Econ 1 ucsb
if you want your workers to work hard
-subsidize complements to hard work --coffee --on-site medical care --childcare -don't provide substitutes for hard work --magazines to read --access to facebook --TV-watching areas
critiques of economic efficiency 2: the kim kardashian problem
-efficiency means that goods go to the people with the highest willingness to pay --kim kardashian is willing to pay more for something than you -problem is that your willingness to pay reflects both: --marginal benefit ---how much would you benefit from the good --ability to pay ---how few dollars you have
a price change is not...
-an externality -consider gentrification: --you (and others) move into a new neighborhood --this leads house prices to rise --making housing unaffordable for others
poverty line
-an income level, below which a family is defined to be in poverty -$25,700 before tax per year for 2 adults and 2 kids (2018) -varies by family structure -adjusted for inflation (only)
when demand is elastic...
-an increase in price causes a large reduction in quantity demanded -raising prices lowers revenue
when demand in inelastic...
-an increase in price will cause only a slight reduction in quantity demanded -raising prices will increase revenue
surplus
-at any price higher than the equilibrium price.... --quantity supplied exceeds the quantity demanded
shortage
-at any price lower than the equilibrium price --quantity demanded exceeds the quantity supplied
permanent income
-average lifetime income -annual spending likely reflects permanent income more than this years or this week's income -there is likely inequality in permanent income than income at a given point in time
rawlsian perpective
-behind the veil of ignorance consider your perspective before you know what circumstances you'll be born into
why do people trade?
-benefits of trade come from re-allocation of tasks -some arguments equally to trade between husband and wife, roomates, co-workers, and with foreigners
choosing occupations costs & benefits
-benefits: --non-wage benefits --gaining valuable skills --wage trajectory --enjoyment & meaning --working conditions -costs: --career risk --physical risk --wage volatility --actual hours worked
what happens when both supply and demand shift at the same time?
-big-small method: it depends when shift is larger --evaluate what happens when: --the demand shift is very big (and the supply shift is very small) --the supply shift is big (and the demand shift is very small) -morning-evening method: evaluate each shift separately --imagine that: ---demand shifts in the morning ---supply shifts in the afternoon
under idealized conditions, markets yield efficient outcomes...
-both buyers and sellers are price-takers -buyers and sellers are equally well informed -all affected parties are at the bargaining table
disequilibrium leads to forces which lower the "effective price"
-breweries spend heavily on marketing, making it "easier" to buy -bundle beer with free shirts etc., lowering "effective price" -black market in beer may develop (home brewing)
rational rule for buyers
-buy more of an item if its marginal benefit is greater than (or equal to) the price
rational rule for buyers
-buy more of an item if its marginal benefit is greater than (or equal to) the price -implies your purchases always increase your economic surplus fo
tax evasion
-buyers might find it easier to evade taxes than sellers (or vice-versa) -different possibilities for tax evasion by buyers versus sellers
rising input prices
-buying more and more an input increases the opportunity cost of that input
who is for international trade?
-consumers of cheaper imports (but they're not very active)
who is against international trade?
-consumers who pay more for exported goods (but they're not very active) -import-competing firms lose business to foreign firms
corrective tax vs. cap & trade
-corrective tax creates a financial cost of producing more gas -cap and trade creates an opportunity cost of producing more gas
examples of corrective taxes
-corrective taxes fix negative externalities --examples: health insurance subsidies --employers subsidize flu shots --a warm glow giving blood is like a corrective subsidy --education and childcare subsidies
consequences for government revenue
-corrective taxes raise revenue -cap and trade can raise similar revenue if the government auctions off emissions permits -but cap and trade raises no revenue if the government gives away emission permits (surprisingly common) --it's politics: governments are often pressured to give away emissions permits
fixed costs
-costs that stay the same regardless of the quantity of output produced --capital equipment, managers buildings -don't change when you produce anpther unit -irrelevant to the "or what?" quesiton
variable costs
-costs that vary with the quantity of output produced --wages, oil expenditures
effects of a quota (maximum quantity)
-decrease the quantity supplied -higher prices (if binding): --competition among buyers drives the price up --decreasing the quantity demanded -inefficient production: higher prices mean supply may not be produced by low-cost firms -lost economic surplus: --many sellers want to sell more at lower prices --buyers want to buy more at lower prices
lower prices result...
-decreasing quantity supplied -increasing quantity demanded -eventually eliminating surplus
comparative advantage is critical
-demand side: --you are particularly good at these tasks --your opportunity cost of production is low -supply side: --you are less troubled by the disamenities of this job --or.. you particularly enjoy the benefits of this style of work
positional externalities
-depend on relative performance -ex: --your high score on the exam lowers my grade (on a curve) --your decision to take steroids hurts my chance of winning
why do demand curves slope downward?
