econs topics 1-5

normal goods

qd increase when income increase - things you buy more when income increase e.g. upgrade from louis to hermes

inferior goods

qd decrease when income increase - things you buy less when income increase e.g. 2 min noodles

substitute goods

increase in price of x = decrease qd for x, increase d for y bc y becomes relatively cheaper. demand for goods x and y are positively related

complement goods

increase in price of x = decrease qd for x and y. demand for goods x and y are negatively related

expectations of future buyers

if buyers expect p to increase in future, they buy as much as they can asap - increasing d now e.g. house

congestion effects

when a good becomes less valuable due to being bought by more ppl e.g. luxury goods - you want less ppl to buy bc exclusivity

network effects

when a good becomes more valuable due to being bought by more ppl e.g. labubu

non price determinants of demand

income of buyers, tastes and pref, price of related goods, expectations of future price changes, congestion and network effects, number of consumers in the market

non price determinants of supply

weather, input prices, changes in tech, prices of substitutes in production, expected future prices, type and number of firms in market

consumer surplus

difference between max price a consumer is willing to pay for a good and the price actually paid for the good. measures net benefit to the consumer. area above the price and below the demand curve.

producer surplus

difference between lowest price seller is willing to sell and the price actually received for that good. measures the net benefit to the seller. area below the price and above the supply curve.

total surplus

maximised when market in equilibrium. MB = MC

price ceiling

draw under equilibrium

price floor

draw above equilibrium. price increase, demand decrease, supply increase bc producers have more of an incentive to produce, surplus develop.

tax

an artificial added cost which drives a wedge between price paid by buyers and price received by sellers. sellers receive less than they do in a free market and buyers pay more so both lose.

subsidy

artificial added benefit which drives a wedge between price paid by buyers and price received by sellers. sellers receive more than they do in a free market and buyers pay less so both benefit.

productive efficiency

when producers produce at lowest cost

dynamic efficiency

firms are willing and able to continually improve production processes and products

elasticity of demand

measures how sensitive quantity demanded is to changes in price. thus Ed = %change Qd div %change in P

price elasticity of demand ratios

Ed > 1 - consumers are price sensitive like an elastic band, flatter slope. Ed < 1 - consumers not very price sensitive, steep slope. Ed = 0 - perfectly elastic demand. ed is infinity - perfectly inelastic demand.

midpoint formula

(change in q div change in p) times ((average of the two prices) div (average of the two quantities)

determinants of price elasticity of demand

availability of close substitutes, time, necessities vs luxuries, definition of market, share of income spent on good

if Ed = 1

unit elastic demand. %change in Q = % change in P hence change in P won’t affect TR. gain from higher revenue per unit sold is exactly balanced out against the loss from the lower volume of sales

income elasticity of demand

measures how sensitive demand is to changes in income. %change in Qd div %change in I.

cross price elasticity of demand

measures how sensitive demand for one good is to changes in price of a related good

price elasticity of supply

measures how sensitive supply is to changes in price of a good. reflects how quickly producers can change Qs in response to changes in price. %change in Qs div %change in P.

Es = 0

perfectly inelastic. firms are unable to change Qs bc doesn’t matter what price is, we can’t move supply beyond a certain point e.g. ppl hungry and want to pay a lot for sandwiches but cafe can’t make more so have to wait till tmr

0 < Es < 1

inelastic. firms are able to change Qs a little

Es = 1

unit elastic. firms are able to change Qs moderately

Es > 1

elastic supply. firms are able to change Qs easily and quickly in response to price change

Es = infinity

perfectly elastic. horizontal supply curve.

determinants of Es

time, cost of input

total tax revenue

(diff between buyer price and seller price) x quantity traded

steeper demand curve in relation to tax

relatively greater burden of the tax is borne by buyers compared to sellers

market failure

when market fails to produce social optimum outcome if ideal conditions don’t hold, and results in deadweight loss.

how can markets fail

externalities, under/overconsumption and production, provision of public goods

government failure

occurs when market is in ideal conditions, and results in dwl, inefficiency and losses in welfare

negative externality of production

social cost > private cost e.g. factory pollution in river. factory’s private cost of producing is cost of inputs. society bears a cost which isn’t borne by the producer e.g bad health, environmental decay. thus the social cost of production is the firm’s total cost AND other members of society. factory doesn’t consider ts external cot when deciding how much to produce so will produce too much = market failure

negative externality of consumption

private cost > social cost e.g. smoking. smoker’s private cost of consuming is their own health so they get sick quick and go to hospital. society bears a cost which isn’t borne by the consumer e.g. taxes which go to public health.

positive externality of consumption

social benefit > private benefit e.g. flu vaccine, education. person’s private benefit is them not getting flu. social benefit is protecting others from flu. but ppl don’t care abt society as much as themselves and consider their own private decisions so too few ppl take vaccine = market failure. society better off if more ppl consume it

positive externality of production

private benefit > social benefit e.g. tech innovation. when a firm produces smth, it creates extra benefits for society that the firm itself doesn’t get paid for. society would be better off if more of this good were produced.

dwl

amt of total surplus lost when markets aren’t efficient. diff between

private bargaining and coase theorem

if transaction costs are low, private bargaining will result in an efficient solution externalities. private parties will solve externalities if bargaining cost is small, contract is easy to enforce, small number of parties e.g. beekeeper and apple farmer enter contract

correcting negative externality

reduce or remove pre-existing dwl with tax to drive wedge between price consumers pay and price producers receive, so that both parties choose to produce and consume less

rivalry

situation that occurs when one person’s consuming a unit of a good means no one else can consume it

excludability

situation in which anyone who doesn’t pay for a good can’t consume it

private goods

rival bc one person’s consumption prevents another from consuming it. excludable bc ppl who don’t pay for the good can be prevented from consuming it e.g food, clothes

common resources

rival bc one person’s consumption prevents another from consuming it. non excludable bc difficult to prevent ppl from using it e.g fish stocks in international waters, clean air

club goods

non rival bc one person’s consumption doesn’t prevent others from consuming it. excludable bc ppl who don’t pay for the good can be prevented from consuming it 

public goods

non rival bc one person’s consumption doesn’t prevent others from consuming it. non excludable bc impossible to prevent individuals from benefiting from the good.

how do common resources lead to market failure

tragedy of the commons. available to all but amt is finite. if i can consume ts good without paying for it, then i won’t. then no one will pay for it and the good will never get produced. it’s not in individual interest to withhold from using the resource, so ts leads to overuse and depletion of the resource. solution: private property rights, bargaining or tax

how do public goods lead to market failure

free rider problem - if i can consume ts good without paying for it, then i won’t. no one will pay for it and the good will never get produced. firms can’t find anyone to pay for the good so gov has to provide it with the taxes we pay.