Introductory Economics Cheatsheet

Problems by Command 1. Information collection 2. Principal-agent 3. Disagreement among multiple decision-makers. Arrows impossibility theorem. problem of voting. 4. Enforcement Coordination by merchandise Princes as signals of scarcity/abundance Induces coordination Requires much less info No enforcement be No principal-agent problem No problem with multiple decision makers Qualification some command systems knocked out(p)live within a grocery (eg firms) Public Good Has escaped-rider problem due to non-excludability. Can only be provided by a coercive authority that advise force users to pay for these goods. Taxes. Collective GoodsProvide benefits for a group. Cartels and Unions Has free riding problem. Prevent by sanctions Common Resources Non-excludable but exhaustible Natural resources goods Lack of well-defined prop rights encourages overuse. The tragedy of the commons. elucidate by asserting ownership rights over common resources. Coarse theorem Markets generate themse lves for situation transfer that internalize externalities. Adverse selection & Moral hazard Market cost based on expected quality Reward people for non maintaining quality High quality sellers drop out Cycle continues Market collapse FDI promotes technical schoolnology transfer without moral hazard.Equilibrium no one has an incentive to variegate their behavior. Price ceiling Cause a shortage due to excess contract Leads to rationing or preferential all toldocation, long queues, inefficiency. Those who do get will benefit from the lower prices. Price floor Eg nominal wage Only those workers who dont lose their jobs benefit from the higher wages. Consumer surplus When price goes down, CS increase due to 2 reasons. Existing buyers pay less. More buyers atomic number 18 able to image market. manufacturer surplus Markets select low cost suppliers. Only those whose costs of production are below the market price enter.When price goes down, marginal seller drops out. When pric e goes up, PS increases due to 2 reasons. Existing manufacturer get a higher price. More producers can enter. Total welfare = CS + PS Govt interpellation decreases this Factors of demand Income & switching effect commute in tastes Expectation of future prices Change in telephone number of buyers Factors of put out Change in technology Change in input prices Expectation of future prices Change in number of sellers Elasticity Price elasticity of demand for a good is the % change in demand when the goods price falls by 1%. Elasticity along a linear demand curve decreases with a decrease in price.Factors affecting elasticity of demand tally of substitutes/whether the good is a necessity/time frame/broadness of category Income elasticity of demand is the % increase in its demand for a 1% rise in income. Indifference curve Non-lexicographic and non-satiation Convex to melody preference for var. Cant cross each other due to consistency and transitivity bare(a) rate of substituti on(MRS) Negative of an indifference curves slope at any augur tint to the ratio of marginal utilities of the 2 goods at that point Slope of budget line is the negative of the coitus prices of the 2 goods.At tangent, slope of budget line and slope of indifference curve must be equal. MRS= coitus prices at this point The ratio of marginal utility to price is equal for both goods at the point chosen (equimarginal principle) Income and substitution effect Cost curve AFC=TFC/Q, AVC=TVC/Q, ATC=AFC+AVC AFC declining with Q. AVC first falls then rises. U shaped. acclivitous marginal cost. When MCMC. No supply curve. MC Pricing P=MC, lead to losses for natural monopoly, which govt can subsidize. But tax has its own deadweight loss. P=ATC , nobody acquire. Alternative, public ownership Price discriminationIncrease monopolist profits First level extract entire CS, socially optimal but unlikely Second degree Charge buyers based on observable characteristics Third degree separated mark ets Quantity rejects Contestable Market No barrier to entry Maintain monopoly only due to the fact that it entered first P=MC, zero economic profits Durable Goods Monopoly MC=0 Compete against its future price Cartels and collusion incentive that monopoly profits are higher Each has an incentive to sell more than the agreed amount, resulting in a collapse of the agreement. Bertrand duopoly Assumption constant MC.Equilibrium at AC=MC. Naive thinking and no capacity backwardness and price easily adjusted Sweezy model Each firm assumes that if it cuts its price, this will be matched by all its rivals while if it increase its price, it will not be matched. Perceive demand curve to be truly inelastic below the existing price and very elastic above existing price. Result in price rigidity Reverse kink Each firm assumes that its price increases will be matched by all rivals, while its price cuts will not. Demand curve becomes elastic below the existing price as the cut speedily increas es the demand for this firms product.Inelastic above the existing price. Result in price instability. Likely during depression. Competition in output Cournet Model Supposes wrongly that other firms will not react to its own output decisions. Will not result in zero-profit outcome. MR=MC. Monopolistic competition elephantine number of sellers with differentiated products No barriers to entry Each firm faces a downward sloping demand curve Short run, try to max profits by MR=MC. Due to free entry, more firms enter in long run as long as positive economic profits are made. Shifts demand curve to the less are market share reduced. Long run symmetry, P=AC.Not at minimum of AC curve, thus inefficiency as each firm has excess capacity. Provide more variety though. Game theory Dominant strategy equilibrium No incentive to deviate as no(prenominal) of the players can do better by choosing a different strategy. Nash Equilibrium Each player has no incentive to deviate by himself. Each gues s what other player choose. Coordination problem Multiple equilibrium Solve by convention Focal point higher payoff for 1 equilibrium Zero-sum gameys Solve by maximin rule maximize his minimum payoffs. Repeated games Grim trigger strategy cannot work if the game is repeated a known finite number of times.If infinitely, can sustain if they do not discount the future heavily(sufficient weight to future punishments). Discount factor 1/3. Sequential game Backward creation work backwards to solve Subgame perfect Nash equilibrium additional property of ruling out renounce threat GDP the market value of all final goods and services produced within a orbit in a given period of time Relies on market prices Includes market value of the sprout of services from durable goods Miss out value of non market services Excludes transfer payments Consumption + investment + Government spending + Net exportY=C+I+G+NX GDP deflator = (Nominal GDP/real GDP)* one hundred GDP per capita flawed as a welfare measure as it excludes value of leisure, clean environment, and safety. consumer price index measures the cost of a fixed basket of goods bought by a typical consumer. Overstates cost of living because of substitution bias. Introduction of new goods and thus increased living standards is not reflected. Quality changes is not measure. GDP deflator includes goods not bought by typical consumer. CPI includes imports. Real interest=nominal interest inflation Productivity is a key to speedy growth. Physical hoodHuman capital Natural resources Technology Y= AF(L, K, H, N) Productivity is given by Y/L = AF(1, K/L, H/L, N/L) Technology progress continuously expands the resource frontier. Phases of rapid growth have occurred when a technological innovation opens up a new elastic supply source. Eg Industrial revolution, Railway boom, IT. Policies to promote growth Encourage savings and investment. Diminishing marginal productivity of capital implies that high saving will no longe r lead to fast growth beyond a point. Convergence effect. Encourage FDI. Builds up physical and human capital accumulation.Has learning effects through tech transfer and positive externalities. Education. Secure system of property rights Lack of corruption or political instability Pursuing free trade Population growth can lead to lower capital-labor ratio which king decrease productivity Also inefficiency in human capital accumulation as same educational facilities spread thinly Large families may keep woman out of labor force which reduces rack up productivity C and IM tend to increase as national income rise. So C= C+cY, IM=IM+mY where c and m are marginal propensity to consume and import. An increase in GDP of $1 increases C by c and IM by m. c,m