1
Q
When is market functioning properly?
A
When S=D and Social Surplus is max.
2
Q
4 types of goods and their characteristics
A
- Private Goods - Excludable + Rival e.g. Clothing 2. Public - e.g. Street Lights 3. Common Resources - Rival e.g. Fish in the sea 4. Natural Monopolies - Excludable e.g. Cable TV
3
Q
How do Gov. decide whether to supply a public good?
A
Cost-benefit analysis Difficult to estimate: - Absence of prices - Value of life/time? Therefore: - Willingness to pay/accept - Earnings over lifetime?
4
Q
Public Goods Graph
A
5
Q
Tragedy of the Commons
A
The Tragedy of the Commons is a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole.
6
Q
Merit Goods
A
Goods that provide benefits that the consumer is not fully aware of and therefore underconsumes e.g. College education.
Intertemporal choice = where decisions made today can affect choices facing individuals in the future.
7
Q
De-merit Goods
A
Goods that generate both private and social costs which are not taken into account by the decision-maker and are therefore overconsumed e.g. Alcohol.
8
Q
Internalizing an externality
A
Altering incentives so that people take account of the external effects of their actions e.g. Using tax
9
Q
Negative Externality Graph
A
10
Q
Positive Externality Graph
A
11
Q
Why sometimes the market for externalities regulates itself?
A
Social norms and Moral Behaviour
- Do unto others as you would have them do unto you.
Charities
Self-interest
- Where two firms gain from each other’s presence
Social Contracts
12
Q
The Coase Theorem
A
The Coase Theorem is a proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own.
But:
- Each party tries to hold out for a better deal.
- Asymmetric Information and Irrational Behaviour.
- Transaction costs are incurred in the process of agreeing to and following through on a bargain.
13
Q
2 types of policies tackling externalities
A
- Command-and-control policies.
- Regulation - Market-based policies.
- Taxes
14
Q
Pigovian Tax
A
Pigovian taxes are taxes enacted to correct the effects of a negative externality.
15
Q
4 Ways of tackling negative externalities
A
- Regulation
- Pigovian taxes
- Trade Permits
- Property rights
16
Q
Public Choice Theory
A
Public choice theory is the analysis of governmental behaviour, and the behaviour of individuals who interact with government.
17
Q
Factors affecting government rational behaviour
A
- The special-interest effect may lead to minorities gaining significant benefits but the cost is borne by the population as a whole.
- Logrolling is a term used to describe vote trading in government. 3. Rent seeking is where individuals or groups take actions to redirect resources to generate income (rents) for themselves or the group.
- Public sector inefficiency.
- Cronyism (returning favours).
- Inefficiency in the Tax System
18
Q
Moral Hazard
A
In economics, moral hazard occurs when one person takes more risks because someone else bears the cost of those risks.
19
Q
Adverse Selection
A
When buyers and sellers have different information, it is known as a state of asymmetric information. Traders with better private information about the quality of a product will selectively participate in trades which benefit them the most, at the expense of the other trader. A textbook example is Akerlof’s market for lemons.
20
Q
Example of signalling
A
University degree
21
Q
Example of screening
A
Insurance companies looking into people’s driving history
22
Q
Prospect theory
A
Prospect theory is a behavioral economic theory that describes the way people choose between probabilistic alternatives that involve risk, where the probabilities of outcomes are known. The theory states that people make decisions based on the potential value of losses and gains rather than the final outcome, and that people evaluate these losses and gains using certain heuristics.
23
Q
Endowment effect
A
Where the value placed on something owned is greater than on an idenical item not owned.
24
Q
Why do natural monopolies come about?
A
An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.
25
Monopoly graph
26
Monopoly deadweight loss
27
Arbitrage
Arbitrage is the process of buying a good in one market at a low price and then selling it in another market at a higher price.
28
Two effects of Price Discrimination
1. Reduces Consumer Surplus
2. Reduces Deadweight loss (D=MC)
29
4 Options for Gov. to deal with Monopolies
1. Make the industry more competitive
2. Regulation
3. Turn into public enterprise
4. Do nothing
30
Monopolistic Competition Graph
31
2 Important differences between monopolistic competition and perfect competition
1. Excess Capacity
- In monopolistic competition, output is less than the efficient scale of perfect competition.
2. Mark-up Over MC
- For a monopolistically competitive firm, price exceeds marginal cost.
