Summary for final exam Microeconomics

Tóm tắt kiến thức quan trọng cho thi cuối kì môn kinh tế vi mô hệ Chất lượng cao đại học Ngoại Thương (FTU). Tóm tắt kiến thức quan trọng cho thi cuối kì môn kinh tế vi mô hệ Chất lượng cao đại học Ngoại Thương (FTU). Tóm tắt kiến thức quan trọng cho thi cuối kì môn kinh tế vi mô hệ Chất lượng cao đại học Ngoại Thương (FTU). Tóm tắt kiến thức quan trọng cho thi cuối kì môn kinh tế vi mô hệ Chất lượng cao đại học Ngoại Thương (FTU). Tóm tắt kiến thức quan trọng cho thi cuối kì môn kinh tế vi mô hệ Chất lượng cao đại học Ngoại Thương (FTU). Tóm tắt kiến thức quan trọng cho thi cuối kì môn kinh tế vi mô hệ Chất lượng cao đại học Ngoại Thương (FTU). Tóm tắt kiến thức quan trọng cho thi cuối kì môn kinh tế vi mô hệ Chất lượng cao đại học Ngoại Thương (FTU). Tóm tắt kiến thức quan trọng cho thi cuối kì môn kinh tế vi mô hệ Chất lượng cao đại học Ngoại Thương (FTU).

Summary for final exam MICROECONOMICS

1 People face trade-offs

efficiency va equity

2 The cost of sth is what you

give up to get it

3 Rational people think at the margin

4 People respond to incentives Reward

Punishment

5 Trade can make everyone better off

6 Markets are usually a good way to organise

economic activity

+Market economy: allocates resources through decentralised

decisions of firms/ household

+Invisible hand

7 Goverments can sometimes improve Market Outcomes

Market failure: +Externality

+Market power (Monopoly)

8 Standard of living depends on ability to produce goods and

services

Living standard is affected by (+)Productivity (-)Budget deficit

9 Prices rise when government prints too much money

=> Inflation

10 Society faces a short term trade off between inflation

and unemployment

=> Philip curve: reduce inflation=temporary rise in unemployment

Chapter 1: Ten Lessons from Economics

Chapter 2: Thinking like an Economist

Producion Possibiliies Fronier: graph that shows various

combinaions of output the economy can possibly produce –given available factors of

Chapter 4: The Market Forces of Supply and Demand

Law of Demand: quanity demanded of a good falls when price of the good

rises (other things being equal)

Supply

Chapter 5: Elasticity and its Applications

Elasic- if demand changes substanially to changes in price

Inelasic- quanity demanded responds slightly to changes in price

1 Availability of close subsitutes

close subsitutes = MORE elasic demand (eg buter and margarine)

no subsitutes = less elasic demand (eg eggs)

2 Necessiies vs Luxuries

luxuries = elasic (eg high price of yacht = low demand)

necessiies = inelasic (eg going to the doctor)

3 Deiniion of Market

narrow deiniion = elasic (eg ice cream- other close subsitutes such as frozen yoghurt) broad deiniion = inelasic (eg food- no other subsitute)

4 Time Horizon 5 PE is higher if you spend a big part of your income

longer time period = MORE elasic (demand may fall slowly- drasic over ime)

What inluences Price Elasticity of Demand?

Elasic: incr price = decr revenue

(food= small elasicity, luxuries= large elasicity)

(incr price of computers = reduced demand for sotware)

Price Elasicity of Supply:

1 Depends on lexibility of sellers to change amount of supply they produce

2 Longer ime period = supply more reacive to price

percentage changegood 1 percentage changegood 2 percentage change in quantity demanded

percentage change income

93 CHAPTER 5 ElASTiciTy And iTS ApplicATiOn

2 leads to a 22% decrease in quantity demanded.

(a) Perfectly Inelastic Demand: Elasticity Equals 0

$5 4

Demand

Quantity

100 0

(b) Inelastic Demand: Elasticity Is Less Than 1

$5 4

Demand

Quantity

100 0

1 At any price above $4, quantity demanded is zero.

Figure 1

The Price Elasticity of Demand

The price elasticity of demand determines whether the demand curve is steep or flat

Note that all percentage changes are calculated using the midpoint method.

