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82 Cards in this Set
- Front
- Back
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time & elasticity of supply for resources
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Short run supply is less elastic and doesn't produce as much output as long run supply
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why do earnings differ?
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1) worker productivity
2) worker preferences 3) race and gender 4) nonpecuniary characteristics 5) immobility of resources (temp. disequilibrium and institutional restrcitions) |
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modern theory of interest
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von Bohm Bowerk - time is a scarce good we impose value on; what we are willing to trade for time is the interest rate
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money rate of interest
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rate of interest that borrowers pay for borrowed funds; in periods of deflation, money rate of interest < rate of interest
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PV
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Present Value - measures the current value of future goods/income adjusted for the fact that prices in the future wil be valued less than they are in the present
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economic efficiency
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1) benefits exceed cost in everything
2) nothing is undertaken for which costs exceed benefits |
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potential shortcomings of the market
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1) lack of competition
2) externalities 3) public goods (nonrival & nonexcludable) 4) imperfect knowledge |
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why shouldn't the public sector intervene?
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1) special interest effect
2) shortsightedness effect 3) rent seeking 4) weak incentives for operational efficiency |
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Perfect Price Competition Model (PPCM)
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1) large # of buyers/sellers
2) free entry/exit 3) everyone is a price taker 4) zero transactions cost 5) homogeneous goods |
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3 Implications of Perfect Competition
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1) productive efficiency
2) allocative efficiency 3) no deadweight loss |
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3 assumptions of monopoly (generally)
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1) no barriers to entry
2) no easily available substitutes 3) all monopolies are price-makers |
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5 negatives of monopolies
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1) reduced output
2) raised prices 3) consumer surplus 4) abnormally high returns 5) deadweight loss |
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Perfect Price Discriminatory Monopoly
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1) reduced output
2) raised prices 3) consumer surplus 4) market segmentation 5) arbitrage |
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benefits of free trade
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free trade --> capturing comparative advantage --> higher investments in foreign markets --> less desirability to spoil relationships --> world peace. yay.
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firms - general
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Coase (firms exist to maximize profit; big cost is transaction cost)
Alchian & Demsetz (firms exist to max profit, but transaction cost is trivial; problem is shirking because firms = team process) |
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Why do cartels fail?
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1) PD is inherent in cartels
2) nothing stopping freeriders 3) monitoring expenses 4) have to stop all methods of non-price competition |
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everything is illegal under antitrust laws!
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raise price = illegal under Sherman (1890)
lower price = illegal under Robinson-Patman (1936) same price = tacit collusion - signaling theory |
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income determination
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1) entrepreneurs (profits & losses)
2) workers (real wages) 3) savers (interest) |
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What does the elasticity of the labor supply curve depend on?
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1) substitution effect - short-term (RW up = Qls up)
2) income effect - long-term (RW up = Qls down) |
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What determined elasticity of the labor demand curve?
What shifts it? |
Law of diminishing marginal returns; nonwage factor (usually capital - positive relationship)
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Economists w/public good theories
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Samuelson & Bator
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Four prerequisites for a public good
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1) nonrivalrous good
2) jointly consumed 3) chronic freeriding 4) no economically viable solution to the freeriding |
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Problems with public goods theory
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1) although market failure is a necessary condition for public good, it's not automatically sufficient
2) tie private good to public good = no market failure 3) assume constant greed & technology 4) private sector underproduces, but this doesn't mean gvt will produce at the optimal level 5) x-inefficiency 6) people learn to cooperate (can solve PD) 7) fundamental cxn between public interest and markets |
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median voter model
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assumes single issue, two party, max vote for candidate, spatial mobility, single-peaked preferences
implications: opp is extremist, i am moderate, start sounding like opponent, primaries are more ideologically driven, candidates speak in generalities |
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impact of a tax on sellers
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causes shift left in supply
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impact of a tax on consumers
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causes shift left in demand
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economic profit
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total revenue - total costs
*economic profits are what are used to make investment decisions* |
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positive rate of time preference
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on average, the desire of consumers for goods now rather than in the future
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problems with "protected habitat status"
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takes away productive land from the producers without subsidizing; increases likelihood of SSS, etc
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problems with prohibition
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if you restrict importation of a good, the price for that good will rise domestically and cause an increase in black market activity
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What causes change in demand for resources?
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1) change in product price
2) change in resource's productivity 3) change in prices of related resources |
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MRP
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Marginal Revenue Product - (MP*MR) = the change in total output that can be expected from the use of one additional unit of a resource
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MP
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Marginal Product - the change in total output that can be expected from the use of one additional unit of a resource
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MR
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Marginal Revenue - the change in total revenue that can be expected from the production and sale of an additional good/service
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VMP
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Value Marginal Product - (MP*selling price of product). For price takers, VMP = MRP; for price makers, VMP > MRP because MR<P
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What causes the MRP curve to shift?
