Econ 11 Notes PDF

2. Rationality - Guide people’s choices ECON 11 or decisions systematically gauge pros and cons Book: Principles of Economics Author: Gregory Mankiw...

2. Rationality - Guide people’s choices ECON 11 or decisions systematically gauge pros and cons Book: Principles of Economics Author: Gregory Mankiw 3. Preferences - Fixed and given that allow assignment of value to all Why study Economics? options and to choose the option I. Will help understand the world that maximixes (net) utility II. Will make you a more astute participant in the economy 4. Restrictions - People face III. Will better understand both the constraints that they cannot change potential and the limits of policies themselves Chapter 1: Ten Principles of Economics 5. Opportunity cost - Deciding in favor of one option always means Economy deciding against some other options - Greek word “oikonomos” meaning “one who manages a household” 6. The Economic Principle - - Social science that deals with the Application of rationality to situations allocation of scarce resources to of scarcity; minimize cost or satisfy unlimited human wants maximize utility - Study of how society manages its scarce resources. 7. Efficiency - Maximum benefits from scarce resources Economists - study how people interact with one another. They also 8. Marginal analysis - Additional analyze the forces and trends that benefits vs additional costs (Iphone affect the economy as a whole. specs discussion) Twin Themes of Economics 9. Equilibrium - Basic economic Scarcity - society has limited models deal with the comparison of resources and therefore cannot two equilibria (comparative statics) produce all the goods and services people wish to have [can’t satisfy] 10. Game Theory - Study situations of Efficiency - An economy is interdependence where people have producing efficiently when it can incentives to think and behave make one better off without making strategically someone else worse off TEN Principles of Economics by Mankiw 10 Principles of Economics 1) People Face Trade-offs 1. Scarcity - Where needs or wants a) To get one thing that we like, exceed means therefore people we usually have to give up have to make choices another thing that we like. Making decisions requires  trading off one goal against action exceeds the marginal another. cost. b) “There is not such thing as d) “is the marginal benefit if this free lunch” call greater than the marginal c) Example: The classic cost?” tradeoff between “guns and butter” ” The more we spend Marginal changes - describes on national defense to small incremental adjustments to an protect our shores from existing plan of action. These are foreign aggressors (guns), adjustments around the edges of the less we can spend on what you are doing. consumer goods to raise our standard of living at home 4) People Respond to Incentives (butter) a) People’s behavior may change when the costs or Efficiency - the property of society benefits change. getting the most/max it can from its b) “People respond to scarce resources. incentives. The rest is commentary. Equity - the property of distributing economic prosperity fairly among the Incentives - a reward or punishment members of society. that induces a person to act 2) The Cost Of Something Is What You 5) Trade can make everyone better off Give Up To Get It - Making decisions a) Trade allows each person to requires comparing the costs and specialize in the activities he benefits of alternative courses of or she does best action. (opportunity cost) b) By trading with others, people can buy a greater Opportunity cost - whatever must variety of goods and services be given up to obtain some item at lower cost. c) allows countries to specialize 3) Rational People Think At The Margin in what they do best and to a) Margin means “edge”, so enjoy a greater variety of marginal changes are goods and service adjustments around the edges of what you are doing. 6) Markets are usually a good way to b) Rational people often make organize economic activity decisions by comparing a) The theory behind central marginal benefits and planning was that only the marginal costs. government could organize c) A rational decisionmaker economic activity in a way takes an action if and only if that promoted economic the marginal benefit of the  well-being for the country as choose on their own: to a whole. promote efficiency or to b) Most countries that once had promote equality. centrally planned economies property rights - the ability of an have abandoned the system individual to own and exercise and are instead developing control over scarce resources market economies. market failure - a situation in which the market on its own fails to Market economy - an economy that produce an efficient allocation of allocates resources through the resources decentralized decisions of many ○ externality - possible cause firms and households as they of market failure which is the interact in markets for goods and impact of one person’s services. Free markets contain many actions on the well-being of a buyers and sellers of numerous bystander. (e.g. pollution) goods and services ○ market power - another Invisible hand by Adam Smith cause that refers to the ability ○ Households and firms of a single person or firm (or interacting in markets act as a small group) to unduly if they are guided by an influence market prices “invisible hand” that leads them to desirable market Even when the invisible hand yields efficient outcomes outcomes, it can nonetheless leave sizable ○ prices are the instrument with disparities in economic well-being. which the invisible hand directs economic activity 8) A Country’s Standard of Living Depends on Its Ability to Produce 7) Governments Can Sometimes Goods and Services Improve Market Outcomes a) variation in living standards is a) invisible hand can work its attributable to differences in magic only if the government countries’ productivity—that enforces the rules and is, the amount of goods and maintains the institutions that services produced by each are key to a market economy unit of labor input b) We all rely on b) productivity is the primary government-provided police determinant of living and courts to enforce our standards rights over the things we c) To boost living standards, produce policymakers need to raise c) There are two broad productivity by ensuring that rationales for a government workers are well educated, to intervene in the economy have the tools they need to and change the allocation of produce goods and services, resources that people would  and have access to the best How People Interact available technology. 