ECON 201 Final Study guide UPDATED
ECON 201 Final Study guide UPDATED Econ 201
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This 17 page Study Guide was uploaded by Cheyenne Thorpe on Thursday March 17, 2016. The Study Guide belongs to Econ 201 at University of Oregon taught by Waddell in Winter 2016. Since its upload, it has received 83 views. For similar materials see Introduction to Microeconomics in Economcs at University of Oregon.
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Date Created: 03/17/16
Econ 201 Microeconomics Glen Waddell Final Study Guide *Bring Green Scantron! *Student or Gov Issued ID *#2 pencils FINAL CHECKLIST Preliminaries What is economics What is our role- No single person directs any more than a tiny part of the production of any good The economic problem The organization of an economy o What should we produce? o How should we produce? o For whom should we produce? Prices and markets Theory- testability Policy analysis (DWI example) Scarcity and competition- we don’t have unlimited supply Cost- value of the next best alternative Demand and supply Consumer Theory Individual preferences and behavioral postulates- o They really do have preferences o More is better o Willing to substitute o Diminishing Marginal Value Valuation- total versus marginal The optimal purchase rule and demand theory- you buy until the price is higher than your marginal value; happens because marginal value is declining The diamond water paradox- what actually drives prices Sale prices- prices follow valuation (buy one get one free is about recognizing what’s true about valuation with humans) Inflation Individual responsiveness- price elasticity Demand determinants o Change in Income o Normal good vs. inferior good o Substitutes-Prices follow each other o Compliments- if bagels are more expensive then I don’t need as much cream cheese (price goes up, other price goes down) Shipping the good apples out Exchange and Supply Voluntary exchange- you can't be forced into it The supply side of the market Organized markets Demand and Supply Demand determinants and changes in demand- marginal value Supply determinants and changes in supply- marginal cost Interactions between markets- taxis are more expensive, therefore people are less likely to buy drinks at resturants Price controls Black markets Cost and production Productive advantages Society’s production choice Marginal cost and supply Market efficiency Production, Profit and Property Rights Production technology Factor demand Markets, By the numbers Demand Supply Equilibrium Production, Profit, and Property Rights Production technology Factor demand Property rights and private ownership Game Theory Preliminaries Games Information Preliminaries Information asymmetries- I know more about the quality of this car but I can’t find someone that trusts me enough to pay for is Production technology Inputs, or factors of production: Anything that in any way contributes to production Production function: The relationship between inputs and outputs Total Product: the amount of output obtained in total from a given quantity of input Marginal Product: The change in the total product that results from a 1 unit increase in an input, holding the amounts of all other inputs constant The “Law” of Diminishing Marginal Product: As more of one factor of production is used with a fixed quantity of other factors, the marginal product of expanding factors ultimately decreases Average Product: The total product divided by quantity Inputs TP MP AP Increasing Decreasing 1 3 3 3 Marginal activity Marginal activity 2 8 5 4 3 15 7 ? How many units of an input (eg labor) will a firm hire? o It depends on what the firm wants to do o The firms objective is to maximize profits, the difference between revenue and total cost Profit= TRTC o How many units of an input will a profitmaximizing firm hire? o They should compare the marginal contribution of the input to the marginal cost of hiring the input Marginal Revenue Product: the increasing total revenue that results from a 1 unit increase in an input, holding the amounts of all other inputs constant Don’t Hire o If we know the MP of an input and the price of the output Hire P, then we can calculate the MRP by, MRP=MPxP Don’t Hire Quantity Inputs TP MP MRP wL Hire? TR (it’s a demand curve) 1 3 3 30 $40 Yes 30 40 10 2 8 5 50 $40 Yes 80 80 0 3 15 7 70 $40 Yes 150 120 30 4 21 6 60 $40 Yes 210 160 50 5 26 5 50 $40 Yes 260 200 60 6 30 4 40 $40 Yes 300 240 60 7 22 3 30 $40 No 330 280 50 8 35 2 20 $40 No 350 320 30 9 36 1 10 $40 No 360 360 0 With welldefined property rights, Resources are allocated such that: o The firm hires 6 units of input (at a cost of 6 x $40=240) o The value of goods produced is $300 o Economic rents of $60 are earned by the firm Welldefined property rights: exist when a decision maker captures al of the marginal benefits produced by an action and suffers all of the marginal costs of an action Common land ownership: Rules o Members of the commune share equally in the value of everything produced o Members are free to join or quit the commune at any time Socialist cooperative: Rules o Members of the commune share equally in the value of everything produced o Members decide how many people will join Property rights matter Transaction costs Origin of gains from trade… people are better off through having the opportunity to voluntarily exchange goods With private ownership of a resource, the owner can direct the use of that resource