68 Cards in this Set
| Front | Back |
|---|---|
|
macroeconomics definition
|
-the study of how and why societies allocate resources as they do
-the study of the aggregate outcome of all individual decisions of how to allocate resources
|
|
what are resources?
|
-muscle power, intelligence, coal, timber, time
-resource allocation is an emergent, or a pattern of behavior that you observe in a system
|
|
what is economics
|
-a positive study, not normative, it values how things actually work, not how they should work
-the core problem is where should I allocate scarce resources
|
|
what is a basic insight of economics?
|
-this decentralized, emergent process of allocating resources does a surprisingly good job of allocating scarce resources
|
|
how is the scarcity of resources manifested?
|
-in tradeoffs
-opportunity costs
|
|
what is one very important tradeoff?
|
efficiency vs equity
-the size of the pie (efficiency)vs the size of the slices (fairness)
|
|
opportunity cost
|
given the centrality of tradeoffs in economics, the correct measure of the cost of doing something is the opportunity cost
-The opportunity cost of an activity is what you forgo in order to engage in that activity; it is the (net) benefit you would have obtained from the best available…
|
|
dismal science
|
-econ is often called the dismal science
-this is in reference to a response to Thomas Cartlye to Thomas Malthus that population growth would exceed economic growth and hunger would increase
|
|
fundamental tenants regarding individual economic behavior?
|
-people respond to incentives
-people think "at the margins'
|
|
marginal analysis
|
-Marginal changes are incremental adjustments to an existing plan of action
-The correct way to analyse tradeoffs and allocate resources is to compare costs and benefits at the margin
|
|
incentives
|
-people tend to behave in ways that help them achieve their goals; they tend to act in their best interests
-changes in costs and benefits will lead individuals to change their behaviour
-We are not saying that people are necessarily selfish their goals could include the happiness of…
|
|
how do people so often make the right decisions in such a complex society?
|
-The 'as if' argument is that, while individuals might not understand exactly how the economy works, they behave 'as if' they do
-Local prices summarise all the relevant 'distant knowledge' that we don't have
|
|
Friedrich Hayek
|
emphasised the role of the price system in simplifying the decision-making process
-one of the great economics of the 20th century
-He pointed out that all we need is 'local' knowledge
e.g. for consumers: our budget, our tastes, the goods on offer and crucially their prices
-Loca…
|
|
Adam Smith
|
-(1723-1790), father of modern economics, introduced the notion of the 'invisible hand'
-Guided by this invisible hand, isolated individual decisions combine to create an efficient outcome at the level of society as a whole
-For Smith (and Hayek) this invisible hand is the price syst…
|
|
models
|
-Because the real world is so complex, economists used stylised representations of the real world ('models') in their analysis
-These could be mathematical, graphical, even literary (rare nowadays)
-No model will capture every aspect of society, but the hope is it will capture the a…
|
|
Circular flow of income
|
-Accountancy more than anything else: visual display of flow of money through economy, recognising that there are two sides to every exchange
-Not just exchange of goods/services: factors of production too (labor/land/capitol)
|
|
productions possibilities frontier
|
a graph that shows the combinations of output that can possibly be produced given the available factors of production and the available production technology
-Could be at level of entire economy or individual firm
-highlights both efficiency and growth
|
|
The economy's PPF shifts out if:
|
-The amount of labour available increases
-The amount of capital available increases
-There is technological progress and we become better at using these factors of production
|
|
why do people trade?
|
-diversity in preferences
-diversity in production, i.e. specialisation
|
|
Two reasons the 'specialise and trade' strategy works so well:
|
-Comparative advantage: this arises from differences in opportunity cost across individuals, i.e. different individual PPFs
-Diseconomies of scope: even with identical PPFs, technology might be such that specialisation increases productivity this is not really covered in most textbook…
|
|
principal of comparitive advantage?
|
-We're going to see that it makes sense for each to specialise completely in the procurement of the good in which he has a comparative advantage, and then to trade
-Comparative advantage is concerned with an individual's relative productivities compared to another individual's (e.g. in…
|
|
autarky'
|
-the state of no trade
-for two economic actors, It's going to make sense for them to move towards greater production of the good in which they have a comparative advantage (lower opportunity cost)
-optimal for each to be completely specialised
in production, and will then trade i…
|
|
Absolute advantage
|
Absolute advantage is concerned with an individual's
absolute productivity compared to another individual's
(in the production of a single good)
-Friday has an absolute advantage in coconuts over Crusoe, because if they both devote all their labour to gathering coconuts Friday will …
|
|
economic insight addressing advantage?
