What logical fallacy assumes that since Y event follows X event, that X event must cause Y?
Post hoc ergo propter hoc Correlation is not causation
What logical fallacy rebuts an argument not through addressing the argument, but instead by deflecting, calling names, or attacking the motives or character of the person making the argument?
Argumentum ad hominen
What logical fallacy assumes that something must be true because many believe it?
Argumentum ad populum (appeal to popularity)
Other than the latin named types, name 4 logical fallacies and explain
Overgeneralisation - from the few expanding to the whole Appeal to emotion - using emotional response to justify an argument Appeal to experts - using uncited references > experts can be wrong Straw man - Taking an aspect of an argument and expanding it into a larger insinuation/proposition that can be easily torn down. Ie. Tearing down an argument that was not original but instead designed.
What are two types of thinking? Briefly explain each
Deduction and induction. Deduction utilizes universal truths and narrows to the particular in a logical manner. Induction will go from the specific to the general (common is stats where samples must be used.
What was the most recent economic revolution? Who was the big thinker? What is the big idea?
Game Theory. John Nash, Reinhard Selten, John Harsanyi. Study of strategic interactions as games.
Who is responsible for the Mathematical Revolution? What was his book? What scientific theory was used?
Paul Samuelson. Foundations of Economic Analysis (1947). Grounded economics in mathematical optimization. Used Thermodynamics.
In what period did the marginal revolution occur? Who were the big thinkers? What was the big idea?
Occurred in the late 19th century. William Stanley Jevons: A general mathematical theory of political economy(1862) . Alfred Marshall: Principles of Economics (1890) Investigated supply and demand - the time and use effect on value.
What was the hallmark of Adam Smith's An inquiry into the nature and causes of the wealth of nations (1776)?
Division of labour is a main driver of economic growth
In what period did the enlightenment happen? What people and events are associated with the enlightenment? What was enlightenment thought?
Period: 1715 - 1789 People and events: Voltaire was a major person. Events were the French and American Revolutions. People: Adam Smith: Writes the first work in economic theory: An inquiry into the nature and causes of the wealth of nations (1776) Thought: Society based on idea that all men are created equal, reason, and natural law. Economically, call for enlightened self interest > greed is not good > furtherance of others to further yourself.
What were the 5 economic revolutions? What period did they take place?
1st revolution: The enlightenment - 18th century 2nd revolution: The marginal - 19th Century 3rd Revolution: The Mathematical - 20th Century 4th Revolution: The Game Theoretic - 20th Century 5th Revolution: now - name ???
What is opportunity Cost? Give an example.
The opportunity cost of an action is the best alternative to that action. For example: you have a choice between 3 options: 1) facebook, 2)reading a book, 3) watching star wars. You don't like reading so your opportunity cost of facebook is watching star wars Everything has a price
How is the trade off between production goods within an economy illustrated? What is the slope of this diagram called?
The tradeoff is illustrated in a diagram called the Production Possibilities Frontiers (PPF). The slope of the PPF is called the marginal rate of transformation (MRT)
What are reasons that a PPF may shift?
• Reasons for the shift may be: ○ Natural events - disasters etc. ○ Technology change ○ Population change - manpower ○ Capital accumulation - of stuff and human capital ○ Trade ○ Political and economic institutions As argued by economist Acemoglu
What is the law of Demand?
Law of Demand: As the price of a good or service goes down, quantity demanded goes up
What factors can cause change in demand?
Ø Income levels will influence demand ○ Normal goods will increase in demand when income goes up ○ Inferior goods will decrease in demand when income goes up
Ø Population will influence demand ○ For example: a rising amount of seniors in a population will increase demand for prescription drugs.
Ø A change in the price of substitutes will influence demand ○ Example: in 1910 prostitution was a very profitable occupation. Now it is not. Reason: prostitution was a substitute for casual sex. As casual sex became more common, demand for prostitution decreased. ○ Example: If the price of coffee goes up, the demand for tea (a substitute for coffee) will go up Ø A change in the price of complements will influence demand ○ Example: Coffee and sugar: if the price of coffee goes up, the demand for sugar will go down.