-diminishing marginal benefit (each additional item yields a smaller marginal benefit than the previous item) -price declines with quantity
change in price
-doesn't change your place -creates movement along the demand curve -call this a change in quantity demanded
diminishing marginal benefit
-each additional dollar is less beneficial (yields a smaller marginal benefit) than the previous
critiques of economic efficency 3: the means matter, not just the ends
-efficiency is consequentialist --focuses on the consequence or outcomes --not how we got there --other philosophies focus on processes -alternative approaches --just deserts: what do you deserve? --equality of opportunity --libertarian: did it respect property rights? --discrimination --did we respect human rights? --do we really know what we want?
rational rule for sellers in competitive markets
-sell another item if the price is greater than (or equal to) the marginal cost -implies your sales always increase your economic surplus
rational rule for sellers
-sell more of an item if the price is greater than (or equal to) the marginal cost
demand for inferior goods
-shifts the demand curve to the left -because they are those you "make do" with because of constrained income -like buses
extensive margin of labor supply
-should you work in the formal labor market?
to isolate discrimination, we need to compare...
-similar people -in similar jobs -regulated by similar institutions
job-specific skills
-skills that are unique to a particular employer
general skills
-skills that many employers find useful
who bears the economic burden of taxes?
-so far.... it doesn't depend on statutory burden -what comes next... it does depend on elasticity
what are health insurance and medicare a form of?
-social insurance
policy analysis
-stage 1: what is going to happen if we adopt this policy? --positive analysis ---what is ---price changes, quantity changes, who'll gain, who'll lose, etc. -stage 2: which is the better outcome, and what policy should the government adopt? --normative analysis ---what should happen ---making judgment about which outcome is better ---weighing the benefits to some against the costs to others
consequences of minimum wage depends on...
elasticity
when prices and quantity move in opposite directions...
supply shifted
marginal cost
the "extra cost" from one more
marginal benefit
the "extra" benefit from one more
total consumer surplus
the area under the demand curve and above the price, out to the quantity sold
consumer surplus
the economic surplus you get from buying something
gains from trade
the extra productivity from specialization and trade
the knowledge problem
the information needed to make a good decision is so broadly dispersed that it's not available to any individual decision-maker
the theory of supply is...
the theory of marginal costs
with more competing products....
there are more substitutes
when quantity demanded is greater than quantity supplied
there are too many buyers chasing not enough sellers
when quantity supplied is greater than quantity demanded
there are too many sellers chasing not enough buyers
statutory burden
who is responsible for paying the tax to the government
import if....
world price + import costs < domestic price
export if...
world price - trade costs > domestic price
cost benefit principle applied to marginal decisions
yes, buy one more if the marginal benefit is at least as large as the marginal cost
highly elastic
highly responsive
highly inelastic
highly unresponsive
the they of demand
is the theory of marginal benefits
with few substitutes...
it's harder for consumers to change quantity when the price changes --so demand is inelastic
an individual brand has....
many close substitutes
your individual demand curve is your...
marginal demand curve
marginal revenue product
marginal product * price of output
what should you pay your workers?
market wages
voluntary exchange
means... -buyer (weakly) gains consumer surplus --because marginal benefit is greater than or equal to price -seller (weakly) gains producer surplus --because price is greater than or equal to marginal cost -both sides gain -except on the last item purchased --when price = marginal benefit = marginal cost
deadweight loss
measure how far economic surplus falls below the efficient outcome
specific brands tend to have....
more elastic demand than categories of goods
demand gets....
more elastic over time
marginal
one additional
specialization
people do what their best at
our supply and demand analysis applies to....
perfect competition
rent control creates....
-useful redistribution -shortages -wasteful misallocation
keep working until...
-wage = marginal benefit of leisure
private information
-when one party to a transaction knows something the other doesn't
market failure
-when the forces of supply and demand lead to an inefficient outcome 1. externalities: others are affected by our decisions 2. imperfect competition: firms have market power 3. asymmetric information: some know more than others 4. irrationality: people make bad choices 5. government regulation: impedes market forces
network effects
-when you buy an iphone, you increase the market for iphone apps, leading more to be developed, benefiting other iphone owners
economic burden
-who bears the burden of the tax --how much more buyers pays --how much less sellers receive
rational rule for workers
-work more hours as long as the wage is at least as large as the marginal benefit of another hour of leisure
social security payment
-workers contribute 6.2% of their earnings and employers contribute another 6.2% -when you turn 67, you''ll get a monthly social security check for the rest of your life
unions represent...
-workers who decide to negotiate jointly with employers -they facilitate "worker voice"
does the length of time elapsed since the price change matter?
-yes --less time to adjust means lower elasticity --over time, consumers can adjust their behavior by finding substitutes (making demand more elastic)
normal goods
-you buy more as your income rises -income elasticity of demand is positive
income effect
-you don't have to work as long to buy the same amount of stuff -work fewer hours -you become money-rich and leisure poor. use the extra $ to buy leisure
scale effect
-your inputs become cheaper, so you can produce more at each price (increases labor demand)
intergenerational externalities
-your overfishing leaves none for the next generation -over-spending by baby-boomers leaves a debt for your generation
income effect
-your purchase power rises: you can afford more gas and more food
fiscal externalities
-your success leads you to pay higher taxes, benefiting me -head start leads to less crime and welfare spending, benefiting taxpayers
private costs
costs that you bear
efficient outcome
creates the largest possible economic surplus
whoever has the less elastic...
bears the bigger burden
economic surplus is maximized when...
each task is done by the person with the lowest opportunity cost
marginal principle question
"one more?"
opportunity cost principle
"or what?"
interdependence principle question
"what else?" (other choices, other people, other markets, other time)
price elasticity of demand
% change in quantity demanded / % change in price
what % of occupations has licensing in U.S
-29% -ex: --manure spreaders, --interior decorators -little evidence they increase quality
why are top executives paid so much?
