Study Guides (248,010)
Canada (121,224)
Economics (386)
ECON 101 (101)
Midterm

ECON101 Midterm 2 notes

9 Pages
149 Views
Unlock Document

Department
Economics
Course
ECON 101
Professor
Shannon Hartling
Semester
Fall

Description
ECON101- CHAPTER NOTES (MIDTERM 2) CHAPTER 5: Efficiency & Equity • Social interest: 2 dimensions  efficiency & equity (fairness) ResourcesAllocation Methods • Market Price: people willing and able to pay that price get the resource  too poor, or choose not to pay market price won’t get the resource • Command: system allocates by order/command of someone in authority  method works poorly for large range of activities that need to be monitored  used widely in firms & government • Majority Rule: majority of voters choose  affect large # of ppl, must put away self-interest • Contest: winner(s)  used when efforts are hard to monitor, so rewards creates motivation and more effort automatically • First-come, First-served: first in line gets resource  used when resource can only serve one user at a time • Lottery: pick winning number/draw lucky cards/gaming system winner gets resource  used when there’s no effective way to distinguish potential users • Personal Characteristics: basis of personal characteristics (“right” characteristics will get resource)  can be used in unacceptable ways (discrimination) • Force: used for good and ill o Ill: wars, theft o Good: transferring wealth from rich to poor, force of state upholds principles of laws to protect properties Demand & Marginal Benefit • Resources allocated efficiently when: marginal benefit = marginal cost   to determine competitive market’s efficiency, must look at equilibrium • Demand, willingness to pay, value: value = what we get, price = what we pay  demand curve is marginal benefit curve o Marginal benefit: value of one more unit of food/service • Individual Demand: relationship bt price and quantity demanded of good by one person • Market Demand: relationship bt price and quantity demanded by all buyers o ** market demand curve = horizontal sum of individual demand curves of each price ** o Think of: price = dollars’worth of other goods willingly forgone to obtain one good • Consumer Surplus: value/marginal benefit of good minus price paid for it, summed over quantity bought  area below consumer’s demand curve, but above market price o All goods have decreasing marginal benefit 1 Supply and Marginal Cost • Market supply reflects marginal cost  firms = businesses trying to profit • Supply, cost, minimum Supply-Price: cost = what producers give up, price = what prod receive • Marginal Cost: cost of producing one more unit of good • Supply curve = marginal cost curve • Individual Supply: price of good & qty supplied by one producer • Market Supply: price of good & qty supplied by all producers  same thing, horizontal sum of indiv supply curves forms qty supplied in market supply curve • Producer Surplus: price received for good minus its minimum supply-price  triangle area above supply curve, below market price •  Consumer surplus & producer surplus can measure market’s efficiency Is the Competitive Market Efficient? • Marginal social benefit (MSB): demand curve for good where it’s only beneficial for those who buy it • Marginal social cost (MSC): supply curve for good where it’s only beneficial for those who produce it for entire society • Efficiency depends on where MSB (demand) & MSC (supply) intersect (aka its equilibrium)  if qty exceeds, marginal costs more to prod than the value consumers place on it  if qty less, the marginal value if higher than cost for it to be produced • Efficient qty produced = total surplus (consumer + producer) is maximized,  promoting social interest 2 Underproduction & Overproduction • Underproduction: producing too little, so total surplus is smaller than maximum  inefficient, and deadweight loss (↓ in total surplus from inefficient lvl of production) • Overproduction: producing too much, causes wasted resources  reduces total surplus to less than maximum with deadweight loss (social loss) • Obstacles of Efficiency: bring over/under production o Price & Qty Regulations: cap put on the limit/permit a minimum or maximum amt of goods o Taxes: & Subsidies: taxes ↑ price for buyers, ↓ prices for sellers = underproduction  subsidies (payments from gov’t to producer) ↓ price for buyers, ↑ price for sellers = overproduction o Externalities: cost/benefit that affects someone other than seller/buyer  ext2costs (CO emitted by electric utility = overprod) & ext benefits (smoke detector ↓ fire risk = underprod) o Public Good & Common Resources: public good = good consumed simultaneously even without paying (eg. National defense), underprod  common resource = used by everyone, overprod o Monopoly: firm is sole