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Y3 Micro > Lecture 6 - Price Theory > Flashcards

Lecture 6 - Price Theory Flashcards

1
Q

Which 3 concepts have long been intertwined?

A

The concepts of Price, Cost and Value have long been intertwined.

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2
Q

Define cost

A

Cost is what is given up, paid, or sacrificed, to attain a good.

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3
Q

Define price

A

Price is what is gained when a good is transferred to another agent

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4
Q

Are cost and price the same thing?

A

No

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5
Q

Give 1 reason why price may not equal cost

A

As price can often include the profit margin/mark-up

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6
Q

Who released “Capital in the 21st Century”?

A

Thomas Piketty (remember there is an exam question on him)

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7
Q

Does price coincide with societal cost?

A

No

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8
Q

Name a quote from Thomas Hodgkin about variations in prices

A

“variations in prices have very important results.”

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9
Q

How do variations in prices regulate consumption?

A

By bringing commodities within, or carrying them out of the reach of a certain number of persons

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10
Q

How did Torrens (1824) define price?

A

Price is the quantity of that particular thing or commodity which is given in order to procure another commodity.

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11
Q

So what does a corn price mean according to Torres (1824)?

A

The quantity of corn which must be parted with, in order to obtain any given quantity of the commodity we want.

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12
Q

What 2 kinds of price are there?

A

Market Price and Natural Price

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13
Q

Define market price

A

What we give in order to obtain any commodity by way of exchange, in the market

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14
Q

Define natural price

A

What we must give in order to obtain the article we want from the great warehouse of nature.

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15
Q

What is natural price the same as?

A

The cost of production

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16
Q

What are prices relationships between?

A

2 commodities

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17
Q

When one of the 2 commodities is money, what do we get?

A

The money price

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18
Q

What is the price of a good, denominated in money, called?

A

The Nominal Price

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19
Q

Why would a nominal price change?

A

Due to a change in the value of either commodity.

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20
Q

Under General Equilibrium Theory, does every economic agent necessarily keep a strictly balanced budget? If so what does this mean?

A

Yes, therefore they maintain along-term equality between the value of their income and expenditure.

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21
Q

Under General Equilibrium Theory what is money?

A

Money is merely an intermediary of exchange

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22
Q

Under General Equilibrium Theory, is money a means of payment?

A

No

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23
Q

Are fluctuations in nominal prices important? Why?

A

No, as it is simply an issue of measurement. Only substantial and real price changes are important.

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24
Q

To somebody who wants to acquire a good, what is the real cost of acquiring it?

A

The real cost is the toil and trouble taken to acquire it.

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25
Q

What is everything worth to the man who owns a good and wants to dispose of it or exchange it for something else?

A

The toil and trouble which it can save to himself, and which it can impose upon other people.

26
Q

Items bought with money or with goods are purchased with what?

A

What is bought with money or with goods is purchased by labour,as much as what we acquire by the toil of our own body.

27
Q

What does Money Illusion often turn into?

A

Mercantilism

28
Q

Which classic economist claimed we had solved the production problem?

A

J.S. Mill (1869)

29
Q

Did Classical Economists believe that scarcity was a major issue? What was true about scarcity?

A

No, it tended to be solved with major innovations.

30
Q

What was the creation myth of Neoclassical Economics?

A

The Marginalist Revolutionof 1871 is portrayed as the legitimate scientific transformation of Economics resulting from a series of historical events.

31
Q

Give a Marginalist Value statement from John Rooke, as well as the year in which he said it:

A

“It must be the last and finite portion of that commodity added to the general stock, which regulates the value” (Rooke, 1820)

32
Q

Who first stated that MC = MR?

A

John Rooke (1824)

33
Q

Who first spoke about diminishing marginal utility? What did he say?

A

William Thompson in 1824 stated “Successive portions of wealth diminish in their power of producing happiness when added to the same individual’s share”

34
Q

What happened as a result of the marginalist revolution?

A

Pure exchange models were developed that shifted the explanation of price away from the classical focus on production to the neoclassical focus on utility and relative scarcity.

35
Q

What happened to Smith’s diamond water paradox as a result of the marginalist revolution?

A

Smith’s diamond-water paradox was no longer a puzzle, since price was explained as proportional to marginal utility, which depended on scarcity.

36
Q

Is the relationship between price and scarcity one way?

A

No, scarcity can cause high prices, but high prices can also cause exclusivity. The relationship should be viewed as bidirectional in terms of causality

37
Q

What did Neoclassical Capital Theory do?

