Mankiw book Flashcards
The word economy comes from
Greek word oikonomos which means the one who manages a household.
Rational people make decisions by
comparing marginal benefits and marginal costs.
Market failure happens because of
market power and externalities
different living standards are because of
productivity
Albert Einstein once put it:
“The whole of science is nothing more than the refinement of everyday thinking.”
Economists at the Office of Management and Budget
help formulate spending plans and regulatory policies.
Economists at the Department of the Treasury
help design tax policy.
Economists at the Department of Justice
help enforce the nation’s antitrust laws.
Problems with graphing:
omitted variable and reverse casuality. Expectations as well.
comparative advantage developed by
David Ricardo developed it.
A 10% increase in the price of cigarettes causes
a 4% reduction in the quantity demanded. Teenagers are especially sensitive to the price of cigarettes: A 10% increase in the price causes a 12% drop in teenage smoking.
A 10% increase in gasoline prices reduces gasoline consumption by
about 2.5% after a year and by about 6% after five years.
THINGS THAT INFLUENCE PRICE ELASTICITY OF DEMAND
- Availability of close substitutes - A good with close substitutes tends to have more elastic demand
- Necessities vs Luxuries - Necessities tend to have inelastic demands, whereas luxuries have elastic demands.
- Definition of the Market - Narrowly defined markets tend to have more elastic demand than broadly defined markets because it is easier to find close substitutes for narrowly defined goods.
- Time Horizon – more elastic in the long run
What shifts the demand curve?
Income
Prices of related goods
Tastes
Expectations
Number of buyers
What shifts the supply curve?
Input prices
Technology
Expectation
Number of sellers
Is demand curve elastic the same at all places?
No. At points with a low price and high quantity, the demand curve is inelastic. At points with a high price and low quantity, the demand curve is elastic.
Income elasticity of demand
Normal goods +
Inferior –
Engel’s Law
(named after the statistician who discovered it): As a family’s income rises, the percent of its income spent on food declines, indicating an income elasticity less than one.
Cross-Price Elasticity of Demand
Substitiues +
complements –
The typical study finds that a 10 percent increase in the minimum wage depresses teenage employment by
1 to 3 percent.
Payroll tax
a tax on the wages that firms pay their workers.
Arthur Laffer
in 1974 suggested that the United States was on the downward-sloping side of the Laffer curve curve. Tax rates were so high, he argued, that reducing them might actually increase tax revenue. – he captured the imagination of Ronald Regan – known as supply side economics because cut in taxes is intended to encourage q of labor supplied.
Benefits of international trade:
- Increased variety of goods
- Lower costs through economies of scale
- Increased competition
- Increased productivity - When a nation opens up to international trade, the most productive firms expand their markets, while the least productive are forced out by increased competition.
- Enhanced flow of ideas
The arguments for restricting trade:
- The jobs argument - Opponents of free trade often argue that trade with other countries destroys domestic jobs.
- The National-Security argument – example steel – it is overused and exaggerated
- The Infant-Industry argument – it is difficult to implement and you cannot predict future profitable companies
- The Unfair Competition Argument – its dumb
- The Protection as a Bargaining-Chip Argument – it may not work and leave the country worse off
Two approaches to achieving free trade:
- Unilateral – remove restrictions on its own
- Multilateral – reduce trade restrictions with other countries – can result in freer trade but if something fails it can result in more restricted trade. It also has political advantages.
negative externalities
shown on supply curve
technology spillover
positive externality. the impact of one firm’s research and production efforts on other firms’ access to technological advance.
positive externalities
shown on demand curve
Public policies toward externalities:
- Command and Control policies: regulation
- Market based policies:
1. Corrective taxes and subsidies Taxes enacted to deal with the effects of negative externalities are called corrective taxes. They are also called Pigovian taxes after economist Arthur Pigou (1877–1959), an early advocate of their use.
2. Tradable pollution permits
Coase theorem
after economist Ronald Coase - if private parties can bargain over the allocation of resources at no cost, then the private market will always solve the problem of externalities and allocate resources efficiently. The initial distribution of rights does not matter for the market’s ability to reach the efficient outcome.
