DOCSLIB.ORG

Partial Equilibrium Competitive Model Lecture 1, ECON 4240 Spring 2017

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Partial Equilibrium Competitive Model Lecture 1, ECON 4240 Spring 2017 Market Demand Market Equilibrium The Partial Equilibrium Competitive Model Lecture 1, ECON 4240 Spring 2017 summary of Snyder et al. (2015) University of Oslo 17.01.2017 1/22 summary of Snyder et al. (2015) Partial Equilibrium Market Demand Market Equilibrium Outline Focus: Determination of market price of 1 good, while taking the price of all other goods as "given" (= not explained) Why we need this? To study the effect of taxes and price regulations To study the effect of changes in income levels or income distribution on market prices and quantity of goods sold To think about how the gains from trade are divided between sellers and buyers (maybe to use this information to guide policies aimed at redistributing wealth among citizens?) To have a benchmark for comparison to study potential welfare losses due to lack of competition (oligopolies) 2/22 summary of Snyder et al. (2015) Partial Equilibrium Market Demand Market Equilibrium The Market Demand Curve I As discussed in ECON 4200 (and in Part 2 of Snyder et al. (2015)), when there are two goods available (good x and good y) the individual demand function for good x is summarized as: quantity demanded of good x by consumer i: xi (px ;py ;Ii ) where px ;py are market prices, Ii is consumer i’s monetary income If there are n consumers: n market demand for x: X = Σi=1xi (px ;py ;Ii ) 3/22 summary of Snyder et al. (2015) Partial Equilibrium Market Demand Market Equilibrium The Market Demand Curve II Note: 1 We allow different consumers to have different preferences (how would you write the market demand if consumers had all the same preferences?) 2 We allow consumers to have different incomes (how would you write the market demand if individuals had all the same income?) 3 We do not allow the prices faced by different consumers to differ As a result of 1 and 2: this model can be used to think about how the distribution of income among consumers affects demand 4/22 summary of Snyder et al. (2015) Partial Equilibrium Market Demand Market Equilibrium The Market Demand Curve III Market demand X is a function of 2 prices and n incomes. It is common to show graphically the relation between X and px , for given values of py and I1,..,In Changes in px : shifts along the demand curve - changes in quantity demanded Changes in py or some/all Ii : shifts of the curve - changes in demand 5/22 summary of Snyder et al. (2015) Partial Equilibrium Market Demand Market Equilibrium The Market Demand Curve IV Alternative partial equilibrium model: focus on one good with price P but consider the effects on the market for that good of changes in prices of other goods (prices of all these other goods measured in vector P0) Demand for good x denoted 0 QD (P;P ;I ) where I is the income of all consumers. 0 ¶QD (P;P ;I ) P Price elasticity of market demand: eQ;P = ¶P QD 0 0 ¶QD (P;P ;I ) P Cross-price elasticity of market demand: e 0 = 0 Q;P ¶P QD 0 ¶QD (P;P ;I ) I Income elasticity of market demand: eQ;I = ¶I QD What are the effects of these elasticities on the shape of the demand curve in the standard Q-P space? 6/22 summary of Snyder et al. (2015) Partial Equilibrium Market Demand Market Equilibrium Timing of Supply Response We look at market equilibrium at 3 different time horizons. The time horizon determines the supply response to changing demand conditions: Very short run: Quantity supplied is fixed Short run: Number of firms in the industry is fixed, but the quantity supplied by each firm, and hence the overall quantity supplied, can vary Long run: Firms can enter or exit the market 7/22 summary of Snyder et al. (2015) Partial Equilibrium Market Demand Market Equilibrium Pricing in the Very Short Run Very short run markets: not very common. Examples: perishable goods - tickets for a concert/game (auctions have features in common with very short run markets) Supply is a vertical line In this case the only role of price is to ration demand 8/22 summary of Snyder et al. (2015) Partial Equilibrium Market Demand Market Equilibrium Pricing in the Short Run Short run: firms can change the quantity supplied, and (for durable goods), owners of used goods can sell them Definition In a perfectly competitive market: 1 A large number of firms, producing the same homogeneous good, 2 Each firm attempts to maximize profits, 3 Each firm is a price-taker 4 Prices are