32
2 Externalities of entry into a monopolistically competitive market
1. Product Variety for consumers
2. Stealing Customers from Other businesses
33
Pros and Cons of advertising
Cons:
- Firms advertise in order to manipulate people’s tastes.
- It impedes competition by implying that products are more different than they really are.
Pros:
- The willingness of a firm to spend advertising dollars can be a signal to consumers about the quality of the product being offered.
- Greater Information and Competition
34
Theory of Contestable markets (Baumol, Panzar and WIllig, 1982)
Firms are influenced by the threat of new entrants into a market. Therefore firms try to limit this threat:
- Entry limit pricing is a situation where a firm will keep prices lower than they could be in order to deter new entrants.
- Predatory pricing
- Competittive advantage
- Aggressive marketing
- Hit 'n' Run
35
What are coordination games?
A game is a coordination game if players wish to make mutually consistent decisions.
Coordination games can lead to inefficient outcomes when players either miscoordinate, or if they coordinate on actions which do not yield the highest payoffs.
36
Sequential Games Diagram
37
Happenstance data
the by-product of (uncontrolled) naturally occurring economic activity e.g. inflation, GDP, interest rates
38
Experimental data
generated for scientific purposes in a controlled environment to help to answer specific questions. e.g. see data from class experiment
39
4 Types of Economic Experiments
1. Lab
2. Field
3. Natural
4. Neuroeconomics/Inernet Studies
40
3 Types of group experiment matching
1. Fixed (you work with a partner that you know)
2. Random (changes over time so you might end up working with a stranger)
3. Perfect-Random
41
Between vs. Within Subject Design
**A within-subjects design** is a type of experimental design in which all participants are exposed to every treatment or condition.
(+) the best control group
(-) all of the above pros, plus it requires tests for sequencing effects
**Between subject design** is often called an independent measures design because every participant is only subjected to a single treatment.
(+) unaware of other treatments (reveal goal), subjects not influenced by other treatment (status quo), time to run more repetitions
(-) control group is not identical
42
What did Keynes mean by the Beauty Contest?
Keynes believed that similar behavior was at work within the stock market. This would have people pricing shares not based on what they think their fundamental value is, but rather on what they think everyone else thinks their value is, or what everybody else would predict the average assessment of value to be.
43
Why do people reject under 40% propositions in an ultimate games?
1. Inequality aversiion
2 NEgative reciprocity
44
3 Axioms of Ratonal Choice
Completeness:
- If we have two bundles of goods, A and B then we can compare them to each other and get a stable preference ordering – i.e. either A is preferred to B, or B is preferred to A, or they are equally preferred.
Transitivity:
- If bundle A is preferred to bundle B, and if bundle B is preferred to bundle C, then bundle A is preferred to bundle C (think about it!).
Monotonicity (more is better):
- If bundles A and B contain the same types of goods (e.g. both are composed of Snickers bars and Starbucks coffees), and bundle A has more of at least one good than bundle B (and not less of either), then bundle A is preferred to bundle B.
45
Anchoring
In many situations, people make decisions by first referring to a known starting point or anchor and then adjusting this anchor up or down according to what they think is right.
There are two types: Internal + External
46
Availability Heuristic
Availability is a heuristic whereby the likelihood of a particular outcome occurring (e.g. the probability of a terror attack) is assessed by the ease with which you can recall examples of the outcome actually happening.
47
Salience
Salience is when information that stands out, seems novel, or seems relevant is more likely to affect our thinking and actions (Dolan et al, 2010).
48
Representativeness bias
Representativeness is when we try to assess the likelihood of something occurring by looking at its similarity to other known occurrences.
49
The law of small numbers
the law of small numbers, whereby people often reach conclusions from observing only a small sample of occurrences, without analysing in any further detail (which takes time and effort).
50
Framing Effect
The framing effect is an example of cognitive bias, in which people react to a particular choice in different ways depending on how it is presented; e.g. as a loss or as a gain.
51
Dynamic Inconsistency
Dynamic Inconsistency: When an individual’s preferred or optimal choice at one point in time is no longer his/her preferred option at another point in time. This leads to a misalignment or inconsistency of preferences over time (almost as though you’re a completely different person at different points in time).
52
Long-run economic growth is due to:
– Increases in the labour supply.
– Accumulation of physical capital.
– Accumulation of human capital.
– Discovery of natural resources.
– Technological progress.
