econ chapters 2-3

how to create pure public good demand schedule

add up all the willingness to pay at each quantity

how to create pure private good demand schedule

add up quantity demanded for each price

equilibrium of pure public good

where quantity supplied and producer set price meets willingness to pay at a quantity

neg / pos externalities are over/under allocation?

negative = overallocation

positive = underallocation

how is S curve affected by pos externality?

S curve shifts right, D curve shifts right bc SOCIETY WANTS MORE

how is S curve affected by neg externality?

S curve shifts left, D curve shifts left bc SOCIETY WANTS LESS

how to deal with positive externalities

subsidize consumers, subsidize producers, distribute the good freely

how to deal with negative externalities

tax producers, laws, pollution credits

remember when calculating marginal utility

if dividing by price to find MU/P, you cannot make the original number of circles and think you can buy them all, because the product still costs however much it costs, not $1

remember with total utility

never sum of total utility because TU already represents a summation

law of demand

ceteris paribus, there exists an inverse relationship between price and quantity demanded

determinants of demand (6?)

1. price of a good (MOVE ALONG CURVE, NOT SHIFTING CURVE), so tech a determinant of quantity demanded, not demand

2. consumer tastes

3. number of buyers

4. real income

5. substitutes

6. complements

7. price expectations

law of supply

ceteris paribus, there exists a direct relationship between price and quantity supplied

determinants of supply (9?)

1. price of good (MOVE ALONG CURVE, DO NOT SHIFT CURVE) , so tech a determinant of quantity supplied, not supply

2. resource prices

3. technological change

4. taxes

5. subsidies

6. government policies

7. price of other goods

8. price expectations

9. number of producers

10. disaster

short run effects of price ceiling

1. shortage

2. inefficient allocation of resources

long run effects of price ceiling

1. black market

2. rationing

3. decreased quality in G/S

short run effects of price floors

1. surplus

2. inefficient allocation of resources

long run effects of price floors

1. government must buy the surplus using taxes

2. government must store the surplus

3. government pays firms not to produce the goods

pure private goods

• exclusive and rivalrous

• hamburgers, clothes

toll goods (quasi-public goods)

• exclusive, not rivalrous

• movies, toll roads, education

common resources

• nonexclusive, rivalrous

• Atlantic fisheries (everyone tried doing it and it was too much)

pure public good

• nonexclusive, not rivalrous

• fireworks

determinants of price elasticity of demand (4)

1. substitutability

2. proportion of income

3. luxury vs necessity

4. time (more elastic as time goes on because they need time to try other goods and over time, they’re going to shift to more efficient spending, but they won’t take that risk right away)

determinants of price elasticity of supply (1)

1. time (becomes more elastic as time goes on as producers have more time to react and change quantity outputted)

3 stages of price elasticity of supply and what they mean

1. the immediate market period: perfectly inelastic because the producers have no time to react to the change in demand

2. the short run: they have time to change how hard they are working, but not their plant capacity or any of their resources so there is a slight shift

3. they can adjust plant sizes and buy more machinery and stuff so there is a large change and it is now elastic

relationship between a pos/neg elasticity for cross-price elasticity of demand

positive: they are substitutes

negative: they are complements

0: independent

relationship between a pos/neg elasticity for income elasticity of demand

positive: normal good

negative: inferior good

cross price elasticity of demand formula

percent change in Q_A / percent change in P_b

income elasticity of demand formula

percent change in Q / percent change in real income

where on a demand curve is a product more elastic

at a higher price because its a luxury and also because at a higher price, the change in price isnt relatively much but since its also a lower quantity, the change in quantity is relatively a lot so a large change in quantity for a small change in price is elastic

relationship between rate of decline of MU and elasticity

if MU decreases slowly, good is more elastic

slope of a budget line

P_B / P_A

TR test

E_d is elastic if price and TR are inverse

E_d is inelastic if there is a direct relationship between price

E_d is unit elastic if TR and price are independent

what do you call amount of money you earn

nominal income

work for changes in mkt equlibrium

you have to show old and new equilibria

explain the price ceiling graph of price vs quantity

it stops at Q1 because price ceiling intersects supply curve and Q1 the only amount a consumer is willing to sell at such a low price. people would like to buy at Q2 but cannot because the company cannot increase the price and therefore won’t sell more than Q1.

