Public Economics Wk 1

Mercantillist

the government should actively promote trade and industry

Laissez faire

the governet should not intervene

Reason for government failures

limited information, control over private market responses, control over buraucracy, political processes

positive economics def

what is

normative economics def

what should be

MRS formula

negative slop of the curve (derivative of curve)

What does MRS represent

the willingness of the indiv to trade y for x

What is an ordianry demand curve

function of prices and income

Ordinary demand curve as the price of a good falls

the BC becomes flatter allowing them to get a higher IC. This gets plot out to create the ordinary demand cuve

Ordinary demand curve - when on the steeper part of the curve

would be willing to give up more y to gain additional units of x

Ordinary demand curve - when on the flatter part of the curve

willing to give up less to gain additional units of x

Compensated demand curve

how quantity demanded chnages as the price of x falls while holding utility constant (same IC curve)

ordinary demand cruve, when the price of x falls

quantity of x demanded rises

compensated demand cirve - as price falls

quantity demanded rises

Substitution effect

even if the indiv remains on the same IC optimal choice will change bc the MRS must equal the new price ratio

What does the compensated demand curve pick up

Substitution effect of a price change

What does the ordinary demand curve picks up

the total substituion and income effect of a price change

income effect

real income is changed and must move to new IC

Step 1 in SE and IE for a price increase

an increase makes the BC steeper

Step 2 in SE and IE for a price increase

the substitition affect is the movement from point A to point C, new BC tangent to original IC

Step 3 in SE and IE for a price increase

Income effect is the movement from point C to point B