Economics 1

Social Insurance

(Chapter 13- Social Insurance and Redistribution)

Insurance: a payoff that occurs hen bad things happen to protect against economic hardship

Social: Provided by the government

Adverse Selection

(Chapter 13- Social Insurance and Redistribution)

The greater the likelihood of something happening, the more likely someone is to buy insurance

Private Information

(Chapter 13- Social Insurance and Redistribution)

When one party in a transaction knows something the other doesn't

Ulititarian

(Chapter 13- Social Insurance and Redistribution)

Promote the greatest happiness for the greatest number

Diminishing marginal benefit

(Chapter 13- Social Insurance and Redistribution)

Each additional dollar is less beneficial (yields a smaller marginal benefit) than the previous

Implication

(Chapter 13- Social Insurance and Redistribution)

Maximizing total well-being involves redistribution since the poor value an additional $1 more than the rich

Rawlsian Perspective

(Chapter 13- Social Insurance and Redistribution)

Behind the veil of ignorance. Consider your perspective before you know what circumstances you'll be born into

Effective marginal tax rates

(Chapter 13- Social Insurance and Redistribution)

The amount of each extra dollar of earnings that you lose to higher taxes or lower benefits

Efficiency

(Chapter 13- Social Insurance and Redistribution)

is about maximizing total economic surplus

-Measure in dollars, not well being

Equity

(Chapter 13- Social Insurance and Redistribution)

is how these resources are redistributed and who gets what

-May enhance average well being

Permanent Income

(Chapter 13- Inequality and Poverty)

Average lifetime income

Intergenerational immobility

(Chapter 13- Inequality and Poverty)

The extent to which the economic status of parents determine outcomes for their children

Poverty Rate

(Chapter 13- Inequality and Poverty)

The fraction of people whose family income is less than the official poverty line

Poverty Line

(Chapter 13- Inequality and Poverty)

An income level, below which a family is defined to be in poverty

Absolute Poverty

(Chapter 13- Inequality and Poverty)

The adequacy of resources relative to an unchained standard

Relative Poverty

(Chapter 13- Inequality and Poverty)

The adequacy of your resources relative to others in your society

General skills

(Chapter 13- Inequality and Poverty)

Skills that many employers find useful

Job specific skills

(Chapter 13- Inequality and Poverty)

Skills that are unique to a particular employee

Extrinsic motivation

(Chapter 13- Inequality and Poverty)

The desire to do something for its external rewards

-Higher pay
-Typical focus of economists

Intrinsic motivation

(Chapter 13- Inequality and Poverty)

The desire to do something for the enjoyment of the activity itself

-Pride
-Focus of psychologists
-Reciprocity norms: workers treat you well and when they fell you treat them well

Minimum wage

(Chapter 12- The Role of Institutions)

The lowest hourly wage that employers are allowed to pay

-Federal: $7.25 per hour
- California: varies by city/country, ranges from 13-16

Licensing

(Chapter 12- The Role of Institutions)

A credential that is required to work in an occupation

Why license?
- Public policy: safety (lawyer, doctor)
-Economics: Licensing limits the supply of workers in an occupation, increasing the wage

Monopsony power

(Chapter 12- The Role of Institutions)

Firm using its power as a major buyer of labor to pay lower wages

-Like monopoly, but instead of one seller, there is one buyer
-Increases bargaining power of employers
-Amazon or walmart example

Prejudice

(Chapter 12- The Role of Institutions)

A dislike for one group that results in lower employment or lower wages for this group

Statistical discrimination

(Chapter 12- The Role of Institutions)

Employers use stereotypes of observable traits (race, gender, age) to infer qualities they can't observe (worker quality, likely tenure with the firm)

Implicit bias

(Chapter 12- The Role of Institutions)

Relying on associations instead of complete analysis

Human capital

(Chapter 12- Worker and Job Characteristics)

Accumulated knowledge and skills that make worker more productive

-Increases your productivity (learn a lot of things like critical reasoning, clear writing, self control, motivation, etc)

Signaling

(Chapter 12- Worker and Job Characteristics)

Like by going to school consistently, it shows you care and would be very productive

