In the beginning

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In the beginning

• Economics
• How to allocate scarce resources with unlimited
  wants or desires.
• Resources
• Labor
• Land/Natural Resources
• Capital
• Entrepreneurship

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Opportunity Costs Marginal Analysis

• Opportunity Costs
• The cost of doing the next best option.
• Marginal
• The cost or benefit of the next one
• EX If one candy bar costs 2 and two bars cost
  3, the Marginal Costs of 1st bar is 2 and the
  MC of the 2nd bar is 1.
• Basis of economic study.

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Production Possibility Frontier
Measures different combinations of production
Good A
Z is beyond capacity, borrowing or running a
deficit
Y
Z
X Y are equally efficient, on the PPF curve
W
X
W is inefficient, Not all resources In use a
recession
Good B
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Trade Advantages

• Example
• Country A
• 60 Pizzas
• 80 Hot Dogs
• Country B
• 40 Pizzas
• 20 Hot Dogs

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Absolute Advantage

• Who can produce the most?
• Pizzas
• Country A 60
• Country B 40
• Hot Dogs
• Country A 80
• Country B 20

Country A b/c 60 gt 40.
Country A b/c 80 gt 20.
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Comparative Advantage

• Who gives up the least to produce?
• (items produced/items no longer produced)
• Pizzas
• Country A (60 Pizzas/80 HD) 0.75
• Country B (40 Pizzas/20 HD) 1.50
• Hot Dogs
• Country A (80 HD/60 Pizzas) 1.33
• Country B (20 HD/40 Pizzas) 0.50

Country B b/c 2.00 gt 0.75.
Country A b/c 1.33 gt 0.50
NB There is always comparative advantages for
both countries even when one country has an
absolute advantage in both products
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Supply and Demand
Price
S
P
D
Quantity
Q
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Demand

• Movement along the curve
• Change in Price
• Curve Shift
• Change in Determinants
• Income
• Substitutes
• Complements
• Number Consumers
• Consumer Tastes
• Consumer Expectations

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Supply

• Movement along the curve
• Change in price
• Curve shift
• Change in Determinants
• Costs of inputs
• Number sellers
• Change in technology
• Taxes
• Producer expectations

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Supply Demand

• Substitutes
• Complements
• Normal goods
• Inferior goods

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Equilibrium
Price
S
surplus
P1
P
P-1
shortage
D
Quantity
Q
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Price Floors Ceilings
Price
Price Floor
S
Pf
Deadweight Loss (DWL)
Price Ceiling
Pc
D
Quantity
QD
QS
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Equilibrium
Consumer Surplus
Price
S
P
Producer Surplus
D
Quantity
Q
Total Welfare is the sum of Consumer Producer
Surpluses
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Elasticity

• Measures change in QUANTITY caused by small
  changes in PRICE
• ?Q / ?P
• Midpoint Formula
• (Q1-Q2)/((Q1Q2)/2)
• (P1-P2)/((P1P2)/2)

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Elasticity

• Perfectly Elastic
• ED 8
• Elastic
• 1 lt ED lt 8
• Unit Elastic
• ED 1
• Inelastic
• 0 lt ED lt 1
• Perfectly Inelastic
• ED 0

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Determinants of Elasticity

• Substitutes
• Income
• Time

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Total Revenue (TR) Method

• Elastic
• Price TR move in opposite direction
• P ? TR ?
• P ? TR ?
• Inelastic
• Price TR move in the same direction
• P ? TR ?
• P ? TR ?
• TR P Q .do not compare P Q !!!

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Types of Elasticity

• Income elasticity
• ?Q / ? Income
• Negative number for Inferior Goods
• Cross elasticity
• ? Q Good A / ? P Good B
• Negative number for Complementary Goods

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Elasticity Taxes
Government Revenue Consumption Taxes paid By Consumer Taxes Paid by Supplier
Perfectly Elastic Least Most 0 100
Elastic
Inelastic
Perfectly Inelastic Most Zero 100 0
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Changing Elasticities
Price
Inelastic A large change in price
leads to a small change in quantity
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10
Elastic A small change in price
leads to a large change in quantity
3
2
4
5
Quantity
11
14
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Graphing Tax Revenue
ST
Price
Tax shifts supply Curve Price up Quantity
down
S
PT
Tax Revenue
P
D
Quantity
Q
QT
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Firms, Markets Costs

• Accounting p TR Explicit Costs
• Economic p Acct p Implicit Costs
• Implicit Costs are Opportunity costs
• Long-run has no fixed costs
• Sunk Costs
• Economies of Scale
• TC TFC TVC

