Midterm #1 Study Guide
Midterm #1 Study Guide CDAE 061
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This 8 page Study Guide was uploaded by HD on Sunday October 2, 2016. The Study Guide belongs to CDAE 061 at University of Vermont taught by Joshua Farley in Fall 2016. Since its upload, it has received 168 views.
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Date Created: 10/02/16
CDAE 061 Midterm 1 Study Guide **This study guide is to be used alongside your own notes, the midterm review questions (and answers) and your own homework. I will put together the lecture notes associated with the assignments as well as the additional topics listed on the review questions. Note that this guide doesn’t include the notes from the 10/4 lecture or Assignment #5. Good luck!! ** Assignment #1 Desirable Ends o Definition of economics Allocation of available resources among alternative desirable ends, within and between generations o What are desirable ends? Is the answer to this based on ethical values or objective science? (normative or positive?) o What do economists say is the goal? Endless growth Satisfaction of individual preferences Preferences weighted by purchasing power Maximization of monetary value Does sustainability matter? Distribution? Who should own natural goods? Is stability desirable? Job security? Assignment #2 Macro opportunity costs vs. Micro opportunity costs Macro o Ecological resources you lose when you boost the economy What is lost when we produce more guns and butter? o Giving up ecosystem Linear throughput = waste output All resource extraction and waste output degrade ecosystems There’s a real cost to greater economic output!! o 1 and 2 ndlaw of thermodynamics Matter and energy can’t be created or destroyed Disorder and uselessness increase o Shifts in the production possibility frontier Get bigger, shifts out o Why do shifts lead to more production instead of more leisure? You lose more nowadays When productivity increases, what happens to the opportunity cost of leisure? Opportunity costs o Micro level = the best alternative you sacrifice when doing something else Allocating resources Allocating income Spend $ on beer and pizza you give it up and it therefore cannot be spent on books Allocating time If you weren’t doing what you were doing, what would you be doing? o Macro level = what we give up in ecological opportunities when the economy grows Externalities Textbook definition o An unintended and uncompensated loss or gain in the welfare of one party resulting from an activity by another party Marginal analysis and marginal benefits o Marginal analysis Rate of change Change in one additional unit “change in margin” Diamond water paradox Why do diamonds cost more than water? o Use value = total value of all units consumed o Exchange value = marginal value (last unit) Basic rules of econ Optimum occurs when: marginal benefit = marginal cost I’ll keep buying things as long as the benefit is bigger than the $ it costs o Non-marginal impacts Thresholds Small change in action has huge outcome Irreversible change = climate change Positive feedback loops Iclicker: What investments should we prioritize at the margin to achieve our desirable ends? o A: invest in natural capital, human capital, social capital, all innerlocking Cost benefit principle o If the benefits > cost, do it, BUT can all cost be measured by the same units? What units do we use? Do we put a $ value on everything? How do we do cost benefit in the future? Is this how people actually behave? Bill Gates and the $100 bill on the street—he would still pick it up Decision pitfalls o Proportional vs. absolute costs o Ignoring opportunity costs o Failure to ignore sunk costs o Failure to understand the average marginal distinction o Ignoring social costs and benefits Assignment #3 Comparative and absolute advantage o Absolute Maria is a better lawyer and typist than Jon o Comparative Maria is a better lawyer but only a slightly better typist than Jon o If the opportunity to practice law is the cost, then Jon has a comparative advantage in typing o Opportunity cost and exchange Maria types x2 fast as Jon She gets $200/hr for practicing law Jon charges $10/hr for typing She should practice law and pay Jon to type to save both hours and money Sources of comparative advantage Nations Natural resources Human capital Built capital Individual Natural abilities Education and training Experience Capital Assignment #4 Supply and Demand Supply curve o Why are marginal opportunity costs increasing? Human costs and comparative advantage Ecological costs Extraction costs o Are the costs always increasing? More detail later o Hamburgers in NYC supply curve example Marginal cost = sellers reservation price = lowest amount at which seller will produce good o What’s the supply curve for land in NYC? *iclicker* Which of the following statements about the demand curve is true? o A: Either C or D?? Demand Curve o A schedule/graph that tells us the quantity of a good that buyers wish to buy at each price o As price of a good/service goes up, what happens to the amount you want to buy? It goes down Unless it’s stock o Demand curve is downward sloping Consumption (use) vs. speculation (exchange to sell later) Law of Demand? o Other things remaining the same, if the price of a good rises Why do buyer’s purchase greater quantity @ lower prices and vice versa? o Substitution effect Change in quantity demanded of a good that results because buyers switch to/away from substitutes when the price of the good changes Do substitutes always exist? o Epipens don’t have them o Income effect Change in the quantity demanded of a good that results because a change in the price of a good changes the buyer’s purchasing power *iclicker* Which of the following is true? o Headline: Survey = US gas price drops 27 cents over 3 weeks A: all of the above The income effect will induce people to buy more gasoline The substitution effect will lead people to buy more gasoline The substitution effect could lead people to ride their bikes less The income effect could lead people to buy nicer bikes Ecological Economics vs. Neoclassical Economics What are the major differences between ecological economics and neoclassical economics? o Pre analytic vision (textbook pages 23 + 24) Each is logical within it’s own pre analytic vision Each is absurd from the viewpoint of the other o Disciplinary underpinnings o Understanding of complexity o Methodological approach o Goals o Attitudes towards economic growth Con = growth forever Eco = steady state economy at optimal scale In regards to Natural Capital o Neoclassical economics How do we allocate natural capital among the production of different economic goods and services? o Ecological economics How do we allocate natural capital and ecosystem services (both essential to survival)? How do we distribute natural capital within and between generations? Make decisions on the margin (marginal analysis) Neoclassical economics o Textbook definition Currently dominant school of economics, characterized by its marginal utility theory of value, its devotion to the general equilibrium model stated mathematically, its individualism, and its reliance on free markets and the invisible hand as the best means of allocating resources, with a consequent downplaying of the role of government o Focuses primarily on self regulating market economy o Built on math framework o Assumptions People are rational/self interested/always want more Economy can and should grow forever Ecological economics o Textbook definition The union of economics and ecology with the economy conceived as a subsystem of the earth ecosystem that is sustained by metabolic flow or throughput from and back to the larger system *also see the definition for throughput* o No single methodology (transdisciplinary) o Built on the assumption that economic system is a subsystem of the global ecosystem Expands when it needs to o Can’t make something out of nothing (thermodynamics) o Main goal Future matters Ecological sustainability o Not elegant or simple Highly complex world What distinguishes ecological economics from conventional (neoclassical) economics? o Pre analytic vision o Ecological economy is a complex evolving system Feedback loops Highly non-linear change Emergent phenomena Surprise Chaotic behavior Uncertainty and ignorance (in technology and ecology) o The ever growing circular economy Exponential economic growth o The economic system is simple Human behavior is simple (says economists), they always want more (selfish) Market system is simple We can model the system mathematically and show it moves toward optimal equilibrium Perfect knowledge and risk dominate uncertainty and ignorance o Physics of Ecology 1 law of Thermodynamics you can’t make something from nothing, can’t make nothing from something Natural resources are essential to economic production Opportunity cost of economic growth is degradation of ecosystems nd 2 law of Thermodynamics entropy increases in the universe = all work requires energy One way flow from natural resources human made economic services waste Increase in disorder and uselessness Like a digestive system, not a circulatory system “throughputs” not “inputs” = things don’t disappear Waste emissions further reduce the flow of goods and services from nature o Laws of ecology Conversion of ecosystem structure into economic products degrades and destroys ecosystems Example: biodiversity Waste emissions degrade/destroy ecosystems o Laws of economics Diminishing marginal returns, opportunity costs and uneconomic growth Sustainable growth is an oxymoron Ever continuing growth in material consumption is an impossible goal Economic development is possible but not continuous economic growth o Uneconomic growth o Sustainable scale = as economy grows, scale increases We care about this because we care about future generations Scale = size of economic system relative to the ecosystem that contains and sustains it Complements vs. Substitutes The difference between complements and substitutes o Complement An increase in the price of one causes a decrease in the demand of the other If a decrease in supply of an unpriced good leads to a decrease in demand for a market good or vice versa o Substitutes Two goods are substitutes in consumption if an increase in the price of one causes an increase in demand for the other If increase in supply of an unpriced good leads to a decrease in demand for a market good and vice versa Example: water and water bottle Their implications o AKA what will happen to supply and demand for a resource if the price of a complement/substitute increases or decreases
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