5. Trade Can Make Everyone Better Off 9) Prices Rise When the Government 6. Markets Are Usually a Good Way to Prints Too Much Money Organize Economic Activity a) mawawalan ng value ang 7. Governments Can Sometimes pera then resulting to Improve Market Outcomes inflation inflation - an increase in the overall How the Economy as a Whole Works level of prices in the economy 8. A Country’s Standard of Living Depends on Its Ability to Produce 10) Society Faces a Short-Run Trade-off Goods and Services between Inflation and 9. Prices Rise When the Government Unemployment Prints Too Much Money a) Increasing the amount of 10. Society Faces a Short-Run Trade-off money in the economy between Inflation and stimulates the overall level of Unemployment spending and thus the demand for goods and Chapter Quiz services. 1. Economics is best defined as the b) Higher demand may over study of time cause firms to raise their a. how society manages its prices, but in the meantime, it scarce resources. also encourages them to hire b. how to run a business most more workers and produce a profitably. larger quantity of goods and c. how to predict inflation, services. unemployment, and stock c) More hiring means lower prices. unemployment. d. how the government can business cycle - the irregular and stop the harm from largely unpredictable fluctuations in unchecked self-interest. economic activity 2. Your opportunity cost of going to a Phillips curve - a curve that shows movie is the short-run tradeoff between a. the price of the ticket. inflation and unemployment b. the price of the ticket plus the cost of any soda and IN SUMMARY: popcorn you buy at the How People Make Decisions theater. 1. People Face Trade-offs c. the total cash expenditure 2. The Cost of Something Is What You needed to go to the movie Give Up to Get It plus the value of your time. 3. Rational People Think at the Margin d. zero, as long as you enjoy 4. People Respond to Incentives the movie and consider it a  worthwhile use of time and b. unions bargaining for money. excessively high wages. 3. A marginal change is one that c. the government imposing a. is not important for public excessive levels of taxation. policy. d. firms using their monopoly b. incrementally alters an power to enforce excessive existing plan. price hikes. c. makes an outcome inefficient. Chapter 2: Thinking Like An Economist d. does not influence incentives. The economist as scientist 4. Adam Smith’s “invisible hand” refers - Economists try to address their to subject with a scientist’s objectivity. a. the subtle and often hidden - They devise theories, collect data, methods that businesses use and then analyze these data in an to profit at consumers’ attempt to verify or refute their expense. theories. b. the ability of free markets to - scientific method—the dispassionate reach desirable outcomes, development and testing of theories despite the self-interest of about how the world works (in econ: market participants. scientific method, observation, and c. the ability of government more observation) regulation to benefit - use models that mostly consist of consumers, even if the diagrams and equations consumers are unaware of the regulations. First model: Circular flow diagram - d. the way in which producers visual model of the economy that shows or consumers in unregulated how dollars flow through markets among markets impose costs on households and firms (decision makers) innocent bystanders. 5. Governments may intervene in a 2 types of decision makers: market economy in order Firms - produce goods and services a. to protect property rights. using inputs, such as labor, land, b. correct a market failure due and capital (buildings and to externalities. machines). c. achieve a more equal ○ Inputs - called factor of distribution of income. production d. All of the above. Households - own the factor of 6. If a nation has high and persistent production and consume all the inflation, the most likely explanation goods and services that firms is produce a. the central bank creates excessive amounts of money. 2 types of markets: ○ What’s left is the profit of the Markets for goods and services - firm owners, who are households are buyers and firms are themselves members of sellers (binebenta/bili ang products). households. In particular, households buy the output of goods and services that firms produce. Markets for the factors of production - households are sellers, and firms are buyers (binebenta/bili ang labor). In these markets, households provide the inputs that firms use to produce goods and services. 2 loops of the circular-flow diagram Inner loop (paggawa ng product/service) ○ represents the flow of goods Second model: The production and services between possibilities frontier households and firms (flows - An economy that just produces only of inputs and outputs) two goods, cars and computers ○ The households sell the use - Use all the factor of production of their labor, land, and available capital to the firms in the - A graph that shows the various markets for the factors of combinations of output (cars and production. computers) ○ The firms then use these - They can produce given the factors to produce goods and available factors services, which in turn are sold to households in the markets for goods and services. Outer loop (pagbili ng product/service) ○ represents the flow of dollars. ○ The households spend money to buy goods and services from the firms ○ The firms use some of the revenue from these sales to pay for the factors of - An outcome is said to be efficient if production, such as the the economy is getting all it can from wages of their workers. the scarce resources it has  available. Points on (rather than economy is simply moving along the inside) the production possibilities PPF. frontier represent efficient levels of move the economy inside the PPF production. When the economy is - This would indicate that the producing at such a point, say point economy is producing less than it A, there is no way to produce more could with the available resources, of one good without producing less meaning of the other. inefficiency/underperforming (e.g., - Point D represents an inefficient unemployment or underutilized outcome. For some reason, perhaps resources). widespread unemployment, the economy is producing less than it Micro and Macro could from the resources it has Microeconomics - study of available: It is producing only 300 households and firms make cars and 1,000 computers. decisions and how they interact in - That is, at point A, the opportunity specific markets cost of 100 cars is 200 computers. Macroeconomics - the study of Put another way, the opportunity economy wide phenomena cost of each car is two computers. including, inflation, unemployment, Notice that the opportunity cost of a and economic growth car equals the slope of the production possibilities frontier. Positive vs. normative analysis - PPF often have this bowed shape. Positive statements are descriptive and can be predictive ex. The expand the PPF- This would mean inflation in Colombia is less than an increase in the economy’s 10% capacity to produce both goods. It Normative statements are typically happens due to factors like prescriptive and may value of technological improvements or an judgement ex. Colombia should increase in available resources. decrease the inflation contract the PPF - This would imply a reduction in the economy’s Commodity - raw materials capacity to produce both goods. It (indistinguishable) could happen due to factors like a decrease in resources or a natural Chapter Quiz disaster. The economy’s capacity 1. An economic model is has permanently reduced (e.g., a. a mechanical machine that fewer resources or less technology). replicates the functioning of move the economy along the PPF the economy. - This means reallocating resources b. a fully detailed, realistic between the two goods without description of the economy. changing the total productive c. a simplified representation of capacity. The total production some aspect of the economy. potential remains the same, and the  d. a computer program that c. the effectiveness of predicts the future of the antipoverty programs in economy. reducing homelessness. 