-raises value of your company to have a good CEO
what applies the cost-benefit principle and account for opportunity costs
"either/or" decisions
perfectly elastic
- % change quantity is infinite
the cap
- a quota on total production --government issues permits allowing a certain amount of pollution
complements (cross-price elasticity)
- the cross-price elasticity of demand is negative -a rise in the price of milk decreases the quantity of cookies demanded
a price change has 2 effects that cancel out...
-"negative externality" on the buyer: i pay a higher price for housing -"positive externality" on the seller: "they recieve a higher price"
why the war on drugs fail
-"successful" policies decrease the supply of drugs -because demand is inelastic, this causes: --revenue of drug deals (as a whole) to rise ---more resources to fight the police --need for cash from drug addicts rise ---more petty crime
midpoint formula
-% change in quantity = change in quanity / (old quantity + new quantity)/ 2 -% change in price = change in price / (old price + new price) / 2
income elasticity of demand
-% change in quantity demanded / % change in income - a measure of how responsive the demand for a good is to changes in income
price elasticity of supply
-% change in quantity supplied / % change in price -measures how responsive suppliers is a change in price
sunk costs
-(not opportunity cost) -costs you have already incurred that cannot be reversed -since these choices have already been made and cannot be reversed, you have incurred them regardless of what future decision you make -oppotunity cost principle says you should ignore sunk costs
number of people who HAVE BEEN in poverty at some point
-1 in 2
number of people in poverty
-1 in 7
why do some workers get paid more than others?
-1. demand: worker characteristics --human capital, signaling, economics of superstars -2. job characteristics --compensating differentials -3. institutions: shape how workers and firms interact --minimum wages, unions, occupational licensing, bargaining power --discrimination: prejustice, statistical discrimination, implicit bias
marginal costs are increasing because of
-1. diminishing marginal product --increases in variable inputs will (at some point) yield smaller increases in output -2. rising input costs
4 steps to estimate market supply
-1. survey possible suppliers --make sure to include folks who aren't currently sellers, but could be --don't forget the extensive margin --ask them about the quantity they supply at each price 2. for each price: add up the total quantity supplied --yielding the total quantity supplied at each price 3. scale the quantities supplied by the survey respondents, so that they represent the whole market --multiply survey supply by (size of the market)/(size of the survey) 4. plot the market supply curve --the total quantity supplied by the market at each price
what percentage of U.S workers are unionized?
-12%
thick market externalities
-a "thick market" has many buyers and sellers, reducing search costs -when you search hard for a job, it makes it easier for firms to find workers, leading them to create more jobs
licensing
-a credential that is required to work in an occupation
high value of leisure is...
-a disincentive to work
prejustice
-a dislike for one group that results in lower employment or lower wages for this group
market supply curve
-a market supply curve is just a set of plans --the quantity businesses plan to sell, depending on the price --it is a set of plans "holding other things constant." --if other things change --the market supply curve will shift -what are these "other things" that might change? --apply the interdependence principle
mandate
-a minimum amount of a good that can be bought of sold -examples: --low-income housing -- health care --car insurance --environmental regulation --corporate board of directors
a price change is...
-a redistribution, not an externality -from buyer to seller -not a policy-relevant externality: --if you had taken account of both of these effects, you would have made exactly the same decision -externalities are about side effects that are not mediated by the market
externality
-a side effect of an activity that affects bystanders whose interests weren't taken into account -some people are not at the bargaining table
compensating differential
-a wage premium that compensates workers for adverse attributes of a job -encourages people to take unpleasant jobs --ex: ---funeral directors ---trash collectors ---coal miners
what percentage of U.S population lives below the official poverty line?
-about 14%
human capital
-accumulated knowledge and skills that make a worker more productive -increases your productivity
wealth
-all available financial resources
perfect competition
-all businesses in the market sell an identical product; and -there are many buyers and sellers, each other whom is small relative to the market -you are a price-taker: --just follow the market, take the market price as given
who is in poverty?
-all groups experience poverty -higher among --single parents --racial/ethnic minorities -children are most likely to experience poverty -elderly are unlikely to experience poverty --social security -full-time workers are unlikely to experience poverty
efficient allocation
-allocating goods to create the largest economic surplus --requires each good goes to the person who'll get the highest marginal benefit
economic surplus rises from...
