Lecture 1 Flashcards
Why do we need both, macro and micro economics in PF?
It´s essential to understand why ppl behave that way (motivation, actions, consequences) micro
but bc gov. budgets are limited: macro/ top-down approach
such zb overall health levels, fertility rates, education and social security top-down
What is an economic market? Name 3 elements
It is an allocation mechanism of goods/ financial resources and services
(Verteilungsmechanismus)
It´s all about scarcity
It contains 3 elements:
- Demand (was marktteilnehmer brauchen/ what is their wtp)
- Supply (der Wille der Produzenten zu Produzieren=, higher wages for nurses
- Price as ordering element (price determines if and when a good is produced/ but also if and when it is consumed= => reflecting scarcity
What is the Equilibrium?
In Wahrheit: S&D ändern sich ständig, man muss sweet spot finden
Pair of price and quantity that satisfies both demand and supply
x-achse: Quantity
z-achse: price
Merit order model: everyone gets the same price
What is the social surplus?
Consumer surplus (y-achse bi gesetzter preis) + producer surplus (ursprung bis gesetzter preis)
What is Pareto Optimum
Pareto Optimal: A situation is pareto optimal if no improvement in welfare can be achieved without making
someone else worse off.
Pareto optimal allocations do not allow any normative statements about distributional situations. If the cake is
100% in one hand, this can be a pareto optimal situation.
Methods& Consequence of interferences in the Market
- Tax Increase (VAT higher)
reduces the social surplus for producers& consumers by the deadweight loss
=> supply curve geht hoch da höherer Preis (abschnitt schneiden S/D neu und s/d alt als Dreieck
Einzige Ausnahme: GEZ Gebühren
- Price fixed at a certain level
Consumer surplus rises for those who can purchase the goods
zb Preis nach unten (kleinere Produzentenrente, dafür aber deadweight los von equilibrium zu Schnittpunkt S& künstlicher neuer Demand
PROBLEM: allocation mechanism is disturbed; not only price alone but also other factors leading to good. e.g. Connections, fcfs
Necessary Conditions for Perfect Markets?
- Efficiency (prica hat alle info, arbitrage bereits ausgenutzt, keine manipulation möglich)
Transparency => markt muss transparent sein, traceability of info of goods, determination of value of the good)
Number of market participants
Damit kein monopol:sufficient number of market participants & No market entry barriers
What factors generate volatility (Unbeständigkeit) in prices?
Volatility per so not bad but needed
Exogenous price formation (Außerhalb)
by the news, changes in Demand or Supply
Endogenous price formation (Innerhalb)
by profit-oriented market participants
Arbitrage
Independence of successive price changes
law of one price
Z.B. Kakao aus anderem Land kaufen => damit Profit schlagen
What is First Fundamental Theorem of Welfare Economics?
The competitive equilibrium, where supply equals
demand, maximizes social efficiency.
What is Deadweight loss?
Wohlfahrtsverlust
The reduction in social efficiency from preventing trades for which benefits exceed costs.
a triangle that points toward the equilibrium price
What is Social Efficiency?
Social efficiency represents the net gains to society from all trades that are made in a market, and it consists of the sum of two components:
consumer and producer surplus = total social surplus.
optimal Verteilung in Gesellschaft inkl alle external / internal costs and benefits; dabei MSB=MSC
andere def:
this is the optimal distribution of resources in society, taking into account all external costs and benefits as well as the internal costs and benefits. Social efficiency occurs at an output where MSB=MSC
What is consumer and Producer Surplus
Consumer surplus: The benefit that consumers derive from consuming a good, above and beyond the
price they paid for the good.
Producer surplus: The benefit that producers derive from selling a good, above and beyond the cost of
producing that good.
What is welfare economics?
study of the determinants of welfare in society
is used in normative analysis (geht auch um Werte)
it´s determined by how much gets produced and how it is distributed
comes along with:
equity- efficiency trade-off: the choice society must make between total size of economic pie and its distributions among individuals
We discuss the determination of welfare in two steps. Which 2 Steps?
First, we discuss the determinants of social efficiency, or the size of the economic pie.
Second, we consider how to integrate redistribution into this analysis so that we can measure the total
well-being of society, or social welfare.
Second Fundamental Theorem of Welfare Economics? Definition.
Second Fundamental Theorem of Welfare Economics: Society can attain any efficient outcome by
suitably redistributing resources among individuals and then allowing them to freely trade.
difficult in practice to redistribute like this
Social Welfare function. Definition & Name 2!
Social Welfare Function (SWF): kombiniert utility functions aller Individuen in einer großen overall social utility function
The utilitarian social welfare function maximizes the sum of individual utility (jeder bekommt das Gleiche):
〖𝑆𝑆𝑊𝑊𝐹𝐹〗^𝑈𝑈=𝑈𝑈_1+𝑈𝑈_2+…+𝑈𝑈_𝑁𝑁
The Rawlsian social welfare function maximizes the utility of the worst-off member of society:
〖𝑆𝑆𝑊𝑊𝐹𝐹〗^𝑅𝑅=min〖(𝑈𝑈_1,𝑈𝑈_2,…,𝑈𝑈_𝑁𝑁)〗
Social welfare functions reflect different possible equity criteria. What are the Criteria?
Commodity egalitarianism: The principle that society should ensure that individuals meet a set of basic
needs but that beyond that point, income distribution is irrelevant. (basic needs should be covered)
Equality of opportunity: The principle that society should ensure that all individuals have equal
opportunities for success but not focus on the outcomes of choices made. (alle aufs gymnasium)
Myths of Economic Markets
When more is demanded, the price goes down!
Correct would be: If more is demanded, the price rises!
If the state fixes the prices, everyone can afford this good!
Correct would be: If the state fixes the prices, it comes to overproduction or shortages.
If the state makes a law that controls the price, nobody can enrich itself and the society has more of it!
Correct would be: If the price is fixed, either the consumers or the producers profit more from it. The total yield for all decreases.
What is PF?
The study of the role of the government in the economy
History of PF
1750: Gottlob von Justi: regressive taxation (discussion about distributional consequences of tacation => more indirect (tobacco) than direct (income) taxes)
1776: Adam Smith: Godfather of Economics: hidden hand, fair taxation
1848: John Stuart Mill: Principles of Political Economy (democracy)
1928: A.C. Pigou: A study in Public Finance
L. J. Kotlikoff: Generation Accounting (weiter vorausschauen)
Decision Making
Rational economic agent:
Healthy apple 2, cookie 1, none 0 => Apple (highest utility)
Koch: Healthy apple 1, cookie 2, none 0 => cookie (the more satisfying the better)
Behavioral Economics
Manchmal jedoch nicht rational, sondern spontaneous choice
Wenn einer woche davor entscheiden: utility increased (=> Apple)
BSP Educational Costs
Supply – Demand Model:
Education costs: Time are costs, since you have opportunity costs for not working and studying instead
Entry qualifications:
Muss man gutes Equilibrium finden
Zu weniger Zugelassene: decrease income of university & of chairs
Zu viele: worse image
