Econ 101 Final Exam Review
Econ 101 Final Exam Review Econ 101
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This 5 page Class Notes was uploaded by Kalli Weber on Saturday July 9, 2016. The Class Notes belongs to Econ 101 at Iowa State University taught by Dr. Brent Kreider in Summer 2016. Since its upload, it has received 5 views. For similar materials see Microeconomics in Economcs at Iowa State University.
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Date Created: 07/09/16
Econ Final Review Public good- non rival in consumption Joint consumption- individuals collectively consume the good From an economic perspective, the amount of a public good actually produced is usually "too small" Minimize Deadweight loss by buying gift cards Chapter 13 Capital and Financial Markets Random Walk Hypothesis- a theory that stock prices follow a "random walk" with "drift" Random Walk- the difference between tomorrow's price and today's price is random, there is no pattern that can be predicted beforehand. With drift- except there might be a general (upward) trend over time Example: Often people invest in the stock market (Hard to find a 10 year period where the stock market goes down) According to the random walk hypothesis, what will the stock market do tomorrow? More likely to go up or down? Fundamentals will drive the price of stocks. Price is not random, just the change in price: -The price level is determined mostly by "fundamentals" like the quality of the firm's management, demand for its product, etc. -But changes in the fundamentals are unpredictable -Any information known about the company's future will already be captured in the current price Efficient Market Hypothesis- no investment strategy based on publicly available information can successfully/systematically beat the market (no strategy will consistently yield a higher return than the average of everyone else's returns except by luck Conclusion: Don't pay anyone for advice about specific stocks (but might want to seek advice on how to avoid taxes or properly diversify to minimize risk) 5 Best Ways to Impoverish Yourself 1. Doing nothing (inflation) 2. Choosing an investment "opportunity" over the phone or over the internet 3. Buying last year's hot investment 4. Buying last year's underperforming stock that's "due" for a rebound 5. Believing you can outsmart the market Economists best advice: buy a "no-load" diversified index fund Buy and hold without trying to time the market- timing the market is just as likely to backfire (usually will get charged for this), no point paying extra fees to move in and out of stocks Take advantage of important tax benefits (401k, 403b, IRA) Be very careful with credit cards Strategy to get rich: SAVE, SAVE, SAVE For Exam: Ch 1-11 on final (use review sheet) Ch 15. public goods Ch. 13 financial markets, PV Ch. 15 Externalities pg. 464-473 Ch. 16 International trade Main Objectives: Learn "Fundamental Theorem of Welfare Economics" Learn about "market failures" using the health sector of the economy as a particular example -Market failure can provide an economic justification for government involvement in the private sector ex. regulations, corrective taxes/subsidies Two broad rationales for possible government interventions: -"fairness" issues: unequal access to good medical care, distributional issues (concerns about who gets what -market failures, resources may be better utilized Fairness issues: Consumers do not have equal access to medical care -Should health care be treated just like any other commodity? "Specific egalitarianism"- a viewpoint that everyone has the right to at least some minimum standard of certain commodities (like health care, food, housing). Boils down to normative value judgements, largely outside the scope of economics. Economic efficiency issues: want resources allocated where they're most valued -Like any other commodity, there is an opportunity cost of producing health care: must give up something else -Think of society as having certain desires for good health care relative to other things (like education, national defense, highways, etc.) -Based on these preferences, the free market system may devote too many or too few of its resources to the production of health care vs. other valued commodities -Interested in cases where private markets are unlikely to receive appropriate signals about how much to produce/consume. -Insurance shields me from facing the true opportunity costs of getting care, encouraging me to the "over consume" health care (from society's prospective) -Insurance leads to an artificially low price for this commodity, distorts my decision-making. Fundamental Theorem of Welfare Economics: Know the differences for the final exam -The commodity being bought and sold is homogeneous (standardized) -Transparency: the buyers are well-informed (know prices and qualities being sold by all sellers) -Many sellers, each attempting to maximize profits (implying cost-minimization for a given output level) -The consumers pay the full cost of what they consume (Under these conditions, it can be shown that private markets will function well in the sense that there will be no waste)= EFFICIENT Externality: A by-product of a good or activity that affects someone not directly involved in the transaction. -Something NOT priced into the market -An externality may be positive or negative Ex. Consumption of second-hand smoke, Noise from your hall mate's stereo Know the formula for the in-class activity- had to add up donations (look for a plus sign) Social benefits= private benefits + external benefits Social costs= private costs + external benefits -Social efficiency requires that a good is consumed (or an activity undertaken) up to the point where SMB=SMC EMB= External Marginal Benefit curve Society will consume at D=PMB (Private Marginal Benefits) Setting PMB=PMC Asking what is socially efficient, not personally. -Without government intervention, private markets lead to too little consumption of education. Social Marginal Benefit- Doesn't mean there are more gains, look at your own costs and benefits and consume where SMB=SMC -In this example you would over consume medical care compared to what its worth to you in society (SMB<SMC) -Essentially if you didn't have the extra value you probably would not NEED to utilize these higher extra costs to society. ---> Overconsumption -Insurance is good for society only if the value consumers get from the extra "peace of mind" is greater than DWL