Externalities
third party is affected by the market
postive externality
third party is helped; ex. good loud music, education, pollution, etc.
negative externality
third party is hurt; ex. loud music, guitar next door, drunk driving, pollution, etc.
why is pollution both a positive and negative externality?
pollution can be positive for fish bc the pollution can cause water to be warmer in which they like however pollution is also bad for the environment
problems with negative externalities
over provided goods, too much, quantity too high
problems with positive externalities
under provided, quantity too low
fixes to externalities
1) taxes 2) subsidize: we subsidize education (Mercer 40K vs. GCSU 7K, theres a 35K difference that is made up for by the government, HOPE takes care of majority of the tuition bringing it down to about $500 and then Zell takes it down to $0) 3) do nothin
income distribution
unequal distribution (problem)
fixes to income distribution
1) tax: progressive income tax (income increase, percent you pay increase) 2) transfer programs: government gives you cash through cash: social security (SSI, unemployment) or inkind: food stamps, HOPE, medicaid/medicare, housing (projects)
price elasticity of demand
measures consumers response to a price change
ED =
%?Qd/%?P
ED < or > 0
ED < 0
slope is constant, elasticity is ___
not constant
ED = 1
demand is unit elastic; %?Qd = %?P
ED < 1
demand is inelastic; %?Qd < %?P
ED > 1
demand is elastic; %?Qd > %?P
ED = -1/3
inelastic
ED = -3
elastic (consumer response is three times as big)
elastic equation
ED = Q1 - Q0 / Q1 + Q0 / P1 - P0 / P1 + P0
if elasticity is 3 and if price decrease by 10%...
quantity demand will go up by 30% and total revenue will go up
total revenue
Price x Quantity goes up
if elasticity is 3 and if price increase by 10%...
quantity demand will go down by 30% and total revenue will go down
elastic
big response; a change in price quickly results in a change in the quantity demanded
if elasticity is 1/3 and price increase by 10%
quantity demand will go down by 3.33% and total revenue goes up
if elasticity is 1/3 and price decrease by 10%
quantity demand will go up by 3.33% and total revenue will go down
drugs are inelastic or elastic
inelastic
determinants of elasticity demand
number of substitutes, time, necessity, budget share
number of substitutes
number of subs goes up, elasticity goes up; ex. electricity has no subs - inelastic ham has tofu, turkey, etc. to sub - elastic - if price goes up you will buy others
specificity
the more specific you are the higher the Ed
specificity example
autos has 10 subs, sedans have 10 + 6 more subs, camry has 50 + 16 more subs
more specific
more elastic
time
the more time you have the higher the Ed
less time
options run out; less elastic
time example
$6 meat on top of gum: if announced that meat was $6 you would've had more time to pick a different meat
necessity
more necessary a good is, less elastic demand
necessity example
food, water, shelter - will pay a lot for
budget share
budget share increase, Ed increase
budget share example
salt: 0.0001% of your budget (you wont notice a price change)
gas: 25% of your budget (we react when has price changes but will still get making the demand more elastic, not many subs)
Es
postive and >0
Es > 1
supply is elastic; %?Qd > %?P
Es < 1
supply is inelastic; %?Qd < %?P
Es = 1
supply is unit elastic; %?Qd = %?P
determinants of elasticity supply
number of substitutes in production, time, income elasticity of demand
number of substitutes in production (Es)
things you can produce; flu season - other virus - other vaccine; subs goes go up Es goes up
time (Es)
more time more options
income elasticity of demand (Ed)
%?Qd > or < %?P
y
income
0 < Yd < 1
ncome rises, demand (Qd) for "X" rises by a small amount; "X" is a necessity-NORMAL good
Yd > 1
income increase, demand (Qd) for "x" increase by A LOT (buy more); "x" is a luxury normal good
Yd < 0
income increase, demand (Qd) for "x" decrease; "x" is an inferior good
types of normal good
luxury: Yd > 1 (yacht, mink coats, jets)
necessity: 0< Yd < 1 if equal zero you buy anyways (toilet paper)
tobacco
Yd: 0.21; normal necessity
furniture
Yd: 2.6; normal luxury
mac n cheese
Yd: -0.6; inferior
mink coat
Yd: 3.5; normal luxury
elasticity of demand (Ed)
how much quantity demand falls; small decrease or large drop
law of demand
when P increases, the quantity demand falls
elasticity of supply (Es)
how much quantity supplied rises; small increase or large increase
law of supply
when P increases, the quantity supplied increases
Income Elasticity (Yd)
what happens to my demand for good "x" when my income rises or falls?
inelastic
small response; there is little change in the quantity demanded if the price of the good changes
inferior good
a good whose demand decreases when consumer income rises
Normal goods `
demand rises as consumer income rises