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The flatter the curve, the bigger the elasticity

The steeper the curve, the smaller the elasticity

Chapter 6: Supply, Demand and Government Policies

Price ceiling

Price floor

Short run: (Small shortage) supply and demand are inelasic

Long run: (large shortage) supply and demand for housing is more elasic

Tax on seller Tax on buyer

=> Taxes on buyers AND sellers are equivalent

~Only diference is who sends the money tothe government

Look at the curve: + D curve for buyers

+ S curve for sellers

=> which one is STEEPER -> share MORE burden of tax

OR Tax burden falls more heavily on side of the market that is LESS ELASTIC

Chapter 7: Consumers, Producers and the Eiciency of Markets

consumer surplus The amount a buyer is willing to pay for a good

- the amount the buyer actually pays for it

Lower Price Raises Consumer Surplus

producer surplus the amount a seller is paid for a good - the seller's cost of providing it

Higher Price raises Producer Surplus

Total surplus = Value to buyers - Cost to sellers

allocaion of resources that maximises total surplus = eicient

Evaluating the Market Equilibrium

- allocate supply of goods to buyers who value them most highly (measured by willingness to pay)

- allocate demand for goods to the sellers who can produce them at lowest cost

- produce the quanity of goods that maximises the sum of consumer and producer

surplus-Supply and Demand – Markets and Welfare (Part 1)

Welfare Economics: Studies how the allocation of resources influences people’s well-being

- How much of each good is produced?

- Which producers produce it?

- Which consumers consume it?

Willingness to Pay (WTP): The maximum amount a buyer will pay for a good or service

- Measures how much the buyer values the good or service

- WTP and Demand Curve (staircase shape)

- Marginal buyer: the buyer who would leave the market if price were any higher

Consumer Surplus : The difference between the amount a buyer is willing to pay and amount paid

- Consumer Surplus (CS) = WTP – P

- CS = Area between Price and Demand Curve – area below Demand Curve, above Price

- Loss in CS (rise in price) due to A buyers leaving market and B remaining buyers paying higher P

Supply Cost: The value of everything a seller must give up producing a good or service

- Includes the cost of all resources used and opportunity cost

Willingness to Sell (WTS): The lowest amount a seller is willing to sell or make for a good or service

- Marginal Seller: the seller who would leave if the market if price were any lower

Producer Surplus : The difference between the amount a seller is paid for a good or service and cost

- Producer Surplus (PS) = P – Cost

- PS = Area between Price and Supply Curve – area above Supply Curve, below Price

- Loss in PS (fall in price) due to A sellers leaving market and B remaining seller getting lower

Total Surplus: total gains from trade in market = (value to buyers) – (cost to sellers) = CS + PS

Market’s Allocation of Resources

Market Economy: Resource allocation is decentralized; determined by interactions of sellers and buyers Efficiency of Allocation: When it maximizes total surplus

- The goods are consumed by the buyers who value them most highly

- The goods are produced by producers with the lowest costs

- Raising or lowering the quantity of a good would not increase total surplus

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Market Equilibrium: At maximum efficiency; no other outcome produces a higher total surplus Laissez Faire (allow them to do): The idea that government should not interfere with the market Free Market vs Central Planning (ex Communism): Inefficient

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At the Market Equilibrium point, total surplus is highest

Chapter 8: The cost of taxation

The Deadweight Loss of Taxation

the fall in total surplus that results from a market distortion, such as a tax

deadweight loss (=C+E)

The Determinants of the Deadweight Loss

The more elastic

is supply The larger

is the DWL

The more elastic

is demand The larger

is DWL

When a tax increases, DWL rises even more

When a tax is small, increasing it causes tax revenue to rise

When the tax is larger, increasing it causes tax revenue to fall

Econ 101 Midterm 2 - Study Guide

Chapter 8 – Taxes

- Create a wedge between the price buyers pay and the price sellers receive

*Adding a tax moves the quantity sold (QT) so there is DEADWEIGHT LOSS

o Deadweight Loss (DWL) – the fall in total surplus that results from a market

distortion, such as a tax (C + E in graph)

 The price elasticities of supply and demand determine size of DWL

 Governments will tax the good/service with the smallest DWL to raise revenue

 The more INELASTIC a market is, the harder it is for sellers and buyers to leave the market when it is taxed.

- Supply & Demand & Taxes

o When a market is INELASTIC = DWL is small (good) (ex Medicine, carbon tax)

o When market is ELASTIC = DLW is high (bad) (ex Yachts)

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- Government

o Big Government – provides more services but requires higher taxes

o Smaller Government – proves less services, but requires less taxes

 Tax on labour income is very important, since it is the biggest source ofgovernment revenue

 Marginal Tax Rate – (tax on the last dollar of earnings) is 40%

o Small tax spread over lots of people is GOOD (ex GST)

o Large tax is bad because it increases DWL

o Laffer Curve – shows the relationship between the size of the tax and tax revenue.

 If taxes are raised to high eventually the government stops making money from it because no one will buy anything

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Chapter 10 – Externalities

- Externality – Market Failure, a cost or benefit from an action that affects a bystander They

can be positive (beneficial) or negative (adverse)

o Market is not efficient

o Government can help with externalities

 Negative Externalities – other people have to deal with the problem you

create You do not bear the full of cost of what you are doing

 Neighbors barking dog

 Air pollution

 Loud stereo in the apartment next to you

 Internalizing an Externality – the incentives in the market are altered so that

individuals take into account the external effects of their actions

 Taxes are often used to internalize an externality

 In the previous example, if a $1 tax per gallon was imposed then sellerscost = social costs

 If market participants must pay social costs then market eq’m = social optimum

 Positive Externalities – benefits others and the person/business is not

compensated for all of the benefits

 Ex Thomas Edison and the light bulb, there is no way that he received all of the benefit from his invention (ex Getting vaccinated, research, individuals attending college/university.)

