Introductory Economics Cheatsheet

Problems by Command 1. Information collection 2. Principal-agent 3. inconsistency among multiple decision-makers. Arrows impossibility theorem. Paradox of voting. 4. Enforcement Coordination by trade Princes as signals of scarcity/abundance Induces coordination Requires much less info No enforcement costs No principal-agent problem No problem with multiple decision makers Qualification approximately command systems exist within a market (eg firms) Public wide Has gratis(p)-rider problem due to non-excludability. Can only be provided by a coercive authority that can force users to pay for these goods. Taxes. Collective GoodsProvide eudaemonias 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 space rights encourages overuse. The tragedy of the commons. Solve by asserting ownership rights over common resources. Coarse theorem Markets generate themselves for space transfer that internalize externalities. Adverse selection & Moral hazard Market harm based on expected quality Reward quite a little for non maintaining quality High quality sellers drop out round of golf continues Market break off FDI promotes technology transfer without moral hazard.Equilibrium no angiotensin converting enzyme has an incentive to change their behavior. Price ceiling Cause a shortf completely due to excess learn Leads to symmetryning or preferential allocation, farsighted queues, inefficiency. Those who do read will benefit from the lower prices. Price substructure Eg Minimum wage Only those dressers who dont lose their jobs benefit from the higher(prenominal) wages. Consumer surplus When price goes down, CS amplification due to 2 reasons. Existing buyers pay less. More buyers ar able to enter market. producer surplus Markets select low cost suppliers. Only those whose costs of end product are below the market price enter.When price goes dow n, fringy seller drops out. When price goes up, PS increases due to 2 reasons. Existing producer get a higher price. More producers can enter. Total welfare = CS + PS Govt intervention decreases this Factors of look at Income & substitution effect modification in tastes Expectation of prospective prices Change in number of buyers Factors of tally Change in technology Change in input prices Expectation of afterlife prices Change in number of sellers Elasticity Price tractileity of demand for a good is the % change in demand when the goods price falls by 1%. Elasticity along a linear demand skid decreases with a decrease in price.Factors impact liveity of demand Number of substitutes/whether the good is a necessity/ epoch 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 origin preference for variety Cant cross from each one former(a) due to consi stency and transitivity Marginal rate of substitution(MRS) shun of an indifference curves slope at any crest Equal to the ratio of marginal utilities of the 2 goods at that point lean of cipher line is the negative of the relational prices of the 2 goods.At tangent, slope of budget line and slope of indifference curve must be follow. MRS=relative 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 constitute curve AFC=TFC/Q, AVC=TVC/Q, ATC=AFC+AVC AFC declining with Q. AVC first falls then rises. U shaped. Rising marginal cost. When MCMC. No supply curve. MC Pricing P=MC, lead to losings for natural monopoly, which govt can subsidize. But tax has its own deadweight loss. P=ATC , zip profits. Alternative, public ownership Price discriminationIncrease monopolist profits First leg extract entire CS, socially optimal but unlikely instant percentage point Charge buyers based on observable characteristics Third degree separated markets Quantity discounts Contestable Market No barrier to admission Maintain monopoly only due to the fact that it entered first P=MC, zip fastener economic profits Durable Goods Monopoly MC=0 Compete against its future price Cartels and collusion Incentive that monopoly profits are higher all(prenominal) 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 constraint and price easily adjusted Sweezy model all(prenominal) 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 very inelastic below the existing price and very elastic above existing price. Result in price rigidity hold back kink Each firm assumes that its price increases will be matched by all rivals, while its p rice cuts will not. Demand curve becomes elastic below the existing price as the cut speedily increases 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 larger-than-life number of sellers with tell apart products No barriers to entry Each firm faces a downward coloured demand curve Short manoeuver, 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. hanker run equilibrium, P=AC.Not at minimum of AC curve, thus inefficiency as each firm has excess capacity. Provide more variety though. biz theory Dominant strategy equilibrium No incentive to warp as none of the players can do better by choosi ng a different strategy. Nash Equilibrium Each player has no incentive to start out by himself. Each guess what other player choose. Coordination problem binary equilibrium Solve by convention Focal point higher payoff for 1 equilibrium Zero-sum hazards Solve by maximin rule maximise his minimum payoffs. Repeated games Grim trigger strategy cannot work if the game is repeated a known finite number of times.If infinitely, can flummox if they do not discount the future heavily(sufficient weight to future punishments). usher out factor 1/3. Sequential game Backward induction work backwards to solve Subgame perfect Nash equilibrium additional property of popular opinion out empty threat GDP the market range of all final goods and services produced within a country in a granted period of time Relies on market prices Includes market value of the stream of services from durable goods Miss out value of non market services Excludes transfer payments Consumption + Investment + Government spending + gelt exportY=C+I+G+NX GDP deflator = (Nominal GDP/real GDP)*century GDP per capita flawed as a welfare measure as it excludes value of leisure, clean environment, and safety. CPI measures the cost of a fixed field goal of goods bought by a typical consumer. Overstates cost of living because of substitution bias. portal 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 pastime=nominal interest inflation Productivity is a key to quick growth. Physical heavy(p)Human capital Natural resources applied science 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. fall marginal productivity of capital implies that high saving will no longer lead to fast growth beyond a point. point of intersection effect. Encourage FDI. Builds up physical and human capital accumulation.Has learning make 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 might 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 append productivity C and IM tend to increase as national income rise. So C= C+cY, IM=IM+mY where c and m are marginal passion to consume and import. An increase in GDP of $1 increases C by c and IM by m. c,m