assumed to be known to all market participants 5 Transactions are costless 9/22 summary of Snyder et al. (2015) Partial Equilibrium Market Demand Market Equilibrium Short Run Price Determination Market supply curve: sum of n individual-firms supply curves: n QS (P;v;w) = Σi=1qi (P;v;w) v: price of capital; w: price of labor 10/22 summary of Snyder et al. (2015) Partial Equilibrium Market Demand Market Equilibrium Equilibrium Price Determination Definition An equilibrium price P∗ is one price at which quantity demanded is equal to quantity supplied. At such price, neither consumers nor suppliers have an incentive to alter their economic decisions. The equilibrium price solves: ∗ 0 ∗ QD (P ;P ;I ) = QS (P ;v;w) In the short run the price has two roles: 1) a way to ration demand 2) a signal to producers informing them of how much to produce 11/22 summary of Snyder et al. (2015) Partial Equilibrium Market Demand Market Equilibrium Shifts in Demand and Supply Curves Demand Curve can shift as a result of changes in: income, price of substitutes or complements, preferences Supply Curve can shift as a result of changes in: input prices, number of producers, technologies The effect of a shift in the demand or supply curve on P∗ depends on the shape of the two curves. 12/22 summary of Snyder et al. (2015) Partial Equilibrium Market Demand Market Equilibrium Mathematical Model of Market Equilibrium Demand: QD = D(P;a). a: parameter that shifts the demand curve. Supply: QS = S(P;b). Equilibrium: QD = QS . This model allows to understand how elasticities of demand and supply (which can be estimated empirically) can be used to estimate/predict the effect of a change of external factors on the equilibrium price 13/22 summary of Snyder et al. (2015) Partial Equilibrium Market Demand Market Equilibrium Mathematical Model of Market Equilibrium Effect of small change in a: ¶QD ¶D(P;a) ¶P da = da = DP da + Da , ¶QS ¶S(P;b) ¶P da = ¶a = SP ¶a ¶QD ¶QS Equilibrium requires: ¶a = ¶a Hence: ¶P = Da ¶a SP −DP ¶P SP > 0 > DP ! SP − DP > 0 ! sign of ¶a = sign of Da We can express this remark in terms of elasticities: a ¶P a D a Da e e = = a = q = Q;a P;a P S − D P P P e − e ¶a P P SP q − DP q S;P D;P Look at Example 11.3 14/22 summary of Snyder et al. (2015) Partial Equilibrium Market Demand Market Equilibrium Long Run Analysis Long run: Each firm has time to change its input mix optimally: for each firm short and long run supply curve can be different (see digression on next slide) Unless profits are 0, firms enter or exit the market. Profit=0 $ P = AC. As in the short run, P = MC from profit maximization Definition A perfectly competitive market is in long-run equilibrium if there are no incentives for profit-maximizing firms to enter or to leave the market. This will occur when (a) the number of firms is such that P = MC = AC and (b) each firm operates at the low point of its long-run average cost curve. (b) is a consequence of (a) and of the (implicit) assumption of increasing marginal costs. 15/22 summary of Snyder et al. (2015) Partial Equilibrium Market Demand Market Equilibrium Digression: Short VS Long Run Cost Curves In the short run SOME inputs are fixed (see ch 9, from page 270) In the long run all inputs are flexible Hence: In the short run the Rate of Technical Substitution does not have to be equal to the ratio of the input prices (Fig. 9.12) The long run total cost curve is the lower than any short run total cost curve (any= for any level of the fixed input) (fig 9.13) 16/22 summary of Snyder et al. (2015) Partial Equilibrium Market Demand Market Equilibrium Long Run: Constant Cost Entry or exit of firms affect the demand for inputs, and hence can affect their price. Simplest case: constant prices of inputs (E.g. the industry is a small fraction of the total demand of inputs) With constant input prices, the long-run supply curve is horizontal. 17/22 summary of Snyder et al. (2015) Partial Equilibrium Market Demand Market Equilibrium Long Run: Constant Cost To understand why the long-run supply curve is horizontal: let the demand increase, then: The short-run supply is an increasing curve, so the equilibrium price increases Firms earn a positive profit In the long run, new firms enter, causing an increase in supply and a reduction in price and profit- but - by assumption - no effect on input prices Entry continues as long as firms earn positive profits, that is, as long as the price is above the original one. Note: in the short-run the supply curve is determined by the short-run marginal cost curve.
