise over run.
When the economy grows, the PPF shifts…
Outwards.
When the economy shifts, the PPF shifts upwards. Does the shift have to be symmetrical?
No.
The shape of the PPF can be…
Linear or bow shaped.
The shape of the PPF line depends on…
What happens to the opportunity cost as the economy shifts resources.
What does PPF stand for?
Production Possibilities Frontier.
A constant opportunity cost is represented by…
A straight PPF line.
An increased opportunity cost is represented by…
A bow shaped PPF line.
PPF is bow shaped when…
Different workers have different skills or different opportunity costs of producing one good in terms of the other. When there is some other resource, or mix of resources with varying opportunity costs (ex. different types of land suited for different uses).
Microeconomics
Examines how households and firms make choices and how they interact with markets.
Macroeconomics
Examines the economy as a whole (ex. inflation, unemployment, and economic growth).
Positive Statements
When economists act as scientists, and attempt to describe the world as it is.
Negative Statements
When economists act as policy advisors, and attempt to prescribe the world as it should be.
In trade, one side benefits and one side suffers. Is this true or false? Explain why.
False. Trade benefits both parties.
Trade is voluntary. Is this true or false?
True. Trade is voluntary most of the time.
In today’s society, you rely on many people from around the world, most of whom you’ve never met, to provide you with the goods and services you use. What does this demonstrate?
Interdependence.
What is the principle of economics that relates to trade?
Trade can make everyone better off.
If Canada has 50 000 hours of labour available for production, 1 computer takes 100 hours to make, and 1 ton of wheat takes 10 hours to produce, what is the result of dividing labour in half?
250 computers and 2500 tons of wheat.
If Japan has 30 000 hours of labour available for production, 1 computer takes 125 hours to make, and 1 ton of wheat takes 25 hours to produce, what is the result of dividing labour in half?
120 computers and 600 tons of wheat.
Exports
When goods and services are produced domestically and sold abroad.
Imports
When goods and services are produced abroad and sold domestically.
When a country gains from trade, a previously ___ amount of goods can be produced, to the point where it is above the ___ line.
Impossible, PPF.
Absolute Advantage
The ability to make goods and services using fewer inputs than another producer.
In the example where it takes Canada 100 hours and 10 hours to produce a computer and wheat respectively, and Japan takes 125 hours and 25 hours to produce the same products, who holds the absolute advantage for each product?
Canada holds the absolute advantage for both the wheat and the computers, as it takes Canada less time to produce the goods.
If each country has an ___ advantage in one good and specializes in that good, then both countries can gain from trade.
Absolute.
Comparative Advantage
Ability to make goods or services at a lower opportunity cost than another producer.
In terms of the wheat and computers example, what is the opportunity cost of the two products?
The opportunity cost of wheat is computers and the opportunity cost of computers is wheat.
For Canada, 1 computer costs 100 hours of labour which equates to 10 tons of wheat. For Japan, 1 computer costs 125 hours of labout which equates to 5 tons of wheat. Who holds the comparative advantage for computers?
Japan holds the comparative advantage for computers, as is costs them less in terms of what they give up (wheat) in order to produce that computer.
Absolute advantage is needed for comparative advantage. True or false?
False. Absolute advantage is not needed for comparative advantage.
Gains from trade happen due to ___ advantages.
Comparative advantages.
Comparative advantages, in essence, are differences in ___ ___.
Opportunity cost.
Specializing in goods that the country possesses a comparative advantage in makes the world’s ___ ___ bigger.
Economic pie.
Market
A group of buyers and sellers.
Competitive Market
A type of market, where there are many buyers and sellers and no one has a significant impact on price.
What are the two conditions necessary to achieve a perfectly competitive market?
- All goods are identical. 2. There are so many buyers and sellers that no one on their own can change the market price.
The quantity demanded describes…
A consumer desire, willingness, and ability to pay a price for a specific good or service.
What are the three consumer aspects crucial to quantity demand?
Desire, willingness, and ability.
What is the Law of Demand?
The quantity of a good or service demanded falls as the price rises (when everything else is equal).
Demand Schedule
A table showing the relationships between price and the quantity demanded for that good.
For the in class example, Helen’s demand for lattes obeyed the…
Law of Demand.
The quantity demanded in the market is the sum of the…
Quantities demanded by all buyers at each price.
The demand curve shows how price impacts quantity demanded, if other things are equal. What are these “other things” that can change demand?
Demand curve shifters.
How can the number of buyers shift the demand curve?
As the number of buyers increases, the quantity demanded at each price increases. Therefore, the demand curve shifts to the right. (Ex. if iPhones sold for $100).
How can income shift the demand curve?
The more wealthy one becomes, the goods and services bought differs drastically.
What is a Normal Good? Define and give an example.
Demand for the good increases as income increases. (Ex. eating out).
What is an Inferior Good? Define and give an example.
Demand for the good decreases as income increases. (Ex. Kraft Dinner).
For Normal Goods, an increase in income shifts the demand curve to the ___.
Right.
What are the five factors that can shift the demand curve?
- Number of buyers. 2. Income. 3. Prices of related goods. 4. Tastes. 5. Expectations.
How can prices of related goods shift the demand curve?