provider of good  underprod o High Transactions Costs: opportunity costs of making trades in market are too high  too costly to operate  underprod • Alternatives to the Market: inefficient markets can use other alternative methods to ↑ efficiency  sometimes possible o Ex. Majority rule attempts to improve allocation, but inefficiency hits when majority pursues their self-interest o Ex. Managers command/avoid transactions costs o Ex. First come, first serve ensures honoured trades atATM Is the Competitive Market Fair? • Natural disaster hits  prices of essential items jump bc demand & willingness to pay has ↑, but supply hasn’t changed • Fairness: (1) not fair if result isn’t fair, (2) not fair if rules aren’t fair • 1. Unfair if Result isn’t fair: people’s incomes are too u▯eWRONG idea = efficiency req equality of incomes o Utilitarianism: greater happiness for the greatest #  the gain is more than the loss o Big Tradeoff: tradeoff bt efficiency & fairness  achieve transfer by taxing higher income ppl more, will overall shrink economic pie (↓ labour & capital)  More redistribution via income taxes, ↑ inefficiency, ↓ economic pie  Adollar from rich person, doesn’t always end up in hands of poor person  Definitely says fairness doesn’t req equality of incomes 3 o Make Poorest as Well-Off as possible: soln to Big Tradeoff  goal to make the piece of economic pie of poor person as big as possible (bigger share of smaller pie can be less than smaller share of bigger pie) • 2. Unfair if Rules aren’t fair: symmetry principle = req ppl in similar situations be treated similarly (aka. Equality of opportunity)  2 rules: (1) state must enforce laws to protect private property, (2) private property can be xferred bt ppl voluntarily o Ex. Majority rule system = strong ppl have enough resources to influence opinion achieve this o If 2 rules are enforced for symmetry principle, then there would be no obstacles of efficiency CHAPTER 6: Government Actions in Markets AHousing Market with Rent Ceiling • Price Ceiling/Price Cap: gov’t regulation making it illegal to charge price higher than specific lvl  if cap above equilibrium = no affect, if cap below equilibrium = force of law & market forces conflict • Rent Ceiling: price ceiling applied on rent  if below equilibrium can cause: o Housing Shortage: demand of housing exceed qty supplied, ∴ shortage of housing o Increased SearchActivity: time spent looking to do business  opportunity cost = price + value of search time spent finding good, ∴ more time spent searching = ↑ cost o Black Market: illegal market with exceeding equilibrium to price ceiling  rent = maximum price a renter willing to pay • Inefficiency of Rent Ceiling: causes underproduction if cap is below equilibrium  MSB>MSC causing deadweight loss to shrink total surplus • Are Rent Ceilings Fair? o Fair rules? No, blocks voluntary exchange o Fair results? Yes, outcome benefits ppl that are less well-off o ∴, fairest = allocate housing to poorest ppl  alternative mechanisms: lottery, first come first serve, discrimination Labour Market with Minimum Wage • Labour Market: influences jobs we get & wages we earn • Price Floor: gov’t-imposed regulation making it illegal to charge price lower than specified lvl  if below equilibrium = no affect, if above equilibrium = force of law & market conflicts • Minimum Wage: price floor applied to labour market  above equil causes unemployment o Qty of labour supplied exceeds qty of labour demanded, ∴ surplus = unemployment • Inefficiency of Minimum Wage: ↑ unemployment, ↑ job search  full loss = deadweight loss + ↑ cost of job search • If Minimum Wage Fair? o Fair rules? No, blocks voluntary exchange o Fair results? No, only ppl w jobs/keep their jobs benefit  unemployed = worse 4 Taxes • Tax Incidence: division of burden of tax bt buyers & sellers • Taxed items can: o Raise price buyers pay, ∴ burden only on buyers o Raise price buyers pay but less than total tax, ∴ burden shared by buyer & seller o Not change price buyers pay, ∴ burden only on seller • Tax on Sellers: causes new Supply + tax curve  shift up/left of original curve bc ↑ cost will ↓ supply o Causes: ↑ buyer’s price, ↓ seller’s price received • Tax on Buyers: lowers amt willing to pay sellers, ↓ demand  shift new Demand – tax curve leftward o To figure out shift: same qty, just ↓ down by $ imposed of tax • Burden can’t be shared equally  will have same affect on either buyer or seller • Tax Incidence & Elasticity of Demand: division of burden depends on elasticity of demand o Perfectly Inelastic: VERTICAL demand curve  ∴, buyers pay all tax o Perfectly Elastic: HORIZONTAL demand curve  ∴, sellers pay all tax • Tax Incidence & Elasti
More Less

Related notes for ECON 101

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit