Lectures IV, V, and VI Flashcards
Property Rights
the rights to use, control, and obtain the benefits from a good or service
What do private property rights include?
1) The right to exclusive use of the property
2) Legal protection against invasion from others
3) The right to transfer, sell, exchange, or mortgage the property
What are the incentive effects of private property rights?
1) Private owners can gain by employing their resources in ways that are beneficial to others
2) Private owners have a strong incentive to care for their property
3) Private owners have an incentive to conserve for the future
4) Private owners have the incentive to keep their property from damaging other people’s property
Tragedy of the Commons
overuse of a resource when property rights are not clearly established
WHAT do pure market organizations and pure command organizations produce?
1) Pure market – what the people are willing and able to buy (consumer sovereignty)
2) Pure Command – what the government deems necessary (benevolent despotism)
HOW do pure market organizations and pure command organizations produce?
1) Pure market – through private enterprises that efficiently maximize profit with a hard budget constraint
2) Pure command – production is determined by a central planner with a soft budget constraint
FOR WHOM do pure market organizations and pure command organizations produce?
1) Pure market – for those who are willing and able to pay
2) Pure command – equal distribution, “to each according to their need”
Economic Agents
1) Households
2) Firms
3) The government
What is essential for a transition from a command economy to a market economy?
1) Achieve price stability
2) Establish and maintain private property rights
3) Allow market incentives to motivate decision-makers
4) Allow prices to fluctuate in response to supply and demand
5) Establish a broadly obeyed legal system
6) Individuals must be able to think in a market-oriented way
Demand vs. Quantity Demanded
1) Demand refers to the entire demand curve on a price vs. quantity graph
2) Quantity demanded refers to a point on the graph at a specific price that represents the quantity that consumers demand
Demand Schedule
shows the relationship between price level and quantity demanded (graphing this would give the demand curve)
Law of Demand
as the price of a good increases, the quantity demanded falls (holding all else constant)
The Relative Price
the price of a good compared to the price of other goods
Consumer Surplus
the amount a consumer is willing to pay MINUS the amount the consumer actually ends up paying
Quantity Supplied
the amount of a commodity that a firm is willing to sell at a given price
Law of Supply
as the price of a good increases, the quantity supplied increases as well (holding all else constant)
Opportunity Cost of Production
the total economic cost of producing a good or service – in other words it is the value of the production of other goods sacrificed as the result of producing the good
Producer Surplus
the amount suppliers actually receive (market price) MINUS the minimum they would have been willing to accept
Market Equilibrium
when quantity supplied EQUALS quantity demanded (everything that is produced is consumed and no one wants more)
What does excess supply (surplus) do to the price?
puts downward pressure on the price
What does excess demand (shortage) do to the price?
puts upward pressure on the price
Shift Factors of Demand
1) Price changes of related goods
2) Change in the income level of buyers
3) Change in the expected future prices
4) Population increase or decrease
5) Change in taste and preferences
What are the two categories of related goods?
1) Substitute goods – when the price of one good increases, the demand for the other increases
2) Complementary goods – when the price of one good increases, the demand for the other decreases
Normal Goods vs. Inferior Goods
1) Normal goods – when people’s income increases, the demand for normal goods increases
2) Inferior goods – these are your basic necessities, so when people’s income decreases, the demand for inferior goods actually increases
Shift Factors of Supply
1) Changes in cost of production
2) Technology shocks
3) Natural events
4) Government intervention (taxes, subsidies, regulation, etc.)
5) Number of producers in the market
6) Expectations about future prices
7) Prices of goods related in production
Excise Tax
a tax of a specific good
Tariff
an excise tax on an imported good
Quota
a quantitative restriction on the amount of a good that one country can import from another
Deadweight Loss (Welfare Loss)
a cost to society caused by market inefficiency, which occurs when supply and demand are out of equilibrium
Subsidy
a payment the government makes to either the buyer or the seller when a good or service is purchased or sold
Tariffs and Quotas vs. Subsidies
1) Tariffs and quotas – raise price and lower demand
2) Subsidies – lower price and raise demand
Price Controls
government mandated price levels (price ceilings and price floors)
Price Ceiling
an upper limit on the price level (ex. rent control)
Price Floor
a lower limit on the price level (ex. minimum wage)
Binding
when a price ceiling or price floor keeps price from reaching equilibrium price level