A rise in price for one good can increase demand for a substitute good, or a rise in price of one good causes a decrease the demand for a complement good.
Two goods are substitutes if…
A rise in price of one good causes an increase in demand for the other good.
Give an example of two goods that are substitutes.
Hot dogs and hamburgers.
Two goods are complements if…
A rise in price in one good causes a decrease in demand for the other good.
Give an example of two goods that are complements.
Ketchup and hamburgers.
How can tastes shift the demand curve?
Anything that causes a shift in tastes toward a good will increase demand for the good and shift its demand curve right.
Give an example of tastes shifting the demand curve.
Popularity of gluten-free diet results in increased demand for gluten-free food.
How can expectations shift the demand curve?
If consumers expect their incomes to increase, their demand for expensive goods increases. If consumers expect a recession and worry about losing their jobs, demand for expensive goods decrease.
Price causes a movement ___ the D-curve, but everything else ___ the D-Curve.
Along, shifts.
Supply
The quantity supplied: the amount of some good that sellers are willing and able to sell.
Law of Supply
Quantity supplied of a good rises when the price of the good rises (everything else equal).
Supply Schedule
A table that shows the relationship between the price of a good and the quantity supplied.
Market supply vs. Individual supply states that…
The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price.
What are the 4 supply curve shifters?
- Input prices. 2. Technology. 3. Number of sellers. 4. Expectations.
How do input prices affect the supply curve?
A fall in prices (for wages or prices for raw materials) makes production more profitable at each price, so firms will supply more of the good at each price.
Which way does the supply curve shift for input prices, technology, and number of sellers?
Right.
Which way does the supply curve shift for expectations?
Left.
How does technology affect the supply curve?
Technology determines how much inputs are needed to produce a good. A cost-saving technological improvement has the same impact as the fall of input prices.
How does the number of sellers affect the supply curve?
An increase in the number of sellers increases the quantity supplied at each price for a good.
How do expectations affect the supply curve?
In general, sellers may adjust supply when there is expectations of future price change.
Give an example of how expectations can affect the supply curve.
Events in the Middle East lead to expectations of higher oil prices. Albertan oil companies may save some oil to sell later at higher prices.
Equilibrium Price
The price that equates quantity supplied with quantity demanded.
Equilibrium Quantity
The quantity supplied and quantity demanded at the equilibrium price.
Surplus (excess supply)
When quantity supplied is greater than quantity demanded.
Shortage (excess demand)
When quantity demanded is greater than quantity supplied.
What are the three steps to analyzing changes in equilibrium?
- Decide whether event shifts S curve, D curve, or both. 2. Decide in which direction curve shifts. 3. Use supply-demand diagram to see how the shift changes equilibrium P and Q.
What is elasticity?
A measurement of how one variable responds to changes in another variable.
What is a common example of elasticity.
If prices rise, how much does demand fall?
Give an example of a product that is elastic and a product that is inelastic.
Lattes are elastic and insulin is inelastic.
What does the price elasticity of demand measure?
How much quantity demanded responds to a change in price.
What is the formula for price elasticity of demand?
(% change in Q demanded)/(% change in P)
Along a demand curve, price and quantity move in opposite directions, which would make price elasticity ___.
Negative.
Price elasticizes are reported in ___ numbers.
Positive.
What is wrong with the following formula:% change = ((end value - start value)/(start value))*100
This formula gives different answers depending on where you start.
What is the formula that utilizes the endpoint method?
% change = ((end value - start value)/(midpoint))*100
What is the midpoint?
The number halfway between start and end values (the average).
What are the 4 factors that price elasticity depends on?
- Extent to which close substitutes are available. 2. Whether the good is a necessity or a luxury. 3. How broadly or narrowly the good is defined. 4. The time horizon.
Price elasticity depends on the time horizon. What does this mean?
Elasticity is higher in the long run than the short run.
The slope of the demand curve and price elasticity of demand are ___.
Related.
The flatter the curve, the ___ the elasticity.
Larger.
The steeper the curve, the ___ the elasticity.
Smaller.
What are the 5 types of demand curves?
Perfectly inelastic demand, inelastic demand, unit elastic demand, elastic demand, and perfectly elastic demand.
What is the demand curve for perfectly inelastic demand
A vertical line.
What is the consumer price sensitivity for perfectly inelastic demand?
None.
What is the elasticity for perfectly inelastic demand?
0.
What is the demand curve for inelastic demand?
A steep line.
What is the consumer price sensitivity for inelastic demand?
Relatively low.
What is the elasticity for inelastic demand?
What is the demand curve for unit elastic demand?
Intermediate slope.
What is the consumer price sensitivity for unit elastic demand?
Intermediate.
What is the elasticity for unit elastic demand?
1.
What is the demand curve for elastic demand?
Relatively flat.
What is the consumer price sensitivity for elastic demand?
Relatively high.
What is the elasticity for elastic demand?
> 1.
What is the demand curve for perfectly elastic demand?
Horizontal.
What is the consumer price sensitivity for perfectly elastic demand?
Extreme.
What is the elasticity for perfectly elastic demand?
Infinite.
Revenue is ___*___.
Price, quantity.
Raising your price can influence your revenue in two ways:
- A higher price can lead to more revenue, as you make more money per unit sold. 2. A higher price can lead to fewer units sold due to the law of demand, lowering revenue.
