GDP
C+I+G+NX
Imperfect Information & 3 types
One party has relevant information that is unknown by another party.
Define Price elasticity of demand, price elasticity of supply and tell me their coefficients for elastic, inelastic, and unit elastic.
Price Elasticity of Demand (PED)- Measures how sensitive Qd is to changes in Price.
PES (Price Elasticity of Supply)- How sensitive Qs is to ∆ in P.
Define Cross price elasticity of demand and name the meaning of the coefficients.
Measuring how sensitive Qd of 1 good is to ∆s in P of another good.
Ec<0 -> compliments
Ec>0 -> substitutes
Ec=0 -> not related
What are some examples of normal goods?
Necessity -> Water, bread, toilet paper, etc...
Luxury -> Lobster at a fancy restaurant, starbucks (it feels like), etc...
What does RGDP and RGDP/capita measure
-Total market value of all final g/s produced within a country within a given year
-RGDP/Capita measures the average income of each person in the country
Monopoly, 1 seller/1 product.
Determinants of demand
What is the definition of Income elasticity of demand and define the coefficients.
Ei>0 -> normal good
0<Ei<1 -> Necessity good
Ei>1 -> luxury good
Ei<0 -> inferior good
How do we calculate RGDP?
RDGP vs NGDP
NGDP- nominal GDP includes output and price, counted in todays dollars.
RGDP- adjusted for inflation, only changes if output changes, counted in constant dollars
Public goods vs Private goods
Public- non-rivalrous and non-excludable
Private- Rival and Excludable
Determinants of supply
Normal good and 2 types
Ei>0
0<Ei<1-necessity
Ei>1- luxury
•We have a market for Goodyear tires. The factory that makes the tires emit a horrible smell from working with the rubber for the tires. Right now they make 1000 tires/hour and it charge $200 at this quantity made. The local town of Jessieville next to the factory has been complaining that their town stinks horribly. The government comes in and decides to levy an excise tax of $400 to force Goodyear to reduce quantity by 600.
•Draw a graph on your own and tell me equilibrium price and quantity, and then the socially optimal price and quantity after the tax.
P* = $200
q* = 1000
Ptax = $600
qtax = 400
What are components of the business cycle?
Boom- big increase in RDGP
Expansion- increase in RGDP
Contraction- decrease in RGDP
Recession- 2 consecutive quarters of declining RGDP
Depression- unusually severe recession
Free Rider problem
You don’t pay for it, but you still use it and enjoy the benefits. Under provided and overused
•The San Diego Dads are meeting the Philadelphia Phillies in the NLCS on Wednesday. The prices were originally set at $50, and Qd was 20 tickets at that price. The game was moved to night and the price went up to $90, and Qd went down to 18 tickets bought at the new price point.
•What is PED?
•What is the interpretation of the coefficient?
•Did TR increase or decrease?
•What would Qd be if they raised the prices to $120?
PED is -.125
Demand is elastic, as price increases by 1%, Qd decreases by .125%
TR increased.
Qd would decrease by 4.167%
•There are two goods sold for Philadelphians, Philly cheese steaks and Yuengling beer. The price of Yuengling goes down by 5.6% and the quantity of Philly cheese steaks sold goes up 10%
•What is Cross-Price Elasticity of Demand?
•What would happen to Qd of Philly cheese steaks if the price of Yuengling increased by 2%
Cross-Price Elasticity is -1.79
Qd of Philly Cheese steaks would decrease by 3.57%
Give an example of each of the three types of asymmetric information.
Adverse Selection -> someone with heart disease goes and gets life insurance without disclosing his condition.
Moral Hazard -> I have car insurance so i decide to take some curves a little harder when I'm driving to work.
Principle-Agent-Problem -> I hire a mechanic to change my oil. He decides to go ahead and fix other things on my car that I did not hire him to do.
What does each component of the expenditure approach mean? and give an example of each
C- Consumption- consumption (spending) of g/s from households
-Durable goods, non-durable goods, services
I- Investment of the private sector from firms
- Plant equipment and software purchases, New home construction, Inventory changes: Increase in inventory--> increase in I (same for the inverse)
G- government purchases (final user is gov)
-Gov investment, Gov g/s, Does NOT include transfer payments
NX- net exports: Exports-Imports
T/F/explain: The government can pick up where firms cannot in terms of distributing public goods.
True,...
How does elasticity affect taxes?
More elastic, more tax burden
More inelastic, less tax burden
•The people of Philadelphia Pennsylvania love their baseball team, the Philadelphia Phillies. Recently, the residents of Philadelphia got a tax break which led to their incomes increasing by 7%. The quantity demanded of Phillies baseball jerseys increased from 4 to 20.
•What is Ei?
•What is the interpretation of this coefficient?
•What would Qd be if the incomes rose by 15%
Ei is .57
This is a necessity good.
Qd would raise by 8.57%
True/False/Explain:
When we have a positive externality, we produce more than enough of it.
When we have a negative externality, we don't produce enough of it.
False to both.
Positive externalities are underprovided by private firms, so the government must step in and either provide the good or offer subsidies to move us to the socially optimal output.
Negative externalities are overprovided by private firms, so the government must step in and regulate the production of the good or tax the production to move us to the socially optimal output.