Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
304 Cards in this Set
- Front
- Back
|
Scarcity |
Is the limited nature of society’s resources |
|
|
Economics |
economics the study of how society manages its scarce resources |
|
|
the economy |
the economy all the production and exchange activities that take place every day |
|
|
economic activity |
economic activity how much buying and selling goes on in the economy over a period of time |
|
|
Equity |
Equity the property of distributing economic prosperity fairly among the members of society |
|
|
opportunity cost |
Opportunity Cost on whatever must be given up to obtain some item; the value of the bene ts foregone (sacrificed) |
|
|
Marginal changes |
marginal changes small incremental adjustments to a plan of action |
|
|
Market economy |
market economy an economy that addresses the three key questions of the economic problem through allocatingresources through the decentralized decisions of many rms and households as they interact in markets for goods and services |
|
|
Market Failure |
market failure a situation where scarce resources are not allocated to their most ef cient use |
|
|
Externality |
externality the cost or bene t of one person’s decision on the well-being of a bystander (a third party) which the decisionmaker does not take into account in making the decision |
|
|
Market Power |
market power the ability of a single economic agent (or small group of agents) to have a substantial in uence on market prices |
|
|
Microeconomics |
microeconomics the study of how households and rms make decisions and how they interact in markets |
|
|
Macroeconomics |
the study of economy-wide phenomena, including in ation, unemployment and economic growth |
|
|
Economic Growth |
the increase in the amount of goods and services in an economy over a period of time |
|
|
Gross domestic product per capita |
the market value of all goods and services produced within a country ina given period of time divided by the population of a country to give a per capita figure |
|
|
Standart of living |
refers to the amount of goods and services that can be purchased by the population of a country.Usually measured by the in ation-adjusted (real) income per head of the population |
|
|
Productivity |
the quantity of goods and services produced from each hour of a worker or factor of production’s time |
|
|
Inflation |
an increase in the overall level of prices in the economy |
|
|
Philips curve |
a curve that shows the short run trade-off between in ation and unemployment |
|
|
business cycle |
fuctuations in economic activity such as employment and production |
|
|
endogenous variable |
a variable whose value is determined within the model |
|
|
exogenous variable |
a variable whose value is determined outside the model |
|
|
circular-flow diagram |
a visual model of the economy that shows how money and production inputs and outputs owthrough markets among households and firms |
|
|
Positive statements |
claims that attempt to describe the world as it is |
|
|
Normative statements |
claims that attempt to prescribe how the world should be |
|
|
Competitive market |
a market in which there are many buyers and sellers so that each has a negligible impact on themarket price |
|
|
Law of demande |
the claim that, other things equal (ceteris paribus) the quantity demanded of a good falls when the priceof the good rises |
|
|
Quantity demanded |
the amount of a good that buyers are willing and able to purchase at different prices |
|
|
demand schedule |
a table that shows the relationship between the price of a good and the quantity demanded |
|
|
demand curve |
a graph of the relationship between the price of a good and the quantity demanded |
|
|
normal good |
a good for which, ceteris paribus, an increase in income leads to an increase in demand (and vice versa) |
|
|
inferior good |
a good for which, ceteris paribus, an increase in income leads to a decrease in demand (and vice versa) |
|
|
quantity supplied |
the amount of a good that sellers are willing and able to sell at different prices |
|
|
law of supply |
the amount of a good that sellers are willing and able to sell at different prices |
|
|
supply schedule
|
a table that shows the relationship between the price of a good and the quantity supplied |
|
|
supply curve |
a graph of the relationship between the price of a good and the quantity supplied |
|
|
Equilibrium or market price |
the price where the quantity demanded is the same as the quantity supplied |
|
|
Who is the nicest person you know? |
Hector |
|
|
Equilibrium quantity |
the quantity bought and sold at the equilibrium price |
|
|
Surplus |
a situation in which the quantity supplied is greater than the quantity demanded at the going market price |
|
|
Shortage |
a situation in which quantity demanded is greater than quantity supplied at the going market price |
|
|
law of supply and demand |
the claim that the price of any good adjusts to bring the quantity supplied and the quantitydemanded for that good into balance |
|
|
Why is Hector your best friend? |
Because you don't have any.
|
|
|
elasticity |
a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants |
|
|
Price elasticity of demand |
a measure of how much the quantity demanded of a good responds to a change in the priceof that good, computed as the percentage change in quantity demanded divided by the percentage change in price |
|
|
Total expenditure |
the amount paid by buyers, computed as the price of the good times the quantity purchased |
|
|
Income elasticity of demand |
a measure of how much the quantity demanded of a good responds to a change inconsumers’ income, computed as the percentage change in quantity demanded divided by the percentage change in income |
|
|
Cross-price elasticity of demand |
a measure of how much the quantity demanded of one good responds to a changein the price of another good, computed as the percentage change in quantity demanded of the rst good divided by thepercentage change in the price of the second good |
|
|
Price elasticity of supply |
a measure of how much the quantity supplied of a good responds to a change in the price ofthat good, computed as the percentage change in quantity supplied divided by the percentage change in price |
|
|
Why did the chicken cross the street? |
The chicken got scared when he saw the size of Cyrils nose. |
|
|
total revenue |
the amount received by sellers of a good, computed as the price of the good times the quantity sold |
|
|
utility |
the satisfaction derived from the consumption of a certain quantity of a product |
|
|
budget constraint |
the limit on the consumption bundles that a consumer can afford |
|
|
Choice set |
the set of alternatives available to the consumer |
|
|
What's the capital of Bahamas? |
Nassau... bet you didn't know that. |
|
|
indifference curve |
a curve that shows consumption bundles that give the consumer the same level of satisfaction |
|
|
TheAxiom of Comparison |
Given any two bundles of goods, A and B,representingconsumptionchoices,a consumer can compare these bundles such that A is preferred to B, B is preferred to A or the consumeris indifferent between A and B. |
|
|
The Axiom of Transitivity |
Given any three bundles of goods, A, B and C, if the consumer prefers A to Band prefers B to C then he must prefer A to C. Equally, if the consumer is indifferent between A and B andis also indifferent between B and C then they must be indifferent between A and C. |
|
|
Properties of indifference curves |
Property 1: Higher indifference curves (further to the upper right) are preferred to lower ones. Property 2:Indifference curves are downwards sloping. Property3:Indifference curves do not cross. Property 4: Indifference curves are bowed inward. |
|
|
total utility |
the satisfaction gained from the consumption of a good |
|
|
marginal utility |
the addition to total utility as a result of consuming one extra unit of a good |
|
|
diminishing marginal utility |
refers to the tendency for the additional satisfaction from consuming extra units of agood to fall |
|
|
marginal rate of substiution |
the rate at which a consumer is willing to trade one good for another |
|
|
perfect substitution |
two goods with straight line indifference curves |
|
|
perfect compliments |
