Copy of Econ exam #2 - Comprehensive study guide for Richard Takyi-Amoah\'s ECON101 micro-economics PDF

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Comprehensive study guide for Richard Takyi-Amoah's ECON101 micro-economics second exam. ...

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Chapter 5 Externalities and Economic Efficiency -Unintended Consequences- by-product: of various activities -Ex: Pollution- wouldn't be bad if it only affected the person who created it Externality is a benefit or a cost that affects someone who is not directly involved in a market transaction (production or consumption) Externality is an unintended consequence (side effect) of a market transaction Negative externality- is an adverse/ detrimental side effect (cost endured by a third party) - The market may produce a quantity of the good that’s is greater than the efficient amount Positive externality- is a beneficial side effect - The market may produce a good that is less than the efficient amount Private cost- is the cost taken on by the producer of a good External cost- is the cost taken on by the third party (bystander) Social cost- is the total cost of producing a good or service including private and any external cost. Private benefit is the benefit received by the consumer of a good External benefit received by a third party Social benefit is the total benefit of consuming a good or service including private and any external benefit Social Benefit= External benefit + Private benefit

What causes Externalities: - Property rights are the rights an individual or businesses have to the exclusive use of their property - Including the right to buy or sell Private solutions - Bargaining when property rights are well defined

Public Solutions- legal things that you have to do - Taxes - Subsidies - Quotas - Command and control policies - Transferable permit systems - Behavioral nudges Cap and Trade - Allowing firms to trade emission permits - A transferable emission permits systems requires polluters to possess a permit for each unit of pollution it emits - Regular issues number of permits equal to the emission goal Regular allows polluters to exchange permits - Incentives productive efficiency Externalities arise because of incomplete property rights or difficulty of enforcing property rights Set uniform emission- (technology) standard command all polluting sources to meet identical emission level Control compliance-

Different polluters likely have different compliance costs -Marginal benefit should equal Marginal Cost. Transaction Costs- the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of a good or service. Coase Theorem- Theory that affirms that where there are complete competitive markets with no transaction costs an efficient set of inputs and outputs to and from production-optimal distribution are selected, regardless of how property rights are divided. Tax and Negative Externalities

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To deal with a negative externality the gov should impose taxes This will cause the cost to equal the cost of the good or service Leads to efficient level of output

Subsidy When There is a Positive Externality: -Gov deal with positive externality in consumption by giving the consumers a subsidy(payment) equal to the value of the externality - Sin Tax: apply taxes on products that are known for negative externalities Pigovian taxes and subsidies- Government taxes and subsidies intended to bring about an efficient level of output in the presence of externalities Command-and-control approach: involves the government imposing quantitative limits on the amount of pollution allowed or requiring firms to install specific pollution control devices - Direct pollution controls of this type are not economically efficient Rivalry- A good is rival when one person’s consumption means no-one else can consume it Excludability- a good is excludable if those who don’t pay for it cannot consume it. Non-Rival means that one person’s consumption does not interfere with another's person’s consumption Non-Excludable means that it is impossible to exclude others from consuming the good whether they have paid for it or not Private Good: is both rival and excludable - Food, clothing, haircuts, Public Good: Is both nonrival and nonexcludable - Often supplied by the government - freeriding - benefit from good without paying for it Common resource: rival but not excludable - Forest, land Tragedy of the commons: refers to the tendency for a common resource to be overused - Results from the lack of clearly defined and enforced property rights Demand for Public Goods

The price elasticity of demand- measure the responsiveness of the quantity demanded to a change in price: The percentage change in quantity demanded divided by the percentage change in price Marginal Social costs: Marginal Private cost + Externality

Chapter 6 Price Elasticity of Demand is the responsiveness of quantity demanded - This is measured Percent Change in Quantity Demanded/ Percent change in price Demand is - Price elastic:if its price elasticity of demand is larger than 1 if E^d> 1 (big % change in qd as p changes) - Price inelastic: if the price elasticity of demand is smaller than 1 if E^d < 1 - Unit price elastic If the Price elasticity of demand is exactly to 1 E^d = 1 Elastic and Inelastic Demand Curve

Midpoint Formula Used to calculate elasticity

(Difference in quantity/ quantity midpoint)/ (Difference in price/ price midpoint) A word of caution- a percentage change is not the same when you go to B to A or A to B As P goes down by 1% Qd goes up by 1.73% Calculate average quantity and average price Calculate the % change in quantity and in price Calculate the price elasticity of demand Polar cases A vertical demand curve= perfectly inelastic (Qd does not change as price change) - Elasticity is zero A horizontal demand curve= perfectly elastic ( quantity demanded is infinitely responsive to price change) - A steeper demand curve is less elastic - Flatter demand curve is relatively more elastic Substitutes: Goods and services that can be used for the same purpose Compliments: Goods and Services that are used together Cross-price elasticity of demand- Measures the strength of a substitute or complement relationships between goods is the % change in the quantity demanded of one good divided by the % change in the price of another good - Substitutes will have positive cross price elasticity - Compliments will have negative cross price elasticity - Unrelated goods will have zero cross price elasticity Income elasticity of demand measures the strength of the effect of income on a quantity demanded is the % change in the quantity demanded divided by the % change in income Normal goods- Goods and services where demand increases as income increases Inferior goods- demand falls as income increases - Normal and a necessity will have a positive IE but less than one - Normal and Luxury will have a positive IE and greater than one - An inferior good will have a negative IE

