Public Administration some theory Flashcards
What is the Consumer Price Index? (CPI)
The CPI is a weighted average of the price increase for each good, where the weights are each good’s budget share in the base year.
Normal Good
A normal good is one where the quantity demanded increases as one’s income rises.
Inferior Good
An inferior good is one where the desire decreases as one’s income rises.
Law of Demand
The law of demand states that other factors being constant (cetris peribus), price and quantity demand of any good and service are inversely related to each other. When the price of a product increases, the demand for the same product will fall.
Isoquant
An isoquant (derived from quantity and the Greek word iso, meaning equal) is a contour line drawn through the set of points at which the same quantity of output is produced while changing the quantities of two or more inputs.
Indifference Curve
An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Definition: An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility.
Marginal Product of Labor
In economics, the marginal product of labor (MPL) is the change in output that results from employing an added unit of labor
Marginal Product of Capital
The marginal product of capital (MPK) is the additional output resulting, ceteris paribus, from the use of an additional unit of physical capital. It equals 1 divided by the incremental capital-output ratio. It is the partial derivative of the production function with respect to capital.
Competition
A competitive firm is a price taker, and as such, it faces a horizontal demand curve.
Profit Maximization
To maximize profit, any firm must make two decisions, how much to produce and whether to produce at all.
Competition in the Short Run
Variable costs determine a profit-maximizing, competitive firm’s supply curve, the market supply curve, and with the market demand curve, the competitive equilibrium in the short run.
Competition in the long run
Firm Supply, Market Supply, and competitive equilibrium are different in the long run than in the short run because firms can vary inputs that were fixed in the short run.
Zero Profit for Competitive Firms in the Long Run:
In the long-run competitive market equilibrium, profit-maximizing firms break even, so firms that do not try to maximize profits lose money and leave the market.
Measuring Costs
Economists count both explicit costs and implicit (opportunity) costs.
Short Run Costs
To minimize its costs in the short run, a firm adjusts its variable factors (such as labor), but it cannot adjust its fixed factors (such as capital).
Long-run Costs
In the long run, a firm adjusts all its inputs because usually all inputs are variable.
Lower costs in the long run
Long-run cost is as low as or lower than short-run cost because the firm has more flexibility in the long run, technological progress occurs, and workers and managers learn from experience.
Cost of producing multiple goods
If the firm produces several goods simultaneously, the cost of each may depend on the quantity of all the goods produced.
The ownership and management of firms
Decisions must be made as to how a firm is owned and run.
Production
A firm converts inputs into outputs using one of possibly many technologies.
Short Run Production: one variable and one fixed input:
In the short run, only some inputs can be varied, so teh firm changes its output by adjusting its variable inputs.
Long-run production: two variable inputs
The firm has more flexibility in how it produces and how it changes its output level in the long run when all factors can be varied.
Returns to scale
How the ratio of output to input varies with the size of the firm is an important factro in determing the size of a firm
Productivity and technical change
The amount of output that can be produced with a given amount of inputs varies across firms and over time.
Deriving Demand Curves
We used consumer theory to derive demand curves, showing how a change in price causes a shift along a demand curve.
How changes in income shift demand curves:
We use consumer theory to determine how a demand curve shifts because of a change in income.
Effects of a price change:
a change in price has two effects on demand, one having to do with a change in relative prices and the other concerning a change in consumer’s opportunities.
Cost-of-Living Adjustments
Using this analysis of the two effects of price changes, we show that the Consumer Price Index overestimates the rate of inflation.
Deriving Labor Supply Curves
Using consumer theory to derive demand curve for leisure, we can derive works’ labor supply curves and use them to determine how a reduction in the income tax rate affects labor supply and tax revenues.
Preferences
We use three properties of prefeences to predict which combinations, or bundle, of goods an indivudal prefers to other combinations.
