HMP 642 Achieve - Exam 1

markets

Dont always align self interest with social interest - sometimes market incentives are too weak (flu shot protects others and yourself, but when you get it, is it just for yourself?), other times too strong (no fines for pollution, so keep polluting. or fisherman incentivized to catch fish, causing stock of fish into collapse)

elasticity rule

If two linear demand (or supply) curves run through a common point, then at any given quantity the curve that is flatter is more elastic

demand curve

a function that shows the quantity demanded at different prices - ALWAYS slope downward / have a negative slope

prediction markets

speculative markets designed so that prices can be interpreted as probabilities and used to make predictions

wedge shortcut

the most important effect of a tax is to drive a tax wedge between the price paid by the buyers and the price received by the sellers

Taxes and Subsidies (as a supply shifter)

- As far as firms are concerned, a tax on output is the same as an increase in costs (ex: before the tax, firms require $40 per barrel to sell 60 million barrels of oil per day. How much will firms require to sell the same quantity of oil when there is a tax of $10 per barrel? $50.) - tax will raise costs of production, so supply decreases - a tax shifts the supply curve up by the amount of the tax.

why americans are more productive than chinese

- Because workers in the United States have more capital equipment available to them, which helps make them more productive (This productivity makes them valuable to employers, who compete with one another for the workers' services. Wages are pushed up as a result.) - Workers in China do not have as much capital to use, which keeps their productivity, and their wages, down.

The Price of Substitutes and Complements (as a factor of demand)

- Every good has substitutes and complements (Natural gas is a substitute for oil in heating. When the price of natural gas goes down, some people will switch from oil furnaces to natural gas, so the demand for oil will decrease—the demand curve shifts down and to the left).

Decrease in Supply

- Higher costs force sellers to provide a smaller quantity at the same price. - An increase in costs decreases supply, shifting the supply curve up and to the left, creating a new supply curve located to the upper left of the old supply curve

increase in supply

- Lower costs allow sellers to provide a greater quantity at the same price - A decrease in costs increases supply, shifting the supply curve down and to the right, creating a new supply curve located to the lower right of the old supply curve - pushes the price down, thereby causing an increase in the quantity demanded - is a shift of the entire supply curve down and to the right

complements (as a factor of demand)

- Things that go well together such as sugar and tea, iPhones and iPhone apps - Demand for a good increases when the price of a complementary good decreases Ex: If the price of beef goes down, people buy more ground beef and they also increase their demand for hamburger buns

income (as a factor of demand)

- When people get richer, they buy more stuff

inelastic

- When the absolute value of the elasticity is less than 1, the demand is not very elastic - revenues go up when the price goes up - increase in price increases revenues - price decrease causes a decrease in revenues - a rise in supply causes a big fall in the rental price

price

- a signal wrapped up in an incentive - Prices are incentives, prices are signals, prices are predictions - signal the value of resources to consumers, suppliers, and entrepreneurs, and they incentivize everyone to take appropriate actions to respond to scarcity and changing circumstances

speculation

- a special case of arbitrage - is arbitrage through time - smooths prices over time - decreases price fluctuations - moderates future price changes

key points

- a supply curve shows how producers respond to higher prices by producing more and to lower prices by producing less - An increase in demand means that buyers want a greater quantity at the same price or, equivalently, they are willing to pay a higher price for the same quantity - Anything that causes buyers to want more at the same price or be willing to pay more for the same quantity increases demand - An increase in supply means that sellers are willing to sell a greater quantity at the same price or, equivalently, they are willing to sell a given quantity at a lower price - If the price of an input decreases, the cost of production decreases, and supply increases.

drug lag

- can die because an unsafe drug is approved, OR you can die because a safe drug has not yet been approved - longer it takes to bring drug to market, more people can be harmed even though that research and time could be making the drug safer

drug loss

- can die because an unsafe drug is approved, can also die because a safe drug is never developed

Who ultimately pays for commodity tax

- does NOT depend on who writes the check to the government - DOES depend on the relative elasticities of demand and supply.