2. The circular-flow diagram illustrates d. the influence of the that, in markets for the factors of government budget deficit on production, economic growth. a. households are sellers, and 6. Which of the following is a positive, firms are buyers. rather than a normative, statement? b. households are buyers, and a. Law X will reduce national firms are sellers. income. c. households and firms are b. Law X is a good piece of both buyers. legislation. d. households and firms are c. Congress ought to pass law both sellers. X. 3. A point inside the production d. The president should veto possibilities frontier is law X. a. efficient but not feasible. 🥲 sana maaral b. feasible but not efficient. page 66 in pdf c. both efficient and feasible. Graphing: a brief review d. neither efficient nor feasible. nlng sa stats 4. An economy produces hot dogs and hamburgers. If a discovery of the Chapter 3: Interdependence and the Gains remarkable health benefits of hot from Trade dogs were to change consumers’ preferences, it would Specialization and Trade - focus on your a. expand the production specialization and trade with others for other possibilities frontier. goods and services bcs you have a high b. contract the production opportunity cost possibilities frontier. c. move the economy along the opportunity cost - whatever must be given production possibilities up to obtain some item frontier. d. move the economy inside the Absolute advantage - the ability to produce production possibilities a good using fewer inputs than another frontier. producer 5. All of the following topics fall within May absolute advantage si tennis the study of microeconomics player since she can mow her lawn EXCEPT for 2 hrs (fewer inputs) a. the impact of cigarette taxes on the smoking behavior of comparative advantage - the ability to teenagers. produce a good at a lower opportunity cost b. the role of Microsoft’s market than another producer power in the pricing of since may mas mataas na money software. offer si serena so may mas  comparative advantage kunin ni demand schedule - a table that forrest gump yung job shows the relationship between the price of a good and the quantity International Trade demanded Because the opportunity cost of a car is 2 demand curve - a graph of the tons of food in the United States but only 1 relationship between the price of a ton of food in Japan, Japan has a good and the quantity demanded comparative advantage in producing cars. Japan should produce more cars than it Market Demand vs. Individual Demand wants for its own use and export some of Individual demand - one demand them to the United States. Market demand - the sum of all the individual demands for a particular Chapter 4: The Market Forces of Supply good or service and Demand Market demand curve - shows how the total Market & Competition quantity demanded of a good varies as the Market - a group of buyers and price of the good varies sellers of a particular good or service. Shifts in the Demand Curve ○ buyers - determine the Movement - up and down/ along the curve demand for the product - demand quantity ○ sellers -determine the supply - Same price ? Competition - situation in which multiple buyers and sellers in the Shift - left right market have the ability to affect the ➔ increase quantity demanded - right price of a good or service. In a ➔ Decrease quantity demanded - left competitive market, no single buyer or seller has the power to influence Normal good market prices, leading to a more ○ Direct rs of $ and demand efficient allocation of resources ○ demand for a good falls, Competitive market - a market in when income falls which there are many buyers and ○ increase in income leads to many sellers so that each has a an increase in demand negligible impact on the market price inferior good ○ inverse rs of income and Demand demand Quantity demanded - the amount of ○ demand for a good rises, a good that buyers are willing and when income falls able to purchase at a specific price ○ increase in income leads to a Law of demand - states that all else decrease in demand being equal as the price of a good falls, the quantity demanded of a Substitutes - two goods for which good falls when the price of the good an increase in the price of one leads rises  to an increase in the demand for the law of supply - the claim that, other other (makikinabang ang compe) things being equal, the quantity ○ Perfect substitutes - same supplied of a good rises when the category pero higher quality? price of the good rises complements - two goods for which supply schedule - a table that an increase in the price of one leads shows the relationship between the to a decrease in the demand for the price of a good and the quantity other (release new model) supplied supply curve - a graph of the tastes/preferences - based on relationship between the price of a historical and psychological forces good and the quantity supplied that are beyond the realm of economics. Economists do, Supply - we are the firm mindset however, examine what happens when tastes change. Market Supply vs. individual Supply Expectations - Market Supply - sum of all the supplies of the sellers Number of buyers - market demand depends on the number of Shifts in the supply curve - occurs when a buyers factor other than the price of the good changes, leading to an increase or decrease in supply at every price level Input prices Technology Expectations Number of sellers Supply and Demand Together equilibrium - a situation in which the market price has reached the level at which quantity supplied equals quantity demanded equilibrium price - the price that balances quantity supplied and quantity demanded equilibrium quantity - the quantity Supply supplied and the quantity demanded quantity supplied - the amount of a at the equilibrium price good that sellers are willing and able to sell  Chapter Quiz 1. A change in which of the following will NOT shift the demand curve for hamburgers? a. the price of hot dogs b. the price of hamburgers c. the price of hamburger buns d. the income of hamburger - Surplus - a situation in which consumers quantity supplied is greater than quantity demanded (#1) 2. An increase