I HATE YOU ECONOMICS

Percentiles

e.g. 10-th percentile is some number such that 10% of all values are smaller than this number; 90-th percentile is some number such that 90% of all values are smaller than this number, etc

Top 10% income share

the share of all income (sum of everybody’s incomes) that is earned by the 10% richest individuals by income

Top 10% wealth share

the share of all wealth (sum of everybody’s wealth) that is owned by the 10% richest individuals by wealth.

Is Wealth inequality bad

depends on its source

Wealth inequality popularity

most think wealth should be more evenly distributed

Intergenerational mobility

Positive slope= parental income predicts child’s income. Slope is a flat line

Poverty rate

Fraction of people below poverty line

Poverty line

Income below which family is poor

Absolute poverty measure

Fixed $ value poverty rate

Relative poverty measure

Poverty relative to others in your society, like a median

Long term poverty

most poor are in this

Equality-efficiency tradeoff

Equitable outcomes spearheaded by the government can reduce inequality, but is costly enough to lead to less efficient outcomes

Redistribution

$1 taken from a rich person and given to a poor person decreases the rich person’s utility by a smaller amount than the benefit experienced by the poor person. Why? because of diminishing marginal utility

Moral hazard

People make riskier choices if they have insurance

Social insurance

insurance provided by the government, typically funded by tax revenues. Not means tested, earned benefits. (ex

Adverse selection

Riskier individuals are more likely to buy insurance than less risky individuals

Insurance death spiral

Insurance becomes more expensive because of how many people buying it, leading low risk individuals to never buy it only leaving risky individuals to increase the price

Cost benefit principle

buy/sell/do if benefits outweigh costs

Opportunity cost principle

the most valuable alternative

Sunk costs

Cost that has already been incurred, cannot be affected by future decisions. Irrelevant for decisions

Marginal principle

Instead of “how many”, “should I buy/sell/do one more?”

Interdependence principle

your decisions affect other choices, other people, other markets, past and future decisions, etc

Economic surplus

your total benefits minus your total cost, always greater or equal to zero

Individual demand

represents preferences of an individual

Market demand

represents preferences of a group

Law of demand

Demand curve is downwards sloping, lower prices = more quantity demanded

Demand and marginal benefits

demand is your marginal benefit. If you buy 3 cokes for 2$, your marginal benefit for 3 cokes is 2$

Market demand

add up all individual demands, multiply by number of people in the market / number surveyed

Golden buying rule

keep buying until price = marginal benefit

Diminishing marginal benefit principle

each additional item yields smaller marignal benefit than previous item

Normal good

more income = you buy more of it

Inferior good

more income = you buy less of it

Intensive margin

buying or selling more or less conditional on buying / selling some amount already

Extensive margin

start buying/selling at the lower/higher price but not otherwise

Price increases / decreases

move up/down demand curve

Demand curve shifting factors

income, tastes, prices of substitutes / complements, expectations(price increase/decrease), network effect, congestion effects, number of buyers(only shifts market demand)

Definition of marginal in economics

“last additional”

Marginal benefit

benefit derived form consuming that additional unit, vary with quantity

Marginal cost

cost of producing that additional unit, vary with quantity

Prices

do not vary with quantity. At any point in time, only one price prevails in the market. Individuals/firms make plans for each possible price level, but only one price occurs at one moment. Called supply/demand curves

Supply/demand

refers to the entire curves

Quantity supplied/demanded

specific points on the curve

Individual supply

preferences of an individual seller/firm

Market supply

represents preferences of a group

Law of supply

quantity supplied is higher when prices are higher. Curve is upward sloping

Perfect Competition

many firms compete selling identical products, many buys, each buyer and seller is small relative to market size. Neither buyer and seller choose prices

Marginal cost and supply curve

the price of the quantity supplied in a supply curve is equal to the marginal cost

Market supply

add individual supplies, than multiply by number of firms in the market/number surveyed

Variable cost

costs that vary with quantity of output produced, anything that can be relatively quickly changed (i.e workers, number of food, etc)

Fixed costs

costs that cannot be quickly changed– heavy machinery, equipment, buildings, etc

Marginal cost

cost of producing one additional unit, includes variable costs but not fixed costs

Short run

horizon over which some inputs cannot be changed, whichever inputs cannot be changed constitute fixed costs

Long run

horizon over which all inputs can be changed, there are no fixed costs in the long run. The supply curve is flatter than the short run.

Increasing marginal cost principle

producing each additional item comes at higher marginal cost than previous item

Shutdown decision 1

in the short run, shut down if your revenues are lower than total variable costs (ignore fixed costs)

Shutdown decision 2

in the long run, shut down if revenues are lower than total costs (no fixed costs in the long run)

Supply price increases / decreases

move up/down supply curve

Supply curve shifts when

input costs change, productivity/technology changes, prices of substitutes/complements in production change (substitute = higher prices, supply curve to the left, complement = higher price= supply curve to the right, expectations (higher future prices shift supply to the left, number of sellers

Production supply relationship

production does not equal supply