Utility
Economists summarize a consumer’s preferences using a utility function, which assigns a numerical value to each possible bundle of goods, reflecting the consumer’s relative ranking of these bundles.
Budget Constraint
Prices, income, and government restrictions limit a consumer’s ability to make purchases by determining the rate at which a consumer can trade one good for another.
Constrained Consumer Choice
Consumers maximize their pleasure from consuming various possible bundles of goods given their income, which limits the amount of goods they can purchase.
How shapes of demand and supply curves matter
The effect of a shock (such as a new tax or an increase in the price of an input) on market equilibrium depends on the shape of demand and supply curves.
Sensitivity of quantity demanded to price
The sensitivity of the quanitty demanded to price is summarized by a single measure called the price elasticity of demand
Sensitivity of the quantity supplied to price
The sensitivity of the quantity supplied to price is summarized by a single measure called the price elasticity of supply.
Long run versus short run
the sensitivity of the quantity demanded or supplied to price varies with time.
Effects of a sales tax
How a sales tax increase affects the equilibrium price and quantity of a good and whether the tax falls more heavily on consumers or suppliers depend on the shape of the supply and demand curves.
Demand:
The quantity of a good or service that consumers demand depends on price and other factors such as consumers’ incomes and the price of related goods.
Supply
The quantity of a good or service that firms supply depends on price and other factors such as the cost of inputs firms use to produce the good or service.
Market Equilibrium
The interaction between consumers’ demand and frims’ supply determines the market price and quantity of a good or service that is bought and sold.
Shocking the equilibrium
Changes in a factor that affect demand (such as consumers’ income), supply (such as a risei n the price of inputs), or a new government policy (such as a new tax) alter the market price and quantity of a good.
Effects of government Interventions
Government policies may alter the equilibrium and cause the quantity supplied to differ from the quantity demanded.
When to use the supply-and-demand model
The supply and demand model applies only to competitive markets
Microeconomics: The allocation of scarce resources
Microeconomics is the study of the allocation of scarce resources
Models
Economist use models to make testable predictions
Uses of microeconomic models
Individuals, Governments, and Firms use microeconomic models and predictions in decision making.
Consumer Welfare
How much consumers are helped or harmed by a change in the equilibrium price can be measured by using information from demand curves or utility functions
Producer Welfare
How much producers gain or lose from a change in the equilibrium price can be measured by using information from the marginal cost curve or by measuring the change in profits.
Maximizing Welfare
Competition maximizes a measure of social welfare based on consumer and producer welfare.
Policies that shift supply curves
Government policies that limit the number of firms in competitive markets harm consumers and lower welfare.
Policies that create a wedge between supply and demand
Government policies such as taxes, price ceilings, price floors, and tariffs that create a wedge between the supply and demand curves reduce the equilibrium quantity, raise the equilibrium price to consumers and loser welfare.
Comparing both Types of Policies (Imports)
Policies that limit supply (Such as quotas or bans on imports) or create a wedge between supply and demand (such as tariffs, which are taxes on imports) have different welfare effects when both policies reduce imports by equal amounts.
General Equilibrium:
The welfare analysis in Chapter 9 (involving gains and losses in consumer and producer surplus) changes when a government policy change or other shock affects several markets at once.
Trading between two people
Where two people have good but cannot produce more goods, both parties benefit from mutually agreed trades.
Competitive Exchange
The competitive equilibrium has two desirable properties: Any competitive equilibrium is Pareto efficient, and any Pareto-efficient allocation can be obtained by using competition, given an appropriate income distribution.
Production and trading
The benefits from trade continue to hold when production is introduced
Efficiency and Trading
Because there are many Pareto-efficient allocations, a society uses its views about equity to choose among theym
Monopoly Profit Maximization
Like all firms, a monopoly maximies its profit by setting its price or output so that its marginal revenue equals its marginal cost.
Market Power
How much the monopoly’s price is above its marginal cost depdns on the shape of the demand curve it faces.