53
Recession vs Depression
A recession is defined as two consecutive quarters of negative economic growth.
A depression is a severe recession (the definition of a depression is subjective).
54
Business Cycles
Fluctuations in economic growth around the trend growth rate
- Procyclical variables (Move in the same direction as GDP)
- Countercyclical variables (Move in the opposite direction)
55
Leading vs Lagging vs Coincident Indicators
A leading indicator is a variable which changes before the change in economic activity. E.g. Stock market performance
A lagging indicator is a variable which changes after the change in real GDP. E.g. Debt relative to Income
A coincident indicator is a variable which changes at the same time as real GDP. E.g. Personal Income
56
Why does the Short-Run AS slope upwards?
1. Sticky wage theory
- This implies that an unexpected change in the overall price level may not be immediately met by a change in the wage rate.
2. Sticky Price theory
- If the overall price level in the economy falls unexpectedly, some firms might lag behind and will be stuck with prices that are “too high.”
3. Misperceptions Theory
- Changes in the overall price level temporary mislead suppliers into increasing/decreasing their production due to misperception of why the prices have changed.
57
Theory of Liquidity prefernces
– The demand for money comes from households and firms, who choose how much of their wealth to hold in the form of money.
– The supply of money is determined by the central bank.
– For any given price level, the interest rate adjusts to balance the supply and demand for money.
58
Crowding-out effect
The crowding out effect is the offset in aggregate demand that results when an increase in government spending raises the interest rate (therefore lower investment).
59
Inside vs Outside lags
An inside lag is the amount of time that it takes for policymakers to respond to shocks.
An outside lag is the amount of time that it takes for a policy to have the intended effect on the economy.
60
Benefits of Common Currency Areas
– Political benefits
– Transplanted price stability
– No need to hold reserves of each other’s currency
– A common currency is more likely to be a global reserve currency
**– Reduction in price discrimination**
**– Elimination of transaction costs**
**– Reduction in foreign exchange volatility**
61
Costs of joining a currency union
- One-off costs
- More difficult to cope with economic fluctuations
-
62
3 Factors contributing to Optimum Currency Areas
1. Real Wage Flexibility
2. Labour Mobility
3. Financial Capital Mobility
63
Push vs Pull Factors (Economic Immigration)
Push factors = Negative incentives that push people away from their country of origi.
Pull Factors = Positive incentives that pull people towards a new country.
64
Stay vs Stay Away (Economic Immigration)
Stay = Positive factors that make people want to stay in their country of origin
Stay Away = Negative factors which make people want to avoid their country of destination
65
Formal Entry/Exit Barriers (Economic Immigration)
Entry = Visa
Exit = North Korean Snipers
66
Costs of Moving (Economic Immigration)
Partly because immigration is so costly, there is surprisingly very littlle migration out of the world’s poorest countries.
67
Possible costs of immigration
– Fiscal strains on the host country’s government.
– Lower wages in the host country in certain sectors.
– Lower overall incomes in the source country.
– Social tension.
68
VMPL Curve
Marginal Product of Labour x Price = VMPL
- Downward sloping because of diminshing marginal product of labour
69
Labour Supply curve (Economics of immigration)
Assumed Vertical because of ambiguity.
70
Labour Market Model of Immigration Graph and Show which area = $ received by the worker and which are = $ received by the capital owner
71
Implications of the Labour Market Model of Immigration
1. Immigration tends to increase wages in the origin country and lower wage in the destination country
2. Economic forces which create wage differences will also create migration
3. Immigration creates winners and losers
- e.g. Capital owners win from immigration
72
Immigration surplus
- Total benefit to the citizens in the destination country = larger than the cost of employing the new workers.
73
Ways immigrants stimulate indirect growth
1. Immigrant = Consumer
2. Immigrant = Innovator (Knowledge + Right Personalities)
74
Indirect costs of immigration
1. Remittances (Money back to home countries)
- Depends how they are used
- Dutch Disease (Increase in recipient country's exchange rate)
2. Brain Drain
- Fiscal repercussions (High-skilled workers tended to pay most tax)
- Long-term development implications
75
3 Factors that mitigate the negative effects of a brain drain
1. Remittances
2. Increase in expected returns of human capital investment
3. Technological transfers (due to social ties)
76
Factors that determine the returns to skills (high wages for high skills)
1. System of taxation/redistribution
2. Migration education-related costs
77
Positive vs Negative Migrant Selection
EPA
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