Compensating differential

(Chapter 12- Worker and Job Characteristics)

A wage premium that compensates workers for adverse attributes of a job

-Funeral directors
-Trash collectors
-Coal miners

Marginal revenue product

(Chapter 11- Labor Demand)

= marginal product x price of output

the value of the extra stuff that person helps you produce = the extra stuff that person helps you produce x the price of that extra stuff

Example:
-if one more hairdresser leads you to sell 30 more haircuts at $20 each:
-Marginal Benefit = Marginal revenue product = 30 x $20 per cut = $600

Rational rule for employers

(Chapter 11- Labor Demand)

Hire more workers (or more hours of work) if their marginal revenue product is greater than (or equal to) the wage

-Echoes rational rule for buyers: buy more of an item if its marginal benefit is greater than (or equal to) the price

-Keep hiring until marginal revenue product = wage

Derived demand

(Chapter 11- Labor Demand)

Derived from the demand for the stuff your workers make

-If there's no demand for your good, there's no demand for labor

Scale effect

(Chapter 11- Labor Demand)

Your inputs become cheaper, so you can produce more at each price

-Increases labor demand
-Which effect dominates depends on the size of the scale effect, and how easily capital and labor can be substituted

Substitution effect

(Chapter 11- Labor Demand)

Firms substitute machinery for labor

-Decrease labor demand

-Which effect dominates depends on the size of the scale effect, and how easily capital and labor can be substituted

Labor Supply

(Chapter 11- Labor Supply)

The time you spend working in the market

-When you work, how many hours should you work per week?

Labor Demand

(Chapter 11- Labor Demand)

Decide how many workers to hire

Rational rule for workers

(Chapter 11- Labor Supply)

Work more hours as long as the wage (or more hours of work) is at least as large as the marginal benefit of another hour of leisure

-Echoes rational rule for sellers: sell more of an item if price is greater than (or equal to) the marginal cost

-Keep hiring until wage = marginal benefit of leisure

Substitution effect

(Chapter 11- Labor Supply)

-Higher wage makes you work more attractive relative to leisure

-Work longer hours

Income effect

(Chapter 11- Labor Supply)

-You don't have to work as long to buy the same amount of stuff

-Work fewer hours

-You become money-rich and leisure poor. Use the extra $ to buy leisure

Market failure

(Chapter 10- Externalities)

When the forces of supply and demand lead to an inefficient outcome

Externality

(Chapter 10- Externalities)

a side effect of an activity that affects bystanders whose interests weren't taken into account

-Some people are not at the bargaining table

-Others are affected by our decisions

Imperfect competition

(Chapter 10- Externalities)

Firms have market power

-Big firm are price takers instead of price makers

Asymmetric information

(Chapter 10- Externalities)

Some know more than others

-Maybe when you buy a car and the mechanic knows the car has problems but you don't know that

Irrationality

(Chapter 10- Externalities)

People make bad decisions

Government regulation

(Chapter 10- Externalities)

Impedes market forces

-Often there for a reason, creates issues in the market

Negative Externality

(Chapter 10- Externalities)

An activity whose side effects harm bystanders

-Example: driving creates pollution
-This harm is an external cost

Positive externality

(Chapter 10- Externalities)

An activity whose side effects benefits bystanders

-Example: getting vaccinated helps ensure others don't get sick
-This help is an external benefit

Private costs

(Chapter 10- Externalities)

You drive somewhere because you want to go there and don't account for the pollution it causes

-Negative externality

Social costs

(Chapter 10- Externalities)

All costs, no matter who bears them

-Leading them to do these activities more than is in society's interests

-Negative externality

Private benefits

(Chapter 10- Externalities)

Benefits that you enjoy

-The opposite, like if you get vaccinated to protect yourself and not others, it still benefits

-Positive externality

Social benefits

(Chapter 10- Externalities)

All benefits, no matter who enjoys them

-Leading them to do these activities less than is in society's interests

-Positive externality

Socially Optimal

(Chapter 10- Externalities)

The outcome that is in society's best interests, accounting for the costs and benefits to buyers, sellers, and also bystanders

-How many gallons of gas are socially optimal?