 Private Value – direct value to individuals engaged in the action.

 External Value – the value to bystanders.

 Socially Optimal Quantity – where the social value intersects the

Chapter 10: Externalities

Social Value – benefit everybody gets.

 Private Benefit + Social Benefit = Social Benefit

 With NEGATIVE externality the eq’m quantity will be LARGER than is socially desirable

 With a POSITIVE externality the eq’m quantity will be SMALLER than is socially desirable

- Government Policy

 2 Responses to Externalities

 Command and Control Policies – control actions directly Ex Limits on

air pollution, requiring manufacturers to use a technology to reduce airpollution (low incentive)

 Market Based Policies – offer incentives so that individuals will choose

the socially optimal quantity Ex Taxes on pollution, subsidies for research, cap-and-trade for pollution

 Corrective Tax (& Subsidies) – a tax designed to induce private

decision-makers to take account of the social costs that arise from a negative externality

 AKA Pigovian Taxes after Arthur Pigou.

 The ideal corrective tax is equal to the external cost

 Moves economy toward a more efficient allocation of resources

o Abatement – when you try to get rid of something bad.

 Ex Pollution Tax is efficient because:

o Firms with low abatement costs will reduce pollution to reduce their tax burden

o Firms with high abatement costs have greater willingness to pay tax

 Ex Of a Corrective Tax: Gas Tax

o Targets 3 negative externalities: congestion, accidents, pollution

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 Tradable Pollution Permits – when government auctions off permits for rights

to pollute

 Firms with a low cost of reducing pollution do so and sell their unused permits

 Firms with high cost of reducing pollution buy the permits

 Coase Theorem – Let people deal with externalities privately.

 Transaction Costs – the costs parties incur in the process of agreeing to

and following through on a bargain

Chapter 11 – Public Goods & Common Resources

- Characteristics of Goods:

 Excludable – you can prevent people from consuming it (ie: food, cell service,)

(NOT excludable: AM/FM radio signals, national defence etc.)

 Rival – if one person’s consumption diminishes others’ use (ie: pizza,

someone borrowing your stuff etc.) (NOT rival: mp3 song, cable tv etc.)

- Types of Goods:

 Private Goods – Excludable & Rival

 Ie: clothes, phone, food etc

 Public Goods – Not Excludable | Not Rival

 Ie: clean air, national defence

 Problem with free riders

 Not enough of the good is produced because there is little incentive

 Common Resource – Not Excludable | Rival

 Ie: fishing, public ponds, timber

 Free riders

 Costs everyone else

 Have to be governed so not over used



 Natural Monopolies – Excludable | Not Rival

 Ie: private parks, cable tv, Netflix

- Tragedy of the Commons – When there is a free resource the public will begin to over use it

making it no good for anybody

Policies can be made to govern and put limits on how much a resource is used (fishing licence etc.)

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Public Sector – Government Interactions & Policy (Part 1)Externalities: type of market failure; a cost or benefit from an action that affects a bystander

- Market outcome is not efficient; people committing actions are not bearing full costs/benefits

- When externalities exist, governments can improve efficiency

Supply Curve: shows private cost (costs directly incurred by sellers)

Demand Curve: shows private value (prices WTP)

Social Cost: Private Cost + External Cost

Social Value: Private Value + External Benefit

Social Optimum for Negative Externality: Where social cost intersects demand curve

- When market equilibrium quantity > social optimum quantity; one solution is taxing sellers

- Internalizing Externality: market incentives are altered so traders are effected by their actions

- When market participants pay social costs, then market equilibrium = social optimum

Social Optimum for Positive Externality: Where social value intersects supply curve

- Private Value: direct value to individuals engaged in the action

- External Value: the value to bystanders

- Any value below than optimal Q, social value of an additional unit exceeds its cost

- Any value above optimal Q, the cost of an additional unit exceeds its social value

- When market equilibrium quantity < social optimum quantity; one solution is subsidy

Government Policy: Two approach or responses to externalities

- Command and Control Policies: Control actions directly

- Market-based Policies: Offer incentives so that individual choices creates social optimum

Corrective Tax (Pigovian Taxes): Designed to induce traders to take account of social costs/benefits

- Move economy toward a more efficient allocation of resources (social optimum)

- Ideal Corrective Tax = External Cost

- Ideal Corrective Subsidy = External Benefit

Private Solutions to Externalities:

- Moral codes and social sanctions

- Charities

- Contracts between market participants and the affected bystanders

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