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Exam 2 study guide!

by: Moriah Gerber

Exam 2 study guide! ECON 142

Marketplace > Kansas > Micro Economics > ECON 142 > Exam 2 study guide
Moriah Gerber
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This study guide has everything and anything you will need to know for exam 2, including definitions, chapter notes, equations, and practice problems.
Dr. Brian Staihr
Study Guide
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This 13 page Study Guide was uploaded by Moriah Gerber on Wednesday September 28, 2016. The Study Guide belongs to ECON 142 at Kansas taught by Dr. Brian Staihr in Fall 2016. Since its upload, it has received 137 views. For similar materials see Microeconomics in Micro Economics at Kansas.


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Date Created: 09/28/16
Tuesday, September 27, 2016 Exam 2 Study Guide Chapter 5 Market Failure - What is Market Failure? • is a situation where the market left on its own fails to produce the efficient level of output - What does Market Failure usually result in? Government intervention • Public Goods / Non-rival and Rival - What is a public good? • Goods or services that are produced (and provided) by the government not the market - Are public goods Rival or Non-rival? • Non-rival - What is the difference between a Rival and a Non-rival good? • Rival means that if you consume it, nobody else can. • Non-rival means that if you consume it, others can too. - What is the difference between an Exclusive and a Non-exclusive good? • Exclusive: only the people who buy the good can receive the good - Ex: There is a concert held in an indoor space, you do not let people in who didn't pay for a ticket, therefore they cannot enjoy the good • Non-exclusive: you can’t stop somebody from receiving a good just because they didn’t pay for it - Ex: There is a concert on wescoe beach, you cannot stop people from listening to the music just because they didn’t pay for it 1 Tuesday, September 27, 2016 Four Kinds of Goods 1. Private goods: Starbucks lattes, levis jeans (rival, excludable) 2. Common resources: fish in the ocean (rival, not excludable) 3. Quasi-Public Goods: Cable TV (non rival, excludable) 4. Public Goods: national defense, mosquito spraying (non-rival, non-excludable) Externalities - Define Externalities: costs or benefits caused by a transaction that isn't apart of the original transaction. - Private vs. External costs and benefits • External cost: cost outside of the transaction • External benefit: benefit outside the transaction • Private cost: the transaction itself: buying the tree • Private benefit: the transaction itself: buying the tree - Social Costs = private costs + external costs • social costs are the full resource costs of an activity, including the externality - “Spillover effect” - neighbor buys and plants an apple tree. it costs $300. branches hangover your property. Every fall the apples drop off and you get the benefit of having free apples. Positive externality External Benefits - What happens to the demand curve? • shifts up - What happens when you have an external cost and you include that cost in the curves? • Increases cost curve —> shifts the supply curve - What happens when you have an external benefit and you include that benefit in the curves? Increase benefit curve —> shifts demand curve • 2 Tuesday, September 27, 2016 A name to know - Mr. Pigou (A.C. Pigou) - An economist who pioneered the idea to use taxes/subsidies which address externalities - This is the guy who made giving us loans possible! Chapter 6 Price elasticity (of demand) - What is another word for elasticity? • responsiveness • the bigger the response, the more elastic demand is - What are the two types of responses to elasticity? 1. buy more or buy less 2. buy or don’t buy period Ex. 1: If the price changes and you buy the same amount you were going to buy anyways, you did not respond to that price change • your demand is not responsive • your demand is not “elastic” Ex. 2: If the price changes and you buy a little more/less than you were going to buy anyways, you had some response to that price change your demand is somewhat responsive • • your demand is somewhat elastic Ex. 3: If the price changes and you buy a lot more/less than you were going to buy anyways, you had a big response to that price change. • your demand is very responsive • your demand is very elastic - Why should we care about elasticity? 3 Tuesday, September 27, 2016 • Elasticity of demand determines whether you earn more revenues by… - selling more units at a lower per-unit price or - selling fewer units at a higher per-unit price - What does elasticity of demand determine in regards to profit? • the size of margin (or profit) on a product Factors that make a good elastic or inelastic - What are the 5 demand factors that make a good elastic or inelastic? 