Econ1

complementary goods

Products and services that are used together. When the price of one falls, the demand for the other increases (and conversely).

substitute goods

Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.

nterdependence principle:

your decisions affect your other choices, other people,other markets, past and future decisions, etc.

Economic Surplus

your total benefits minus your total cost; always greater or equalzero

Why redistribution works:

$1 taken from a rich person and given to a poorperson decreases rich person's utility by a smaller amount than the benefitexperienced by the poor person. Why? because of diminishing marginal utility

Figure 3 shows Jen's marginal benefit curve for Boba Tea. How many Boba Tea's is she willing to buy if the market price is $6.5? (Assume she cannot buy fractions of Boba Tea).

1 Boba tea

In the figure from Piketty and Saez (2003), the top 10% income share in 1947 was approximately____ and in 2012 it was approximately_____ .

35; 50

Other costs of redistribution

Admin costs (keeping records, determining who is eligible, etc)o Moral hazard: people make riskier choices if they have insuranceo People avoid and evade taxes, cheat to get access to benefits programso Wasteful lobbying by various interest groups

Cost-Benefit Principle

An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs. - Take into account the cost and benefits of any decision you face. Think of cost and benefits broadly, not only direct out-of-pocket costs. Pursue the choice if the benefits are at least as significant as the costs

When thinking about dinner decisions:

Deciding whether to have dinner is an extensive margin decision, while how much to eat is intensive margin

Marginal Principle

Decisions about quantities are best made incrementally. You should break "how many" questions into a series of smaller, or marginal decisions, weighing marginal benefits and marginal costs. Thinking on the margin, instead of asking whether or not you should buy something, or how many to buy, ask yourself, should i buy one more, should i do this one more time? Combining the marginal principle with the cost-benefit principle If YES, the benefit of one more unit is at least

It is well known that the 405 Hwy in LA is one of the busiest highways in the U.S. What happens to the number of cars (demand!) on the 405 as it becomes more congested?

Demand shifts to the left

Government interventions make outcomes more______ but less___________ .

Equitable; efficient

Normal goods

Goods for which demand goes up when income is higher and for which demand goes down when income is lower. higher income causes an increase in demand for normal goods. Quantity demanded increases

The marginal principle states that:

I should break Down "how much" decision into "on more?"

Opportunity cost principle states:

I should compare the benefit of this decision to the best alternative

The interdependence principle states that:

I should consider the effect of my decision on future decisions

My marginal benefit of buying a bouquet of roses is $7 and the cost of bouquet is $5. Which of the following statements is true?

I will compare this purchase to the best alternative use of $5

Anna is deciding whether she should buy a new set of headphones. If she orders the headphones online the cost is $250, which is also her willingness to pay. There is a store that sells the headphones for $230. Going to the store is costly. According to the Cost-Benefit principle:

If the cost of travelling to the store is less than $20, she will buy the headphones in the store

The Figure shows the market demand for eyeglasses. Which of the following can explain the shift in the demand curve from the Original demand curve to New demand curve:

Increase in the price of contact lenses

Figure 2 shows the market demand for tomato sauce. Which of the following can explain the shift in the demand curve from the Original demand curve to New demand curve:

Increase in the price of pasta

You are told to choose which of the following allocations is the fairest: (i) Anna gets $3, Mark gets $3, Susana gets $3 (ii) Anna gets $5, Mark gets $1, Susana gets $3 (iii) Anna gets $1, Mark gets $1, Susana gets $1 Which one would you choose if what you care most is equality of results?

Indifferent between Scenario (i) or scenario (iii)

Ella is trying to decide how many classes she should take this quarter. She already decided on two, and thinks the benefits of one more class won't outweigh the costs. Which of the following principles is she mostly using:

Marginal principle

Which of the following can happen due to Unemployment Insurances:

Moral hazard: individuals spend longer time unemployed with the insurance that they would have without it

The "death spiral" implies that:

Only the riskier individuals are left in the insurance market

Some individuals may perceive these goods as a good substitute for roses:

Other flowers

Marcel is deciding whether he should start going to the gym. The membership fee is $500. He already has workout clothes that he paid $150 for. It will take him a lot of willpower to go to the gym, which he values at $600. His benefit from working out is $1200. Marcel will:

Start going to the gym, because the benefits (1200) are equal or larger than the costs (1100)

Rose has a shoe company and is deciding how many shoes she should produce this quarter. Emma owns the other larger shoe producer in that industry. If Rose's marginal benefit depends on how many shoes Emma is producing, then according to the interdependence principle, Rose should:

Take into account Emma's production when deciding how much to produce

Figure 1: The following graph from Chetty, Hendren, Kline, Saez (2014) plots the Mean Child Income Rank vs. Parent Income Rank, for the US and Denmark.

The graph shows that an increase in parent's rank in the income distribution is associated with a larger increase in the child's placement as an adult in the US in comparison with Denmark

Figure 1: The following graph from Chetty, Hendren, Kline, Saez (2014) plots the Mean Child Income Rank vs. Parent Income Rank, for the US and Denmark.

The graph shows that an increase in parent's rank in the income distribution is associated with an increase in the child's placement as an adult, in both countries

Which of the following is an example of imperfect or asymmetric information?

When buying a car, you don't know if it has electric faults or not, and the seller does

interdependence principle

Your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future. When any of these factors changes, your best choice might change. Choices in an economy are not isolated. You have to account for everything else How your decisions interact with your other choices Choices of other people How they effect other markets How today's decisions depend on past and future choices.

Cost benefit principle:

buy/sell/do if benefits outweigh costs

Relative poverty measures:

easure adequacy of resources relative to others inyour society (relative to a median, for example)o There are large differences in poverty rates across groups of people: higherpoverty rates for minorities, children, single mothers, and unemployedo 1-in-7 is poor at any given moment in the U.S., but 1-in-2 experience poverty atsome point in lifeo Most poor are in long-term poverty (median duration > 8 years

Poverty rate

fraction of people below poverty line; approx. 12% in the U.S.

In presence of adverse selection, individuals with higher health insurance coverage:

have higher claims because they are less healthy

Opportunity cost principle:

he most valuable alternativeo Ex.: opportunity cost of studying more is not going out with friends, not workingduring those hours, etc.o Important: sunk costs are not opportunity costs and are irrelevant for decisions(a sunk cost is a cost that has already been incurred, irrespective of futuredecision is take

inferior goods

higher income causes a decrease in demand for inferior goods. Quantity demanded decreases

Poverty line

income level below which family is poor (does not have sufficientfinancial resources for basic life necessities such as food and shelter); varies byfamily structure

The interdependence principle highlights that my decision to buy a cup of coffee for $3 from Coral Tree Cafe:

may affect Coral Tree Cafe's existance in the future

Absolute poverty measures

measure adequacy of resources to maintain a basicstandard of living (as defined by a fixed $ cutoff)

Absolute poverty rate:

measures fraction of population with income below a fixed threshold

Marginal principle

nstead of "how many" ask "should I buy/sell/do one more?"

Poverty measures

ocus on poorest individuals, disregarding overall inequality

Moral hazard:

people make riskier choices if they have insurance (e.g. lesscareful driving, less careful about fire dangers in my house, less likely to fix oldpipes to avoid burst pipes, etc)o Moral hazard makes insurance provision more costly by increasing payouts

extensive margin

the cheaper something is, the more customers you get. Consumers who weren't buying will start to buy now; therefore, the demand will increase with lower prices.

intensive margin

the cheaper something is, the more each customer buys. Consumers who were already buying will buy more now, and therefore, demand increases with lower prices

If the price of cheese rises, then:

the quantity demanded of cheese decreases

Opportunity cost principle

the true cost of producing an additional unit of a good or service is the value of other goods or services that must be given up to obtain it The most valuable alternative you are giving up to get it Resources are scarce = with every decision you make, you are giving up something else What could you be doing with your limited resources instead

economic surplus

total benefits minus total costs from an economic activity

After taking Econ 1 class, you feel very hungry and buy sandwiches in UCen. Whether you buy the third sandwich or not will depend on:

whether the marginal benefit of the third sandwich is greater than the price of the sandwich