If property rights aren’t well-defined, transaction costs are positive and resource allocation is different insofar as they are spent attempting to better-define these rights o When the right to a seat at Autzen stadium are not well- defined, resources are reallocated toward keeping the peace o Where workers are prone to shirk, resources are reallocated toward monitoring workers Difficulty in completely contracting with another person or worker is best thought of as a transaction cost that keeps property rights from being well defined Example: Confectioner and a Doctor- o the confectioner’s noise keeps the doctor from doing business at an estimated cost of $400,000 o To build a soundproof wall would cost $300,000 o For the confectioner to move it would cost $900,000 In this case the courts had little difficulty in granting the doctor the injunction he sought. The Coase Theorem: in the absence of transition coasts, resource allocation is independent of the assignment of liability (or distribution of property rights) o If rules (property rights) are well known and enforceable to all, changes in those rights will change the wealth of the participants but not the outcomes Baseball’s reserve clause, free agency, fault/ no fault divorce If you ask your kid to make her bed everyday for a week you pay her $1.75..or you could pay her 25 cents a day. If its 25 cents a day it only costs her 25 to not make her bed, but if you pay her by week and she doesn’t make her bed it costs her 1.75 All standard models assume that consumers are fully informed about product prices, attributes, qualities, locations, etc, yet we would acknowledge that consumers often have incomplete information Asymmetric information: One party to a transaction knows a material fact that the other party doesn’t o Can lead to non existence of equilibrium, or resources being used less efficiently that they would be if there were perfect information Observable Low quality In the used car market, is it not more likely that the current owner has learned over time if the car has needed frequent repairs and if the car has been taken care of? At best, buyers may only know the probability of getting a high quality car o We try to sell ourselves high o If buyers can’t distinguish between low and high quality used cars, the cars sell for the same price High quality o Unable to distinguish- the expected value of a randomly chosen used car would be $7500 You’re either going to get a car worth 6000 or 9000, never 7500, but suppliers are never going to sell their car for 9000, above their marginal value The low quality cars eventually drive out the high quality cars Used cars markets are now indicators of low quality cars Unobservable quality o Why is it meaningful to certify cars- gives the cars meaning, letting them charge more. Can’t make them all certified because then it becomes meaningless Certify the ones that are less costly to repair Insurance markets: Health insurance becomes more expensive as one ages as the likelihood of needing the insurance increases. It is possible that healthy elderly people may find it too expensive to purchase health insurance o Prices are inflated by the unhealthy people o Adverse selection: As price of the policy rises, the insurance company ends up selling insurance only to those with the most need for insurance o What do insurance companies do that could be thought of as a response to adverse selection in insurance markets? Is there equality in health insurance markets? No, but that’s not necessarily a bad thing…? Home repair: If homeowners cannot observe the quality of workmanship, those who cut corners (yielding lower costs) may drive out those who don’t Possible solutions: o Guarantees or warranties o Liability laws- you’re “on the hook,” willing to pay more money now o Reputation- people talk (yelp), if you have high ratings, your price goes up o Experts o Standards and certification Nash Equilibrium: A set of strategies in which no player wants to change given the other players actions Game theory is a framework of analysis in which two or more individuals compete for various payoffs that depend explicitly on the individual’s own decisions and on the strategies employed by all other individuals in the game. Who are the players? What are the strategies? What are the payoffs associated? Catastrophic Regulation: The Case of US air Traffic Controllers A regulation is designed to alter behavior of an individual o Using some appropriate set if incentives o Raise the gains or lower the cost The Federal Employees Compensation Act guarantees the income of any federal employee who is inured or disables while serving the federal government o In 1974, Congress changed the FECA disability program to make it easier to qualify for compensation o By joining the program, a worker gives up his or her right to sue the employer for on the job injuries in exchange for guaranteed injury compensation no matter who may have been at fault. The injury was disabling The injury was job related o In the 74 amendments congress made two procedural changes in the program Psychologist gave medical evidence o Lowered the cost to an employee claiming a disability (especially neuropsychiatric) when it didn’t actually exist o The Office of Workers Compensation Programs instructed claims examiners to look for particular incidents that were symptoms of or contributed to, a mental disability Drew the controllers attention to the relevance of specific events The report had to