Key Economic Concepts

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Key Economic Concepts
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Pessimists Model Limits to Growth
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Optimists Model Kahns Work
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Purview of Traditional Microeconomics
Product or Activity
Production Consumption
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normative criteria (what ought to be) static
efficiency dynamic efficiency
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optimal allocation net benefits are
maximized Plimsoll line
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Demand Curve
Price
willingness to pay
Quantity
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Cost Curve
Cost
total cost
Quantity
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Derivation of Net Benefits
net benefits are maximized when benefits costs
Price
Quantity
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dynamic efficiency time
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present net worth/discount rates
if interest rates hold steady for 1 year at
10 then in one year 1.00 is worth
1.10 or 1.10 received next year 1.00
received today
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sustainability intergenerational
equity sustainable level of development is
reached when a reasonable standard of living can
be maintained for all humans/non-humans over time
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Purview of Traditional Macroeconomics
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allocation efficiency addressed by market
structure distribution Justice addressed by
economic theory
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Purview of Environmental Macroeconomics or
Ecological Economics
Closed System
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Contrasted with a viewpoint that the economy is
an open system sitting in the larger environment
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1st Law of Thermodynamics energy and matter
cannot be created or destroyed
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2nd Law of Thermodynamics entropy
increases entropy amount of energy not
available for work
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From Ricklefs, 1979
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scale Plimsoll line
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scale of human economy
current estimate 25 of global net primary
production 40 or terrestrial primary production
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cowboy economy
spaceman economy
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property rights economic definition a bundle
of entitlements
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characteristics of efficient market
allocations universality exclusivity
transferability enforceability
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universality all resources privately owned all
entitlements clearly specified
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exclusivity all benefits and costs from
ownership accrue to the owner
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transferability all property rights are
transferable in voluntary exchange
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enforceability rights are secure from
involuntary seizure or encroachment by others
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• Sources of market failure
• externalities
• commonly held goods
• imperfect market structures
• variable discount rates
• government/political failure

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externality an externality exists when the
welfare of an agent depends directly on his/her
activities and on the activities under the
control of some other agent
Violates exclusivity
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commonly held goods tragedy of the commons
Violates universality
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imperfect market structures monopolies and
cartels
Violates enforceability
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variable discount rates rich have lower
discount rates than poor or 1.00 today is
worth more to a poor person than to a rich person
Unforeseen limit on market function
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government/political failure rent seeking
(lobbying) result - special interest group gets
increase in benefits, society as a whole gets
lower net benefits and voter apathy or ignorance
Violates enforceability
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• Resolution of inefficiencies
• individual negotiation
• judicial remedies
• property rules
• liability rules
• regulation

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