in ________ will cause - Shortage - a situation in which a movement along a given demand quantity demanded is greater than curve, which is called a change in quantity supplied (#3) ________. a. supply, demand law of supply and demand - the claim that b. supply, quantity demanded the price of any good adjusts to bring the c. demand, supply quantity supplied and the quantity d. demand, quantity supplied demanded for that good into balance 3. Movie tickets and film streaming services are substitutes. If the price of film streaming increases, what happens in the market for movie tickets? a. The supply curve shifts to the left. b. The supply curve shifts to the right. Supply - the position of the supply curve c. The demand curve shifts to quantity supplied - the amount suppliers the left. wish to sell d. The demand curve shifts to price ^ supply ^ = movement along the right. price ^ demand v = movement along Demand ^ price x = shift 4. The discovery of a large new reserve of crude oil will shift the ________ curve for gasoline, leading to a ________ equilibrium price. a. supply, higher b. supply, lower c. demand, higher d. demand, lower  5. If the economy goes into a recession ○ Kahit magbago ang price, and incomes fall, what happens in bibilhin pa rin/less than 1 the markets for inferior goods? ○ Mga survival essentials like a. Prices and quantities both egg water also luxury/limited rise. items na walang substitutes b. Prices and quantities both fall. price elasticity of demand - a measure of c. Prices rise and quantities fall. how much the quantity demanded of a good d. Prices fall and quantities rise. responds to a change in the price of that good, computed as the percentage change 6. Which of the following might lead to in quantity demanded divided by the an increase in the equilibrium price percentage change in price of jelly and a decrease in the equilibrium quantity of jelly sold? Determinants: a. an increase in the price of availability of close substitutes - peanut better, a complement more elastic demand because it is to jelly easier for consumers to switch from b. an increase in the price of that good to others Marshmallow Fluff, a Necessities versus Luxuries - substitute for jelly Necessities tend to have inelastic c. an increase in the price of demands, whereas luxuries have grapes, an input into jelly elastic demands. d. an increase in consumers’ Definition of the Market - Narrowly incomes, as long as jelly is a defined markets tend to have more normal good elastic demand than broadly defined markets Chapter 5: Elasticity and Its Application Time Horizon - Goods tend to have more elastic demand over longer Elasticity - a measure of the time horizons. responsiveness of quantity demanded or quantity supplied to a change in one of its Computing the Price Elasticity of Demand determinants Elastic - substantial change in Price elasticity of demand = % change in quantity demanded (more than 1) quantity demanded/ % change in price ○ Pag magbago price, more than 1 na di bibili For example, suppose that a 10 percent ○ if the quantity demanded increase in the price of an ice-cream cone responds substantially to causes the amount of ice cream you buy to changes in the price. fall by 20 percent. We calculate your Inelastic - less than one? Or di elasticity of demand as ganon kalaki ang di bibili (limited) ○ if the quantity demanded price elasticity of demand = 20% /10% = 2 responds only slightly to changes in the price. Midpoint Method: A better way annoying problem (in a good way): The elasticity from point A to point B seems different from the elasticity from point B to point A. - For example, tumaas presyo ng product so bababa demand - Pero pag bumalik uli yung orig price, mas tataas na from before yung demand (kc tingin nila nakatipid sila) - Di ka lugi if mag price increase, For instance, $5 is the midpoint between $4 since inelastic so may bibili pa rin and $6. Therefore, according to the midpoint method, a change from $4 to $6 is Either same or larger decrease considered a 40 percent rise because (6 2 C) Unit Elastic Demand: Elasticity 4) / 5 3 100 5 40. Similarly, a change from equals 1 $6 to $4 is considered a 40 percent fall. - Price increase same with price dec The Variety of Demand Curves Either no change or minimal A) Perfectly Inelastic Demand: Elasticity equals 0 - Increase in price, quantity demanded unchanged D) Elastic Demand: Elasticity is greater than 1 - Price increase, larger qd decrease B) Inelastic Demand: Elasticity is less than 1 - A 22% increase in price, only 11% decrease in quantity demanded  E) Perfectly elastic demand: Elasticity cross-price elasticity of demand - a equals infinity measure of how much the quantity - If price increase, demand is zero demanded of one good responds to a - At exact price, any quantity change in the price of another good, - If price decrease, demand is infinite % change in quantity demanded of good 1 / % change in quantity demanded of good 2 elasticity of supply is same lang dawww Chapter Quiz 1. A life-saving medicine without any close substitutes will tend to have a. a small elasticity of demand. b. a large elasticity of demand. c. a small elasticity of supply. d. a large elasticity of supply. Total revenue - the amount paid by 2. The price of a good rises from $8 to buyers and received by sellers of a $12, and the quantity demanded good, computed as the price of the falls from 110 to 90 units. Calculated good times the quantity sold P x Q with the midpoint method, the price elasticity of demand is Elasticity along a linear demand a. 1/5. curve - The slope “rise over run” of b. 1/2. a linear demand curve is constant, c. 2. but its elasticity is not. The price d. 5. elasticity of demand is calculated using the demand schedule in the 3. A linear, downward-sloping demand table and the midpoint method. curve is ○ At points with a low price and a. Inelastic high quantity, the demand b. unit elastic. curve is inelastic. c. Elastic. ○ At points with a high price d. inelastic at some points, and and low quantity, the demand elastic at others. curve is elastic. 