Lecture 1 (Joeri Sol)

Question 1

Neoclassical Economics

Answer 1

Metatheory based on fundamental assumptions:

1. People have rational preferences among outcomes
2. Individuals maximise their satisfaction (“utility”) and firms maximise their profits
3. People act independently on the basis of full and relevant information

Question 2

Physiocracy

Answer 2

Wealth of nations is derived from the value of land agriculture.

Productive Class -> farmers creating value
Proprietors -> merchants moving value around
Sterile Class -> landlords charging for existing assets

Focus on reproduction

Question 3

Classical Economics

Answer 3

• Believe that markets regulate themselves when free of any intervention
• Focus on increase of productivity
• Adam Smith etc.

Question 4

Marginal revolution (1820s)

Answer 4

• change in economical thinking
• the value of products is subjective
• introduction of thinking in terms of marginalism & mathematics into economics

Question 5

Carl Menger (Marginalist)

Answer 5

• value of something, much like beauty, is in the eye of the beholder/consumer not determined by amount of labour and land that went into it

Question 6

William Stanley Jevons (Marginalist)

Answer 6

-proposed the concept of diminishing marginal utility

= satisfaction derived from obtaining/consuming additional units /products decreases with the amount already in possession

Question 7

Leon Walras (Marginalist)

Answer 7

• first general equilibrium of supply = demand and marginal costs = marginal benefits

Question 8

General equilibrium theory

Answer 8

-attempts to explain the behaviour of supply, demand, and price in a whole economy, by seeking to prove that the interaction of demand and supply will result in a general equilibrium

Equilibrium= Gleichgewicht

Question 9

Neoliberalism

Answer 9

Belief society would be best off with little state influence/ intervention in markets

Should not be confused with Neoclassical Economics

Question 10

Homo Economicus

Answer 10

Pursues it’s “narrow self-interested” subjectively defined goals

• rational and attempting to maximise their utility

Question 11

Pareto Efficiency

Answer 11

• a situation is Pareto efficient if we can’t make anyone better off without making anyone worse of
• Pareto inefficient if all parties can still improve without making each other worse off

Violations will give rise to market failures

Question 12

Externalities

Answer 12

-uncompensated external effects of consumption or production incurred by third parties

Question 13

Pigouvian Tax

Answer 13

• tax on any market activity that generates negativ externalities

—> internalisation of externalities

Question 14

Tragedy of commons

Answer 14

• plenty of earth’s resources are available to all (eg. oceans, forest..)

—> results in overharvesting due to allowing unlimited access to the resource

Question 15

Harold Hotelling

Answer 15

• > optimal consumption of non-renewable resources theory

- > valuation of public goods such as national parks

Question 16

Assymetric Information

Answer 16

A market for sustainable lemons:

The offer of low-quality products discourages supply of high-quality products when consumers cannot observe quality by lowering their willingness to pay.

• Akerlof