Study Guides (380,000)
CA (150,000)
McMaster (9,000)
ECON (500)
ECON 1B03 (200)
Midterm

ECON 1B03 Study Guide - Midterm Guide: Planned Economy, Pigovian Tax, Coase Theorem


Department
Economics
Course Code
ECON 1B03
Professor
Hannah Holmes
Study Guide
Midterm

This preview shows page 1. to view the full 5 pages of the document.
Test1:
Market economy: allocates resources through the decentralized decisions of
firms and households
Command or centrally planned economy: all production and distribution
decisions are made by a central authority, like a government
Opportunity cost: what you have to give up to get something.
oExplicit and implicit costs
Market failure can be influenced by market power: the ability of a single person
or firm to unduly influence market prices
Positive statements: describe world as is (descriptive analysis)
Normative statements: describe how world should be (prescriptive analysis)
PPF = production possibilities frontier
Comparative advantage: can produce at lower opportunity cost than someone
else
Absolute advantage: can produce a good using fewer inputs (e.g. less time)
Productivity = quantity produced / number of inputs used
Elasticity of demand: % change in Qd / % change in price. Drop –ve sign
Midpoint formula: Ep = (Q2 – Q1) / ([Q2 + Q1] / 2) ÷ (P2 – P1) / ([P2 + P1] / 2)
oInelastic: E<1 (% change Q < % change P), Elastic: E>1
oPerfectly inelastic E=0, perfectly elastic E=infinity
oNecessities inelastic. Luxuries, close substitutes, long time horizon elastic
Downwards demand curve: top left elastic, midpoint unit elastic, bottom right
inelastic
Total revenue = price x quantity
oTR will increase if P increases, if demand is inelastic.
oTR will decrease if P increases, if demand is elastic.
oTR max when price elasticity = 1
Income elasticity = % change in Qd / % change in income. Sign matters.
oEI > 0, then normal good. (increase Q if increase income).
oEI < 0, then inferior good.
oEI between 1 and -1, good is income inelastic
oEI >1 or EI < -1, good is income elastic
onecessities income inelastic, luxuries income elastic
Cross-price elasticity of demand, Eab = % change Qd of ‘a’ / % change P of ‘b’
oE>0, substitutes. E<0, complements
Elasticity of supply: always +ve.
oEs between 0 and 1, inelastic. Es>1 elastic. rest, same as Ed
Consumer surplus: buyer’s willingness to pay, minus amt actually pays for it
Producer surplus: amt seller is paid for good, minus cost
Allocation efficient if maximizes total surplus (consumer + producer)
Pigovian tax = tax levied to correct negative externality of market (usu. by gov)
Coase theorem: if private parties can bargain without cost over the allocation of
resources, they can solve the externalities problem on their own. Sometimes, the costs
You're Reading a Preview

Unlock to view full version

Only page 1 are available for preview. Some parts have been intentionally blurred.

of bargaining (called transaction costs) can be so high that private agreements aren’t
possible
You're Reading a Preview

Unlock to view full version