Load more

Recommended publications
  • Estimating the Effects of Fiscal Policy in OECD Countries
    Estimating the e®ects of ¯scal policy in OECD countries Roberto Perotti¤ This version: November 2004 Abstract This paper studies the e®ects of ¯scal policy on GDP, in°ation and interest rates in 5 OECD countries, using a structural Vector Autoregression approach. Its main results can be summarized as follows: 1) The e®ects of ¯scal policy on GDP tend to be small: government spending multipliers larger than 1 can be estimated only in the US in the pre-1980 period. 2) There is no evidence that tax cuts work faster or more e®ectively than spending increases. 3) The e®ects of government spending shocks and tax cuts on GDP and its components have become substantially weaker over time; in the post-1980 period these e®ects are mostly negative, particularly on private investment. 4) Only in the post-1980 period is there evidence of positive e®ects of government spending on long interest rates. In fact, when the real interest rate is held constant in the impulse responses, much of the decline in the response of GDP in the post-1980 period in the US and UK disappears. 5) Under plausible values of its price elasticity, government spending typically has small e®ects on in°ation. 6) Both the decline in the variance of the ¯scal shocks and the change in their transmission mechanism contribute to the decline in the variance of GDP after 1980. ¤IGIER - Universitµa Bocconi and Centre for Economic Policy Research. I thank Alberto Alesina, Olivier Blanchard, Fabio Canova, Zvi Eckstein, Jon Faust, Carlo Favero, Jordi Gal¶³, Daniel Gros, Bruce Hansen, Fumio Hayashi, Ilian Mihov, Chris Sims, Jim Stock and Mark Watson for helpful comments and suggestions.
    [Show full text]
  • Econ 230A: Public Economics Lecture: Tax Incidence 1
    Econ 230A: Public Economics Lecture: Tax Incidence 1 Hilary Hoynes UC Davis, Winter 2013 1These lecture notes are partially based on lectures developed by Raj Chetty and Day Manoli. Many thanks to them for their generosity. Hilary Hoynes () Incidence UCDavis,Winter2013 1/61 Outline of Lecture 1 What is tax incidence? 2 Partial Equilibrium Incidence I Theory: Kotliko¤ and Summers, Handbook of Public Finance, Vol 2 I Empirical Applications: Doyle and Samphantharak (2008), Hastings and Washington 3 General Equilibrium Incidence – WILL NOT COVER 4 Capitalization & Asset Market Approach I Empirical Application: Linden and Rocko¤ (2008) 5 Mandated Bene…ts I Theory: Summers (1989) I Empirical Application: Gruber (1994) Hilary Hoynes () Incidence UCDavis,Winter2013 2/61 1. What is tax incidence? Tax incidence is the study of the e¤ects of tax policies on prices and the distribution of utilities/welfare. What happens to market prices when a tax is introduced or changed? Examples: I what happens when impose $1 per pack tax on cigarettes? Introduce an earnings subsidy (EITC)? provide a subsidy for food (food stamps)? I e¤ect on price –> distributional e¤ects on smokers, pro…ts of producers, shareholders, farmers,... This is positive analysis: typically the …rst step in policy evaluation; it is an input to later thinking about what policy maximizes social welfare. Empirical analysis is a big part of this literature because theory is itself largely inconclusive about magnitudes, although informative about signs and comparative statics. Hilary Hoynes () Incidence UCDavis,Winter2013 3/61 1. What is tax incidence? (cont) Tax incidence is not an accounting exercise but an analytical characterization of changes in economic equilibria when taxes are changed.
    [Show full text]
  • 2B Tax Incidence : Partial Equilibrium the Most Simple Way of Analyzing
    2b Tax Incidence : Partial Equilibrium The most simple way of analyzing tax incidence is to use demand curves and supply curves. This analysis is an example of a partial equilibrium model. Partial equilibrium models look at individual markets in isolation. They are appropriate when the effects of the tax change are | for the most part | confined to one market. They are inappropriate when there are changes in other markets. Why might partial equilibrium analysis be misleading in many cases? Recall that a demand curve for some commodity expresses the quantity consumers wish to buy of a good as a function of the price they pay for that good | holding constant a bunch of stuff. In particular, when drawing an ordinary [as opposed to a compensated] demand curve for socks, we are holding constant the prices buyers pay for all other goods (other than socks), and the incomes of all the buyers. Very often, a tax will change not only the price that consumers pay for socks, but the prices they pay for other goods. For example, an 8 percent sales tax should have some effects on the market for socks. But since a sales tax also applies to many more goods than socks, the sales tax will also probably affect the equilibrium price of shoes, pants, and many other commodities. All these changes will shift the demand curve for socks, if there are any important substitutabilities or complementarities in the demand for socks with the prices of other goods. So partial equilibrium analysis of the market for some commodity, or group of commodities, will be useful, and reasonably accurate, only when looking at at tax which applies only to that group of commodities.