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Total Average Cost Graphs
ATC
TC
P
MC
AVC
VC
FC
AFC
Q
Q
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Profits
? determined by MC MR
P
MC
ATC
? (P-ATC)Q
P1
MR
Q
Q1
NB Shut down price for business If Price lt
Minimum AVC
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Perfect Competition (profits)
Firm
Industry
Price
Price
Profits
MC
S
S2
ATC
P1
DMRARP
P1
P2
D2
D
Q1
q1
Q2
q2
Quantity
Quantity
New firms enter b/c profits, Results in P?,
Industry Q?, Firm q?, p 0
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Perfect Competition (losses)
Industry
Firm
Price
ATC
Price
S2
S
MC
Losses
P2
D2
P1
P1
DPMRAR
D
Q1
q1
Q2
q2
Quantity
Quantity
Firms leave b/c losses, results in P ?, Industry
Q ?, Firm q ?, p 0
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Monopoly
Monopoly P set by demand Curve point above MCMR
Price
Socially optimal allocation or allocative
efficiency at MC D
MC
ATC
P
Fair return Price ATCP (0 economic profit)
Deadweight loss (DWL) Difference between
Monopoly P Socially optimal P
D
Quantity
Q
?max set by MCMR
MR
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Monopolistic Competition
MC
P
ATC
ATC tangent to D
P
Equilibrium at zero economic profits
MR
Q
Q
Excess Capacity
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Monopolistic Competition
MC
P
ATC
ATC lt D
P
Economic profit will cause firms to enter, with
more firms in the market, consumers have more
choice demand for the company decrease
P2
MR
D
D2
Q
Q
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Monopolistic Competition
MC
ATC
ATC gt D
P
P2
Economic losses will cause firms to exit which
will increase demand for companies still in
business
P
D2
MR
D
Q
Q
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Oligopoly
Jack
Confess
Dont Confess

• Barriers to entry
• May or may not have differentiation
• 4 Firm ratio
• Prisoners dilemma
• Dominant Strategy
• One choice is always better
• Nash Equilibrium
• Each player know options of opponent no need to
  change

10 year
20 years
Confess
Free
10 year
Jill
1 years
Dont Confess
Free
20 years
1 years
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Oligopoly Incentive to Collude

• Game theory applied
• Oligopolists have a strong incentive to collude
  and raise their prices.
• However, each firm also has an incentive to cheat
  by lowering price because the demand curve facing
  each firm is more elastic than the market demand
  curve.
• This conflict makes collusive agreements
  difficult to maintain.

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Factor Economics

• Demand for inputs
• Labor
• Resources
• MRP Marginal Revenue Product
• MR for factor markets
• ?TR / ?Q
• MRC Marginal Revenue Cost
• MC for factor markets
• ?TC / ?Q

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Factor Economics

• If MRP gt MRC
• Increase Production
• If MRP MRC
• Max profits
• Stop (ideal) Production
• If MRP lt MRC
• Decrease production

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Factor Economics

• Marginal Productivity / Least Cost
• MPA / PA MPB / PB
• Firms produce at a level where all costs are
  minimized
• Derived Demand
• Demand for products creates or affects the demand
  for resources such as labor

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Factors Distribution

• Marginal Productivity Theory of Income
  Distribution
• Income allocated by how much production is
  created
• Theory may lead to
• Income inequality
• Market Imperfections

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Types of Goods
Rivals in Consumption
Yes
No
Private Goods
Natural Monopoly
Yes
Excludable
No
Common Resources
Public Goods
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Negative Externalities
Externality Cost

• Supply Failure
• Suppliers do not have to pay the full value
• Will supply more b/c costs paid by others
• Costs affect supply
• Taxes raise price to public equilibrium

Social Cost
P
Private Cost
P2
P1
Private Value
Q1
Q2
Q
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Positive Externalities

• Demand Failure
• Public not willing to pay full value
• Benefits or subsidies needed to induce suppliers
  to supply at lower price levels
• Benefits affect demand
• Subsidies absorb costs creating public
  equilibrium

External Benefit
Private Cost
P
Public Cost
P1
P2
Private Value
Q1
Q2
Q
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Income Inequality

• Lorenz Curve
• Measures ratio between richest poorest
  quintiles.
• Gini Index
• Measures among of distribution
• Increasing numbers (ranges from 0.0 to 1.0) means
  less equality

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Miscellaneous

• Taxes
• Progressive
• Increasing Marginal Rates
• Proportional
• Regressive
• Decreasing Marginal Rates

• Moral Hazard
• Taking higher risks b/c of insurance or
  government bail-outs
• Adverse Selection
• Signaling
• Only those who need product would buy it
  (insurance)