1. Number of substitutes - lots of substitutes = demand is elastic (responsive) - few substitutes = demand is inelastic (not responsive) 2. Luxury or necessity - luxury = demand is elastic (responsive) - necessity = demand is inelastic (not responsive) 3. How broadly the market is defined - defined narrowly = demand is elastic (responsive) - defined broadly = demand is inelastic (not responsive) 4. Size of the good in the consumer’s budget (price relative to income) - Large part of budget = demand is elastic (responsive) - Small part of budget = demand is inelastic (not responsive) 5. Amount of time buyer has to adjust - What is the one supply factor that makes a good elastic or inelastic? • TIME: As more time passes, supply becomes more elastic (if you're the seller) How elasticity works **must memorize** - If demand is elastic and you lower the price your total revenues will increase - if demand is elastic and you raise the price your total revenues will decrease 4 Tuesday, September 27, 2016 - if demand is inelastic and you lower the price your total revenues will decrease - if demand is inelastic and you raise the price your total revenues will increase Calculating elasticity - What is the price elasticity equation? Price Elasticity = % change in quantity demanded % change in price - What four pieces of information do we need in order to calculate elasticity? 1. the original price 2. the new price 3. the original quantity demanded 4. the new quantity demanded - What is the midpoint formula? (Change in quantity demanded / average quantity demanded) (Change in price / average price) - Is a good whose demand elasticity falls between 0-1 (in absolute value) an elastic or inelastic good? • Inelastic - Is elasticity the same thing as slope? • NO - What is a good with a negative number? • An inferior good Cross price elasticity - What type of good has a cross price elasticity that is negative? • Complements - What type of good has a cross price elasticity that is positive? 5 Tuesday, September 27, 2016 • Substitutes ***HINT: the “S’s” (substitutes and positive) go together and the “n’s” (complements and negative) go together *** Price elasticity (of supply) - Define price elasticity. • When the price changes the quantity supplied will change - To calculate this, use the SAME equations as you did for demand - Practice problem: you’re the producer and buyers are “bidding up” the price of your product. Match the letter with the correct number. A. Right now: B. More time: C. Even more time: I. You can employ your workers longer hours II. You can expand your factory or build new capacity III. You can only supply what you have in stock Answer: A-III, B-I, C-II Income elasticity of demand - Define income elasticity of demand. • How the quantity demanded changes when your income changes - Is income elasticity positive or negative when a good is a necessity? • Income elasticity is positive but small - Ex: Gas: become richer you fill up on gas when your tank is only half way full instead of empty - Is income elasticity positive or negative when a good is a luxury? • Income elasticity is positive but large 6 Tuesday, September 27, 2016 - Ex: Jewelry: become richer and buy something you otherwise would not have bought, like jewelry - Is income elasticity positive or negative when the good in an inferior good? • Income elasticity is negative Combining elasticity with what we’ve done before (NOT in the book) - How do you calculate supply? Elasticity of Supply Elasticity of Supply + Elasticity of Demand - What does the number from that calculation represent? • The percentage of any tax that will fall on the buyer - How do you calculate demand? Elasticity of Demand Elasticity of Supply + Elasticity of Demand - What does the number from that calculation represent? • The percentage of any tax that will fall on the seller - What are we talking about if supply is on top of the equation? • The buyer - What are we talking about if demand is on top of the equation? • The producer - Not explicitly in your book: • The more elastic the supply is, the more of the tax falls on the BUYER • The more elastic the demand is, the more of the tax falls on the SELLER 7 Tuesday, September 27, 2016 Practice Problem Calculate what portion of a $10 tax will fall on the buyer, and what portion on the seller? P Q P Q 76 14 50 10 70 16 52 14 Chapter 7 - Do most people in the U.S. pay for health care? • NO! Most people buy health insurance, and then the insurance company pays for the health care - What percentage of Americans receive health insurance through their work? • 55% - What percentage of Americans receive health insurance through the government? 36% • - What percentage of Americans buy health insurance through the market? • 15% - What percentage of Americans just go without health insurance? • 10% - Which type of people usually receive MEDICAID? • Lower income - Which type of people usually receive MEDICARE? • The elderly Comparing health care systems through an example • United States: Bob breaks his arm, he has insurance and pays a premium every month —> his insurance pays the doctor - Third party payer system • Party “consuming” the product isn’t the party “paying” for the product 8 Tuesday, September 27, 2016 • Canada: Bob breaks his arm, he has health insurance through government, bob does not have to pay a premium but pays his taxes every month —> government pays the doctor when Bob breaks his arm - single payer system • United Kingdom: Bob breaks his arm, Bob does not have insurance but instead the doctor is a government employee, Bob does not pay a premium but pays his taxes every month —> Bobs taxes pay the doctor’s salary - Socialized Medicine **You should read about Japan’s health care system in the book** - How does the emergency work