Microeconomics (1-4)

• UN Sustainability Definition

  Meeting the needs of present generations without compromising the ability of future generation to meet their needs.
• How much as the world GDP grown by since 1960? 


  100 times
• Human development Stats 


  The richest 1% of the world receive 17% of the world total income (UNDP)
• Biocentrism 


  The natural world is the first priority, which humans are only one part of. All living things have intrinsic value. Biocentrism emerges from the moral perspective and technically no one is 100% biocentric.
• Anthropocentrism and utilitarianism


  The environment has 1 purpose, which is to provide material gratification to humans. This is different from utilitarianism which emphasized the wellbeing people attain from the environment. Anthropocentrics only gain instrumental value from the environment.
• Utility curve of a bio centrist

  Y -Axis: environmental quality. X- Axis: income. Horizontal lines.
• Utility Function of an Anthropocentrist


  Y -Axis: environmental quality. X- Axis: income. Vertical lines.
• Indifference Curve


  Shows a combination of 2 goods in various quantities.
• List of Social Choice Mechanisms

  1. Pareto criterion
  2. Potential Pareto Improvement
  3. Kaldor Hicks efficiency compensation principle
  4. Voting
• 1. Pareto Criterion


  A is an improvement on B if at least one person is better off. If all individuals prefer A, then society should too.
• Weakness of Pareto Criterion

  • Supports the status quo.
  • Not everything is comparable
  • does not solve distributional issues
• 2. Potential Pareto Improvement


  Allows for the possibility of compensating those who are adversely affected. This means that there is a net gain in overall welfare.
• 3. Kaldor Hicks Efficiency Compensation Principle


  A choice can still be socially desirable if transfers are made to achieve unanimity, even if the transfers are not actually made. (can hypothetically compensate)
• 4. Voting


  Pareto Criterion is a form of unanimous voting.
• Majority voting


  only declare a winner when they win the more significant part of the votes. Must win more than half
• Plurality voting


  election winner is the most popular choice as decided by voters.
• Limitations of voting

  • does not account for preference intensity
  • no compensation
  • does not involve other policy principles
• Egalitarian view point for social welfare


  Want to close the gap between the rich and the poor. The utility in society should be equal for all.
• Benthamite (Utilitarian) View point for social welfare

  Want the maximum utility gain possible from a decision based outcome
• Rawlsian view point for social welfare


  Only look at the minimum - decide from the bottom up. (can impose a veil of ignorance)
• 6 axioms required for making social choices

  1. Completeness: compare all the alternatives
  2. Unanimous
  3. Non-dictatorship
  4. Transitivity: if A is socially preferred to B, and B is socially preferred to C, then A should also be socially preferred to C
  5. Independence / irrelevant alternatives: only matters how people rank a and b, without regard to alternatives
  6. Universality: any individual ranking of alternatives are permissible
• Consumption efficiency


  Whether the good goes to the person that values it the most. MRS_A=MRS_B
• Production Efficiency


  Can't produce any more of good A without producing any less of good . MRT_A=MRT_B
• Product-mix efficiency / Allocative efficiency


  The good is produced with optimal production processes and is allocated to the person who values it the most. MRS_A=MRT_A
• 2 Theorems of Welfare Economics

  1. in a competitive market, the market equilibrium is Pareto optimal
  2. in a competitive market, any Pareto optimum can be achieved by market force, provided the resources of the economy are appropriately distributed before the market is allowed to operate.
• 4 Assumptions of welfare economics


  if the 2 theorems of welfare economics can be achieved, the market should be efficient. However, this is not realistic because it requires,

  1. complete property rights
  2. atomistic participates: all agents are cost maximizers. Producers are small when compared to the market.
  3. Complete information: the future is unknown
  4. No transaction costs
• Discount factors is determined by,

  1. time
  2. How productive an investment is
  3. generally, a high discount factor means people will send their money in the short term, and a low discount factor means people will invest because the future is safer.
• Tragedy of the Commons definition


  When there are no owners of resources, or if the owners are public entities, then there is a real risk that the resource will be overused.
• Open access resources


  Anyone may access them
• Common property resources


  Everyone owns the property and has access
• Common Pool


  Everyone is drawing from a common resources
• Externality Definition


  Exists when the consumption of production choices of one person/firm enters the utility/production function of another entity without their permission or compensation.

  Ex: playing loud music in a neighboring flat which decreases their productivity
• Pecuniary Externality


  Your prices, instead of resources, change due to the actions of another.
• Example of a pecuniary externality


  You like yellowtail sushi, and now more people like it, so the price increase. You are no longer able to eat is as much because it is too expensive.
• Excludability


  A good / bad is excludable if it is feasible and practical to selectively allow consumers to consume the good / bad. The use of this good will exclude the use by others. O
• Non-excludability


  Any individual cannot exclude others to use this good. (ex. deep sea fishery has no property rights.)
• Importance of excludability


  Allows the attachment of a price tag to the consumption of a good or bad. Means that you can deny consumption if the price has not been paid. Can pollution be made excludable?
• Rivalry


  The act of consumption reduces the amount of good that is available for other consumers.
• Non-rivalrous good


  The consumption does not diminish what is available for others (ex. scenic view)
• Importance of Rivalrous goods

  
  

  If consumption does not affect quantity - there is no market.