two goods with right-angle indifference curves |
|
|
income effect |
the change in consumption that results when a price change moves the consumer to a higher or lowerindifference curve |
|
|
substitution effect |
the change in consumption that results when a price change moves the consumer along a givenindifference curve to a point with a new marginal rate of substitution |
|
|
What will you give Hector in return for the flashcards? |
A Beer would be nice. |
|
|
Price-consumption curve |
a line showing the consumer optimum for two goods as the price of one of the goodschanges, assuming incomes and the price of the good are held constant |
|
|
Giffen good |
a good for which an increase in the price raises the quantity demanded |
|
|
Engel curve |
curve a line showing the relationship between demand and levels of income |
|
|
Bounded rationality |
the idea that humans make decisions under the constraints of limited, and sometimes unreliable,information |
|
|
heuristics |
short cuts or rules of thumb that people use in decision making |
|
|
expected utility theory |
the idea that preferences can and will be ranked by buyers |
|
|
explicit costs |
input costs that require an outlay of money by the firm |
|
|
implicit costs |
input costs that do not require an outlay of money by the firm |
|
|
the short run |
the period of time in which some factors of production cannot be changed |
|
|
the long run |
the period of time in which all factors of production can be altered |
|
|
production function |
the relationship between the quantity of inputs used to make a good and the quantity of outputof that good |
|
|
marginal product |
the increase in output that arises from an additional unit of input |
|
|
diminishing marginal product |
the property whereby the marginal product of an input declines as the quantity of theinput increases |
|
|
fixed costs |
costs that are not determined by the quantity of output produced |
|
|
variable costs |
costs that are dependent on the quantity of output produced |
|
|
average total cost |
total cost divided by the quantity of output |
|
|
average fixed cost |
fixed costs divided by the quantity of output |
|
|
average variable cost |
variable costs divided by the quantity of output |
|
|
marginal cost |
the increase in total cost that arises from an extra unit of production |
|
|
efficient scale |
the quantity of output that minimizes average total cost |
|
|
constant returns to scale |
the property whereby long-run average total cost stays the same as the quantity of output changes |
|
|
economies of scale |
the property whereby long-run average total cost falls as the quantity of output increases |
|
|
What's round and hates jews? |
the entire world. |
|
|
diseconomies of scale |
the property whereby long-run average total cost rises as the quantity of output increases |
|
|
meaning of competition |
Where more than one rm offers the same or a similar product there is competition. ● Competition can also manifest itself where substitutes exist: for example, gas and electricity are separ-ate markets but there is the opportunity for consumers to substitute gas cookers for electric ones and so some element of competition exists. ● The closer the degree of substitutability the greater will be the competition that exists. ● Firms may in uence the level of competition through the way they build relationships with consumers, encourage purchasing habits, provide levels of customer service and after sales service, and so on. |
|
|
perfectly competitive |
There are many buyers and many sellers in the market. ● The goods offered by the various sellers are largely the same (if identical the goods are described as being ‘homogenous’). ● Firms have to accept the price determined by the market as a whole – no individual rm can in uence supply and thus price. Firms are referred to as being ‘price takers’. Each seller can sell all he wants at the going price, he has little reason to charge less, and if he charges more buyers will go elsewhere. CONTINOUS |
|
|
● There are no restrictions (called barriers to entry) on rms entering or exiting a market. Any rm is free to set up and conduct business and equally there are no reasons why they cannot just close down and leave the industry. ● There is a high degree of information available to buyers and sellers in the market. |
Cheers |
|
|
Average revenue |
total revenue divided by the quantity sold |
|
|
marginal revenue |
the change in total revenue from an additional unit sold |
|
|
economic profit |
total revenue minus total cost, including both explicit and implicit costs |
|
|
accounting profit |
total revenue minus total explicit cost |
|
|
normal profit |
the minimum amount required to keep factors of production in their current use |
|
|
abnormal profits |
the profit over and above normal profit |
|
|
The Firm’s Short-Run Decision to Shut Down |
Shut down if TR < VC Shut down if TR/Q < VC/Q Shut down if P < AVC |
|
|
sunk cost |
a cost that has already been committed and cannot be recovered |
|
|
The Firm’s Long-Run Decision to Exit or Enter a Market |
Exit if TR < TC Exit if TR/Q < TC/Q Exit if P < ATC Enter if P > ATC |
|
|
Measuring Profit in Our Graph for the Competitive Firm |
Profit = TR – TC Profit = (TR/Q – TC/Q) × Q Profit = (P – ATC) × Q |
|
|
Why the Long-Run Supply Curve Might Slope Upwards |
Some Resources Used in Production May Be Available Only in Limited Quantities Firms May Have Different Costs |
|
|
welfare economics |
the study of how the allocation of resources affects economic well-being |
|
|
well-being |
happiness or satisfaction with life as reported by individuals |
|
|
allocative efficiency |
a resource allocation where the value of the output by sellers matches the value placed on thatoutput by buyers |
|
|
willingness to pay |
the maximum amount that a buyer will pay for a good |
|
|
consumer surplus |
a buyer’s willingness to pay minus the amount the buyer actually pays |
|
|
What Does Consumer Surplus Measure? |
Conceiving of Price as a Bargaining Model |
|
|
Cost |
the value of everything a seller must give up to produce a good |
|
|
Time for another shitty joke or comment Turn the card around and get a surprise |
They know that you know that they know that you know that they know that you don't know that they suck. |
|
|
producer surplus |
the amount a seller is paid for a good minus the seller’s cost |
|
|
general equilibrium |
the notion that the decisions and choices of economic agents are coordinated across markets |
|
|
total surplus |
the total value to buyers of the goods, as measured by their willingness to pay, minus the cost to sellers ofproviding those goods Total surplus = Value to buyers − Cost to sellers |
|
|
efficiency |
the property of a resource allocation of maximizing the total surplus received by all members of society |
|
|
pareto improvement |
when an action makes at least one economic agent better off without harming another economic agent |
|
|
equity |
the property of distributing economic prosperity fairly among the members of society |
|
|
social welfare function |
the collective utility of society which is re ected by consumer and producer surplus |
|
|
price ceiling |
a legal maximum on the price at which a good can be sold |
|
|
price floor |
a legal minimum on the price at which a good can be sold |
|
|
direct taxes |
a tax levied on income and wealth |
|
|
indirect tax |
a tax levied on the sale of goods and services |
|
|
specific tax |
a fixed rate tax levied on goods and services expressed as a sum per unit |
|
|
ad valorem tax |
a tax levied as a percentage of the price of a good |
|
|
tax incidence |
the manner in which the burden of a tax is shared among participants in a market |
|
|
subsidy |
payment to buyers and sellers to supplement income or lower costs and which thus encourages consumption orprovides an advantage to the recipient |
|
|
Why did Hector have a beer in his hand |
Because you paid him one and he's very grateful for that. Thank you in advance |
|
|
deadweight loss |
the fall in total surplus that results from a market distortion, such as a tax |
|
|
Adam Smith’s Four Canons of Taxation |
