ECON 4113 Final Exam Oklahoma State

Economics

study of choices we make in a world of scarce resources

Positive Analysis

objective and fact-based statements, about what “is”

Normative Analysis

value-based judgements, about what “should be”

Private Costs

the direct cost to market participants, such as buyers and sellers.

Social Cost

the cost to society, including both private costs and externalities

Externalities

uncounted and unintentional spillover effects on other parties, resulting from the actions of producers and consumers.

difficult to measure and often go unaccounted for when policies are made.

Economic Efficiency

allocating our scarce resources to their most beneficial uses.

Cost-benefit analysis (CBA)

Economic analysis aimed at maximizing marginal benefits and minimizing marginal costs.

Finds the most efficient point to be where MB = MC

Marginal Benefit (MB)

measurable benefit or satisfaction that a consumer receives from using one more unit of a good or service.

Marginal Cost (MC)

the incremental expense of producing that one additional unit of a good or service.

Gross Domestic Product (GDP)

measures the total monetary value of goods and services produced in a country in a given time.

almost always annually, but sometimes quarterly.

most commonly used as a year to year growth rate.

Per Capita

means per unit of population (per person). Calculated by taking the current economic measure and dividing it by the population.

Energy Intensity (EI)

the ratio of energy spending to output.

the amount of energy used to produce our economic activity.

Energy Expenditures / GDP

Private Efficiency

involves only the parties participating in the economic exchange or action.

Social Efficiency

includes how outside parties are affected by an economic exchange.

includes externalities and ‘spillovers’.

Wealth of Nations

written by Adam Smith in 1776.

forms much of the basis for modern economic theories.

one of the most important economic textbooks created.

Invisible Hand

Adam Smith’s term for unseen free-market forces which drive peoples economic actions.

individuals driven by self-interest will result in the most societal benefit.

Utility

the well-being or value derived from consuming a product or service

Social Welfare

a broad measure of aggregate utility felt by society as a result of an economic action.

• Consumer Surplus (CS) + Producer Surplus (PS)

Equity

condition in which resources and structure lead to balanced economic participation and outcomes.

Pareto Efficiency

economic point where it is impossible to make someone better off without making someone else worse off.

efficient points have no losers. makes comparison of outcomes simple.

minimally weighs potential benefits of decisions. a very restrictive view of policy.

Kaldor-Hicks Efficiency

relative efficiency measure where winners compensate losers for their externalities.

leads to efficient outcomes due to the net gains felt by all parties.

requires agreements and compensation to occur between parties.

difficult to enact from a policy perspective.

What do economists prefer?

perfect competition, where price = marginal cost.

this rarely occurs.

Monopoly

where one dominant firm controls the market price.

1. single firm

2. unique product

3. high barriers to entry

Cartel

association of suppliers who collude to maintain high prices and restrict competition.

Organization of Petroleum Exporting Countries (OPEC)

13 countries who cooperate to regulate the global supply of oil and maintain a world price.

considered to be a blend of both monopoly and cartel.

coordinate by setting quotas for the oil production of member countries.

Rival Good

good can only be consumed by a single person

Non-Rival Good

consumption can occur across many people without affecting supply.

Excludable Good

private goods for which use can be restricted.

Non-Excludable Good

public goods which cant be effectively restricted.

Free Rider Effect

why pay for a public good if you can get it for free and someone else pays for it?

Criteria for efficient societal decision making

Private Efficiency, Social Efficiency, Equity, Social Welfare, Sustainability

Demand

the willingness and ability for consumers to pay for a good or service at given prices.

Law of demand

as prices increase, the quantity demanded decreases.

represented by a demand curve, price = y-int + (slope * quantity)

slope should be negative

Supply

the willingness and ability for producers to produce and sell a good or service at given prices.

Law of supply

as prices increase, the quantity supplied increases.

represented by a supply curve, price = y-int + (slope * Qsupplied)

slope should be positive

Market Equilibrium

the point where demand and supply intersect.

quantity demanded = quantity supplied, price demanded = price supplied

What can shift supply and demand curves?

government policies, changing consumer preferences, technological innovations for production.

Perfect Competition

an ideal market with many producers and consumers, each having minimal market power. Perfect competition has four requirements.

1. a large number of buyers and sellers

2. identical (homogenous) products

3. no (or small) barriers to entry

4. perfect information

Average Total Cost

U-shaped curve indicating the average cost per unit at a given quantity.