    [Show full text]
  • PARTIAL EQUILIBRIUM Positive Analysis
    PARTIAL EQUILIBRIUM Positive Analysis [See Chap 12 ] 1 Equilibrium • How are prices determined? • Partial equilibrium – Look at one market. – In equilibrium, supply equals demand. – Prices in all other markets are fixed. • General Equilibrium – Look at all markets at once. – Consider interactions. 2 Example: Car Market • What happens if the Chinese Govt builds more roads? • Partial equilibrium – Demand for cars rises. – Quantity of cars rises. – Price of cars rises. • General equilibrium – Price of inputs rises. Increases car costs. – Value of car firms rises. Shareholders richer and buy more cars. 3 1 Model • We are interested in market 1. – Price is denoted by p 1, or p. – Firms/Consumers face same price (law of one price). – Firms/Consumers are price takers. 4 Model • There are J agents who demand good 1. – Agent j has income m j – Utility u j(x 1,…,x N) – Prices {p 1,…,p N}, with {p 2,…,p N} exogenous. • There are K firms who supply good 1. – Firm k has technology f k(z 1,…,z M) – Input prices {r 1,…,r M} exogenous. 5 Competitive Market • To understand how the market functions we consider consumers’ and firms’ decisions. • The consumers’ decisions are summarized by the market demand function. • The firms’ decisions are summarized by the market supply function. 6 2 MARKET DEMAND 7 Market Demand • Market demand is the quantity demanded by all consumers as a function of the price of the good. – Hold constant price of the other goods. – Hold constant agents’ incomes. 8 Market Demand • Assume there are two goods, x1 and x2.
    [Show full text]
  • Chapter 5: Elasticity and Its Application Principles of Economics, 8Th Edition N
    Chapter 5: Elasticity and Its Application Principles of Economics, 8th Edition N. Gregory Mankiw Page 1 1. Introduction a. Elasticity is a concept with broad applications in economics. b. It is the percentage change, usually in quantity, due to a percentage change in something else. c. Percentages are used to avoid problems with units. 2. The Elasticity of Demand: (% Change in Quantity/% Change in the Price) a. Elasticity is a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants. P. 90. b. The price elasticity of demand and its determinants i. The ranges are: (1) Elastic if the ratio is greater than one and (2) Inelastic if the ratio is less than one. ii. Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price. P. 90. iii. Availability of close substitutes (1) This is the key to price elasticities with those with many substitutes have high elasticities and those with few substitutes having low elasticities. iv. Necessities versus luxuries (1) They are more strongly influenced by income with necessities have low income elasticities and luxuries have high income elasticities. v. Definition of the market (1) They become more elastic as the market is more narrowly defined. (a) Wonder Bread has a higher elasticity than bread. vi. Time horizon (1) More substitutes become available or consumers become aware of them in the long run, thereby, increasing the elasticity.
    [Show full text]
  • A Comparative Analysis of the Demand for Higher Education: Results from a Meta-Analysis of Elasticities
    View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Research Papers in Economics A comparative analysis of the demand for higher education: results from a meta-analysis of elasticities Craig Gallet California State University at Sacramento Abstract Studies of the demand for higher education have produced numerous estimates of the tuition and income elasticities. Because of widespread variation in the models estimated, this paper performs a meta-analysis of the literature to uncover the extent to which study characteristics influence elasticities. In addition to being more inelastic in the short-run, the results reveal that demand is least responsive to tuition and income in the United States. Also, the measure of quantity and price, coupled with the method of estimation, have important effects on the tuition elasticity. Nonetheless, there are many study characteristics that have little impact on elasticity estimates. Citation: Gallet, Craig, (2007) "A comparative analysis of the demand for higher education: results from a meta-analysis of elasticities." Economics Bulletin, Vol. 9, No. 7 pp. 1-14 Submitted: March 22, 2007. Accepted: April 9, 2007. URL: http://economicsbulletin.vanderbilt.edu/2007/volume9/EB-07I20002A.pdf 1. Introduction Recent reductions in state appropriations to higher education have led many institutions to significantly increase tuition in an effort to bolster revenue. However, whether or not tuition increases meet revenue targets depends upon the tuition elasticity of demand. In particular, if the tuition elasticity is lower than expected, then tuition revenue will exceed its target – or if the tuition elasticity is higher than expected, tuition revenue will fall short of its target.
    [Show full text]
  • Estimating Impact in Partial Vs. General Equilibrium: a Cautionary Tale from a Natural Experiment in Uganda∗
    Estimating Impact in Partial vs. General Equilibrium: A Cautionary Tale from a Natural Experiment in Uganda∗ Jakob Svensson† David Yanagizawa-Drott‡ Preliminary. August 2012 Abstract This paper provides an example where sensible conclusions made in partial equilibrium are offset by general equilibrium effects. We study the impact of an intervention that distributed information on urban market prices of food crops through rural radio stations in Uganda. Using a differences-in-differences approach and a partial equilibrium assumption of unaffected urban market prices, the conclusion is the intervention lead to a substantial increase in average crop revenue for farmers with access to the radio broadcasts, due to higher farm-gate prices and a higher share of output sold to traders. This result is consistent with a simple model of the agricultural market, where a small-scale policy intervention affects the willingness to sell by reducing information frictions between farmers and rural-urban traders. However, as the radio broadcasts were received by millions of farmers, the intervention had an aggregate effect on urban market prices, thereby falsifying the partial equilibrium assumption and conclusion. Instead, and consistent with the model when the policy intervention is large-scale, market prices fell in response to the positive supply response by farmers with access to the broadcasts, while crop revenues for farmers without access decreased as they responded to the lower price level by decreasing market participation. When taking the general equilibrium effect on prices and farmers without access to the broadcasts into account, the conclusion is the intervention had no impact on average crop revenue, but large distributional consequences.
    [Show full text]
  • Introduction
    APPLIED GENERAL EQUILIBRIUM MODELS: AN ASSESSMENT OF THEIR USEFULNESS FOR POLICY ANALYSIS Antonio M. Borges CONTENTS Introduction . ..... .. 8 I. History and brief survey . ..... .. 9 II. Strengths and weaknesses of the general equilibrium approach .. 15 A. Strengths . .... .. 15 B. Weaknesses . .... .. 19 111. The "state of the art" - directions of current research .. .. 23 IV. Operational aspects and constraints . .... .. 26 Conclusion: Assessment of general equilibrium models for policy analysis ............................ .. 30 Bibliography ............................ .. 33 Antonio M. Borges is Professor of Economics at INSEAD; he has prepared this paper under contract with the OECD Economics and Statistics Department. 7 INTRODUCTION Applied general equilibrium modelling is nowadays one of the most active areas of research in economics. It has generated much interest among policy makers and policy analysts as a new methodology capable of providing coherent answers to complicated questions in a systematic way. The popularity and prestige of this fairly new approach in applied economics have occasionally led to exagerated optimism about its usefulness to handle any issue or answer any question. Applied general equilibrium models are a powerful and informative tool to deal with important practical policy issues; but they should be developed with great care and used with prudence. A careful and comprehensive model requires substantial resources, which certainly does not make it a fast and ready instrument to handle trivial problems. Its usefulness is unquestionable for certain types of issues, while dubious for others. Based on the Walrasian tradition, applied general equilibrium models describe the allocation of resources in a market economy as the result of the interaction of supply and demand, leading to equilibrium prices.
    [Show full text]
  • Introduction ...1 . Model Structure
    THE MINISTERIAL TRADE MANDATE MODEL H. Bruce Huff and Catherine Moreddu CONTENTS Introduction .............................................. 46 1 . Model structure ........................................ 47 A . Country models .................................... 47 B. Policy elements .................................... 51 C . Data ............................................ 52 D. The behavioural properties of the MTM model ............. 53 II . Simulating the partial liberalisation of agriculture policies ......... 54 A . Impact on world prices ............................... 55 B. Impacts on production and trade ....................... 57 111. Further developments ................................... 61 A . Developing countries model ........................... 61 B. Production inputs analysis ............................ 63 C . Commodity policy analysis ............................ 64 D. Future directions ................................... 65 Bibliography .............................................. 67 The authors are. respectively. Division Head and Administrator in the Agricultural Trade Analysis Division of the Directorate for Food. Agriculture and Fisheries. They would like to acknowledge helpful comments from Robert Ford. Pete Richardson and Joe Dewbre on earlier drafts . 45 INTRODUCTION Following the sharp rise in agricultural demand and prices in the early 1970s, the acceleration of inflation, the worldwide recession and the macroeconomic policies of the late 1970s and early 1980s contributed to a depression of agricultural
    [Show full text]