-allowing exports -allowing imports
"and trade"
-allows firms to trade these permits --allows efficient firms to buy permits off in efficient firms --ensuring production occur among firms with fewer emissions --also called "tradeable emissions permits"
rising opportunity costs of inputs
-alternative uses of that input are increasingly valuable -search costs: harder to find the input -transportation costs: buy it further away -you've exhausted low-cost suppliers: Have to buy from high-cost suppliers
limiting trade: domestic regulations
-americans have democratically agreed to a social compact --no child labor --minimum wages --safe and healthy workplaces (no sweatshops) -trade can undermine this social compact --economic: purchase foreign goods made with child labor, low wages, or in sweatshops --ethical: do we intend to substitute foreign child labor for domestic child labor? (same for low wages and unsafe workplaces) -counterargument: --opportunity cost principle: or what? --if foreigner weren't working for $1 per hour, what's the alternative?
signaling
-an action taken by an informed party to reveal private information to an uninformed party
positive externality
-an activity whose side effects benefits bystanders --ex: getting vaccinated helps ensure others don't get sick --this help is an external benefit
negative externality
-an activity whose side effects harm bystanders --ex: driving creates pollution ---this harm is an external cost
why offer benefits?
-employers get tax breaks: --retirement savings, child care, transportation, and health insurance --nice workplaces are untaxed -employers have purchasing power --health insurance -complements to hard work increase productivity --offer coffee, laptops, and flu shots -minimize substitutes for hard work --couches, smoking areas, and foosball tables
statistical discrimination
-employers use stereotypes of observable traits (race, gender, age) to infer qualities they can't observe (worker quality, likely teneure with the firm)
counterargument to national security concerns?
-enemies rarely control the global market for any good -as long as we don't go to war with every country that exports food, we'll have reliable food sources
cost benefit principle
-evaluate the full set of benefits and costs for any choice you make -pursue that choice if the benefits are at least as large as the costs -is cost greater than benefit?
yields political pressure for:
-expanding trade in our export sectors (intellectual property) -reducing trade in importing sectors (manufacturing)
monopsony power
-firm using its power as a major buyer of labor to pay lower wages
substitution effect
-firms substitute machinery for labor
specialization
-focus on specific tasks --spend more time on what you're relatively good at --and less time on other stuff
limiting trade: unfair competition and anti-dumping
-global competitors might temporarily charge very low prices (dumping their product) to drive other firms out of business -trade policy can shield domestic firms from unfair competition --global equivalent of domestic antitrust laws (regulating monopoly) -opponents argue: --it's difficult to determine what is dumping and what is comparative advantage --a tool used by domestic producers to demand protection
re-allocating...
-goods and services -labor: re-allocating workers to jobs = re-allocating tasks to people -capital and intermediate inputs -purchasing power over time (banking) -risk (financial markets)
more elastic goods
-goods where consumers are willing to search for a low-cost alternative
how firms respond to increased globalization
-greater competition --limit firms' abilities to increase prices -outsourcing --firms re-allocate some tasks overseas --and on-shore some tasks domestically -larger global market --creating a market for highly-specialized products --increasing the variety of goods available to consumer -interdependence increases --we benefit from economic growth in other countries --we suffer from downturns in other countries
median duration among the currently poor is..
-greater than 8 years
a category of goods....
-has few substitutes -example: --breakfast cereal
inferior good
-higher income means you buy less of it (hamburger) -quantity increases by less (in extreme case, quantity could decrease)
normal good
-higher income means you can buy more of it (steak) -quantity increases even further
effects of a price floor
-higher prices (if binding) -increase the quantity supplied -decrease the quantity demanded -surplus results
cost to import-competing firms are...
-highly concentrated
rational rule for employers
-hire more workers if their marginal revenue product is greater than (or equal to) the wage
intensive margin of labor supply
-how many hours should you work?
opportunity cost of a task
-how much of an alternative good you can produce if you don't do this task - (hours this task takes) / (hours required to produce alternative good)
equity of leaky bucket metaphor
-how the resources are distributed and who gets what --may enhance average well-being
coase theorem
-if bargaining is costless, then externality problems can be solved by private bargains --role for government: facilities private bargaining
argument for limiting trade: saving jobs
-if domestic workers can't be re-employed in another job, their opportunity cost is zero --comparative advantage is based on opportunity costs --but most workers are re-employable and are allocated new tasks -domestic workers in importing industries will lose jobs --but domestic workers in exporting industries will gain jobs -other counterarguments: --focus on gains to consumers, not just losses to workers --long rum: employment determined by labor market institutions
changes in other factors
-if the change buyers' plans they lead to a new demand curve -call this an increase in demand or a decrease in demand
ongoing debates about globalization
-immigration and free trade --argument for restricting immigration ---protect domestic workers from foreign competition -but trade allows foreign labor to enter the U.S --foreign labor is embodied in imports -fair trade versus free trade --exploitation of cheap foreign labor? -would "fair trade' (high er pricers, better conditions) rather than "free trade" --reduce exploitation; or --reduce opportunities?
critiques of economic efficency 1: distribution matters
-in reality, the winners don't compensate the losers --costless redistribution may not be possible, or politically feasible --policies have distributional impacts --distribtuonal implications (inequality) matters -evaluate policy based on both efficiency and equity
marginal costs
-include change in variable costs -exclude fixed costs --there is no change in fixed costs, so they're not counted as marginal costs
demand shifters
-income -- income elasticity of demand -price of other goods -- cross-price elasticity of demand
implicit bias
-relying on associations instead of complete analysis
evidence on individual labor supply curves
-income tax cuts raise after-tax wages --stimulate a slight rise in average hours -history: wages have risen a lot --average workweek has declined a little -different jobs --people in high-wage jobs work about the same hours as people in low-wage jobs
U.S. exports skill intensive goods: lower trade costs and increased trade will...