ATC = Total Costs / Q

Average Variable Cost

U-shaped curve indicating the average variable cost per unit at a given quantity.

AVC = Variable Costs / Q

Marginal Cost

upward sloping curve indicating the cost of producing one more unit of output (at the current quantity).

MC = change in total costs / change in Q

Hotelling Model

argues that nonrenewable resources will only be developed and produced if doing so yields profits greater than what could be earned from risk-free financial assets (such as U.S. treasury bills) and other financial assets

Dynamic Efficiency

efficient use of resources over time

• multi-period version of the one period market equilibrium model

Present Value Equation

PV = FV / ((1+r)^t)

r - real interest rate

t - number of years in the future

Discount Factor

1/((1+r)^t)

Equimarginal Principle

a rational decision maker should allocate resources such that marginal profit is equal across periods.

Where does perfect competition set quantity?

where P = MC = Demand

Where do monopolists set output (Q)?

where MR = MC

Risk Averse

preferring less risk to more risk

4 types of derivatives

• forward contracts

• futures

• swaps

  • options

Speculators

buying and selling derivatives for a profit

• betting on a stock to go up or down

Pennsylvania Rock Oil Company

established by George Henry Bissell and a group of investors in 1855 to look for a more efficient replacement for asphalt-based kerosene

Competitive Profit

pi = Total Revenue - Total Cost

Fracking

injection of a fluid at high pressure into an underground rock formation to open fissures and allow trapped gas or crude oil to flow through a pipe to a wellhead at the surface

• proffitability drives production and production drives domestic prices

  • when prices are low, fracking declines as profitability decreases. production increases when prices are high

Petroleum Industry Supply Chain Segments

• Upstream

• Midstream

  • Downstream

Upstream

oil and gas exploration and production

• fields, wells, drill rigs, offshore platforms

Midstream

transport and storage

• 70% pipelines, 23% shipping, 4% trucking, 3% rail

Downstream

turns petroleum products into final sellable products

Types of Crude Oil

• weight

• sweetness

  • TAN count

Weight (Crude Oil)

heavy oil evaporates slowly and contains materials used in heavy products such as asphalt. weight is measured by API gravity.

Sweetness (Crude Oil)

sulfur levels contained in the oil. sweet is low sulfur (less than 1%), sour is high sulfur (greater than 1%)

TAN Count (Crude Oil)

total acid number measures how corrosive the oil is

• higher TAN = more corrosive = tougher to transport

Petroleum

makes up the largest source of energy consumption in the U.S. and globally

Forward Contract

gives the buyer of the contract the right to delivery of the underlying commodity at an agreed upon price. Delivery is often set to a date in the future

Futures Contract

operate similarly to forward contracts, but are traded on central exchanges

• New York Mercantile Exchange and Intercontinental Exchange

Spot Price

today’s price of oil

Long Position

if a trader expects futures prices to increase compared to todays spot price, they would buy futures in anticipation, and sell at a later date

Short Position

if a trader expects futures prices to decease compared to todays spot price, they would sell futures in anticipation

Contango

when futures prices are decreasing at larger maturities compared to expected spot price

Options

grant the buyer the right, but not the obligation, to buy or sell the underlying commodity

Premium

the price the buyer pays for the contract

Strike Price

the predetermined price at which the buyer can purchase the commodity

Natural Gas

fossil fuel energy formed from organic material build up over millions of years

• made up of methane, ethane, propane, and butane

Conventional Natural Gas

gas found in large cracks and spaces between layers of overlying rock

Unconventional Natural Gas

gas found in tiny pores and spaces within shale, sandstone, and other sedimentary rock deposits

Associated Natural gas

gas found in deposits of crude oil and is often produced as a byproduct of crude oil drilling

Coalbed Methane

natural gas found in coal deposits

Stages of Natural Gas and Oil Extraction

• Preparation

• Drilling

• Cement and Test

• Well Completion

• Fracking

• Production and Fluid Recycling

• Abandonment and Restoration

Levelized Cost

technique used for electricity plants to compare the average cost of generation using different fuels

• shows the minimum cost at which electricity must be sold by a plant to break even.

Natural Gas Price Determinants

• crude oil price effects

• supply and storage constraints

• transportation infrastructure and shipping

• demand, weather, and seasonality

• geopolitical and regulatory risk

• financial market arbitrage

Anthracite

type of coal, 86%-97% carbon and has the highest heating value of coal.

