1
Q
Economics
A
Study of the systems societies use to allocate scarce resources
to the production of goods and services and to distribute them to consumers
2
Q
Three economic questions
A
(1) What goods and services should be produced (and in what quantity)?
(2) How should they be produced (including who does what)?
(3) Who gets to consume these goods?
3
Q
Why is answering the three economic questions hard?
A
Because of scarcity
4
Q
Scarcity (DEF)
A
When there’s not enough of it to satisfy everyone at zero price
(i.e., when it’s available for free
5
Q
A fundamental starting point in economics - why does scarcity exist?
A
Human needs and wants are practically unlimited
whereas the resources needed to satisfy them are limited
6
Q
Microeconomics
A
Study of how households and firms make decisions and how they interact in individual market
7
Q
Macroeconomics
A
Study of economy-wide phenomena, including
inflation, unemployment and economic growth
8
Q
Opportunity cost
A
Net value of the next best alternative activity
9
Q
Rational people
A
- Think at the margin (& compare costs and benefits at the margin)
- Economists normally assume that people are rational
10
Q
Marginal changes (costs or benefits)
A
Small incremental adjustments to an existing plan of action
11
Q
Incentives
A
Something that induces someone to act - people respond to incentives
12
Q
Market economy
A
Allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services (no government control)
13
Q
What can go wrong in a market economy?
A
Monopolies can exist, or unequal distribution of income
13
Q
Does trade always make people better off?
A
When countries trade, the two countries are better off, but some individuals in those countries may be worse off
14
Q
A country’s standard of living depends
A
on its ability to produce goods and services (productivity = growth)
15
Q
Why do economists make models?
A
Models are simplifications of reality, making simplifying assumptions as the world is too complex.
16
Q
Positive Statements
A
Factual, data based
17
Q
Normative Statements
A
Opinion based
18
Q
Why do economists disagree?
A
Econ is both normative and positive science. There may be different judgements or different ideas about fairness/values
19
Q
Assumptions in PPC
A
- Economy only produces 2 goods.
- Can also make the assumption that the economy produces several goods, but production of all but the two we are interested in is held constant. Ie assume jeans and jackets produced - this doesn’t mean there are no shoes, it means that they are ignored
20
Q
Production possibility frontier
A
A graph that shows the various combinations of output that the economy can possibly produce, given the available resources (land, labour and capital) and the available technology.
21
Q
PPC illustrates…
A
If an economy is on the PPF, the only
way to produce more of one good is to produce less of the other
22
Q
Slope of the PPF
A
OC of the good measured on the horizontal axis.
23
Q
Why is the PPF bowed outwards?
A
This is because the resources are most suited to making one good. As we make more of one good, the resources left to do so are not as useful.
24
When would PPF move out?
More resources, labour or tech
25
Principles illustrated by the PPF model
- Scarcity
- Trade offs
- Technical efficiency
- Economic growth
26
What happened in 1882?
First refrigerated meat shipment was sent from NZ to London. Totara estate statue was a symbol of this. Export orientation of NZ was to send animal products to only one market - the UK/Britain. The prices of the exports were set by inter-government agreements. It bought a lot of wealth to NZ.
27
Export orientation of NZ 1880s
Send animal products to only one market - the UK/Britain. The prices of the exports were set by inter-government agreements.
28
1950s NZ living standards
In 1950s, NZ had the 3rd highest living standards in the world due to export of animal products to UK
29
Living standards in NZ in 1978 post UK joining Euro
22nd highest living standards. This was because Britain became a member of the EU in 1973. British guaranteed export prices came to an end and NZ exports dropped. Oil shocks in 1974 and 1979.
30
1980 NZ economy
Very highly regulated
31
Centrally planned economy
- Fully planned and managed by the government
32
Three questions for a centrally planned economy
1. What to produce - what goods, what quantity (and they also set targets for firms to produce)
2. How to produce (who works, how many hours they work, how much they are paid)
3. For whom to produce (ie who is allowed to buy etc cars.
33
Market economy
- A market system is driven by individual decisions
34
Four market economy questions
1. What to produce (willingness and ability of individual consumers to pay for each good and service/price signals)
2. Who is deciding what is produced? (price signals)
3. How to produce (individual entrepreneurs)
4. For whom to produce (individual consumers are driven by needs/wants/preferences/cost)
35
Invisible hand theory
People interact out of self interest with no social concerns. This leads to desirable outcomes. If governments set prices, this can stop the invisible hand from working
36
Adam Smith
'Grandfather' of economics. He wrote Wealth of Nations in 1776. His theory is that price changes allocate resources.