Effects of a shift of the demand curve
A shift of the demand curve may have a wider range of effects on a monopoly than on a competitive market.
Welfare Effects of a Monopoly
By setting its price above marginal cost, a monopoly creates a deadweight loss
Cost advantages that create monopolies
A firm can use a cost advantage over other firms (due, say, to control of a key input or economies of scale) to become a monopoly.
Government actions that create monopolies
Governments create monopolies by establishing government monopoly firms, limiting entry of other firms to create a private monopoly, and issuing patents, which are temporary monopoly rights.
Government actions taht reduce market power
The welfare loss of a monopoly can be reduced or elimated if the government regulates the price the monopoly charges or allows other firms to enter the market.
Why and how firms price discriminate
A firm can increase its profit by price discriminating if it has market power, can identify which customers are more price sensitive than others, and can prevent customers who pay low prices from reselling to those who pay high prices.
Perfect price discrimination
If a monopoly can charge the maximum each customer is willing to pay for each unit of output, the nonopoly captures all potential consumer surplus, and the efficient (competitive) level of output is sold.
Quantity Discrimination
Some firms profit by charging different prices for large purchases than for small ones, which is a form of price discrimination.
Multimarket price discrimination
Firms that cannot perfectly price discriminate may charge a group of consumers with relatively elastic demands a lower price than other groups of consumers.
Two Part Tariffs
By charging consumers a fee for the right to buy any number of units and a price per unit, firms earn higher profits than they do by charging a single price per unit.
Tie-in sales
By requiring a customer to buy a second good or service along with the first, firms make higher profits than they do by selling the goods or services separately.
Market Structures
The number of firms, price, profits, and other properties of markets vary, depending on whether the market is monopolistic, oligopolistic, monoplistically competive, or competitive.
Game Theory
When there are relatively few firms in a market, firms take into account how their actions affect other firms and how other firms’ actions affect them. Economists use a set of tools called game theory to analyze conflicts and cooperation between such firms.
Cooperative oligopoly modles
If firms successfully coordinate their actions, they can collectively behave like a monopoly.
Cournot Model of Noncooperative Oligopoly
In a Cournot model, in which firms coose their output levels withoutcolluding, the market output an dfirms’ profits lie between the competitive and monopoly levels.
Stackelberg model of noncooperative behavior
In a stackelberg model, in which a leader firm chooses its output level before its identical-cost rivals, market output is greater than if all firms choose their output simultaneously, and the leader makes a higher profit than the other firms.
Comparison of collusive, Cournot, Stackelberg, and Competitive Equilibria
Total market output declines from the competitive level to the Stackelberg level to the Cournot level and reaches a minimum with monopoly or collusion.
Monopolistic Competition
When firms can freely enter the market but, in equilibrium, face downward-sloping demand curves, firms charge prices above marginal cost but make no profit.
Bertrand Price-Setting Model
The oligopoly equilibrium in which firms set prices differes from the quantity-setting equilibrium and depends on the degree of product differentiation.
Preventing Entry: Simultaneous Decisions
When Firms make entry decisions simultaneously, firms cannot act strategically to prevent rivals from entering the market.
Preventing Entry: sequential decisions
If an incumbent firm can commit to producing large quantities before another firm decides whether to enter the market, the incumbent may deter entry.
Creating and using cost advantage
By raising costs to rivals, a firm may be able to deter entry or gain other advantages.
Advertising
Firms use advertising to increase the demand for their produce, possibly at the expense of rival firms.
Competitive Factor Market
The intersection of the factor supply curve and factor demand curve (which depends on firms’ production functions and the market price for output) determines the equilibrium in a competitive factor market.
Effect of monopolies on factor markets
If firms exercise market power in either factor or output markets, the quantities of inputs and outputs sold fall.
Monopsony
A monopsony maximizes its profit by paying a price below the competitive level, which creates a deadweight loss for society.