|
Even if an agent has no absolute advantage in any good, she can have a comparative advantage in some good
-Comparative advantage is a sufficient condition for there to be gains from trade
|
|
David Ricardo
|
The theory of comparative advantage and trade is due to David Ricardo (1772-1823)
|
|
Diseconomies of scope
|
-Diseconomies of scope are another source of gains from trade, even when everyone is identical
-the more an individual specialises in her activities,
the more productive she becomes
|
|
summary, intro to econ
|
(1)Economics studies the allocation of scarce resources, and the tradeoffs that are implicit (eg using PPFs)
(2) Economists assume people are pretty smart, and don't consistently act against their own self-interest
(3) One source of gains from trade: diversity in preferences
(4) Anoth…
|
|
what is a market?
|
A market is just a collection of buyers and sellers of a particular good or service
-Doesn't have to be geographically separated: think of eBay
|
|
Demand basics
|
Basics:
-The quantity demanded is the amount of a good that buyers are willing and able to purchase
-The law of demand holds that, other things equal, the quantity demanded of a good falls when the price of the good rises
-The demand schedule is a table that shows the relationship…
|
|
diminishing marginal utility
|
-the more you get, the worse they are
|
|
market demand
|
-refers to the sum of all individual demands for a particular good or service
-Graphically, individual demand curves are summed horizontally to obtain the market demand curve
|
|
shifts vs movements of demand curves
|
-A movement along a demand curve is a change in the quantity demanded of a good caused by a change in its price
-A shift of a demand curve (to the left or right) is caused by something that changes the quantity demanded for any given price level
|
|
five things that can cause shifts in demand curves?
|
1- Consumer incomes
2- Consumer tastes
3- Prices of substitutes or complements
4- Number of buyers
5- Expectations
|
|
income effect on demand?
|
-a rise in income lowers the demand for an inferior good and raises the demand of a normal good
|
|
demand falls when and rises when
|
-the price of a complement good rises
-the price of a substitute rises
|
|
basics of supply?
|
Basics:
-The quantity supplied is the amount of a good that sellers are willing and able to purchase
-The law of supply holds that, other things equal, the quantity supplied of a good rises when the price of the good rises
-The supply schedule is a table that shows the relationship…
|
|
increasing marginal costs of supply
|
-it is easier to get your hands on the first good to sell than it is the fifth
|
|
market supply
|
-refers to the sum of all individual supplies for a particular good or service
-Graphically, individual supply curves are summed horizontally to obtain the market supply curve
|
|
shifts vs movements for supply curves
|
-A movement along a supply curve is a change in the quantity supplied of a good caused by a change in its price
-A shift of a supply curve (to the left or right) is caused by something that changes the quantity supplied for any given price level
|
|
four things that can cause shifts in supply curves?
|
1-Input prices
2-Technology
3-Number of sellers
4-Expectations
|
|
when does supply shift out?
|
-a fall in input prices,
-a technological advance or
-an increase in the # of sellers
|
|
Equilibrium
|
-refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded
-The equilibrium price is that which balances quantity supplied and quantity demanded
-The equilibrium quantity is that supplied and demanded at the equilibrium price
…
|
|
How do we get to the equilibrium price and quantity?
|
-If the price is too low, there's excess demand
buyers will compete with one another to obtain the limited quantity of oysters available, and bid the price up
-If the price is too high, there's excess supply
sellers will compete with each other to sell their oysters by offering lower…
|
|
what does an outward shift in the supply curve do?
|
-lowers the equilibrium price and increases the quantity
-raises the equilibrium price and increases the quantity
-f both curves shift at the same time, then the effect on price or quantity might be ambiguous
|
|
conclusion of Goldin and Katz on skill-based technical change?
|
Technological advance in the US has served to increase the productivity of the highly-skilled more than the productivity of the less highly-skilled; is has been skill-biased
This has shifted out the demand curve for skill by enough to raise the skill premium
the skill premium has r…
|
|
consumer surplus
|
-a buyer's willingness to pay for a good minus the amount the buyer actually pays for it
-There will usually be, in equilibrium, buyers paying less for a good than they would be willing to pay
|
|
producer surplus
|
-the excess of the price of a good over what a seller would have been willing to sell it for (his cost of production)
-There will usually be, in equilibrium, sellers being paid more for a good than it cost to produce
-Together, consumer & producer surplus measure the combined benefit…
|
|
total surplus?
