ECON Microeconomics Test #2 POTTER UNG

1. Perfect Competition: Many buyers and sellers

2. Homogenous Products: each product is exactly the same
-EX: T-Mobile is different from AT&T

3. Easy entry and exit: applies to/for firms

4. Perfect information(chap 8): buyers and sellers know correct information

5. No externalities(chap 8): when you do something that effects other people
-a lot of economists base normative thinking (chap 7)
-assumes inequality is not a factor (chap 7)

-Willingness to pay minus actual price

-The difference b/w the price a consumer is willing and able to pay for an additional unit of a good and the price the consumer actually pays; for the whole market, it is the sum of all the individual consumer surpluses

-The net benefits received by consumers after deducting the cost of purchasing a good

EX: willingness to pay=3.75 Price=2.50 (3.75-2.50= 1.25 (consumer surplus))

-(graph looks like stairs)
-P down; CS up (with consumer surplus)
-Below demand, above price= CS on demand curve (loos at notes)

-We assume CS can't be negative (-)
-Demand shows willingness to pay
-Consumer Surplus= Triangle (on graph)
-To find willingness to pay on graph: go up and over

-The difference between what a producer is paid for a good and the cost of producing that unit of the good; for the market, it is the sum of all the individual sellers' producer surpluses—the area above the market supply curve and below the market price

-PS on the graph= below Price, above Supply
-No government interference

-The cost of producing one more unit of a good

-Supply is the same thing as marginal cost

-The sum of consumer and producer surpluses

-Total surplus= CS + PS

Net loss of total surplus that results from an action that alters a market equilibrium

the gains and losses associated with government intervention in markets

the consumer surplus.

the sum of the consumer surplus and producer surplus

the net gain to society from trading that good

Because what a consumer is willing to pay for a good declines as more of that good is consumed; the difference between what he is willing to pay and the price he must pay also declines for later units.

A decrease in a good's price increases the consumer surplus from consumption of that good by lowering the price for those goods that were bought at the higher price and by increasing consumer surplus from increased purchases at the lower price.

Consumer surplus is the difference between what people would have been willing to pay for the amount of the good consumed and what they must pay. Even though the marginal value of less expensive stones is lower than the marginal value of a diamond ring to buyers, the difference between the total value of the far larger number of less expensive stones purchased and what consumers had to pay may well be larger than that difference for diamond rings.

the deadweight loss

greater; greater

there is a deadweight loss because the program increases the output beyond the efficient of output

A tax would not impose a welfare cost only if the quantity exchanged did not change as a result—only when supply was perfectly inelastic or in the nonexistent case where the demand curve was perfectly inelastic. In all other cases, a tax would create a welfare cost by eliminating some mutually beneficial trades (and the wealth they would have created) that would otherwise have taken place.

The elasticity of demand represents the ability of buyers to "dodge" a tax because it represents how easily buyers could shift their purchases into other goods. If it is relatively low cost to consumers to shift out of buying a particular good when a tax is imposed on it—that is, demand is relatively elastic—they can dodge much of the burden of the tax by shifting their purchases to other goods. If it is relatively high cost to consumers to shift out of buying a particular good when a tax is imposed on it—that is, demand is relatively inelastic—they cannot dodge much of the burden of the tax by shifting their purchases to other goods.

The more elastic are supply and/or demand, the larger the change in the quantity exchanged that would result from a given tax. Given that tax revenue equals the tax per unit times the number of units traded after the imposition of a tax, the smaller after-tax quantity traded would reduce the tax revenue raised, other things being equal. Because the greater change in the quantity traded wipes out more mutually beneficial trades than if demand and/or supply was more inelastic, the welfare cost in such a case would also be greater, other things being equal.

A larger tax creates a larger wedge between the price including tax paid by consumers and the price net of tax received by producers, resulting in a greater increase in prices paid by consumers and a greater decrease in price received by producers, and the laws of supply and demand imply that the quantity exchanged falls more as a result. The number of mutually beneficial trades eliminated will be greater and the consequent welfare cost will be greater as a result.

A price ceiling reduces the quantity exchanged because the lower regulated price reduces the quantity sellers are willing to sell. This lower quantity causes a welfare cost equal to the net gains from those exchanges that no longer take place. However, that price ceiling would also redistribute income, harming sellers, increasing the well-being of those who remain able to buy successfully at the lower price, and decreasing the well-being of those who can no longer buy successfully at the lower price.