be accompanied by a corroborating statement from his or her supervisor o FAA minimum separation requirements for Air Route Traffic Control Centers Five miles horizontally, 2000 feet vertically Minimum separation is 3 miles horizontally, 1000 ft vertically Any violation of standard minimums constitutes a system error o What response would we expect from a controller who is contemplation “punching out” on disability compensation The 74 changes to FECA should lead to a rise in system errors According to the FAA data, between 1962 and 1973 there were roughly 280 system errors annually In 1974 there were 340 1975- 420 1976- 491 o Adjusting for other possible explanations for the increase in system errors, these changes are statistically significant. o The amendments to the FECA, and the handling of the OWCP disability claims had induced controllers to allow airplanes to pass too close together o How close does the controller actually allow the planes to get? Near mid-air collisions: Critical- less than 100 ft Potential- less than 500 ft No Hazard- collision improbable Its almost impossible for a controller to determine from converging radar blimps whether aircraft actually pass within the distances outlined in the FAA’s definition of “near miss” o Due to the added costs of a near miss and the absences of offsetting gains, we would expect to find no increase in near misses after 1975 Controller would be watching screen more carefully during a planned system error Controller would want to pick a slower and smaller plane carrying fewer passengers Controller would want his planned system error to occur when his assigned airspace wasn’t crowded Optimal security alert status o We should establish why one should care (a normative position supported by something positive) o Homeland Security Advisory System- A five color scheme was introduced by the Bush administration in March 2002 Green (Low risk terrorist attack) through Red (severe risk) o The National Terrorism Advisory System replaced the color coded Homeland Security Advisory System in 2011 o What is fundamentally at issue in considering security alerts- Incomplete information o What must the security alert provide if its going to fix the fundamental problem- Information Why does a football coach make more than the President? o Marginal Value o Diamondwater paradox Search theory and the margins of importance in job acquisition o Firstthird cut... little use investing in X unless X is at the margin. Consider investing in the Xs that show up earlier in the firm’s search Media bias? Really? o Not just market segmentation? Further encouraged by advances in technology? The more you can segment the market the higher you are willing to pay Penalty severity and drug potency? o Shipping the good apples out? o Drug potency increases demand for higher quality goes up Are morals exchangeable? (Why do they differ across people at a given time? Why do they differ across time for a given person? o Church used to think that interracial marriage was of the devil... now their view is different and the battle is against same sex marriage o That declared morals change requires explanation. Driven by changes in marginal values. Litmus test for presidential candidates? (their positions on abortion, gay marriage, etc.) o What is that ignoring o Is that all that matters? o Using litmus test for how you vote is ignoring marginal ____ o The less likely X is going to be readjudicated, the less important X should be to casting one’s vote Do you want to split the check? o If we don’t split the check then I will pay for this time and you will pay for the next... creating a next time o Wait until they’ve ordered, don’t start by telling them “this is on me” because then they will be less conscious of their costs o Property rights not well defined? You don’t have to actually learn anything in college for college to be worthwhile. Why? o It Was costly to take time out of your life o Get a higher paying job You’re rebuilding where? Should disaster relief be given to those who build in highrisk areas? o They pay less to live in that high risk area o Prices adjust with risk Personal genetics: Should people be require to reveal what they know o Should we get those fancy tests that tell us what we are going to die from? Some people want to know some people don’t o Adverse selection problem? Moral hazard? o Issues with sexism in the work place: women are likely to get pregnant, more apt to take off… How do I decide who to train, Male or Female? Male because they’re less likely to leave. not equal, moral hazard Review Definitions: Normal good: is a good for which demand increases as income increases Income elasticity: % change in quantity of x/ % change in income Cross Price Elasticity: % change in quantity of x/ % change in y Price floor: a government imposed limit on how low a dollar price can be charged Imposed above (below) the equilibrium price is effective… surplus (ineffective... it doesn’t change anything) Agriculture price supports Dairy price supports Federal minimum wage (higher minimum wage, higher unemployment) Price Ceiling: a government imposed limit on how high a dollar price can be charged Imposed below (above) the equilibrium price is effective (ineffective) Insurance and utility rates Gas Food Prescription drugs Rent controlled apartments Tuition) Productions Possibilities Frontier: The combinations of various goods that can be produced given available resources and technology Absolute Advantage: if