● Equality – that each person should pay taxes according to their ability to pay so that the rich should paymore in taxes than the poor ● Certainty – tax payers need to know what taxes they are liable for and be able to plan ahead on thisbasis and at the same time governments should be able to have some certainty in how much they areable to collect in taxes ● Convenience – paying taxes should be made as easy as possible and tax systems should be designedto be as simple as possible in order to help maximize tax revenue ● Economic – any tax system must ensure that the cost of collecting and administering taxes is less thanthe amount collected. |
|
|
average tax rate |
total taxes paid divided by total income |
|
|
marginal tax rate |
the extra taxes paid on an additional unit of income |
|
|
lump-sum tax |
a tax that is the same amount for every person |
|
|
Guillaume veut que je mets une bonne blague sur lui parce que il ne veut pas parler avec moi.. alors j'ai besoin un peu de créativité de vous. Fini la phrase: Guillaume aime sucer.... |
.. des cornichon. |
|
|
OK ATTEND: Blague de Guillaume et elle est bien. alors. Toc Toc Toc, Qui est la? Ellen! Ellen qui? |
LN(x)
|
|
|
benifits principle |
the idea that people should pay taxes based on the bene ts they receive from government services |
|
|
ability-to-pay principle |
the idea that taxes should be levied on a person according to how well that person can shoulderthe burden` |
|
|
vertical equity |
the idea that taxpayers with a greater ability to pay taxes should pay larger amounts |
|
|
Horizontal equity |
the idea that taxpayers with similar abilities to pay taxes should pay the same amount |
|
|
Proportional or flat tax |
a tax for which high-income and low-income taxpayers pay the same fraction of income |
|
|
regressive tax |
a tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers |
|
|
progressive tax |
a tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers |
|
|
public sector |
that part of the economy where business activity is owned, nanced and controlled by the state, and goodsand services are provided by the state on behalf of the population as a whole |
|
|
private sector |
that part of the economy where business activity is owned, nanced and controlled by private individuals |
|
|
excludable |
the property of a good whereby a person can be prevented from using it when they do not pay for it |
|
|
rival |
the property of a good whereby one person’s use diminishes other people’s use |
|
|
That friend that nobody invites but still shows up in front of your door step... |
You are going to hell for laughing at this joke. |
|
|
private goods |
goods that are both excludable and rival |
|
|
public goods |
goods that are neither excludable nor rival |
|
|
common resources |
goods that are rival but not excludable |
|
|
natural monopoly |
a good which is excludable but non-rival |
|
|
free rider |
a person who receives the bene t of a good but avoids paying for it |
|
|
Some Important Public Goods |
Natural Defence Basic Research Fighting Poverty |
|
|
Cost-benefit analysis |
a study that compares the costs and bene ts to society of providing a public good |
|
|
Tragedy of the commons |
a parable that illustrates why common resources get used more than is desirable from thestandpoint of society as a whole |
|
|
Some Important Common Resources |
Clean air and water congested roads fish, whales and other wildlife |
|
|
merit goods |
goods which can be provided by the market but may be under-consumed as a result |
|
|
intertemporal choice |
where decisions made today can affect choices facing individuals in the future |
|
|
de-merit goods |
goods that are over-consumed if left to the market mechanism and which generate both private andsocial costs which are not taken into account by the decision maker |
|
|
externality |
the cost or bene t of one person’s decision on the well-being of a bystander (a third party) which the decisionmaker does not take into account when making the decision |
|
|
negative externality |
the costs imposed on a third party of a decision |
|
|
positive externality |
the benefits to a third party of a decision |
|
|
Time to take a break and think... |
when you will give that beer to Hector |
|
|
] Types of Externalities |
Economics, 3rd Edition The exhaust from cars is a negative externality because it creates smog that other people have tobreathe. Drivers do not take into consideration this externality and so tend to drive too much, thusincreasing pollution. The government attempts to solve this problem by setting emission standardsfor cars. It may also tax petrol and vehicle ownership in order to reduce the amount that people drive. ● |
|
|
Restored historic buildings convey a positive externality because people who walk or drive by them can enjoy their beauty and the sense of history that these buildings provide. Building owners do not get the full benefit of restoration and, therefore, tend to discard older buildings too quickly. Many national gov- ernments respond to this problem by regulating the destruction of historic buildings and by providing tax incentives to owners who restore them. IT CONTINOUS |
Economics, 3rd Edition Barking dogs create a negative externality because neighbours are disturbed by the noise. Dog ownersdo not bear the full cost of the noise and, therefore, tend to take too few precautions to prevent theirdogs from barking. The government may address this problem by making it illegal to ‘disturb the peace’. IT CONTINOUS |
|
|
Economics, 3rd Edition Research into new technologies provides a positive externality because it creates knowledge that otherpeople can use. Because inventors cannot capture the full benefits of their inventions, they tend todevote too few resources to research. The government addresses this problem partially through thepatent system, which gives inventors an exclusive use over their inventions for a period of time. IT CONTINOUS |
Economics, 3rd Edition A programme of vaccination against a flu virus or any other communicative disease protects those whoreceive it from the risk of contracting the virus. Those who are not vaccinated, however, may receive somebenefit too because the prevalence of the virus is lower and so there is a reduced risk that they will contractthe illness. Health services also benefit because they do not have to devote resources to treating those withillnesses. Governments encourage vaccinations because there are positive benefits to society as a whole. IT CONTINOUS |
|
|
internalising and externality |
altering incentives so that people take account of the external effects of their actions |
|
|
The Types of Private Solution |
Social Norms of Moral Behaviour Charities Self-interest Social Contracts |
|
|
Coase Theorem |
the proposition that if private parties can bargain without cost over the allocation of resources, they cansolve the problem of externalities on their own |
|
|
Why Private Solutions Do Not Always Work |
Transaction Costs Bargaining Problems Coordinating Interested Parties Asymmetric Information and the Assumption of Rational Behaviour |
|
|
transaction costs |
the costs that parties incur in the process of agreeing and following through on a bargain |
|
|
positional externality |
a situation which exists when the payoff to one individual is dependent on their relativeperformance to others |
|
|
Positional arms races |
a situation where individuals invest in a series of measures designed to gain them an advantagebut which simply offset each other |
|
|
Pigovian Tax |
a tax enacted to correct the effects of a negative externality |
|
|
marginal abatement cost |
the cost expressed in terms of the last unit of pollution not emitted (abated) |
|
|
property rights |
the exclusive right of an individual, group or organization to determine how a resource is used |
|
|
Property Rights |
Government Solutions to the Absence of Property Rights Difficulties in Establishing Property Rights |
|
|
Goverment failure |
a situation where political power and incentives distort decision making so that decisions are madewhich con ict with economic ef ciency |
|
|
public interest |
making decisions based on a principle where the maximum bene t is gained by the largest number ofpeople at minimum cost |
|
|
public choice theory |
the analysis of governmental behaviour, and the behaviour of individuals who interact withgovernment |
|
|
rational ignorance effect |
the tendency of a voter to not seek out information to make an informed choice in elections |