4. The ability of firms to enter and exit income elasticity of demand - a measure a market over time means that, in of how much the quantity demanded of a the long run, good responds to a change in consumers’ a. the demand curve is more income elastic. b. the demand curve is less % change in quantity demanded / % change elastic. in income  c. the supply curve is more - Law of Supply: as the price of a elastic. good increases, the quantity d. the supply curve is less supplied generally increases, and elastic. vice versa 5. An increase in the supply of a good Interaction of Supply and Demand will decrease the total revenue equilibrium - the point where supply producers receive if equals demand, meaning the a. the demand curve is quantity consumers want to buy inelastic. equals the quantity producers wish b. the demand curve is elastic. to sell c. the supply curve is inelastic. surplus - when supply exceeds d. the supply curve is elastic. demand shortage - when demand exceeds 6. Over time, technological advance supply increases consumers’ incomes and reduces the price of smartphones. Price Controls Each of these forces increases the Price Ceiling - maximum price set amount consumers spend on by the govt (rent control) smartphones if the income elasticity Price Floor - minimum price set by of demand is greater than ________ the govt (minimum wage) and if the price elasticity of demand is greater than ________. a. zero, zero b. zero, one c. one, zero d. one, one Chapter 6: Supply, Demand, and Government Policies Demand - the quantity of a good or service When the government imposes a binding that consumers are willing and able to price ceiling on a competitive market, a purchase at various prices shortage of the good arises, and sellers - Law of Demand: as the price of a must ration the scarce goods among the good increase, the quantity large number of potential buyers. demanded generally decreases, and vice versa Supply - the quantity of a good or service that producers are willing and able to sell at various prices Basahin mo nlng tong chap na to t-t Rent control - a rule that limits how much landlords can charge for renting out apartments ➔ Elastic supply, inelastic demand - tax Rent subsidies might be a better idea than falls more on consumers rent control bcs at least it does not reduce ➔ inelastic supply, elastic demand - tax the quantity of housing supplied therefore falls more on sellers no housing shortages Chapter Quiz: minimum wage - the lowest amount of 1. When the government imposes a money that employers are legally required binding price floor, it causes to pay their workers. It aims to ensure that a. the supply curve to shift to workers earn enough to live on. the left. b. the demand curve to shift to Similarly, wage subsidies raise the living the right. standards of the working poor without c. a shortage of the good to discouraging firms from hiring them. develop. d. a surplus of the good to Rent and wage subsidies cost the develop. government money and, therefore, require higher taxes. 2. In a market with a binding price ceiling, an increase in the ceiling will Taxes - payments that individuals and ________ the quantity supplied, businesses are required to make to the ________ the quantity demanded, government. and reduce the ________. a. increase, decrease, surplus tax incidence - the manner in which the b. decrease, increase, surplus burden of a tax is shared among c. increase, decrease, shortage participants in a market (buyers) d. decrease, increase, shortage 3. A $1 per unit tax levied on consumers of a good is equivalent to  a. a $1 per unit tax levied on d. supply is elastic, and producers of the good. demand is inelastic. b. a $1 per unit subsidy paid to producers of the good. c. a price floor that raises the Chapter 21: The Theory of Consumer good’s price by$1 per unit. Choice d. a price ceiling that raises the good’s price by $1 per unit. In this chapter, we develop a theory that describes how consumers make decisions 4. Which of the following would about what to buy. Thus far in this book, we increase quantity supplied, decrease have summarized consumers’ decisions quantity demanded, and increase with the demand curve. As we have seen, the price that consumers pay? the demand curve for a good reflects a. the imposition of a binding consumers’ willingness to pay for that good. price floor When the price rises, consumers are willing b. the removal of a binding to pay for fewer units, so the quantity price floor demanded falls. We now look more deeply c. the passage of a tax levied at the decisions that lie behind the demand on producers curve. d. the repeal of a tax levied on producers Theory of Consumer Choice - The theory of consumer choice examines how 5. Which of the following would consumers facing these trade-offs make increase quantity supplied, increase decisions and how they respond to changes quantity demanded, and decrease in their environment. the price that consumers pay? a. the imposition of a binding The Budget Constraint: What the Consumer price floor Can Afford b. the removal of a binding - Assuming there are only two goods: price floor pizza $10 and pepsi $2 c. the passage of a tax levied - Suppose the consumer or you in this on producers matter has a $1000 income (entire d. the repeal of a tax levied on budget for the two goods) producers - In this figure, it shows some combinations of pizza and pepsi that 6. When a good is taxed, the burden of you can buy the tax falls mainly on consumers if - Sa point A, pwede ka kumain ng 100 a. the tax is levied on pizzas pero no budget left for pepsi consumers. - While in point B it’s the opposite, if b. the tax is levied on $1000 ang budget mo and $2 ang producers. isang litro ng pepsi so u can c. supply is inelastic, and maximize it and get 500 liters of it demand is elastic. - Well sa point C naman ay yung gitna nila, if choose this option you can  get equal parts of pizza and pepsi. ○ Kung ano mas preferred 50 pizzas and 250 liters of pepsi option nyo, edi ayun yung nasa higher indifference Budget Constraint (the line) - the curve limit on the consumption bundles marginal rate of substitution - the that a consumer can afford rate at which a consumer is willing to trade one good for another ○ shows the rate at which the consumer is willing to trade Pepsi for pizza. ○ It measures the quantity of Pepsi the consumer must be given in exchange for 1 pizza. - I mentioned earlier that in theory of consumer choice, may kasamang trade offs pag magdedesisyon - In this example, pag pinili mo yung 1 pizza, you are letting go or trading that 5 liters of pepsi for the pizza The indifference curves also tell us that point D is preferred to point C because point Preferences: What the Consumer Wants D is on a higher indifference curve. Even though point D has less Pepsi than point C, - Of course, di lang naman budget it has more than enough extra pizza to ang cinoconsider natin when making make the consumer prefer it. choices di ba? Four Properties of Indifference Curves indifference curve - shows the various bundles of consumption that Property 1: Higher indifference make the consumer equally happy. curves are preferred to lower ones - ○ The consumer’s preferences People usually prefer to consume are represented with more rather than less. indifference curves, which Property 2: Indifference curves are show the combinations of downward-sloping - The slope of an pizza and Pepsi that make indifference curve reflects the rate at the consumer equally which the consumer is willing to satisfied. substitute one good for the other.  Property 3: Indifference curves do Two extreme examples of indifference not cross - pag nagcross kc it means curves it’ll make the consumer equally happy, but it contradicts the first Perfect Substitutes - two goods with property that consumer always straight-line indifference curves prefers more of both goods to less. - For this example, instead of nickels and dimes, let’s use five-peso and ten-peso coins. Suppose someone offered you bundles of these coins. - Of course you’d be willing to trade 2 five-peso coins for 1 ten-peso coin - So your MRS is a fixed number of 2. 