|
is a measure of the combined benefit to buyers and sellers of trading in the market (total=consumer+producer surplus)
total surplus =consumer surplus + producer surplus
= (value to buyers − amount paid by buyers)
+ (amount received by sellers − cost to sellers)
=value to buyers − …
|
|
Efficiency of the market outcome
|
-The market equilibrium is said (usually) to be efficient
-That is, it is the price/output combination that maximises the total surplus in the economy
-Put another way, it maximises 'value to buyers minus cost to sellers'
-Put another way, it maximises: the value to society of hav…
|
|
what do we mean by efficiency?
|
-The market induces society to keep producing more of a good as long as the value from doing so exceeds the cost
-We stop producing just when the marginal benefit of one more unit of the good falls to equal the marginal cost of that good
|
|
three insights regarding market outcomes?
|
(1) Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness & ability to pay
(2) Free markets allocate the demand for goods to the sellers who can produce them at least cost
(3) Free markets (usually) produce the quantity of g…
|
|
circumstances under which the market outcome is
in fact inefficient?
|
-if markets are uncompetitive (e.g. monopoly)
-if there are externalities
|
|
elasticity
|
- a measure of the responsiveness of supply and demand to changes in the price
- it's a measure of the slope of the supply or demand curve
-a relatively flat curve is 'elastic'; it implies a large change in quantity supplied/demanded for a given change in price
-a relatively steep c…
|
|
price elasticity of demand?
|
-the %age change in quantity demanded due to a 1% change in the price
|
|
when is demand for a good likely to be more elastic
|
-if close substitutes are available
-if the good is a luxury rather than a necessity
-(and the curve flatter)
|
|
price elasticity of supply
|
the %age change in quantity supplied due to a 1% change in the price
|
|
Supply of a good is likely to be more elastic if...
|
(and the supply curve therefore flatter):
- if technology allows firms to change supply easily
- in the long run
|
|
Price controls
|
-a time-honoured tool of government intervention that are implemented when governments think a price is too high or too low
-They take the form of legally-binding floors (min wage) or ceilings (rent controls) on prices
-Such policies typically result in excess demand or supply
-th…
|
|
basic results of taxes?
|
-Taxes discourage the activity being taxed
when a good is taxed, the quantity sold is smaller
-Buyers and sellers share the tax burden
-in fact, the 'tax incidence' does not depend on whether it is buyers or sellers being taxed it instead depends on the relative elasticities of th…
|
|
general rule for taxes on buyers
|
If the government imposes a tax on buyers of t dollars per unit, the market demand curve will shift vertically downward by $t
|
|
general rule for tax on sellers
|
If the government imposes a tax on sellers of t dollars per unit, the market supply curve will shift vertically upward by $t
-Whether the tax is on buyers or sellers, the amount traded in equilibrium and the prices the buyers and sellers effectively pay are the same
-In each case th…
|
|
where does the burden of a tax fall?
|
The burden of a tax falls more heavily on the side of the market that is less elastic
|
|
deadweight loss
|
-The deadweight loss to society resulting from a tax is equal to the falls in consumer and producer surplus, minus the government revenue that results
-It's a measure of the efficiency loss associated with taxation, and arises because mutually benefical trade between buyers and sellers i…
|
|
how taxes are used to raise revenue?
|
If we want to raise a given amount of tax revenue, find
something with inelastic supply and demand to tax
|
|
externality
|
An exernality is something that is not taken into account in market transactions
-For example, the total cost of a production process might not be reflected in the price of the resulting good
-The reason for this would be a missing market
|
|
Two ways to reduce GHG emissions to the efficient level, given that the problem is a missing market in emissions rights?
|
-carbon tax
-cap and trade
|
|
carbon tax
|
-a tax on emitters
-for every unit you emit, you pay T
-analogous to a tax on buyers of emissions rights
this would shift the demand curve down by the amount of the tax
|
|
cap and trade
|
-creates a market on carbon emissions
-emitters would have to buy carbon permits
|
ECON 201: EXAM 1