|
|
special-interst effect |
where bene ts to a minority special-interest group are outweighed by the costs imposed onthe majority |
|
|
logrolling |
the agreement between politicians to exchange support on an issue |
|
|
rent seeking |
where individuals or groups take actions to redirect resources to generate income (rents) for themselves orthe group |
|
|
privatisation |
the transfer of publicly owned assets to private sector ownership |
|
|
cronyism |
a situation where the allocation of resources in the market is determined in part by political decision making andfavours rather than by economic forces |
|
|
What's Hector's favourite Bar? |
The elephant. Why? 14$ pitcher.. that you will give to him. |
|
|
production isoquant |
a function representing all possible combinations of factor inputs that can be used to produce agiven level of output |
|
|
marginal rate of technical substitution |
the rate at which one factor input can be substituted for another at a givenlevel of output |
|
|
isocost line |
a line showing the different combination of factor inputs which can be purchased with a given budget |
|
|
imperfect competiton |
exists where rms are able to differentiate their product in some way and so can have somein uence over price |
|
|
Market share |
Economics, 3rd Edition the proportion of total sales in a market accounted for by a particular firm |
|
|
market power |
where a rm is able to raise the price of its product and not lose all its sales to rivals |
|
|
monopoly |
a firm that is the sole seller of a product without close substitutes |
|
|
barriers to entry |
anything which prevents a rm from entering a market or industry |
|
|
Barriers to entry |
Economics, 3rd Edition ● A key resource is owned by a single firm. ● The government gives a single firm the exclusive right to produce some good or service. ● The costs of production make a single producer more efficient than a large number of producers. ● A firm is able to gain control of other firms in the market and thus grow in size. |
|
|
patent |
the right conferred on the owner to prevent anyone else making or using an invention or manufacturing processwithout permission |
|
|
copyright |
the right of an individual or organization to own things they create in the same way as a physical object toprevent others from copying or reproducing the creation |
|
|
natural monopoly |
a monopoly that arises because a single rm can supply a good or service to an entire market at asmaller cost than could two or more firms |
|
|
arbitrage |
the process of buying a good in one market at a low price and selling it in another market at a higher price inorder to pro t from the price difference |
|
|
perfect price discrimination |
a situation in which the monopolist knows exactly the willingness to pay of eachcustomer and can charge each customer a different price |
|
|
Examples of Price Discrimination |
Cinema Tickets Airline Prices Discount coupons Quantity Discounts |
|
|
PUBLIC POLICY TOWARDS MONOPOLIES |
● trying to make monopolized industries more competitive ● regulating the behaviour of the monopolies ● turning some private monopolies into public enterprises ● doing nothing at all. |
|
|
Pourqoui est-ce-que Guillaume a pas passer ces examins? |
Il a passe trop de temp sur tinder. |
|
|
Synergies |
where the perceived bene ts of the combined operations of a merged organization are greater than those whichwould arise if the rms stayed separate |
|
|
monopolistic competition |
a market structure in which many rms sell products that are similar but not identical |
|
|
Monopolistic versus Perfect Competition |
Excess Capacity Mark-Up over Marginal Cost |
|
|
Branding |
the means by which a business creates an identity for itself and highlights the way in which it differs from its rivals |
|
|
Entry limit pricing |
a situation where a rm will keep prices lower than they could be in order to deter new entrants |
|
|
predatory or destroyer pricing |
a situation where rms hold price below average cost for a period to try and force outcompetitors or prevent new rms from entering the market |
|
|
competitive advantage |
the advantages rms can gain over another which have the characteristics of being bothdistinctive and defensible |
|
|
cream-skimming |
a situation where a firm identifies parts of a market that are high in value added and seeks to exploit those markets. |
|
|
Oligopoly |
competition amongst the few – a market structure in which only a few sellers offer similar or identical productsand dominate the market |
|
|
Concentration ratio |
the proportion of total market share accounted for by a particular number of rms |
|
|
Almost there. |
Time for a beer |
|
|
market segments |
the breaking down of customers into groups with similar buying habits or characteristics |
|
|
Collusion |
an agreement among rms in a market about quantities to produce or prices to charge |
|
|
Cartel |
a group of firms acting in unions |
|
|
Nash equilibrium |
a situation in which economic actors interacting with one another each choose their best strategygiven the strategies that all the other actors have chosen |
|
|
How the Size of an Oligopoly Affects the Market Outcome |
The output effect. Because price is above marginal cost, selling one more litre of water at the goingprice will raise profit. ● The price effect. Raising production will increase the total amount sold, which will lower the price ofwater and lower the profit on all the other litres sold. |
|
|
non-price competition |
a situation where two or more rms seek to increase demand and market share by methodsother than through changing price |
|
|
Game Theory |
the study of how people behave in strategic situations |
|
|
Payoff matrix |
a table showing the possible combination of outcomes (payoffs) depending on the strategy chosen byeach player |
|
|
Prisoners dilemma |
a particular ‘game’ between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneifcial |
|
|
Dominant strategy |
a strategy that is best for a player in a game regardless of the strategies chosen by the other players |
|
|
tacit collusion |
when firm behaviour results in a market outcome that appears to be anti-competitive but has arisenbecause firms acknowledge that they are interdependent |
|
|
residual demand |
the difference between the market demand curve and the amount supplied by other firms in the market |
|
|
reaction function |
the decision of one firm on a particular issue such as the pro t maximizing output in response to theprofit maximizing output decisions of its rivals |
|
|
Controversies over Competition Policy |
Resale Price Maintenance Predatory Pricing Tying |
|
|
derived demand |
a situation where demand is determined by the supply in another market |
|
|
The Competitive Profit-Maximizing Firm |
1: Competitive Conditions 2: Firms Are Profit Maximisers |
|
|
marginal product of labour |
the increase in the amount of output from an additional unit of labour |
|
|
value of the marginal product |
the marginal product of an input times the price of the output |
|
|
marginal revenue product |
the extra revenue a rm gets from hiring an additional unit of a factor of production |
|
|
What Causes the Labour Demand Curve to Shift? |
The Output Price Technological Change The Supply of Other factors |
|
|
What Causes the Labour Supply Curve to Shift? |
Changes in Tastes Changes in Alternative Opportunities Immigration |
|
|
how wages are determined in competitive labour markets |
The wage adjusts to balance the supply and demand for labour. ● The wage equals the value of the marginal product of labour. |
|
|
Monopsony |
a market with a single buyer |
|
|
compensating differential |
a difference in wages that arises to offset the non-monetary characteristics of different jobs ● Workers, who maintain and repair major roads such as motorways, are paid more than other publicsector workers who repair roads in towns and cities. This is because the danger level of working onmajor roads is much higher, not to mention the fact that they often have to work unsociable hours(when drivers are not using the motorways). |
|
|
human capital |
the accumulation of investments in people, such as education and on-the-job training |
|
|
The Superstar Phenomenon |