that individual can produce more than others in the same time or the same amount as others in less time Comparative Advantage: if the individual can produce the good at lower cost than others Specialization Would we both be better off through specialization? If your roommate is good at math do you ask him to help you with your math homework or your English homework? If you’re good at English and he’s not, do you switch homework? You’d both be better off focusing on what you can produce better Through specialization you both end up with more stuff What will happen over time as specialization occurs? o You’re going to get better at producing your product o Your production possibilities frontier is going to decrease because you’re focusing on one item The Principle of increasing Opportunity cost: As the production of one good increases, the opportunity cost of producing another unit (marginal cost) of producing that good generally increases Consumer Surplus: the amount producers receive upon selling the units above the costs of producing unit Efficiency: the absence of waste. Obtained where Marginal cost of production equals the Marginal Values of consumption Welfare: the sum of consumer and producer surplus. Defined this way, it’s maximized in perfectly competitive markets The “Law” of demand: as the price of an item rises, the quantity demanded of the item generally falls Qd(p)=abp, where a>; 0, b>0 Since, b>0, inversely related o Qd(p)=102p At p=2 quantity demanded in the market is 102(2)=6units Supply: Qs(p)=2+2p Quantity supplied rises two units for every dollar increase in price Equilibrium Suppose that Qd(p)=50p and Qs(p)=20+2p o Qd(p)=Qs(p) o 50p=20+2p o p=$10 Qd(10)=Qs(10)=40 Suppose Qd(p)=40010p and Qs(p)=100+2p. Is a price ceiling of p=$10 effective? o 40010p=100+2p o p=25 o $10 price ceiling is effective because 10<25 o Shortage (Qd(p)=40010(10)=300, Qs(p)=100+2(10)=120 Inverse demand: p(Qd)=60Qd Inverse supply: p(Qs)=0.5Qs Inputs, or factors of production: Anything that in any way contributes to production Production function: The relationship between inputs and outputs Total Product: the amount of output obtained in total from a given quantity of input Marginal Product: The change in the total product that results from a 1 unit increase in an input, holding the amounts of all other inputs constant The “Law” of Diminishing Marginal Product: As more of one factor of production is used with a fixed quantity of other factors, the marginal product of expanding factors ultimately decreases Average Product: The total product divided by quantity Marginal Revenue Product: the increasing total revenue that results from a 1 unit increase in an input, holding the amounts of all other inputs constant o If we know the MP of an input and the price of the output P, then we can calculate the MRP by, o MRP=MPxP The Coase Theorem: in the absence of transition coasts, resource allocation is independent of the assignment of liability (or distribution of property rights) Table example (definition equations put to use) Inputs TP MP MRP wL Hire? TR TC Profit 1 3 3 30 $40 Yes 30 40 10 2 8 5 50 $40 Yes 80 80 0 3 15 7 70 $40 Yes 150 120 30 4 21 6 60 $40 Yes 210 160 50 5 26 5 50 $40 Yes 260 200 60 6 30 4 40 $40 Yes 300 240 60 7 22 3 30 $40 No 330 280 50 8 35 2 20 $40 No 350 320 30 9 36 1 10 $40 No 360 260 0 Questions: Farmers can plant either corn or soybeans in their fields. Suppose that the st first decade of the 21 century, a new technology for converting corn into liquid furl increases the demand for corn. What will happen? o The supply of soybeans will decrease In May of 1996 a Value Jet airliner crashed in Florida. Allegations were made that cost cutting by Value Jet had led to reduce safety measures. On the day following the crash, airline stock rallied. UAL gained 6 to 214, AMR gained 2.5 to 92 and Delta air rose 3.375 to 85.657 o Anticipated behavior changed so stock prices rose because everyone wanted a piece of the other airlines (demand for airline stock increase-prices adjust upward) Suppose that over time, technological innovations act to lower the cost of music piracy. What would you expect to happen in the retail market for recorded music? o Demand in the retail sector falls and prices adjust downward… fewer units are exchanged o Long run predictions: if the market is segmented and those with a higher willingness to pay- retail prices should increase The wall street journal reports that crude oil prices soared after the U.N. froze the Iraqi oil pact that was to permit Iraq to resume sales of oil on the world market. Why should oil prices rise when Iraq was not selling oil at the time? o Expectations –demand adjusts o Prices adjust upward o Quantity increases Surplus: Tutor: $10 an hour Time Benefit Price/ Hour Price Net Benefit 1 30 10 10 20 2 45 10 20 25 3 60 10 30 30 4 70 10 40 30 5 75 10 50 25 With 3 hours of Tutoring you get the same Net Benefit as 4 hours of tutoring Total Surplus= Consumer Surplus + Producer Surplus Consumer Surplus: Producer Surplus: Suppose the government builds a dam on a river in order to generate electricity. The dam also creates a lake that enhances recreational use of the land. As a result rents on the land increase and campers and hikers are charged a higher fee for use of land o These increase in use-frees are a measure of benefits created by the dam o The lake is worth that use-fee If property rights aren’t well-defined, transaction costs are positive and resource allocation is different