If the loss in revenue from lower quantity sold is greater than the revenue from a higher price, revenue ___. This happens in a case that demand is ___.
Falls. Elastic.
If the loss in revenue from a lower quantity sold is smaller than the increase in revenue from a higher price, revenue ___. This happens in a case that demand is ___.
Rises. Inelastic.
Price elasticity of supply measures how much quantity supplied responds to a change in ___.
Price.
The flatter the supply curve, the ___ the elasticity.
Larger.
The steeper the supply curve, the ___ the elasticity.
Smaller.
What are the 5 different types of supply curves?
Perfectly inelastic, inelastic, unit, elastic, and perfectly elastic.
What is the slope of a perfectly inelastic supply curve?
Vertical.
What is the seller’s price sensitivity of a perfectly inelastic supply curve?
None.
What is the elasticity of a perfectly inelastic supply curve?
0.
What is the slope of an inelastic supply curve?
Steep.
What is the seller’s price sensitivity of an inelastic supply curve?
Relatively low.
What is the elasticity of an inelastic supply curve?
What is an example of inelastic supply?
Car companies.
What is an example of (close to) perfectly inelastic supply curve?
Electricity companies.
What is the slope of unit elastic supply?
Intermediate slope.
What is the seller’s price sensitivity of unit elastic supply?
Intermediate.
What is the elasticity of unit elastic supply?
1.
What is the slope of elastic supply?
Relatively flat.
What is the seller’s price sensitivity of elastic supply?
Relatively high.
What is the elasticity of elastic supply?
> 1.
What is the slope of perfectly elastic supply?
Horizontal.
What is the seller’s price sensitivity of perfectly elastic supply?
Extreme.
What is the elasticity of perfectly elastic supply?
Infinite.
The easier sellers can change the quantity of the good or service they produce, the ___ the price elasticity of supply.
Greater.
Price elasticity of supply is ___ in the long run, because businesses can build new factories or firms to enter the market.
Greater.
What is the formula for income elasticity of demand?
(% Change in Quantity Produced)/(% Change in Income)
Income elasticity is ___ for normal goods. and ___ for inferior goods.
Positive, negative.
What is the formula for cross-price elasticity of demand?
(% Change in Quantity Produced of Good A)/(% Change in Price of Good B)
Cross-price elasticity is ___ for substitutes, and ___ for compliments.
Positive, negative.
Government policies that impact private market outcomes include price controls. What are two types of price controls?
Price ceiling and price floor.
What is the price ceiling?
A maximum price for a good/service.
What is the price floor?
A minimum price for a good/service.
Taxes
The government can make buyers and sellers pay a specific amount on every unit they buy or sell.
If the price ceiling is above equilibrium price, it has ___ impact on the market outcome. This means that it is ___ ___.
No. Non-binding.
If a price ceiling is below equilibrium price, the ceiling is a ___ ___ on the price and cause a shortage.
Binding constraint.
In the long run, both supply and demand are more price ___, so the shortage is ___.
Elastic, larger.
When there is a shortage, who are the winners and who are the losers in a market for apartments?
The renters that already have an apartment are winners, but people looking for an apartment and those who rent out the apartment are losers.
With a shortage, sellers must figure our how to ___ the goods among buyers.
Ration.
What are the two rationing mechanisms?
- Long lines. 2. Discrimination according to seller’s biases.
Rationing mechanisms are often unfair and inefficient, as the goods…
Do not necessarily go to the buyers that value them most highly.
When prices go uncontrolled, the rationing mechanism is ___, because…
Efficient. Because the goods go to buyers who value them the most, and the process is impartial.
Price floors are only binding if they are ___ market (equilibrium) price.
Above.
Minimum wage laws affect who? Who doesn’t it affect?
Minimum wage laws affect teen workers, but do not affect highly skilled workers.
A price floor below the equilibrium price is ___ because…
Non-binding. Because it has no effect on market outcome.
___ are signals that society uses to guide the allocation of resources.
Prices.
If the government interferes with prices, allocation is ___.
Altered.
Governments use ___ on goods and services to raise revenue to pay for services (hospitals, roads, schools, etc.)
Taxes.
Taxes apply to buyers, sellers, or both?
Both.
A tax on buyers shifts the demand curve ___ by the amount of tax.
Down.
The incidence of tax: Burden of tax is ___ among market participants.
Shared.
A tax on sellers shifts the supply curve ___ by the amount of tax.
Up.
The effects on price and quantity, and the tax incidence are ___ whether the tax is imposed on buyers or sellers.
The same.
The outcome of taxes on buyers and sellers is…
The same.
A tax drives a wedge between…
The price buyers pay and the price sellers receive.
When it is easier for sellers than buyers to leave the market, and the buyers bear most of the burden of the tax, ___ is more elastic than ___.
Supply is more elastic than demand.
When it is easier for buyers than sellers to leave the market, and the sellers bear most of the burden of the tax, ___ is more elastic than ___.
Demand is more elastic than supply.
Welfare economics studies how the allocation of resources influences people’s…
Well being.
The allocation of resources refers to 3 things. What are they?
- How much of each good is produced. 2. Which producers produce it. 3. Which consumers consume it.
