ECO 111 Final (Ch 2,12,9)

Coase Theorem main point

"We need to face up to the hard facts of life: transaction costs are high." -McCloskey

price taking (1) vs price setting (2)

(1) *no market power*; no control over market price of its product (2) *market power*; some control over market price of its product (business must price search for price-quantity combination on D curve; if price raises, they settle for reduced sales)

change in the quantity demanded Q(d) (1) vs change in demand (2)

(1) a movement along the demand curve that occurs in response to a change in price (2) a shift of the entire demand curve

change in quantity supplied Q(s) (1) vs change in supply (2)

(1) a movement along the supply curve that occurs in response to a change in price (2) a shift in the entire supply curve

severe slowdowns (1) vs strong expansions (2)

(1) depressions (2) expansions

What is the difference between buyer's surplus (1), seller's surplus (2), and total surplus (3)

(1) difference between the buyer's reservation price and the price actually paid (2) difference between the price received by the seller and their reservation price (3) difference between buyer's reservation price and the seller's reservation price

What is the difference between macroeconomics (1) and microeconomics (2)

(1) government actions designed to affect the performance of the economy as a whole (2) affect the performance of the market for a particular good or service

Describe the difference between elastic (1), inelastic (2), and unit elastic (3)

(1) if price elasticity is *greater than* (>) 1 (qD responsive to P) (2) if price elasticity is *less than* (<) 1 (qD not very responsive to P) (3) if price elasticity *equals* (=) 1 (Q and D chang eby same percentage)

difference between a deficit (1) and surplus (2)

(1) occurs when government officials *spend more* than they collect in taxes (2) occurs when they *spend less* than they collect in taxes

recessions (1) vs expansions (2)

(1) periods of slowdowns in the economy (2) periods of rapid economic growth

excess supply (1) vs excess demand (2)

(1) surplus; *Q(s) > Q(d)* (2) shortage; * Q(d) > Q(s)

What factors cause an increase (right or upwards shift) in supply?

1. a decrease in the cost of materials, labor, or other inputs used in preparation of goods or service 2. an improvement in technology that reduces cost of producing good or service 3. an improvement in the weather (for agricultural products or if product requires transportation system) 4. an increase in the number of sellers 5. an expectation of lower prices in the future

What factors cause an increase (right or upwards shift) in demand?

1. a decrease in the price of complements to the good or service 2. an increase in the price of substitutes for the good or service 3. an increase in income (for a normal good) 4. an increased preference by demanded for the good or service 5. an increase in the population of potential buyers 6. an expectation of higher prices in the future

Name the determinants of price elasticity of demand

1. substitution options MORE options, MORE elastic (generic salt vs. Morton salt) 2. budget share LARGER share, MORE elastic (new car vs salt) time LONGER time to adjust, MORE elastic (air conditioner vs gasoline)

Which of the following is a macroeconomic policy? a. How an early freeze in California will affect the price of fruit. b. Tax cuts to bring the federal budget into balance. c. Requiring locks on all guns. d. Regulations limiting automobile emissions.

B

T/F: taxes and subsidies always lead to a loss in total economic surplus

F

T/F: the legal right to perform should influence a negotiations surrounding activities that cause externalities

F

T/F: As price decreases, the quantity demanded increases

T

T/F: having more of one thing means having less of another

T

T/F: externalities reduce economic efficiency

T; but solutions may be efficient subsidies for external benefit tax, laws, regulations for external costs

Reciprocal harm

To avoid the harm to B would inflict harm on A (should A be allowed to harm B or should B be allowed to harm A?)

Externalities

a *cost or benefit* of an activity that falls on people other than those who pursue the *activity*

external benefits (positive externalities)

a benefit of an activity received by people other than those who pursue the activity there is "too little" of the activity

efficiency (or economic efficiency)

a condition that occurs when all goods and services are produced and consumed at their respective socially optimal levels

external costs (negative externalities)

a cost of an activity that falls on people other than those who pursue the activity there is "too much" of the activity

inferior good

a good that consumers demand less of when their incomes increase ex: apartments in unsafe neighborhoods

normal good

a good that consumers demand more of when their incomes increase ex: conveniently located apartments

price ceiling

a maximum allowable price, specified by law

GDP deflator

a measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100

In Econland exports equal 15% of total output, while imports equal 20% of total output. Econland has

a trade deficit

How would each of the following shift demand in the indicated market? a. The incomes of buyers in the market for dining out decreases. b. Buyers in the market for pizza read a study linking pepperoni consumption to clogged arteries. c. Buyers in the market for CDs learn of an increase in the price of downloadable MP3s (a substitute for CDs). d. Buyers in the market for CDs learn of an increase in the price of CDs.

a. The demand curve shifts to the left. b. The demand curve shifts to the left. c. The demand curve shifts to the right d. The demand curve remains unchanged

How would each of the following affect the U.S. market supply curve for corn? a. A new and improved crop rotation technique is discovered b. The price of fertilizer falls. c. The government offers a new tax break to farmers. d. A tornado sweeps through Iowa.

a. The supply curve for corn would: shift to the right. b. The supply curve for corn would: shift to the right. c. The supply curve for corn would: shift to the right d. The supply curve for corn would: shift to the left.

