Midterm Flashcards
Opportunity Cost
What are you giving up?
Marginal Analysis
Comparing marginal benefit to marginal cost (if mb>mc take the action)
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)
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
demand schedule
how much people would want to buy at dif prices
law of demand
higher price –> less demand
changes in demand caused by:
changes in # of consumers, preferences of buyers, price of related g/s (substitute or compliment), in income
substitutes
a pair of goods where an increase in the price of one causes consumers to by another (coffee+tea)
complements
pair of goods where rise in price of one causes less demand for other (phones+apps)
normal good
demand increases when income rises
inferior good
demand decreases when income rises
input
a g/s used to produce another g/s
surplus
excess supply of a g/s
shortage
excess demand for g/s
Change in supply caused by:
change in input prices, expectations, technology, # of producers, related g/s
Price elasticity of demand equation. What’s its sign?
(q2-q1/q2+q1)/(p2-p1/p2+p1). Always negative but written as positive
Calculate PED: p1=3,p2=4,q1=60,000,q2=5700
0.18
(in relation to PED) Unit Elastic, Relatively Inelastic, Relatively Elastic, Perfectly Inelastic, Perfectly Elastic
PED=1, <1, >1, 0, infinite
quantity effect
revenue lost from reduction in sales by increasing price
price effect
revenue gained from increased price
(In relation to qty/price effect) Relatively elastic/inelastic
qty effect > price effect, qty effect < price effect
factors affecting PED
Short term vs. long term, luxury or necessity, budget share (higher percent = lower elasticity), close substitute (more options = higher elasticity)
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)
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)
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)