For government to provide a public good, it must
do the cost-benefit analysis before. Studies using this approach conclude that the value of a human life is about $10 million.
Ben Franklin’s observation
“in this world nothing is certain but death and taxes.”
A corporation is
is a business set up to have its own legal existence, distinct and separate from its owners. The government taxes each corporation based on its profit. Profits are taxed twice, first when corporation earns profit and then as personal income tax,
Costs of taxes to tax payers:
- Cost of the tax itself
- The deadweight losses that result when taxes distort the decisions people make
- The administrative burdens that taxpayers bear as they comply with the tax laws on April 15.
Lump – sum tax
tax that taxes everyone the same amount regardless of their income, it is the most efficient tax but they are not good for equity.
Taxes and equity – principles to make tax system more equitable:
- The benefits principle - states that people should pay taxes based on the benefits they receive from government services. – it tries to make public goods similar to private goods. Example gasoline tax
- The ability to pay principle(horizontal and vertical equity) - taxes should be levied on a person according to how well that person can shoulder the burden.
Types of tax systems:
proportional, regressive, and progressive
quintiles
Households are ranked according to their income and placed into five groups of equal size, called quintiles.
industrial organization
the study of how firms’ decisions about prices and quantities depend on the market conditions they face.
efficient scale of the firm
The bottom of the U-shape occurs at the quantity that minimizes average total cost. This quantity is sometimes called the efficient scale of the firm.
For all types of firms, average revenue equals the price of the good.
For competitive firms, marginal revenue equals the price of the good.
For all types of firms, average revenue equals the price of the good.
For competitive firms, marginal revenue equals the price of the good.
Shut down if
if TR < VC.
if P < AVC
Exit if
TR < TC.
If P < ATC
The competitive firm’s short-run supply curve is
the portion of its marginal-cost curve that lies above the average-variable-cost curve.
The competitive firm’s long-run supply curve is
the portion of its marginal-cost curve that lies above the average-total-cost curve.
The process of entry and exit end when
P=ATC
2 reasons that the long-run market supply curve might slope upward:
- The first is that some resources used in production may be available only in limited quantities.
- A second reason for an upward-sloping supply curve is that firms may have different costs. Costs vary in part because some people work faster than others and in part because some people have better alternative uses of their time than others. For any given price, those with lower costs are more likely to enter than those with higher costs.
The fundamental cause of monopoly is
barriers to entry
- Monopoly resources: A key resource required for production is owned by a single firm. monopolies rarely arise for this reason (DeBeers, the South African diamond company
- Government regulation: The government gives a single firm the exclusive right to produce some good or service. The patent and copyright laws are two important examples. The benefits are the increased incentives for creative activity.
- The production process: A single firm can produce output at a lower cost than can a larger number of firms. Natural monopolies because of economies of scale. (distribution of water
Marginal revenue is negative when
when the price effect on revenue outweighs the output effect.
When a monopoly increases the amount it sells, there are two effects on total revenue
- The output effect: More output is sold, so Q is higher, which increases total revenue.
- The price effect: The price falls, so P is lower, which decreases total revenue
There is no price effect in competitive firm.
Socially efficient quantity is found where
the demand curve and the marginal-cost curve intersect.
arbitrage
the process of buying a good in one market at a low price and selling it in another market at a higher price to profit from the price difference.
Policymakers in the government can respond to the problem of monopoly in one of four ways:
- By trying to make monopolized industries more competitive – antitrust laws - The first and most important of these laws was the Sherman Antitrust Act, which Congress passed in 1890 to reduce the market power of the large and powerful “trusts” that were viewed as dominating the economy at the time.
- By regulating the behavior of the monopolies
- By turning some private monopolies into public enterprises
- By doing nothing at all
synergies
Sometimes companies merge not to reduce competition but to lower costs through more efficient joint production. These benefits from mergers are sometimes called synergies.
There are two noteworthy differences between monopolistic and perfect competition:
excess capacity and the markup.