-increase foreign demand for these goods -increasing domestic supply of these goods -increasing demand for domestic skilled workers -increasing wages for domestic skilled workers
U.S imports low-skilled intensive goods: lower trade costs and increased trade will:
-increase imports of these goods -decreasing domestic supply of these goods -decreasing demand for domestic low-skill workers -decreasing wages for domestic low-skill workers
effects of subsidies
-increase the equilibrium quantity -increase the price
changing tastes shift demand
-increased environmental awareness has reduced demand for large SUVs -advertisers try to change tastes, shifting the demand curve -changes in fashion trends shift demand fro clothing choices
why are supply curves sloped upward?
-increasing marginal costs --at some point, producing each additional item comes at a higher marginal cost than the previous item -upward-sloping supply means: --price increases with quantity -if the price you're willing to sell is your marginal cost --implies: marginal costs are increasing with quantity
higher prices result...
-increasing quantity supplied -decreasing quantity demanded -eventually eliminating shortage
benefits of mass production
-incredibly specialized production lines -bargaining power for buying inputs
benefits are larger for....
-inelastic factor -the more elastic factor bears less of the burden of a tax
marginal principle
-instead of "how many" and "one more?" -ex: how many workers should I hire?
how is monopsony like monopoly?
-instead of one seller (monopoly), there is one buyer
social insurance
-insurance: a payoff that occurs when bad things happen to protect against economic hardship -social: provided by the government
why is the quantity demanded higher when the price is lower?
-intensive margin --the cheaper something is, the more each customer buys -extensive margin: --the cheaper something is, the more customers you get
expectations
-interdependence principle: --your choices are linked through time -buying tomorrow is a substitute for buying today --if the price of an Apple watch is expected to fall in a month --decreases demand for apple watches today
why does the elastic factor bear less of the burden?
-intuition: the only way to avoid paying soda taxes is to reduce the quantity you buy or sell --the more your quantity declines in response to taxes, the more of the tax you will avoid --price elasticity measures this responsiveness --relatively more elastic = relatively more successful at avoiding the burden -intuition: the elastic factor can "get out of the way" of taxes --by changing quantities --leaving the inelastic factor to bear the burden
quota
-is a maximum quantity of a good that can be bought or sold -examples: --zoning laws --immigration laws --anti-polygamy laws --environmental regulation
effiiciency of leaky bucket metaphor
-is about maximizing total economic surplus --measured in dollars, not wellbeing
producer surplus
-is the economic surplus you get from selling something -price-marginal cost
risks you would like to insure against...
-job loss --unemployment insurance -injury and inability to work --worker's compensation -outliving your savings --social security -large medical bills --health insurance -being born without marketable skills --progressive taxes and cash transfers
market demand curve
-just a set of plans -the quantity people plan to buy, depending on the price -"holding other things constant" -if other things change --people's plans will change --the market demand curve will shift -what are these "other things" that might change? --apply the interdependence principle
individual demand curve
-just a set of plans "holding other things constant" -the quantity you plan yo buy, depending on the price -if other things --your plans will change --your demand curve will change
following the rational rule for buyers means..
-keep buying until price = marginal benefit -(this is the rational rule, applied to buyers) -it leads you to take every chance to increase your surplus
following the rational rule for sellers means...
-keep selling until: price = marginal cost -(rational rule applied to suppliers) -following this rule will maximize your profit -it leads you to take every chance to increase your profit -the theory of supply is the theory of marginal costs
implication of rational rule for employers
-labor demand is all about the marginal revenue product of labor
implication of rational rule for workers
-labor supply is all about the marginal benefit of leisure
the opportunity cost of work is...
-leisure
social security insures you against...
-living longer than expected and exhausting your savings -outliving your family's primary breadwinner -failing to save enough
disequilibrium symptoms
-long lines: increased the "effective" price because people had to queue -bundling to raise the price: increases the price if you didn't want the add-ons -secondary market prices: emerged as people sold the item on another site for more than they paid
examples of price ceilings
-rent control apartments -limits on uber surge pricing -"usury laws" -anti-price gouging laws
effects of a price ceilings
-lower prices (if binding) -decrease in the quantity supplied -increases in the quantity demanded -shortages result -disequilibrium forces increase the "effective price," partly undoing the price regulation --extra hassle to find available apartments --potential tenants pay "finder's fees," raising the cost --pay bribes to landlord to choose you --landlord refuses to do repairs --black market emerges: sublets, airbnb
keep producing until....