What determines price elasticity of Demand? 1. The availability of close substitutes More substitutes= more elastic demand 2. Passage of time - Over time ppl adjust buying habits - Elasticity is higher in the long run than in the short run 3. Whether the good is a luxury or a necessity - People are more flexible with luxuries than necessities - Price elasticity of demand is higher for luxuries 4. The Definition of the Market - The more narrow the market is the more substitutes there are - - more elastic a demand is 5. The share of a good in a consumer’s budget - If a good is a small portion of your budget, you will likely not be very sensitive to price

Price elasticity of supply: is the responsiveness of the quantity supplied to a change in price(never negative)

Total Revenue: the total amount of funds received by seller of a good or service - Price x Quantity Price inelastic: customers are not sensitive to price - As you decrease you expect to gain few additional - Overall revenue goes down Price Elastic: - Customers are very sensitive - Decrease price= you expect to gain many additional customers - Revenue goes up Price Elasticity of Supply: - % change in quantity supplied/ % change in price - Depends on the ability and willingness of firms to alter the quantity they produce as price increases - Time period in question

Chapter 10

Consumers will pick the goods and services that will make them as well-off as possible - Examine their choices based off of how much income they have

A consumer’s budget constraint is the limited amount of income available for goods and services How do we measure your satisfaction from consumption? We call people’s satisfaction from consumption: utility As you continue to consume or buy something your utility changes (marginal utility) Marginal Utility is the change in total utility a person receives from consuming 1 additional unit of a good or service Diminishing marginal utility: as you consume more and more units the marginal utility begins to decrease

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You don’t need that much and it becomes less and less satisfying

Budget constraint- limits what they can buy Marginal utility = other marginal utility Income effect= you can buy more than before - You are “richer” - Price of normal good decrease you would eat more - Price of inferior good decreases you would eat less Substitution effect= Coffee has become cheaper relative to other product

How to solve the utility problems Marginal Utility: - Change in total Utility divided by the change in Quantity Marginal utility per dollar: marginal utility divided by the price of the good If coffee is a normal good, the income effect of the price reduction means more consumption of coffee If coffee is an inferior good the income effect of the price increase is less consumption of coffee If the price of coffee goes down, coffee becomes cheaper to relative bagels - The opportunity cost of consuming a cup of coffee falls - This suggests you should buy more coffee At different prices we have different consumption levels- we can graph a demand curve for coffee (figure 10.2)

We can assume that each consumer either likes - Z more than A

- A more than Z - A as much as Z We assume that more is always better: a rational consumer will always like M more than A We assume that choices are consistent - If the consumer prefers A over Z, M over A, then she must also prefer M over Z If the consumer likes Z more than A then - We conclude that consuming Z must make the consumer happier than consuming A - Put differently, Z yields a higher utility than A If the consumer likes Z as much as A - We conclude that consuming Z makes the consumer just as happy as consuming A - Put differently- A yields the same utility as Z Suppose the consumer is indifferent between •3 cups of coffee and 4 bagels (bundle B) •2 cups of coffee and 8 bagels (bundle E) •5 cups of coffee and 2 bagels (bundle F) In other words, these bundles give the consumer the same level of satisfaction from consumption

I3 Is an indifference curve a curve that shows the combinations of consumption bundies that give the consumer the same utility Bundle A is on a lower indifference curve - less utility - Bundle C is on a Higher indifference curve= more utility From B to E she gives up 4 bagels for 1 additional cup of coffee: MRS = 4/1 = 4 From E to F, she gives up 2 bagels for 2 additional cups of coffee: MRS = 2/2 = 1 The MRS tends to decrease as we move southwest, making the indifference curve bowed in toward the origin

Scarcity The consumer’s Budget Suppose you have $10, P(coffee) = $2 and P(bagel)= $1 each - If you spend all your money on coffee, how many cups could you buy?

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If you spend all your money on bagels, how many bagels could you get

Consumer Behavior: Celebrity endorsements: Consumer buys the products bc they trust the endorser or “i could be like them” Behavioral economics can explain certain aspects of business decisions - Consumers think it’s fair for firms to raise prices after an increase in cost Fairness: People will try and help others even if it makes themselves worse off Indifference Curves:

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Cannot cross Chapter 11

The seller’s Problem Technology(production) Recipe Costs: dough, cheese, pepperoni,tomatoes, oven macro Revenue: how much can i sell a slice Technology- the process a firm uses to convert inputs into outputs Technological change is the change in a firm's ability to produce a given level of output with a given quantity of inputs The short run is a period of time during which at least one of a firm’s inputs is fixed In the long run the firm can no input is fixed- adopt new technology, increase/decrease the size of its physical plant Variable costs are costs that change as outputs changes Fixed costs are costs that remain constant as output changed In the long run all costs are variable In the short run some inputs are fixed and not able to me changed Total cost is the cost of all inputs s firm uses in production Total costs= Fixed cost + Variable costs TC(Q)= FC +FC(Q) Fixed cost is the y intercept Explicit costs; costs that involves spending money (firm’s expenses) Implicit costs- nonmonetary opportunity costs (time) The production function shows the relationship between inputs and maximum output from those inputs -The marginal product of labor is the additional output from using one additional unit of input Average total cost: the total cost divided by the quantity

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U shaped line

-The average product of labor is the total output divided by the number of workers -The marginal cost is the additional cost of producing one more good or service

Long-run average cost curve (LRAC)- Shows the lowest cost at which a firm is able to produce a given quantity in the Long Run...