Econ 201 FINAL-University of Oregon

Normative

-based in fact, can be proven right/wrong, answered by agree/disagree

-focusing on norms, values, morality and preferences

Positive

-value judgement

-focusing on objective reality

-do not need to be true, yes/no answer

Ceteris Paribus

holding all other things constant. When we think about moving from A to B, for the question to be meaningful, we require that C be the only change instituted

Policy

action taken to influence actions through a change in incentives

Theory

-based on observation, experimentation reasoning

-logical explanation or testable model of how phenomena interact

-a scientific theory must be testable and potentially falsiable

structure

If we start in/at A and C happens/is instituted then B

-this does not mean if B, then A and C happened (If P then Q does not mean If Q then P)

-Science can't prove anything, we can only test a theory and fail to disprove it

Mercantilism

system in which the government directs the production and distribution decision of the economy by dolling out monopoly rights to key economic decisions

Socialism

system in which government directs production and distribution by owning the means of production

Feudalism

system in which traditional roles are dominant

Capitalism

system in which property and the means of production are privately owned

Price

-ratio of exchange between two goods

-only requires logical corollary, it is impossible to change only one price

Regulation

-a policy designed to change behavior by changing a price

-only changes prices, can't make anything impossible

Scarcity

not having enough of a resource to meet desires

Opportunity Cost

-value of the next best alternative

-what could you be doing instead of going to class

Methods of Competition

-Payment

-Merit

-Deceit

-Theft

-Violence

Arrows Impossibility Theorem

it's impossible to make meaningful statements about group preferences. Even if everyone has well-defined preferences, there is no decision making process which can identify what are the groups preferences

Behavioral Postulates

-people have preferences

-more is preferred to less

-people can substitue

-marginal values are decreasing

Total Value

is the max/min amount that a consumer would be willing to give up/to gain a quantity of a good

-highest amount you'd be willing to obtain/give up a pizza

Marginal Value

is the max/min amount that a consumer would be willing to give up/to gain the next unit of a good

-the highest amount you'd be willing to pay/be paid to obtain/give up another slice of pizza

Marginal Revenue < Price

Consumers should purchase until for the next purchase MR < Price

Demand Curve

representation of the relationship between price and quantity. We can replace marginal value with price and create a demand schedule

Law of Demand

as prices rise, the quantity demanded falls

Demand

the schedule (relationship) between a price and the quantity of a good that a consumer would like to buy at that price

Quantity Demanded

-specific quantiy of a good that is purchased at a price, other things held constant.

-an increase in demand changes the entire realtionship

"Own Price Demand"

the elasticity of a good is a measure of how sensitive is the quantity demanded with respect to a change in price

Causes of High/Low elasticity

-the fraction of income spent on the good

-the availability of close substitutes

-the unit of time,

Complimentary Good

-a good is a compliment if they are consumed together

-an increase in the price of one, decreases demand for the other

Substitute Good

-a good is a substitute if you switch between them

-an increase in price of one, increases demand for the other

Inferior Good

-a good is inferior if when income increases, demand for the good decreases

-(public transportation)

Marginal Cost

cost of the next unit of a good

Economic Efficiency

the absence of waste, all potential gains are utilized

Equilibrium

the price and quantity combination at which quantity demanded equals quantity supplied

Tax Incidence

a distribution of the burden of the tax

Consumer Surplus

-total value which consumers receive from their purchases in excess of what they pay

-on graph it's above the price, and below the demand curve

Producer Surplus

-profit that producers receive, total revenues minus total cost

-on graph it's above the supply curve, and below the price

Total Surplus

sum of consumer and producer surplus, as well as government revenue in the case where there is a tax

Dead Weight Loss

the loss to total surplus resulting from a tax or price control

Shortage in a Market

occurs when at the market price, quantity demanded exceeds quantity supplied

Surplus in a Market

occurs when at the market price, quantiy supplied exceeds quantity demanded

-prices are above the equilibrium price

Price Control

government regulation which places rules on what prices can be used in the market

Price Floor

minimum price that the government allows for a good

-common when government wants to help producers

Price Ceiling

maximum price that the government allows for a good

-common when government wants to help consumers

In the event of a price floor we have...

a surplus

In the event of a price ceiling we have...

a scarcity

Quota

an explicit definition of the quantity available rather than a constraint on price

-most quotas restrict quantity available rather than increase quantity supplied

Economic Rent

Payment made to suppliers above the marginal cost

Black Market

-form when there is an effective price control and people want to avoid these

-black market prices are constrained by the option to trade legally

Production Possibilities Frontier

is a graph representation of the economy of possible production choices

Ex: farmer can plant either soy or corn

Principle of Increasing Opportunity Cost

as the production of one good increases, the opportunity cost of producing another good (marginal cost) will generally increase

Absolute Advantage

the ability of one party to make more of something than the other party

Comparative Advantage

the ability of one party to produce a good at a lower cost than the other party

Key Analysis of Trade

-people prefer a mix of goods

-quantity of one good consumed increases, the marginal value decreases

-at some point consumer prefers first unit of B to another unit of A

Autarky Production

condition of producing without trade

Import Quota

restriction on quantity that can be imported

Import Tariff

a per unit tax on imports, in either case tariffs or quotas, total surplus falls

Price Control

-any effective price control is inefficient

-any efficient price control is ineffective

Endowment Economy

you value the product more when you own it

Inputs

factors of production are anything which contribute to production

-capital (machines/equipment)