-marginal benefit equals marginal cost (demand curve) (supply curve)
keep hiring until...
-marginal revenue product = wage
how are markets organized?
-markets bring buyers and sellers together -posted prices -open outcry -online -auction
internal markets
-markets that managers set up within a company to buy and sell resources -feeding america set up an internal market
implication
-maximizing total well-being involves redistribution since the poor value an additional $1 than the rich --take money from the rich who get little marginal benefit from it --give it to the poor who get a large marginal benefit --implies total (and average) well-being rises
what is declining?
-measured poverty IS NOT declining -actual poverty IS declining
benefit of redistribution
-moves money to those who benefit more from it
cost of redistribution
-moving that money is costly --the redistributive bucket leaks
implications of negative externalities
-negative externalities are over-produced -there is still a socially-optimal quantity of pollution --if there were no trade-off: no pollution is best --but pollution is a by-product of a productive activity --trade off between: useful gasoline versus harmful pollution
other people's buying decisions
-network effect: --when a good becomes more useful because other people use it --increased use by others will increase demand --tik tok -congestion effects: --when a good becomes less useful because other people use it --roads, prom dresses
necessities
-no good substitutes are available, and doing without isn't a good option --we do not change quantity much when price changes
income
-normal & inferior goods
if american workers are competing with cheaper labor, does this mean american wages will fall?
-not all workers are equal: --average american manufacturing worker is 12x more productive than his or her chinese counterpart --firms are willing to pay american workers 12x more
a disincentive to work...
-not very generous in the U.S. -subject to work requirements -much bigger deal in other countries
poverty recurs...
-over half who escape poverty today will return within 5 years
negative externality problem
-people make decisions without taking full account of the cost imposed on others -guided by private costs rather than social costs -leading them to do these activities more than is in society's interest
behavioral economics
-perceptions and salience matter --you need to be aware of something to react to it: ---are workers or businesses more likely to notice the social security tax ---if a tax cut falls in the forest and nobody hears, did it really have an effect?
what is adverse selection a problem of?
-private information problem
alternatives to social insurance
-private insurance markets with no private information --house insurance -private insurance that is mandatory --obamacare --third-party car insurance -personal savings --saving for a rainy day -informal insurance --marriage and family
median spell of poverty
-probably around half a year
limiting trade national security concerns
-probably don't want to rely on other countries to manufacture defense weapons
corrective taxes (and subsidies)
-problem: people ignore external costs (and benefits) -solution: [substitute an incentive that people ignore (external costs) with one that they don't ignore (taxes or subsidies) -even if people ignore external costs to bystanders, they pay attention to prices -negative externalities: corrective tax equal to the external cost -positive externalities: corrective subsidy equal to the external benefit -the tax or subsidy leads people to act as if they internalize the externality
rational rule for society
-produce more of a good if its marginal social benefit is greater than (or equal to) the marginal social cost -keep producing until: marginal social benefit = marginal social cost
efficient production
-producing a given quantity at the lowest possible cost --requires each good is produced by the lowest marginal producer
efficient quantity
-producing the quantity that produces the largest possible economic surplus --rational rule for markets: produce until marginal benefit = marginal cost
utilitarian
-promote the greatest happiness for the greatest number
limiting trade: infant industry
-protecting an industry can help it develop... --learning-by-doing as a source of comparative advantage --time-limited protection that is to be removed when the industry globally competitive -opponents argue: --infant industries rarely mature and remain reliant on protection --infant industries develop political capital and demand more protection
why license?
-public policy: safety -economics: licensing limits the supply of workers in an occupation, increasing the wage
no-trade equilibrium occurs where...
-quantity demanded by domestic buyers equal quantity supplied by domestic sellers
price of other goods
-substitute goods: --replace each other (iphones & androids) --demand increases when the price of substitute goods rise -complementary goods: --goods that go together --demand decreases when the price of complementary goods rise -when the price of taxis falls: --i take the buss less (substitute for taxis) --i go out with my friends more (complement for taxis)
examples of specialized skills
-swiss make great watches -french
comparative advantage
-the ability to carry out a task at a lower opportunity cost than other tasks -do use this
absolute advantage
-the ability to carry out a task more efficiently than other people -don't use this
absolute poverty
-the adequacy of resources relative to an unchanging standard -world bank: $1.90 per day (used to be $1 per day in 1988, than $1.25 per day in 2005) -U.S official poverty is absolute measure (3x basic food needs)
relative poverty
-the adequacy of your resources relative to others in your society -a measure of social inclusion -OECD uses 60% of median income
total producer surplus
-the area above the supply curve and below the price, out the quantity sold
substitution effect
-the bang-for-your-buck of gas rises (relative to the next best alternative)
substitutes (cross price elasticity)
-the cross-price elasticity of demand is positive -an increase in the price of a rival brand of cookies increases the quantity demanded for your brand
extrinsic motivation
-the desire to do something for its external rewards
intrinsic motivation
-the desire to do something for the enjoyment of the activity itself
intergenerational mobility
-the extent to which the economic status of parents determine outcomes for their children -about 1/2 of the economic advantage or disadvantage of your parents will go to you -the U.S. has less mobility than many other advanced democracies
trade costs
-the extra costs incurred as a result of buying or selling overseas, rather than domestically -examples: --shipping costs --taxes to U.S. government on imports or to foreign governments on exports --opportunity costs of working across language barriers and time zones
what determines worker's wage?
