Econ Week 1-8

Core] What is opportunity cost?

The value of the next best alternative forgone. Лучшая упущенная альтернатива, а не сумма всех альтернатив.

Core] Should sunk costs affect a forward-looking decision?

No. They are already incurred and unrecoverable; future avoidable costs still matter.

Core] What does the cost-benefit principle require?

Choose an action when its benefit covers its opportunity cost.

Core] What is marginal benefit?

The additional benefit from one more unit of an activity.

Core] What is marginal cost?

The additional opportunity cost of one more unit.

Core] What is the marginal decision rule?

Continue while MB exceeds MC; a smooth interior optimum has MB = MC.

Core] Must MB exactly equal MC for discrete choices?

No. Select the last unit whose marginal benefit covers marginal cost.

Core] What does the interdependence principle remind you to consider?

Other choices, other people, connected markets and future consequences.

Core] What is the simple buyer's decision rule?

Buy until marginal benefit equals price at an interior optimum.

Core] What is a price taker's interior output rule?

P = MC; the market determines price.

Markets] Demand versus quantity demanded?

Demand is the whole P–Qd relationship; quantity demanded is one quantity at a particular price.

Markets] What causes movement along demand?

A change in the good's own price, holding other determinants constant.

Markets] What causes a demand shift?

Changes in income, tastes, related prices, expectations or number of buyers.

Markets] What happens to demand for a normal good when income rises?

Demand shifts right.

Markets] What happens to demand for an inferior good when income rises?

Demand shifts left. Inferior describes the income response, not necessarily quality.

Markets] If the price of a substitute rises, what happens to demand for this good?

It tends to rise because buyers switch toward this good.

Markets] If the price of a complement rises, what happens to demand for this good?

It tends to fall because using the goods together becomes more costly.

Markets] Name key supply shifters.

Input costs, technology/productivity, seller numbers, expectations and alternative uses of resources.

Markets] How does a rise in input costs affect supply?

Supply shifts left/up: less output is offered at each price.

Markets] What defines market equilibrium?

Quantity demanded equals quantity supplied.

Markets] When is there a shortage?

Qd exceeds Qs at the prevailing price, typically below competitive equilibrium.

Markets] When is there a surplus?

Qs exceeds Qd at the prevailing price, typically above competitive equilibrium.

Markets] Demand increases alone: what happens to P and Q?

Both rise, holding supply constant.

Markets] Supply decreases alone: what happens to P and Q?

P rises and Q falls, holding demand constant.

Markets] Supply increases alone: what happens to P and Q?

P falls and Q rises, holding demand constant.

Markets] Demand decreases alone: what happens to P and Q?

Both fall, holding supply constant.

Markets] Demand rises and supply falls: what is unambiguous?

Price rises; quantity is ambiguous without the relative shift sizes.

Markets] Demand rises and supply rises: what is unambiguous?

Quantity rises; price is ambiguous.

Markets] Solve Qd = 100 − 2P and Qs = 20 + 2P.

Set them equal: P = 20 and Q = 60.

Markets] Explain high flight prices during football finals.

Demand rises sharply while short-run capacity is relatively inelastic, so price rises strongly.

Markets] Does a CO₂ shortage necessarily shift soft-drink demand?

No. It primarily reduces supply; higher price causes a movement along demand.

Markets] How can Airbnb expand accommodation supply but reduce rental supply?

Properties can move from long-term residential rentals into short-term tourist accommodation.

Markets] Is a rental price rise automatically an externality?

No. It can be a market price effect; uncompensated effects such as neighbour noise are separate externalities.

Markets] What is induced demand in road transport?

Lower travel costs after capacity expands can encourage additional driving.

Elasticity] What is price elasticity of demand?

PED = percentage change in Qd divided by percentage change in price.

Elasticity] How is the midpoint percentage change calculated?

(New − old) / average of new and old, multiplied by 100.

Elasticity] When is demand elastic?

When absolute PED is greater than 1.

Elasticity] When is demand inelastic?

When absolute PED is less than 1.

Elasticity] When is demand unit elastic?

When absolute PED equals 1.

Elasticity] What is total revenue?

TR = P × Q. Revenue is not profit.

Elasticity] If price rises on elastic demand, what happens to TR?

TR falls, holding demand determinants constant.

Elasticity] If price rises on inelastic demand, what happens to TR?

TR rises, holding demand determinants constant.

Elasticity] Does a constant demand slope imply constant PED?

No. PED varies along a straight-line demand curve.

Elasticity] What tends to make demand more elastic?

Close substitutes, larger budget share, more time, narrower market definition and luxury status.

Elasticity] What is PES?

Percentage change in quantity supplied divided by percentage change in price.

Elasticity] What makes supply more elastic?

Spare capacity, inventories, flexible inputs and more time to adjust.

Elasticity] What does a vertical supply curve mean?

Perfectly inelastic supply: quantity is fixed despite price changes.

Elasticity] What is income elasticity for a normal versus inferior good?

Positive for a normal good; negative for an inferior good.

Elasticity] What is the cross-price elasticity sign for substitutes versus complements?

Positive for substitutes; negative for complements.

Elasticity] P rises 10 to 12; Q falls 100 to 80. Find midpoint PED.

(−20/90)/(2/11) = −1.22 approximately: elastic demand.

Elasticity] P rises 20% and Q falls 5%. Find PED and revenue change.