37
Mixed market system
Markets (invisible hands) play a major role, but elements of other systems remain important. The government still provides goods and services and redistributes income from rich to poor to ensure equality.
38
Three learning objectives of this paper
- How in concept does the market and market system work?
- How well do markets work? What inhibits markets from working well and can govt intervention do better?
- Understanding macroeconomic performance and stabilization policy
39
1980s NZ economy
State organised economy - the government had complete control over all citizens and their decisions.
40
1984 Fourth Labour economic reform
- Removed trade barriers
- Removed price control
- State owned assets were sold
- Monetary policy was introduced to reduce inflation
- Tax was decreased
41
When can there be gains from trade?
When individuals have differing opportunity costs in production
42
Three reasons for trade
- Misallocated endowments
- Gains from large scale production
- Variation in resource production
43
Misallocated endowments
Misallocated endowments of consumer goods (eg you and your friend would both prefer what the other has for lunch, so trade can make you better off.)
44
Gains from larger scale production
When large quantities of good are produced, it may be that the inputs required to produce one more unit of output falls (so best to specialize)
45
Adam Smith, The Wealth of Nations (1776) on specialization
- Each worker at a pin factory has a different job - drawing out into a wire, straightening it, cutting it, pointing it etc. 4,800 pins per worker were produced per day. With no specialization, each worker may have made only 20 pins.
He said that as
a result of strict labor specialization, the worker has no opportunity to improve understanding or exercise his invention.
46
Karl Marx, Das Kapital (1867) reflections on Adam Smith's ideas
- He said that all means for the development of production will mutilate the laborer into a fragment of a man.
47
Absolute Advantage: Adam Smith’s insight
A person has absolute advantage (AA) over another if they take fewer hours to perform a task than another person.
48
Comparative advantage
Able to produce with a lower opportunity cost of producing the good.
49
Two sources of comparative advantage
Individual or national
50
Individual sources of comparative advantage
Nature:
Natural talent
Physical characteristics
Nurture:
Education/training
Family culture
Experience
51
National level sources of comparative advantage
Nature: Natural resource endowments
Nurture: Infrastructure investment
52
Term of trade
Agreement required for specialisation that puts the price of one good in terms of another
53
Arguments in favour of trade
It differentiates products, increases competition and allows domestic firms to access larger markets/
54
What does trade do to domestic/international markets?
Opens domestic markets to foreign suppliers, which increases competition and forces efficiency / lower prices.
55
Would a country still trade if it had an absolute advantage in everything?
Even if a country was most efficient in every industry, it would not be able to have a comparative advantage in everything
56
Arguments against trade
- Not all citizens benefit (strands workers as imports replace locals)
- It ultimately improves welfare in aggregate (the gains of winners outweigh losses of losers )
57
Should we buy local in times of crisis / high unemployment? (including our model of trade and its assumptions)
Buying local goods (instead of imports) can protect jobs and businesses. Our model of trade assumes that countries are on their PPFs (technically efficient), which they are not if there is significant unemployment. Secondly, if other countries do the same and buy locally, this will harm our exporters, leading to job losses in the export sector.
58
Our model of trade assumes
That countries are on their PPFs (technically efficient)
59
Alfred Marshall (1842-1942)
- Wrote Principles of Economics (1890)
- Explained supply/demand model, PED, incidence of tax, consumer surplus, in general - introduced welfare economics
- Modern economist of microeconomics
60
Market
A group of people whose interactions establish the equilibrium market price.
61
Characteristics of Perfectly Competitive Markets (4)
- Homogenous product
- No single buyer or seller can influence prices
- Perfect knowledge (information)
- Freedom of entry and exit
62
Quantity demanded
The amount of a good that buyers are willing and able to purchase.
