ECON Final Flashcards
Efficient Resource Allocation Methods
- Market Price: market defines value of a resource in terms of $ impacting willingness to pay allocating scarce resources
- ex. sell labor and buy g+s - Majority Rule: majority of voters choose how resources resources are allocated for big societal decisions, works best for decisions that affect lots of people & self-interest must be suppressed to use resources efficiently
- ex. Taxes between public & private use, defense or healthcare - Command: command system allocates resources by the order of authority, works well in organizations with clear lines but bad in an entire economy
- ex. boss decides labor time & tasks - Contest: allocates resources to winner(s), works well when efforts of “players” are hard to monitor & reward directly
- ex. sporting, Oscars - First-Come First-Served: resources allocated to those first in line, works well when scarce resources can just serve one person at a time in a sequence
- ex. Supermarkets, restaurants - Lottery: allocate resources to those coming up lucky on some gaming system, works well when there is no effective way to distinguish among potential users of a scarce resource
- ex. state lotteries, casinos - Personal Characteristics: allocate resources to those with the “right” characteristics (education, behavior, beauty, old friend), can be used in discriminatory/racist/sexist ways
- ex. Marriage, scholarship, employment - Force: allocating resources effectively through threat, theft, robbery for survival, works well if all other methods fail
- ex. War, establishing legal framework poor vs rich, theft
Value vs Price vs Cost
Value=what we get, Price=what we pay+producer receives, Cost=what producer gives up (Firm distinguishes between Price & Cost)
Individual Demand vs Market Demand
Individual Demand: price vs quantity demanded relationship of one person
Market Demand: price vs quantity demanded relationship of all buyers in a market, horizontal/quantity sum of individual demand curves
Consumer Surplus + Expenditure - Individual vs Market vs Specific Quantity
Individual Consumer surplus: benefit received from good in excess of the expenditure on it, (Value-Price)/quantity bought, triangle above market price
Individual Expenditure: amount paid, area of rectangle below market price
Market Consumer Surplus + Expenditure: horizontal/quantity sum of individual CS + Exp, triangle below market price
Consumer Plus on a Specific Quantity of good: individual value - market price of good, vertical/price difference
Marginal Benefit vs Marginal Cost + Graph components
Marginal Benefit: value/max price willing to pay of one more unit of a good or service, represented by demand/MB curve
Marginal Cost: minimum price that firm is willing to accept for one more unit of a good or service, represented by supply/MC curve
Total Producer Surplus + Production Cost - Individual vs Market vs Specific Quantity
Individual Producer Surplus: amount received from sale of good in excess of the production cost on it received from (price received-min supply price) over quantity sold, area of triangle below market price and above supply curve
Market Producer Surplus: horizontal/quantity sum of individual PS
Production Cost: cost of producing good, space below market price = rectangle-PS triangle
Producer Surplus at a Specific Quantity: market price - marginal cost, vertical price difference
Individual Supply vs Market Supply
Individual Supply: price vs quantity of good supplied by one producer
Market Supply: price vs quantity of good suppliedby all producers, horizontal/quantity sum of individual supply curves
Efficient vs Inefficient Allocation of Resources on Graph + Impact on Production
Equal to the Equilibrium Quantity: MSC=MSB, Q supplied= Q wanted, society is happy, total surplus is maximized (CS+PS)
Left/Less than the Equilibrium Quantity: MSB>MSC = accumulative benefit to produce more
Right/More than the Equilibrium Quantity: MSB<MSC = excess production=accumulative cost, reduce production to be used for something else
Market Failure: any point not on market equilibrium, inefficient outcome, too little UP or too much produced OP
2 Types of Economists
Classical: no interruptions, forces push economy, may be delayed
Caines: interruptions needed, how long do forces take, provide money to speed up process
The Invisible Hand
Competitive markets send resources to their highest valued use in society. Consumers & producers pursue their own self-interest & interact in markets. Market transactions generate an efficient highest valued use of resources
Market Failure Reasons
- Price Regulations: put a block of price adjustments & lead to underproduction