insofar as they are spent attempting to better-define these rights o When the right to a seat at Autzen stadium are not well- defined, resources are reallocated toward keeping the peace o Where workers are prone to shirk, resources are reallocated toward monitoring workers First Midterm Review: Definitions: Price: Ratio of exchange Ex: Raise price of DUI raises the number of hit and runs Theory Value: Testability How well it predicts behavior Scientist cant prove anything. At best we fail to refute Ex: one cannot prove gods existence or lack there of Regulation: designed to alter the behavior of individuals by using some appropriate set of incentives (sanctions and rewards) to induce us to incur the costs of a behavior change We put costs in front of the unethical forms of competition to push people into the right paths Ex: Punishments for immoral actions like jail, fines, tickets, etc. Incentive: must serve to raise the gains or lower the costs (positive incentive) or opposite (negative) Scarcity: not having enough of the items we find desirable to satisfy our wants Ex: Mineral, water, clean air, wildlife, land / Labor hours by labor force / torque of a given turbine engine Pollution isn’t a scarcity but clean air is Opportunity Cost: of any decision is the value of the next best alternative foregone Ex: How does one determine the financial rate of return to a 4year college degree, most expensive part=time Consumer theory: characterizes consumers’ choices in a systematic way Producer theory: characterizes producers’/sellers’ choices in a systematic way Demand curve shows the amount of a good consumers wish to purchase at specified prices (negative slope) Supply curve shows the amount if a good producers are willing and able to sell at specified prices (positive slope) Equilibrium where the demand curve and supply curve intersect Surplus: an excess of quantity supplied over quantity demanded Shortage: an excess of quantity demanded over quantity supplied Behavior Postulates: People have preference, more is preferred to less, people are willing to substitute, marginal values are decreasing We can’t accurately describe the preferences of a group, It would be problematic if we based theory on groups: ex. 3 people have 3 different Republicanprimary candidate preferences Valuation: we measure value by what one is willing to give up in order to obtain something Ex: one gives up $40,000 worth of other goods to buy a car reveals that the car has a value of at least $40,000 Intrinsic Value: we will maintain that an object cant have value beyond what people are willing to pay for right to control the object Value of human life: US government says $78 million to a human life Total Value: the max amount of money a consumer is willing to pay in order to acquire the good, the minimum amount of money a consumer is willing to accept in order to give up the good Marginal Value: the max amount a consumer is willing to pay to acquire one more unit of the good The law of diminishing marginal value: for all individuals and good the marginal value of goods decreases as more of that good is consumer, holding other things constant After running a marathon, how might you value the first glass of water? What about the first relative to the second? The first glass of water is a lot more valued than the second The optimal purchase rule: a consumer is always better off by purchasing an additional unit of a good if the marginal value of that next unit exceeds the price he would be required to pay for that unit That is, the consumer should continue to purchase additional goods as long as Marginal Values>Price The law of demand: as the price of an item rises, the quantity demanded of the item generally falls The Diamondwater paradox: Why are diamonds more expensive than water, which is essential to all life? the market prices of goods reflects consumers marginal values of these goods and not their total value One more glass of water is worth less than one more diamond Inflation: prices rise If there are currently 20 million packs of cigarettes sold in a week, how much revenue will a new $.25 per pack tax generate for the government? Will they still sell 20 million after the tax is imposed Probably less than $5 million (20x.25) Priceelasticity of demand: measures the responsiveness in quantity demanded to change in price (%change in quantity of x) / (%change in price of x) What determines the responsiveness of an individual’s choice of quantity demanded to a change in price? The availability of close substitutes, ex: cigarettes, prescription drugs steep slope The fraction of income spent on the good The unit of time: with the passage of time, the response to a given change in price nd becomes greater (2 law of demand) Normal Good: A good for which demand increases as income increases Inferior Good: response to income increases Substitutes: two goods for which the demand of one good increases as the price of the other good increases MacBook pro Dell Latitude Econ major Business major Beer Spirits? Complements: two goods for which the demand of one good increases as the price of the other good decreases CDs CD players IPod ITunes Coffee Cream Voluntary Exchange: o What is the basis of trade (why does it exist?) Voluntary exchange is based on mutual benefits Everything depends on free choice Are you willing? Forced? The only way you can back out value is if the situation was forced/coerced, the rules change
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