1:2 kumbaga - Because the marginal rate of Property 4: Indifference curves are substitution is constant, the bowed inward - In particular, indifference curves are straight lines. because people are more willing to trade away goods that they have in abundance and less willing to trade away goods of which they have little, the indifference curves are bowed inward toward the graph’s origin. ○ At point A, because the consumer has a lot of Pepsi and only a little pizza, she is very hungry but not very thirsty. To induce the consumer to give up 1 pizza, she has to be given 6 liters of Perfect Complements - two goods with Pepsi: The MRS is 6 liters right-angle indifference curves per pizza. - In this case, someone offered you bundles of shoes. - you would judge a bundle based on the number of pairs you could assemble from it. - A bundle of 5 left shoes and 7 right shoes yields only 5 pairs. Getting 1 more right shoe has no value if there is no left shoe to go with it. - a bundle with 5 left shoes and 5 right shoes is just as good as a  bundle with 5 left shoes and 7 right - The consumer can afford point B, shoes. Same lang na 5 pares nabuo but that point is on a lower indifference curve and, therefore, provides the consumer less satisfaction. - The optimum represents the best combination of pizza and Pepsi available to the consumer. Pasok sa budget, while you also loved it How Changes in Income Affect the Consumer’s Choices So pano naman if nag-increase ang income Optimization: What the Consumer Chooses mo as a consumer? With higher income, the consumer can afford more of both goods. So nabanggit na natin yung budget and The increase in income, therefore, shifts the yung preference ng mamimili, dito naman budget constraint outward. sa pangatlo pagccombine natin yun parehas para malaman ano na ang kaniyang pipiliin Notice that, in Figure, the consumer after i-factor yung pera at gusto niya chooses to consume more Pepsi and more pizza. The logic of the model does not require increased consumption of both goods in response to increased income, but this situation is the most common. As you may recall from Chapter 4(discussed by Abu), meron tayong tinatawag na normal good - ito yung good na nag-iincrease ang demand pag nag-increase din ang income ng consumer. The indifference curves in Figure 7 are Optimum - The point at which this drawn under the assumption that both pizza indifference curve and the budget constraint and Pepsi are normal goods. (basically, may touch. The consumer chooses the point on nagbago sa income mo kaya nakaapekto rin her budget constraint that lies on the ito sa choices mo as a consumer highest indifference curve. - The consumer would prefer point A, A normal good is a good that experiences but she cannot afford that point an increase in demand due to an increase because it lies above her budget in a consumer's income. constraint.  The impact of a change in the price of a Inferior goods - the consumer buys less of it good on consumption can be decomposed when her income rises. into two effects: Income and Substitution Effects Figure 8 shows an example in which an increase in income induces the consumer to ➔ “Great news! Now that Pepsi is buy more pizza but less Pepsi. cheaper, my income has greater purchasing power. I am, in effect, richer than I was. Because I am richer, I can buy both more pizza and more Pepsi.” (This is the income effect.) ➔ “Now that the price of Pepsi has fallen, I get more liters of Pepsi for every pizza that I give up. Because pizza is now relatively more expensive, I should buy less pizza and more Pepsi.” (This is the drawn under the assumption that pizza is a substitution effect.) normal good and Pepsi is an inferior good. How Changes in Prices Affect the Consumer’s Choices For example, bumaba presyo ng pepsi from $2 to $1 per liter, while presyo ng pizza still remains $10. Basically, in this graph, pinapakita na dahil sa price decrease ng pepsi, mas tumaas yung consumption nito kaya bumaba naman yung pizza Three Applications consumption with the given budget of $1000 ng consumer. Do All Demand Curves Slope Downward? As a matter of economic theory, however, What will you choose if you are demand curves can sometimes slope Kayla, more work sayang pera or upward. In other words, consumers can more time for leisure na? sometimes violate the law of demand and buy more of a good when the price rises. Consider first the substitution effect. When Kayla’s wage rises, leisure becomes more Giffen goods - inferior goods for which the expensive relative to consumption, and this income effect dominates the substitution encourages Kayla to substitute away from effect. leisure and toward consumption. The - Potatoes are an example of inferior opportunity cost of work is now at $60 goods - In between meat and potatoes, Now consider the income effect. She is now potatoes are staple food and better off than she was. As long as generally affordable it. consumption and leisure are both normal - They cant substitute it with other goods, she tends to want to use this goods but since tumaas yung presyo increase in well-being to enjoy both higher ng potatoes, they now feel poorer consumption and greater leisure. WHY? kasi di mo na afford or compared dati mas onti nalang In the end, economic theory does not give a mabibili mong potatoes based sa clear prediction about whether an increase budget mo ngayon in the wage induces Kayla to work more or - In this way, the income effect (feeling less. If the substitution effect is greater than of poorer) dominates the substitution the income effect, she works more. If the effect (finding a replacement good) income effect is greater than the substitution - Pag affordable yung giffen good, di effect, she works less. The labor-supply bibilhin kasi mas may pera na for curve, therefore, could be either upward- or other stuff. Pero pag di na backward-sloping. affordable, no choice but to stick with it since di rin namn kaya wla un Same lang sa interest rates affect household saving–either save now and enjoy later or vice versa How Do Wages Affect Labor Supply? The theory of consumer choice does not try Kayla to present a literal account of how people Freelance software designer make decisions. It is a model. And as we Awake for 100 hours per week first discussed in Chapter 2, models are not Gets paid for $50 per hour intended to be completely realistic. Experiencing trade-off between leisure and consumption For every hour of leisure she gives up, she Chapter 22: Frontiers of Microeconomics works one more hour and gets $50 of consumption. Asymmetric information What will happen if Kayla’s wage - “I know something you don’t know” increases from $50 to $60 per hour?  - Different in access to knowledge that Signaling is relevant to an interaction - actions taken by an informed party for the sole purpose of credibly hidden action - a worker knows revealing his private information more than his employer about how - uses signal to convince the much effort he puts into his job uninformed party hidden characteristic - seller of a used car knows more than the buyer Ex. about the car’s condition > advertising high quality products > course/univ are signals of capabilities but effects no guarantee hidden action: Moral hazard - the tendency of a person who is Screening to Uncover Private Information imperfectly monitored to engage in Screening dishonest or otherwise undesirable - an action taken by an uninformed behavior party to induce an informed party to - a problem that arises when one reveal information person (agent) is performing some - Like manipulation–blackmail? xD task on behalf of another person Political Economy (principal) - the study of government using the - the risk or “hazard” of immoral analytic methods of economics behavior by the agent - uses the methods of economics to Agent - a person who is performing study how the government works. an act for another person, called the principal Condorcet paradox Principal - a person for whom ○ that democratic outcomes do another person, called the agent, is not always obey this performing some act property. ○ the failure of majority rule to hidden characteristic: Adverse selection produce transitive - the tendency for the mix of preferences for society unobserved attributes to become ○ The broad lesson is that undesirable from the standpoint of majority voting by itself does an uninformed party not tell us what outcome a - problem that arises in markets in society really wants. which the seller knows more about the attributes of the good being sold Properties of voting system than the buyer does. ➔ Unanimity: If everyone prefers A to ex: B, then A should beat B. > used cars ➔ Transitivity: If A beats B, and B > worker characteristics beats C, then A should beat C. > insurance for sicker people ? ➔ Independence of irrelevant alternatives: The ranking between Signaling to Convey Private Information any two outcomes A and B should  not depend on whether some third ➔ People are reluctant to change their outcome C is also available. minds ➔ No dictators: There is no person who always gets his way, regardless ★ People care about fairness of everyone else’s preferences. ★ People are inconsistent over time Arrow’s impossibility theorem Chapter Quiz - no voting system can satisfy all 1. Because Elaine has a family history these properties. of significant medical problems, she - a mathematical result showing that, buys health insurance, whereas her under certain assumed conditions, friend Jerry, who has a healthier there is no scheme for aggregating family, goes without. This is an individual preferences into a valid example of set of social preferences a. moral hazard. b. adverse selection. c. Signaling. d. screening. 2. George has a life insurance policy Median voter theorem that pays his family $1 million if he - majority rule will produce the dies. As a result, he does not outcome most preferred by the hesitate to enjoy his favorite hobby median voter. of bungee jumping. This is an - a mathematical result showing that if example of voters are choosing a point along a a. moral hazard. line and each voter wants the point b. adverse selection. closest to his most preferred point c. Signaling. median voter - the voter exactly in d. screening. the middle of the distribution 3. Before selling anyone a health Behavioral Economics insurance policy, the Kramer - the subfield of economics that Insurance Company requires that integrates the insights of psychology applicants undergo a medical - humans should be viewed not as examination. Those with significant rational maximizers but as pre existing medical problems are satisficers. charged more. This is an example of - Instead of always choosing the best a. moral hazard. course of action, they make b. adverse selection. decisions that are merely good c. Signaling. enough. d. screening. ★ People aren’t always rational 4. The Condorcet paradox illustrates ➔ People are overconfident Arrow’s impossibility theorem by ➔ People give too much weight to a showing that pairwise majority voting small number of vivid observations  a. is inconsistent with the Consumer surplus - the amount a buyer is principle of unanimity. willing to pay for a good minus the amount b. leads to social preferences the buyer actually pays for it. (natipid/benefit that are not transitive. niya kasi willing sya for 100 pero nabili lang c. violates the independence of for 70 so consumer surplus is 30) irrelevant alternatives. Consumer surplus = Value to buyers - d. makes one person in effect a Amount paid by buyers. dictator. 5. Two political candidates are vying for town mayor, and the key issue is how much to spend on the annual Fourth of July fireworks. Among the 100 voters, 40 want to spend $30,000, 30 want to spend $10,000, and 30 want to spend nothing at all. What is the winning position on this issue? Cost - the value of everything a seller must a. $10,000 give up to produce a good b. $15,000 c. $20,000 producer surplus - the amount a seller is d. $30,000 paid for a good minus the seller’s cost of providing it 6. The experiment called the ultimatum Producer surplus = Amount received by game illustrates that people sellers - Cost to sellers. a. are overconfident in their own abilities. b. play the Nash equilibrium in strategic situations. c. care about fairness, even to their own detriment. d. make inconsistent decisions over time. Chapter 7: Consumers, Producers, and the Efficiency of Markets welfare economics - the study of how the allocation of resources affects economic well-being Willingness to pay - the maximum amount that a buyer will pay for a good  Market efficiency - able to allocate the resources efficiently - For buyers high utility - For sellers low cost Opposite: market distortion Area of P Q is called the revenue ❖ The Benevolent Social Planner - an all-knowing, all-powerful, well-intentioned dictator. total surplus - One possible measure is the sum of Invisible hand - leads the market consumer and producer surplus Even though each buyer and seller in a Total surplus = Value to buyers - Cost to market is concerned only about her own sellers. welfare, together they are guided by an invisible hand to an equilibrium that Efficiency - the property of a resource maximizes the total benefits to buyers and allocation of maximizing the total surplus sellers. received by all members of society Market Failure - the inability of some Equality - the property of unregulated markets to allocate resources distributing economic prosperity uniformly efficiently. among the members of society Market Power - ability to influence prices - can cause markets to be inefficient because it keeps the price and quantity away from the levels determined by the equilibrium of supply and demand. Market efficiency and equilibrium is the Externalities same - the welfare