63
Law of demand
The claim that, other things equal, the quantity demanded of a good falls when the price of a good rises
64
Substitution effect
As prices of a certain good increase, consumers will substitute to other similar goods
65
Income effect
As prices increase, consumers have less money to spend on everything, so can't afford to buy as much
66
A change in price causes..
A shift along the demand curve
67
A change in any demand/supply variable...
Shifts the demand curve
68
What variables shift the demand curve? (5)
Income, price of related goods, tastes and preferences, expectations about the future, number of buyers
69
Normal good
When income increases, Qd increases
70
Inferior good
When income increases, Qd decreases
71
Substitute
two goods for which a decrease in the price of one good leads to a decrease in the demand for another good
72
Complements
two goods for which a decrease in the price of one good leads to a increase in the demand for another good
73
Supply
The amount of a good that sellers are willing and able to sell
74
Law of supply
The claim that, other things being equal, the quantity supplied of a good rises when the price of a good rises
75
Changes in variable that shift the supply curve (4)
Changes in input prices, changes in technology, changes in expectations, number of sellers
76
Equilibrium occurs when..
Supply and demand curves intersect
77
What happens if price is above equilibrium?
There is an excess supply of goods and suppliers reduce price to reach eq.
78
What happens if P is below equilibrium price?
There is excess demand, sellers increase prices until eq reached.
79
Marking clearing price
The equilibrium - everything supplied is also demanded.
80
The role of prices in allocating resources
Price signals lets suppliers know what consumers want to buy - there is no need for a central planner.
81
Why would a cold winter in Northern hemisphere lead to higher oil prices in NZ?
Cold winter in North increases demand for oil, which increases market demand for oil, which increases market price, which leads to higher oil prices
82
Elasticity
a measure of responsiveness of Qd to one of its determinants.
83
Price elasticity of demand
a measure of how much Qd of a good responds to a change in P of that good
84
Elasticity formula
percentage change in Qd / percentage change in P
85
PED formula
P0/Q0 x 1/demand curve slope
86
Why does elasticity vary along a linear demand curve?
PED depends not only on the slope of the demand curve, but also on the price and quantity
87
Arc elasticity
Mid point method of calculating percentage changes
88
Elastic
If a percentage increase in price leads to a more than percentage decrease in quantity (PED>1)
89
Inelastic
If a percentage increase in price leads to a less than a percentage decrease in quantity (Ped > 1)
90
Unit elastic
PED=1
91
Total revenue
Amount paid by buyers and received by sellers of a good
92
TR dependent on PED - inelastic, elastic and unit elastic
Inelastic - increase in price / increase in total revenue
Elastic - increase in price / decrease in total revenue
Unit elastic - a price change does not affect TR
93
Income elasticity of demand (YED)
A measure of how much Qd responds to a change in consumer's income (Y)
94
Normal goods YED
Positive
95
Inferior goods YED
Negative
96
Cross price elasticity of demand
A measure of how much the Qd of one good responds to a change in the price of another good.
97
For substitutes, the cross price elasticity of demand will be
Positive
98
For complements, the cross price elasticity of demand will be
Negative
99
What determines elasticity?
Substitutes, necessities/luxuries, how narrowly we define market, time horizon
100
Perfectly elastic
PED= infinite, horizontal
101
Perfectly inelastic
PED=0, vertical
102
Price elasticity of supply
A measure of how much the Qs of a good responds to a change in price of that good
103
Factors that affect PES
Inventories, spare capacity, ability to hire more workers/buy more materials
104
Price ceiling
a legal maximum on the price at which a good can be sold (ie on medicine, rent, electricity to keep necessities affordable.)
105
Price floor
a legal minimum on the price at which a good can be sold (ie wages, tobacco/vapes to either increase incomes of low paid workers or to discourage consumption of a good)
106
Market economies rationing
markets ration goods with prices. When the market is allowed to reach equilibrium, anyone who wants (and is able) to pay the market price can consume the good (hence, there is no shortage).
107
Rent control : an application of price ceilings (why are they introduced?)
