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FinReg > Intro > Flashcards

Intro Flashcards

1
Q

Economic assumptions to markets

A
  • Perfect competition.
  • Rational actors.
  • Full information.
  • Homogenous product
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2
Q

Aggregate demand

A

The sum of all individual demand curves

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3
Q

Demand - A price increase results in

A

movement on the demand curve - the demand changes but the curve stays the same

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4
Q

Aggregate supply

A

Sum of all individual supply curves

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5
Q

Excess supply

A

the area above the equilibrium -> Producers produce for a price no one is WTP

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6
Q

Excess demand

A

The area below the equilibrium - No producer is WTS at price below eq

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7
Q

efficiency

A

maximizing utility of all market participants

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8
Q

distribution

A 
Distribution of resources and fairness
Depends, e.g., on 
property rights and 
initial distribution of
resources.
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9
Q

Pareto efficiency

A

A situation which no party can be made better off without another party being worse off

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10
Q

Pareto improvement

A

At least one party can be made better off and no other party will be worse off

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11
Q

Consumer surplus

A

Area below the demand curve and above the price

  • > The amount that customers are WTP - the actual price in the market
  • > Reflects customers utility
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12
Q

Producer surplus

A

Area below the price and above the supply function

-> Price paid to the produced - production costs

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13
Q

Total welfare in the market =

A

CS+PS

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14
Q

Deadweight loss DWS

A

loss in welfare to perfect competition

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15
Q

Perfect competition vs monopoly

A

Perfect competition: producers produce at marginal cost,
price as givenMonopoly: producer produces at marginal revenue, price set
by monopolist

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16
Q

Elasticities are useful measure informing about

A

how suppliers and

consumers react to changes in the market (e.g., prices).

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17
Q

Elasticities

A
  1. Elasticity of demand (price elasticities, income elasticities)
  2. Elasticity of supply (price elasticity)
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18
Q

Price elasticity of demand

A

Measures how demand changes if the p increases by 1 unit

= the % change in demand quantity / % change in price

19
Q

Perfectly inelastic demand

A

Elasticity = 0

An increase in p leaves the quantity demanded unchanged

20
Q

Inelastic demand

A

Elasticity < 1

A 22% increase in price leads to an 11% decrease in quantity demanded

21
Q

Unit elastic demand

A

Elasticity = 1

A 22% increase in p leads to 22% decrease in quantity demanded

22
Q

Elastic demand

A

Elasticity > 1

A 22% increase in p leads to 67% decrease in quantity demanded

23
Q

Perfectly elastic demand

A

Elasticity equals infinity
At any p > $4, quantity demanded = 0,
at exactly $4, customers will buy any quantity
At p < $4, quantity demanded is infinite

24
Q

Cross price elasticities of demand

A

CPED = & change of quantity of good 1 / % change of p for good 2

if + : goods are substitutes
if - : goods are complements
if 0: goods are independent

25
Q

Perfectly inelastic demand

A

Elasticity = 0

An increase in p, leaves the quantity supplied unchanged

26
Q

Inelastic supply

A

Elasticity < 1

A 22% increase in p leads to a 10% increase in quantity supplied

27
Q

Unit elastic supply

A

Elasticity = 1

A 22% increase in p, leads to a 22% increase in Q supplied

28
Q

Elastic supply

A

Elasticity > 1

A 22% increase in p leads to 67& increase in Q supplied

29
Q

Perfectly elastic supply

A

Elasticity equals infinity
At any p > $4, Q is infinite
At exactly $4, producers will supply and Q
At p < $4, Q=0

30
Q

Why do we have regulatory interventions

A

Market failure (efficiency criteria):
• No existing market.
• Incomplete competition (e.g., monopoly).
• Externalities.
• Public goods.
• Incomplete information, transaction cost.

Equality criteria (social justice):
• Equal distribution of wealth.
• Redistribution
• Allocation of property rights.

31
Q

What are the regulatory interventions

A

• Interventions targeted at prices.

  • > Maximum price.
  • > Minimum price.

• Taxes.

  • > To generate public income.
  • > To steer and influence market outcomes.

• Subsidies.

  • > To increase income of certain groups.
  • > To increase the supply/demand of certain goods.
32
Q

Minimum price

A

State sets min Ps, resulting in excess demand Qg, and to keep Ps, the state needs to buy Qg

Consequences for consumers and suppliers:
Consumer surplus is reduced
Producer surplus increases

Welfare loss: D - (Q2-Q1)Ps
Potential savings for society: (Q2 - Q1)Ps- D

33
Q

Taxes

A

Direct
and
Indirect

34
Q

Direct taxes

A

Collected directly at the taxpayer: income tax, earnings tax, inheritance tax

35
Q

Indirect taxes

A

Collected with the sale from goods and services: VAT, Fuel duty, CO2 tax, Dividend tax

36
Q

Price inelastic demand means that

A

buyers have few alternatives to the product

37
Q

Price inelastic supply means

A

producer dont have good alternatives

38
Q

Subsidies

A

The opposite of a tax.
 A subsidy for the producer reduces production cost.
 Subsidies change market equilibria.
 Subsidies allow consumers to pay lower prices and producers to pay
lower production cost.
 Consumers and producers benefit from subsidies.
 But they might also lead to a DWL.

39
Q

Externalities

A

Uncompensated effects of economic decision making on the
wealth of independent third parties
 Are usually not included in the economic decision making
process of parties.
 Are a form of market failure.

Consequence: inefficient allocation of resources and welfare losses

40
Q

Negative externalities

A

− Emmisions
− Cigarette smoke
− Dogshit on the street
− Loud music

41
Q

Positive externalities

A

− Scientific discoveries
− Renovating of historic buildings
− Planting trees

42
Q

Coase theorem

A

under ideal economic conditions,
where there is a conflict of property rights, the involved parties can
bargain or negotiate terms that will accurately reflect the full costs and
underlying values of the property rights at issue, resulting in the most
efficient outcome.
Allocation of property rights.
Private negotiations.
Trade (of C02 certificates, e.g.,)

43
Q

Coase theorem May not always work, because of

A

transaction cost,
asymmetric information, bargaining power, free-rider
problems

FinReg (12 decks)

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