Week 3- Supply, Demand, and Gov't policy lectures Flashcards
Demand-Side Market failures-
Affecting consumers, looking at their willingness to pay.
Supply-Side Market Failures-
Looking at producer’s willingness to supply.
Consumer surplus-
Amount buyer willing to pay for a good - amount buyer actually pay for it.
Maximum willingness to pay (MWP) - Price (P)= CS.
Producer suplus-
- Amount a seller is paid - cost of production.
Minimum Acceptable Price (MAP) - Price (P)= PS.
Productive efficiency-
Minimized production cost.
Allocative efficiency-
Output is MB=MC.
Total Surplus-
Consumer surplus + producer surplus.
Deadweight loss-
Cost to society created by market inefficiency.
Private goods-
When you have rivalry and excludability.
Rivalry-
When 1 person buy and consumes a product, it’ll no longer available to other.
Excludability-
When sellers let people who don’t pay have access to that product.
Public goods-
Gov’t services.
Non-rivalry-
You consumes something does not stop consumption of that good by others.
Non-excludability-
There’s no way of excluding 1 individual from benefit of a good. Ex: air.
2 ways for a good to be provided:
- Private philanthropy-
- Gov’t provision-
- Museums.
2. Medicaid, building roads, military.
Free rider-
Everyone including nonpayers can obtain it.
Quasi-public goods-
Goods could be produced and deliver in way that exclusion would be possible. Ex: public school.
Reallocation process-
Everything use resources.
Externality-
A third party is affected by sellers and buyers. If that 3rd party is hurt: Negative externality. If that 3rd party is benefit: Positive externality.
Negative externality-
Overproduction of output so over-allocation (spillover cost). Causes supply market failure.
Positive externality-
Underproduction of output and so under-allocation (spillover benefits). Causes demand market failure. Ex: planting flowers.
Gov’t intervention to externalities:
Direct control-
To deal w/ negative externalities, gov’t pass legislation and taxing to limit activity.
EX: Illegal to throw waste into streams.
Gov’t intervention to externalities:
Subsidies and Provisions
Subsidy to buyers- Gives people money to increase demand and quantity.
Subsidy to producers- Gives money to increase supply and quantity.
Gov’t provision- Gov’t provides money through taxing buyers and sellers.
Society’s Optimal Amount of Externality Reduction-
There’re cost to reduce pollution. Ex: put up fence and patrols
Real GDP (Gross Domestic Product)-
Measures value of final goods created w/i that society.
Normal GDP-
Total dollar value when their current price during that year were produced.
Unemployment-
Those who actively seeking work but can’t get a job.
Inflation-
Increase in overall price.
Purchasing Power Parity (PPP)-
Price are much lower in some countries.
Investment-
Resources are devoted to increase future output.
Financial investment-
Stock, bond.
Economic investment-
When expanding your business, you buy newly created capital goods.
Banks-
- Gives us mutual fund, pension plans, helping us save.
- Rewards w/ interest and dividends.
- Lend fund to business.
Shocks-
Expectation that does not happen.
Demand shock-
Unexpected change in demand.
Supply shock-
Unexpected change in supply.
Positive shock-
demand turns out to be higher than expected.
Sticky price-
Price of goods are hard to change in short run.
In reality, many prices are inflexible, not changing rapidly. So positive demand shock creates more supply but price stays the same.
Inventory-
Place where company store goods, waiting for price to increase.
IF price not up, supply w/ drop,firms will reduce output. IF manufacturing decline, economy falls into recession where GDP falling, unemployment rising.