Governments would introduce rent controls to make housing affordable to the people. General goal is to assist those who cannot afford/can barely afford housing eg disabled, elderly, living on a fixed/limited income)
108
Rent control elasticity in short and long run
n the short run, supply and demand are both inelastic.
Long run - supply is elastic (a decrease in price means a reduction in rentals supplied. Over time, people may convert rental houses to shops, or bulldoze them to turn into carparks, or sell them). Demand is more elastic. Over time, people may want to go flatting at a younger age, or decide to rent rather than buy a house if rental price is lower)
109
Effects of rent control
- Lead to a shortage of housing, so landlords will have to ration properties in some other way.
- Examples - give properties to people with no children, or people they like the look of, or people who are prepared to make "under the table" payments.
110
Issues with rent control
- Misallocation - wrong sized, wrong place or wrong tenure (decrease renters' incentives to become homeowners)
- Maintenance - lower rents reduce landlords' incentive to maintain and make improvements to their rentals.
111
Jenkins (2009), Economists on rent control
economic research consistently and predominantly frown on rent control
112
Navarro (1985), Economists on rent control
the economics profession has reached a rare consensus : rent control creates many more problems than it solves.
113
Current minimum wage NZ
$23.50 per hour, training $18.80
114
Living wage
If you have a house with 2 children and 1.5 jobs, this is the amount that you need to 'live with dignity'. This is not a legally binding minimum wage.
115
Two criticisms of minimum wage
- It increase unemployment among low-skilled labor - reduces Qd (demand for labor for firms) and increases Qs (supply of labor by household), which is especially binding for young workers (starting out rate is meant to address this concern).
- It doesn't address the root of the problem - it means that all incentive to improve skills and work harder for a better job are removed
116
What does a binding minimum wage cause?
Unemployment / excess supply
117
4 categories of underutilisation
Unemployed
Underemployed
Available potential job seekers
Unavailable jobseeker
118
NEET
Youth not in employment, education or training
119
NEET currently
13.8%
120
Do minimum wages create unemployment?
The graph is suggestive - unemployment rates may have been higher in minimum wage areas for some other reason. Maybe in countries with minimum wages, skills are also lower and it is the low skills that are causing unemployment.
121
Difference in differences study (Card and Krueger, 1994)
Identified two similar labor markets - fast food workers in New Jersey and Pennsylvania (neighboring states).
Measure differences in unemployment for workers in this sector in both states. Minimum wage increased in New Jersey, but not in Pennsylvania. They found that the increase in minimum wage did not increase unemployment.
122
Welfare Economics
The study of how the allocation of resources affects wellbeing.
Economists like to make markets efficient.
123
Consumer surplus - demand curve
A buyers willingness to pay (WTP) minus the amount actually paid.
124
Producer surplus - supply curve
The amount a seller is paid for a good minus the seller's marginal opportunity cost (or what they wanted to sell the good for).
125
Horizontal interpretation of demand curve
The number of units that demanders in the market would buy at any price ie qd at that price
126
Vertical interpretation of demand curve
The demand curve plots the maximum someone among the demanders is willing and able to pay for each unit of the good. Therefore, the demand curve is a marginal value/marginal benefit curve
127
Consumer surplus
The area below the demand curve and above the price line
128
Horizontal interpretation of supply curve
The number of units that suppliers in the market would sell at any given price
129
Vertical interpretation of supply curve
The supply curve plots in increasing order the minimum someone among the suppliers is willing to accept (or willingness to sell) for each unit of the good. Therefore it is a marginal opportunity cost curve - minimum amount at which one more unit will be supplied.
130
Where are potential gains maximised?
At equilibrium price
131
What does the competitive market do to allocate goods and operate at surplus maximising level?
Allocates products to consumers with the highest willingness to pay, which are supplied by the sellers with the lowest opportunity cost of production
132
Technical efficiency
When you produce on the PPF
133
Allocative/economic efficiency
Producing at the level that maximises total surplus. If allocative efficiency has not been achieved, markets are said to have failed.
134
GST
goods and services tax - 15%
135
Property rate
0.4-0.6% of house value
136
Petrol tax
70 cents/litre plus levies/GST - total 120 cents. Potential road user charge in 2027.