great economic problem

- how to arrange our scarce resources to satisfy as many of our wants possible -

production possibilities frontier

- illustrates trade offs "a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology"

factors (that increase or decrease demand) (demand shifters)

- income - population - price of substitutes - price of complements - expectations - tastes

increase in quantity supplied

- is a movement along a fixed supply curve

drug trade off

- more testing means drugs that are eventually approved will be safer but it also means more drug lag and drug loss

Maximizing the gains from trade

- requires producing at the equilibrium price and quantity - In addition, goods must be produced at the lowest possible cost and they must be used to satisfy the highest value demands

theory of comparative advantage

- says that when nations or people specialize in goods in which they have a low opportunity cost, they can trade to mutual advantage

supply and demand model

- successfully predicts real-life behavior.

law of supply

- the higher the price, the greater the quantity supplied

equilibrium price

- the quantity demanded is equal to the quantity supplied - is stable because at the equilibrium price the quantity demanded is exactly equal to the quantity supplied - every seller can sell as much as they want at the equilibrium price, so don't have an incentive to push prices down

monetary and fiscal policy

- werent well understood at the time of the great depression, but if they were, could have prevented or mitigated the great depression's effects - these tools are now very well understood and can reduce swings in unemployment and GDP - unemployment insurance can also help - these can also make recessions worse and the economy more volatile if used poorly

elastic

- when absolute value is greater than 1 - revenues go down when the price goes up - when the demand curve is elastic, an increase in price decreases revenues - price decrease causes an increase in revenues - a fall in supply causes only a small increase in the rental price

decrease in supply

- will lower the equilibrium quantity and increase the equilibrium price

trade

1. Makes people better off when preferences differ 2. Increases productivity through specialization and the division of knowledge 3. Trade increases productivity through comparative advantage - nobody can afford to specialize in a world without trade

supply and demand key points

1. Market competition brings about an equilibrium in which the quantity supplied is equal to the quantity demanded. 2. Only one price/quantity combination is a market equilibrium and you should be able to identify this equilibrium in a diagram. 3. You should understand and be able to explain the incentives that enforce the market equilibrium. What happens when the price is above the equilibrium price? Why? What happens when the price is below the equilibrium price? Why? 4. The sum of consumer and producer surplus (the gains from trade) is maximized at the equilibrium price and quantity, and no other price/quantity combination maximizes consumer plus producer surplus. 5. You should know from Chapter 3 the major factors that shift demand and supply curves and from this chapter be able to explain and predict the effect of any such shift on the equilibrium price and quantity. 6. A "change in demand [the demand curve]" is not the same thing as "a change in quantity demanded"; a "change in supply [the supply curve]" is not the same thing as "a change in quantity supplied."

unit elastic

= 1 - when price increases or decreases, nothing happens - a change in price is exactly matched by an equal and opposite percentage change in quantity so revenues stay the same

tax revenue

= the tax rate times the number of items taxed - If demand is perfectly inelastic at a quantity of 50, and an $8 tax is imposed, tax revenue will = $400

a higher equilibrium price

A decrease in supply along a fixed demand curve results in:

substitute (as a factor of demand)

A decrease in the price of a ____________ will decrease demand for the other good. Ex: Decrease in the price of Pepsi will decrease the demand for Coke - vice versa, an increase in the price of a substitute will increase demand for the other good

inferior good

A good like Ramen noodles for which an increase in income decreases the demand is ____________. (When were students, we dont have a lot of money to go to expensive restaurants. But for 50 cents we could have Ramen noodles. When our income increased, however, our demand for Ramen noodles decreased—we don't buy Ramen noodles anymore!)

increases, and the quantity of widgets demanded decreases

A nationwide strike by workers in the widget industry has decreased the supply of widgets. Because of the decrease in supply, the equilibrium price of widgets: - The decrease in supply shifts the supply curve left along a fixed demand curve, causing an increase in the equilibrium price and a decrease in quantity demanded.