explain the price floor graph of price vs quantity w/o government support

it stops at Q1 because demand curve intersects price floor and people are only willing to pay for Q1 since it’s such a high price. however, the producer cannot sell below the price floor and is forced to sell at Q2 in order to cover costs. no one buys the extra items, and the company is at a loss.

explain the price floor graph of price vs quantity with government support

same thing but the government buys what the consumers won’t. anything they buy that is to the right of the demand curve is something that producers would never buy, and therefore it is worthless to society even though the government spends society’s money buying it, so it is DWL and society is at a loss.

what to show as work when doing cost benefit analysis (problems like how much bridges to build)

you pick the largest project where MB is still greater than MC and show that for the next project, MC is greater than MB

coase theorem

externalities don’t need to be solved by government, sometimes private sector can work it out amongst themselves

information failures

1. adverse selection

   1. one party (buyer or seller) has more information than the other

2. moral hazard

   1. as a result of a contract, oj

slope of perfectly inelastic vs perfectly elastic

perfectly inelastic is infinity and perfectly elastic is 0 (backwards from values because on a graph, price is y, but in equation, quantity is y)

elasticity by value

infinity = perfectly elastic

greater than 1 = elastic

1 = unit elastic

in between 1 and 0 = elastic

0 = inelastic

vertical distance for CS vs area

vertical distance is 1 person’s CS, area of triangle is total CS

def productive efficiency

competition forces companies to use best tech to minimize per-unit cost

def allocative efficiency

the correct q is produced relative to other G/S

determinants of budget line and how that affects it (2)

1. change in income

   1. parallel shift to left/right

2. change in price of one good

   1. budget line will rotate around the axis of other good

marginal utility analysis vs indifference curves

marginal utility analysis needs values of utils but indifference curves just need relatively which one gives more satisfaction

how to find equilibrium on indifference map

point where budget line is tangent to the indifference curve with greatest TU

what is the absolute value of derivative of indifference curve

MRS

what is MRS

how much of good A you’d give up for one more good B

how does MRS change

at first you’d give up a lot of good A for one more good B, and later not as much, so MRS decreases as you go on

equilibrium position

optimal combo on indifference map

both slope and MRS are what formula

Pb over Pa

how to make demand curve from the equilibria

plot quantities of B for EP1 and EP2 and the price of good B at each equilibrium position

what to do when you’re doing marginal utility analysis and haven’t exhausted all money and MUA/P equals MUB/P

buy both

how to max marginal utility analysis

last dollar spent has to have same MU/P and all money is used ho

how to create demand schedule given marginal utility analysis

find how much B they will buy when B is one price or another price

substitution effect vs income effect

substitution: you will buy more of the good whose price decreased (seems backwards, ik)

income: you will buy more of the other good because you have more money to spend now

why is water cheap even tho useful and diamonds expensive even tho useless

MU of water (low) / Price of water (low) = Mu of diamonds (high) / Price of diamonds (high)

MU of water is low because we use a lot of I t

Price of water is low because its so abundant

MU of diamonds is high because we buy few

Price of diamonds is high because its rare

• Essentially, water is cheap because theres a lot of it and its useful, whereas diamonds are rare

how is free rider problem fixed

we pay for public goods with taxes

state law of diminishing marginal utility

in a given time period, the additional utility obtained from each successive unit consumed of a G/S will decline

assumptions with consumer behavior theory

1. rational behavior

2. preferences

3. budget constraint

4. fixed price

budget line defn

all possible combinations of goods that can be purchased at a given income

indifference curve defn

curve representing all combinations of goods that generate the same total utility

indifference curve characteristics

downsloping and convex

MRS defn

amount of one good you are willing to sacrifice to consume an additional unit of the other good

MRS math defn

absolute value of slope of tangent to IC at point c

characteristics of indifference maps

1. greater TU is farther from origin

2. curves cannot intersect

how to determine perceived marginal benefit and costs from a public demand schedule

Q demand is MB and Q supplied is MC so find the prices for each and if the price of MB > MC, there is underallocation, and if the price of MC > MB, there is overallocation

when you can pick more than one plan to build bridges

pick all the plans where MB > MC and add up costs for total cost

elasticity of supply other formula

1 + (b/mQold)

where y intercept of supply determines elasticity

y int above 0 = elastic

y int below 0 = inelastic

y int equals 0 = unit elastic