What does WTP stand for?
Willingness to Pay.
Define WTP.
The maximum price the buyer will pay for that good.
WTP is a mix of ___ and ___ to pay.
Willingness and ability.
What does the demand curve of WTP look like?
A staircase.
There is ___ step per buyer in a WTP demand curve.
One.
What is a marginal buyer?
The buyer will leave the market if the price were any higher.
Define CS, and give the formula.
The amount a buyer is willing to pay minus the amount the buyer actually pays. CS=WTP-P.
What does CS stand for?
Consumer surplus.
How do you find total CS?
Add up each consumer’s CS.
Consumer surplus is the area ___ the equilibrium line.
Above.
Producer surplus is the area ___ the equilibrium line.
Below.
Tax revenue is the area to the ___ of the line that displays the size of the tax.
Left.
DWL stands for…
Dead Weight Loss.
Tax creates a ___ between the price the buyers pay and the price sellers receive.
Wedge.
When does the effect of a wedge being driven between the price buyers pay and the price sellers receive happen?
Whenever tax is charged, whether it be on the buyers or the sellers.
What is the formula for the revenue from tax?
Size of tax * quantity with tax.
What is DWL?
The loss in total surplus that results from a market distortion, such as tax.
When supply is ___, it’s harder for firms to leave the market when the tax reduces the price of the supply, so the tax only reduces quantity a little, and DWL is small.
Inelastic.
In a case where supply is inelastic, ___ take most of the burden of the tax.
Businesses.
The ___ elastic the supply. the easier it is for firms to leave the market when the tax reduces the price of the supply, and the greater quantity falls below the surplus maximizing quantity, and the ___ the DWL.
More, greater.
When demand is ___, it’s harder for consumers to leave the market when the tax raises the price buyers pay. So, the tax only reduces quantity a little, and DWL is ___.
Inelastic, small.
When demand is ___, the easier it is for buyers to leave the market when tax increases the price buyers have to pay. So, quantity falls below the surplus=-maximizing quantity, and the ___ the DWL.
Elastic, greater.
A ___ government provides more services, but requires higher taxes which cause DWL.
Bigger.
The ___ the DWL from taxation, the greater the argument for smaller government.
Larger.
The tax on ___ ___ is very important, as it is the biggest source of government revenue.
Labour income.
For the typical worker, the marginal tax rate is…
40%.
If labour supply is ___, then DWL is small.
Inelastic.
If labour supply is ___, then DWL is large.
Elastic.
What are some ways that labour supply can be elastic?
-Changing hours to work overtime. -Second earner allows flexibility. -Elderly may retire sooner. -“Underground Economy”.
The ___ curve shows the relationship between the size of tax and tax revenue.
Laffer.
What is Pw?
The world price of a good.
What is world price?
The price that prevails in world markets.
What is Pd?
Domestic price without trade.
If Pd _ Pw, then the country has a comparative advantage in the good, and the country would ___.
If Pd _ Pw, then the country does not have a comparative advantage in the good, and the country would ___.
> . Import.
What is the small economy assumption?
A small economy is a price taker in world markets, since its actions have no effect on the world price.
What is an example of a small economy?
Canada.
Why would no seller accept less than the world price in a small economy?
She could sell the good for the world price in world markets.
Why would no buyer pay more than the world price in a small economy?
She could buy the good for the world price in world markets.
In a country that exports beans, if the domestic demand is 300 and the domestic supply is 750, how much will be exported?
450.
In a country that exports beans, who are the losers and who are the winners?
The consumers are losers and the producers are winners.
On a graph where a country exports beans, where is the consumer surplus without trade?
The area above the equilibrium line.
On a graph where a country exports beans, where is the consumer surplus with trade?
The area above the export line.
On a graph where a country exports beans, where are the gains from trade?
The area bordered by the equilibrium line, the export line, the supply curve, and the demand curve (above the equilibrium point).
On a graph where a country exports beans, where is the producer surplus without trade?
The area below the equilibrium line.
On a graph where a country exports beans, where is the produced surplus with trade?
The area below the export line.
In a country that imports plasma TV’s, if the domestic demand is 600 and the domestic supply is 200, the country would import how many?
400.
On a graph where the country imports plasma TV’s, where is the consumer surplus without trade?
The area above the equilibrium line.
On a graph where the country imports plasma TV’s, where is the consumer surplus with trade?
The area above the import line.
On a graph where the country imports plasma TV’s, where is the gains from trade?
The area bordered by the supply and demand curves, and the equilibrium line and import line below the equilibrium point.
On a graph where the country imports plasma TV’s, where is the producer surplus without trade?
The area below the equilibrium line.
On a graph where the country imports plasma TV’s, where is the producer surplus with trade?
The area below the import line.
When the country imports plasma TV’s, who loses and who wins?
The producers are losers and the consumers are winners.
Whether a good is imported or exported, trade creates winners and lowers, but ___ exceed ___.
Gains, losses.
With trade, consumers enjoy a greater variety. True or false?
True.
With trade, producers sell to ___ markets, and can achieve ___ costs.
Larger, lower.
With trade, competition from abroad may reduce market power of domestic firms, which would ___ total welfare.
Increase.
How does trade influence technology?
It encourages the spread of ideas.
How does trade encourage world peace?
It causes countries to have common interests.
People oppose trade, as the ___ are highly concentrated among a small group of people who feel them acutely.
Losses.
People oppose trade, as the ___ are often spread thinly over many people, who may not see how trade benefits them.
Gains.
People oppose trade, and the ___ have more incentive to organize and lobby for restrictions on trade.
Losers.
What is a tariff?
A tax on imports.
How to you calculate consumer price?
Consumer price = Pw + T
Where is the revenue generated from the tariff?
The rectangle underneath the supply and demand curves, in between the two DWL triangles.
Where is the DWL generated from tariff?
The two triangles adjacent to the revenue rectangle.
Of the two DWL triangles generated as a result of tariff, which is the DWL from the overproduction of shirts by producers and which is the DWL from the under-consumption of shirts by consumers?
The triangle on the left is a result of overproduction of shirts by the producers. The triangle on the right is the result of the DWL from the under-consumption of shirts by conusmers.
What is a import quota?
A quantitative limit on imports of a good.
What is the effect of an import quota?
Largely the same as tariffs. Raises price, reduces the wuantity of imports. Increases seller’s welfare and reduces the buyer’s welfare.
A ___ creates revenue for the government.
Tariff.
A quota creates profits for the ___ producers of the imported goods.
Foreign.
What are the 5 arguments for restricting trade?
- Jobs argument. 2. National security argument. 3. Infant industry argument. 4. Unfair competition argument. 5. Protection as bargaining chip argument.
What is the jobs argument for restricting trade?
Trade destroys jobs in industries that compete against imports.
What is the response to the jobs argument for restricting trade?
Job losses domestically (import industries) are offset by job gains overseas (in export industries).
What is the national security argument for restricting trade?
An industry vital to national security should be protected from foreign competition, to prevent dependence on imports that could be disrupted during wartime.
What is the response to the national security argument for restricting trade?
Fine, as long as we base policy on true security needs. Producers may exaggerate their own importance to national security to ovtain protection from foreign competition.
What is the infant industry argument for restricting trade?
A new industry argues for temporary protection until it is mature and can compete with foreign firms.
What is the response to the infant industry argument for restricting trade?
Difficult for government to determine which industries will eventually be able to compete, and whether benefits of establishing these industries exceed cost of consumers restricting imports. If companies are confident in their industry taking off, they should be willing to take an initial hit.
What it the unfair competition argument for restricting trade?
Producers argue their competitors in another country have an unfair advantage.
What is the response to the unfair competition argument for restricting trade?
Great, we can import subsidized goods. Foreign tax dollars essentially go into domestic consumer pockets.
What is the protection as bargaining chip argument for restricting trade?
For example, when Australia reduced imports of Canadian salmon, Canada had a choice: reduce exports of products to Australia and lose welfare, or not (and lose face).
What is the difference between a unilateral and multilateral trade agreement?
A unilateral trade agreement is with one nation, while a multilateral trade agreement is among many nations.
Without any market failures, the market outcome is efficient, meaning that…
Total surplus is maximized.
A cost or benefit from an action that affects a bystander is what type of market failure?
Externality.
Externalities can be positive (___).
Beneficial.
Externalities can be negative (___).
Adverse.
Externalities can be ___ or ___.
Positive or negative.
Give some examples of negative externalities:
- Neighbour’s barking dog. 2. Air pollution from a factory. 3. Water pollution from construction. 4. A loud stereo in an apartment next to yours. 5. Health risks from secondhand smoke. 6. Drinking and driving (as it makes roads less safe for other people).
Supply curve shows ___ costs, which…
Private, the costs directly incurred by sellers.
Demand curve shows the ___ value, which is…
Private, the value to buyers, or the price they are willing to pay.
Social cost is ___ + ___.
Private cost, external cost.
The external cost is the value of the negative impact on ___.
Bystanders.
The socially optimal quantity is ___ than the market equilibrium quantity in a negative externality.
Lower.
At any value less than the socially optimal quantity, the value of additional gas ___ social cost.
Exceeds.
At any value greater than the socially optimal quantity, the social cost of the last gallon is ___ than its value to society,
Greater.
In the case of negative externalities, market equilibrium is ___ than the social optimum.
Greater.
Internalizing the externality means…
The incentives in the market are altered so that individuals take into account the external effects of their actions.
The goal of internalizing the externality is to get the market participants to pay the social costs, and equate ___ ___ with ___ ___.
Market equilibrium, social costs.
What are some examples of positive externalities?
-Getting vaccinated. -Research creates knowledge that others can use (Edison or Apple). -Individuals attending a college.
If a positive externality exists, the social value of a good includes two things:
- Private cost. 2. External value.
In a private externality, what is private cost?
The direct value to individuals engaged in the action.
In a private externality, what is external value?
The value of the action to bystanders.
In a positive externality, the socially optimal quantity is where the ___ ___ curve intersects with the ___ curve.
Social value, supply.
In a positive externality scenario, any quantity lower than the optimal quantity would mean the ___ ___ of an additional unit exceeds its cost.
Social value.
In a positive externality scenario, any quantity higher than the optimal quantity would mean the cost of an additional unit exceeds its ___ ___.
Social value.