Just as in the case of a tax, a price floor where the government does not buy up the surplus reduces the quantity exchanged, thus causing a welfare cost equal to the net gains from the exchanges that no longer take place. However, that price floor would also redistribute income, harming buyers, increasing the incomes of those who remain able to sell successfully at the higher price, and decreasing the incomes of those who can no longer sell successfully at the higher price.

Subsidies cause people to produce units of output whose benefits (without the subsidy) are less than the costs, reducing the total gains from trade.

Both tend to increase output beyond the efficient level, so that units whose benefits (without the subsidy) are less than the costs, reducing the total gains from trade in the same way; furthermore, the dollar cost of the deficiency payments are equal to the dollar amount of taxes necessary to finance the subsidy, in the case where each increases production the same amount.

less deadweight(dw) loss

more deadweight(dw) loss

Tax * Qt

Ps and Pb are happy, but fire department is not

CS increases

CS goes down

-if long run; more elastic demand and supply= more dw loss

-if short run; less elastic demand and supply= less dw loss

a. the price producers receive is the price consumers pay plus the subsidy.

b. the subsidy leads to the production of more than the efficient level of output.

c. there is a deadweight loss.

*D. all of the above are true.

a. consumer surplus decreases.

b. producer surplus increases.

c. a greater deadweight loss occurs than with a deficiency payment system.

*D. all of the above are true.

consumer surplus derived from the good to increase

falls as greater quantities are consumed

some consumer and producer surplus is transferred form buyers and sellers to the government

1,500

an increase in the market price due to an increase in demand will increase producer surplus

consumer surplus derived from the good to decrease

the difference between the loss in consumer and producer surplus and the gain in the tex revenue

increases the output beyond the efficient level of output

false

enforce environmental standards

false

**a. ​In the case of public goods, when people act as free-riders, some goods having benefits greater than costs will not be produced.
b. ​In the case of external benefits, a tax equal to external benefits would result in an efficient level of output.
c. ​In the case of external benefits, if we could add the benefits that are derived by non-paying consumers, the supply curve would shift to the right, increasing output.
d. ​The private market provides too much of goods that generate external benefits.

a. ​Externalities can never lead to under-production of a specific good.
b. ​External benefits can never exceed external costs.
**c. ​Externalities can never refer to costs borne by the seller.
d. ​Both external costs and external benefits can never exist for the same good

less than the efficient amount is being produced

false

a. ​The greater would be the optimal pollution tax.
**b. ​All of the above are true.
c. ​The larger is the deadweight loss from overproduction.
d. ​The further the private market solution ignoring those costs would deviate from the socially efficient level of output.

overproduce the product

that waterways are not private property and can use free of charge

​a producer's costs could be increased by an amount equal to the external cost resulting from the production of a good

false

can easily be withheld from those who refuse to pay for it

​Can lead to clustering of technology firms near one another.

EPA

we do not know whether the efficient level of pollution abatement would rise or fall

output of the good produced will be too low

The market equilibrium output level is less than the efficient equilibrium output level.

assume externalaties

assumes imperfect information

Positive externalities and Negative Externalities

BOTH lead to Market Failure

When costs spill over to an outside party who is NOT involved in producing or consuming the good= a big mess

Ex: pollution, gasoline, air pollution from a factory (steel mill)

Ex: with government- Pollution taxes and regulation

When benefits spill over to outside party who is NOT involved or consuming the good

-some of the costs or benefits associated with production and/or consumption of a good or service falls on someone other than the producers or consumers of the product or service.

-When a price fails to reflect all the costs of a product, too much of it is produced and/or consumed.

changing incentives so people will take into account the effects of the external costs or benefits imposed on, or enjoyed by, others

-means an externality problem is solved

a benefit or cost from consumption or production that spills over onto those who are not consuming or producing the good

Private costs + External costs

ignores Ssocial and focuses on Sprivate

Deadweight loss

Yes

Yes

external cost

vertical difference

Pollution tax because it is simpler and easier to enforce on the big guys (corporations)

lead to OVERproduction and a market price for consumers that is to low

The free market has a DW loss

This DW loss can be eliminated by a tax= external cost

*is a benefit that a third party receives from someone else's economic activity.

