Econ flashcards

positive statement

easy to prove, factual

normative statement

no right answer, often political

self interest

Economics assumes humans operate in their own self interest

invisible hand

our self interested acts typically result in socially constructed transitions

opportunopprotunityty cost

the loss of potential gain from other alternatives when one alternative chosen

rational choice

mb > bc - do; mb <mc - dont; mb=mc - indifferent, do

sunk cost

a cost paid you cannot get back - this should not be a factor in decision making

resources

land, labor, capital

land = natural resources, capital - machines and productive resources

money is not a resource it is not productive in se

production possibilities frontier

shows all possible combinations of an output that can be produced assuming

1. a fixed amount of productive resources at a given quantity

2. efficient use of those resources

direct costs

out of pocket costs

indirect costs

opportunity costs, often a value and not monetary

law of demand

• there is an inverse relationship between price and quantity demanded

  • If the price of milk decreases, the quantity people will buy increases

demand curve

a graph that shows the relationship between the price of a good and the quantity demanded at various prices.

Demand curve can shift to the left or right, a decrease in demand shifts to the elft while an increase in demand shifts to the right

• If the graph follows the curve downard, thats a change in quantity demanded

• If the graph shifts along the x axis but remains constant on the y axis, that is a change in demand 

• Demand stays the same but quantity demanded increases when the price decreases
  

substitution effect

1. Chances in price motivate consumers to buy relatively cheaper substitutes goods 

income effect

1. Changes in price affect the purchasing power of consumers’ income 

law of diminishing marginal utility

1. As you continue to consume a given product, you will eventually get less additional utility (satisfaction) from each unit you consume 

5 shifters of demand

1. Tastes and preferences

2. Number of consumers

3. Price of related goods (substitutes and compliments)

   1. Substitute is a good you use in place of the original

   2. A complement is a good you use along with the original good 

4. Income

   1. Normal goods - income and the demand for the product are directly related

   2. inferior goods - income and the demand for the product are inversely related

5. Expectations 

normal goods

 income and the demand for the product are directly related

inferior goods

1.  income and the demand for the product are inversely related

law of supply

• Law of supply - there is a direct relationship between price and quantity supplied

• When the price goes up for milk, the quantity produced will increase

When the price increases only the quantity supplied increases (moves along the curve) while the 5 shifters change the supply (moves curve)

5 shifters of supply

1. Price of resources - changes in prices of inputs (cheaper cows - more milk)

2. Number of producers  

3. Technology - milking machines = increase supply

4. Taxes and subsidies - if gov gives subsidies, supply curve shift to right, while taxes shift to left 

5. Expectations

market equilibrium

Market equilibrium - where the supply and demand curves converge to determine price and quantity

disequilibrium

 leads to a surplus when the quantity supplied is higher than the quantity demanded (upper region)

also leads to a shortage when the quantity demanded is higher than the quantity supplied 

price ceilings

•  lie below the intersection of the supply and demand curve 

• Purpose is to prevent the price from rising above a certain level 

excess demand

• at a cheaper price consumers have more of an incentive to consume and producers have less of an incentive to produce, leading to an excess of demand 

allocation problems

• if goods are not allocated by price, allocation becomes a more first come first serve basis. Causing one to pay time in exchange for a decreased price 

black markets

•  allows criminal organizations to gain power by controlling underground markets—making trades that are otherwise prohibited by the government 

corruption

•  political connections are powerful, allowing politicians to acquire the goods for themselves and their friends 

policing costs

•  the government would need to expand resources to combat lack markets, increasing opportunity costs. If government officials are benefitting from the law, they have an incentive to crack down on their black market competitors 

decline in quality

 producers have an incentive to cut costs, especially since they are making less of a profit. Thus, they may water down their milk or add substitutes. Declining the quality of the product they produce intentionally

targeting

• price ceilings affect everyone. While intended to help the poor, the wealthy have an increased access to it and probably end up getting the goods more than the poor regardless

rigid/inflexible pricing

free market prices adjust to changing conditions, allowing prices to serve as a signal. Governments tend to be slow in reacting to changes, causing price ceilings to take a long time to change and may not adapt to evolving supply and demand conditions

lack of transparency

• cost of price controls are hard to assess and measure because they are often unexpected and volatile. Making efficacy hard to determine. 

prices send signals

•  if the price on something rises it is because there is a higher demand relative to supply 

  • Decreasing the price would just make the supply problem worse

  • Price controls kill the messenger 

• Bidding up price vs bidding up time 

  • During the 70s the widespread price ceiling led to an economic freeze because everything was out and a literal freeze 

  • Farmers drowned a bunch of baby chicks 

  • Higher prices give consumers incentive to conserve and thus free some up for others

rent control

price ceiling on rents designed to provide affordable housing for the poor 

• Economists are not against the goals of rent control but the unpredicted consequences it tends to come with