Taxpayers

A subsidy means that the sellers are receiving more than buyers are paying, so who is making up the difference? - The cost to taxpayers is the amount of the subsidy times the number of units subsidized

decreases

As prices are pushed up, the quantity supplied increases and the quantity demanded _____________ until a certain price is no longer an incentive for prices to rise and equilibrium is restored

total consumer surplus

Adding up consumer surplus for each consumer and for each unit - on a graph, is the shaded area beneath the demand curve and above the price

decrease in demand (type of demand might be wrong here)

At a given price, consumers are willing to purchase fewer units at that price - For a given quantity, consumer are willing to pay less for that same quantity - creates new demand curve to the lower left of the old curve - decreases price and quantity

total gains from trade to market participants

Consumer surplus measures the consumer's benefit from trade, and producer surplus measures the producer's benefit from trade. If we add the two surpluses together, we get ____________. - measure of welfare

less elastic supply

Difficult to increase production at constant unit cost (e.g., some raw materials) Large share of market for inputs Global supply Short run

more elastic supply

Easy to increase production at constant unit cost (e.g., some manufactured goods) Small share of market for inputs Local supply Long run

increases

Economists say that a decrease in costs _________ supply - a decrease in costs means that the supply curve shifts down and to the right - higher costs mean that the supply curve shifts in the opposite direction, up and to the left

Changes in Opportunity Costs (as a supply shifter)

Ex: Suppose a farmer is growing soybeans but that his land could also be used to grow wheat. If the price of wheat increases, then the farmer's opportunity cost of growing soybeans increases and the farmer will want to shift land from soybean production into the more profitable alternative of wheat production. As land is taken out of soybean production, the supply curve for soybeans shifts up and to the left - an increase in opportunity costs shifts the supply curve of soybeans up and to the left. - a decrease in opportunity costs shifts the supply curve down and to the right

expectations (as a factor of demand)

Ex: The expectation of a reduction in the future oil supply increased the demand for oil today. Ex: When the weather forecaster predicts a big storm, many people rush to the stores to stock up on storm supplies

tastes (as a factor of demand)

Ex: The keto diet increased the demand for beef and helped to make steakhouses such as Outback Steakhouse and the Brazilian-inspired Fogo De Chão popular

less elastic demand

Fewer substitutes Short run (less time) Categories of product Necessities Small part of budget

quantity supplied would decrease

If the demand for oil decreased, then:

Technological Innovations and Changes in the Price of Inputs (as a supply shifter)

Improvements in technology can reduce costs, thus increasing supply - A reduction in input prices also reduces costs and thus has a similar effect - A fall in the wages of oil rig workers, for example, will reduce the cost of producing oil, shifting the supply curve down and to the right (and vice versa)

inflation

Increase in the general level of prices - caused by a sustained increase in the supply of money (when people have more money, they spend it, and without an increase in the supply of goods, prices must rise - too much money in the economy can lead to this (but too little can lead to a recession) - refers to rising input prices

a lower equilibrium price

Lower production costs result in: - shift the supply curve down and to the right along a fixed demand curve

thinking on the margin

Making decisions in terms of marginal benefits and marginal costs, the benefits and costs of a little bit more or a little bit less ex: trying to get somewhere as fast as you can, but without getting a ticket, upping and downing the speed as you travel

population (as a factor of demand)

More people, more demand

more elastic demand

More substitutes Long run (more time) Specific brands Luxuries Large part of budget

analyzing supply shifters

Sometimes it's easier to think of cost changes as shifting the supply curve right or left, and other times it's a little easier to think of cost changes as shifting the supply curve up or down - correspond to the two methods of reading a supply curve, the horizontal and vertical readings, respectively

expectations (as a supply shifter)

Suppliers who expect that prices will increase in the future have an incentive to sell less today so that they can store goods for future sale - the expectation of a future price increase shifts today's supply curve to the left

802 total facts known in society K

Suppose that the 100 people in society J all know the same 10 facts, while the 100 people in society K specialize, with each person knowing 8 unique facts as well as 2 facts also known by the other 99 people in the society. Which of the following is true?