A

Extended the general principle of relative scarcity to explain all prices, including factor prices.

38
Q

What is a a one-commodity Samuelson/Solow/Swan aggregate production function model?

A

Q = ƒ(K, L)

39
Q

List the 4 usual assumptions of the Simple Model.

A

-Exogenously given resources and technology -Constant returns to scale
-Diminishing marginal productivity
-Competitive equilibrium

40
Q

What does this simple model exhibit? Who named these as such as when?

A

This simple model exhibits what Samuelson (1962) called three key “parables”

41
Q

What is Parable 1, and what is it determined by?

A

The real return on capital (i.e. the rate of interest) and is determined by the technical properties of the diminishing marginal productivity of capital

42
Q

What is Parable 2?

A

↑K→↓MPK →↓ rate of interest. The same inverse relation with the rate of interest holds for the capital/output ratio (ie ↑K→ ↓output) & sustainable levels of consumption per head (ie ↑population→ ↓consumption per head).

43
Q

What is Parable 3?

A
  • The distribution of income between labourers and capitalists is explained by relative factor scarcities/supplies and marginal products.
  • The price of capital services (the rate of interest) is determined by the relative scarcity and marginal productivity of aggregate capital,
  • The price of labour services (the wage rate) is determined by the relative scarcity and marginal productivity of labour (L).
44
Q

What do the three parables of this one-commodity model depend on?

A

A physical conception of capital (and labour) for their one-way causation

45
Q

In which models can there be problems? Why? What is a common solution to this?

A
  • There are problems in models with heterogeneous capital goods.
  • Heterogeneous capital goods cannot be measured and aggregated in physical units;
  • Capital valuation is used, as Wicksell (1911) explained
46
Q

Give 2 ways in which the value of capital can be measured

A

-The cost of production, which takes time
-The present value of the future output stream they produce

47
Q

What is true about either methods of valuing capital?

A

In either case, since the measure involves time, it presumes a rate of interest, in the simple model, this is determined in a one-way manner by the quantity of capital.

48
Q

What kind of economist was Piero Sraffa?

A

He was a classical economist

49
Q

Sraffa’s 1960 book demonstrated the significance of what?

A

Reswitching and Capital-reversing

50
Q

What was Sraffa’s book we are focussing on called, and when was it written?

A

The Production of Commodities by Means of Commodities (1960)

51
Q

What key question did Sraffa;s work pose?

A

“What is the good of a quantity of capital . . . which, since it depends on the rate of interest, cannot be used for its traditional purpose . . . to determine the rate of interest [?]”

52
Q

The Cambridge capital theory controversies of the 1950s to 1970s revolved around a series of still-unresolved controversies over which three deep issues?

A

-Explaining and justifying the return to capital;
- Due to path dependence, equilibrium is not an outcome of an economic process and therefore an inadequate tool for analysing accumulation & growth;
- The role of ideology and vision in fuelling controversy when results of simple models are not robust.

53
Q

Explain the Arrow-Debreu solution

A
  • Intertemporal General Equilibrium notion
  • One might have a multitude of interest rates
  • A structure of interest rates associated with different capital goods, rather than financial ones, even if you do have monetary rates too
  • This is what the mainstream did, which changed the notion of equilibrium,
  • And gave up the notion of a uniform rate of profit.
54
Q

What can a multitude of interest rates also be known as?

A

The term structure

55
Q

Have any economists ever admitted their errors?

A

Yes, in an updated version of his book, Samuelson purged his errors, and in one paper, opened it up with “We wish to make it clear for the record that the non-reswitching theorem associated with us is definitely false.” (Levhari and Samuelson 1966).

56
Q

Is neo-classical economics correct?

A

No

57
Q

What is an issue with macroeconomic textbooks?

A

They discuss Capital as if it were a well-defined concept, which it is not

58
Q

What did (Burmeister, 2000) say?

A

The problems of heterogeneous capital goods have also been ignored in the ‘rational expectationsrevolution’ and in virtually all econometricwork.”

59
Q

Which famous economist did Sraffa work with at Cambridge?

A

Keynes

60
Q

Sraffa edited which piece of work disagreeing with neo-classical economics?

A

Works & Correspondence of David Ricardo (1951-1973)

61
Q

Which Marx issue did Sraffa focus on?

A

The Transformation Problem, turning values into prices

62
Q

What did Sraffa initiate?

A

The Capital Controversy

Y3 Micro (11 decks)

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