State whether the following pairs of goods are complements or substitutes. a. Handball courts and squash courts are __________________. b. Squash racquets and squash courts are __________________. c. Roast turkey and gravy are __________________. d. Cloth diapers and cloth wipes are __________________.

a. substitutes b. complements c. complements d. complements

For each good listed below, discuss whether the good is likely to entail either an external cost or an external benefit. In addition, discuss whether the private market is likely to provide more or less than the socially optimal quantity of the good. a. Vaccinations b. Cigarettes

a. typically thought to entail an *external benefit*. As a result, private markets are likely to provide *less than* the socially optimal quantity of vaccinations. b. typically thought to entail an *external cost*. As a result, private markets are likely to provide *more than* the socially optimal quantity of cigarettes

positive analysis

addresses the economic consequences of a particular event or policy, NOT whether those consequences are desirable objective

normative analysis

addresses the question of whether a policy should be used subjective

market

all buyers and sellers of any particular good

What will happen to the equilibrium price and quantity of beef if consumer income decreases? (Assume that beef is a normal good).

both will increase

All of the following are examples of positive statements EXCEPT: a. Higher interest rates reduce construction activity. b. Higher interest rates are achieved by slowing the growth of the money supply. c. Economic output should not be allowed to increase too fast d. Historically higher rates of money growth are associated with higher rates of inflation.

c

Suppose you camped out in front of an electronics store to be one of the 200 lucky people able to purchase the latest gaming system. You bought the system for $350. Two weeks later you see that the same system can be sold on e-Bay for $600, so you sell your system. Your market role was as a:

consumer at the electronics store and a seller on e-Bay

Law of Demand

consumers will buy more when the price falls and less when the price rises

fiscal policy

decisions that determine the government's budget

Consumer Price Index

designed to measure the impact of price changes on the cost of the typical bundle of goods and services purchased by households

monetary policy

determination of the nation's money supply

demand curve is ____________ sloping because ____________.

downward; fewer people are willing to buy an item at higher prices

One reason the demand curve slopes ____________ is that as prices fall ____________.

downward; more people find that the price is now less than their reservation price

A trade deficit occurs when:

exports are less than import

structural policy

government policies aimed at changing the underlying structure, or institutions, of the nation's economy'

Coase Theorem

if at no cost people can negotiate the purchase and sale of the right to perform activities that cause externalities, they can *always arrive at efficient solutions* negotiations must be costless (doesn't imply that affected parties will be indifferent)

When negotiation is not costless, ___________ can be used to remedy externalities.

laws; i.e. noise regulations, zoning laws, traffic-related laws, building hieight and footprint regulations, air and water pollution laws (burden of the law can be placed on those who have the lowest cost)

Individuals tend to engage in positive externality activities ___________ than the socially optimal level; and negative externality activities ___________ than the socially optimal level.

less; more

to increase sales, monopolist must ______________ price

lower

monopolist _________________ profits

maximize; increase output if MB (marginal benefit) > MC (marginal cost) decrease output if MB < MC

price index

measurement of the cost of purchasing a market basket (or "bundle") of goods and services at a point in time relative to the cost of purchasing the identical market basket during an earlier reference period

An increase in interest rates by the Federal Reserve is an example of _______ policy.

monetary

3 major types of macroeconomic policies

monetary fiscal structural

market equilibrium

occurs in a market when all buyers and sellers are satisfied w/ their respective quantities at the market price

average labor productivity

output per employed worker

What is the source of market power?

patent

marginal benefit is called marginal ________________

revenue; change in total revenue from a 1-unit change in output *total revenue = P x Q (= to P for perfectly competitive firm) (< than P for monopolist)

Suppose one knows two facts: first, the market for prescription drugs experiences chronic shortages and second, the government sets the price for prescription drugs. One can conclude that the government has:

set the price below the equilibrium price

In order to achieve a socially optimal level of output, goods that entail positive externalities should be:

subsidized

A per unit _____________ on output can move the market to the socially optimal output when there is a *negative externality*; a per unit _____________ can move the market to the socially optimal output when there is a *positive externality*

tax; subsidy

In order to achieve a socially optimal level of output, goods that entail negative externalities should be:

taxed

aggregation

the adding up of individual economic variables to obtain economy-wide totals

income effect

the change in the quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power ex: consumer can't afford to buy pizza at higher prices

substitution effect

the change in the quantity demanded of a good that results from *buyers switch to or from substitutes when the price of the good changes* (pizza and burgers are substitutes)

Macroeconomic policies are government policies designed to affect

the economic activity of the government

unemployment rate

the fraction of people who would like to be employed but can't find work (rises during recessions)

buyer's reservation price

the largest dollar amount the buyer would be *willing to pay* for a good

The optimal quantity of a negative externality is zero if:

the marginal cost of reducing the externality is zero.

price elasticity of demand

the percentage change in quantity demanded (qD) relative to a 1% change in price (p) % change in qD / % change in P (always negative)

How can the optimal amount of negative externalities be found?

the point of intersection at which the MC (marginal cost) = MB (marginal benefit)

equilibrium price and equilibrium quantity

the price and quantity at the intersection of the supply and demand curves for the good

law of diminishing marginal utility

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time

inflation

the rate at which prices in general are increasing over time

seller's reservation price

the smallest dollar amount for which a seller would be willing to sell an additional unit, (generally equal to marginal cost)

Tragedy of the Commons

the tendency for a resource that has no price to be used until its marginal benefit falls to 0 (one person's use of commonly held property imposes an external cost on others by making the property less valuable) (one solution is to place resource under private ownership)

GDP

the total market value of all final goods and services produced annually in an economy

If the market equilibrium quantity is less than the socially optimal quantity, one can infer that:

there is a positive externality associated with this good

compliments

two goods for which an increase in the price of one leads to a decrease in the demand for the other ex: tennis balls and tennis court rental fees

substitutes

two goods for which an increase in the price of one leads to an increase in the demand for the other ex: e-mail and overnight letter delivery

Economic efficiency

used to make the pie as large as possible no change is possible that will help some people without hurting others MC (marginal cost) =MB (marginal benefit)