Supply Shifters

Technological innovations and changes in the price of inputs Taxes and subsidies Expectations Entry or exit of producers Changes in opportunity costs

federal reserve

The US central bank - has the power and responsibility to regulate the supply of money int he american economy - can be for good, like minimizing a recession, or for bad, like encouraging too much growth in the supply of money --> leads to inflation and economic disruption - not always possible to make the right guess about the where the world is headed, other times they make mistakes that they could've avoided - sometimes they must accept a certain amount of either inflation or unemployment - can increase the money supply - often a lag between when they make a decision and when

-

The higher coffee bean price would shift the supply curve to the left, increasing the equilibrium price and decreasing the quantity demanded. Demand would not change.

productivity of labor

The quantity of output produced by a unit of labor. ______________ determines wage rate

specialization

The real power of trade is the power to increase production through _______. - we survive and prosper only because specialization increases productivity ex: auto mechanic learns more about cars and thoracic surgeon learns more about hearts than either could if they had to learn how to repair both cars and hearts - increases productivity

speculation

The shifting of supply in response to price expectations is the essence of ___________, the attempt to profit from future price changes

scarcity

Trade offs are a consequence of _______. (also related to opportunity cost) - we don't have enough resources in the world to satisfy all of our wants - look at trade-offs that people face to understand human behavior

economic growth

Understanding _____ is one of the most important tasks of economics - wealth comes from this

higher

Unexploited gains from trade exist when at least one potential buyer places a value on a good that is _______ than the cost of producing the good to at least one potential seller.

his 2002 Nobel Memorial Prize (in economic sciences)

Vernon Smith's experimental approach to economics led to:

total producer surplus

We can find _____________ by adding the producer surplus for each producer for each unit - the area above the supply curve and below the price

The supply of oil increased at an even faster pace than the demand for oil.

What happened to the supply of oil from the early twentieth century to the 1970s? - New oil discoveries led to an increase in supply, causing supply changes to outpace demand changes.

differences in comparative advantage

What makes trade between two nations mutually beneficial is: - differences in comparative advantage. - Specialization and trade based on comparative advantage allow all goods to be produced at the lowest opportunity cost:

normal good

When an increase in income increases the demand for a good, the good is _________ - cars, electronics, and restaurant meals are normal goods

when wages in the sectors equalize

When will workers in the aircraft manufacturing industry, which has experienced falling wages, stop moving to sectors with rising wages?

sellers and sellers, buyers and buyers

Who competes with whom to determine the price of a good?

burden

Whoever bears the _________ of a tax receives the benefit of a subsidy

increase in demand (type of demand might be wrong here)

______ increases price and quantity - Shifts the demand curve up and to the right, an increase in price and quantity. - movement along a fixed demand curve - a shift of the entire demand curve (up and to the right) - At a given price, consumers are willing to purchase more units at that price - For a given quantity, consumer are willing to pay more for that same quantity - shifts the demand curve outward, up, and to the right

greater trade

________ increases total wealth

gains from trade

___________ push the quantity toward the equilibrium quantity. - can be broken down into producer surplus and consumer surplus

firms

___________ want the substitutes for their products to be expensive and the complements to be cheap

does NOT

a change in price __________ affect the demand curve - only affects the quantity demanded

supply curve (for oil)

a function showing the quantity of oil that suppliers would be willing and able to sell at different prices, or: - the quantity supplied at different prices

subsidy

a reverse tax - Instead of taking money away from consumers (or producers), the government gives money to consumers (or producers) 1. Who gets the subsidy does not depend on who gets the check from the government. 2. Who benefits from a subsidy does depend on the relative elasticities of demand and supply. 3. Subsidies must be paid for by taxpayers and they create inefficient increases in trade (deadweight loss). - the price received by sellers exceeds the price paid by buyers, the difference being the amount of the subsidy (opposite of a tax) *The subsidy=Price received by sellers−Price paid by buyers

profitable

as the price of oil rises, it becomes ________ to extract oil from more costly sources - the higher the price of oil, the deeper the wells