**Graphically, a positive externality places the social benefit curve above the private benefit curve. In the presence of a positive externality, the market equilibrium quantity produced is less than the efficient quantity. The reason for this inefficiency is that the market equilibrium reflects only the private benefit to each consumer. It doesn't take into account the fact that some benefits spill over, making other members of society better off.

*lead to UNDERproduction

Examples: Vaccinations, Education, Landscaping, and Christmas Lights

Optimal Subsidy= External Benefit

some costs are associated with production that the producer fails to take into consideration.

provide firms with the incentive to decrease the level of activity creating the pollution.

those not directly involved in the market transactions are harmed.

decrease in production

Public education

too low; too high

too low; too low

subsidies in the case of external benefits and taxes in the case of external costs.

An externality exists whenever the benefits or costs of an activity impact individuals outside the market mechanism. That is, some of the effects spill over to those who have not voluntarily agreed to bear them or compensate others for them, unlike the voluntary exchange of the market.

If the owner of a firm that pollutes does not have to bear the external costs of pollution, she can ignore those real costs of pollution to society. The result is that the private costs she must pay are less than the true social costs of production, so that the market output of the polluting activity is greater, and the resulting market price less, than it would be if producers did have to bear the external costs of production.

If the government could impose a tax or fee on producers equal to the external costs imposed on people without their consent, producers would have to take those costs into account. The result would be that those costs would no longer be external costs, but internalized by producers.

External benefits are benefits that spill over to others because the party responsible need not be paid for those benefits. Therefore, some of the benefits of an activity to society will be ignored by the relevant decision makers in this case, and the result will be a smaller output and a higher price for goods that generate external benefits to others.

Just as taxes can be used to internalize external costs imposed on others, subsidies can be used to internalize external benefits generated for others.

The external costs to others from loud noises in residential areas early in the morning and late in the evening are higher because most residents are home and trying to sleep, than when many people are gone at work or are already awake in the daytime. Given those higher potential external costs, most cities impose more restrictive noise laws for nighttime hours to reduce them.

states that where property rights are defined in a clear-cut fashion, externalities are internalized

Ex: Mill owner Vs. Rancher
-when the mill owner has the property right so he/she can dump in the river legally. Dirty river
-when the rancher has the property right he/she has the legal right to a clean river. Dirty river
= assume transaction costs are low
- no matter the property right their will be a dirty river
-the person who values it most will always get their way

for the government to make certain that property rights are well defined.

can lead to an optimal allocation of resources if private parties can bargain at relatively low cost.

determines who bears the cost of the solution but does not affect the efficient result.

the cost of reducing pollution by an additional unit is the same for all polluting firms.

If the rights to clean air, water, and so on, were clearly owned, those that infringe on those rights would be forced to compensate the owners. Such costs would be internalized, rather than external, to the relevant decision makers. Therefore, externalities are the result of the absence of clear and enforceable property rights in certain goods.

When property rights are clearly defined and information and transaction costs are low, whoever wants to exercise their right faces an opportunity cost of what others would pay for that right. That opportunity cost, represented by the potential payment from others to sell the right, is what forces decision makers to internalize what would otherwise be an externality.

Transaction costs limit the ability of the market mechanism to internalize externalities because trading becomes more difficult. The free-rider problem—where those who benefit from some action cannot be forced to pay for it—also hinders the ability for voluntary trade across markets to generate efficient levels of goods such as cleaner air.

-a good that is nonrivalrous in consumption and non excludable

-Public goods provide benefits to more than one person at a time, and their use cannot be restricted to only those people who have paid to use them.

Ex: cheeseburger, laptop, computer

a good with rivalrous consumption and excludability

*their are more Private than Public goods

Ex: Military and flood control

a rival good that is non excludable

can lead to the tragedy in the commons

Ex: Wifi, forests, clean air
-everyone is on wifi leads to less connection
-when you clear cut forests, leads to less forests*

-deriving benefits from something not paid for

-someone who receives a good of a service without paying for it

-The free-rider problem prevents the private market from supplying the efficient amounts of public goods. That is, no private firm would be willing to supply national defense because people can consume it without paying for it—the free-rider problem. Therefore, the government provides important public goods such as national defense.

More national defense means less of something else that society may value more, like health care or Social Security. To be efficient, additional goods from the public sector must also follow the rule of rational choice—pursue additional government activities if and only if the expected marginal benefits exceed the expected marginal costs. It all comes back to the adage "there are no free lunches."

