Midterm - Lectures 1-7 Flashcards
Consumer’s Choice
Every point on a plane is a bundle that the consumer could buy
What are the two steps to consumer choice?
1) What bundles can the consumer afford? (Establish the budget set)
2) Of the bundles the consumer can afford, which does she prefer? (Create utility function)
Budget Set
(PQ1)+(PQ2)
What is a utility function?
a rule assigning numbers to bundles such that if x is preferred to y, U(x)>U(y) where U= utility function.
What do utility functions NOT take into account?
magnitude
What is an indifference curve?
Its a curve where all the bundle combinations have the same utility
What are the assumptions of indifference curves?
Assumes a rational consumer, and it assumes that prferences (and thus indifference curves) do not change.
Even though along a given indifference curve we are indiffiernt, what indifference curve do we always prefer?
The one farthest from the origin that is still on our budget set; is tanglet to the budget set.
What do we aim to achieve in our budget set choice?
we aim to maximize utility - aka aim for constrained maximization
What is the peltzman effect?
when people adjust their behavior to a regulation in a way that counteracts its intended effect.
It may not completely erase the effect, but it could reduce its impact.
In the budget set, what happens if the price of one item changes?
her budget set - and thus choice - will shift, even though her indifference curves (and thus preferences) do not change… you have to maximize your utility based upon your constraints.
Crowd out
When governmental intervention crowds out the private purchase of goods. It involves consumers switching from privately purchased goods to publically purchased goods.
What must policy makers budget for concerning crowd out?
Policy makers must budget for individuals who will opt into government programs due to crowd out - this makes governmental programs expensive.
Opportunity Cost
The value of the next forgone alternative use (the next best use of that resource).
“On the margin”
At each “Unit” or increment there is a decision whether or not to consume based upon the benefit/cost to you.
its the point at which you become indifferent/determine overconsumption
Competitive Market
Many consumers and many producers who are price takers
Law of demand
if price increases then consumption decreases (downward sloping).
If people are richer, shift right
If people are poorer shift left.
How do you get a market demand curve?
Take individual demand curves and aggregate them up to the market demand curve –> its summed consumption vs price added horizontally.
A competitve Firm is 2 things
a price taker
a profit maximizer
Profit =
(pricequantity) - (costquantity)
Fixed costs
are independent of quantity produced
Variable costs
change based upon the quanitity produced
Average costs
total costs/quantity produced
i.e. the more units, the smaller the cost per unit
Marginal Costs:
The additional cost of producing onem ore unit - isnt necessarily linear.
Firms want to maximize profits at the margin - they will continue to produce until price = marginal cost, at which point the cost would be greater than the price to produce the next item, and the firm would lose money
Economies of Scale
Firms enjoy lower costs as quantities increase (when marginal costs
What happens when marginal costs intersect average costs?
you hit diseconomies of scale, where costs have to increase to meet demand (i.e. more employees, factories, etc.).
Law of supply
Supply curves slopes “sup”
If cheaper/easier to produce, shift right
if harder to produce/more expensive, shift left
Competitive Equilibrium
No one looking to buy a product can’t find it; no one looking to sell a product cant sell it.
happens naturally without governmental intervention.
prices transmit info; as prices increase consumers may consume less and/or shift to another product.
What happens when a price ceiling is put on food?
A shortage can be created (bc quantity produced at that price is less than the quanitity demanded at that price).
Who wins in price ceilings?
consumers who can find food
Who loses with price ceilings
producers
consumers who cannot find food
may lead to a misallocation problem.
Economic Rents
Profits made by keeping out the competition
Rent Seeking Behavior
when suppliers attempt to Use government power to keep out competition (i.e. bar exam, taxi medallions, nurse practicioners as pcp’s).
Externalilty
a transaction where a third party is affected
can be positive or negative.
when these exist, if the government does not intervene, there will be inefficiencies.
Free market & externalities
the private market will not work without government intervention when it comes to externaltities.
What do negative externalities sans gov’t intervention lead to?
overproduciton
What do positive externalities sans gov’t intevention lead to?
underproduction
public goods
1) are non-rival in consumption (person a’s use does not affect person b’s use)
2) are non-excludable (its difficult to keep others from enjoying the good).
If externalities are negative, which direction does government intervention shift the supply curve?
to the left!
What are government inteventions to avoid over production in the case of negative externalities?
pigouvian tasxes
Quanity quotas
Cap & Trade
Pigouvian Tax:
lower the market price through a tax… producers are allowed to produce as many units as they want, they just have to give the government a cut of the income.
Ways for government to intevene in the case of positive externalities (to make up for under production)?
subsidies
quantity regulation
when you’re only allowed to produce a certain amount due to negative externalities/gov’t intervention
Cap & Trade
How the government regulates firms that produce pollution… they create “pollution vouchers” for the amount they’re allowed to pollute, and the firms can trade these vouchers in a new market with one another.
Positive Externalities:
vaccines –> herd immunity
autopsy –> discovery of new diseases, learn how disease affects body, new surgical techniques, performance of new treatments.
Knowledge –> public good, we can all benefit
Negative Externalties
car size - smog car size - dangerous in accidents econimic epidemiology --> self-limiting incentive effects of epidemics; rationale for individuals to sop prevention efforts when disease risk becomes rare --> feedback loop antibiotics --> resistance tobacco
Behavioral economics
are economics keeping in mind human irrationality
internalities
individuals ignore fugture costs ot their future self….need high taxes on items like this to make them internalize the costs.
paternalism
people are utility maximizers, not health maximizers
Exploiting defualt bias
asymmetric paternalism; libertarian paternalism. have the default choice be the healthy choice.
Uncertainty
Difference in well-being between two different states in the world.
Probability something will occur =
1 - the probability that something will not occur
Expected Value =
the weighted average of all possible outcomes
prob1outcome1)+(prob2outcome2
Expected Utility
a different way of modeling how people make decisions… on average, how much utility will they have?
Utility curve says
the wealthier you are, the happier you are
Diminishing Marginal Utility
at any increasing point on the curve, your marginal utility increase is less.
losing money leads to a greater loss in utility than an equivalent gain in the opposite direction.
Expected Utility Calculation
E(U insured) = [prob(sick)(wealth if healthy - money lost if sick - premium + reimbursement from insurance)]+ [prob(healthy)(wealth if healthy - premium)]
if you have a higher likelihood of being sick, you have more to lose if?
you dont have insurance.
if you have a higher likelihood of being healthy, you have more to lose if
you do have insurance –> this is why people may not purchase insurance if they’re young/healthy and think they dont have a lot to gain.
what exemplifies a more risk-adverse person… a more curved utility curve or a less curved utlity curve?
a more curved utility curve.
