Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Resources • Achieve.towson.edu -> Sign up for tutoring • Towson.edu/aac -> Resources -> Business & Liberal Arts Resources • Phone Apps: - Khan Academy - - Microecon X Terms and Definitions • Utility: Number representing satisfaction gained from the cost of goods and services. Measured in utils (one unit of utility) • Total Utility: Total satisfaction gained from a given activity • Marginal Utility: The change in total utility from one additional unit of consumption Terms and Definitions • Budget Constraint: How much you can consume of two goods fully utilizing your income • Income = $100 • Pizza = $10 • Wings = $5 Terms and Definitions • Indifference Curve: Curve showing combination of two goods and/ or services that generates the same level of utility. - Any place on that curve you are equally satisfied - Indifference curves never intersect - Indifference curves are negatively sloped - The further from the origin, the higher the satisfaction - Convex to the origin Terms and Definitions • Marginal Rate of Substitution (MRS) - Rate at which consumers are willing to substitute 1 good/ service for another - MRS is larger at the top and smaller at the bottom Circular flow model Demand • Law of demand—the quantity of a good demanded in a given time period increases as its price falls, ceteris paribus. • Ceteris paribus—assumption that nothing else changes. • So when price changes, the ceteris paribus assumption means that everything else stays the same and we measure the change in quantity demanded • Demand curve—describes the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus. Examples of positive and normative economics • Positive: A study to determine the impact of gasoline taxes on distances driven (and/or car fleets manufactured) • Positive: A study to determine the impact of non-point source pollution of the Chesapeake Bay Watershed and its impact on pfisteria • Normative: A study to determine the appropriate regulatory device to implement to lower the number of automobile miles driven • Normative: A study to determine the appropriate regulatory device to decrease the occurrence of pfisteria in the Chesapeake Bay Benefits • Economic agents derive benefits from something once there is a value associated with it. • Benefits—the benefits that people receive from a good or service must be equal to the amount they are willing to pay for it. • We use WTP to determine benefits since value is associated with WTP. • This permits us to use ordinary demand curves to determine the benefits that accrue to people. • The demand curve can also be described as: • MWTP (marginal willingness to pay) • MB (marginal benefit) curve Is WTP the only (best) way to determine value? • What may be wrong with using WTP to determine value? • Endowment effect—people often demand more to give up an object than they would be willing to pay to acquire it. • Status quo effect—a preference for the current state. • Loss aversion—the disutility of giving up an object is greater than the utility associated with acquiring it. Cost • Choice and opportunity costs: Every time you make a choice, you incur an opportunity cost • Opportunity cost—the value of the most desired goods or services that are forgone in order to obtain something else. • Opportunity cost applies to society as a whole: To produce more of one thing means we must shift resources away from something else. • PPF is simply a graphical illustration of opportunity cost. Opportunity Cost • Increasing opportunity cost—the more of something that is produced, the greater the opportunity cost of producing one more unit • In order to produce more environmental quality at point a, we take away resources that were used in a relatively efficient manner to produce market goods and use them in a relatively inefficient manner to produce environmental quality. • The PPF is concave because of the Law of increasing opportunity cost. Deriving Cost Curves • Stems from the notion of supply • Supply—the quantities of a good the producer is willing and able to bring to market at a given set of prices during some discrete period of time, ceteris paribus. • Law of Supply—there is a positive relationship between price and quantity supplied of a good, ceteris paribus. The MC curve is also the Supply Curve Why is the MC curve also the Supply Curve? • In the previous graph, assume we have a competitive industry. • P* is given and the firm acts as a price-taker. • This firm maximizes profit by producing where MC = P*; this level of production is Q* • This firm does not produce at Q<Q* because it could INCREASE profits by moving toward Q*. When MC<P*, the firm should INCREASE production. • This firm does not produce at Q>Q* because it could INCREASE profits by moving toward Q*. When MC>P*, the firm should DECREASE production. Externalities • Externality—a spillover effect associated with production or consumption that extends to a third party outside the market • Negative externality—an external effect that generates costs to a third party • Positive externality—an external effect that generates benefits to a third party 16 Solution to Externalities Government Intervention • Set policy prescription, such as: • • • • Set standards on pollution allowed Tax polluter equal to MEC at QE Establish a market and price for pollution Assigning property rights 17 Utility Curve Utility Maximization Production Possibility Frontier (PPF) Economic Growth using PPF Diagram Opportunity Cost The PPF and Opportunity Cost PPF, Diminishing Returns and Opportunity Cost