Governments provide an alternative method to markets for supplying goods and services when it appears that the benefits to society of doing so outweigh the costs to society. Not all individuals will bear the same costs or share the same benefits of those policies.

A government policy to correct a market imperfection is not justified economically if the cost of implementing it exceeds its expected benefits.

by consuming goods is by price

because if charges you money and Rivalrous

private firms cannot restrict the benefits from those goods to consumers who are willing to pay for them

it is prohibitively difficult to withhold national defense from someone unwilling to pay for it.

nonrivalrous; nonexclusive

a. do not need to be produced by government.
b. are subject to free-rider problems.
c. tend to be underproduced in the marketplace.
*d. All of the above are true.

a. is rivalrous in consumption.
b. is nonexcludable.
c. can lead to the tragedy of the commons.
*d. All of the above are true.

Private goods are rival in consumption (we can't both consume the same unit of a good) and exclusive (nonpayers can be prevented from consuming the good unless they pay for it). Public goods are nonrival in consumption (more than one person can consume the same good) and nonexclusive (nonpayers can't be effectively kept from consuming the good, even if they don't voluntarily pay for it).

The government can overcome the free-rider problem by forcing people to pay for the provision of a public good through taxes.

Common resource goods often lead to overuse because if no one owns the resource, they are not likely to consider the cost of their use of the resource on others. This is the so-called tragedy of the commons. This problem has led to overfishing. Of course, you could remove the common and make the resource private property, but assigning private property rights to a vast ocean area would be virtually impossible.

occurs when the available information is initially distributed in favor of one party relative to another in an exchange

EX: **Because the seller of a car has more information than the buyer has, the potential buyer does not know whether the car is a cherry or a lemon. So the buyer guesses the car is average quality and consequently he offers an average price. The owner of a carefully maintained, good used car will be unable to get a high enough price to make selling that car worthwhile. Consequently, owners of good cars will not place their cars on the used-car market. But those with cars of less than average quality will dump their cars on the market. Hence, the lemon problem.

a situation where an informed party benefits in an exchange by taking advantage of knowing more than the other party

-happens because of asymmetric informations

-signaling also happens because of asymmetric information

One method that sellers can use to convince potential buyers that their products are high quality is reputation.

*For example, if a supermarket has a reputation of selling fresh produce, you are more likely to shop there. The same is true when you choose an electrician, plumber, or physician. In the used-car market, the dealer might advertise how long he has been in business. This provides a signal that he has many satisfied customers. Therefore, he is likely to sell more used cars. In short, if there is a reputation of high quality, it will minimize the market failure problem.

goes from the party with more information into the party with less information

EX: references/ experience, diploma

they will use screening:
-good resume
-dress up (look professional)
-be nice during interview
-require a degree

takes place after someone buys insurance>> taking additional risks because you are insured, this lowers the cost to you of taking risks

taking additional risks because you are insured

the phenomenon that occurs when one party in an exchange takes advantage of knowing more than another party.

the moral hazard problem.

those who buy insurance to take fewer precautions to avoid the insured risk.

In the used-car market, the seller has superior information about the car's condition, placing the buyer at an information disadvantage. It also increases the chance that the car being sold is a "lemon." A substantial warranty can provide the buyer with valuable additional information about the condition of the car, reducing both asymmetric information and adverse selection problems.

Too extensive a warranty (e.g., an unlimited "bumper-to-bumper" warranty) will give the buyer less incentive to take care of the car because the buyer is effectively insured against the damage that lack of care would cause.

​a higher price of cars and a smaller quantity of cars sold.

impose a tax on production of the good in order to decrease production.

Costs of capital, entrepreneurship, land, and labor

​private firms cannot restrict the benefits from those goods to consumers who are willing to pay for them.

Price is too low; output is too large.

True (not positive though?)

Some homeowners in a mountain resort area refuse to contribute toward paving the area's only access road.

decrease the quantity of pollution generated.

there will be too few public goods produced

False

remedies an externality by legally limiting a specific behavior by a specific entity. Some examples of command-and-control policies are directly limiting the emissions of carbon dioxide by each factory or mandating that firms adopt emissions-reducing technology.

remedies an externality by regulating general behavior—in this case, total emissions of carbon dioxide—but also by allowing market forces to determine individual outcomes—in this case, the amount that each individual factory pollutes.

encourages behavior that has positive external effects. Since planting trees generates a social value beyond the private value to the tree planter, a subsidy to induce citizens to plant trees can help achieve the efficient quantity.

discourages behavior that has negative external effects. For example, since carbon-dioxide pollution generates a social cost beyond the private costs to the factory owner, a corrective tax can help achieve the socially optimal quantity of pollution.