In a positive externality scenario, the social value is equal to…
Private value + external benefit.
Should a government tax or subsidize to internalize the externality in a positive externality scenario?
Subsidize.
With a negative externality, the equilibrium quantity will be ___ than is socially desirable.
Larger.
With a positive externality, the equilibrium quantity will be ___ than is socially desirable.
Smaller.
Governments should ___ actions with negative externalities, and ___ actions with positive externalities in order to internalize the externality.
Tax, subsidize.
What are the two approaches used by governments in response to externalities?
- Command-and-control. 2. Market based.
What is a command-and-control policy?
Governments control actions directly. For example, the government would limit air pollution, and require manufacturers to use a technology to reduce air pollution.
What is a market based policy?
Offer incentives so that individuals will choose the socially optimal quantity. For example, taxes on pollution, subsidies for research, cap-and-trade for pollution.
What approach is cap-and-trade part of, and what is it?
It is a market based policy where the government auctions/sells permits to the companies, who can trade the permits.
What is a corrective tax?
A tax designed to induce private decision makers to take account of the social costs that arise from a negative externality.
Corrective taxes are also called ___ taxes after…
Pigovian. Arthur Pigon.
The ideal corrective tax is equal to…
External cost.
The ideal corrective subsidy is equal to…
External cost.
Taxes and subsidies outside the ideal amount…
Distort incentives and move the economy away from the social optimum.
Corrective taxes and subsidies align ___ incentives with ___’s interests.
Private, society.
Corrective taxes and subsidies make private decision makers take into account the ___ costs and benefits of their actions.
External.
Corrective taxes and subsidies move the economy towards a more ___ allocation of resources.
Efficient.
According to the efficient outcomes theory with respect to corrective taxes, firms with the ___ abatement costs reduce pollution the most.
Lowest.
A pollution tax is efficient because…
Firms with low abatement costs will reduce pollution to relieve tax burden, while firms with high abatement costs will have a higher willingness to pay the tax.
Which is more efficient, a pollution tax or regulation?
Pollution tax.
Why is regulation inefficient?
All firms must lower their emission, regardless of whether their abatement cost is high or low.
The corrective tax gives firms incentive to continue reducing pollution as long as…
The cost of doing so is less than the tax.
If you impose a corrective tax, and a cleaner technology becomes available, the tax gives firms incentive to…
Adopt it.
In contrast to a corrective tax scenario, a regulation scenario would not give firms incentive to further reduce pollution beyond…
The level specified in the regulation.
In an exmaple explored in class, the gas tax targets 3 negative externalities:
- Congestion. 2. Accidents. 3. Pollution.
A tradeable pollution permits system reduces pollution at ___ cost than regulation.
Lower.
What is the result of a tradeable pollution permits system?
Pollution reduction is concentrated among firms with the lowest costs of abatement.
Like most demand curves, the firms’ demand for the ability to pollute is a ___ sloping function of the “price” of polluting.
Downward.
What is the difference between a corrective tax and a tradeable permits system?
A corrective tax raises the price of polluting and reduces the quantity of pollutions firms demand. A tradeable permits system restricts the supply of pollution rights, but has the same effect as the tax.
Though policymakers do not know the position of the demand curve, the ___ system achieves pollution targets more precisely.
Permits.
Some people object to the economic analysis of pollution, as they feel that no one should be able to…
“Buy” the right to pollute, as the environment does not have a price tag on it.
“The Golden Rule” is an example of what kind of private solution to externalities?
Moral codes and social sanctions.
The Sierra Club is an example of what kind of private solution to externalities?
Charities.
Contracts between market participants and the affected bystanders is an example of a…
Private solution to externalities.
When goods and services are free, the market forces that usually allocate society’s resources are ___.
Absent.
What is an excludable good?
A good that you can prevent people from consuming.
What are some examples of excludable goods?
Fish tavos, cell phone service, coffee.
What are some examples of non-excludable goods?
AM radio signals, national defence.
What is a good that is rival in consumption?
A good where one person’s consumption diminishes others’ use.
What are some examples of rival goods?
Pizza, smartphone, car.
What are some examples of non-rival goods?
MP3 songs, cable TV.
What are the four different types of goods?
Private goods, public goods, common resources, natural monopolies.
Private goods are…
Excludable and rival in consumption (such as your laptop).
Public goods are…
Non-excludable and non-rival in consumption (such as a park).
Common resources are…
Non-excludable and rival in consumption (such as timber).
Natural monopolies are…
Excludable and non-rival in consumption (such as cable TV).
Which two types of goods have externalities?
Public goods and common resources.
Public goods are difficult for private markets ro provide because of the ___ ___ problem.
Free rider.
What is a free rider?
A person who recieves the benefit of a good but avoids paying for it.
If a good is not excludable, they have incentive to be free riders, as…
Firms cannot prevent non-payers from consuming the good.
If the benefit of a public good exceeds the cost of providing it, the government should provide the good and pay for it with…
A tax on the people who benefit.
What is a cost-benefit analysis?
A study that compares the costs and benefits of providing a public good.
What is an extra problem that arises with common resources over private goods?
They are rival in consumption, so it must be ensured that common resources are not overused.