-Apply the core principles

Rational rule for society

(Chapter 10- Externalities)

Produce more of a good if is marginal social benefit is greater than (or equal to) the marginal social cost

-Keep producing until: marginal social benefit = marginal social cost

Coase Theorem

(Chapter 10- Solutions for Externalities)

If bargaining is costless, then externality problems can be solved by private bargains

-If you come home and see that your roommate is sleeping and you make noise, then that's a negative externality. Maybe you would bargain with them and give them 20 dollars so you can make noise at night

Free riding

(Chapter 10- Solutions for Externalities)

People choose a "free ride" rather than paying

-Creates externality

-If everyone else is paying polluters, I won't want to

-They may think that it won't make a big difference and if everyone thinks that way, then it just doesn't happen

The cap

(Chapter 10- Solutions for Externalities)

A quota on total production

-Government issues permits allowing a certain amount of pollution

And trade

(Chapter 10- Solutions for Externalities)

Allows firms to trade these permits

-Allows efficient firms to buy permits off inefficient firms, ensuring production occurs among firms with fewer emissions

Non-excludable

(Chapter 10- Solutions for Externalities)

Someone can enjoy benefits of a good without bearing the costs

-Example: clean air is there for anyone, cannot be excluded from anyone

Excludable

(Chapter 10- Solutions for Externalities)

Only allowing people over 35 in a certain place

Non-rival

(Chapter 10- Solutions for Externalities)

Benefits earned by others don't hurt you

-Public goods problem (non-excludable + non rival)

-We want to provide for the free riders (it doesn't hurt us)

Rival

(Chapter 10- Solutions for Externalities)

The free rider's benefits comes at someone else's expense

-Tragedy of the commons (non-excludable + rival)

-We want to make sure that the free riders pay their share

Imports

(Chapter 9- International Trade)

Purchases from foreigners

Exports

(Chapter 9- International Trade)

Sales to foreigners

Relatively abundant skills

(Chapter 9- International Trade)

If your country has a lot of something, you're going to have a comparative advantage

-Like Saudi Arabia with oil

Specialized skills

(Chapter 9- International Trade)

If you have a particular skill that your country is really good at, you're probably going to make a lot off it

-Like the United States with scientists and education

Mass production

(Chapter 9- International Trade)

If you produce a lot of something, you might end up getting comparative advantage with that

-Like Canada with their wood

Trade costs

(Chapter 9- International Trade)

The extra costs incurred as a result of buying or selling overseas, rather than domestically

Examples:
- Shipping costs
- Taxes to US government on imports or to foreign governments on exports
- Opportunity costs of working across language barriers and time zones

The Case for Limiting International Trade

(Chapter 9- The Case for Limiting Trade)

1. National Security
2. Infant Industry
3. Unfair Competition and Anti-dumping
4. Domestic Regulations
5. Saving Jobs

Gains from trade

(Chapter 8- Gains from Trade)

Benefits from reallocating resources to better uses

Reallocating:
- Goods and services
- Labor: Reallocating workers to jobs = reallocating tasks to people
- Capital and intermediate inputs
- Purchasing power over time (banking)
- Risk (financial markets)

Absolute advantage

(Chapter 8- Gains from Trade)

The ability to carry out a task more efficiently than other people

Comparative advantage

(Chapter 8- Gains from Trade)

The ability to carry out a task at a lower opportunity cost than other tasks

Specialization

(Chapter 8- Gains from Trade)

Focus on specific tasks

-Spend more time on what you're relatively good at
-And less time on the other stuff

Internal Markets

(Chapter 8- Prices and Markets)

Markets that managers set up within a company to buy and sell resources

-Just like regular markets, internal markets help companies reallocate scarce resources to their best uses

Prices 3 play central roles

(Chapter 8- Prices and Markets)

1. Prices are a signal
2. Prices are an incentive
3. Prices aggregate information

Economic Surplus

(Chapter 7- Consumer and Producer Surplus)

The benefits of a decision, less the costs

-Count all benefits and costs, no matter who they accrue to

Economic Efficiency

(Chapter 7- Consumer and Producer Surplus)

the more economic surplus that's generated, the better the outcome

Efficient outcome

(Chapter 7- Consumer and Producer Surplus)