-labor (work/workers)

-land and natural resources

Production Function

the relationship between inputs and outputs

Total Product

sum of all that is created by a given quantity of input

Marginal Product

how much more is created by a one-unit increase in the input

Average Product

total product divided by the quantity of input used

Marginal Revenue Product (MRP)

how much revenue increases based on the addition of one more unit of an input

-MRP=marginal product x price

-gives optimal hiring rule

Optimal Purchase Rule

-think of consumers as consumer surplus maximizers

-they purchase until, for the next unit, price is greater than marginal value

-if cost of hiring a worker increases, you will higher less amount of people and your profit will be smaller

Property Rights

are said to be well-defined in the case where a decision-maker bears the burden and costs of his actions

-what if you came to class late?

-what if you pump toxic waste into a river?

-what if you give to charity?

Externality

occurs when property rights aren't well-defined

Positive Externality

occurs when a decision maker's actions are a positive influence on someone else

Ex:

-education

-charity/welfare

-scientific research

-bee keeping

-lawn care

-immunization

Negative Externality

occurs when a decision maker's actions are a negative influence on someone else

Ex:

-congestion (roads/lines)

-pollution

-over harvesting common grounds (fishing, logging, etc)

-antibiotic over use

The Coase Theorem

when property rights are well-deinfed, the allocation of rights doesn't matter to the allocation of resources

-either I have the right to pollute the air or you do

-if our values are such that you should pollute, you will

-if our values are such that you shouldn't pollute, you won't

Game Theory

a framework analysis in which two or more individuals compete or cooperate for various payoffs that depend on the decisions of every individual involved in the game

-analyzing how people play games

-game theory is going to be how we analyze very many competitive and complex cooperative situations

A Game always has 3 parts...

players, strategies and payoffs

Nash Equilibrium

is any outcome where neither player wants to change a strategy

-to find nash equilibrium, look at the actions of each player

-holding every other player's strategy constant, determine which strategy is preferred by the player

-in the case where an outcome is such that no one wants to change by themselves, you have a nash equilibrium

Dominant Strategy

said to be dominant if a player would prefer that strategy regardless of what is the other player's strategy

-when every player has a dominant strategy, we really expect the game can only end in one outcome

-if every player has a dominant strategy, there is a single nash equilibrium

Prisoner Dilemma

a specific nash equilibrium in the prisoner confession game

-assume we have two players

-both arrested by police and are being held in separate rooms

-can either confess and gain leniency or not

-enough evidence to charge both, but a confession will result in much steeper punishment

Socially Optimal Outcome

if the outcome is the the one with the largest sum of payoffs across all players

Public Goods

will have two properties; non-excludability and non-rivalry in consumption

Private Goods

will exhibit excludability and rivalry in consumption

Common Resources

will be non-excludable but rivalrous

Artificially Scarce Goods

will be excludable but non-rivalrous

Ex: Netflix

Excludability

ability of producers to exclude people from consumption

Ex:

-Cars

-Donuts

-Wheat

-any physical object and non-physical object (songs, movies)

Non-Excludability

inability of producers to exclude people from consumption

Ex:

-air

-sunlight

-water

-light from lighthouse

-any non physical object that doesn't have an intellectual property right

Exhibiting Rivalry

in production menas that my consumption reduces what you could potentially consume

-any physical object or service, food, goods, massages, your consumption reduces what I could potentially consume

Non-Rivalrous

exhibit in consumption means that my consumption does not reduce what you could potentially consume

-any non physical goo; sunlight, ideas/software,online lectures

Private Goods

one which exhibits excludability and rivalry in consumption

-most goods and services

Public Goods

one which exhibits non-excludability and non-rivalry in consumption

-National Defense

-Police

-Court System

Public Good Provision

is hampered by the presence of "free riders", people who coast on the efforts of others

-their actions are socially optimal

-because they don't exert the socially optimal level of effort, everyone may suffer

-free riding happens when there is a separation between private and social returns

-private returns should be less than 1

-because private returns are less than 1, even if social returns are greater than 1, we won't be willing to spend enough on public goods

Overuse

happens when a common resource can't be excluded and therefore is consumed so much that it reduces the quantity available

How to solve the problem of Common Resources

-introduce some sort of excludability

-government could ban any use

-government could license use or give it all to one party who will want to consume it at the socially optimal level

Artificially Scarce Goods

those which are legally excludable but which are non-rivalrous, so that producers can pick who receives the good, but my consumption doesn't reduce your ability fo consume

Ex:

-copyrighted songs/movies/software

-patented inventions

Asymmetric Information

occurs when the buyer and seller don't have the same information about the product

Ex:

-used cars

-hope repair

-health care

Adverse Selection

occurs when only those with bad quality end up purchasing or selling in the market

Even in the case wehre the market doesn't break down, the gains will still be lower because...

externalities. Firms won't find it in their best interest to invest in increasing quality if it will be others who capture most of the gains from the investment

How can we solve Information Asymmetrics?

-guarantees

-warranties

-certification

-experts

-reputation

-liability laws