It is NOT possible to prevent an individual from using the good

Consumption of the good by the person decreases the ability of other people to consume the good

When a good is rival in consumption and nonexcludable, it is a common resource. For example, the swings at the local public park are nonexcludable because anyone can use them, but they are also rival in consumption since no one else can use the swing when you are using it.

The park is an example of a public good. It is a nonrival in that one additional visitor does not lessen the benefit of another visitor.

It is also nonexcludable since any student can visit for free.

EX: Public goods suffer from the free-rider problem. Students have no incentive to donate to the park but, instead, will take a free ride from those who do donate.

Summing the marginal utilities of each unit of a good consumer

she gets the same marginal utility from the last six pack of beer as from the last bag of pretzels.

90 units

​The more beer Phil drinks, the more he enjoys the next one

True

​generally decreases as more of a good is acquired.

FALSE

there is no way a consumer, given the available income, could increase her satisfaction

the price of pizza is three times that of pizza

FALSE

a. ​decrease since more food is now likely to be consumed by students who eat a meal in the cafeteria.

D. one half that of wine

b. has a negative slope

a. True

d. consumer equilibrium

b. ​the marginal utility of the last dozen cookies is THREE times that of the last pint of ice cream.

a. ​A person will receive less added satisfaction from consuming a fourth hot dog in a week than from consuming the third hot dog in a week

c. ​there is no way a consumer, given the available income, could increase her satisfaction.

extra satisfaction generated by consumption of an additional good or service during a specific time period

is the additional utility you get from consuming an additional unit of a good—in this case, continuing on in the relationship

total amount of satisfaction derived from the consumption of a certain number of goods or services

is equal to the overall utility you get from all the units of a good you consume. In other words, assuming you receive no utility from consuming no units of a good, your total utility is the sum of the marginal utilities of each unit of a good that you consume—in this case, the total happiness Gilberto and Juanita got from their whole relationship.

states that, in general, the first units of a good you consume give you more additional utility, or pleasure, than later units. In this case, Juanita has derived less and less additional utility from their relationship as time went on.

Consumers maximize their utility, and thus achieve consumer equilibrium, when they cannot reallocate spending from one good to another to make themselves better off. In economic terms, this means they equate their marginal utility per dollar spent on each good. Marginal utility per dollar is the ratio of the marginal utility of the last unit of a good consumed to the price paid for that good. For example, the marginal utility per dollar you receive from the last gallon of milk is equal to the marginal utility you receive from that gallon divided by the price of that gallon.

a measure of the relative levels of satisfaction consumers get from consumption of goods and services

1 unit of satisfaction

a consumer's switch to another similar good when the price of the preferred good increases

reduction in quantity demanded of a good when its price increases because of a consumer's decreased purchasing power

*a good's ability to provide less satisfaction with each successive unit consumed; the concept that states that as an individual consumes more and more of a good, each successive unit generates less and less utility (or satisfaction)

*the concept that states that as an individual consumes more and more of a good, each successive unit generates less and less utility (or satisfaction)

Marginal utility

the change in total satisfaction derived from consuming one more unit of a particular good.

total utility rises as long as the marginal utility of the oranges is positive, but the marginal utility of each additional orange likely falls.

generally depends on how many hot fudge sundaes the consumer has already consumed.

marginal utility equals zero

the less you value additional units of output.

the marginal utility of a gallon of gasoline is greater than the marginal utility of a gallon of water.

marginal utility is negative.

Economists define utility as the level of satisfaction or well-being an individual receives from consumption of a good or service.

allocation of consumer income that balances the ratio of marginal utility to the price of goods purchased

consumer equilibrium

summing the marginal utilities of each scoop consumer

e. all of the above are generally true except (a).

The marginal utility of the last hamburger consumed must be greater than that of the last hot dog.

Increased the number of bags of popcorn and reduced the number of rides

Consumer equilibrium means that a consumer is consuming the optimum, or utility-maximizing, combination of goods and services, for a given level of income.

Between total utility and marginal utility

marginal utility is less than 0. "<0"