ib HL econ

somebody sedate me

primary good

goods that come from use of natural resources, (low PED/inelastic/few subs/necessity)

what are the economies of scale

specialisation, spreading of costs over large outputs, bulk buying

Law of diminishing marginal returns

As more of a variable input are added to 1+ fixed units, the marginal product of the variable input at first increases, therefore decreasing marginal cost but there comes a point where it begins to decrease and then increase MC

Where do suppliers supply

MC = MR

Free goods

goods that aren’t scarce and have no opportunity cost

economic goods

goods that are scarce and have an opportunity cost

price signals

where price communicates info to decision makers

price incentives

where prices motivate decision makers to respond to info

Price rationing

when price determines if a consumer will get a good

non price rationing

when price rationing fails, queue, limiting the amount you can buy

Marginal Benefit

Demand, the extra benefit you get from each additional unit of something you buy, the max price someone is willing to pay for the additional item

Consumer surplus

The max price consumers are willing to pay minus what they pay

Producer surplus

the price firms receive for selling their good minus the lowest price they would sell it for

Allocative Efficiency

Where resources are distributed so social welfare is maximised

Assumption of rational consumer choice

consumer rationality, utility max, perfect info

Why is consumer rationality not real

biases, bounded rationality, bounded self control, bounded selfishness, imperfect info

what are biases

rule of thumb: make choices based on their default,

anchoring/framing: anchoring is where they rely too heavily on the first info, framing is where the presentation of info changes their judgement

availability bias: people rely on immediate examples

whats bounded rationality

people make choices without gathering all the necessary info

bounded self control

people have a limited ability to control themselves in the face of conflicting desires (make emotional choices)

bounded selfishness

not everyone is selfish always

imperfect info

info is not perfectly accessible or maybe asymmetric leading to choices based on limited info

Firm objectives

corporate social responsibility, maximise market share, growth maximisation, profit maximisation

PED def

how QD responds to price changes

YED

how demand responds to income changes

PES

how QS responds to price changes

manufactured goods

goods made by land, labour, capital (high PED/elastic/have subs), exception medicine which is inelastic

Engels curve

depending on income, YED for a good will change

determinants of PES

length of time (short can’t change shit),

mobility of FoP (can they make other shit),

space capacity (can quickly make more shit),

ability to store stocks (if price bad save for later),

rate of costs increasing (don’t wanna risk making more)

7 reasons gov would intervene:

Revenue

Support firms (encourage growth in certain industries/competition)

Support low income houses

Influence levels of production

Influence levels of consumption

Correct market failure

Promote equity

How can a government intervene

Price controls (floors/ceilings)

Indirect Taxes

Subsidies

Direct provision

regulation/legislation

nudges

Price ceiling

a mandated max price that can be charged

consequences of price ceiling

shortages,

welfare loss,

consumers gain and lose (people who couldn’t buy, can but some people miss out),

producers eat shit,

workers get fired,

gov politics stuff

Price floor

mandated min price that can be charged

consequences of price floor

surplus,

welfare loss

consumers eat shit

producers gain (if the gov buys the surplus)

workers get employed

gov might spend on surplus buying, + politics yay

Why Taxes

revenue

discourage consumption

redistribute income (put it on luxury goods)

improve allo eff

What do taxes do (graph)

Shift supply up by amount of tax

consequences of tax

gov gets revenue

consumers eat shit

producers eat shit

workers get fired

bad for society because under-allocation (unless externality)

who pays the tax based on ela

Inela supply - prod

Inela demand - cons

Ela supply - cons

Ela demand - prod

why subsidy

increase prod revenue/income

make necessities affordable to low incomes

support growth of certain industries

encourage exports of certain goods

correct positive externalities

consequences of subsidy

double yay consumers (more for less)

double yay producers (make more for more)

gov eats shit, potential opportunity cost

workers get hired

society eats shit cause overallocation (except for externality) but also opp cost from gov

Common pool resources

rivalrous but non excludable goods, free to use without payment

rivalrous

consumption of a good reduces its availability for others

non excludable

you cannot exclude someone from using it

externality def

When production or consumption of a good have side effects on unrelated third parties that are not accounted for

Socially optimal amount

MSB = MSC

Negative Prod Externalities corrections (almost always pollution):

indirect tax

carbon tax

tradable permits

gov legislation/regulation

education/awareness

Indirect tax pro/con

internalise externality

gov revenue

effectiveness dependent on PED

black market (maybe for consumer ones)

workers get fired

carbon taxes pro/con

encourages firms to invest in less polluting stuff to avoid tax

revenue

dependent on PED again

workers fired

what does legislation do graphically

if aimed at consumer (i.e drinking age), decr demand

if aimed at producer (i.e closing crayfish areas), decr supply

legislation pro/con

can be targetted

can fine those who don’t obey = revenue

reduce external costs

need to hire more people to enforce

can be hard to enforce

creates black markets

political unfavourability

Education pro/con

shifts demand the right way

while gov spends on edu, often less than long term costs of not

education can result in positive cultural changes

education is good for economic development

opportunity cost on gov spending

demerit goods can be addictive

nudges

basically education

Direct provision pro/con

incr supply

gov spending op cost

hard to measure size of benefit so is hard to be accurate

public goods and the free rider problem

people can use something without paying for it, signalling producers to produce less which is bad for everyone because we still want it

gov intervention to correct public good market failure

direct provision except its hard to figure out benefits accurately

contracting out to private sector:

yay because firms compete so they end up w a low price, and firms are specialised so quality

not yay because gov isn’t accountable and loses control, the contracting costs could be bigger (includes gov managing costs) and poor quality if they compete too much

Asymmetric info

A kind of market failure where buyers and sellers do not have equal access to information causing underallocation of resources as the part with less information tries to protect themselves

Adverse selection

when one side knows more about the quality of a good

Moral hazard

when one party takes risks but doesn’t face the consequences as the other party does

Adverse selection (when producers know more) solutions:

Gov regulation - quality standards by law, time consuming

Gov info provision - force producers to supply info/supply it themselves

Gov licensing - law requiring people to be licensed to do shit

Private screening - look into stuff, can give more but not total info

Private signalling - try to prove you’re high quality i.e brand names, show rooms, etc (also not full info)

Adverse selection (when consumers know more) solutions

Private response - i.e low insurance cost = high deductible, works like screening as healthy people will pick the low cost one and vice versa, however low income ones will opt for low cost regardless (discrimination)

Gov response - direct provision, BIG cost tho

Moral hazard situation

when buyers change behaviour after getting insurance, leading to higher prices as sellers try to protect themselves against this, like financial crisis of 2008 where gov is seller and financial institutions were buyers

Moral Hazard solutions

buyers paying part of the cost thru deductibles, incentivising them to not be risky

Market power

Ability of a firm to control the price in an industry

Diseconomies of scale because of:

coordination - too big can’t work together

communication - same as above

poor worker motivation - get bored and don’t care so they are less eff

Perfect comp

large number of small firms selling a homogenous product in a market with no barriers to entry

Why does PC make 0 profit in the long run

If the industry is profitable, firms will enter, increasing total output and therefore reducing price, and vice versa

PC and allo eff

Perfectly competitive markets result in allo eff in the long run, because firms making normal profit in PC = allo eff, and they always end up at normal profit

Pros of PC

allo eff

low prices for consumers

competition weeds out inefficient producers

market responds to consumer tastes (if they change then demand changes so short run abnormal and negative profit and in long run back to good)

Cons of PC

Unrealistic (simply does not happen)

no economies of scale

no product variety (consumers like variety)

no R&D

Monopoly

A single firm selling undifferentiated products that have no close substitutes in a market with high barriers to entry

Barriers to entry

Economies of scale

Natural monopolies (really big economies of scale)

branding = customer loyalty

legal barriers such as patents, copyrights, licenses WHICH MAY PROTECT CONSUMERS

resource control (debeers had 90% diamond control 1980)

aggro tacticts (lower prices to flush them out)

When is total revenue at its max

TR = Max when MR = 0

Where do monopolies operate + profit stuff

Q is MR = MC,
P is AR at Q

Profit is the gap between AC and AR at Q

what (graphically) do natty monos look like

demand curve intersecting LRAC within economies of scale territory, i.e producing anymore is a loss and they still haven’t reached the bottom of the curve

mon/mc/oli WHY allo ineff

MR is also in the long run as its own shit unlike in PC, therefore when MC = MR, theres welfare loss

pros of mono

economies of scale (potentially lower prices)

