Week 3 Flashcards
What art the 3 main frameworks economists use?
- General equilibrium approach
- two-sector economy approach
- partial approach
what is the general equilibrium approach? What are some issues with it?
A framework that requirs looking at all sectors of the economy
it’s costly and complex
What is the two-sector economy approach?
its a framework that looks at two categories of goods in the economy. Such as coal and a composite good that is everything else except coal.
What is the partial approach?
Its a framework that examines the production/consumption of ONE good. It identifies the costs and benefits of society using resources to produce that good.
This is the framework used most frequently in natural resource and environmental economics.
What is WTP (Willingness To Pay)?
The purchasing power of a given good or service
What does WTP depend upon?
- individuals tastes and preferences
- individuals incomes
- individuals knowledge and experience
What is Marginal WTP?
The additional WTP for each UNIT of a given good or service.
Typically, WTP goes down with each additional unit.
Price per unit on vertical axis, quantity over a period of time on horizontal axis.
What is inelastic demand?
Shown by a steep demand curve. A change in price leads to a SMALL change in Q purchased.
What is elastic demand?
Shown by a flat demand curve. A change in price leads to a LARGE change in Q purchased.
What would shift a demand curve in (WTP goes down)?
Decrease in income, change in preferences/taste, knowledge change.
What would shift a demand curve out (WTP goes up)?
Increase in income, change in preferences/taste, knowledge change.
What is aggregate marginal WTP?
The summation of the marginal WTP of all individuals in a group.
Known as the MARKET DEMAND CURVE
How to calculate aggregate WTP?
Derive the aggregate quantity for any given price
What is the total WTP?
The sum of the WTP for each of the units consumed.
Defines the total benefits of consumption
What is opportunity cost?
the loss of potential gain from other alternatives when one alternative is chosen.
