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Econ Exam 1 Terms
| Term | Definition |
|---|---|
| Supply | The quantity of a good that sellers are willing to sell at each price. |
| Demand | The relationship between a good's price and the quantity of the good that consumers would buy at each price. |
| Equilibrium | The quantity and price at which demand and supply are equal. Marginal cost is equal to marginal benefit. |
| Market Forces | Forces that tend to move prices and quantities back to equilibrium values. They push the equilibrium price back to where supply intersects demand. |
| Inverse Supply | Describes the price at which producers are willing to sell a given amount of a good. AKA Marginal cost. |
| Inverse Demand | How much people value units of a good that they consume for given quantities consumed. How much people benefit from buying things. Marginal willingness to pay. |
| Adam Smith's Theory of the Invisible Hand | Markets make people as well off as possible. Markets maximize economic surplus. They are efficient and capture 100% of economic surplus. |
| Assumptions of the Invisible Hand | No market power (cannot set price), everyone always has complete information, and there are NO externalities. |
| Theory of Externalities | How costs and benefits of economic activities can affect unrelated third parties, creating economic inefficiencies. |
| Social Welfare | Basically the net economic surplus of an economy. Positive surplus - negative surplus. |
| Net Economic Surplus | The sum of consumer and producer surplus at market equilibrium. The bigger the NES, the more "well-off" society is. |
| NES with NO externality or policy = | CS + PS |
| NES WITH tax polity but NO externality = | CS + PS + G |
| NES with NO policy but WITH externality = | CS + PS - External Cost |
| NES WITH Pigouvian tax AND externality = | CS + PS + G - External Cost |
| Methods of Cost-Benefit Analysis (CBA) | Stated Preference and Revealed Preference methods. |
| Difficulties of CBA | Putting monetary values on costs and benefits. |
| Stated Preference | Directly asking people about their willingness to pay. Has high hypothetical bias because no one actually has to pay the amount they say they would. One method is the Contingent Valuation Method. |
| Revealed Preference | Uses data from observed choices in other markets, or surrogate markets. (Housing market) Two types: Travel Cost and Hedonic Price. |
| Travel Cost Method | The cost of time and actual money to visit a site represent the cost of access to that site. |
| Hedonic Price Method | Estimates willingness to pay based on the idea that the price of a large number of market goods is a function of a bundle of characteristics. (Ex: cars, homes) |
| Discounting | Converting future dollars to present dollars. Attaches a lower weight to a given unit of future benefit (or cost) than to equivalent present unit. |
| Examples of Travel Cost Mehod | How much it would cost for me to visit the smokey mountains (gas, time it takes to get there) |
| Examples of Hedonic Price Method | House or car markets. |
| Pigouvian Tax | Tax rate set equal to the marginal external cost at the social optimum. Shifts cost from society back to supplier and internalizes the cost to the company. |
| Contingent Valuation | Stated Preference Method where a hypothetical market is described where the good in question can be traded. People are asked their max or min WTP for a change in the level of provision of the good. |
| Marginal Social Cost | The sum of marginal eternal cost and marginal private cost of production. Measures all costs of production. |
| Marginal External Cost | Change in the cost to parties other than the producer or buyer due to the production of an additional good or service. |
| Marginal Willingness to Pay | The maximum a consumer is willing to pay for one additional unit of a good. |
| Environmental Externality | The economic concept of uncompensated environmental effects of production and consumption that affect wellbeing outside of markets. |
| Example of Environemtnal Externality | Nitrogen Oxide and Sulfur Oxide pollution in the atmosphere that cause acid rain that damages infrastructure and crops. |
| Quantity Demanded | Quantity of a good sold at a particular price. |
| Reason Demand is Downward-Sloping | Substitution effect and income effect |
| Income Effect | When the price of a good rises, people can afford less of that good. |
| [Blank] Cause Shifts in the Demand Curve | Change in income, change in preferences, prices of substitute goods, future expectations. NON-PRICE factors. |
| [Blank] Cause Shifts ALONG the Demand Curve | Change in price of the good itself. |
| Change in Quantity Demanded | Movement along the demand curve. |
| Change in Demand | A shift of the demand curve. |
| Example of a Market Force | Think of situations that would cause a shortage (too low of price causes demand to exceed supply, forcing suppliers to drive the price back up to equilibrium). |
| Dead Weight Loss | The reduction in NES that results from a market distortion (taxes or standards). |
| Taxes cause producers to have a higher [blank]. | Marginal cost of production, thereby supplying less at each market price. |
| True or False: The private market level of output (market equilibrium) with an externality will be the same as the private market output without an externality. | True. CS and PS remain the same because no one is actually paying for the cost to society. |
| Total External Cost = | (External Cost)*Equlibrium quantity |
| Pigouvian Taxes... | Get prices right and generates revenue. |
| Issues With Pigouvian Taxes: | Hard to know where the social optimum is, hard to know the magnitude of the marginal external cost, and hard to implement the tax in general. |
| Externalities [blank] overall social welfare. | Lower |
| The optimal level of the Pigouvian tax is equal to... | The marginal external cost. |
| Cost-Benefit Analysis | The economic appraisal of of policies where policy costs are weighed against policy benefits. |
| Higher discount means [blank] present value of future benefits. | lower |
| Why do we care less about the future's problems (discounting)? | Opportunity cost: You can get a return on today's money. |
| Tyrrany of Discounting | Environmental problems typically have a longer time horizon and the effect of discounting is often to given very low weight to events in the far-off future. |
| Kotchen 2025 main idea | The larger the ratio between welfare gain and government revenue, the more efficient the policy is. |
Created by:
mmontg28
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