Week 3- Supply, Demand, and Gov't policy lectures

Question 1

Demand-Side Market failures-

Answer 1

Affecting consumers, looking at their willingness to pay.

Question 2

Supply-Side Market Failures-

Answer 2

Looking at producer’s willingness to supply.

Question 3

Consumer surplus-

Answer 3

Amount buyer willing to pay for a good - amount buyer actually pay for it.
Maximum willingness to pay (MWP) - Price (P)= CS.

Question 4

Producer suplus-

Answer 4

• Amount a seller is paid - cost of production.

Minimum Acceptable Price (MAP) - Price (P)= PS.

Question 5

Productive efficiency-

Answer 5

Minimized production cost.

Question 6

Allocative efficiency-

Answer 6

Output is MB=MC.

Question 7

Total Surplus-

Answer 7

Consumer surplus + producer surplus.

Question 8

Deadweight loss-

Answer 8

Cost to society created by market inefficiency.

Question 9

Private goods-

Answer 9

When you have rivalry and excludability.

Question 10

Rivalry-

Answer 10

When 1 person buy and consumes a product, it’ll no longer available to other.

Question 11

Excludability-

Answer 11

When sellers let people who don’t pay have access to that product.

Question 12

Public goods-

Answer 12

Gov’t services.

Question 13

Non-rivalry-

Answer 13

You consumes something does not stop consumption of that good by others.

Question 14

Non-excludability-

Answer 14

There’s no way of excluding 1 individual from benefit of a good. Ex: air.

Question 15

2 ways for a good to be provided:

1. Private philanthropy-
2. Gov’t provision-

Answer 15

1. Museums.

2. Medicaid, building roads, military.

Question 16

Free rider-

Answer 16

Everyone including nonpayers can obtain it.

Question 17

Quasi-public goods-

Answer 17

Goods could be produced and deliver in way that exclusion would be possible. Ex: public school.

Question 18

Reallocation process-

Answer 18

Everything use resources.

Question 19

Externality-

Answer 19

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.

Question 20

Negative externality-

Answer 20

Overproduction of output so over-allocation (spillover cost). Causes supply market failure.

Question 21

Positive externality-

Answer 21

Underproduction of output and so under-allocation (spillover benefits). Causes demand market failure. Ex: planting flowers.

Question 22

Gov’t intervention to externalities:

Direct control-

Answer 22

To deal w/ negative externalities, gov’t pass legislation and taxing to limit activity.
EX: Illegal to throw waste into streams.

Question 23

Gov’t intervention to externalities:

Subsidies and Provisions

Answer 23

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.

Question 24

Society’s Optimal Amount of Externality Reduction-

Answer 24

There’re cost to reduce pollution. Ex: put up fence and patrols

Question 25

Real GDP (Gross Domestic Product)-

Answer 25

Measures value of final goods created w/i that society.

Question 26

Normal GDP-

Answer 26

Total dollar value when their current price during that year were produced.

Question 27

Unemployment-

Answer 27

Those who actively seeking work but can’t get a job.

Question 28

Inflation-

Answer 28

Increase in overall price.

Question 29

Purchasing Power Parity (PPP)-

Answer 29

Price are much lower in some countries.

Question 30

Investment-

Answer 30

Resources are devoted to increase future output.

Question 31

Financial investment-

Answer 31

Stock, bond.

Question 32

Economic investment-

Answer 32

When expanding your business, you buy newly created capital goods.

Question 33

Banks-

Answer 33

• Gives us mutual fund, pension plans, helping us save.
• Rewards w/ interest and dividends.
• Lend fund to business.

Question 34

Shocks-

Answer 34

Expectation that does not happen.

Question 35

Demand shock-

Answer 35

Unexpected change in demand.

Question 36

Supply shock-

Answer 36

Unexpected change in supply.

Question 37

Positive shock-

Answer 37

demand turns out to be higher than expected.

Question 38

Sticky price-

Answer 38

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.

Question 39

Inventory-

Answer 39

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.