There is a town where the sheep graze on common land. The amount of land is fixed, and the grass begins to disappear, as the private incentive of using the land for free outweighs the social incentive of using it carefully. This results in people no longer being able to raise sheep as all the grass has disappeared. This is an example of…
Tragedy of the Commons.
In a tragedy of the commons, the tragedy is due to an ___, because…
Externality. Allowing one’s flock to graze on the common land reduces its quality for other farmers.
What are some policies that can be used to prevent the overconsumption of common resources?
- Regulate the use of the resource. 2. Impose a corrective tax to internalize the externality. 3. Auction off permits allowing use of the resource. 4. If the resource is land, convert to private land and sell off.
Public goods are often ___ ___ while common resources are often ___ ___.
Under-provided, over-consumer.
We assume that a firm’s sole goal is to…
Maximize profit.
Profit is equal to…
Total revenue - total cost.
What is total revenue?
The money a firm recieves from selling its product,
What is total cost?
The market value of the inputs a firm uses in production.
What are explicit costs?
Require the firm to pay money (for example, paying money for raw materials).
What are implicit costs?
Do not require money to be paid (for example, opportunity cost of the owner’s time).
In ___ costs, no money changes hands.
Implicit.
What is the difference between accounting profit and economic profit?
Accounting profit does not take into account implicit costs so it is always higher than economic profit.
What is accounting profit equal to?
Total revenue - total explicit costs.
What is economic profit equal to?
Total revenue - total costs (including both explicit and implicit costs).
A production function depicts the relationship between…
The quantity of inputs used to produce a good and the quantity of output of that good.
If Jack hires one more worker, his output will rise by…
The marginal product of labour.
The marginal product of any input is the…
Increase in output that occurs when you add one more unit to that input.
The marginal product of labour (MPL) is equal to…
Change in output / change in labour.
When Farmer Jack hires an extra worker, his costs rise by the… and his output rises by…
Wage he pays the worker, the marginal product of labour.
As Jack adds workers, the average worker has ___ land to work with, and therefore is ___ productive.
Less, less.
In general, MPL ___ as labour increases, whether the fixed input is land or capital.
Diminishes.
What is a diminishing marginal product?
The marginal product of an input falls as the quantity of the input rises.
What is marginal cost?
The increase in total cost from producing one more unit.
What is marginal cost equal to?
MC= change in TC / change in output quantity.
If the cost of additional wheat (MC) is less than the revenue he would get from selling it, then Jack’s profits ___ if he produces more.
Rise.
What are fixed costs?
Costs that do not vary with the quantity of output produced (such as rent).
What are variable costs?
Costs that vary with the quantity produced (such as the wages he pays the workers).
What is total cost equal to?
FC+VC.
What is average fixed cost equal to?
FC/Q.
What is average variable cost equal to?
VC/Q
What is average total cost equal to?
The total cost divided by the quantity of output. ATC=TC/Q. Also, ATC=AFC+AVC.
As quantity produced rises, initially, the ___ AFC pulls the ATC ___.
Falling, down.
As quantity produced rises, initally, the falling ___ pulls the ___ down.
AFC, ATC.
As the quantity produced rises, eventually, the ___ AVC pulls the ATC ___.
Rising, up.
As the quantity produced rises, eventually, the rising ___ pulls the ___ up.
AVC, ATC.
When MC
Falling.
When MC>ATC, ATC is ___.
Rising.
The MC curve crosses the ATC curve at the ATC curve’s ___.
Minimum.
What are short run costs?
Some inputs are fixed (such as factories or land). The costs of these inputs are FC.
What are long run costs?
All inputs are variable (for example, firms can build more factories, or sell existing ones).
In the long run, ATC at any Q is cost per unit using the most ___ mix of inputs fir that Q.
Efficient.
What does SRATC stand for?
Short Run Average Total Cost.
Say there are three factory sizes: S, M, and L. In the long run, to produce a small quantity, the firm will use the _ factory.
Small.
A typical LRATC curve in the real world would look like a _ shape.
“U.”
What are economies of scale?
As you produce more, costs drop.
In economices of scale, ATC ___ as Q ___.
Falls, increases.
In constant returns to scale, ATC ___ as Q ___.
Stays the same, increases.
In diseconomies of scale, ATC ___ as Q ___.
Rises, increases.
Henry Ford got his workers to ___, resulting in more efficient production, with costs dropping.
Specialize.
Economies of scale occur when increasing production allows greater ___.
Specialization.
Diseconomies of scale are due to…
Coordination problems in large organizations.
What are the 3 characteristics of a perfectly competitive market?
- Many buyers and sellers. 2. The goods being sold are very similar. 3. Firms can easily enter or exit the market.
What are examples of perfectly competitive markets?
Gasoline and agriculture.
The first two characteristics of a perfectly competitive market forces…
Every buyer and seller to be a price taker- no single person can change prices.
What is the formula for total revenue?
TR = P * Q.
What is the formula for average revenue?
AR = P = (TR / Q)
What is the formula for marginal revenue?
MR = (Change in TR) / (Change in Q)
What is marginal revenue?
The change in total revenue from selling one more unit.
For a competitive firm, MR would be equal to…
Price.
A competitive firm can keep increasing its output without…
Affecting the market price.
