Economics Lecture Notes Review

Flashcards for reviewing key vocabulary and concepts from economics lecture notes.

Rational Consumer

Rational consumers maximize satisfaction from goods and services within their budget constraints.

Marginal Utility

The satisfaction or benefit derived from consuming one more unit of a good or service.

Diminishing Marginal Utility

As you consume more of a good, the additional satisfaction you get from each additional unit decreases.

Budget Constraint

All the possible combinations of goods and services a consumer can afford, given their income and the prices of goods.

Maximizing Utility

Consumers choose the bundle of goods and services on their budget line that provides them with the highest total utility.

Income Effect

The change in consumption resulting from a change in purchasing power (real income) due to a price change.

Substitution Effect

The change in consumption resulting from a change in the relative price of goods (consumers switch to relatively cheaper goods).

Time Inconsistency

The tendency for people to want different things in the present versus the future (e.g., planning to study but then binge-watching Netflix).

Commitment Devices

Help future behaviors , such as calendars

Sunk Cost Fallacy

The fallacy of continuing an endeavor just because you've already invested money, time, or effort into it (money already spent and unrecoverable).

Factors of Production

Inputs used to produce goods and services (e.g., land, labor, capital).

Markets for Factors of Production

Markets where inputs like land, labor, and capital are bought and sold.

Wage

The price of labor, determined by the supply and demand for labor.

Marginal Benefit (MB)

The additional revenue a worker brings in.

Production Function

Shows how output changes as more workers are added.

Marginal Product of Labor (MPL)

Additional output from one more worker.

Labor Market Equilibrium

Reflects a balance between workers' willingness to supply hours and firms' willingness to hire based on productivity.

Opportunity cost

Lost time

Minimum Wage

Government-imposed minimum price for labor. Leads to surplus and unemployment.

Externality

A cost or benefit imposed on someone else without compensation.

External Cost

Harm to others (e.g., second-hand smoke).

External Benefit

Gain to others (e.g., getting a flu shot).

Negative Production

Pollution from Factories

Negative Consumption

Smoking cigarettes

Positive Production

Bees pollinating nearby crops

Positive Consumption

Getting vaccinated/attending school

Private Cost

The producers costs

Negative Externalities

The market produces too much.

Positive Externalities

The market produces too little

Coase Theorem

If property rights are clear and transaction costs are low, people can negotiate to fix the externality problem.

Pigouvian Tax

Makes people internalize the external costs

Pigouvian Subsidy

Fixes positive externalities

Excludability

Can someone be excluded from using a good if they don't pay?

Rivalry in Consumption

Does one person's use reduce another's ability to use it?

Private goods

Pizzas, car

Club Goods

Netflix, toll roads

Public Goods

National defense, streetlights

Common Resources

Use of it affects other people.

Common Resources

Forests, fisheries, clean air

Tragedy of the commons

Resulting in overuse and depletion

Free Rider Problem

People benefit without paying.

Free Rider Problem

Public goods are under-provided in the free market.

Solutions: Common Resources

Social norms, peer pressure

Solutions: Common Resources

Government units, fishing quotas, hunting licenses

Privatization

Shifting shared resources into owned property to incentivize care.

Production Possibilities Frontier (PPF)

Shows all combinations of 2 goods that a society or person can produce using all available resources and technology.

Tradeoffs

Producing more of one good requires producing less of another.

Opportunity Cost

What you give up to get something else.

Straight PPF

Constant opportunity cost

Concave PPF

Increasing opportunity cost

Law of Increasing Opportunity Cost

As you produce more of a good, resources become less efficient, and the opportunity cost increases.

Economic Growth

More resources or better technology

Comparative Advantage

Producing something at a lower opportunity cost.

Gains from Trade

Each country specializes in what they have a comparative advantage in.

Why Do Governments Tax?

To raise revenue to fund public services (roads, schools) To change behavior (tax cigarettes to reduce smoking)

Deadweight Loss (DWL)

The total surplus lost when a tax reduces the quantity of trades.

Elasticity Affects DWL

The more elastic supply or demand is, the bigger the deadweight loss is.

Lump-Sum Taxes

Efficient but unpopular charges everyone the same amount.

Administrative Burden

The real economic costs of a tax system (paperwork, legal help, record keeping).

Tax

Demand curve shifts down by the tax amount. The new equilibrium quantity is lower.

Tax Revenue: Price Effect

Higher tax per unit = more revenue per sale

Tax Revenue: Quantity Effect

Higher tax = fewer sales = less total revenue

Revenue-maximizing tax rate

Depends on elasticity

Tax Incidence

Who really pays.

Statutory Incidence

Who writes the check to the government.

Economic Incidence

Who actually bears the burden.

Demand Inelastic

Buyers bear more.

Supply Inelastic

Sellers bear more.

Proportional Tax

Same rate for all.

Progressive Tax

Higher income = higher % paid

Regressive Tax

Lower income = higher % of income

Consumption and Income

Consumption is considered more wealth.

private goods

anyone not the owner can be excluded from consuming the good (excludable) and that good can only be consumed by 1 person (rival)

• examples are food, clothing, cars

public goods

non-excludable and non - rival

nobody can be prevented from consuming the good and they can be used by multiple people at the same time

typically supplied by the government and paid by taxpayers

• examples are fire departments, national defense

common resources

non-excludable and rival

nobody can be prevented from consuming them but they can only be consumed by one person or group at the same time

• tragedy of the commons - overconsumption

• examples are freshwater fish, forestry, or pastures

club goods

excludable and non-rival

individuals can be prevented from consuming them but they can be used by multiple people at the same time

• examples are gym memberships, cable tv, or wifi

• usually the pay per memberships exclude them from consuming the good