Midter, 2023-2 Flashcards
GDP
It’s a measure of a country’s economic productivity.
It measures the monetary value of final goods and services produced in a country over a given period of time (quarterly, yearly etc.).
Per cc is GDP / population
Esterlin Paradox
Demonstrates that life satisfaction does rise with average income both among and within nations but it is only up to a point. Beyond that point the marginal gain in happiness doesn’t increase.
Approaches to measure GDP
- Output Method: Total value of what’s produced
- Income method: Sum of gross profits of companies, the self employed, and employees’ wages
- Expenditure Method: Total spending on goods and services
Remember that all method must add to the same value.
Capitalism
Capitalismis aneconomic systemcharacterized by a particular combination of:
1. Private Property
2. Markets
3. Firms
How does capitalism lead to growth in living standards?
- Technology: It is a process that takes a set of inputs and creates an output. Example: cake
- Specialization: Focusing on a limited range of activities
- Learnind by doing
- Difference in ability
- Economies of scale
- Task juggling
Absolute Advantage
When a producer can provide a good or service in greater quantity for the same cost, or the same quantity at a lower cost, than its competitors.
Comparative Advantage
A producer’s ability to produce a particular good or service at a lower opportunity cost than its trading partners.
Correlation
Measures the strength and
direction of the relationship between X and Y .
Causation
Indicates that a change in X directly results in a change in Y .
Law of demand
The tendency for quantity demanded to be higher when the price is lower.
Giffen Goods
Essential goods with upward sloping demand because, with higher prices, one cannot afford better alternatives
ex: rice in China
Veblen goods
Goods with upward sloping
demand due to increased perceived exclusivity at higher prices.
Ex: Rolls Royce
Law of supply
Tendency for the quantity produced to increase, when prices increase
Price-taking
Sellers and buyers accept the market price as given
Perfect Competition
All firms in an industry sell an identical good (product homogeneity)
There are many buyers and sellers, each of whom is small relative to the size of the market (atomistic agents)
Market
A setting bringing together potential buyers and sellers
Market equilibrium
When the market clears. All unites produced are bought.
Price elasticity of demand
A measure of how responsive buyers are to price changes. It measures the percent change in quantity demanded that follows from a percent price change
Cross-price elasticity of demand
A measure of how responsive the demand of one good is to price changes of another good. It measures the percent change in quantity demanded that follows from a percent change in the price of another good
Substitute goods
Goods that can replace each other in consumption.
Ex: Pepsi- Coca Cola
Complement goods
Goods that are consumed together.
Ex: Printers and ink cartridges
Income elasticity of demand
A measure of how responsive the demand for a good is to changes in income. It measures the percent change in quantity demanded that follows from a percent change in income.
Normal goods
Goods for which higher income leads to a higher demand.
Inferior goods
goods for which higher income leads to a lower demand
Price elasticity of supply
A measure of how responsive sellers are to price changes. It measures the percent change in quantity supplied that follows from a percent price change
Tax on buyers
Tax shifts demand curve LEFT
Price ceiling
A maximum price that sellers can charge.
There’s a shortage of what is produced and what is demanded.
It’s below the equilibrium
Prices floors
If price floors bind (i.e. are above the equilibrium price), they raise prices but cause surplus
Mandate
A requirement to buy or sell a minimum amount of a good
Quota
Limit on the maximum quantity of a good that can be sold.
Progressive tax
A tax where those with more income tend to pay a higher share of their income in taxes
Regressive tax
A tax where those with less income tend to pay a higher share of their income on the tax
Tax expenditures
Special deductions, exemptions, or credits that lower your tax obligations, to encourage you to engage in certain kinds of activities
Fiscal policy
is the government’s use of spending and tax policies to influence the economy
Expansionary fiscal policy
Increases government spending & decreases taxes
Contractionary fiscal policy
Decreases government spending & increases taxes
Discretionary fiscal policy
Deliberate changes in government spending or taxes to boost or slow the economy on a temporary basis
Automatic stabilizers
Spending or tax programs that automatically adjust as the economy expands or contracts, without any need for deliberate action.
Gross government debt
The total accumulated amount of money the government owes
Net government debt
The debt that the government owes to external parties (domestic and foreign)
Seller’s market power
The extent to which a seller can charge a higher price without losing many sales to competing businesses
Externality
A side effect of an activity that affects bystanders whose interests aren’t taken into account
Negative: marginal social costs exceed marginal private costs –> Overproduction
Positive
marginal social benefits exceed marginal private benefits –> underproduction
Private information (negative externality)
Either the seller or the buyer have relevant information they would not want to disclose
Adverse selection (negative externality)
The tendency for the mix of goods to be skewed toward more low quality goods when one side of the market can’t observe quality
Incomplete contracts (negative externality)
Situations where some product conditions are too intricate or costly to specify
Irrationality (negative externality)
When people make decisions that don’t seem in their best interest
Time-inconsistent preferences (negative externality)
When individuals value decisions differently over time, leading to potential regret about past choices
Deadweight loss (DWL)
The difference between the actual level of economic surplus and the largest possible economic surplus (at the efficient quantity)
Marginal social cost (MSC)
The extra cost paid by the seller and bystanders from one extra unit
Marginal social benefit (MSB)
The extra benefit enjoyed by the buyer and bystanders from one extra unit
Solution to externalities
- Corrective taxes and subsidies: designed to induce people to take account of the externalities they cause.
- Cap-and-trade:
A quantity regulation implemented by allocating a fixed number of permits, which can then be traded
Static games
Are always played simoulstaneosly
Dynamic games
Players move repeatedly or sequentially
Nash equilibrium
An equilibrium in which the choice that each player makes is a best response to the choices other players are making.
Tragedy of the commons
Tendency for common resourcesto be overutilized
Coordination game
Games with multiple equilibria
Finitely repeated game
When you face the same strategic interaction a fixed
number of times
Indefinitely repeated game
When you face the same strategic interaction an unknown number of time
Folk theorem
sometimes, in indefinitely repeated games, very punitive strategies can allow players to enact collusion and maximize their pie
Strictly dominant strategy
Best strategy a player can choose. It wins all the time
Strictly dominated
Whatever the other player chooses, that stratregy always yields the worst outcome.
Median Voter Theorem
when citizens’ preferences are single-peaked, the preference of the median voter wins any alternative in majority voting elections