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1) change in product price
2) change in resource's productivity 3) change in related resources |
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MP Theory of Employment
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As long as benefits>costs, it is economically efficient to employ an additional unit of labor.
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immobility of resources
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1) temporary disequilibrium due to market changes
2) institutional restrictions (ie occupational licensing) |
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3 components of interest rate
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1) pure interest rate
2) inflationary premium (compensates for the fact that the purchasing power of the principal and interest will go down in a period of inflation) 3) risk premium (how risky are you as an investor?) |
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factors affecting income distribution
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education; age; family statues; persons/family, etc
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income mobility
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the ability of an indv/group to move up or down income distribution rankings when comparisons are made at diff points in time
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Who launched environmental economics?
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A.C. Pigou in The Economics of Welfare. Said there was a social cost of pollution that the supply curve didn't take into account, so factories overproduced pollution beyond socially optimal level; sol'n: polluter tax (wrong, as shown by Coase).
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trade balancing equation
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current account + capital account = 0
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arguments against free trade
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protect high wages; save jobs; don't trade with human rights violators
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golden rule for all firms
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MR = MC
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PPD
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perfect price discriminator - tracks out demand curve and charges diff people diff prices for the same good/service
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"traditional" way of identifying monopoly competition
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counting # of suppliers and calculating the market share concentration ratio. can't do this because monopolies are defined by behavior, not numbers
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Potential competition hypothesis
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When sunk costs are low or none, potential bidders are just as good as actual competition for maintaining a competitive market.
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U.S. antimonopoly laws
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Sherman (1890)
Clayton and FTC (1914) Robinson-Patman (1936) |
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middlemen
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are good! they perceive trading opportunities that would otherwise not be perceived (and therefore would not exist)
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what guides business investment decisions?
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rate of return on investor equity
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How do you know if you've made an economic profit?
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1) have to know what was invested
2) have to know your returns on the investment 3) compare it to all other possible investments |
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Tragedy of the Commons
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G. Hardin (1968)
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public goods
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the economic theory of the state
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Wherever you have public goods, market will be...
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chronically under pressure, due to the PD, and will ultimately fail.
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modern public choice
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progressivism - Wicksell, Downs, Buchanan, etc
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mechanics of public choice
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1) politicians
2) voters 3) bureaucrats |
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Mancur Olson
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Logic of Collective Action - special interest groups theory; special interest groups vote in higher percentages than the general voting age population
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residual claimants
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Receve the excess of revenues over costs - RCs gain if firm's costs are low and production is high
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accounting profits
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half-assed accounting - not the whole picture because it doesn't take into account opportunity costs
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Menger: Theory of Price
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1) producers undersell
2) buyers overbid 3) final exchange price is set by limits defined by max buying and min selling points 4) as more parties enter the transaction, the limits of price formation are progressively narrowed |
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Menger: Theory of Exchange
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1) inverse valuation
2) recognition of #1 3) perceived ability to execute ownership 4) net benefit for both parties |
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Menger: Theory of Value
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1) subjectivism
2) value is defined by the margin (solves H20/diamonds paradox) |
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Menger on human needs
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HN > quantity avail = shortage
HN < quantity = noneconomic good HN = quantity = transition point |
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General Theory of the Good
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1) human need
2) good is able to fulfill the need 3) recognition of causal cxn betwee 1 and 2 4) sufficient command (accessibility) |
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assumptions of economic science
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1) scarcity
2) methodological individualism 3) rational choice 4) unlimited wants |
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spontaneous order
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discovered by physiocrats (mercantilists) - spontaneous order is the product of human action, not design/intention
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consumer surplus
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difference between max price buyer is willing to pay and what they actually pay
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Law of Comparative Advantage
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indv/groups benefit when they produce something at a low OC and trade it for something else that has a high OC for them
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Law of Demand
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As Q increases, P decreases (inverse relationship)
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Law of Supply
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As Q increases, P increases (direct relationship)
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substitutes
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increase in price of one causes increase in price of the other
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complements
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decrease in price of one causes increase in demand of other
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price ceiling
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causes a shortage; ie rent controls and gas prices in the 70s
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price floor
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causes a surplus; ie minimum wage
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black market
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activity here increases when imports are restricted
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supply curve is also the...
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marginal cost curve = set of minimum selling prices
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demand curve is also the...
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marginal benefit curve - set of maximum buying prices
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Principle of Diminishing Marginal Utility
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As each additional unit of a good is acquired, the next unit is of lesser value than the previous unit acquired
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normal good
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as income goes up, desire for normal good goes up
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inferior good
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as income goes up, desire for inferior good goes down
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internal homeostasis of the price system
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price > Pe = shortage, so buyers underbid until Pe is achieved
price < Pe = surplus, so consumers overbid until Pe is achieved |