● Every customer in the market wants to enjoy the good supplied by the best producer. ● The good is produced with a technology that makes it possible for the best producer to supply every customer at low cost. |
|
|
minimum wage |
the lowest price an employer may legally pay to a worker |
|
|
Union |
a worker association that bargains with employers over wages and working conditions |
|
|
strike |
the organized withdrawal of labour from a firm by a union |
|
|
efficiency wages |
above-equilibrium wages paid by firms in order to increase worker productivity |
|
|
discrimination |
the offering of different opportunities to similar individuals who differ only by race, ethnic group, sex, ageor other personal characteristics |
|
|
economic rent |
the amount a factor of production earns over and above its transfer earnings |
|
|
transfer earnings |
the minimum payment required to keep a factor of production in its current use |
|
|
Lorenz curve
|
the relationship between the cumulative percentage of households and the cumulative percentage of income |
|
|
Gini coefficient |
a measure of the degree of inequality of income in a country |
|
|
Problems in Measuring Inequality |
The economic life cycle Transitory versus Permanent income |
|
|
Life cycle |
the regular pattern of income variation over a person's life |
|
|
permanent income |
a person's normal income |
|
|
poverty rate |
the percentage of the population whose family income falls below an absolute level called thepoverty line |
|
|
poverty line |
an absolute level of income set by the government below which a family is deemed to be in poverty. In the UKand Europe this is measured by earnings less than 60 per cent of median income |
|
|
absolute poverty |
a level of poverty where an individual does not have access to the basics of life – food, clothing andshelter |
|
|
relative poverty |
a situation where an individual is not able to access what would be considered acceptable standards ofliving in society |
|
|
Okey, you are almost done. For the last time I ask you to think long and hard.. What will you give Hector in exchange for the flash cards? |
HEY! You got it right. Cheers. |
|
|
utilitarianism |
political philosophy according to which the government should choose policies to maximize the totalutility of everyone in society |
|
|
liberalism |
the political philosophy according to which the government should choose policies deemed to be just, asevaluated by an impartial observer behind a ‘veil of ignorance’ |
|
|
maximin criterion |
the claim that the government should aim to maximize the well-being of the worst-off person in society |
|
|
libertarianism |
the political philosophy according to which the government should punish crimes and enforce voluntaryagreements but not redistribute income |
|
|
social security |
government benefits that supplement the incomes of the needy |
|
|
negative income tax |
a tax system that collects revenue from high-income households and gives transfers to low-incomehouseholds |
|
|
In-kind transfers |
transfers to the poor given in the form of goods and services rather than cash |
|
|
Summary Chapter 1 The fundamental lessons about individual decisionmaking are that people face trade-offs amongalternative goals, that the cost of any action ismeasured in terms of foregone opportunities, thatrational people make decisions by comparing mar-ginal costs and marginal benefits, and that peoplechange their behaviour in response to the incentivesthey face. |
The fundamental lessons about interactions amongpeople are that trade can be mutually beneficial,that markets are usually a good way of coordinat-ing trade among people, and that the governmentcan potentially improve market outcomes if thereis some market failure or if the market outcome isinequitable.
|
|
|
The field of economics is divided into two sub-fields: microeconomics and macroeconomics.Microeconomists study decision making by house-holds and firms and the interaction among householdsand firms in the marketplace. Macroeconomistsstudy the forces and trends that affect the economyas a whole. |
The fundamental lessons about the economyas a whole are that productivity is the ultimatesource of living standards, that money growth isthe ultimate source of inflation, and that societyfaces a short-run trade-off between inflation andunemployment. |
|
|
Summary Chapter 2 Economists try to address their subject with a scientist’sobjectivity. Like all scientists, they make appropriateassumptions and build simpli ed models in order tounderstand the world around them. One simple eco-nomic model is the circular- ow diagram. Economists use empirical methods to develop and testhypotheses |
Research can be conducted through using inductiveand deductive reasoning – no one way is the ‘rightway’.
Economists develop theories which can be used toexplain phenomena and make predictions. In developing theories and models, economists have to makeassumptions. |
|
|
Using theory and observation is part of scienti c methodbut economists always have to remember that they arestudying human beings and humans do not alwaysbehave in consistent or rational ways. ● A positive statement is an assertion about how theworld is. A normative statement is an assertion abouthow the world ought to be. When economists makenormative statements, they are acting more as policyadvisors than scientists. |
Economists who advise policymakers offer con ictingadvice either because of differences in scienti c judge-ments or because of differences in values. At othertimes, economists are united in the advice they offer,but policymakers may choose to ignore it. |
|
|
Summary Chapter 3 Economists use the model of supply and demand to ana-lyse competitive markets. In a competitive market, thereare many buyers and sellers, each of whom has little orno in uence on the market price. ● The demand curve shows how the quantity of a gooddemanded depends on the price. According to the lawof demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand curve slopesdownwards. |
In addition to price, other determinants of how muchconsumers want to buy include income, the prices ofsubstitutes and complements, tastes, expectations, thesize and structure of the population and advertising. Ifone of these factors changes, the demand curve shifts. The supply curve shows how the quantity of a goodsupplied depends on the price. According to the lawof supply, as the price of a good rises the quantitysupplied rises. Therefore, the supply curve slopesupwards. |
|
|
In addition to price, other determinants of how muchproducers want to sell include the price and pro t-ability of goods in production and joint supply, inputprices, technology, expectations, the number of sellersand natural and social factors. If one of these factorschanges, the supply curve shifts. The intersection of the supply and demand curvesdetermines the market equilibrium. At the equilibrium price, the quantity demanded equals the quantitysupplied. |
The behaviour of buyers and sellers naturally drivesmarkets towards their equilibrium. When the marketprice is above the equilibrium price, there is a surplus of the good, which causes the market price to fall. Whenthe market price is below the equilibrium price, there isa shortage, which causes the market price to rise. |
|
|
To analyse how any event in uences a market, we usethe supply and demand diagram to examine how theevent affects the equilibrium price and quantity. To dothis we follow three steps. First, we decide whetherthe event shifts the supply curve or the demand curve(or both). Second, we decide which direction the curveshifts. Third, we compare the new equilibrium with theinitial equilibrium. |
In market economies, prices are the signals thatguide economic decisions and thereby allocatescarce resources. For every good in the economy, theprice ensures that supply and demand are in balance.The equilibrium price then determines how much of thegood buyers choose to purchase and how much sellerschoose to produce. |
|
|
Summary Chapter 4
The price elasticity of demand measures how muchthe quantity demanded responds to changes in theprice. Demand tends to be more elastic if close substi-tutes are available, if the good is a luxury rather thana necessity, if the market is narrowly de ned or if buy-ers have substantial time to react to a price change. |
