ECON 3048 Exam 1
In a competitive market, to whom is coffee allocated?
Those with the highest willingness-to-pay (i.e., those who value it the most)
Can think of the total surplus in the coffee market as the ______________________ accruing to individuals in society from the coffee market
Total Net Benefit
Consequentialist Ethics
focuses on the consequence • Is the baker losing but the children being fed a good or bad outcome?
Virtue Ethics
focuses on the individual (is Jean good or bad?)
Consumer surplus (CS)
gains from trade accruing to demand side
Producer surplus (PS)
gains from trade accruing to supply side
3 fundamental concepts of ethics
good right ought
Briefly describe how Karl Popper viewed scientific advancement. Briefly explain.
not finished
Briefly explain "government failure". Give an example of your own, not discussed in the slides or in class, to illustrate.
not finished
Economic Agents
Individual or group that makes a choice
From an economist's perspective, does it matter that one is better off than the other?
No
Scarcity implies
Opportunity Cost
Ohio increases the sales tax on retail goods by 1%. What happens to retail sales purchases?
People will be more likely to opt out of purchases if the 1% tax increase creates a higher total cost than total benefit.
Give your own examples of both a "positive" statement and a "normative"statement that were not in the slides or discussed in class. Briefly explain why each of your examples is, respectively, appropriate.
Positive statements are what is. Normative statements are what should be. (not finished)
normative economics
Prescribes what people should do • "Ought" • Subjective • Is the outcome "good" or "bad"? • Makes a value judgment "We should blow up the moon."
In economics we assume
ceteris paribus, i.e., all else equal
Marginal Benefit Equation
change in total benefit/change in quantity
Marginal Cost Equation
change in total cost / change in quantity
pareto improvement
change that makes someone better off and nobody worse off (winning the lottery)
Scarcity
"Society" has limited resources • Unlimited wants
Economics
"the science which studies human behavior as a relationship betweenends and scarce means which have alternative uses"
minimum wage elasticity of employment
(% change is employment/ % change is minimum wage)< 0
If George values chicken at $7.50 per meal and chicken costs $5, how much is George better off?
+$7.50−$5.00 George is $2.50 better off
How can the government encourage people to live healthy lifestyles? Think like an economist.
-health insurance discount -any money incentive -work with farmers to lower prices for organic foods
Ohio State is compensated from the state based on its graduation rate. How can Ohio State increase its graduation rate? Think like an economist.
-make classes easier to pass -accept a higher percentage of more promising students
How can the US Department of Education get more college students to major in STEEM fields? Think like an economist.
-offering STEEM specific scholarships -STEEM youth programs -more STEEM opportunities
Homo economicus
Agents are self-interested optimizers
Baseline Economic Model
Agents have some objective function they're trying to optimize
First Fundamental Theorem of Welfare Economics
All competitive market equilibria are Pareto efficient
Competitive equilibrium
At the market price, the quantity of coffee demanded per week equals the quantity of coffee supplied per week all agents are optimizing Since everybody is optimizing, nobody has an incentive to change their behavior • Not all equilibria are socially-desirable • Example: Child labor in the 19th century • Child labor drives down wages• b/c wages are low, children need to work • If a single household removes children from the workforce, the household is worse off
Procedural rationality
Behavior depends on the process that generated it • "Rationality" > somebody has thought about the behavior • "Irrationality" > impulsive response w/o intervention of thought • This is what many others mean by "rationality"
Substantive rationality
Behavior that is appropriate to the achievement of given goals within the given limits & constraints • This is what economists mean by "rationality" • Maximize objective function subject to constraints
Tragedy of the commons
Common pool resources: high rivalry, low excludability • Common pool resources > overuse > MB↓ • e.g., free WiFi at the airport • If everybody can use it, then nobody can benefit!
Positive economics
Describes what people do • "Is" • Objective • What is the outcome? • Makes a scientifically testable prediction "The moon is made of green cheese."
Demerit goods
Goods & services that are bad in and of themselves for the consumer • Individuals consume the improper amount of demerit goods because they maybe misinformed, irrational, stupid, or morally bankrupt • e.g., heroin, prostitution, cigarettes, sugary beverages, gambling
Merit goods
Goods & services that are good in and of themselves for the consumer • Individuals might not consume the proper amount of merit goods because they may be misinformed, irrational, stupid, or morally bankrupt • e.g., health insurance, education, religion, smoke detectors, motorcycle helmets
Minimum wage regulation (pricefloor on labor)
Government makes it illegal to sell/buy labor under the minimum wage
Market failure: imperfect information
If buyers (or sellers) don't have perfect information, a market might not exist at all or people may not be able to purchase goods and services that make them better off
Coase's Coase Theorem
If transaction costs are high, markets DO NOT allocate economic resources to those who value them the most. In this case, initial property rights WOULD matter for efficiency.