137
Tobacco tax
$1.50 per cigarette including GST
138
Alcohol tax
14%, 37%, 50% of retail price for beer, wine and spirits.
139
Marginal tax rate
= extra tax / extra income
140
Average tax rate
= total tax / total income
141
Legal incidence
Who is legally responsible for passing on tax to govt - the seller usually
142
Economic incidence of the tax
How much the price received by the seller and the price paid by the buyer changes as a result of the tax.
143
Tax wedge
- The tax effectively slides a wedge between supply and demand from the left
- The back of the wedge has length equal to the tax
144
Why do governments tax what they do?
Reduce output of goods with negative externalities (pollution), reduce consumption of harmful goods (tobacco), to raise revenue
145
Sugar taxes NZ
Dr Simon Thornley (UoA) argues NZ needs a tax on sugary drinks. UoO study founds that a 10% tax deceases consumption by 10%
146
UK sugar tax - Known as the soft drinks industry levy (SDIL)
Tax charges 24p per litre for >8g sugar/100ml, 18p per litre for 5-8g of sugar/100ml. Found that amount of sugar in drinks fell by about 10%. Consumption of drinks did not change, but people drank more sugar free drinks and less sugary drinks.
147
Tax incidence when demand is more inelastic than supply
Buyers pay a larger proportion of tax
148
Tax incidence when demand is more elastic than supply
Sellers pay a larger proportion of tax
149
Deadweight loss from tax
Reduces consumer/producer surplus. Some of this loss represents a transfer to the govt (revenue from tax), some not offset by a gain to anyone else. If a tax is introduced to correct a market failure, like externalities, this will reduce deadweight loss.
150
Subsidy
A subsidy introduces a wedge between supply and demand, but from the right. Back of the wedge has length equal to the subsidy
151
What affects the size of DWL? (subsidies and taxes)
DWL is bigger the more elastic supply and demand are, increases with size of tax /subsidy. (when tax doubles, DWL grows by a bigger proportion)
152
What does increasing DWL as tax increase mean?
It is better to tax lots of goods at a low rate ie GST on all goods
153
What happens to DWL as tax increases?
Increases
154
What happens to tax revenue as tax increases? What does this suggest about taxation?
Laffer curve
- Increases, then reaches a stationary point, then decreases
- We should tax lots of a goods a low rate (ie GST) instead of a small amount of goods at a high rate to maximise tax revenue
155
What happens when countries start to trade?
The market supply curve for the good is perfectly elastic/horizontal. If world price is above eq, it will be exported. If world price is below eq it will be imported.
156
Welfare effects due to exporting
Higher world prices means domestic suppliers win/consumers lose (net gain overall)
157
Welfare effects due to importing
Lower world prices mean consumers win but suppliers lose (net gain overall. short term loss of jobs)
158
Why would the government introduce protectionist policies?
Job losses from low priced imports - lead to introduction of a tariff or a quota
159
Tariff of New Zealand
All imports in NZ must be classified within this. Most goods have no tariff. Duty free - but GST is still payable.
160
Tariff
Tax on an import
161
Import quota
A limit on the quantity of a good allowed to be imported. Importers need a license to import.
162
When are markets efficient?
Where MC=MV / S=D --> competitive markets are usually efficient
163
Market failure
If allocative efficiency is not achieved (MC does not equal MV)
164
Reasons for market failure
- Imperfect information
- Imperfect competition
- Public goods
- Common resources
- Externalities
165
Imperfect competition examples
Monopoly
Oligopoly
Monopolistic competition
166
Imperfect information
When buyers and sellers have different info. Govt can pass laws requiring sellers to provide accurate info.
167
Deadweight loss from gift giving
Difference in price giver paid and value of gift to the recipient
168
Non rival good
A good whose consumption by one person does not diminish its availability to others (TV signals, street lights, streaming services)
169
Public good
A good that is non rival and non excludable (ie street lights, bike lanes, public defense)
170
Non excludable good
A good that is difficult, or costly, to exclude non payers from consuming (ie street lights, public defense, fishing lakes, bike lanes)
171
Rival and excludable
Private goods ie ice cream
172
Rival and non excludable
Common good ie fish in fishing lake
173
Non rival and excludable
Club goods (ie gym that needs a membership)
174
Non excludable and non rival
Public goods ie street lights
175
Why won't the market provide public goods? Who provides them?