• If landlords cannot afford to pay the taxes of their property due to rent control, they also cannot pay for repairs or maintenance - buildings collapsing in mumbai

economical rent support

• giving money to a target population, such as a housing voucher to ensure its spent on housing and increases demand directly 

advantages of housing vouchers

• Providing income to consumers - a demand subsidy - will shift the demand curve to the right 

• Housing vouchers are provided through tax returns 

• Incentive to build more rental housing units - by stimulating demand it encourages supply 

• Avoids black markets, policing costs, tenant-landlord litigation, and quality problems 

• Transparency 

• Sharing the burden

• Price message is still heard

production subsidies

• To subsidize the construction of affordable housing 

• “Low income housing tax credit”

• Increases supply by lowering production cost for producers 

• Creates a wedge between price consumers pay and the price producers get

zoning restrictions

governmental restrictions of what can be built on the land 

housing problems in the US

• Mortgage rates are decreasing, but homes built are not increasing—In fact, theyre at an all time low 

• Exclusionary zoning makes it even more difficult to build homes 

• The laws dont explicitly mention race, but they continue to influence segregation

price floors

attempt to keep prices above the equilibrium price 

• Intended to help producers by keeping prices high 

  • Minimum wages and agricultural farm support programs 

The cost of the policy are spread out among millions of consumers while the benefits are concentrated on a small group of people

excess due to price floors

• Throw it away

• Save it up (just to throw it away when it goes bad) 

  • Government cheese

• Use it for the military or school lunches 

• Let the price fall while maintaining the target price (taxes go towards the difference

• Sell it abroad

• Give it away as food aid to developing countries 

  • Tanks the agricultural sector of those countries 

pure capitalism

private ownership of resources - private property of land labor and capital

prices free to adjuist

resources free to flow

firms produce to make a profit

decentralized decision making

command socialism

state ownership of resources

prices controlled by state planners

resource allocation by state planners

firms produce to meet a quota

centralized decision making

• government owns all resources and production

under communism

 the government disappears and there is economic cooperation as well. The principle of distribution becomes “from each according to his/her ability, to each according to his/her need” 

two fundamental problems for command socialism

1. Incentives - a lack of incentives leads to a lack of production 

2. Lack of knowledge - without a system of working prices the relative values of resources are unknowable 

Politicians do not bet their own money when campaigning and making policy, they bet taxpayer money 

socialism

 market economies with a high preference for income equality

social democracy

seeks to modify capitalism

democratic socialists

• seek to replace capitalism with a decentralized socialist ownership structure 

elasticity of demand

measures how sensitive quantity demanded is to a change in price

inelastic demand

• the quantity is insensitive to the change in price 

  • Products that are inelastic have very few substitutes

  • Price goes up, total revenue goes up

  • Price goes down, total revenue goes down 

  • When change is = 1 , unit elastic demand 

  • elasticity coefficient less than 1

elastic demand

• quantity is sensitive to a change in price 

  • Many substitutes 

  • Elasticity coefficient greater than 1 

  • Price goes up, total revenue goes down

  • Price goes down, total revenue goes up 

perfectly inelastic

•  quantity demanded does not change for price, it remains constant

midpoint formula

ped = (q2-q1/(q1+q2)/2)/(p2-p1/(p1+p2)/2)

price elasticity of supply determinants

• When we are more horizontal (flatter the supply curve) - relative elasticity 

• For inelastic

  • Short run

  • Not a lot of available resources 

• For elastic

  • Long run 

  • Arent resource constrained 

price elasticity of supply

• Calculates how responsive quantity supplied is to a change in price 

• % change in quantity supplied/ % change in price 

• Supply elasticity will be greater the easier it is for producers to acquire the resources needed to produce the good in question 

  • Goods needing specialized input will tend to be more inelastic than goods that do not need a specialized input

income elasticity of demand

• How responsive demand is to a change in income

  • Positive for normal goods

  • Negative for inferior goods

• Luxury good > 1 > necessity 

• All luxury goods are normal goods, but not are normal goods are luxury goods

cross price elasticity of demand

• How responsive demand for good x is to a change in the price of good y 

  • Positive for substitutes

  • Negative for complements

the labor market

• For the labor market - the supply is the amount of labor available (workers) while the demand is coming from employers 

• When new labor comes into the country, it has no necessary effect on wages in general (although it can be focused on other low skilled labor). But these individuals are also driving up demand for food, clothes, and other things, so it evens out

in favor of minimum wage

• minimum wage has not been risen since 2009 

• A “starvaton wage” 

• Treating workers decently is worth the price 

• Increase in minimum wage does not reduce the number of jobs

• A higher minimum wage can actually lower costs for small business

  • The choice leads to higher productivity, better service, etc

• A majority of workers who received a wage increase improved their performance

  • Employee turnover decreased by 34%

• For every10% increase in the minimum wage, prices increased by less than half of the percent (and this is a temporary increase!)

