Terms in this set (48)
Market Allocation (Chpt. 1)
Agreements in which competitors divide markets (types of customers) among themselves.
Ex. Coca Cola gained a market in East Germany by passing Coke's through the Berlin Wall.
Assumption of Rational Utility Maximizers (Chpt. 1)
Individuals seek to maximize utility, or make themselves well off.
Ex. Americans giving money to charity, or going to college to better yourself.
Opportunity Costs (Chpt. 1)
The real cost of something is what you must give up. Trade off a utility now for a better one later.
Ex. Whacking your boss will fulfill momentary desire, but will be a disutility when you have no job or money
Proft Maximization (Chpt. 1)
Firms maximize profits by taking inputs and adding value.
Ex. Selling umbrellas when it starts to rain
Prices Allocate Resources (Chpt. 1)
Profit opportunities attract firms because rare things are more expensive.
Ex. If tuna sales in a restaurant go up, fishermen get paid more their catch
Barriers to Entry (Chpt. 1)
Factors that machete difficult to enter an area. Barriers can be physical, natural, or political.
Ex. Truffles can't be cultivated
Market Price/ Pricing Decisions (Chpt. 1)
Prices are determined by supply and demand. The price settles when the number of products for sale matches the number consumers want.
Ex. If there are more potential pet owners than dogs available, then the price of the dogs will go up
Lessons of Market (Chpt. 1)
A. The market economy is powerful because it delivers goods that we want to buy.
Ex. In 1900, a 3-minute phone call was $5 and now it's less than a quarter
B. Market is amoral
Ex. Diamonds are expensive, but water is nearly free
C. Prices allocate resources.
D. Markets are self-correcting.
Ex. Limiting oil production causes higher prices and political action. People start driving less and insulating.
E. Private firms will compete.
Ex. In South Africa, the gas prices are fixed so private firms make the station attendance nicely dressed.
F. Market transactions make people better off
Ex. Asian sweatshop workers choose to work there
Wrong Incentives -> Undesirable Outcomes
Inadvertent incentives that can be created when we set out to do something different.
Ex. People kill black rhinos because the pay off is greater than the risk. The price tag increases, the more rare they become.
When a person in a company has incentives to make the customer whose while bettering himself.
An agent that does things that aren't necessarily in the best interest of the firm.
Ex. Most mergers don't add value but the CEO benefits
Game Theory and Prisoners' Dilemma
Two arrested men decide where to not speak, confess, or rat.
The process by which the market rewards handwork and progress not only for the rewards but to crush losers.
Ex. Opening Walmart puts smaller businesses out of business due to cheaper prices.
Tax/ Government Disincentives
Mechanisms such as fees, policies, procedures, rules, and taxes intentionally directly discourage/prevent desirable actions, behaviors, or decisions.
Regression Taxes - Burden is on the poor
Progressive Taxes - Equal fraction of income rich vs. poor
The gap between the private costs and social costs of some behavior. The private costs of one's behavior are different than the social costs; when an externality is large, individuals have an incentive to of things that make them better off at the expense of others.
Ex. Pollution by cars
Government Solutions to Externalities
Taxing bad behavior.
Federal government issues large amounts of regulations on lots of things; states have their own regulatory structures; taxing the offending behavior rather than banning it
Government makes Market Economy Possible: Rights, Laws, and Regulations
Government sets rules: defines and protects property rights, lowers the cost of doing business in the private sector, builds and maintains infrastructure.
When an activity has a good impact on society.
Ex. Smoking kills the person who smokes and saves the government social security
Public Goods and Free Riders
Government provides us with a wide array of public goods that make us better off but wouldn't otherwise be provided by private sector.
Ex. You can't stop a captain from seeing a lighthouse
Government redistributes wealth: we collect taxes from some citizens and provide benefits to others
Ex. Middle Class and Social Security
Government operations function as we would expect given the incentives; we depend on their functions, they have no incentives to treat people nicely
Ex. DMV has a monopoly on licenses and would be very disorganized
Government Allocations vs. Private Allocations
Government shouldn't be the sole provider of a good unless there is a compelling reason to believe that the private sector will fail in that role.
Government employees don't have to be the ones actually doing the work when they can plan then solicit bids from the private sector.
Ex. US postal used to be good, but now UPS and Fedex do it privately
Effects of Regulations
Regulation can disrupt the movement of capital and labor, raise the cost of goods and services, inhibit innovation, and otherwise shackle the economy at best/ At the worst it can become a tool for self-interest
Ex. Citizenship tests
Effects of Taxation
When government is doing things its theoretically supposed to do, government spending must be finance by levying taxes, causing individuals to change their behaviors in ways that make the economy worse off without necessarily providing revenue
Ex. People quitting their jobs because taxes are too high
When information known by the first party to an agreement isn't known to the second
Ex. Bill Clinton's hope Scholarships future graduates sort themselves in/ out of the program based on private information about career plans
Ex. Why used cares are cheaper
Screening mechanisms elicit information from their potential customers
Branding Provides Information
Companies spend enormous sums of money to build an identity for their products; branding helps to provide an element of trust that is necessary for a complex economy
Ex. Starbucks in the middle of nowhere
Branding vs. Commodities
Branding can be very profitable strategy, prices are driven relentlessly towards the cost of production
One party credibly conveys some information about itself to another party Firms will do whatever they can do to signal their own quality in the market
Ex. Interior Decor
Skills; natural talent or acquired skills through training.
Jobs are created anytime an individual provides a new service or finds a better way of providing an old one.
Effects of Human Capital on Standard of Living
One total stock of human capital defines how well off we are as a society. The stock of education, training, skills, and even health of people constitutes abut 75% of the wealth in the economy.
The efficiency with which we convert inputs into outputs.
The more productie we are, the richer we are.
Our economy is evolving in ways that favor skilled workers. Tech makes smart workers more productive while making lower skilled workers more redundant.
The rich get richer an the poor gets poorer
Diversifying your investment yields a decreased risk of extreme loss.
Purposes of Financial Instruments
They must create value. Both the buyer and the seller must perceive themselves as better off.
Ex. Selling shares of a company for a quick gain of cash and giving away future profits
Efficient Markets + Index Funds
Financial markets do for capital what other markets do for everything else
Asset pries already reflect all available information
Save, invest, repeat; take risk, earn reward; invest for the long run
Interest Groups + Politicians' Incentives
It pays to be small. an adept politician would probably improve his/ her career prospects by voting/ siding with the more motivated underdogs
The government should not be doing the business of providing incentives for people to of things that would otherwise not make sense
Some Regulations Benefit Business
Firms + industries benefit from regulation by using political process to generate regulation that helps them
Tyranny of the Status Quo
If small groups get what they want out of the legislative process, they can stop what they don't want
Importance of GDP
Gross domestic process product; the total value of all goods and services produced in an economy
Real vs. Nominal GDP
real GDP; the GDP figure has been adjusted to account for inflation/ nominal GDP; nominal figures haven't been adjusted for inflation
GDP Per Capita
a nation's GDP divided by its population
GDP Growth + Wage Growth
The average american is 5x as rich as he would have been in 1940 because we're more productive on wage growth: increase productivity over the years, both prices and wages have increased
GDP Misses Social Progress
GDP is an imperfect measure of how well off we really consider ourselves to be
When GDP turns negative, the damage is real: jobs lost, businesses close, productivity turns idle
Uses government to tax and spend as a lever for prying the economy from reverse into forward
Has the potential to affect the economy very quickly; the chairman of the Federal Reserve can raise/ lower short term interest rates with one phone call
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