Econ Final Notes covering all lectures PDF

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Covers all of the content and lectures, should set you up perfectly for the final....

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Econ Final Notes Elasticity ● Price elasticity of Demand: % change in Q demanded / % change in P ● Cross price elasticity: % change in in Q of good A / % change in price of good B ○ Substitutes are positive, complements are negative ○ Used in antitrust cases ● Point elasticity: 1 / |slope| when P is in terms of Q (ex: P = 50-2Q , e = 1/2) ● Income elasticity: % change in Q / % change in income ○ Inferior goods = negative, normal goods = positive ● Inelastic: vertical line ● Elastic: horizontal line ● Elastic if bigger than 1, inelastic if less than 1, unit elastic = 1 ● More substitutes = demand more elastic ● Luxury goods = elastic ● In the long run demand is more elastic than in the short run Taxes ● ● ● ● ●

The bigger share of the tax burden falls on whatever curve is more inelastic Taxes are inefficient: lead to DWL and administrative costs The more elastic the curves are, the greater the DWL Taxes can distort incentives to work (If you tax the wealthy too much, they no work) When calculating equilibrium add the amount of tax to the supply side of problem

Accounting ● Accounting profit = revenue - expenses ● Economic profit = revenue - explicit costs - implicit costs (opportunity cost) ● Sunk cost: have already occurred and can’t be recovered ● PDV = A(1+R) -T Consumer Theory ● Budget constraint: PA QA + PB QB is less than/equal to income ● Marginal utility: added benefit of consuming one more unit ● Optimal consumption bundle: MUA / PA = MUB / PB (budget line is tangent to indifference curve) ● Indifference curves ○ Contours of the utility curve ○ Never cross ○ Downward sloping and convex ○ -MUA / MUB = marginal rate of substitution (slope) ○ Perfect substitutes = linear indifference curve

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Perfect compliments = L looking curves Income effect: shift outward Substitution effect: horizontal shift Normal good: income and sub effect move in same direction Inferior: move in opposite direction Almost always the sub effect dominates

Competitive Markets ● Price takers: some firms have market power, they can influence market prices ● If perfectly competitive, all producers are price takers ● Consumers are almost always price takers ● Perfectly competitive: many small producers, products are identical, and free entry ● Maximize profit: Price = Marginal Cost (MC = change in cost / change in output) ● Break even: Price = Average Total Cost ● Shut down price: Price = Average Variable Cost ● Long run: Qs = Qd (no economic profit and no firms want in or out) ● MPL = change in output / change in labor ● TC = Fc + Vc ● Increasing returns to scale: production increase = decrease in costs Monopolies ● Monopolies might: control scarce resources, increasing returns to scale, tech superiority, or legal protections ● Efficient: MR = MC (to get MR just double the slope of the demand curve) ● Quantity effect: Increase in output = increase in revenue ● Price effect: increase in output = decrease in price ● Prices way higher than MC ● Create artificial scarcity ● Solutions: antitrust enforcement, regulation of natural monopolies ● First degree price descrimination: charging individuals their WTP ● Third degree price descrimination: charging different prices to specific groups ○ Higher prices are charged to the more inelastic group ○ May lead to an efficient outcome by eliminating DWL Oligopolies ● Market share = firms output / total industry output ● HHI: sum of each firms’ market share squared ○ Less than 1500 = unconcentrated, greater than 2500 = highly concentrated ○ Mergers that increase HHI by more than 100 cause scrutiny ● C4: sum of the market share of 4 largest companies

● Efficient: MR = MC ● Price effect is smaller than that for monopolists ● Nash equilibrium (MC pricing): best choice I can make based on what others are doing ○ Dominant strategy: best choice no matter what the rival does ○ Bertand paradox: companies constantly undercut each other ■ Leads to prisoners dilemma ○ Escape forces through differentiation ○ Differentiation = market power Public Goods ● Non rival and non excludable ○ Rival: if one person's consumption displaces anothers ○ Excludable: if you have to pay for it or if the producer can control consumption ● Common resource: rival but not excludable ● Artificially scarce: excludable but non rival ● Underprovision of public goods leads to free riding ● Fixing overuse: regulation, taxes, licenses, property rights Externalities ● Marginal social benefit and marginal social cost ● Marginal private benefit and cost ● Policies: direct regulation, pigouvian taxes, coase theorem (free/cheap bargaining) ● No intervention: MPB = MPC ● Socially optimal: MSB = MSC ● MSC = private cost + externality ● Pigouvian tax: MPB = MPC + tax (plug socially optimal Q into MPB and MPC) ● If a group has different MPB curves, then add all of them together and set = MSC Income Inequality ● Income share ● Income ration ● Gini: scale of 0 to 1 (0 = equal, 1 = unequal) ● Tradeoff between equity and efficiency Risk Aversion ● Actuarially fair: price = expected loss ● The more concave the utility function, the more risk averse (diminishing MU) ● People with higher incomes are riskier ● People are riskier with less money ● Risk is tradeable ● Asymmetric information: when one side of a transaction has private information

● Moral hazard: one person takes actions that affect risk, but the cost are borne by someone else ● Adverse selection: hidden information or characteristic (reckless driver gets low deductible insurance)...