Markets can solve

both the information problem and the incentive problem associated with central planning

arbitrage

buying low and selling high

In a world without trade, people:

cannot afford to specialize

zero

consumer surplus equals _______ when demand is perfectly elastic

shifts in the supply curve

create changes in quantity demanded - and shifts in the demand curve create changes in the quantity supplied

when demand is more elastic than supply

demanders pay less of the tax than sellers

surplus

drives prices down

shortage

drives prices up - an excess demand - buyers also have an incentive to offer higher prices when there is a shortage because when they can't buy as much as they want at the going price, they will try to outbid other buyers by offering sellers a higher price

30%

during the great depression, national output plummeted by ______

cannot

economic booms and busts can or cant be avoided?

escape

elasticity = _____________ - An elastic demand curve means that demanders have lots of substitutes and you can't tax someone who has a good substitute because they will just buy the substitute - if you try to tax an industry with an elastic supply curve, the industry inputs will escape to other industries - the more elastic side of the market can better escape the tax

Entry or Exit of Producers (as a supply shifter)

ex: The entry of more firms meant that at any price a greater quantity of lumber was available; that is, the supply curve shifted to the right

total welfare

gain in value plus loss in value

social interest

good institutions align self interest with ______ - good outcomes when self interest aligns with public interest - bad outcomes when self interest and public interest are at odds - individuals acting in their own self interest often produce outcomes that werent part of their intention or design, but yet have desirebale properties

demand curve for oil

has a negative slope because oil is not equally valuable in all of its uses

luxury

has an income elasticity greater than 1

substitutes

have a positive cross-price elasticity

better to tax good with an

inelastic demand, rather than an elastic demand

pursuit of self-interest

leads not to chaos but to a beneficial order

The opportunity cost of a good is revealed by the:

lowest price that someone is willing to accept for selling a good

new ideas

macroeconomists are especially interested in the incentives to produce ______. - require incentives, which means an active scientific community and the freedom and incentive to put new ideas into action - one apple feeds one person, but one idea can feed the world, meaning that ideas arent used up when they are used

futures market

markets where you can buy or sell something at a future date

elasticity

measures how much Q goes down when P goes up = % change in quantity/ % change in price

elasticity of demand

measures how responsive the quantity demanded is to a change in price - the more responsive quantity demanded is to a change in the price, the more elastic is the demand curve - The fewer substitutes for a good, the less elastic the demand - The more substitutes for a good, the more elastic the demand - the more time people have to adjust to a change in price, the more elastic the demand curve will be - the demand for a specific brand of a product is more elastic than the demand for a product category - is the percentage change in the quantity demanded divided by the percentage change in price - always negative because when the price goes up, the quantity demanded always goes down

elasticity of supply

measures how responsive the quantity supplied is to a change in price - fundamental determinant is how quickly per-unit costs increase with an increase in production = the percentage change in the quantity supplied divided by the percentage change in price

equilibrium

occurs when the quantity demanded equals the quantity supplied

innovations that make life better

originated in one place and then spread around the world

commodity taxation

raises revenue and creates deadweight loss (i.e., reduces the gains from trade) - the price paid by the buyers exceeds the price received by sellers

equilibrium quantity

resources are wasted if the quantity exceeds the _______________________

incentives

rewards and penalties that motivate behavior - huge part of economics - government can change incentives with taxes, subsidies, or other regulations when markets don't align self interest with social interest

When supply is more elastic than demand

suppliers pay less of the tax than buyers

drug mareket

takes 12 years and $1 billion on average to bring a new drug to market - more testing means that approved drugs will have fewer side effects, but there are two trade offs: drug lag and drug loss

commodity taxes

taxes on goods (ex: fuel, liquor, cigarettes) - taxes are the same as an increase in cost as far as sellers are concerned - Raises Revenue and Reduces the Gains from Trade (Creates a Deadweight Loss) tax = price paid by buyers - price received by sellers

opportunity cost

the __________ of a choice is the value of the opportunities lost. - need to understand the opportunities you are losing when making a choice to recognize the real trade offs faced -people often don't respond to changes in opportunity cost, even when money costs haven't changed - need to understand opportunity cost to understand behavior

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer - says that to increase its wealth, a country should produce the goods it can make at low cost and buy the goods that it can make only at high costs - explains trade patterns - differences in this is what makes trade profitable - explains how a country, just like a person, can increase its standard of living by specializing in what it can make at low opportunity cost and trading for what it can make only at a high cost

absolute advantage

the ability to produce more of a good than another country - Or when a country can produce the same good using fewer inputs than another country

marginal cost

the additional cost from producing a little bit more

marginal revenue

the additional revenue from producing a little bit more

globalization (economist donald boudreaux)

the advance of human cooperation across national boundaries - More cooperation means greater specialization, a larger division of knowledge, increased productivity, and more output.

producer surplus

the amount a seller is paid for a good minus the seller's cost of providing it - the difference between the market price and the minimum price at which a producer would be willing to sell a particular quantity - the difference between the lowest price that a producer is willing to sell a good for and the actual price is the producer's surplus, the producer's gain from exchange Ex: If the price of oil is $40 per barrel and Saudi Arabia can produce oil at $2 per barrel, then we say that Saudi Arabia earns a producer surplus of $38 per barrel equation: (market price - wage per hour) x output (like # of poems)?? (depends on problem)

consumer surplus

the difference between what youre willing to pay and what you must pay (the price) - the consumers gain from exchange equation: 0.5 x (demand price - market place) x new quantity demanded??? (depends on problem)

doesnt

the economy does or doesnt grow as a steady pace?

global

the local supply of a good is much more elastic than a _________ supply - also, supply is more elastic when the industry can be expanded without causing a big increase in the demand for that industry's inputs

law of demand

the lower the price, the greater the quantity demanded

free market

the quantity bought and sold WONT exceed the equilibrium quantity in a ____________ - We have only a limited number of resources and getting the most out of those resources means producing neither too little of a good nor too much of a good - maximizes the gains from trade - maximizes producer plus consumer surplus. How it maximizes gains from trade: 1. The goods are bought by the buyers with the highest willingness to pay. 2. The goods are sold by the sellers with the lowest costs. 3. There are no unexploited gains from trade and no wasteful trades. - consumers would not use a product unless the value they received from it was greater than the value of the product in another use, and free markets approximate this outcome because buyers face prices, and prices reveal opportunity cost - a market where people act in their own interests, and actions are cooperative and voluntary

deadweight loss

the reduction in total surplus caused by a market distortion or inefficiency. In this case the deadweight loss is caused by the tax - the value of the trades which dont occur because of the tax - becomes larger the more elastic the demand curve is - If the supply curve is elastic, then the tax deters many trades, but if the supply curve is inelastic, there is little deterrence and thus few lost gains from trade - broad-based taxes will tend to create less deadweight loss than more narrowly based taxes (ex: substitutes for fruit as opposed to apples, substitutes for food as opposed to fruit, so on) - A tax creates a deadweight loss because with the tax, some beneficial trades fail to occur - A subsidy creates a deadweight loss for the reverse reason: With the subsidy, some nonbeneficial trades do occur.

when costs fall

the supply curve shifts down and to the right - a reduction in price and an increase in quantity

marginal tax rates

the tax rate on the additional dollar of income

international trade

trade across political borders

rising wages

wages in sectors will equalize when workers in sectors with falling wages move to sectors with:

shifts in demand and supply

what changes the equilibrium price and quantity are ____________.

high

when price of oil is ______, consumers will only choose to use oil in its most valuable uses (gas and jet fuel), and vice versa when it is low (heating and rubber ducks)

competition

will push prices down whenever there is a surplus - As competition pushes prices down, the quantity demanded will increase and the quantity supplied will decrease - will push prices up whenever there is a shortage - pushes the price down whenever it is above the equilibrium price and it pushes the price up whenever it is below the equilibrium price