Economics Quiz 1 (8/24-9/2)

Economic goods

• things that if consumed versus not, they will make the individual better off.

• the more consumed, the better off the individual is. It follows that goods are valuable

Economic Bads

• things that if consumed versus not, they will make the individual worse off.

•  the more consumed, the worse off the individual is

How do economic bads reinforce the idea that economic goods are valuable?

people are willing to make avoiding expenditures or could receive compensation for being exposed to something they have the right to not be exposed to

Avoiding Expenditure

a cost you pay to avoid something

Residual Dollars

the cost difference when you’re willing to pay more for something than you actually pay

Consumer Surplus

when you pay less for something than you were willing to pay, and have residual dollars

Excludability

if there exist mechanisms that determine who gets to consume and who does not.

What are examples of mechanisms that make a good excludable?

• Laws or rules

• Markets

• Societal norms/culture

• Nonmarket procedures to allocate resources

What laws or rules lead to a good being excludable?

alcohol, prescriptions/medical, gambling, drugs, age limits

How can markets lead to a good being excludable?

• price

• supply/demand, like gas or things that fluctuate in price

How can societal norms/culture lead to a good being excludable?

religious reasons, countries where women can’t do certain things

How can nonmarket procedures to allocate resources lead to a good being excludable?

first come first serve, random

Rivalry

if one individual’s consumption of the good results in less being available for others or if it undermines the benefits derived by others.

What is an example of a rival good?

water, because if you get some there’’s less for someone else

What is an example of a nonrival good?

Netflix movies, because one person using the good it doesn’t keep others from doing it or diminish their experience

(Maximum) willingness to pay

the largest amount someone is willing to pay for something 

(Minimum) Willingness to accept

minimum compensation someone will settle for, in situations like insurance where they don't want to give you a lot of money

What are the four classes of economic goods?

private, common, club, and public goods

Private goods are ______ and _______

rival and excludable

Club goods are ______ and _______

nonrival and excludable

Common goods are ______ and _______

rival and non-excludable

Public goods are ______ and _______

non-rival and non-excludable

Private Goods

only specific people can get it depending on income, nationality, or other factors. One person using it diminishes its quality/amount for someone else

What is an example of a private good?

Food and drinks. If you have them, there’s less for someone else and people can be excluded from them based on availability/price

Common Goods (Common Property Resources)

Anyone can access it regardless of who they are/what they have, but one person getting it diminishes the amount for someone else. 

What is an example of common goods?

Fishing in open waters. Anyone can really fish so it’s not excludable, but it can be rival because if someone takes a lot, there’s less for someone else 

Club Good

only certain people can access it based on their condition/life situations, but the number of people using the resource doesn’t necessarily diminish its value

What is an example of a club good?

Our classes. They’re excludable because we have to get into UCF, pay money, and be in the Honors college.

They’re not rival because the lecture is the same experience for everyone, no matter how many people are listening to it 

What are issues with club goods?

• If price is too low, it can be rival. If price is too high, it can be nonrival. 

• Can become excludable depending on price, or if it becomes so busy it diminishes people’s experience (making it rival)

Public Goods

everyone gets it no matter their income, nationality, etc. One person using/receiving the good does not result in it being diminished for other people buying/using the good

What are examples of public goods?

air and national defense. Everyone gets it and the amount doesn’t diminish based on who you are or how many other people are using it

What are prices determined by?

interactions of buyers and sellers

Market

a mechanism that brings buyers and sellers together for the purpose of trade. Can be formal or informal

Demand

the relationship between the quantity of a good consumers are willing and able to purchase and factors that affect this quantity

How can demand be expressed as a function?

Q_D= f (price, preferences, prices of related goods, expectations about future, income)

What is the function of demand in words?

The quantity an individual is willing to pay is a function of price, preferences, prices of related goods (substitutes/complements), expectations (about the future)

Perfectly Competitive Market

Bunch of sellers, bunch of buyers. Good that is produced and traded is identical. There’s a common trading price

What are important factors of a perfectly competitive market?

• good is identical and similarly priced

• There’s perfect information: what you know about the market is the same as what someone else knows about the market

• No transactions cost. Prices are identical all the time. It’s relatively costless for consumers to shift purchases  

What is generally the primary determinant of demand (DOD)?

Price

What is the fundamental law of demand (LOD)?

if price falls (or rises), the quantity demanded will rise (or fall) if all other factors remain constant

How do you figure out the fundamental law of demand?

isolate the relation between QD and P (price), we obtain a fundamental law in economics

What is the graphical depiction of the law of demand?

an inverse demand curve

How are demand curves graphed?

the independent variable (P) is on the y-axis and the dependent variable (Dij) on the x-axis 

What is Dij on a demand curve?

the dependent variable; consumer i’s demand curve for good j

Why might different consumer’s demand for the same good differ?

due to preferences and income

What can be determined from a consumer’s demand curve?

• There is a choke price 

• The quantity demanded is finite even if the price is 0 

• The consumer’s total expenditures are equal to p x Q (price times quantity), the area of a rectangle 

• The demand curve need not be linear. The individual may not respond to price changes at a constant rate 

What is the choke price?

the price above which the consumer is not willing to purchase any units (a₀=0)

What are two ways to interpret a consumer’s demand curve?

• One is that it identifies the maximum QD at a given price (pick price, observe Qs)

• Alternatively, it identifies the consumer’s WTP for each additional unit.

What is the marginal maximum willingness to pay?

Consumer has maximum they’ll pay for the first unit, and for the second. changes based on quantity

How do you figure out a marginal maximum willingness to pay curve?

You pick the Qs, and observe WTPs