  • ELASTICITY Principles of Economics in Context (Goodwin, Et Al.), 2Nd Edition
    Chapter 5 ELASTICITY Principles of Economics in Context (Goodwin, et al.), 2nd Edition Chapter Overview This chapter continues dealing with the demand and supply curves we learned about in Chapter 3. You will learn about the notion of elasticity of demand and supply, the way in which demand is affected by income, and how a price change has both income and substitution effects on the quantity demanded. Objectives After reading and reviewing this chapter, you should be able to: 1. Define elasticity of demand and differentiate between elastic and inelastic demand. 2. Calculate the elasticity of demand. 3. Understand how to apply an elasticity of demand to a business seeking to maximize revenues as well as to a policy situation. 4. Define elasticity of supply and differentiate between elastic and inelastic supply. 5. Understand the income and substitution effects of a price change. 6. Discuss the differences between short-run and long-run elasticities. Key Terms elasticity price elasticity of demand price-inelastic demand price-elastic demand price-inelastic demand (technical definition) price-elastic demand (technical definition) perfectly inelastic demand perfectly elastic demand unit-elastic demand price elasticity of supply income elasticity of demand normal goods inferior goods substitution effect of a price change income effect of a price change short-run elasticity long-run elasticity Chapter 5 – Elasticity 1 Active Review Questions Fill in the blank 1. When you drop by the only coffee shop in your neighborhood, you notice that the price of a cup of coffee has increased considerably since last week. You decide it’s not a big deal, since coffee isn’t a big part of your overall budget, and you buy a cup of coffee anyway.
    [Show full text]
  • Partial Equilibrium Sequential Search
    Labor Economics, 14.661. Lecture 11: Partial Equilibrium Sequential Search Daron Acemoglu MIT December 6, 2011. Daron Acemoglu (MIT) Sequential Search December6,2011. 1/43 Introduction Introduction Introduction Central question for labor and macro: what determines the level of employment and unemployment in the economy? Textbook answer: labor supply, labor demand, and unemployment as “leisure”. Neither realistic nor a useful framework for analysis. Alternative: labor market frictions Related questions raised by the presence of frictions: is the level of employment e¢ cient/optimal? how is the composition and quality of jobs determined, is it e¢ cient? distribution of earnings across workers. Daron Acemoglu (MIT) Sequential Search December6,2011. 2/43 Introduction Introduction Introduction (continued) Applied questions: why was unemployment around 4-5% in the US economy until the 1970s? why did the increase in the 70s and 80s, and then decline again in the late 90s? why did European unemployment increase in the 1970s and remain persistently high? why is the composition of employment so di¤erent across countries? male versus female, young versus old, high versus low wages Daron Acemoglu (MIT) Sequential Search December6,2011. 3/43 Introduction Introduction Introduction (continued) Challenge: how should labor market frictions be modeled? Alternatives: incentive problems, e¢ ciency wages wage rigidities, bargaining, non-market clearing prices search Search and matching: costly process of workers …nding the “right” jobs. Theoretical interest: how do markets function without the Walrasian auctioneer? Empirically important, But how to develop a tractable and rich model? Daron Acemoglu (MIT) Sequential Search December6,2011. 4/43 McCall Model McCall Sequential Search Model McCall Partial Equilibrium Search Model The simplest model of search frictions.
    [Show full text]
  • AS Economics: Microeconomics Ability to Pay Where Taxes Should
    AS Economics: Microeconomics Key Term Glossary Ability to pay Where taxes should be set according to how well a person can afford to pay Ad valorem tax An indirect tax based on a percentage of the sales price of a good or service Adam Smith One of the founding fathers of modern economics. His most famous work was the Wealth of Nations (1776) - a study of the progress of nations where people act according to their own self-interest - which improves the public good. Smith's discussion of the advantages of division of labour remains a potent idea Adverse selection Where the expected value of a transaction is known more accurately by the buyer or the seller due to an asymmetry of information; e.g. health insurance Air passenger duty APD is a charge on air travel from UK airports. The level of APD depends on the country to which an airline passenger is flying. Alcohol duties Excise duties on alcohol are a form of indirect tax and are chargeable on beer, wine and spirits according to their volume and/or alcoholic content Alienation A sociological term to describe the estrangement many workers feel from their work, which may reduce their motivation and productivity. It is sometimes argued that alienation is a result of the division of labour because workers are not involved with the satisfaction of producing a finished product, and do not feel part of a team. Allocative efficiency Allocative efficiency occurs when the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the cost of the resources used up in production (technical definition: price eQuals marginal cost).
    [Show full text]