R&D

cons of mono

allo ineff/market failure

high price, low output

welfare loss AND mono steals cons surplus

bad for income distribution (mons get rich cons get poor)'

lack of comp = inefficiencies

potentially less innovative, they do want to but monopolistic and oli have to to survive

Mon con

Many firms with differentiated products in a market with low barriers to entry

mon con and profit and allo eff

normal profit because of competition

ineff because even with normal profit, P > MC

ineff is justified ish because it leads to variation, so consumers are ‘paying’ for variation

mon comp/oli v everyone else

just sub in for either mon or pc depending on who ur comparing w

key is that MC has more innovation and product variation than both mon and pc

and that Oli is harder to catch out for abusing market power

what makes oligopolies so fun (awful)

conflicting incentives - compete vs collude

two types of collusive oli

cartel or informal collusion

why are cartels hard to set up

Anti cartel laws

incentive to cheat (they wanna fuck each other over)

cost differences

number of firms (people don’t wanna agree)

why olis have stable prices

collusive ones agree to fix prices

non collusive ones predict the other behaviour and realise changing price is bad both ways

even in non collusive they still don’t want price wars for obvious reasons

legislation against abusing market power (oli and mon)

legislation, i.e fines which is bad because they can see fines as costs, its hard to prove, laws can be vague

ALSO can block mergers (Air NZ & Quantas blocked in 2004)

nationalisation, in cases of natural monopolies, government can own however they’re inefficient because their goal isnt profit max

regulation against abusing market power

Marignal cost pricing - must charge at MC (allo eff), however this often leads to losses so they go out of business

Average costpricing - must charge at AC (normal profit), however they get lazy because they’re guaranteed AC as a price

costs of unemployment

less RGDP cause less work
loss of income for unemployed people
loss of tax revenue
gov costs from benefit
gov costs from dealing with social issues
income inequality
poverty = crime
self esteem = suicide
unemployed people left behind

types of unemployment

cyclical, seasonal, structural, frictional

RWE for each unemployment

Cyclical: Great D = high crime & 25% unemp
Frictional: Quantas layoff 5k in 2013
Seasonal: Liberia 70% agriculture
Structural: 2017 Australia cars to germany and china

consequences of economic growth

more employment
more inflation
living standards up if it goes to low income
if not done right bad for enviro

consequences of inflation

redistributive effects: Bad for FISCL
uncertainty - less investment - less growth
less incentive to save - less sig investment
inequality - necessities cost + no real estate
price signalling wack = allo ineff
less export competitiveness

inflation RWEs

CP - 1970s oil shocks in NZ
DP - 2013 consumer confidence = 43% infl in syria

trade off between unemp and infl (include RWE)

SR: phillips curve + AS/AD AD inc = trade off
RWE: late 1980s US infl 6.5-2.8% but unemp 5-8%

consequences of deflation

redistributive effects - Good for FISCL
good for export comp
uncertainty = less invest = less growth
deferred consumption = less invest = less growth
cyclical unemployment leads to defl spiral
price signalling WACK = allo ineff
policy ineff

deflation RWE

1930’s Great D in US, 25% unemp, incr crime

why sticky wages

labour contracts fix wages
min wage
unions
wage cuts = less morale = less eff

what happens when AD decr in a NC model (include RWE)

AD shift, output falls, unemployment, people willing for lower wages, less CoP, SRAS shift, back to full employment but at a lower PL
RWE: WW2 recovery in the us w/o gov int

what happens when AD decr in a Keynes perspective (AS/AD (include RWE)

AD shifts, output falls, unemployment, STICKY WAGES, prolonged unemployment, gov must act
RWE: The great D 1930s, prolonged period of unemployment

what happens when AD incr in a NC model (include RWE)

output increases in SR beyond capacity, PL also increases so workers demand higher wages, this increases CoP = shift of SR supply BACK to LRAS so in the LR employment remains constant and PL incr, indicating inflation UNLESS LRAS also incr
RWE: USA covid recovery was inflationary

what happens when AD incr in a Keynes model (include RWE)

if spare capacity: PL remains constant and employment incr, if not same as NC
RWE: great depression had spare capacity