- Quantity Regulations: limit the amount that a farm is permitted to produce also leads to underproduction
- Taxes: taxes on suppliers
- P+tax = rises cost & supply decrease UP - Subsidies: government gives funds to producers to make more
- P-subsidy = lowers cost & supply increase OP - Externalities: cost or benefit that the actions of producer’s have on 3rd party, although production can be production efficient, but not societally efficient
- Positive Externality = Underproduction
- Negative Externality = Overproduction - Public Goods: benefits everyone, no one can be excluded, thus less satisfying → Underproduction
- Freeriding: it is in everyone’s self-interest to avoid paying for a public good - Common Resources: resources owned by no one but can be used by everyone → Overproduction
- Tragedy of Commons: it’s in everyone’s self interest to ignore they costs of their own use of a common resource that fall on others = huge use of resources - High Transaction Cost: costs of services that enable a market to bring buyers & sellers together, too higher → underproduction
- Monopoly: a firm that is a sole provider of a good or service with the self-interest to maximise its profit setting a price to achieve this goal → produces too little & Underproduces
Rent Ceiling + When is it Efficient + Inefficiency + Unfair
Rent Ceiling (R): price ceiling in the housing market
Ineffective above market equilibrium, market will operate at equilibrium legally
Effective below market equilibrium, market consequences
Legal price cannot eliminate the shortage other mechanisms operate:
- Increase in potential loss from search activity: time spent looking for someone with whom to do business, costly,
- Black markets: illegal market that operates alongside a legal market where a price ceiling or other restriction is imposed. Illegal arrangements are made between renters & landlords at rents above the rent ceiling or unregulated market
Inefficiency of Rent Ceiling = Shortage
- Marginal Social Benefit>Marginal Social Cost = QD>QS=shortage
- Deadweight loss arises, producer surplus & consumer surplus shrinks
- Increase in potential loss from increased search activity
Rent Ceilings are Unfair
- Blocks voluntary exchange, generally does not benefit the poor as wealthy offer the highest profit
- Rent ceiling decreases quantity of housing & scarce housing is unfairly allocated by Lottery (the lucky)
First-come first-served (to those with greatest foresight & get their names on the list first)
Discrimination (housing to friends, family members, selected race, sex or political status)
Price Ceiling/Cap
Regulation that makes it illegal to charge above a maximum price
Minimum Wage + When is it Efficient + Inefficiency + Unfair
Minimum Wage: price floor applied to labor markets
Ineffective: below equilibrium, market will operate at legal equilibrium
Effective: above equilibrium, market consequences
Inefficiency of Minimum Wage - Unemployment:
- Effective min wage is set above equilibrium → QS>QD quantity of labor supplied by workers exceeds the quantity demanded by employers
- Quantity of labor decreases
- Surplus of labor/workers → unemployment (inefficient outcome)
- Less workers are hired than within an unregulated labor market
- Marginal social cost of labor to workers (leisure forgone)>Marginal social benefit from labor (value of goods produced)
- Full Loss Increases: DWL rises + Potential loss from increased job search increases → decreasing workers’ & firms’ surplus
Minimum Wage isn’t Fair:
- Increases the unemployment of rate of low-skilled younger workers as they lack job experience & wages have increased
- Government needs to create more job opportunities
Rent Ceiling + Min Wage Long - Draw Graph
1. Formulate 4 equations
2. Effective or Ineffective
3. At Rceil or Wmin=# What is QD & QS. Surplus or Shortage → effect?Unemployment of people or hours
4. DWL
5. Potential loss of search activity
6. Consumer & Producer Surplus
7. Is it fair?
- Isolate for Q or P
- Equilibrium Qe Pe, Rent Ceiling/Min Wage efficient or inefficient above or below equilibrium
- Sub in Rceil or Wmin in Q equations. Depending on which is greater QD or Qs, surplus or shortage, find difference
- Area of arrow point triangle from Qs to Qe
- Rectangle between CS & PS
- Area of top and bottom triangles
- Blocks voluntary exchange, generally does not benefit the poor as wealthy offer the highest profit
Rent ceiling decreases quantity of housing & scarce housing is unfairly allocated by Lottery, First-come first-served, discrimination
Minimum Wage isn’t Fair
Increases the unemployment of rate of low-skilled younger workers as they lack job experience & wages have increased
Government needs to create more job opportunities
