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Chapter 4-5 Comprehensive Notes

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ECO 304K

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Econ Chapter 4 Besides 84-101 and chapter 5 Chapter 4: the complexity with in each little small market 1. Some markets need constraints or rules to ensure the best results 2. Markets and Efficiency a. A few number of government beaurecrats cant decide everything, they need to let the free market take its course 3. Efficient Market Requirements a. Accurate Information must be widely available i. Transaction costs must be kept low ii. The more information the more a customer or seller knows how to make the best choice for the market on price, how to produce it, where to sell it, ect. b. Property Rights are protected i. Property Rights- the clear delegation of ownership of property or shares or anything backed by government enforcement 1. If a government fails to establish and protect property rights more informal economic mechanisms will evolve 2. Allows resources to be used more efficiently and nnot wasted c. Contract Obligations are Enforced i. Large and complex markets need a well running legal system that enforces contracts and agreements d. There are no external costs or benefits i. External costs- like when your driving on a crowded highway you are inflicting this on other drivers and the society by adding pollution ii. External benefits- if you attend a private college you are not using tax payer money, you are more likely to pay more taxes and are less likely to commit a crime iii. A market works better when these externalities are minimized e. Competitive Markets Prevail 4. The Discipline of Markets a. Given limited resources, each of us must decide whihch products are most important to us, since we cannot have unlimited quantities b. If governments centrally plan for radio, cellular spectrum or the nations electricity for example, it is difficult for them to do it efficiently because they don’t have a vested interest in profits i. If a private firm does it it forces discipline because the firms management and stockholders have a vested interest in the firm’s success. ii. If a firm fails to innovate, consumers will quit buying its products, financial markets will reduce there loans, and the stock market will decimate its shares 5. Consumer and producer Surplus: a tool for measuring Economic Efficiency a. Consumer Surplus- When a customer values an item to be more then what the market price for it is b. Producer Surplus- When a seller values the price of anitem as less then the market price Chapter 5: Elasticity 1. Elasticity- The responsiveness of one variable to changes in another a. A term economists use to measure this change b. Like when gas prices rose over time people started buying less SUV’s and more cars with good gas milage c. A study of how much demand will change with a price change, will one offset the other? Will you make more or less then before? 2. Elasticity of Demand a. Price Elasticity of Demand- (E ) id a measure of how responsive quanity demanded is to a changed price and E = Pedcent change in quantity Demanded/Percent Change in Price i. Ex. Strawberry’s gain 10% in price and fall 5% In sales, -5/10=-.5 b. To calculate percent change do Price New-Price Old/Price Old i. Gas goes from 2 to 3= 3-2/2= 50% increase c. Price Elasticity of Demand as an Absolute Value i. Elasticity of demand is always negative because the slope of the demand curve is negative, thus they sometimes just use the absolute value d. Measuring Elasticity with Percentages i. Always use percentages e. Elastic andnelastic Demand i. Elastic 1. Elastic Demand- When the absolute value of the price elasticity of demand is greater than 1 a. Elastic demand curves are responsive to price change b. A Perfectly elastic Demand curve will drop to 0 if the price is changed a
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