implications of market activity depend on more than just the Market Equilibrium value obtained by the buyers and - balance of supply and demand the cost incurred by the sellers. - Price determinant Chapter Quiz 4. An efficient allocation of resources 1. Jen values her time at $60 an hour. maximizes She spends 2 hours giving Colleen a a. consumer surplus. massage. Colleen was willing to pay b. producer surplus. as much at $300 for the massage, c. consumer surplus plus but they negotiate a price of $200. In producer surplus. this transaction, d. consumer surplus minus a. consumer surplus is $20 producer surplus. larger than producer surplus. b. consumer surplus is $40 5. When a market is in equilibrium, the larger than producer surplus. buyers are those with the ________ c. producer surplus is $20 willingness to pay and the sellers are larger than consumer those with the ________ costs. surplus. a. highest, highest d. producer surplus is $40 b. highest, lowest larger than consumer c. lowest, highest surplus. d. lowest, lowest 2. The demand curve for cookies is 6. Producing a quantity larger than the downward-sloping. When the price equilibrium of supply and demand is of cookies is $2, the quantity inefficient because the marginal demanded is 100. If the price rises buyer’s willingness to pay is to $3, what happens to consumer a. Negative. surplus? b. Zero. a. It falls by less than $100. c. positive but less than the b. It falls by more than $100. marginal seller’s cost. c. It rises by less than $100. d. positive and greater than the d. It rises by more than $100. marginal seller’s cost. 3. John has been working as a tutor for $300 a semester. When the Chapter 10: Externalities university raises the price it pays - External force (environment tutors to $400, Jasmine enters the - the uncompensated impact of one market and begins tutoring as well. person’s actions on the well-being of How much does producer surplus a bystander rise as a result of this price - arises when a person engages in an increase? activity that influences the well-being a. by less than $100 of a bystander but neither pays nor b. between $100 and $200 receives compensation for that effect c. between $200 and $300 d. by more than $300 Invisible hand - leads self-interested buyers and sellers in a market to maximize the total benefit that society derives from that market. Externality Positive externality - beneficial ○ Restored historic bldg ○ Research into new technologies ○ Immunizations Negative externality - adverse ○ Automobile exhaust ○ Cig smoking ○ Loud karaoke night All of the remedies share the goal of moving the allocation of resources closer to the internalizing the externality social optimum. - altering incentives so that people take into account the external effects Problem ba ang externality? –depends of their actions Positive - harms the doer(?) benefits - Aluminum producers would take the the recipient costs of pollution into account when Negative - harms the recipient, deciding how much aluminum to benefits the doer supply because the tax would make them pay for these external costs Freeloader - because the market price would reflect the tax on producers, Subsidy consumers of aluminum would have an incentive to buy a smaller Public Policies toward Externalities quantity Command-and-Control Policies: Regulation - The government can remedy an externality by either requiring or forbidding certain behaviors. negative externalities - taxing goods - Environmental Protection Agency Positive externalities - subsidizing goods (EPA) is the government agency tasked with developing and enforcing regulations aimed at protecting the environment. Market-Based Policy 1: Corrective Taxes and Subsidies - to align private incentives with social efficiency. Corrective taxes ○ taxes that deal with the effects of nega externalities, aka pigovian taxes  ○ would equal the external cost from an activity with negative Why Private Solutions Do Not Always Work externalities, and an ideal Transaction costs - the costs that parties corrective subsidy would incur during the process of agreeing to and equal the external benefit following through on a bargain (lawyers) from an activity with positive externalities. Bargaining breakdown and holdouts - ○ Economic incentive to reduce strategic behavior = statement and prevent ○ places a price on the right to an efficient outcome pollute ○ perfectly elastic (because The role of government firms can pollute as much as - Play a crucial role in addressing exte they want by paying the tax), - Can act as a mediator or regulator Market-Based Policy 2: Tradable Pollution Chapter Quiz Permits 1. Which of the following is an example Pollution permits of a positive externality? ○ Limited number of supply a. Dev mows Hillary’s lawn and ○ Perfectly inelastic (because is paid $100 for performing the quantity of pollution is the service. fixed by the number of b. While mowing the lawn, permits) Dev’s lawnmower spews out smoke that Hillary’s neighbor Private Solutions to Externalities Kristen has to breathe. Govt action is not always needed to solve c. Hillary’s newly cut lawn the problem of the externalities makes her neighborhood ➔ Moral codes and social sanctions more attractive. ➔ Charitable organizations d. Hillary’s neighbors pay her if ➔ Contracting between parties she promises to get her lawn ➔ Integrating different types of cut on a regular basis. businesses 2. If the production of a good yields a The Coase Theorem negative externality, then the - the proposition that if private parties social-cost curve lies ________ the can bargain without cost over the supply curve, and the socially allocation of resources, they can optimal quantity is ________ than solve the problem of externalities on the equilibrium quantity. their own a. above, greater - the two parties can bargain with b. above, less each other and solve the externality c. below, greater problem. d. below, less - bargain in which everyone is better off and the outcome is efficient. 3. When the government levies a tax d. both parties understand the on a good equal to the external cost externality fully. associated with the good’s production, it ________ the price paid by consumers and makes the market outcome ________ efficient a. increases, more b. increases, less c. decreases, more d. decreases, less 4. Which of the following statements about corrective taxes is generally NOT true? a. Economists prefer them to command-and-control regulation. b. They raise government revenue. c. They cause deadweight losses. d. They reduce the quantity sold in a market. 5. the government auctions off 500 units of pollution rights. They sell for $50 per unit, raising total revenue of $25,000. This policy is equivalent to a corrective tax of _____ per unit of pollution. a. $10 b. $50 c. $450 d. $500 6. The Coase theorem does NOT apply if a. there is a significant externality between two parties. b. the court system vigorously enforces all contracts. c. The transaction costs make negotiating difficult.