Ø Expectations will influence demand ○ Example: In the expectation of a hurricane the demand for plywood goes up ○ Example: The expectation of a particularly bad winter will increase demand for shovels or snow blowers
Ø Tastes will influence demand ○ The more people decide that they want something the more the price goes up Example: Chinese consumers develop a taste for Nova Scotia lobster - increases demand and price for Nova Scotia lobster
What is consumer surplus? What is the calculation?
Consumer Surplus (CS) is a way to measure consumer benefit from buying a good or service. CS = WTP (max price willing to pay) - Price
In general terms, how is the consumer surplus calculated on a demand curve?
By calculating the area of a triangle. (Height)(length) / 2. For example: if the max price for a good is $100. and the market price is $50 which meets a demand for 10 units. Then Length = 10, height = 100-50 = 50 . 50 * 10 / 2 = $250 CS
What can change supply?
○ Entry and exit of producers
○ Changes in opportunity cost
○ State of nature Eg. Drought causes a lower supply of wheat
What is the producer surplus?
○ Producer surplus (PS) ○ Difference between the price the producer gets on the market and the minimum price he will accept ○ The supply curve represents different producers min price ○ Example: You are a beer producer ○ Min price = $8 per pint ○ Actual price = $10 per pint PS = actual price - min price (2=10-8)
What is the law of supply
Law of supply states that when prices are higher, producers produce more quantity
Describe a supply and demand surplus situation. What should occur to correct this?
Supplier are attempting to sell goods at too high a price - the quantity demanded is low. Therefore there is a surplus of goods. To correct - the suppliers will reduce price to sell surplus. Then demand will increase as price lowers. This will return things to equilibrium
Describe a supply and demand shortage situation. What should occur to correct this?
The price suppliers are asking is lower than it should be - therefore the qty demanded is higher - creating a shortage. To correct - suppliers will increase there price as demand is high. As the price increases, demand will go down. Both price and supply will trend towards equilibrium
How can the supply and demand curve be applied to labour markets?
As there is a surplus or shortage of workers wages will rise and fall. Surplus workers = lower wages. Shortage of workers = higher wages
According to economics, what is the firms main objective?
To maximize profit
What is economic cost for firms? Defined
Accounting Costs plus opportunity cost
What is Absolute Advantage?
It is the ability to produce the same good using fewer inputs than another producer
What is a production possibilities frontier?
A PPF shows all the combinations of goods that a country can produce given its productivity and supply of inputs
What is comparative advantage?
A country has a comparative advantage in producing goods for which it has the lowest opportunity cost
What is the quantity demanded?
The quantity that buyers are willing to and able to buy at a particular price
What is consumer Surplus?
It is the consumers gain from exchange, or the difference between the maximum price a consumer is willing to pay for a certain quantity and the market price
What is Total Consumer Surplus?
It is a measurement of the area beneath the demand curve and above the price
What is a normal good?
A good for which demand increases when income increases
What is an inferior good?
A good for which demand decreases when income increases
What does it mean if two goods are substitutes?
It means that a decrease in the price of one good leads to a decrease in demand for the other good.
What does it mean if two goods are compliments?
It means that a decrease in the price of one good leads to an increase in the demand for the other good.
What is the supply curve?
It is a function that shows the quantity supplied at different prices
What is the quantity supplied?
It is the amount of a good that sellers are willing and able to sell at a particular price
What is a producer Surplus?
It is the producers gain from exchange, or the market price and the minimum price at which a producer would be willing to sell a particular quantity
What is Total producer Surplus?
Is the measurement of the area above the supply curve and below the price
What is a Surplus?
A situation in which the quantity supplied is greater than the quantity demanded
What is a shortage?
A situation in which the quantity demanded is greater than the quantity supplied
What is equilibrium price?
The price at which the quantity demanded is equal to the quantity supplied
What is equilibrium quantity?
The quantity at which the quantity demanded is equal to the quantity supplied
What is elasticity of demand?
Measures how responsive the quantity demanded is to a change in price; more response equals more elastic
What factors make demand more elastic?
More substitutes = more competition
More time (the long run) - prices will adjust more over time
Specific Brands - part of a category - subs are easy to find
Luxuries - can be done without if required
Large part of budget - a significant part of budget we pay attention to
What factors make demand less elastic?