-the forces of supply and demand --determine the wage --and total employment
poverty rate
-the fraction of people whose family income is less than the official poverty line -currently 12.3% (2017)
adverse selection
-the greater the likelihood of something happening, the more likely someone is to buy insurance
intensive margin
-the higher the price, the more each seller produces
extensive margin
-the higher the price, the more sellers enter the market (and lower prices cause loss-making firms to exit the market)
number and types of buyers
-the individauls in the market are changing --doesn't shift individual demand --does shift market demand -more buyers increases demand
downward slopping individual demand curve
-the lower the price, the higher is the quantity demanded -the cheaper something is, the more you buy
minimum wage
-the lowest hourly wage that employers are allowed to pay
law of diminishing marginal utility
-the marginal product of an input declines as you use more of that input -eventually additional workers will yield smaller increases in output -does not mea extra inputs reduce output
the invisible hand
-the market achieves an efficient outcome despite the fact that no market participant is trying to achieve that goal -
common resource problem
-the more i take, the less is left for you
elastic
-the percent change in quantity is larger than the percent change in price -% change in quantity / % change in price is greater than 1 -quantity responds a lot
inelastic
-the percent change in quantity is smaller than the percent change in price -% change in quantity / % change in price is less than 1 -quantity responds a bit (but not much)
equilibrium
-the point at which there is no tendency for change --occurs when quantity demanded equals quantity supplied ---where supply and demand curves cross ---forces of demand and supply are in balance --forces pushing prices to rise balanced by forces pushing prices to fall --neither suppliers nor demanders have an incentive to change --every seller who wants to sell an item can find a buyer --every buyer can find a potential seller
law of supply
-the quantity supplied is higher when prices are higher
labor supply
-the time you spend working in the market
economic surplus
-the total benefits minus total costs flowing from a decision -measures how much your decision has improved your well-being
opportunity cost
-the value of the next best alternative that's given up to acquire that good or service -your decision should reflect the opportunity cost, rather than the simple out-of-pocket financial costs
price floor creates
-useful redistribution -misallocation to inefficient producers -surplus production
costs of redistribution
1. administrative costs 2. taxes reduce the incentive to work 3. means-tested programs raise effect marginal tax rates: --the amount of each extra dollar of earnings that you lose to higher taxes or lower benefits --reducing the incentive to work 4. moral hazard leads people to make riskier choices --drop out of school, unprotected sex 5. tax avoidance, tax evasion and welfare fraud --the economic cost is the effort put into these activities --the actual avoidance/evasion/fraud is "just" a transfer 6. wasteful lobbying by interest groups
3 steps to discovering your comparative advantage
1. determine how long each task would take each person --measures the cost in hours 2. evaluate the opportunity cost (of each person in each task) --how much of the alternative good could you have produced? 3. identify who has a comparative advantage (at each task) --who can complete a task at the lowest opportunity cost?
market failure is common...
1. firms are not always price-takers --problem of market power 2. there are side effects on others --problem of externalities 3. people are not always well informed --problem of asymmetric information 4. people make bad choices --problem of irrationality 5. government regulations impede markets --problem of government failure
6 factors shifting market demand curves
1. income 2. tastes 3. price of other goods 4. expectations 5. network and congestion effects 6. the number and type of buyers --changes the scaling factor in moving from individual to market demand
what determines the price elasticity of supply?
1. inventories make supply more elastic --the quantity supplied can be adjusted, even if is difficult to adjust production 2. easily available inputs make supply elastic --can easily expand production 3. extra capacity makes supply elastic 4. easy entry and exit make supply more elastic --when prices rise, new businesses may enter the market --when prices fall, some businesses may exit the market 5. over time, supply becomes more elastic --short run: can purchase more variable inputs --long run: can build a new factory --very long run: research and development on new products (electric cars)
how to analyze price or quantity regulations
1. is the regulation binding? --does it establish... ---a price floor above the equilibrium price? ---a price ceiling below the equilibrium price? ---a quota below the equilibrium quantity? ---a minimum quota above the equilibrium quantity? if not: the regulation will not impede market forces 2. if binding, the regulation has force: --price is determined by the price regulation --quantity is determined by quantity regulation --if not binding: price and quantity reflect supply-equals-demand equilibrium 3. non-regulated outcome determined by: --price regulation: quantity is determined by market forces ---minimum of quantity demanded and quantity supplied --quantity regulation: price is determined by competition among buyers and sellers ---maximum quota on sellers or minimum mandate on buyers: shortage leads pirce to be bid up
3-step recipe for predicting market outcomes
1. is the supply or demand curve shifting (or both)? 2. is that shift an increase (shifting the curve to the right) or a decrease (shifting the curve to the left)? 3. how will prices and quantities change in the new equilibrium?
what determines the price elasticity of demand?