The price elasticity of demand is calculated as thepercentage change in quantity demanded dividedby the percentage change in price. If the elasticityis less than 1, so that quantity demanded moves pro-portionately less than the price, demand is said tobe inelastic. If the elasticity is greater than 1, so thatquantity demanded moves proportionately more thanthe price, demand is said to be elastic. |
|
|
The price elasticity of supply measures how muchthe quantity supplied responds to changes in theprice. This elasticity often depends on the time hori-zon under consideration. In most markets, supply ismore elastic in the long run than in the short run. ● The price elasticity of supply is calculated as thepercentage change in quantity supplied divided bythe percentage change in price. If the elasticity is lessthan 1, so that quantity supplied moves proportionatelyless than the price, supply is said to be inelastic. If theelasticity is greater than 1, so that quantity suppliedmoves proportionately more than the price, supply issaid to be elastic. |
Total revenue, the total amount received by sellersfor a good, equals the price of the good times thequantity sold. For inelastic demand curves, total rev-enue rises as price rises. For elastic demand curves,total revenue falls as price rises. ● The income elasticity of demand measures howmuch the quantity demanded responds to changesin consumers’ income. The cross-price elasticity ofdemand measures how much the quantity deman-ded of one good responds to changes in the priceof another good. |
|
|
Summary Chapter 5 The analysis of consumer choice looks at how con-sumers make decisions. There are a number of assump-tions underpinning the model which include that peoplebehave rationally to maximize their utility from theirgiven resources. ● A consumer’s budget constraint shows the possiblecombinations of different goods he can buy givenhis income and the prices of the goods. The slope ofthe budget constraint equals the relative price of thegoods. |
The consumer’s indifference curves represent hispreferences. An indifference curve shows the vari-ous bundles of goods that make the consumer equallyhappy. Points on higher indifference curves are pre-ferred to points on lower indifference curves. The slopeof an indifference curve at any point is the consumer’smarginal rate of substitution – the rate at which the con-sumer is willing to trade one good for the other. |
|
|
The consumer optimizes by choosing the point on hisbudget constraint that lies on the highest indifferencecurve. At this point, the slope of the indifference curve (the marginal rate of substitution between the goods)equals the slope of the budget constraint (the relativeprice of the goods). |
When the price of a good falls, the impact on the con-sumer’s choices can be broken down into an incomeeffect and a substitution effect. The income effect isthe change in consumption that arises because a lowerprice makes the consumer better off. The substitutioneffect is the change in consumption that arises becausea price change encourages greater consumption of thegood that has become relatively cheaper. |
|
|
The income effect is re ected in the movement from a lower to a higher indifference curve, whereas the substitution effect is re ected by a movement along an indifference curve to a point with a different slope.
The theory of consumer choice can be applied in manysituations. It can explain why demand curves can poten-tially slope upward, why higher wages could eitherincrease or decrease the quantity of labour supplied,and why higher interest rates could either increase ordecrease saving. |
SHUT UP DUDE |
|
|
Summary Chapter 6 When analysing a firm’s behaviour, it is important toinclude all the opportunity costs of production. Some, suchas the wages a rm pays its workers, are explicit. Others,such as the wages the rm owner gives up by working inthe rm rather than taking another job, are implicit. ● A firm’s costs reflect its production process. A typicalfirm’s production function gets flatter as the quan-tity of an input increases, displaying the property ofdiminishing marginal product. As a result, a firm’stotal cost curve gets steeper as the quantity pro-duced rises. |
A firm’s total costs can be divided between xed costsand variable costs. Fixed costs are costs that are notdetermined by the quantity of output produced. Variablecosts are costs that directly relate to the amount pro-duced and so change when the rm alters the quantityof output produced. ● Average total cost is total cost divided by the quantity ofoutput. Marginal cost is the amount by which total costchanges if output increases (or decreases) by 1 unit. |
|
|
For a typical firm, marginal cost rises with the quantity ofoutput. Average total cost rst falls as output increasesand then rises as output increases further. The marginalcost curve always crosses the average total cost curveat the minimum of average total cost. ● Many costs are xed in the short run but variable in thelong run. As a result, when the rm changes its levelof production, average total cost may rise more in theshort run than in the long run. |
Because a competitive rm is a price taker, its revenueis proportional to the amount of output it produces. Theprice of the good equals both the rm’s average revenueand its marginal revenue. ● One goal of rms is to maximize pro t, which equalstotal revenue minus total cost. ● To maximize pro t, a rm chooses a quantity of out-put such that marginal revenue equals marginal cost.Because marginal revenue for a competitive rm equalsthe market price, the rm chooses quantity so that priceequals marginal cost. Thus, the rm’s marginal costcurve is its supply curve. |
|
|
In the short run when a rm cannot recover its xed costs,the rm will choose to shut down temporarily if the price ofthe good is less than average variable cost. In the long runwhen the rm can recover both xed and variable costs, itwill choose to exit if the price is less than average total cost. ● In a market with free entry and exit, pro ts are driven tozero in the long run. In this long-run equilibrium, all rmsproduce at the ef cient scale, price equals the minimumof average total cost, and the number of rms adjusts tosatisfy the quantity demanded at this price. |
Changes in demand have different effects over differenttime horizons. In the short run, an increase in demandraises prices and leads to pro ts, and a decrease indemand lowers prices and leads to losses. But if rmscan freely enter and exit the market, then in the long runthe number of rms adjusts to drive the market back tothe zero-pro t equilibrium. |
|
|
Summary Chapter 7 Consumer surplus equals buyers’ willingness to payfor a good minus the amount they actually pay for it,and it measures the bene t buyers get from particip-ating in a market. Consumer surplus can be computedby nding the area below the demand curve and abovethe price. ● Producer surplus equals the amount sellers receivefor their goods minus their costs of production, andit measures the bene t sellers get from participat-ing in a market. |
Producer surplus can be computed by nding the area below the price and above thesupply curve. An allocation of resources that maximizes the sum ofconsumer and producer surplus is said to be ef cient.Policymakers are often concerned with the efficiency,as well as the equity, of economic outcomes. The equilibrium of supply and demand maximizes thesum of consumer and producer surplus. That is, theinvisible hand of the marketplace leads buyers andsellers to allocate resources efficiently. |
|
|
Summary Chapter 8 A price ceiling is a legal maximum on the price of a goodor service. An example is rent control. If the price ceilingis below the equilibrium price, the quantity demandedexceeds the quantity supplied. Because of the resultingshortage, sellers must in some way ration the good orservice among buyers. |
A price oor is a legal minimum on the price of a good orservice. If the price oor is above the equilibrium price,the quantity supplied exceeds the quantity demanded.Because of the resulting surplus, buyers’ demandsfor the good or service must in some way be rationedamong sellers. ● When the government levies a tax on a good, the equi-librium quantity of the good falls. That is, a tax on amarket shrinks the size of the market. |
|
|
