SL Economics - Unit 2

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108 Terms

1
Competitive Market
Where buyers and sellers carry out an independent exchange where no one individual has market power
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2
Good vs Service
Goods are tangible. Services are not tangible
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3
Demand
Quantities consumer is willing/able to buy at different prices
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4
Law of Demand
higher price = lower demand (etc)
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5
Increase Demand Graph
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6
Decrease Demand Graph
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7
Aggregate vs Market
Aggregate = whole economy. Market = 1 industry
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8
Non-Price Determinants of Demand
Income (normal goods↑↑/inferior goods↑↓), preferences and tastes↑↑, price of substitute goods↑↑, price of complementary goods↑↓, population↑↑
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9
Increase Quantity Demand vs Increase Demand
Increase quantity demand is a movement along demand curve (has to do with price). Increase demand is a shift.
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10
Supply
Quantity producer willing/able to supply at different prices
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11
Law of Supply
Increase price = increase supply
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12
Increase Supply Graph
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13
Decrease Supply Graph
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14
Non-Price Determinants of Supply
Prices of related goods (joint supply↑↑/competitive supply↑↓), government intervention (tax↑↓/subsidy↑↑), cost of resource prices ↑↓, changes in technology↑↑, price of complementary goods↑↑, producer price expectations↑↓, number of suppliers↑↑, unpredictable events↑↓
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15
Market equilibrium
The intersection between demand and supply
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16
Surplus
QD > QS. P > Pe. Price often drops with surplus
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17
Shortage
QD < QS. P < Pe. Price often increase with shortage
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18
Price Elasticity of Demand (PED)
Measures how much QD responds to change in price
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19
Price Elastic (Demand)
Demand is highly responsive to change in price (PED > 1)
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20
Price Inelastic (Demand)
Demand not very responsive to change in price (PED < 1)
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21
PED Formula
| (Qf-Qi / Qi) / (Pf-Pi / Pi) | or | %ΔQD / %ΔP|
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22
Price Elastic Demand Graph
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23
Price Inelastic Demand Graph
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24
Unit Elastic Demand Graph
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25
Perfectly Elastic Demand Graph
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26
Perfectly Inelastic Demand Graph
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27
Determinants of PED
Number of substitutes, closeness of substitutes, necessities vs luxuries, length of time, proportion of income spent
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28
Calculate total revenue
TR = QS x QD
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29
Income Elasticity of Demand (YED)
How much demand responds to change in income
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30
YED Formula
(Df-Di / Di) / (Yf-Yi / Yi) or | %ΔQD / %ΔY|
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31
YED > 0 (positivie)
Demand for normal good
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32
YED < 0 (negative)
Demand for inferior good
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33
0 < YED
Income elastic demand (necessities)
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34
YED > 1
income inelastic demand (luxuries)
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35
YED Shifts in Demand Graph
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36
Engel Curve
As you get rich, changes in income don’t affect you as much. Graph looks like a spiral
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37
Price Elasticity of Supply (PES)
How much quantity supplied responds to change in price
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Price Elastic (Supply)
Supply is highly responsive to change in price (PES > 1)
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39
Price Inelastic
Supply is not very responsive to change in price (PES < 1)
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40
PES Formula
(Qf-Qi / Qi) / (Pf-Pi / Pi) or or %ΔQD / %ΔP
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41
Price Inelastic Supply Graph
\
\
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42
Price Elastic Supply Graph
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43
Unit Elastic Supply Graph
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44
Perfectly Elastic Supply
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45
Perfectly Inelastic
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46
Determinants of PES
Length of time↑↑, mobility of factors of production ↑↑, spare capacity of firms↑↑, Access to inventory ↑↑, rate at which costs increase, ↑↓
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47
Indirect Tax Graph
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48
Government Legislation Graph
Same as indirect tax
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49
Price Floor Graph
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50
Price Ceiling Graph
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51
Subsidies Graph
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52
Negative Production Externality Graph
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53
Indirect Tax Externality Graph
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54
Carbon Tax Graph
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55
Traceable Permits Graph
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56
Common pool resource
Resources not owned by anyone. Rivalrous (If I take some, less for you) and non-excludable. Examples: air, river, forest
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57
Tragedy of the commons
Herders share field for cattle. As herd grows, grass decreases. Eventually there is no more grass.
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58
Marginal cost (MC)
Cost to producers of producing goods.
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59
2 Types of marginal cost
Marginal private cost (MPC): cost to private firm/producers

Marginal social cost (MSC): cost to society
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60
Marginal benefit (MB)
Benefit to consumers for consuming goods
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61
2 Types of marginal benefit
Marginal private benefit (MPB): benefits go to private individuals

Marginal societal benefit (MSB): benefits for society
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62
Social surplus
Sum of consumer and consumer surplus
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63
Externality
When actions of consumers/producers causes positive/negative side effects to third parties
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2 types of positive externalities
Positive production externality: external benefit created by producers (research, new tech)

