Lecture 3 Flashcards
A brief review of introductory and microeconomic principles and applicable to the study of health care.
What are the three economic methodologies and their differences
Theory, empirical data analysis and experiments. A THEORY is a set of assumptions and principles of human behaviour devised to explain facts or hypothetical phenomenon. An EMPIRICAL DATA ANALYSIS is the use of statistical tool to analyze real world data. EXPERIMENTS are controlled studies of hypothetical or paid decisions which can take place in lab or the field.
What are the 2 reasons economists view markets as a desirable tool for allocating resources
- Under some conditions, markets can lead to Technically, Cost-effectively and Allocatively efficient allocations of resources, goods and services. 2. Prices play pivotal role in coordinating market activity. PRODUCTION: prices ensure resources are used in their most productive way. CONSUMPTION: Prices under ideal conditions ensure that those who get a good are those who value it most highly. Caveat: depends on distribution of income & wealth. Additionally, by prices, economists mean relative prices or the opportunity cost one thing relative to another.
What are the consumption conditions for a well functioning market
- consumers have the same information regarding product quality as do producers
- Consumers are aware of prices charged by all producers
- Consumers are able to judge accurately the value of a good to themselves
- One individual`s consumption does not impose any costs or confer benefits on anyone else. Ie. no externalities or no benefits or costs fall on anyone other than the person making the decision
- All of these are opposites under market failure conditions
What are the production conditions for well functioning markets
- Many producers producing a similar, if not identical, product
- No concentration of market power: free entry or exit of producers, information and input costs commonly available
- Producers must consider all costs of production- no externalities in production
- All of these are opposites under market failure conditions
When does market failure occur
It occurs when at least one of the consumption or production conditions is violated, in which case a market will not generate an efficient amount or allocation of resources.
Define demand
Demand in economics is defined as consumers’ willingness and ability to consume a given good
What factors affect the amount of a good that consumers purchase or demand
- consumer`s tastes, preferences and needs.
- Ability to pay–income and wealth.
- Price of complementary and subsitute goods.
Complement goods: goods that are consumed together. Ie Tires & Cars
Substitute goods: goods that are often used in place of each other. Ie Tea & cofee, Bus & car
What 2 factors dictate consumer behaviour
- Utiliy function: summarize his or her preferences or things that give satisfaction or happiness. It is represented as a bundle of goods, each having a score denoting satisfaction. A score of 70 means a higher satisfaction than a score of 50.
- Budget Constraint: tells consumers what combination of goods they can afford to purchase and depends on market prices and her income.
Consumers are assumed to make purchases so as to maximize utility subject to their budget contraints.
What do the budget constraint line, the X and Y axes and the X and Y intercept represent?
A. The budget constraint line represents the relative PRICE of one good to another or opportunity cost from forgoing another good.
B. The X axis represents the number of good x while the y axis represents the number of good y.
C. X intercept represents the quantity of goods when all income is spent on that good while the Y intercept represents the quantity of goods when all income is spent on good Y. Or the real income in terms of good X and Y.
Mathematically, relative price is the slope of the line represented by (-Px/PY).
The X intercept is represented as (M/Px), while the Y intercept is represented as (M/Py)
What are the formulas for the budget constraint line?
M=Px + Py
or Y= -(Px/Py) + (M/Py)
What are indifference curves
Represents all the combinations of the two goods amongst which an individual is indifference. Each point on an indifference curve represent an equal amount of utility.
Why are indifference curves convex
Because of diminishing marginal utility: consuming more of a good increases utility but at a diminishing rate.
What does a budget line tangential to a preference curve represent
It represents the point maximizing utility while also being affordable according to his budget constraint, also called the consumers optimal combination of goods.
We could also say its the rate at which a consumer can optimally trade one good for another.
Why would a consumer not choose an indifference curve positioned higher or lower than her budget constraint
A preference curve higher than the budget constraint represents unaffordable preferences while those below her budget constraints neglect to maximize utility.
Differentiate between inverse and direct relationships
In inverse relationships both variable go in opposite directions, while in direct relationships, both variable go in the same direction.
The price and demand quantity on the demand curve are inversely related while they are directly related on the supply curve.
What does the demand curve represent and how is it impacted by diminishing marginal utility
It depicts how prices, incomes, taste, etc affect the quantity of a good demanded. In other words, it shows the relationship between price and quantity demanded all other things constant.