• Raising the minimum wage would decrease the taxes spent on public assistance 

• Will reduce racial and gender paid disparities

• Low minimum wage is harming people in their prime working years

• Good for workers, good for businesses, good for the economy

against minimum wage

• May reduce employment - depends on the price elasticity of demand for labor 

• If higher wages are good for a business then they would do that on their own - a government mandate is not required 

earned income tax credit

• the program where the government provides extra income for work 

  • Based on annual income earned and size of family 

income subsidies over minimum wage

• Incentivising - creates the incentive to hire workers instead of firing them. The subsidy is paid by taxpayers not by employers - thus encouraging a greater hiring of labor

• Targeting - goes to low income families. Provides those with more dependents a larger subsidies. Minimum wage does not adjust for how many dependent there are 

• Transparency - the whole program is transparent and we can see that the programs work and then argue about the size 

• Sharing the burden - its covered by all taxpayers instead of just employers

marginal benefit

• the additional benefit arising from a unit increase in a particular activity 

consumer surplus

•  consumers gain from exchange - the difference between the maximum price a consumer is willing to pay for a quantity vs the price they actually have to pay 

  • The area beneath the demand curve and above the price on a graph 

  • ½(base x height)

producer surplus

• producers gain from exchange. The difference between the market price and the minimum price at which producers would be willing to sell a given quantity

  • The sum of the producer surplus of each seller is total producer surplus

  • Measured by the area above the supply curve and below the price

free market equilibrium

• Equilibrium price is the only stable price 

• For any quantity below the equilibrium quantity there are unexploited gains from trade 

• The equilibrium quantity = all gains from trade exploited 

• For any quantity above the equilibrium quantity there is waste 

• A free market maximises the gains from trade (consumer and producer surplus)

• Goods are bought by the buyers that value them the most 

• Goods are sold by the sellers with the lowest cost

• The supply of goods is bought by the buyers with the highest willingness to pay

• The supply of goods are sold by the seller with the lowest costs

• Between buyers and sellers there are no unexploited gains from trade or any wasteful trades

excise tax

•  tax on producers of a specific good

  • The consumers and producers both pay a portion of the tax

calculating tax

• Vertical distance between price and new price tells us the per unit amount of tax 

• Consumer and producer surplus decreases

total tax revenue

•  tax x quantity demanded

tax paid by consumers

•  change in consumer price x quantity demanded

tax paid by producers

• total tax revenue - total amount paid by producers 

total expenditures

• new price x quantity demanded 

total revenue to firms

• total expenditures - total tax revenue = producer takeaway

taxes and elasticity

• For inelastic goods, consumers will end up bearing more of the tax burden because as the price rises consumers do not shift away from the product 

• If supply and demand have identical elasticities then the burden is shared equally 

  • Excise taxes on goods with relatively inelastic demand results in less distortion and more tax revenue for the government 

eitc and minimum wage

• Price controls tend to work against arket forces and tend to come with more unintended consequences than market friendly interventions (taxes and subsidies) 

• EITC is a production subsidy in which workers supply labor 

• Market friendly policies tend to lead to greater transparency, better targeting, less corruption, lower policing costs, fewer lawsuits, and a shared burden

means tested

•  assistance is targeted to a certain group - typically low income households 

• assistance prograsm: housing vouchers, food stamps, medicaid, temporary assistance for needy families, unemployment benefits, pell grants etc

entitlements

•  if you qualify then the government will give it to you 

• Incentive to not work so you qualify for a government subsidy? 

• A lower BRR (benefit reduction rate) increases work incentives but will increase the cost of the program 

• The extra income earned reduces benefits from each program 

  • Families are in some sense trapped in poverty

• Universal basic income 

  • Government progvides everyone a basic monthly income 

market failures

 occur when the free unregulated market produces a result that is not optimal

• Comes in positive externalities, negative externalities, common property goods, public goods, information failures, and insufficient competition 

negative externalities

• when actions by one party force others to suffer a consequence 

  • You do not need to have the sale of a good to have an externality 

marginal private cost

•  the internal costs considered in supply curves such as labor, power, machines, etc. 

• Free market outcome

marginal external costs

• externalities that fall on other parties rather than the company

  • Imposes costs on anyone not involved in the decision making 

Marginal social costs

•  the combination of marginal private cost and external costs, all costs are considered 

  • The total cost to all members of society 

marginal social benefit

•  area e is the degree to which the free market results in a less than optimal outcome  

• Government solutions to negative externalities

  • Internalize the externalize costs 

postive ecternalties

• choices that result in the benefits of others

  • Social benefits exceed private benefits 

  • Gov solution - internalize the external effect 

  • Gov needs to make the decision more beneficial to the private decision maker 

• As you decrease costs, the marginal benefit of decreasing it more decreases

• We dont equally accrue benefits and we dont all equally play the cost of pollution reduction 

correcting for externalities

• Voluntary action - moral suasion - educat and encourage people to “do the right thing”

• Command and control - government sets a law or regulation

• Tax negative externalities/subsidize positive externalities 

• Marketable (like pollution) permits for dealing with some negative externalities 

  • Permits that give you the right to pollute 

non-exclusive competition

•  once a good is provided it is difficult or impossible to restrict access to it based on whether someone has paid for it or not