1. more competing products mean greater elasticity 2. specific brands tend to have more elastic demand than categories of goods 3. necessities have less elastic demand --necesstities: no subsitutrs exist --necessities: going without isn't a substitute 4. consumer search makes demand more elastic 5. demand gets more elastic over time --more substitutes become available over time --there's more time to adjust
the case for limiting international trade
1. national security 2. infant industry 3. unfair competition and anti-dumping 4. domestic regulations 5. saving jobs
3 steps for analyzing externalities
1. predict the equilibrium outcome --supply = demand equilibrium --demand curve: marginal benefit to buyers --supply curve: marginal cost to sellers 2. assess what externalities are involved --negative externalities: supply curve doesn't reflect all social costs --positive externalities: demand curve doesn't reflect all social benefits 3. evaluate what outcome is in society's best interests --where marginal social benefit = marginal social cost
prices play 3 central roles
1. prices are a signal 2. prices are an incentive (people respond to price signals because of incentives) 3. prices aggregate information
sources of comparative advantage
1. relatively abundant inputs 2. specialized skills 3. mass production
what shifts labor demand?
1. shifts in demand for your output 2. changes in the capital stock 3. management techniques and technological progress
4 steps to estimate market demand
1. survey your customers --ask them about the quantity they demand at each price 2. add up the total quantity demanded --yielding the total quantity demanded at each price 3. scale the quantities demanded by the survey respondents, so that they represent the whole market --multiply the survey demand by size of the market/size of the survey 4. plot the market demand curve --the total quantity demanded by the market at each price
3 steps of assessing the effects of international trade
1. what price will a traded good sell at? --world price adjusted for trade costs 2. what quantities will domestic sellers and buyers supply and demand at this new price? --check domestic supply and domestic demand curves 3. what quantity will be traded? --the gap between domestic supply and domestic demand is made up by international trade
relative abundant inputs
= lower opportunity cost
labor is...
a derived demand
price ceiling
a maximum price that sellers can charge
elasticity
a meausure of responsiveness
price floor
a minimum price that sellers can charge
subsidy
a negative tax
social costs
all costs, no matter who bears them
increased speculation led to....
an increase in demand for housing
market
any setting that brings together potential buyers ("demanders") and potential sellers ("suppliers")
your own choices
are interdependent because you have limited resources
elasticity and slope...
are not a percentage change
gains from trade
benefits from reallocating resources to better uses
interpreting market data
changes in prices and quantities can reveal whether demand or supply changed
predicting market changes
consequences of shifting demand and shifting supply
economic surplus gained from any single transaction
consumer surplus + producer surplus
when prices and quantity move in the same direction...
demand shifted
comparative advantage...
drives specialization
statutory burden of social security
half paid by workers, half paid by employers
the marginal rule
if something is worth doing, keep doing it until your marginal benefits equal your marginal costs
income-elastic goods
income elasticity is greater than 1
income-inelastic goods
income elasticity is positive but less than 1
Does elasticity = slope?
no
total revenue
price * quantity
what are markets organized through?
prices
rational rule for markets
produce more of a good if its marginal benefit is greater than (or equal to) the marginal cost
perfectly inelastic
quantity does not respond at all to changes in price (E=0)
if labor demand is elastic....
raising the minimum wage causes a massive decline in employment
if labor demand is inelastic...
raising the minimum wage causes a tiny cut in employment
switching brands when price change is easy....
so demand is elastic
economic efficiency
the more economic surplus that's generated, the better the outcome
economic efficiency
the more economic surplus that's generated, the better the outcome 1. distribution also matters, so you also need to account for equity 2. willingness to pay reflects ability to pay 3. the means matters, not just the ends --efficiency is consequentialist --other philosophical approaches focus on processes
the more responsive quantity demanded is to a change in price...
the more elastic is the demand curve
the more responsive quantity supplied is to a change in price...
the more elastic is the supply curve
socially optimal
the outcome that is in society's best interests, accounting for the costs and benefits to buyers, sellers, and also bystanders
efficient outcome
the outcome that yields the largest possible economic surplus
equilibrium price
the price at which the market is in equilibrium
equilibrium quantity
the quantity demanded and supplied in equilibrium
law of demand
the quantity demanded is higher when prices are lower
law of supply
the quantity supplied is higher when prices are higher
higher wages lead..
to an increase in the quantity supplied
interdependence principle
to fully account the consequences of your decisions, account for: -1. how your decisions interact with your other choices -2. how your decisions depend on the choices of other people in the market -3. how the decisions in one market depend on other markets and -4. how today's decisions depend on past and future decisions
the opportunity cost of work is...
unemloyment
luxuries
we are most sensitive to price changes
positive economics
what is is
normative economics
what ought to be
market failure
when the forces of supply and demand lead to an inefficient outcome
your individual supply curve is...
your marginal cost curve