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30 Cards in this Set
- Front
- Back
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5 key elements of supply and demand model
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Demand curve
Supply curve Demand and supply curve shifts Market Equilibrium Changes in market equilibrium |
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Neoclassical model assumptions
part 1 |
Markets tend to equilibrium
Static model Perfectly competitive markets, perfect information, no monopolies, firms and consumers are price takers consumer is rational policies should correct for market failiure Labor and Capital used as only input factors Tech is a free good |
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Tools of Gov't
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1. Direct administration of programs - Direct provision of a service or good
2. Grants - Giving money to an external organization or individual, organization, or government to provide the good; Common between levels of government; Provides an incentive to implement a policy without actually forcing 3. Contracts - Contracting for work to be done on behalf of a public organization 4. Taxes Expenditures and Credits - Providing tax exemptions to encourage or support certain types of behavior; Mortgage interest; Earned Income Tax credit 5. Laws - Requiring some behavior under penalty of imprisonment; Paying taxes 6. Regulations - Requiring some behavior 7. Loans - Subsidizing the cost of providing some good or service 8. Coercion and Force (Fear) - Imprisonment and harassment; Threatening self and family |
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Evolutionary Model
part 1 |
Creative destruction, no equilibrium
Dynamic model markets opperate under under uncertainty history matters |
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Evolutionary Model
part |
entrepreneurship critical
Firms can set prices too Technology is an important factor in creating wealth |
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Function of Government (4)
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Protect Citizens
Ensure Rule of Law Correct market failures or inefficiencies Ensure provision of public goods |
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Tools of Government
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Direct provision of good or service
Grant Contracts Tax expenditures and credits Laws and regulations Loans Coercion and force |
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Reasons for Gov't intervention in market (6)
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Externalities and public goods - too little or too much produced
Monopoly Market imperfections - information asymmetry Distributional equity Market overshoot Existence of market creates shortage |
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Failures with Government Intervention (4)
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No connection between cost and supply - inefficiencies created, no check on costs.
Internalities and Organizational Goals substitute for market mechanisms and feedback (revenue and profit) Derived externalities - unanticipated side effects Distributional inequality - distributing power and prestige (instead of wealth) |
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Why neoclassical economics
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used in policy analysis
Implicit assumptions of models need to be understood Microeconomic analysis grounded on these assumptions Ignores growth theory, innovation, and evol. economics |
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Why study Microecon?
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study of economic behavior at the individual level: consumer, firm, resource owner
V. important model in policy analysis want to understand effect of policy |
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Conclusion
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Studying econ is essential when analyzing effect sof policy
Need some kind of model to determine if one alternative is better than the other Use Neoclassical model(Supply and Demand model) |
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Why economic models
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Represents reality but not exactly
Purpose of model is to make predictions concerning phenomena in the real world Like frictionless world/physics need to understand the way it works perfectly in to understand why gov'ts might intervene and what failures occur b/c of intervention |
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Demand Shifters
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Change in the prices of related goods/services
Change in income Change in tastes change in expectations change in the number of consumers |
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Supply shifters
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Change in input prices
Change in the price of related goods and services change in technology change in expectations change in the number of producers |
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Market Demand curve
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horizontal sum of all the individual demand curve of all consumers in the market
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Market Supply curve
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the horizontal sum of all the individual supply curves of all producers in the market
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price elasticity of demand
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% change in quantity demanded/
% change in price (change in Qd/Q)/(change in P/P) |
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elasticity
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greater than 1 is price elastic
equal to one is unit elastic less than one is price inelastic |
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Elastic demand
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Quantity demanded is very responsive to price change
Even with a small change, the quantity change is large |
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Inelastic Demand
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Quantity demanded is very unresponsive to price changes
even though a large price change, quantity change is small |
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Elasticity is related to slope
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1/slope*(P/Q)= elasticity demand
prefered by economists because unit free. |
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Demand Curve to shift
Change in income |
Nomal goods
rise in income increases demand Inferior good Rise in income decreases the demand |
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What causes a demand curve to shift
changes in price of related goods |
substitutes: a fall in price makes consumers less willing to buy the other good.
complements, a fall in the price of one makes people more willing to buy the other good |
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Analysts need to know elasticity
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need to figure out what will happen if policy causes a change in price
to figure out how much the price will change because of the policy how much the quantity will change b/c of the change in price |
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Individual demand curve
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level of utility changes as we move along the curve
at every point, consumer is maximizing utility, satisfying MRS Marginal rate of substitution |
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budget line
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Price of food*Food plus Price clothing*Clothing equal income
Pf*F+PcC=I |
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slope of budget line
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change in y/change in x
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maximize market basket
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must be on budget line
must give consumer most preferred combination of goods and services |
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marginal utility
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additional satisfaction gained by one additional unit of good
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