The Second Best theorem
In a world of multiple market failures, it's unclear that remediating a distortion in one market will result in a more efficient outcome • Example: monopoly polluter • Monopoly restricts output →inefficiency • Pollution is a negative externality →inefficiency • On the one hand, if government breaks up the monopoly, 𝑄 ↑→move toward efficiency • On the other hand, 𝑄 ↑→pollution ↑→ move away from efficiency • On net, may move toward or away from the efficient allocation • Cannot generalize policy advice and argue that all monopolies should be broken up
T/F: answers to ethical questions are matters of opinion
F; The study of ethics applies reason and logic to these debates: • What one believes • Why one believes it • Can form arguments, examine premises, use logic/reason to come to a consensus
Thomas Kuhn
Scientific revolutions occur when there is a paradigm crisis • An increasing recognition of the problems from an accumulation of falsified theories • Assumptions reexamined • New paradigm emerges
Arrow's Impossibility Theorem:
There is no way to aggregate pluralistic individual preferences into a social preference function without violating some aspect of democratic fairness
T/F: If government implements a (relevant) minimum wage in a competitive labor market, then firms will reduce their employment
T
Total Net Benefit Equation
TNB= TB (total benefit) - TC (total cost)
Total surplus (TS)
TS = CS + PS
Stigler's Coase Theorem
The initial allocation of property rights doesn't matter for efficiency. Competitive markets allocate economic resources to those who value them the most.
The Federal Reserve bank announces that it will double the number of economists it hires over the next few years. What happens to the number of students majoring in economics?
The number of economics majors will increase because they expect more job opportunities
Three major approaches to ethics
Virtue ethics Deontological ethics Consequentialist ethics
What ethics are we focusing on?
Western Moral Philosophy
Not enough information (Economist Friedrich Hayek)
Without a market to put a value (price) on a good or service, how is the government supposed to know how much to produce relative to the alternatives?
Pareto improvement
a change in allocation that makes at least somebody better off without making anybody worse off
Oligopoly
a market with a few sellers • e.g., a duopoly market has two sellers
Monopsony
a market with one buyer
Monopoly
a market with one seller
economic models
a simplification of how the world works. They are meant to understand reality by making predictions.
Voluntary exchange is mutually-
beneficial
buying goods manufactured by child labor in developing economics brings about what?
coercion/exploitation objectification slippery slope
If a market is _________________, then it delivers an efficient outcome (First Welfare Theorem) and there is no market failure.
competitive
Suppose that a competitive, free market produces unaffordable prices and inequality in consumption. Is this result a market failure? Briefly explain.
definition question. Markets fail when we get an inefficient outcome. What is an inefficient outcome? not finished
Increasing returns to scale
doubling inputs more than doubles output
Law of Increasing Opportunity Cost
each additional increment of one good requires the economy to give up successively larger increments of the other good
Firms that exhibit increasing returns to scale have _______________________ (average cost falls as they produce more)
economies of scale
Excludability
firms can easily make people pay
Deontological Ethics
focuses on the action • Is stealing (in-and-of itself, i.e., separate from the consequences) right or wrong?
Biff desperately needs money to buy food to feed his family. To earn money, he works a very difficult and unsafe job in a uranium mine for very little pay. Is Biff better off or worse off from this transaction? Briefly explain.
he is better off because he would not be working there if he wasn't. He is better off than to not work. not finished
Pareto efficiency
if nobody can be made better off without making somebody worse off • Sometimes called allocative efficiency An economy can be Pareto optimal but still "perfectly disgusting" from an ethical perspective
larger firms have a ________ per average cost than smaller firms
lower
Optimum is where
marginal benefit = marginal cost
Positive externality
market transaction has a positive effect on a third party • When the total social benefits of the transaction aren't included in agents' decision making, the market produces too little of a "good" thing • e.g., vaccinations
Negative externality
market transaction has an adverse effect on a third party • When the total social costs of the transaction aren't included in agents' decision making, the market produces too much of a "bad" thing • e.g., pollution
imperfect information
may lead to market failure
Government is inherently ___________________, without market forces to punish suboptimal behavior
monopolistic
Rivalry
my enjoyment prevents your enjoyment
second best theorem
need to avoid the nirvana approach. fixing one market failure doesn't necessarily fix everything.
Would a rational optimizer knowingly engage in an exchange that makes him/her worse off?
no
Make the case that cigarettes are a demerit good with negative externalities. Briefly explain. (It should be apparent from your answer that you know what demerit goods and negative externalities are.)
not finished
Set aside your own opinion on the matter and make the case that live organsales are a repugnant transaction and should be banned. Briefly explain.(Your answer should reflect your understanding of repugnant transactions.)
not finished
Set aside your own opinion on the matter and make the economic case that live organ sales should be legalized. Briefly explain. (Your answer should reflect your understanding of economic arguments.)
not finished
Goodhart's law
once a measure becomes a target, it ceases to be a good measure
stagflation
persistent high inflation combined with high unemployment and stagnant demand in a country's economy.
markets
places in time/space(can be abstract) where individuals exchange economic resources with one another
Market failure: public goods
rivalry and excludability
Roth: the law seeks to limit what some consider a _______________ transaction
repugnant
nirvana approach
the grass is always greener fallacy, the fallacy of the free lunch, and the people could be different fallacy
Transaction costs
the costs of participating in the market (not the market price!) • Search• Evaluation• Enforcement • e.g., buying a used car Higher transaction costs > fewer than socially-optimal transactions
Opportunity Cost
the next-best thing an agent gives up when making a choice
Economic resources
things that people want
The National Highway Traffic Safety Administration requires all car manufacturers to install a pointy metal spike protruding out of all steering wheels and aimed at the driver's heart ("Tullock's spike").What happens to traffic accidents?
traffic accidents will decrease because people will be less likely to drive.
