MAE101 Economics
Economics
Economics
Kartei Details
| Zusammenfassung | This flashcard set covers advanced macro-economic concepts at the university level, focusing on market dynamics, firm behavior, and externalities. It delves into topics like the Coase theorem, the tragedy of the commons, and various types of goods, including private, public, and common resources. The flashcards explore market failures, externalities, and government interventions, such as Pigovian taxes and permits. Additionally, it examines different market structures like monopolies, oligopolies, and monopolistic competition, highlighting their characteristics and inefficiencies. This set is ideal for economics students and professionals seeking to understand complex economic principles and their real-world applications. |
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| Karten | 92 |
| Lernende | 1 |
| Sprache | English |
| Kategorie | VWL |
| Stufe | Universität |
| Erstellt / Aktualisiert | 24.09.2018 / 01.10.2018 |
| Weblink |
https://card2brain.ch/box/20180924_mae101_economics
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Advertising (Critical and favourable perspective)
Critical perspective:
- manipulation of peoples taste
- misleading of customers by implying that products are more different than they truly are
Favourable perspective
- providing information to consumers
- increase in competition (due to greater variety)
- willingness to spend money can be a signal to consumers about the quality of products
Characteristics of Oligopoly
few firms
similar products
interdependent firms (voneinander abhängig) --> need to consider competitors strategies
Conflict between individual self-interest and collective well-being.
Disadvantages of a Oligopoly (or Duopoly)
Collusion: Agreement among firms in a market about qauntities to produce or prices to charge
Cartel: group of firms acting in unison --> try to control prices and output level
but competition laws often prohibit explicit agreements as a matter of public policy
What is a market?
What is a market failure?
1. Institution that involves the exchange of goods and services
2. Situation where the market fails to achieve an effiecient outcome or where the outcome is deemed to be socially undesirable
Cost and benefit analysis of regulation
A study that compares the costs and benefits to society of providing a public good
- expense against the gain --> measuring costs and benefits (mostly of public goods)
Causes of market failure --> Externalities
Third parties have to carry costs of economic transactions and are not compensated --> spillovers
Negative externality
An uncompensated cost born by a third party --> lead to oversupply
i.e.
- greenhouse effect
- pollution
- road congestion
Positive externality
An uncompensated benefit born by a third party --> lead to undersupply
i.e.
- education
- health and personal hygiene
- common language
- concerts
Options to face negative externalities
Internalising an externality involves altering incentives so that people take account of the external effects of their actions.
Achieving the socially optimal output
The government can internalise an externality by imposing a tax on the producer to reduce the equilibrium quantity to the socially desirable quantity.
Options to face positive externalities
Internalising externalities with subsidies
Government solution on externalities
Command-and-control policies (regulations, forbid or require certain activities)
Market-based policies (taxation and subsidies to align private incentives)
Pigovian tax vs permits
Pigoian tax
- tax sets the price of (i.e.) pollution which together with the demand curve determines the quantity of pollution
Permit
- Pollution permits set the quantity of pollution which together wich the demand curve determines the price of pollution
Definition of excludability and rivalry
Excludability
-property of a good whereby a person can be prevented from using it (i.e. if others haven't paid for it)
Rivalry
-property of a good whereby one person’s use diminishes other people’s use (i.e. if I eat an apple, others can't eat the same apple)
Definition of non-excludability and non-rivalry
Non-excludability
not possible to prevent people from consuming the public good
Non-Rivalry
not desirable to prevent people from consuming the good as long as the consumer receives some benefit from consuming the good. People can consume the same good (or bad) at the same time
Characteristics of private goods
- property right after purchase
- consumption reduces amout available for others --> rivalry
- can exclude others from consuming it --> excludability
- transferable, low information cost and many producers and consumers
Characteristics of public goods
- cannot exclude others --> non-excludability
- consumption by one person does not deplete consumption by others --> non-rivalry
i.e. national defence, lighthouses, police
Quasi public goods (exception) as non-rival up to a point, until congestion occurs (roads i.e. if traffic jam) --> therefore introduction of toll or congestion tax
The free-rider problem
A free-rider is a person who receives the benefit of a good but avoids paying for it.
i.e. Once a public good is produced, it does not cost anything for others to enjoy it; others can’t be excluded from the benefits of the public good. Thats why the free-rider problem prevents private markets from supplying public goods.
