Econ 202 - 3/14
Econ 202 - 3/14 ECON*202*04
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This 10 page Study Guide was uploaded by Taylor Landis on Sunday March 13, 2016. The Study Guide belongs to ECON*202*04 at Coastal Carolina University taught by Dr. Jordan in Spring 2016. Since its upload, it has received 60 views. For similar materials see Microeconomics in Economcs at Coastal Carolina University.
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Date Created: 03/13/16
CHAPTER 5 economic efficiency - efficiency implies maximum value of output from resource base - two necessary conditions: 1. all activities providing more benefits than costs must be undertaken 2. no activities that provide less benefits than costs should be undertaken two major functions of the government: 1. protective function - protection of individuals and their property against invasion by others - involves maintenance of legal structure for enforcement of contracts and mechanism for settlement of disputes 2. productive function - production of goods and services not easily be provided through private markets - involves provision of limited set of goods that are difficult to supply through markets reasons the “invisible hand” may fail: 1. lack of competition - too few units will be produced - prices will be higher 2. externalities - exists when markets do not register fully costs and benefits - external cost - when actions of an individual or group harm others outside the market transaction without their consent - external benefit - when actions of an individual or group generate benefits for non-participating parties 3. public goods - non-rival in consumption - different individuals can simultaneously enjoy consumption of the same product or service - non-excludable - it is not possible to restrict consumption of the good or service to only those who pay for it 4. poor information - difficult to evaluate on inspection and seldom repeatedly purchased from the same producer - potentially capable of serious and lasting harmful side effects that cannot be predicted by a lay-person - consumer’s information problem is minimal if an item is purchased regularly - market responses to poor information: 1. consumer information publications 2. brand names and franchises 3. warranties CHAPTER 6 government spending as a share of the U.S. economy: 1930-2010 - government spending has increased - size of the U.S. government has increased notably over the last several years (almost 40%) size of the government = (government spending/GDP)(100) the growth of government transfer payments - have grown notably since 1930 - transfer payments - tax income from some and transfer it to others - social security - unemployment insurance - welfare differences and similarities between government and markets - competitive behavior is present in both markets and public sectors - scarcity imposes the aggregate consumption-payment link in both sectors - public sector organization can break the individual consumption-payment link - private sector action is based on mutual agreement - public sector action is based on majority rule - when collective decisions are made legislatively, voters must choose among candidates who represent bundle of positions on issues - income and influence are distributed differently in the two sectors, but still unequal public choice analysis: - applies tools of economics to understand the political process - self-interested behavior and an incentive structure are present in both markets and political sectors - the political process can be viewed as complex interaction among these groups: 1. voters - taxpayer/consumer 2. politicians 3. bureaucrats - voter - consumer - support candidates that they expect to receive a net benefit from - rational ignorance effect: recognizing their individual votes are unlikely to be decisive, so voters have little incentive to obtain information - politician/supplier - interested in winning elections - rationally uninformed voters often must be convinced to “want” a candidate - legislative bodies: - establish general direction of policy - appoint and supervise bureaucrats - set budgets of agencies and bureaus - bureaucrats/civil servants - seek promotion, job security, power - interests are often complementary to the interest groups they serve - larger budgets and program expansion generally serve interests of both bureaucrats and their constituent groups when voting works well: - legislators will have strong incentive to support political actions that provide voters with large total benefits relative to costs reasons for inefficient political allocation: - special interest effect: - provides a large benefit to a small number of people - costs are widely distributed - politicians have strong incentive to favor views of special interests even if the action is inefficient - logrolling - politicians vote for a certain issue because later on they will receive support on another issue - pork-barrel legislation - package poor projects with good projects in order to receive support for the poor project as well - shortsightedness effect: - issues that yield clearly defines current benefits at the expense of future costs that are difficult to identify - rent-seeking - inefficiency of government operations CHAPTER 7 fundamentals of consumer choice: 1. budget limited 2. rational (compares benefits vs costs/objective of achieving highest utility level) 3. one good can be substituted for another 4. consumer has less than perfect information (information is costly) 5. consumer experiences diminishing marginal utility (as consumption is expanded, there is less and less additional satisfaction) demand curve for individual: - law of diminishing marginal utility helps explain the shape of the demand curve - height of an individual’s demand curve indicates maximum price the consumer would be willing to pay for that unit - consumer’s willingness to pay for a unit of good is directly related to utility derived from consumption of that particular unit - law of diminishing marginal utility implies that a consumer’s marginal benefit, and thus height of the demand curve, falls with rate of consumption consumer equilibrium with many goods - each consumer will maximize his/her satisfaction by ensuring that last dollar spent on each good yields an equal degree of marginal utility price changes and consumer choice - reasons the demand curve slopes downward: 1. substitution effect 2. income effect - substitution and income effect work in the same direction - encourage people to buy more in response to reduction in price time cost and consumer choice - the monetary price of a good is not always a complete