Vertical Integration
A firm may engage in sequential stages of production itself, perform in only a few stages and relies on markets for others, or use contracts or other means to coordinate its activities with those of other firms, depending on which approach is the most profitable.
Comparing money today to money in the futures
Interest rates tell us how much more money is worth today than in the future
Choices over time
Investing money in a project pays if the return from that investment is greater than that on the best alternative when both returns are expressed on a comparable basis
Exhaustible Resources
Scarcity, rising costs of extraction, and positive interest rates may cause the price of exhaustible resources like coal and gold to rise exponentially over time.
Capital markets, interest rates, and investments
Supply and demand in capital markets determine the rate of interest over time, which affects how people invest.
Degree of Risk
Probabilites are used to measure the degree of risk and the likely profit from a risky undertaking
Decision making under uncertainty
Whether people choose a risky option over a nonrisky depends on their attitudes toward risk and on the expected payoffs of each option.
Avoiding risk
People try to reduce their overall risk by not making risky choices, taking actions to lower the likelihood of a disaster, combining offsetting risks, insuring, and in other ways.
Investing under uncertainty
whether people make an investment depends on the riskiness of the payoff, the expected return, attitudes toward risk, the interest rate, and whether it is profitable to alter the likelihood of a good outcome.
Externalities
By-products of consumption may benefit or harm other people
The inefficiency of competition with externalities
A competitive market produces too much of a harmful externality, but that overproduction can be prevented through taxation or regulation
Market Structure and Externatlities
With a harmful externality, a noncompetitive equilibrium may be closer to the socially optimal level than a competitive equilibrium.
Allocating property rights to reduce externalities
clearly assigning property rights allows exchanges that reduce or eliminate externality problems.
Public goods
Private markets supply too few public goods, and governments have difficulty determining their optimal levels
Problems due to asymmetric information
Informed people take advantage of uninformed people
Responses to adverse selection
To reduce the harms from adverse selection - an informed person’s benefitting from trading with an uninformed person who does not know about a characteristic of the informed person - government actions or contracts between involved parties may be used to prevent opportunistic behavior, or the information asymmetry may be reduced or eliminated.
How ignorance about quality drives out high-quality goods
If consumers cannot distinguuish between good and bad products before purchase, it is possible that only bad products will be sold.
Problems arising from ignorance while hiring
Attempts to eliminate information asymmetries in hiring may raise or lower social welfare.
Principal-agent problem
How an uninformed principal contracts with an informed agent determines whether moral hazards occur and how risks are shared.
Production efficiency
how much the agent produces depends on the type of contract used and the ability of the principal to monitor the agent’s actions.
Trade-off between efficiency in production and in risk bearing
A principal and an agent may agree to a contract that does not eliminate moral hazards or optimally share risk but strikes a balance between these two objectives.
Payments linked to production or profit
Employees work harder if they are rewarded for greater individual or group productivity
Monitoring
Employees work harder if an employer monitors their behavior and makes it worthwhile for them to keep from being fired.
Checks on principals
As a restrainer against taking advantage of employees, an employer may agree to contractual commitments that make it in the employer’s best interest to tell employees the truth.
Contract choice
By observing which type of contract an agent picks when offered a choice, a principle may obtain enough information to reduce moral hazards.
Pareto efficiency, or Pareto optimality…
is a state of allocation of resources in which it is impossible to make any one individual better off without making at least one individual worse off.
Can any efficient allocation be reached using competition?
Any Pareto-efficient equilibrium can be obtained by competition, given an appropriate endowment.
Any competitive equilibrium is Pareto efficient.
Dominant Firm
a price-setting firm that competes with price-taking firms.
Competivie Fringe
refers to the small price-taking firms that compete with a dominant firm.
Average variable costs are found by…
dividing total fixed variable costs by output.
Average total cost (ATC) can be found by…
adding average fixed costs (AFC) and average variable costs (AVC).
Property Right
An exclusive privilege to use an asset.
