Midterm Flashcards by Harry Albert

Opportunity Cost

What are you giving up?

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Marginal Analysis

Comparing marginal benefit to marginal cost (if mb>mc take the action)

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Competitive Market

A market in which there are many buyers and sellers of the same good or service. No individual can noticeably impact the price (well described by supply and demand)

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5 key elements of supply and demand model

supply curve, demand curve, 2 sets of factors that cause the two curves to shift, p* and q*, the way mkt equilibrium changes when the supply/demand curve shift

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demand schedule

how much people would want to buy at dif prices

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law of demand

higher price –> less demand

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changes in demand caused by:

changes in # of consumers, preferences of buyers, price of related g/s (substitute or compliment), in income

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substitutes

a pair of goods where an increase in the price of one causes consumers to by another (coffee+tea)

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complements

pair of goods where rise in price of one causes less demand for other (phones+apps)

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normal good

demand increases when income rises

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inferior good

demand decreases when income rises

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input

a g/s used to produce another g/s

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surplus

excess supply of a g/s

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shortage

excess demand for g/s

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Change in supply caused by:

change in input prices, expectations, technology, # of producers, related g/s

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Price elasticity of demand equation. What’s its sign?

(q2-q1/q2+q1)/(p2-p1/p2+p1). Always negative but written as positive

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Calculate PED: p1=3,p2=4,q1=60,000,q2=5700

0.18

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(in relation to PED) Unit Elastic, Relatively Inelastic, Relatively Elastic, Perfectly Inelastic, Perfectly Elastic

PED=1, <1, >1, 0, infinite

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quantity effect

revenue lost from reduction in sales by increasing price

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price effect

revenue gained from increased price

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(In relation to qty/price effect) Relatively elastic/inelastic

qty effect > price effect, qty effect < price effect

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factors affecting PED

Short term vs. long term, luxury or necessity, budget share (higher percent = lower elasticity), close substitute (more options = higher elasticity)

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Income Elasticity of Demand (and what this number indicates)

change in quantity demanded / change in income. (negative = inferior good, positive = normal good, 0-1=necessity and income inelastic, >1=luxury and income elastic)

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Cross price elasticity of demand (and what this number indicates)

change in quantity demanded of product a / change in price of product b (>0 = substitute, < 0 = compliment)

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Price elasticity of supply (and what this number indicates)

Change in quantity supplied / change in price (1=unit elastic, > 1 = relatively more elastic, < 1 relatively inelastic)

What effects price elasticity of supply?

timeframe (short term vs long term), future expectations

Willingness to pay

the maximum amount that a consumer is wtp for a g/s

Consumer Surplus

WTP - Px paid

Seller's Cost (WTS)

the lowest amount that the producer is willing to sell the g/s at

Producer surplus

Px received - WTS

Total Social Welfare (no externalities)

CS + PS

Efficient

Maximized social welfare (there is not trade that can make someone better off without making someone else worse off)

Price Ceilings

Maximum amount that can be charged for a g/s (rent control, steel, medical sector)

Dead Weight Loss

loss in tsw relative to efficient eqm

Price floor

Minimum price in the market (minimum wage, butter/essentials, agricultural commodities)

tax equity

tax incidence (who bares burden of tax)

tax efficiency

size of DWL due to tax

Excise Taxes

Per unit tax on g/s

Consumption side tax (and TSW formula)

tax on consumer (TSW = CS + PS + govt. revenue)

Draw a graph for a consumption side tax

check notes (lecture 7)

draw a graph of relatively elastic vs inelastic supply/demand

check notes (lecture 3)

draw a graph and label CS and PS

check notes (lecture 5)

graph a price ceiling, producer surplus, consumer surplus, dead weight loss, etc.

check notes (lecture 6)

graph a price floor, producer surplus, consumer surplus, dead weight loss, etc.

check notes (lecture 6)

Tax incidence

amt. of welfare (surplus) lost by producers/consumers

relation of elasticity to tax burden

more elastic demand = producers bare greater tax burden, more elastic supply = consumers bare greater tax burden

Graph a production side tax

check notes (lecture 7)

Types of taxes

income tax, property tax, estate tax/inheritance tax, sales tax, wealth tax, corporate taxes, capital gains

tax base

the value/measure we are taxing (property value, income)

tax structure

defines how the tax base is taxed

proportional tax, regressive tax, progressive tax

everyone pays the same percent regardless of income. As income increases, tax rate decreases. As. income increases, tax rate increases

Marginal Social Benefit and Marginal Private Benefit

Society's WTP and individual's WTP (demand curve)

Equation for MSB

MPB + external benefits to others from consumption - external costs to others from consumption

Marginal Private Cost and Marginal Social Cost

Society's and individual's WTS (supply curve)

Equation for MSC

MSC + external costs to society from production - external benefits to society from production

Consumption Externalities (proportions)

positive = MSB > MPB, negative = MSB < MPB

Production Externalities (proportions)

Positive = MSC < MPC, Negative = MSC > MPC

Graph a Positive Consumption externality, calculate CS, PS, Ext benefit, TSW, DWL

check lecture 8

Pigouvian Subsidy

equal to ext benefit

Graph a Negative Consumption externality, calculate CS, PS, Ext benefit, TSW, DWL

check lecture 8

Graph a Positive Production externality, calculate CS, PS, Ext benefit, TSW, DWL

check lecture 8

Graph a Negative Production externality, calculate CS, PS, Ext benefit, TSW, DWL

check lecture 8

Public soutions to Externalities

taxes for negative, subsidies for positive, mandate for positive, ban for negative

Coase Theorem

we can solve the externality using markets so long as the transaction costs are low and the number of people impacted is small (a few people in an apartment could decide not to play loud music, but a lot of people would have a harder time coordinating this)

Tradeable Permits

decide how much pollution we find acceptable, divide this amount into permits, have firms bid on these permits

Excludable g/s

firm/supplier can exclude those who are not paying from consuming the good/service

Rival in consumption

only one person can consume g/s

Combinations of rival, non-rival, excludable, non-excludable

r+e=private good, nr+e=artificially scarce good, ne+r=common resource, ne+nr=public good

free rider problem (and graph it)

people contribute less than their true value of the g/s because they want to free-ride on others contribution to the g/s. Leads to underproduction of the g/s in the free market. (check lecture 9 for graph)