Because of diminishing marginal utility, we would expect that the maximum amount a person is willing to pay for a good decreases as the amount of the good consumed increases ( this causes the demand curve to be downward sloping as is known as the law of demand)
What do the X and Y axis represent on the demand curve and what’s the difference between demand and quantity demanded?
The X axis represents quantity demanded (per unit of time), while the Y axis represents the price (per unit).
The demand curve or line represents the entire price to quantity demanded while quantity demanded is just a quantity demanded at a particular price.
What factors shift vs cause movement along the demand curve?
If the price of a good changes then we move along a demand curve.
When anything other than the price of a good changes then we may get a shifting of the demand curve.
e. g Increasese in income would shift the demand curve to the right since more quantity would be demanded at all prices and vice versa.
e. g when the prices of complement goods increase, you will consume less of the good whose price hasn’t changed and the demand curve will shift to the left.
What is the concept of elasticity and the price elasticity of demand (E<span>d</span>)?
Elasticity is a measure of the responsiveness of one variable to a change in another.
The price elasticity of demand tells us how much does the quantity demanded respond to a change in price. (value is unitless so we can make comparisons across different markets.)
Ed= Percentage change in quantity demanded
Percentage change in price
Ed=P/Q {1/slope <span>demandcurve</span>}
Look at notes
If |Ed|>1, what does this mean?
If 0< |Ed| <1 what does this mean?
If |Ed|>1 then demand is called elastic.
If 0< |Ed| <1 then it is called inelastic.
What is the supply curve?
It is a curve that depicts how prices, input cost, etc affect the quantity of a good supplied.
The upward sloping curve shows the relationship between price and quantity supplied all other things constant.
The law of supply states that price and quantity supplied are positively related and is accounted for by?
The law of diminishing marginal returns states that as we add more of one input (ex labour) while holding everything else constant, we would expect output quantity to increase but at a decreasing rate. The fact that each addtional unit of output produced requires and more workers implies that the firm’s marginal cost per unit of output is increasing so a higher price must be charged.
What does excess supply look like on an equilibrium look like?
What does excess demand look like on an equilibrium graph?
What’s the consumer surplus and it significance?
Its the distance (area) between the demand curve and the price the customer pays.
The demand curve shows the maximum price consumers are willing to pay for each unit or quantity.
The horizontal price line shows what consumer actually have to pay.
The customers’s surplus diminishes as the quantity supplied or demanded and price increases till the point of equilibrium.
What is the producer surplus and its significance?
If a producer recieves more than the price she would be willing to sell the good for, she recieves a net benefit ( sometimes called profit).
The producer surplus is the distance (or area) between the supply curve and the price the producer recieves.
The producer’s surplus diminishes as the quantity supplied or demanded and price increases til the point of equilibrium.
What is unique to market equilibrium in from the perspectives of consumer and producer surplus?
It makes the combination of consumer and producer surplus as large as possible. e.g the sum of the red and blue areas.
What does a producer surplus represent in terms of profit, total variable cost (TVC), total fixed costs (TFC) and total revenue (TR)?
Profit = TR - TC
= TR - (TVC + TFC)
= TR - TVC - TFC
Profit + TFC = TR - TVC eg. either one of these is equal to producer surplus.
Look at graph.
If the quantity bought and sold is less or higher than the equilibrium quantity, what happens to the consumer and producer surplus?
And what is the term used to mark this phenomena?
The consumer and producer surplus will not be maximized and a loss of surplus will result.
The term used to describe this loss is called the deadweight loss.
Note, the equilibrium graph looks different depending on whether quantity is below or above equilibrium. Look at notes!!!
What happens to consumer and producer surplus when taxes occur and is the outcome different depending on who’s taxed?
As stated on another slide, taxes increase deadweight loss and decrease consumer and producer surplus.
Also, the outcom is the same regardless of who gets taxed.
**Look at costs of taxation example**
Based on the image below, mark the competitive equilibrium point and the social welfare maximizing point.
What is the difference between these two points?
What’s the difference between negative and postive externality curves?
While negative externalities mean that the supply curve should be higher that it actually is, positive externalities mean that the demand curve should be higher than it actually is.
**The efficient equilibrium when externalities are present is where SMB=SMC and NOT PMB=PMC **