Fewer substitutes = less competition
Less time (short run) - in the short term price may be hard to change
Categories of product - The whole category - ie. Subs are difficult to find
Necessities - we need them - need to pay $
Small part of budget - so small we may not worry too much about changes in $
How is elasticity of demand calculated?
The percent change in quantity demanded / percent change in price
Note: Drop the negative sign
What do elasticity values mean?
Elasticity Less than 1 = Inelastic - Price and revenue move together
Elasticity more than 1 = elastic - Price and revenue move in opposite directions
Elasticity = 1 = Unit elastic - when price changes, revenue stays the same
Note: any negative sign is dropped
What is elasticity of supply?
Measures how responsive the quantity supplied is to a change in price
Inelastic - not very sensitive
Elastic - quite sensitive
What factors make supply less elastic?
Difficult to increase production at constant unit cost (eg. Raw material needed still)
Large share of market of inputs - price is set by many
Global supply - price change involves many factors
Less time (short run) - it is difficult to alter process quickly
What factors make supply more elastic?
It is easy to increase production at constant unit cost (assembly line possibly)
Small share of market for inputs - not much competition for inputs
Local supply - price change of inputs can be affected easier
Long run - (more time) - over time is easier to alter process
How is elasticity of supply calculated?
The percent change in quantity supplied / percent change in price
Note: drop any negative sign
What is it meant to be perfectly elastic or inelastic? For supply and demand?
For Supply = perfectly elastic is flat, perfectly inelastic is straight up.
For Demand = perfectly elastic is flat, perfectly inelastic demand is straight up
What is the formula for calculating elasticity of demand?
Ed = (1/slope) x (p/q)
How do taxes effect consumer surplus and producer surplus?
They will reduce them.
The triangle will shrink - government will make money, but there will be DWL
How is the deadweight loss of a tax calculated?
It is the triangle to the right of the tax gain. Tax the size of the tax as height. Take the qty lost by the tax as width. Multiply and divide by 2
How is tax burden calculated?
It is the rectangle with cost of the tax as height and the qty under tax as qty.
What effect does a subsidy have on market price and equilibriums?
There will be an artificial rise in quantity produced, also, consumer surplus and producer surplus will increase.
How do you calculate how much a subsidy effects taxpayers?
It is the p value of the subsidy multiplied by the qty under the subsidy.
What is a price ceiling?
A maximum price allowed by law
What is deadweight loss?
The total of lost consumer and producer surplus when not all mutually profitable gains are exploited
What is a price floor?
A minimum price allowed by law
What is protectionism?
The economic policy of restraining trade through quotas, tariffs, or other regulations that burden foreign producers but not domestic producers
What is a Tariff?
It is a tax on imports
What is a trade quota?
A restriction on the quantity of goods that can be imported: imports greater than the quota amount are forbidden or heavily taxed.
What is the long run?
The time after all exit or entry has occurred
What is the short run?
The period before exit or entry can occur
What is Total Revenue? TR
It is price times quantity sold
TR = P x Q
What is total cost? TC
The cost of producing a given quantity of output
TC = Fixed Costs (FC) + Variable Costs (VC)
What are fixed costs? Examples?
Costs that do not vary with output
What are variable costs? Examples?
Costs do vary with output
What is Marginal Revenue? MR
The change in total revenue from selling an additional unit
MR = change in Total Cost(TC) / change in quantity (Q)
What is marginal cost? How is it depicted on a diagram?
The change in total cost from producing an additional unit
The change in total costs / change in quantity produced
It is depicted as a check mark in a diagram
What is average total cost? How is it depicted on a diagram?
The total cost divided by the total output
TC / Q
If the marginal cost is greater than the average then the ATC goes up
If the marginal cost is less than the average then the ATC goes down
It is depicted as in a U like shape running through the marginal cost
What is average cost?
The average cost of production is the cost per barrel, that is, the total cost of producing Q barrels divided by Q
AC = TC / Q
What is a natural monopoly?
Exists when a single firm can supply the entire market at a lower cost than two or more firms.
In a perfectly competitive market, how is the amount to produce determined?
The amount produced should be an attempt to meet equilibrium price and marginal cost.
At What point is profit maximized? How is profit calculated on a diagram?