Four kinds of goods
Private goods i.e. clothing
are both excludable and rival
Public goods i.e. national defence
are neither excludable nor rival
Common resources i.e. fish in the ocean
are rival but not excludable
Natural monopolies (club goods) i.e. Deakin webpage
are excludable but not rival
The tragedy of the Commons
Common resources get used more than is desirable from the standpoint of society as a whole
Common resources tend to be used excessively when individuals are not charged for their usage.
i.e. fish, whales, other wildlife, clean air and water
The coase theorem
The Coase theorem is a proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
Microeconomics
studies indivudial choices and their impact in specific context, e.g. consumer and business choices and their impact in specific market and industries
macroeconomics
examines determinants of overall economic activity, unemployment, growth, inflation; Impact of fiscal and monetary policy choices
Choices: what results of the need to choose? Why can't we have everything?
limited resources, we have to give up something in order to have something else (opportunity costs).
As individuals we face constraints such as limited income and limited time, as an economy --> limited resources and knowledge
this creates scarcity, therefore we face opportunity cost
Opportunity cost
the value of the best alternative given up when making a choice.
due to scarcity we face trade-off's
PPF, definition? curve shape?
The PPF is a boundary that shows the alternative combinations of the two goods that can be produced:
- all available resources are fully allocated
- resources are used in the most efficient way
always downward sloping as resources are limited
if a point is below PPF curve then it is inefficient (but attainable)
if a point is above PPF curve then it is unattainable
--> therefore, trade-off's are faced and decisions must be made
Explanation of PPF bowed out shape
As we move from above to the bottom on the PPF, opportunity cost increases
Positive statement
statement is objective in nature, validity can be tested
normative statement
statement includes value judgement, that can be subjective (should can be a hint)
features of a market-based economy
Private ownership of resources and goods
option to make free choices in self-interest and voluntarily trade through markets
Adam Smith theorie
voluntary exchanges in markets make all parties better off, even though each party just looks after their own interest
theory of "invisible hand" --> guiding people to make efficient decisions
Why is voluntary exchange is mutually beneficial?
opportunity to trade in markets encourages people to specialize
--> focus on producing things at which they are relatively better
mutual gains from trade (baker vs teacher example)
marginal benefit vs marginal cost
the extra benefit of an action vs the extra cost
marginal cost: minimum supply price
sunk costs
a cost already incurred and cannot be recovered
sunk cost are irrelevant to make a decision
e.g. 20$ film ticket, but film sucks. I could go home and watch a tv show that is worth 10$ to me. since I gain a marginal benefit of 10$ through this and do not incur a marginal cost (0$) as the rest of the movie is worth noting to me, the choice is leaving the cinema
Absolute advantage
A country has an absolute advantage in a good if its productivity (output per unit of input) is higher
Adam Smith proposed that such reciprocal absolute advantage creates the basis for trade between two countries
comparative advantage
comparing the opportunity cost of a good, the one country with a lower opportunity cost has a comparative advantage.
We should always take into account the comparative advantage and not the absolute terms. If one country has smaller opportunity cost, there are good conditions for specializing in a particular good and start trading (theorie by david ricardo). it is not possible to have a comparative advantage in both goods (it is reciprocal)
divide numbers to 1 unit of good
What is a market? Why does it emerge?
a market is a medium through which buyers and sellers can find each other and voluntarily participate in a trade or exchange. Intention is usually communicated through price.
people value things differently, thats why there is an incentive to find each other and gain mutually from exchange
what fosters efficiency of a market? what has George Akerlof to do with this?
free flow of information
low transaction cost
George Akerlof: Markets can function poorly or not exist when consumers lack critial information
Technological advances and middlemen have contributed to market efficiency
Sources of demand
Tastes and preferences (desires and needs)
Income
Availability and price of substitutes and complements
Expectations
Number of consumers
Ceteris paribus
quantity demanded for any given price (all else equal, all other determinants of demand are held fixed)
or
same theory for supply
Law of demand
inverse relationship between price and quantity along the demand curve
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