A tax on a good places a wedge between the price paidby buyers and the price received by sellers. When themarket moves to the new equilibrium, buyers pay morefor the good and sellers receive less for it. In this sense,buyers and sellers share the tax burden. The incidenceof a tax (that is, the division of the tax burden) does notdepend on whether the tax is levied on buyers or sellers. ● A subsidy given to sellers lowers the cost of productionand encourages rms to expand output. Buyers bene tfrom lower prices. |
The incidence of a tax or subsidy depends on the priceelasticities of supply and demand. The burden tends tofall on the side of the market that is less elastic becausethat side of the market can respond less/more easily tothe tax/ subsidy by changing the quantity bought or sold. |
|
|
Summary Chapter 9 The efficiency of a tax system refers to the costs thatit imposes on taxpayers. There are two costs of taxesbeyond the transfer of resources from the taxpayer tothe government. The rst is the distortion in the allo-cation of resources that arises as taxes alter incentivesand behaviour. The second is the administrative burdenof complying with the tax laws. A tax on a good reduces the welfare of buyers and sellers of the good, and the reduction in consumer and producer surplus usually exceeds the revenue raised by the government. |
The fall in total surplus – the sum ofconsumer surplus, producer surplus and tax revenue –is called the deadweight loss of the tax. ● Taxes have deadweight losses because they causebuyers to consume less and sellers to produce less, andthis change in behaviour shrinks the size of the marketbelow the level that maximizes total surplus. Becausethe elasticities of supply and demand measure howmuch market participants respond to market conditions,larger elasticities imply larger deadweight losses. |
|
|
As a tax grows larger, it distorts incentives more, andits deadweight loss grows larger. Tax revenue rst riseswith the size of a tax. Eventually, however, a larger taxreduces tax revenue because it reduces the size of themarket. ● The equity of a tax system concerns whether the taxburden is distributed fairly among the population.According to the bene ts principle, it is fair for peopleto pay taxes based on the bene ts they receive from thegovernment. According to the ability-to-pay principle, it - Next - |
is fair for people to pay taxes based on their capability tohandle the nancial burden. When evaluating the equityof a tax system, it is important to remember a lessonfrom the study of tax incidence: the distribution of taxburdens is not the same as the distribution of tax bills. ● When considering changes in the tax laws, policy-makers often face a trade-off between ef ciencyand equity. Much of the debate over tax policy arisesbecause people give different weights to these twogoals. |
|
|
Summary Chapter 10 Goods differ in whether they are excludable andwhether they are rival. A good is excludable if it is pos-sible to prevent someone from using it. A good is rivalif one person’s use of the good reduces other people’s ability to use the same unit of the good. It can be arguedthat markets work best for private goods, which areboth excludable and rival. Markets do not work as wellfor other types of goods. |
Public goods are neither rival nor excludable. Examplesof public goods include reworks displays, nationaldefence and the creation of fundamental knowledge.Because people are not charged for their use of thepublic good, they have an incentive to free ride whenthe good is provided privately. Therefore, governmentsprovide public goods, making their decision about thequantity based on cost–bene t analysis. |
|
|
Common resources are rival but not excludable.Examples include common grazing land, clean air andcongested roads. Because people are not charged fortheir use of common resources, they tend to use them excessively. Therefore, governments try to limit the use of common resources. ● Merit goods such as education and health might beunder-consumed if left to the market and so the statecan step in to help provide services which providesocial as well as private bene ts. |
De-merit goods are goods which are over-consumedand which confer both private and social costs.Governments might intervene in the market to reduceconsumption in some way either through the pricemechanism (levying taxes on these goods, for example),or through regulation and legislation. |
|
|
Summary Chapter 11 When a transaction between a buyer and seller directlyaffects a third party, the effect is called an externality.Negative externalities, such as pollution, cause thesocially optimal quantity in a market to be less thanthe equilibrium quantity. Positive externalities, such as technology spillovers, cause the socially optimal quan-tity to be greater than the equilibrium quantity. Those affected by externalities can sometimes solvethe problem privately. |
For instance, when one businessconfers an externality on another business, the two 2 businesses can internalize the externality by merging.Alternatively, the interested parties can solve the prob-lem by negotiating a contract. According to the Coasetheorem, if people can bargain without cost, then theycan always reach an agreement in which resources areallocated efficiently. In many cases, however, reachinga bargain among the many interested parties is dif cult,so the Coase theorem does not apply. |
|
|
When private parties cannot adequately deal withexternal effects, such as pollution, the government oftensteps in. Sometimes the government prevents sociallyinef cient activity by regulating behaviour. At other times it internalizes an externality using Pigovian taxes.Another public policy is to issue permits. For instance,the government could protect the environment by issu-ing a limited number of pollution permits. The end resultof this policy is largely the same as imposing Pigoviantaxes on polluters. |
Government intervention to correct market failure mightbe subject to its own failures. This is because minoritygroups are able to exercise political power to in u-ence decision making of politicians and bureaucrats togain bene ts which might be outweighed by the costsimposed on the majority. |
|
|
Summary Chapter 13 The use of isoquants and isocosts helps to conceptu-alize the reasons why rms make decisions to changefactor combinations used in production and how theprices of factor combinations can also in uence thosedecisions. |
A Firm’s costs often depend on the time horizon beingconsidered. In particular, many costs are xed in theshort run but variable in the long run. As a result, whenthe rm changes its level of production, average totalcost may rise more in the short run than in the long run. |
|
|
Summary Chapter 14 A monopoly is a firm that is the sole seller in its market. A monopoly arises when a single rm owns a keyresource, when the government gives a rm the exclus-ive right to produce a good, or when a single rm cansupply the entire market at a smaller cost than many rms could. |
Because a monopoly is the sole producer in its market,it faces a downwards sloping demand curve for itsproduct. When a monopoly increases productionby 1 unit, it causes the price of its good to fall, whichreduces the amount of revenue earned on all units produced. As a result, a monopoly’s marginal revenue isalways below the price of its good. |
|
|
Like a competitive rm, a monopoly rm maximizespro t by producing the quantity at which marginal revenue equals marginal cost. The monopoly then choosesthe price at which that quantity is demanded. Unlike acompetitive rm, a monopoly rm’s price exceeds itsmarginal revenue, so its price exceeds marginal cost. |
A monopolist’s profit-maximizing level of output is belowthe level that maximizes the sum of consumer and pro-ducer surplus. That is, when the monopoly charges aprice above marginal cost, some consumers who valuethe good more than its cost of production do not buy it.As a result, monopoly causes deadweight losses similarto the deadweight losses caused by taxes. |
|
|
Policymakers can respond to the inef ciency of monopolybehaviour in four ways. They can use competition law totry to make the industry more competitive. They can regulate the prices that the monopoly charges. They can turnthe monopolist into a government-run enterprise. Or, if themarket failure is deemed small compared to the inevitableimperfections of policies, they can do nothing at all. |