PED = −0.25. TR rises by 1.20 × 0.95 − 1 = 14% using the stated percentages.

Policy] What wedge does a per-unit tax create?

Pc − Pp = t: consumer price minus producer receipts equals the tax.

Policy] What is statutory incidence?

The legal responsibility to remit the tax.

Policy] What is economic incidence?

The actual burden through higher consumer prices and lower producer receipts.

Policy] Which side bears more of a tax?

The relatively less elastic side, not necessarily the side that legally remits it.

Policy] How do you calculate tax revenue?

Per-unit tax multiplied by post-tax quantity traded.

Policy] Is tax revenue itself deadweight loss?

No. It is a transfer to government; DWL is lost total surplus from distorted trades.

Policy] What is linear-curve tax DWL in an initially efficient market?

½ × tax per unit × reduction in quantity.

Policy] Initial price 10, Pc 12 and Pp 9: tax and burdens?

Tax = 3; consumer burden = 2; producer burden = 1 per unit.

Policy] Tax = 3, Qt = 80 and Q0 = 100: revenue and DWL?

Revenue = 240; DWL = 30 for linear curves without a pre-existing distortion.

Policy] When is a price ceiling binding?

When the maximum price lies below equilibrium.

Policy] What does a binding ceiling cause in the competitive model?

A shortage: quantity demanded exceeds quantity supplied.

Policy] When is a price floor binding?

When the minimum price lies above equilibrium.

Policy] What does a binding floor cause in the competitive model?

A surplus: quantity supplied exceeds quantity demanded.

Policy] Does a ceiling above equilibrium change the market outcome?

No. It is non-binding.

Policy] What wedge does a per-unit subsidy create?

Pp − Pc = s; government spending equals s times subsidised quantity.

Policy] Can a subsidy improve efficiency?

Yes, if it corrects a market failure such as positive external benefits; excessive subsidies can overcorrect.

Policy] What is the basic competitive minimum-wage prediction?

A binding wage floor creates excess labour supply; actual effects depend on labour market conditions.

Welfare] What is consumer surplus?

Willingness to pay minus the amount paid.

Welfare] What is producer surplus?

Receipts minus the marginal opportunity costs of supplying the units.

Welfare] What is total surplus in the simple untaxed market?

Consumer surplus plus producer surplus.

Welfare] What is deadweight loss?

A reduction in total surplus caused by an inefficient quantity or allocation.

Welfare] Does efficiency mean equity?

No. Efficiency concerns total gains; equity concerns their distribution.

Welfare] What is the condition for socially efficient quantity?

Marginal social benefit equals marginal social cost.

Trade] What is absolute advantage?

Producing more output with the same resources.

Trade] What is comparative advantage?

Producing at a lower opportunity cost.

Trade] Can trade help when one country has absolute advantage in everything?

Yes. Different relative opportunity costs can create comparative advantages.

Trade] A makes 10 reports or 5 datasets; B makes 6 reports or 6 datasets. Who specialises in what?

A in reports: cost 0.5 dataset versus 1. B in datasets: cost 1 report versus 2.

Trade] What exchange ratio benefits both in the reports-datasets example?

Between 0.5 and 1 dataset per report, strictly inside for positive gains to both.

Trade] Who gains and loses from a tariff in the small importing-country model?

Domestic producers and government gain; consumers lose; net national welfare falls without other distortions.

Externalities] What is an externality?

An uncompensated cost or benefit imposed on third parties.

Externalities] How do you express marginal social cost?

MSC = MPC + marginal external cost.

Externalities] How do you express marginal social benefit?

MSB = MPB + marginal external benefit.

Externalities] Negative production externality: market quantity versus efficient quantity?

Market quantity is too high because private decision makers ignore external costs.

Externalities] Positive consumption externality: market quantity versus efficient quantity?

Market quantity is too low because buyers ignore benefits received by others.

Externalities] What is an ideal Pigouvian tax?

A tax equal to marginal external damage at the socially efficient quantity.

Externalities] Do all taxes worsen efficiency?

No. Corrective taxes can reduce an existing externality-related deadweight loss.

Externalities] Is harm borne solely by the consumer an external cost?

No. It is a private cost; uncompensated harm to others is the external component.

Externalities] Why can congestion pricing be justified?

An extra driver delays others; a charge can internalise that external cost.

Externalities] Why is an ordinary toll not necessarily a congestion charge?

It may recover infrastructure costs rather than track marginal congestion damage.

Externalities] Why can childcare subsidies mainly raise provider prices?

If supply is constrained or inelastic, additional purchasing power produces a small quantity response.

Externalities] What is the Coase insight?

With clear rights and negligible bargaining costs, negotiation can reach an efficient outcome.

Public goods] What does rivalry mean?

One person's use reduces availability to others.

Public goods] What does excludability mean?

It is feasible to prevent non-payers from using the good.

Public goods] What are the two defining features of a public good?

Non-rivalry and non-excludability.

Public goods] What is a common resource?

A rival but non-excludable resource, such as an open-access fishery.

Public goods] What is a club good?

An excludable but non-rival good before congestion, such as an uncongested subscription service.

Public goods] What is a free rider?

Someone who benefits from provision without contributing toward it.

Public goods] Why can public goods be underprovided privately?

Non-excludability weakens incentives to pay voluntarily.