The quantity that minimizes average total cost is called the efficient scale of the firm. In the long run, perfectly competitive firms produce at the efficient scale, whereas monopolistically competitive firms produce below this level. Firms are said to have excess capacity under monopolistic competition.
Markup over marginal cost – in perfectly competitive P=MC and in monopolisticly competitive P>MC
One experiment showed that advertising
reduced prices by more than 20%.
If there is larger oligopoly, when deciding about pricing owners look at:
- The output effect: Because price is above marginal cost, selling one more gallon of water at the going price will raise profit.
- The price effect: Raising production will increase the total amount sold, which will lower the price of water and lower the profit from all the other gallons sold.
The winning program for prisoners dilemma
Robert Axelrod - The winning program turned out to be a simple strategy called tit-for-tat. According to tit-for-tat, a player should start by cooperating and then do whatver the other player did last time.
Controversies over antitrust policy:
- Resale price maintenance – If prodecer requires retailer to charge a certain price. Defense is that these do not aim to reduce competition and second is that they have a legitimate goal to solve free-rider(good costumer service) problem.
- Predatory pricing – cuting prices to make competition exit and than raising them again. - predatory pricing is rarely, if ever, a profitable business strategy.
- Tying – for example, offers theaters the two films together at a single price, rather than separately, the studio is said to be tying its two products. – it is still unclear if this works because it does not increase willingness to pay
Why could labor demand curve shift?
- The output price - when the output price changes, the value of the marginal product changes, and the labor-demand curve shifts.
- Technological change - Advances in technology typically raise the marginal product of labor, increasing the demand for labor and shifting the labor-demand curve to the right(labor-augmenting). Technological change can also reduce labor demand(labor-saving).
- The supply of other factors - The quantity of one factor of production that is available can affect the marginal product of other factors. For example, ladders affect productivity of apple pickers.
the labor supply curve depends on
income effect and substitution effect
What can cause a shift in labor-supply curve?
- Change in tastes
- Changes in alternative opportunities - The supply of labor in any one labor market depends on the opportunities available in other labor markets.
- Immigration - When immigrants come to the United States, for instance, the supply of labor in the United States increases and the supply of labor in the immigrants’ home countries falls.
When you receive interest on your bank account and dividends, that income is part of the
economy’s capital income.
The equilibrium purchase price of a piece of land or capital depends on
both the current value of the marginal product and the value of the marginal product expected to prevail in the future.
Black Death
In 14-th-century in Europe – population reduced – marginal product of labor rises – raise in wages – marginal product of land fell because there were less workers to farm it – lower rents. During Black Death wages doubled and rents declined 50%. It led to economic prosperity for the peasant classes and reduced incomes for the landed classes.
Why did the gap between skilled and unskilled labor rise over time?
International trade and technology
Some determinants of equilibrium wages:
- Compensating differentials - Some jobs are easy, fun, and safe, while others are hard, dull, and dangerous.
- Human capital - workers with more human capital(education) earn more on average than those with less human capital. – in US almost twice as much. It also states that education raises productivity.
- Ability, effort and chance - people differ in their physical and mental attributes, Some people work hard; others are lazy
- An alternative view of education: Signaling – education a way of sorting between high-ability and low-ability workers. Education doesn’t raise productivity.
Superstars arise in markets with two characteristics:
- Every customer in the market wants to enjoy the good supplied by the best producer. 2. The good is produced with a technology that makes it possible for the best producer to supply every customer at low cost.
Above equilibrium wages reasons
minimum wage laws(Most workers in the economy are not affected by these laws because their equilibrium wages are well above the legal minimum.)¬, unions(Studies suggest that union workers earn about 10 to 20 percent more than similar, nonunion workers.) and efficiency wages(to increase productivity).
statistical discrimination
It is based on the assumption that employers have imperfect information about possible employees. Some employers, for instance, prefer not to hire workers with criminal records. There is a “ban the box” law that does not allow to ask for criminal records.
The top quintile in US takes X of total income and the bottom quintile y.
50%, 3.8%
Quintile ratio
is the income of the richest quintile divided by the income of the poorest quintile.
Most equal countries
Pakistan and Sweden
