Economics 19e Flashcards
founder of microeconomics
Adam Smith
founder of macroeconomics
1936, when John Maynard Keynes published his revolutionary General Theory of Employment, Interest and Money.
Keynes developed an analysis of what causes business cycles, with alternating spells of high unemployment and high inflation.
econometrics
technique that applies the tools of statistics to economic problems
The following are some of the common fallacies encountered in economic reasoning:
- The post hoc fallacy. The first fallacy involves the inference of causality. The post hoc fallacy occurs when we assume that, because one event occurred before another event, the first event caused the second event. This occurred in the Great Depression of the 1930s in the United States. Some people had observed that periods of business expansion were preceded or accompanied by rising prices. From this, they concluded that the appropriate remedy for depression was to raise wages and prices. This slowed recovery
- Failure to hold other things constant.
- The fallacy of composition. Sometimes we assume that what holds true for part of a system also holds true for the whole. In economics, however, we often find that the whole is different from the sum of the parts. When you assume that what is true for the part is also true for the whole, you are committing the fallacy of composition.
The key points to understand about slopes are the following:
- The slope can be expressed as a number. It meaures the change in Y per unit change in X, or “the rise over the run.”
- If the line is straight, its slope is constant everywhere.
- The slope of the line indicates whether the relationship between X and Y is direct or inverse.
major forces affecting the shape of the economy are the dual monarchs of
tastes and technology
Globalization
a term that is used to denote an increase in economic integration among nations. Increasing integration is seen today in the dramatic growth in the flows of goods, services, and finance across national borders.
as the world’s major lending countries
1st China, Japan
world’s largest borrower
United States
Governments have three main economic functions in a market economy:
- Governments increase efficiency by promoting competition, curbing externalities like pollution, and providing public goods.
- Governments promote equity by using tax and expenditure programs to redistribute income toward particular groups.
- Governments foster macroeconomic stability and growth—reducing unemployment and inflation while encouraging economic growth—through fiscal and monetary policy.
Since World War II, for example, there have been X recessions in the United States, some putting millions of people out of work. These fluctuations are known as the business cycle.
11
US government spends most on
healthcare
Hike the minimum wage, and you put people out of work.”
Gary Becker
Daniel Bernoulli, a member of a brilliant Swiss family of mathematicians, observed in 1738
that people act as if the dollar they stand to gain in a fair bet is worth less to them than the dollar they stand to lose.This means that they are averse to risk and that successive new dollars of wealth bring them smaller and smaller increments of true utility.
Jeremy Bentham (1748–1832)
accomplished early introduction of the utility notion into the social sciences
extended Bentham’s utility concept to explain consumer behavior.
William Stanley Jevons (1835–1882). Jevons thought economic theory was a “calculus of pleasure and pain,” and he developed the theory that rational people would base their consumption decisions on the extra or marginal utility of each good.
The ideas of Jevons and his coworkers led directly to the modern theories of ordinal utility and indifference curves developed by
Vilfredo Pareto, John Hicks, R. G. D.
Equimarginal principle
The fundamental condition of maximum satisfaction or utility. It states that a consumer will achieve maximum satisfaction or utility when the marginal utility of the last dollar spent on a good is exactly the same as the marginal utility of the last dollar spent on any other good.
The seventeenth-century philosopher Francis Bacon held that
the purest of human pleasures was gardening.
developing a better understanding of the role of asymmetric information and the market for “lemons.”
George Akerlof
received the prize for “the analysis of human judgment and decision-making . . . and the empirical testing of predictions from economic theory by experimental economists.”
Daniel Kahneman and Vernon L.Smith
Ordinal variables
ones that we can rank in order, but for which there is no measure of the quantitative difference between the situations. Economists today generally reject the notion of a cardinal (or measurable) utility that people feel or experience when consuming goods and services. Utility does not ring up like numbers on a gasoline pump.
Rather, what counts for modern demand theory is the principle of ordinal utility. Under this approach, consumers need to determine only their preference ranking of bundles of commodities.
In between substitutes and complements are
independent goods, such as beef and textbooks, for which a price change for one has no effect on the demand for the other.