Monopolists often can raise their pro ts by chargingdifferent prices for the same good based on a buyer’s willingness to pay. This practice of price discriminationcan raise economic welfare by getting the good tosome consumers who otherwise would not buy it. Inthe extreme case of perfect price discrimination, thedeadweight losses of monopoly are completely elim-inated. More generally, when price discrimination isimperfect, it can either raise or lower welfare com-pared to the outcome with a single monopoly price. |
|
|
Summary Chapter 15 A monopolistically competitive market is characterizedby three attributes: many rms, differentiated productsand free entry. ● The equilibrium in a monopolistically competitive mar-ket differs from that in a perfectly competitive marketin two related ways. First, each rm in a monopolistic-ally competitive market has excess capacity. That is, itoperates on the downwards sloping portion of the aver-age total cost curve. Second, each rm charges a priceabove marginal cost. |
Monopolistic competition does not have all the desirableproperties of perfect competition. There is the standarddeadweight loss of monopoly caused by the mark-up ofprice over marginal cost. In addition, the number of rms(and thus the variety of products) can be too large or toosmall. In practice, the ability of policymakers to correctthese inef ciencies is limited. The product differentiation inherent in monopolisticcompetition leads to the use of advertising and brandnames. Critics of advertising and brand names argue that -> Continuos on next slide |
|
|
Firms use them to take advantage of consumerirrationality and to reduce competition. Defenders ofadvertising and brand names argue that rms use themto inform consumers and to compete more vigorouslyon price and product quality. ● The theory of contestable markets suggests that rm behaviour may be directed at pricing strategiesdesigned to prevent new entrants or to exploit the valuein markets. |
Public policy, therefore, might be more directed at focusing on keeping barriers to entry as low as possible so that prices are driven down towards aver-age cost. Low barriers to entry provide a constraint on Firms seeking to adopt strategies to prevent competition. |
|
|
Summary Chapter 16 Oligopolists maximize their total pro ts by forming acartel and acting like a monopolist. Yet, if oligopolistsmake decisions about production levels individually,the result is a greater quantity and a lower price thanunder the monopoly outcome. The larger the numberof rms in the oligopoly, the closer the quantity andprice will be to the levels that would prevail undercompetition. |
The prisoners’ dilemma shows that self-interest canprevent people from maintaining cooperation, evenwhen cooperation is in their mutual interest. The logicof the prisoners’ dilemma applies in many situations, including advertising, common-resource problems andoligopolies. ● There are different models of oligopoly which eachmake different assumptions and result in different mar-ket outcomes. |
|
|
Policymakers use competition law to prevent oli-gopolies from engaging in behaviour that reducescompetition. The application of these laws can be con-troversial, because some behaviour that may seem toreduce competition may in fact have legitimate busi-ness purposes. |
HEYHO! ALMOST THERE! Don't give up. |
|
|
Summary Chapter 17 The demand for labour is a derived demand that comesfrom rms that use the factors to produce goods andservices. Competitive, pro t-maximizing rms hire eachfactor up to the point at which the value of the marginalproduct of the factor equals its price. ● The supply of labour arises from individuals’ trade-offbetween work and leisure. An upwards sloping laboursupply curve means that people respond to an increase inthe wage by enjoying less leisure and working more hours. |
The price paid to each factor adjusts to balance the sup-ply and demand for that factor. Because factor demandre ects the value of the marginal product of that factor,in equilibrium each factor is compensated according toits marginal contribution to the production of goods andservices. ● Because factors of production are used together, themarginal product of any one factor depends on thequantities of all factors that are available. As a result, achange in the supply of one factor alters the equilibriumearnings of all the factors. |
|
|
Workers earn different wages for many reasons. To someextent, wage differentials compensate workers for jobattributes. Other things equal, workers in hard, unpleasantjobs get paid more than workers in easy, pleasant jobs. ● Workers with more human capital get paid more thanworkers with less human capital. The return to accumu-lating human capital is high and has increased over thepast two decades. |
Economics, 3rd Edition Although years of education, experience and job characteristics affect earnings as theory predicts, there is much variation in earnings that cannot be explained bythings that economists can measure. The unexplainedvariation in earnings is largely attributable to naturalability, effort and chance. Some economists have suggested that more educatedworkers earn higher wages not because educationraises productivity but because workers with highnatural ability use education as a way to signal theirhigh ability to employers. |
|
|
If this signalling theory is correct, then increasing the educational attainment of all workers would not raise the overall level of wages. Wages are sometimes pushed above the level thatbrings supply and demand into balance. Three reasonsfor above-equilibrium wages are minimum wage laws,unions and efficiency wages. Some differences in earnings are attributable to dis-crimination on the basis of race, sex or other factors.Measuring the amount of discrimination is dif cult,however, because one must correct for differences inhuman capital and job characteristics. |
Competitive markets tend to limit the impact of discrimi-nation on wages. If the wages of a group of workers arelower than those of another group for reasons not relatedto marginal productivity, then non-discriminatory rmswill be more pro table than discriminatory rms. Pro tmaximizing behaviour, therefore, can reduce discrim-inatory wage differentials. Discrimination persists incompetitive markets, however, if customers are willingto pay more to discriminatory firms or if the governmentpasses laws requiring rms to discriminate. |
|
|
Summary Chapter 18 Data on the distribution of income show widedisparity in industrialised economies. ● Because in-kind transfers, the economic life cycle,transitory income and economic mobility are soimportant for understanding variation in income, itis dif cult to gauge the degree of inequality in oursociety using data on the distribution of income ina single year. When these other factors are takeninto account, they tend to suggest that economicwell-being is more equally distributed than is annualincome. |
Political philosophers differ in their views aboutthe role of government in altering the distributionof income. Utilitarians (such as John Stuart Mill)would choose the distribution of income to maxim-ize the sum of utility of everyone in society. Liberals (such as John Rawls) would determine the dis-tribution of income as if we were behind a ‘veil ofignorance’ that prevented us from knowing our ownstations in life. Libertarians (such as Robert Nozick)would have the government enforce individualrights to ensure a fair process -> continuous on next slide |
|
|
but then not be con- cerned about inequality in the resulting distribution of income. Various policies aim to help the poor – minimumwage laws, social security, negative income taxesand in-kind transfers. Although each of these policieshelps some families escape poverty, they also haveunintended side effects. Because financial assistance declines as income rises, the poor often faceeffective marginal tax rates that are very high. Suchhigh effective tax rates discourage poor familiesfrom escaping poverty on their own. |
HOLY MOLY YOU MADE IT! TIME TO GO DRINK A BEER WITH HECTOR! HE'S BEEN WAITING THERE ALREADY THE WHOLE TIME FOR YOU. SO YOU SHOULD REPAY HIM A FINE DUTCH BREWED BEER. PREFERABLY A DELARIUM. GOOD BLESS YOUR SOUL |
