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What is the Economy?
total OUTPUT of a ntion and the way the nation ALLOCATES its limited resources of land, labor, and capital in an attempt to maximize production levels and promote trade and growth for future generations
What are Key Concepts in Energy Economics?
- Supply & Demand = how much of a product will a consumer buy and how much will the producer produce?
- Elasticity vs. Inelastic Demand = how flexible is the price of a product before demand will change?
- Economy = how will the production and consumption of a product effect the overall income of a country?
What is the Law of Demand and Supply?
- Demand Curve = HIGHER the price, LOWER the quantity demanded
- - quantity demand is low b/c price is high
- - quantitiy demand is high b/c price is low
- - xaxis = quantity, y-axis = price; downward slope
What is the Supply Curve? Equilibrium?
- Supply Curve = HIGHER the price, HIGHER the quantity supplied
- - upward slope
- Equilibrium = when supply and demad are equal
What are Movements and Shifts in the Law of Demand and Supply?
- Movements = changes in quantity due to price change or vice versa (downward)
- Shifts = changes in quantity and/or price due to changes in some other facor (preferences, taxes, price of other goods) (upward)
What are Marginal Costs and Externalities?
- Marginal Costs = cost of producing an additional unit of a product over the average cost
- Externalities = full cost or benefit of consuming and producing a product not calculated in price
- Marginal social cost = private + external marginal cost
What is Elasticity? (2nd major economic concept)
- the degree that a demand supply curve reacts to a change in price
- Elasticity = (% change in quantity/ % change in price)
- Inelastic = SMALL change in demand = essential goods - change in price
- Elastic = LARGE change in demand = non-essential - change in price
What Factors affect Elasticity?
- 1) Availability of Substitutes
- - if price of coffee goes up, people will move to tea; this makes coffee elastic, but caffeine industry is inelastic
- 2) Amount of Income- if price goes up, but income does not, there will be elastic change in demand
- 3) Time - if price goes up, demand may not change immediately for an elastic good but it could eventually
What is 3rd major economic concept? and Describe it.
- National Economy
- - Gross Domestic Product (GDP) determined by:
- 1) Product method - all goods and services traded in a year
- 2) Income Method - everyone's annual income added together
- 3) Expenditure Method - total value of all sales in one year
Describe the Demand and Supply of Oil in the U.S.
Demand for oil is INELASTIC
True or False: Crude Oil Prices are linked to Global and US economy.
When you buy gas, where does your money go? least to most?
- Distribution & marketing (8%), Taxes (13%), Refining [diesel more expensive than regular gasoline] (14%), Crude Oil (65%)
- - station Markup can also influence final price!!!!
What are some bad side effects of externalities of Fossil fuels?
- Production Externalities:
- 1) spills
- 2) governance
- 3) security
- Comubstion Externalities:
- - US greenhouse gas emissions
- -China has most CO2 emissions & 2nd highest GDP
- ** thre is NO PRICE on externalities
What are the Estimated Costs of these Externalities?
- 1) Air pollution damages (excl. climate and mercury)
- 2) Security Costs (military, coast guard, SPR)
- 3) Climate Change Costs
What are optimal fossil fuel pricing KWh from coal? KWh from natural gas? gallon of gasoline?
- coal = 25 cent tax
- natural gas = 10 cent tax
- gasoline = 60 cent tax
- * this ignores subsidies in tax code for fossil fuel discovery and production
What Role of subsidies for alternative fuel development?
- 2 RATIONALES
- 1) put on even playing field since fossil fuels underpriced from social perspective
- 2) Infant Industries
What are some externalities of alternative fuels?
- 1) fuel for food = deforestation in Indonesia due to EU policy; corn ethanol as much climate forcing as gasoline due to energy conversion requirements
- 2) Biodiversity/ Habitat = bird kills from windmills; altered land use patterns due to ponds or soar arrays
- 3) Noxious Emissions
What are some economist's perspectives?
- 1) prefer PIGOUVIAN TAX on all fuels to reflect external damages since fuel agnostic
- 2) Cap-and-Trade second best in this case b/c fixes quantity of fuel but not price
- - not guaranteed to get price = externality
What are 1st generation Biofuels?
- corn & sugarcane ethanol
- - grains, sugar crops --> starch, sugars --> fermentation--> ethanol
- - oil seed crops --> fats and oils --> transesterification --> biodiesel
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