Merit goods
whose consumption is thought intrinsically worthwhile, and the opposite, which are demerit goods, whose consumption is deemed harmful.
Network markets are special because
consumers derive benefits not simply from their own use of a good but also from the number of other consumers who adopt the good. This is known as an adoption externality. When I get a phone, everyone else with a phone can now communicate with me. Therefore, my joining this network leads to positive external effects for others.
These central issues of industrial organization were first raised by
Ronald Coase in a pathbreaking study for which he was awarded the 1991 Nobel Prize.
One important distinction between the income statement and the balance sheet is that between
stocks and flows. A stock represents the level of a variable, such as the amount of water in a lake or, in this case, the dollar value of a firm. A flow variable represents the change per unit of time, like the flow of water in a river or the flow of revenue and expenses into and out of a firm. The income statement measures the flows into and out of the firm, while the balance sheet measures the stocks of assets and liabilities at the end of the accounting year.
A perfectly competitive firm sells a
homogeneous product (one identical to the product sold by others in the industry).
Pareto efficiency
(or sometimes just efficiency) occurs when no possible reorganization of production or distribution can make anyone better off without making someone else worse off. Under conditions of allocative efficiency, one person’s satisfaction or utility can be increased only by lowering someone else’s utility.
Nobel Prizes in economics were awarded to Kenneth Arrow, John Hicks, and Gerard Debreu for their contributions to developing the
theory of perfect competition and its relationship to economic efficiency.
Gilded Age (1870–1914)
period of economic growth as the US jumped to the lead in industrialisation ahead of Britain
Many economists believe that traditional concentration ratios do not adequately measure market power. An alternative, which better captures the role of dominant firms, is the
Herfindahl-Hirschman Index (HHI). This is calculated by summing the squares of each participant’s market share. Perfect competition would have an HHI of near zero because each firm produces only a small percentage of the total output, while complete monopoly would have an HHI of 10,000 because one firm produces 100 percent of the output
dumping
Selling at lower prices at home than abroad
developed by John von Neumann (1903–1957), a Hungarian- born mathematical genius.
Game theory
Sherman Act 1890 against
contracts in restraint of trade and monopolizing
Clayton Act 1914 against
tying, price discrimination, merging. Another important element of the Clayton Act was that it specifically provided antitrust immunity to labor unions.
Federal Trade Commision Acts 1914 prohibits
unfair methods of competition.
Practices that are illegal in all cases:
● Bid rigging, in which different firms agree to set their bids so that one firm will win the auction, usually at an inflated price, is always illegal.
● Market allocation schemes, in which competitors divide up markets by territory or by customers, are anticompetitive and hence illegal per se.
- Agreements between firms to fix prices.
Speculation involves
buying and selling in order to make profits from fluctuations in prices. A speculator wants to buy low and sell high. The simplest case is one in which speculative activity reduces or eliminates regional price differences by buying and selling the same commodity. This activity is called arbitrage
Hedging
consists of reducing the risk involved in owning an asset or commodity by making an offsetting sale of that asset. Hedging allows businesses to insulate themselves from the risk of price changes. Selling immediately
that ideal speculation reallocates goods
from times of feast (when prices are low) to times of famine (when prices are high).
inappropriability
The inability of firms to capture the full monetary value of their inventions
About x of national income goes to labor
two thirds
Personal income equals
market income plus transfer payments
Wealth consists of the
net dollar value of assets owned at a given point in time. Note that wealth is a stock (like the volume of a lake) while income is a flow per unit of time (like the flow of a stream).
wealth or net worth
The difference between total assets and total liabilities
The major reason for the remaining difference between wages is that labor markets are segmented into
noncompeting groups
The most important labor legislation of all was the National Labor Relations (or Wagner) Act of 1935.
This law stated: “Employees shall have the right to . . . join . . . labor organizations, to bargain collectively . . . , and to engage in concerted activities.”
bilateral monopoly
where there is one buyer and one seller.