Because of non excludability (They will just free ride). Govt provides it instead.
176
Marginal value
Demand
177
Marginal cost
Supply
178
Common resource
Rival and non excludable goods
179
Tragedy of the commons
When common goods are harvested too quickly
180
Role of govt in regards to common resources
To allocate property rights to create an incentive for owner of resource to use it optimally
181
NZ solution to Tragedy of Common in 1980 fisheries
Introduced tradable quotas. Govt allocates quota to fishing companies. If they don't use it, they can sell it. Defines property rights and means that those who end up fishing are those that can catch fish at the least cost which is efficient.
182
Elinor Ostrom on common goods
Theory predicts that common goods wil be overexploited, but Ostrom shows that many communities have come up with solutions that do not require private or government ownership.
183
When do externalities occur?
Externalities occur when there is a difference between the marginal cost (or marginal value) to society and to the parties involved in the transaction.
184
Externalities
The uncompensated impact of one person's actions on the wellbeing of a bystander (someone other than the buyer or seller) Can be positive or negative.
185
Where is socially optimal level of pollution?
Where the marginal social cost of the polluting activity = marginal social value of the polluting activity
186
Why is the socially optimal level of pollution not zero?
Pollution also generates benefits as it is produced during consumption of goods
187
Pollution abatement - what is it and what is the socially optimal level?
Clean up of pollution
Where MSV = MSC of abatement
It is not optimal to clean up all pollution
188
If left to the market, how much abatement will be done?
None - costs money with no direct benefit to firms
189
How could govt make firms to conduct the socially optimal amount of abatement?
Tax on emissions equal to the marginal cost of abatement at Qsoc (cheaper for firms to reduce emissions instead of paying tax)
190
Policy options for reducing pollution
Taxes (on polluting activity or on emissions), command and control (regulations), tradable permits
191
Taxes and tradeable permits are...
Market based solutions as they rely on changing incentives to change market participants behaviour voluntarily
192
Three types of command and control
Banning an activity, regulating the max amount of pollution that can be carried out, imposing a max amount of pollution that can be emitted.
193
Advantages of per unit tax emissions compared to regulation
- Firms can reduce pollution at least cost do so (this is efficient)
- Continuing incentive to reduce emissions
194
Advantages of regulation compared to per unit taxes
- The govt knows with certainty what the maximum amount of emissions is
- A ban can be put in place
195
Govt/markets with taxes
Govt sets price (tax) and market determines quantity
196
Govt/markets with tradeable permist
Markets set price, govt sets quantity
197
Advantages of permits compared to taxes
Maximum allowed quantity of pollution, continuing incentive to reduce emissions so you don't have to buy permits, firms that can reduce pollution at least cost do so. Enviro groups can buy permits
198
Why are some people opposed to pollution tradeable permits?
They don't like the idea that the govt gives permission to pollute
199
What is the best way to reduce green house gas emissions?
Internalise the externality (ie tax or tradable permits)
200
Why did Kyoto agreement not work?
It was legally binding so no one fully committed and it failed
201
New Zealand emission trading scheme
Firms in some sectors of the economy have to purchase a permit to emit CO2 and surrender this permit to the govt. Highest up in supply chain has to pay this ie oil importers, not ordinary citizen filling their car with petrol
202
How can you earn permits?
Forestry owners - when they plant trees
203
How does ETS work?
Reduces pollution by having a max number of permits. As demand for permits increases, price increases. Increases cost to business, which can be passed on to consumers depending on elasticity.
204
NZU
1 metric tonne of CO2 emission or equivalent
205
Why didn't NZU work?
Prices were so low for NZU that there was no incentive to reduce emissions.
206
What did Climate Change Commission say about ETS?
It made country too reliant on planting trees instead of reducing emissions - so many trees could be planted that the price of permits would plummet. Not maintainable to reach net zero.
207
Traffic congestion and how to solve
Generates Tragedy of Commons - negative externality. Toll roads makes roads excludable.