If MR(Marginal Revenue) > MC(Marginal Cost) you should produce more to maximize profit
If MR < MC then you should produce less
When MR = MC you maximize profits
(picture MC as a ball sliding up and down the MC check mark. The goal of the ball is to be equal to MR (which is P and AR). If it is below the line...slide up....if it is above the line...make less)
What is a shutdown point?
Where marginal cost is below average variable cost
What is Average Revenue?
Price x quantity / quantity
Note: Price is determined by supply and demand on the market. Ie...there is a diagram for q* representing the individual firm. And there is a diagram for Q* representing the greater market.
What is a dominant strategy?
Is a strategy that has a higher payoff than any other strategy no matter what the other player does
What is the Nash equilibrium?
A situation such that no player has an incentive to change strategy unilaterally
How do the different players behave in the Nash equilibrium?
The top player goes first, then the left if not defined. If defined then read the question.
How is a Nash equilibrium depicted?
In a matrix. The equilibrium is where both players have a positive outcome
Can there be two Nash equilibriums?
Yes there can be
What is a focal point?
Defined by Thomas Shelley: Strategy of Conflict
A solution people choose because it seems natural or salient to them. Ex. Eiffel tower at noon.
What is private cost?
The cost paid by the consumer to the producer
What is external cost?
The cost paid by people other than the consumer or the producer trading in the market
What is social cost?
The cost to everyone: the private cost plus the external cost
What are externalities?
The external costs or external benefits, that is, costs or benefits, respectively, that fall on bystanders
How are externalities depicted on a diagram?
There is a MSB - Marginal Social Benefit - for positive externalities
There is a MSC - Marginal social cost - for negative externalities
What is Social Surplus?
The consumer surplus plus producer surplus plus everyone else's surplus
What is efficient equilibrium?
The price and quantity that maximizes social surplus
What is the efficient quantity?
The social quantity that maximizes social surplus
What is a Pigouvian tax?
A tax on a good with external costs
What is a Pigouvian Subsidy?
A subsidy on a good with external benefits
What is rational ignorance? Who can this favour?
Occurs when the benefits of being informed are less than the costs of being informed.
It can favour special interest groups who are rationally informed.
What is the Median Voter theorem?
It says that when voters vote for the policy that is closest to their ideal point on a line, then the ideal point of median voter will beat any other policy in a majority rule election
What is a Deontological ethical approach?
An approach where the morality of an action is based on pre-existing rules, the action, as well as its consequences matter.
What is a Consequentialist ethical approach?
Only, or mainly, the consequences of action matter.
What is the Harm principle? Who defined it?
The idea that the only purpose for which power can be rightfully exercised over any member of a civilized community against his will, is to prevent harm to others.
John Stuart Mill, on liberty (1859)
AKA: as long as you don't harm others, do what you want
Who wrote the righteous mind? What did the research demonstrate? What are possible reasons for this?
Jonathan Haidt. That disgust is prominent in moral reasoning
The idea of natural law, human goodness is endowed...and psychology
Who wrote the good rebel? What does it postulate?
Louis Groake. That freedom only happens after morality and goodness are achieved.
How does freedom affect the free market?
Free markets only work when individuals within them are rational and good. Otherwise greed, dishonesty prevail
Adam Smith and rational self-interest, not greed
What is a key economic assumption regarding what is good? What does this assumption beg?
That economic efficiency is good. It begs the question, what about equity?
What are Rawlsian Ethics?
That the government should, without violation of basic rights, maximize the benefits going to the most disadvantaged groups
What is Nozick's entitlement theory?
If people engage in free and fair exchange, without violating others' rights, then this perfectly fine. Ensuing income inequality does not matter.
Who used economics to study public choice and behaviour?
James Buchanan, 1986
What are the public choice goals of firms, politicians, bureaucrats, and voters?
Firms: maximize profits
Politicians: Maximize votes
Bureaucrats: maximize their budget
Voters: max public service while minimizing taxes
What is political equilibrium?
Occurs when the goals of voters politicians, firms and bureaucrats balance
What is allocative efficiency?
The point on the PPF that attains productive efficiency, while also reflecting
Which of the following describes the tendency of governments to underprovide or
overprovide goods and services?