Keynesian unemployment
cyclical unemployment(insufficient aggregate demand)
Economists who first began to study discrimination
Gary Becker, realized that a fundamental puzzle arises: If two groups of workers have equivalent productivity, but one has lower wages, why don’t competitive profit- maximizing firms hire the low-wage workers and increase their profits?
forces other than pure discriminating attitudes are necessary to maintain income disparities between equivalent groups.
Affirmative action
This requires that employers show they are taking extra steps to locate and hire underrepresented groups.
“cornucopians,”
or technological optimists, who believe that we are far from exhausting either natural resources or the capabilities of technology.
A commodity is called appropriable when
firms or consumers can capture its full economic value. Appropriable natural resources include land (whose fertility can be captured by the farmer who sells wheat or wine produced on the land), mineral resources like oil and gas (where the owner can sell the value of the mineral deposit), and trees (where the owner can sell the land or the trees to the highest bidder). In a well-functioning competitive market, appropriable natural resources would be efficiently priced and allocated.
a resource is inappropriable when
when some of the costs and benefits associated with its use do not accrue to its owner. In other words, inappropriable resources are ones involving externalities. (Recall that externalities are those activities in which production or consumption imposes uncompensated costs or benefits on other parties.)
Examples of inappropriable resources are found in every corner of the globe.
A tax on pure economic rent will lead to no distortions or inefficiencies.
We distinguish rent on fixed factors like land from rentals on durable factors like capital. Apartment is rental.
contingent valuation
Some environmental economists use a technique called contingent valuation, which involves asking people how much they would be willing to pay in a hypothetical situation, say, to keep some natural resource undamaged. This technique will yield answers, but these answers have not always proved to be reliable.
1997 Kyoto Protocol on climate change
Under the protocol, high-income countries along with formerly socialist countries agreed to binding commitments to reduce by 2010 their total emissions of greenhouse gases by 5 percent (relative to 1990 levels). Each country was allocated a specific target.
Irving Fisher
Among his fundamental contributions was the development of a complete theory of capital and interest in The Nature of Capital and Income (1906) and The Theory of Interest (1907). It was Fisher who uncovered the deep relationship between interest and capital and the economy, as described in this summary from The Theory of Interest: He lobbied for a “compensated dollar” as a substitute for the gold standard.
Fisher’s most famous forecast came in 1929 when he argued that the stock market had achieved a “permanent plateau of prosperity.”
Henry George
wanted single tax only on land and nothing else. Georgism- single tax movement
Studies by economist Tom Tietenberg
Under the 1990 Clean Air Act amendments, the government allocates a limited number of pollution permits. His studies have determined that the traditional approaches cost 2 to 10 times as much as would cost-effective regulations like emissions trading.
equity premium
This excess return on equities above that on risk-free investments is called the equity premium. Empirical studies suggest that the equity premium averaged around 5 percent per year over the twentieth century
Country with highest tax to GDP ratio
Denmark 48%
Country with lowest tax to GDP ratio
20%
fiscal federalism
division of governmental functions and financial relations among levels of government
Robert Hall and Alvin Rabushka
developed flat tax. Their proposal incorporates the following major features:
● It taxes consumption rather than income. As we will discuss later in this chapter, taxing consumption serves to increase the incentive to save and can help boost the declining national savings rate.
● It integrates the corporate income tax with the individual income tax. This removes one of the major distortions in the U.S. tax code.
● It eliminates virtually all loopholes and tax preferences. Gone are subsidies for medical care, owner-occupied homes, and charitable contributions.
● It provides a basic exemption of around $20,000 per family and then imposes a constant marginal tax rate of 19 percent above that level.
Ramsey tax rule
states that the government should levy the heaviest taxes on those inputs and outputs that are most price-inelastic in supply or demand.
Lorenz curve
We can show the degree of inequality in a diagram known as the Lorenz curve, a widely used device for analyzing income and wealth inequality. Economists often need to calculate quantitative measures of inequality. One useful measure is the Gini coefficient.This is measured by calculating the shaded area in the Lorenz curve of and multiplying it by 2. The Gini coefficient is equal to 1 under complete inequality and 0 under complete equality.
“death taxes.”
inheritance and gift taxes
Schumpeterian profits
profits from newly invented products or services. eg Bill Gates with Microsoft
