Econ 201 Midterm

How is an allocation of resources efficient?

An allocation of resources is efficient if it is feasible and there is no way to make someone better off without making someone else worse off

First Welfare Theorem (long explanation)

Assume the market structure is perfectly competitive (no monopolies or oligopolies) Assume there are no externalities (such as pollution) Then the unregulated market (laissez-faire - free market) allocation is Efficient. It maximizes the size of the social pie

Pricing problem example

Should you charge $5 or $10 for your fruit smoothie at the Saturday Market

Example of opportunity cost

Something along the lines..: Opportunity cost to go to college is very high (paying lots of money for an education)

Price of other goods substitute vs complement

Substitute: use in place of: P substitute Increases implies Q^D increases Complement: use together with: P complement increases implies Q^D Ex. corn: butter, cars that run on ethanol

When does the equilibrium move

The equilibrium moves when the supply or demand curve shifts Curve shows the relationship between quantity and price.. So a shifter must be something that changes that relationship (the other determinants of supply and demand)

The production possibility frontier (ppf)

The graph that shows the tradeoff between producing two different good Shows all of the combinations of those 2 goods that an individual, group, or society can possibly produce

competitive market

a market in which there are many buyers and many sellers so that each has a negligible impact on the market price

most economists believe that tariffs are

a poor way to raise general economic well-being

Incentive

a positive or negative environmental stimulus that motivates behavior

an economic model is..

a simplified representation of some aspect of the economy

autarky

a situation in which a country does not trade with other countries

Marginal change

a small, incremental adjustment to a plan of action

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

Circular flow diagram

a visual model of the economy that shows how dollars flow through markets among households and firms

Buyers (as a group) determine the

demand for the product

Pricing problem

depends on how many people are willing to buy it at that price

Coordination game

depends on who else makes the same decision

factors of production

land, labor, capital

Willingness to pay

maximum amount a buyer will pay (how much the buyer values the good)

is the influence on the government budget deficit on economic growth a topic within the study of microeconomics

no

e=0

perfectly inelastic demand P falls by 10%, Q changes by 0% PED= (%changeQ) / (%changeP) = (0%) / (10%) = 0 D curve: vertical, Consumers' price sensitivity: None, Elasticity: 0

externality example

pollution

Equilibrium price

price where the quantity supplied equals the quantity demanded (P^E)

Equilibrium quantity

quantity supplied demanded at the equilibrium price (Q^E)

Market economy

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

what does the production possibility frontier (ppf) depend on

available factors of production (resources) and technology

Price of other goods (demand shifter)

substitutes for the original good (ex. corn syrup instead of using sugar)

Market demand

sum of all individual demands for a good service

Market demand curve

sum of the individual demand curves horizontally. To find the total quantity demanded at any price we add the individual quantities

Sellers (as a group) determine the

supply of the product

allocation

the action or process of allocating or distributing something - "Money from the sale of the house was allocated to each of the children"

quantity demanded

the amount of a good that buyers are willing and able to purchase

trade

the basis of economic activity

Marginal buyer

the buyer who would leave the market if P were any higher (height of D curve)

law of supply and demand

the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

law of supply

the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises

Why are we are concerned with how the equilibrium moves when supply and demand changes ?

we care about this because it tells us what the outcomes and allocations are

Pareto optimal

when a market is in equilibrium, with no external influences and with no external effects.