The outcome that yields the largest possible economic surplus

Consumer surplus

(Chapter 7- Consumer and Producer Surplus)

The economic surplus you get from buying something

-Consumer surplus = marginal benefit - price

Willingness to pay (WTP)

(Chapter 7- Consumer and Producer Surplus)

the maximum price at which a consumer will buy a good

Total consumer surplus

(Chapter 7- Consumer and Producer Surplus)

the area under the demand curve and above the price, out to the quantity sold

-Area of a triangle (1/2 x base x height)

Producer surplus

(Chapter 7- Consumer and Producer Surplus)

the economic surplus you get from selling something

-The difference between the price you get and the marginal cost of producing that good

-Producer surplus = price - marginal cost

Willingness to accept (WTA)

(Chapter 7- Consumer and Producer Surplus)

the minimum amount a seller would accept in exchange for a good

Total producer surplus

(Chapter 7- Consumer and Producer Surplus)

the area above the supply curve and below the price, out to the quantity sold

-Area of a triangle (1/2 x base x height)

Total economic surplus

(Chapter 7- Consumer and Producer Surplus)

the area between the demand and supply curves

Positive analysis

(Chapter 7- Critiques of Economic Efficiency)

WHAT IS

-No value judgements involved

Describing and forecasting the effects of the policy
-Price changes, quantity, who'll gain, who'll lose, etc

Negative analysis

(Chapter 7- Critiques of Economic Efficiency)

WHAT SHOULD HAPPEN

-All "should" statements rely on value judgements. What is the better outcome? Choose one.

Making judgements about which outcome is better
-Weighing the benefits to some against the costs to others

Efficient production

(Chapter 7- Market Efficiency)

Producing a given quantity at the lowest possible cost

-Requires each good is produced by the lowest marginal cost producer

Efficient allocation

(Chapter 7- Market Efficiency)

Allocating goods to create the largest economic surplus

-Requires each god goes to the person who'll get the highest marginal benefit

Efficient quantity

(Chapter 7- Market Efficiency)

Producing the quantity that produces the largest possible economic surplus

-Rational rule for markets: produce until marginal benefit = marginal cost

Rational rule for markets

(Chapter 7- Market Efficiency)

Produce more of a good if its marginal benefit is greater than (or equal to) the marginal cost

Efficient

(Chapter 7- Market Efficiency)

Outcome creates the largest possible economic surplus

Deadweight

(Chapter 7- Market Efficiency)

Measures how far economic surplus falls below the efficient outcome

Price ceiling

(Chapter 6- Price and Quantity Regulations)

A maximum price that sellers can charge

Examples:
-Rent control
-Limits on Uber surge pricing
-"Usury laws"
-Anti-price gouging laws

Price floor

(Chapter 6- Price and Quantity Regulations)

A minimum price that sellers change

Example:
-Minimum wage
-Dairy products
-Agricultural goods

Disequilibrium

(Chapter 6- Price and Quantity Regulations)

forces increase the "effective price", partly undoing the price regulation

-Extra hassle to find available apartments
-Potential tenants pay "finder's fees", raising cost
-Pay bribes to landlord to choose you
-Landlord refuses to do repairs
-Black market emerges: Sublets, Airbnb

Quota

(Chapter 6- Price and Quantity Regulations)

A maximum quantity of a good that can be bought or sold

Examples:
-Zoning laws
-Immigration laws
-Anti-polygamy laws
-Environmental regulation

Mandate

(Chapter 6- Price and Quantity Regulations)

A minimum amount of a good that can be bought or sold

Examples:
-Low income housing
-Health care
-Car insurance
-Environmental regulation
-Corporate board of directors

Statutory burden

(Chapter 6- Taxes)

Who is responsible for paying the tax to the government?

-Sellers required to pay $3 per pack

Economic burden

(Chapter 6- Taxes)

Who bears the burden of the tax

-How much more buyers pay ($2 per pack)
-How much less dollars receive ($1 per pack)

Subsidy

(Chapter 6- Taxes)

A payment made by the government to those who make a specific choice

-Effectively a negative tax