regarding health care vs. health insurance? • Emergency rooms are required to treat ACUTE cases but are NOT required to treat CHRONIC cases - Ex: coughing up blood, they determine you have lung cancer —> they stop you from coughing up blood but will not treat your cancer because you don’t have health insurance. - What is the Emergency medical treatment and active labor act (EMTALA)? • A federal law that requires anyone coming to an emergency department to be stabilized and treated, regardless of their insurance status or ability to pay, but since its enactment in 1986 has remained an unfunded mandate. The Principal-Agent problem - What is it? • One party acting on behalf of another party, but there is asymmetric or incomplete information - Ex. 1: You buy a coffee at Starbucks, you know its cold and that you want another. You buy a coffee at Starbucks for another person and you can’t tell if it is cold and that they want another - Ex. 2: Professor acting on behalf of the school - professors boss doesn’t actually know what they are doing or teaching during class each day - Define the Principal-Agent Problem. 9 Tuesday, September 27, 2016 • An agent pursues his/her own interests instead of the interests of the principal who hired him/her - Ex: Doctor says to patient “Here’s this test we can do on you, it costs $1000 but your insurance will cover it. Theres a 85% chance it won’t tell us anything, and a 15% chance it will give us important information about your health.” • Question 1: Is it in the patients best interest to go ahead and have the test done? • Question 2: Is it in the insurance company’s best interest to go and have the test done? Question 3: Who is the doctor acting on behalf of? • Asymmetric Information - Define asymmetric information. • When one party has more information than another party does entering a transaction - Does the buyer or seller know more information when it comes to insurance? buyer • Adverse Selection - Define adverse selection. • When one party takes advantage of another party’s lack of information - What does adverse selection result in? • Bad products or bad customers are more likely to be selected Risk Pooling - What is risk pooling? • A way to reduce adverse selection (in insurance) - Ex: Missouri requires that all people with a drivers license have car insurance as well - Why do we have to do this? 10 Tuesday, September 27, 2016 Moral Hazard - Define moral hazard. • An action one party takes after entering into the transaction that takes advantage of other party’s lack of information - Ex: You are careful to lock your apartment door all of the time until you buy insurance, than you no longer are so careful to lock your door The market for lemons - Who created this? • George Akerlof • He won nobel prize in 2001 because of this example - What is the main point of this example? • That because the seller has more information than the buyer, the market can “break down” - The car example - What are the three “punchlines” from this example? 1. Markets function badly when information is incomplete 2. Markets function better when information is more complete 3. The role for the government is to encourage/require more complete information Other things to know - Is health care rival or non-rival? • Rival - Is health care excludable or non-excludable? • Excludable - Is health care technically qualified as a public good? • No - What are 4 reasons the cost of health care ISN’T rising? 11 Tuesday, September 27, 2016 1. Excess paperwork, bureaucracy, duplication, and waste 2. Everyone can sue doctors for malpractice ; doctors have to pay malpractice insurance 3. Everyone can sue doctors for malpractice; doctors order unnecessary tests to cover themselves 4. Uninsured people go to the emergency room; this is expensive and inefficient - What are 3 reasons the cost of health care IS rising? 1. “Cost Disease” - The service industries do not see productivity gains like manufacturing industries do. - Low productivity in service industries causes higher costs, that is called cost disease 2. The population is aging: health care spending on people over age 65 is 6x greater than the health care spending on people between 18 and 24 3. Distorted economic incentives Obamacare - What year was it signed into law? • 2010 - What is Obamacare? • A set of adjustments to our current third party payer system - What is an individual mandate? • Requires all individuals to have insurance or pay a fine (Risk Pooling) • Low income people are offered a tax credit to offset the cost of buying insurance - What do the pre-exciting conditions do? • Stops insurance companies from denying coverage to people because of pre- existing conditions 12 Tuesday, September 27, 2016 • Stops insurance companies from charging a much higher premium to people with pre-existing conditions - What is an employer mandate? • Requires all firms who are employing more than 200 employees to offer insurance to employees • Requires all firms who are employing 50 or more employees must offer health care or pay a fee • Small firms do not have to offer insurance - How do we pay for Obamacare? • Taxes! People with incomes > $200,000 will see some tax increases - What is the maximum age at which a person can still be on their parents health insurance? • 26 13


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