Tariffs

which are taxed on goods produced abroad and sold domestically

a point inside the production possibilities frontier is

feasible but not efficient

Welfare economics studies..

how allocations affect well-being

consumer tatstet (demand shifter)

how much we like/dislike a good (advertisements/where you live)

total surplus

in a market TS=CS+PS (total surplus equals value to buyers minus cost to seller)

Reservation price

there is a maximum amount I am willing to pay

First Welfare Theorem

under certain conditions, a competitive equilibrium is Pareto optimal

e=1

unit elastic demand P falls by 10%, Q rises by 10% 10% / 10% = 1 D curve: intermediate slope

Example of marginal change

"Should I leave the party now or wait another 10 min to see if someone I know shows up"

Normative statements example

"The government should raise the minimum wage" Opinion statements

from the first welfare theorem we get statement: if market allocation is efficient why do we need government at all

1. Set up the marketplace 2. Enforce contracts 3. Encourage competition 4. Might care about equity Also, may have a role for government when assumptions are violated..

which parts of government regularly rely on the advice of economists

1. department of treasury 2. office of management and budget 3. department of justice

price of inputs (supply shifter) 3 categories

1. labor: humans doing stuff 2. materials: stuff that is consumed by the process of creating that good or service 3. capital: stuff is used to create the good or service but is NOT consumed

households and firms interact in 2 types of markets

1. markets for goods and services (households are buyers and firms are sellers) 2. markets for factors of production (households are sellers, firms are buyers)

4 supply curve shifters

1. price of inputs 2. number of sellers 3. technology 4. expectations of producers

4 demand curve shifters

1. price of other goods 2. income 3. number of buyers 4. consumer tastes

the discovery of a large new reserve of crude oil will shift the ___ curve for gasoline, leading to a ___ equilibrium price

1. supply 2. lower

Perfectly competitive markets

All goods are exactly the same A market in which there are many buyers and many sellers so that the behavior of an individual buyer or seller has a negligible impact on the market price

consumer surplus

CS=WTF-P (amount the buyer is willing to pay minus the amount they actually had to pay). Is the area between the demand curve and the price

difference between curve shift and movement along curve

Change in demand: A shift in the D curve Occurs when a non-price determinant of demand changes (like income or # of buyers) Change in quantity demanded: Occurs when P changes A movement along a fixed D curve

Positive statement example

Confirm of refute by examining evidence: "minimum-wage laws cause unemployment"

technology (supply shifter)

Determines how many inputs are needed to produce a unit of output. If technology "goes up" we don't need as many inputs to produce the same output. Same effect as a fall in input prices. Shift to right

Coordination game example

Do you want to join Delta Gamma or Alpha Phi

e>1

Elastic demand (smart phones) P falls by 10%, Q rises more than 10% >10% / 10% = >1 D curve: relatively flat, consumers price sensitivity: relatively high, elasticity: >1

e<1

Inelastic demand (surgery, gas) Pretty vertical slope, but a little curve P falls by 10%, Q rises less than 10% PED = (<10%) / (10%) < 1

Equilibrium

Occurs when the quantity supplied equals the quantity demanded

income (demand shifter) normal vs inferior good

Normal good: when income goes up, demand increases (curve shifts to the right) (cars, computers, TVs - most goods) Inferior good: when income goes up, demand decreases (curve shifts to the left) (ramen noodles)

producer surplus

PS=Price-Cost the cost is the value of everything a seller must give up to produce a good - Profit=revenue-cost)

e=infinity

Perfectly elastic demand (very competitive markets - agriculture) P changes by 0%, Q changes by any % any% / 0% = infinity D curve, horizontal, consumers price sensitivity: extreme, elasticity: infinity

Rationality

Rational people systematically and purposefully do the best they can to achieve their objectives given the available opportunities

number of buyers (demand shifter) example

Suppose the population booms in Eugene then demand for goods and services is going to go up (shift to the right, individual demand schedules vs market demand schedule)

Opportunity cost

The cost of a choice is what you give up in order to get it

Positive statements

They are descriptive. Attempt to describe the world as it is

Normative statements

They are prescriptive. Attempt to prescribe how the world should be. Opinion statements

Our decisions are interdependent means..

We make decisions by thinking about decisions of others

number of sellers (supply shifter)

What happens if wheat farmers switch to corn?

Incentive example

When gas prices go up, more people choose hybrids over SUVs

Deadweight loss

the fall in total surplus that results from a market distortion such as a tax

Externality

the impact of one person's actions on the well-being of a bystander