Say a competitive firm sold one more unit. This increases in quantity causes revenue to rise by…
Price.
What is the objective of profit maximization?
To find the quantity that will maximize a firm’s profit.
When considering profit maximization, If you increase the quantity by one unit, you must consider 2 things. What are they?
- Revenue rises by MR. 2. Costs rise by MC.
If MR>MC, then you can increase profits by…
Selling more.
If MR
Selling less.
Profit is maximized when what is equivalent to what?
MR=MC.
The MC curve is the firm’s ___ curve.
Supply.
What is the difference between a shutdown and an exit?
A shutdown is a short-run decision not to produce anything because of market conditions, while an exit is a long-run decision to leave the market.
What is the difference as far as costs between a shutdown and an exit?
In a shutdown in the short-run, the firm must still pay fixed costs, while in an exit in the long-run, the firm incurs no costs.
What are the costs and benefits of shutting down, and when would it be beneficial to shut down?
The cost of shutting down is revenue loss (TR), and the benefit of shutting down is variable cost savings (VC). Shut down if TR
Firms should decide to shut down if TR
P
If P>AVC, then firm produces Q where…
P=MC.
If P
The firm shuts down.
What is a sunk cost?
A cost that has already been committed and cannot be recovered.
Sunk costs should be ___ to decisions, as you must pay them regardless of your choice.
Irrelevant.
Fixed cost is a ___ ___.
Sunk cost.
Should fixed costs matter in a decision to shut down?
No, because it is a sunk cost.
What are a firm’s costs and benefits of exiting a market, and when would it be beneficial for them to exit the market?
The cost of the firm exiting a market is revenue loss (TR), and the benefit of them exiting a market is cost savings (TC). Therefore, the firm should exit if TR
Firms should decide to shut down if TR
P
In the long run, a new firm will enter the market if it is profitable to do so, or if…
TR>TC.
The firm’s long run supply curve is the portion of the MC cost above ___.
LRATC.
What are the three assumptions we make about market supplt?
- All existing firms and potential entrants have identical costs. 2. Each firm’s costs do not change as other firms enter or exit the market. 3. The number of firms in the market is fixed in the short run, and variable in the long run.
Why is the number of firms fixed in the short run and variable in the long run?
It is fixed in the short run as a result of fixed costs, but is variable in the long run as a result of free entry and exit.
The market quantity supplied is the sum of…
Quantities supplied by all firms.
In the long run, the number of firms can ___ as a result of entry and exit.
Change.
If existing firms earn positive economic profit, then…
New firms enter, and the short-run market supply shifts right. Price falls, reducing profits and slowing entry.
If existing firms incur losses, then…
Some firms exit, and the short-run market supply shifts left. Prices rise, and the firm’s losses are minimized.
What is long-run equilibrium?
The process of entry or exit is complete, and the remaining firms earn zero economic profit.
Zero economic profit occurs when…
P=ATC.
Economic profit is revenue minus all costs, including ___ costs.
Implicit.
In the long run, the typical firm earns ___ profit.
Zero.
The long-run market supply curve is ___ at P=ATC
Horizontal.
What is a monopoly?
A firm that is the only seller of a product which has no close substitutes.
What is the main difference between monopoly and perfect competition?
Market power.
What is market power?
The ability to influence the market price of a product it sells.
A competitive firm has ___ market power.
No.
What is the main cause for monopolies?
Barriers to entry.
What are barriers to entry?
Things that prevent other businesses from entering the market.
What are the three sources of barriers to entry?
- A single firm owns a key resource. 2. The government gives a single firm the exclusive right to produce the good. 3. Natural monopoly.
DeBeers owns most of the world’s diamond mines. This is an example of what kind of barrier to entry?
A single firm owns a key resource.
Patents and copyright laws are examples of what kind of barrier to entry?
The government gives a single firm the exclusive right to produce the good.
What is a natural monopoly?
A single firm can produce the entire market quantity at lower cost than could several firms.
In order for a natural monopoly to occur, fixed costs must be ___ and marginal cost be ___.
Large, small.
In a competitive market, the ___ demand curve slopes downwards.
Market.
In a competitive market, the ___ demand curve is horizontal at market price.
Individual firm’s.
In a competitive market, the firm can increase the quantity it produces without…
Lowering price.
For a competitive firm in a competitive market, marginal revenue is equal to…
Price.
In a competitive market, a competitive firm can increase quantity without lowering price. However, in a monopoly, the monopolist is the only seller, so it faces the ___ demand curve. This means that…
Market. To produce more quantity, the firm must reduce price.
By increasing quantity in a monopoly, there are two effects on revenue. What are they?
- Output effect. 2. Price effect.
What is the output effect?
A higher output raises revenue.
What is the price effect?
A lower price reduces revenue.
To sell a larger quantity, the monopolist must reduce the price on all the units it sells. This means that marginal revenue is ___ price.
Less than.
Like a competitive firm, a monopolist maximizes profit by producing the quantity where ___ equals ___.
MR=MC.
What is the formula to find the monopolist’s profit?
(P-ATC)*Q.
Why is there no supply curve in a monopoly?
Monopoly firms are price-makers and not price-takers, and quantity does not depend on price. Quantity and price are determined by marginal cost, marginal revenue, and the demand curve.