measure of its cost to the consumer - consumption of most goods requires time as well as money (time is scarce - a lower time cost will make a product more attractive) price elasticity of demand - price elasticity reveals responsiveness of amount purchased to a change in price - price elasticity = % change in quantity/% change in price - elasticity term < 1, demand is inelastic - elasticity term > 1, demand is elastic - elasticity term = 1, demand is unitary elastic elasticity of demand - with a constant-slope demand curve, elasticity varies across a range of prices - elastic when price is high and inelastic when price is low determinants of price elasticity of demand: 1. availability of substitutes - greater availability = more elasticity 2. share of total budget spent on product - larger share = more elasticity time and demand elasticity - if price of a product increases, consumers will reduce their consumption by larger amount in the long run than in the short run (demand is more elastic in the long run than in the short run) income elasticity - income elasticity = % change in quantity/% change in income - income elasticity > 0, normal good - income elasticity < 0, inferior good - income elasticity is large, luxury item - income elasticity is low, necessities/essentials price elasticity of supply - price elasticity of supply = % change in quantity supplies/% change in price - small change in quantity and large change in price = elastic - large change in quantity and small change in price = inelastic - supply elasticity > 1, elastic - supply elasticity < 1, inelastic - supply elasticity = 1, unitary elastic CHAPTER 8 residual claimants: - firm owners - right to any revenue left after costs are paid - the firm organizes raw materials, labor, and machines with goal of producing goods and services 1. purchases of inputs 2. transportation of inputs 3. sale of final goods and services methods of production and shirking: 1. contracting - no employees 2. team production - workers are hired by firm to work together under supervision of owner or manager - can reduce transactions costs - owners must reduce problem of shirking - employees working at less than expected rate of productivity/controlled through incentives and monitoring) principal-agent problem - incentive problem that arises when lack of information makes it difficult for the purchaser (principal) to determine whether the seller (agent) is acting in the principal’s best interest three types of business firms: 1. proprietorships - single owner - owner faces unlimited liability 2. partnerships - 2 or more owners - share risk and decision-making - owners face unlimited liability 3. corporations - owned by stockholders - limited liability - ownership can be easily transferred - attract funds from large number of owners - principal-agent problem costs, competition, and the corporation - competition among firms for investment funds and customers - stockholders have incentive to monitor firm;s management - consumers have incentive to monitor quality and price of firm’s product - compensation and management incentives - firms usually tie executive compensation to market success and, therefore, to stockholder’s interest - threat of corporate takeover - managers not serving interests of shareholders leave the firm vulnerable to takeover - if management is ineffective, stock prices fall - takeover threat helps keep current managers from straying too far from a profit maximization strategy the economic rate of costs - production requires resources - opportunity cost - a profit-seeking firm will produce only those units of output for which buyers are willing to pay full explicit and implicit costs: - total costs - explicit costs + implicit costs - explicit costs - monetary payment - implicit costs - resources owned by firm that do not involve monetary payment - time spent by owner running firm - foregone normal rate of return on the owner’s financial investment accounting and economic profit - economic profit = total revenue - total costs - economic profit = 0, break-even - economic profit > 0, expansion - economic profit < 0, contraction - accounting profit = total revenue - explicit costs the short run: - usually, there is at least one fixed labor of production - output can only be altered by changing the amount of variable resources used the long run - firm can alter all factors of production - firms can freely enter and exit the industry - short run and long run will differ among industries total and average fixed costs: - total fixed costs - - remain unchanged in the short run - must be paid even if output is zero - average fixed costs - - fixed costs per unit - declines as output expands - total fixed costs/number produced total and average variable costs: - total variable costs - sum of costs that increase as output expands - average variable costs - variable costs per unit of output = total variable costs/number produced total and marginal costs: - total costs = total fixed costs +total variable costs - average total costs = average fixed costs + average variable costs - marginal cost = increase in total cost associated with a one-unit increase in production shape of theATC curve - U-shaped law of diminishing returns - as more units of a variable resource are applied to a fixed resource, output will increase by a smaller and smaller amount product curves: - total product - total output of a good associated with different levels of variable output - marginal product - change in total product due to a one unit increase in the variable input - average product - total product divided by number of units of the variable input long runATC - shows minimum average cost of producing at each output level when firm is able to choose its plant size economies of scale - as output (plant size) is increased, per unit costs will follow one of these three possibilities 1. economies of scale - reductions in per unit cost as output expands - mass production - specialization - improvements in production as a result of experience 2. diseconomies of scale - increases in per unit cost as output expands 3. constant returns to scale - unit costs are constant as output expands cost curve shifters: 1. prices of resources 2. taxes 3. regulations 4. technology sunk costs - historical costs associated with past decisions that can’t be changed - may provide information but are not relevant to current choices cost and supply - when making output decisions in the short run, it is the firms’s marginal costs that are most important - for long run output decisions, it is the firm’s average total costs that are most important
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