Positive consumption externality: external benefits created by consumers (education)
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65
2 types of negative externalities
Negative production externality: external costs created by producers (pollution)

Negative consumption externality: external costs created by consumers (smoking)
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66
Carbon tax
Tax per unit of carbon emissions of fossil fuels
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67
Tradable permits
Permits to pollute issued by gov. which can be bought and traded
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68
Collective self-governance
Solution to common pool resources where consumers choose to use sustainably
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69
Market failure
Overallocation/provision: QS > QD

Under-allocation/provision: QS > QD

Not always bad as it signals areas to be corrected
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70
Policies to correct negative production externality
Indirect taxes, carbon taxes, tradable permits, gov. legislation/regulation, education and awareness creation, collective self-governance
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71
Advantages of market-based policies
* Can internalize externalities where costs are covered by producers and consumers
* Taxation on emission = less pollution/cost
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72
Disadvantages of market-based policies
  • May be impractical (calculating amount of emission is hard)

  • Technical limitations

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73
Advantages of government legislation and regulations
  • Easier to implement

  • Can avoid technical difficulties

  • Highly effective

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74
Disadvantages of government legislation and regulations
  • More costly as no gov. revenue

  • Can still face technical difficulties

  • Cost involving monitoring regulations

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Advantages of self-governance
* Sustainability without private or government ownership
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76
Disadvantages of self-governance
  • Unlikely

  • Much communication needed

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77
Education and awareness creation advantages
* Part of “natural” free market system
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78
Education and awareness creation disadvantages
  • May not be effective

  • Difficult to measure

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79
Positive production externality and graph
  • External benefits created by producers

  • MSC < MPC

  • MPC – MSC = external benefit

<ul><li><p>External benefits created by producers</p></li><li><p>MSC &lt; MPC</p></li><li><p>MPC – MSC = external benefit</p></li></ul>
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80
Direct government provision externality
  • Positive production externality

  • Direct government provision to producers to continue to continue to produce goods/services

  • Can be capital or resources

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81
Direct government provision externality graph?????
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82
Subsides external benefit
  • Positive production externality

  • Subsidy to a firm per unit of the good provided = external benefit

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83
Subsides external benefit graph??????
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84
Positive consumption externality and graph
  • External benefits created by consumers

  • Often caused by consumption of merit goods

  • MSB > MPB

  • MSB –MPB = external benefit

<ul><li><p>External benefits created by consumers</p></li><li><p>Often caused by consumption of merit goods</p></li><li><p>MSB &gt; MPB</p></li><li><p>MSB –MPB = external benefit</p></li></ul>
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85
Government legislation and regulation
  • Positive consumption externality

  • Regulations to promote greater consumption of goods with positive externalities

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86
Education and awareness creation
* Influencing consumer taste and preference to directly influence consumption choices (increase the demand)
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87
Indirect tax
Is imposed on one person or group (like manufacturers), then shifted to a different payer, usually the consumer. (Taxes are put on goods, not consumers)
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88
4 types of indirect taxes
Excise taxes, Specific taxes, Ad Valorem taxes, General sales taxes
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89
Excise taxes
Are imposed on a particular goods and services
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90
Specific taxes
A fixed amount of tax per unit of goods/service sold
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91
Ad Valorem taxes
A fixed % of the price of the good/service (price up → tax up)
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92
Direct tax
(Paid to the government by taxpayers. Suppliers →gov) income tax, business tax, property tax
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Effects of indirect taxes (increase the price)
reduces consumer spending on taxed goods (QD decreases), signal producers to produce less (QS decreases)
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Effects of indirect taxes (changes allocative efficiency)
Economy with a high degree of allocative efficiency → allocative efficiency goes down, welfare loss goes up. Economy with a low degree of allocative efficiency → allocative efficiency goes up (potentially)
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Reasons for imposing indirect taxes
Indirect taxes → source of gov revenue. Indirect taxes are a method to discourage consumption of demerit goods. Indirect taxes can be used to redistribute income (by taking luxury goods) Indirect taxes are a method to improve the allocation of resources
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96
Price ceiling
A gov setting a legal maximum price for a good. These are usually set to make certain goods more affordable to people on low incomes. Price ceiling must be below equilibrium price. AFFORDABILITY IS IMPORTANT. Creates a shortage.
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Possible consequences of price ceilings
Non-price rationing (distribution of goods determined not solely by price). Underground (parallel) markets (black market) (unrecorded transaction involving markup on goods with price ceiling). Under-allocation of resources (allocative inefficiency), creates shortage. Negative welfare impacts (due to disequilibrium, max social surplus not reached; there is welfare loss)
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98
A legal minimum price; sellers can’t charge less than this price. Must be above market equilibrium price. It creates a surplus
price floor
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99
Creates surplus (QD
Possible consequences of price floor
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Subsidies
A payment made to the firm by the gov (opposite of tax), to lower production cost. Right supply shift.
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