Bureaucrats and politicians are ______________ maximizers
utility
Doing economics, economic analysis involves __________ judgments
value
Nirvana Approach
we live in an imperfect world. If we compare this imperfect world against an ideal perfect world. We see that it's imperfect. However, an ideal perfect world is not the relevant next best thing to compare. We need to compare to a comparative institution approach in which the relevant choice is between alternative real institutional arrangements.
Briefly describe Dierdre McCloskey's view on what economists "do". Briefly explain.
what we are doing as econ is not science, it is rhetoric. Trying to persuade to our way of doing things. Innovation and tech change raise productivity. not finished
Market failure
when markets do not deliver an efficient outcome • This occurs with any violation of the many competitive assumptions • There are many such instances • They MAY justify government intervention
winner or losers
who is better off after the transaction?
Macroeconomics
• Aggregate behavior in the economy • Economy-wide approach • Example topics: • Unemployment • Inflation • Economic growth • Business cycle
Law of One Price
• All sellers charge the market price • All buyers pay the market price
Duhem-Quine Thesis
• Auxiliary hypothesis are required to do empirical testing. • Therefore, we can only falsify sets of hypotheses Consequently, • Individual hypotheses are seldom falsified • General theories are seldomfalsified
Microeconomics
• Decision-making of individuals, firms, organizations, etc. • Focus on small parts of the economy, a few markets • Example topics: • Consumer choice • Minimum wage • Monopoly power
Law of Demand
• Demand side: buyers, consumers • For most goods & services, an inverse relationship between market price and quantity demanded: • Substitution effect • Real balances effect • Diminishing marginal benefits
Dierdre McCloskey
• Economics is rhetoric • Argument & persuasion • NOT a value-free scientific endeavor • Economists "make knowledge" • Socially-contingent upon • Operation of the scientific community • The times • Biases & ideologies of researchers • Historical development • The context of issues • Technical capabilities of scientists
Government Intervention: public goods
• Government provision of public goods • Are these "pure" public goods? • Fire protection• Police protection• Education • Just because the government provides a good does not make it a "publicgood"! • Just because a good is not "pure" public good, doesn't mean the government shouldn't provide it! (e.g., externalities)
Solutions to Common Pool Resources
• Government regulation to make people pay • e.g., radio stations, water rights • Pigouvian taxes • e.g., fisheries • Privatization (where possible) • e.g., forestry • Private solutions • Ethics• e.g., group projects in college • Community self-regulation• e.g., open-field agriculture
Characteristics of a Perfect Market
• Many sellers • Many buyers • "Law of one price" • An individual seller or buyer's actions DO NOT affect the market price • No product differentiation • No non-market institutions • No third-party effects • All goods are private goods • Rival in consumption • Excludable • Agents are rational, self-interested optimizers • Perfect information • No transaction costs• & others...
Market-clearing price
• No unsold supply (glut) • No unmet demand (shortage)
Instrumentalism- Milton Friedman
• Positive economics should not explain, only predict. • "Realism" of theories doesn't matter • Evaluate theories on predictive power • Related idea to Popperian falsification
Government Intervention: Externalities
• Price & quantity controls • Mandate the socially-efficient price/quantity • Example: cap & trade (acid rain) • Government provision of goods with positive externalities • Example: primary education • Market-based approaches • Pigouvian taxes (negative externalities) • Example: carbon taxes • Pigouvian subsidies (positive externalities) • Example: college financial aid
Government intervention: monopoly & oligopoly
• Price regulation • Antitrust • Government ownership
What determines an individual's willingness-to-pay for coffee?
• Prices of other goods (substitutes/complements) • Individual's real income (normal goods/inferior goods) • Individual's tastes & preferences
The Invisible Hand
• Rational self-interest in a competitive market > efficient outcome • Technical efficiency (efficiency in production) • Maximum gains from trade • Pareto efficiency (allocative efficiency) • CAUTION: Conditional on a perfectly competitive market • Not all markets deliver an efficient outcome
Imre Lakatos
• Sciences is the evaluation of research programs • Clusters of interconnected theories • Progress: • Programs generate additional empirical implications • Theoretically explain the previously unexplainable "Hard core" of believed-to-be "irrefutable" hypotheses
Law of Supply
• Supply side: sellers, producers • For most goods & services, a positive relationship between market price and quantity supplied: • Diminishing factor quality • Diminishing marginal productivity • Law of Increasing Opportunity Cost
market power
• Their actions affect the market price • They produce less than the efficient outcome • This allows them to raise prices to raise profits
The economic method
• Use theory to build an economic model • Use the model to make predictions • Test against empirical evidence