208
Food miles debate -
There should be taxes on imported food and consumers who are concerned about environment should purchase local food.
209
Food miles anti debate
CO2 is emitted in production of food as well as the transport. Consumers concerned about environment should focus on CO2 emitted from both sources.
210
Will oil ever run out?
No. Prices will always ration everything.
211
Extreme poverty
Living on less that $2.15 per day
212
What is NZ govts poverty goal?
Half child poverty within 10 years (2018-2028)
213
What SDG goals are reducing poverty and inequality?
Goal 1 and Goal 10
214
Inequality in market economies
Arises automatically in market economy due to higher wages attracting more people
215
Is the equal distribution of income normative or positive?
Normative as reasonable people could disagree
216
Gini cofficient
Area A / Area a + B (triangle)
217
Perfect inequality gini coefficient
1
218
Perfect equality gini coefficient
0
219
90/10 percentile ration
Income of those in 90th percentile divided by those in 10th percentile
220
NZ taxes and benefit system impact on inquality
Progressive taxes and benefit systems reduce income inequality, by about 75% of OECD average
221
Is there more inequality in wealth or income?
Wealth - bottom quintile has negative net worth, top quintile has 70% of assets
222
Absolute poverty
Income is so low they cannot afford basic necessities of life
223
Poverty line absolute poverty
Income is below $2.15 a day in purchasing power terms.
224
Child poverty monitor
Alternate measure of material hardship. Looks at 17 items children may be deprived in. 6/17 or more = material hardship
225
How many NZ kids live in child poverty/material hardship?
10.3%
226
Relative poverty
Poor in comparison to society
Income is blow a certain proportion of median income
227
What is the only way to reduce relative poverty?
Reduce inequality
228
Fixed line
Poverty line is set at 50% of median income in 2018, increases at rate of inflation (not with median income)
229
Moving line
Poverty line increases with median income
230
Poverty by ethnicity
Maori and Pacifica are more likely to live in poverty, have a lower median income and be unemployed
231
Ways to reduce relative poverty
- Increase progressivity of the tax system
- Increase welfare/transfer payments to low income households
- Increase minimum wage
- Improve access to education and skills training (especially in areas with demand for those skills)
232
Ways to reduce absolute poverty
Reduce inequality or increase economic growth. In port countries ie Chine, absolute poverty has been reduced, primarily from economic growth
233
Utilitariansism
Jeremy Bentham (1748-1832) and John Stuart Mill (1806-1873)
- Argue that fairness consists of maximising society’s total utility
- Argument for redistribution of wealth - a rich person is likely to get less utility from an extra $ than a poor person (diminishing utility of income), so taking money off a rich person and giving it to a poor person will increase utility to society as a whole
234
Liberalism
John Rawls (1971) - Theory of Justice
Argues that in order to know what a just society would look like, we have to make decision behind a veil of ignorance. Thinks that we would choose a society that maximises the income of the poorest. Income would not be equally distributed as this affects incentives, but it would be more equal.
235
Why should everyone not have the same income?
It would remove incentive to work harder/become educated
236
What is the issue with liberalism?
People who are not risk averse will choose the max-min criterion.
237
Libertarianism
Govt should not redistribute income, but instead ensure that the process that generates the distribution is fair (equality of opportunity, not of outcomes)
238
What do libertarians believe about what the market delivers?
It is fair as it is a result of voluntary transactions
239
Behavioural economics
A field that looks at assumptions of behaviour within economics
240
Ultimatum Game (Guth et al., 1982)
Player A proposes how money is split
If player B accepts, money is split as proposed
If player B rejects, both players get zero.
According to econ theory, Player B will accept as little as $1. What really happens is player B rejects small amounts.
241
Variations in Ultimatum Game
People in developed countries are used to market economies that require reciprocity. Machiguenga live in small groups and reliance on reciprocity is low. Lamelara depend on communal hunting where reciprocity and sharing is vital.
242
Dictator game (Kahneman 1980s, Forsyth et al., 1994)
Player A decides how a sum is split, Player B cannot veto.
Results show that most people care about fairness. People care about welfare of others AND their own.
BSNS113 Sem 1
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