• mainly used by the metals industry

Bituminous

type of coal, 45%-86% carbon. The most abundant rank of coal in the U.S.

• used to generate electricity

Sub-bituminous

type of coal, 35%-45% carbon.

• accounts for 46% of U.S. production

Lignite

type of coal, 25%-35% carbon. Lowest energy content of all coal types

Types of Carbon Capture and Storage

• post-combustion carbon capture

• pre-combustion carbon capture

  • oxy-fuel combustion systems

The rhetoric of impending doom surrounding climate change belies what absolutely essential point?

Hint: from False Alarm

Humanity is on the brink of imminent extinction

Life on earth is better now than it was at any time in history

The climate is changing rapidly

Life on earth is better now than it was at any time in history

The best current research shows that if humanity does nothing, climate change costs by the end of the century will be around 3.6 percent of total GDP. This means that instead of seeing incomes rise to 450 percent by 2100, they might only...

Hint: from False Alarm

 

only increase to 434 percent

only decrease to 45 percent

incomes will not change at all

only increase to 4.6 percent of global GDP

only increase to 434 percent

According to the UN's Sustainable Development Goals, what is the top ranked policy priority for people around the world?

Hint: from False Alarm

 

Education

Equality

Health

Action on climate change

Education

Time Magazines June 13, 2019 cover story showed the UN secretary general photographed standing in a suit and tie with water up to his thighs off the coast of a small Pacific island nation. The article warned that "rising seas threaten to submerge" and "wipe off the map completely" the island nation. However, during the last four decades of sea level rises, the island has actually expanded and seen its total land area increase by 2.9 percent due to accretion. 

What was the name of the Pacific island nation?

Hint: from False Alarm

 

New Guinea

Japana

Tuvalu

Hawaii

Tuvalu

GDP and the planet's health are inseparably tied. As countries get richer and their GDP increases, which of the following occurs?

Hint: from False Alarm

 

poverty increases, lowering emissions

they use more green energy

environmental regulations decrease

they emit more carbon

they emit more carbon

According to The Social Benefits of Fossil Fuels By Joseph L. Bast and Peter Ferrara, fossil fuels are vastly improving human well-being and safety. Four direct benefits are:

 

dramatically increasing the quantity of food humans produce

Fossil-fuel emissions are contributing to a “Greening of the Earth"

Warming the earth to reduce air conditioning use

vastly improving human well-being and safety

Improving political stability around the globe

Increasing the social cost of carbon

lifting billions of people out of poverty

dramatically increasing the quantity of food humans produce

Fossil-fuel emissions are contributing to a “Greening of the Earth"

vastly improving human well-being and safety

lifting billions of people out of poverty

Many climate change proponents, including Al Gore's 2006 documentary An Inconvenient Truth, predicted what iconic species would suffer immensely due to interglacial warming? Instead, the species numbers have been growing and reached its largest official population in 2019.

Hint: from False Alarm

 

Black Rhino

Penguins

Polar bears

Narwhal

Polar bears

True or False: Because of the expanding bull's-eye effect, property damage from extreme weather has dramatically increased. At the same time, extreme weather has become more deadly, causing more loss of human life.

Hint: from False Alarm

 

True

False

False

The following statement is an example of normative analysis:

"Developed countries should increase investment in green energy and renewables."

 

True

False

True

The total monetary value of goods and services produced in a country in a given period of time is known as:

 

Gross National Product

Gross Domestic Product

Cost-benefit analysis

Total Production

Gross Domestic Product

What causes efficient free-market outcomes to not always match societies goals?

 

externalities

greed

equity

social welfare

externalities

What collection of 13 countries, cooperate to regulate the global supply of oil and maintain a world price?

 

NATO

USSR

OPEC

EIA

OPEC

Public goods are non-rival and non-excludable. This means some people can get the good for free without paying for it, leading to underinvestment. What is this effect known as?

 

free-rider

kaldor-hicks

invisible-hand

private-efficiency

free-rider

Oklahoma State is considering an energy saving project for campus. 

The project would cost $1.5 million but would save $4.8 million of electricity fees 20 years from now.

Alternatively, OSU could invest that money instead and get a return of 7% per year. 

Should OSU go forward with the project?

 

Yes, OSU should invest in the project

No, OSU should decline the project

No, OSU should decline the project