THOMAS ACQUINAS
JUST PRICE
OPPORTUNITY COST
LONG RUN VS
SHORT RUN POLICIES
ADAM
SMITH
INVISIBLE HAND
PROFIT DRIVEN
BEHAVIOR
PRODUCTION POSSIBILITIES CURVE
DEFINE FACTOR OF
PRODUCTION
ASSUMPTIONS
FULL
EMPLOYMENT
EFFICIENT
USE OF RESOURCES
ATTAINABLE VS
NON-ATTAINABLE
EFFECTS OF
INVESTMENT
MOVES THE FRONTIER
INCREASES
FUTURE CHOICES
POVERTY
UNITED STATES
POOR FAMILY
OF 4 INCOME $19,000
WORLD STANDARD
POOR FAMILY
OF 4 INCOME $1,460
CAPITALIST SYSTEM
PROPERTY RIGHTS
ROLE OF PROFIT
VOLUNTARY
EXCHANGE
BENEFICIAL
DISTRIBUTION
BOTH
PARTIES GAIN
MARKET
ALLOCATION / PRICE RATIONING
MARKETS AS EXCHANGE
MARKET MECHANICS
DEMAND/QUANTITY
DEMANDED
SUPPLY/QUANTITY
SUPPLIED
DISEQUILIBRIUM
PRICES
EQUILIBRIUM
PRICE
MARKETS AND THE PRIVATE SECTOR CH. 3
PROFIT AS A NECESSARY CONDITION
PROFIT INCENTIVE
PROFIT AS A PERCENTAGE OF INCOME LESS
THAN 10 PCT
PRICE THEORY I: LAW OF MARKETS
DEMAND
CURVE
SUPPLY
CURVE
DISEQUILIBRIUM
PRICES
INVENTORY
CHANGES AS SIGNALS
NO
INTENTIONAL MISTAKES
EQUILIBRIUM
PRICE
VOLUNTARY EXCHANGE/BENEFICIAL
DISTRIBUTION
MARKETS AS EXCHANGE/ PRICE RATIONING
CONSUMER SURPLUS
PRODUCER SURPLUS
LAW OF DEMAND
DEMAND
VS QUANTITY DEMANDED
QUANTITY
DEMANDED
MUST
BE A NUMBER
MUST
FIRST KNOW THE PRICE
DEMAND
IDENTIFIES QUANTITY DEMANDED AT EACH PRICE
LAW OF SUPPLY
QUANTITY
SUPPLIED
MUST
BE A NUMBER
MUST
FIRST KNOW THE PRICE
SALES
ARE UNCERTAIN BEFORE THE MARKET PERIOD
ROLE
OF PROFIT
NORMAL
PROFIT
NECESSARY
RESOURCE
CREATES/DESTROYS MARKETS/JOBS/TECHNOLOGY
SUPPLY
IDENTIFIES QUANTITY SUPPLIED AT EACH PRICE
LAW OF MARKETS: SUPPLY AND
DEMAND/PRICE DETERMINATION
DISEQUILIBRIUM
PRICES
QUANTITY
DEMANDED MORE THAN QUANTITY SUPPLIED
QUANTITY
SUPPLIED MORE THAN QUANTITY DEMANDED
CHANGE
IN PRICE DOES NOT CHANGE DEMAND
CHANGE
IN PRICE DOES NOT CHANGE SUPPLY
INVENTORIES
AS SHOCK ABSORBERS
EQUILIBRIUM PRICE
SELF-INTEREST
(PROFIT) NOT SOCIAL WELFARE
MARSHALLIAN
SCISSORS
EFFECTS OF CHANGES IN THE UNDERLYING
CONDITIONS
DEMAND
CHANGES
SUBSTITUTES
COMPLEMENTS
INCOME
SUPPLY
CHANGES
COSTS
NUMBER
OF SELLERS
AT
ANY MOMENT IN TIME
ONLY ONE DEMAND CURVE IS RELEVANT
ONLY ONE SUPPLY CURVE IS RELEVANT
PRICE VS PRICE EXPECTATION
CHANGE
IN PRICE NEVER MOVES DEMAND OR SUPPLY
CHANGE
IN PRICE EXPECTATION CAN MOVE EITHER ONE
SIMULTANEOUS CHANGES IN MARKET
CONDITIONS
THE SUM OF THE PARTS
ONE KNOWN, ONE UNKNOWN
PRICE CONTROLS
CEILING/MAXIMUM
PRICES
EFFECTIVE
ONLY WHEN BELOW EQUILIBRIUM
COMPARE
Q TO FREE MARKET
BLACK
MARKETS
DISCRIMINATION
DOES
SOCIETY GAIN?
FLOOR/MINIMUM PRICES
EXAMPLE:
MINIMUM WAGES
EFFECTIVE
ONLY WHEN ABOVE EQUILIBRIUM
COMPARE
Q TO FREE MARKET
UNEMPLOYMENT
PROBLEM
DISCRIMINATION
DOES
SOCIETY GAIN?
NECESSARY CONDITIONS TO JUSTIFY A
GOVERNMENT'S ATTEMPTS TO USE ITS ECONOMIC POLICY TOOLS
THERE
MUST BE A PRIVATE SECTOR PROBLEM.
GOVERNMENT
MUST HAVE ABILITY TO ALLEVIATE THE PROBLEM
UNLESS
BOTH CONDITIONS ARE SATISFIED,
THERE
IS NO ECONOMIC REASON FOR GOVERNMENT ACTION
ROLES OF GOVERNMENT, EACH SUBJECT TO
QUESTION
LEGAL/SOCIAL/POLITICAL
ENVIRONMENT
CORRECTION
OF MARKET FAILURE
PROVIDE
FOR PUBLIC GOODS
EXTERNALITIES (SPILLOVER
COSTS)
INDUSTRIAL
CONCENTRATION/MAINTAIN COMPETITION
DISTRIBUTION(REDISTRIBUTION) OF INCOME
ALLOCATION
OF RESOURCES
STABILIZATION
OF THE ECONOMY (MACRO ECONOMICS)
PUBLIC GOODS: DEFINITION
NOT
NECESSARILY PRODUCED BY THE GOVERNMENT
DEPLETABILITY
RIVAL
VS NON-RIVAL CONSUMPTION
EXCLUSIVE
VS NON-EXCLUSIVE GOODS
PROBLEM:
UNDERPRODUCTION
GOAL:
EFFICIENT PRODUCTION
OPTIMAL PRIVATE VS OPTIMAL Q OF
PUBLIC GOODS
HORIZONTAL
VS VERTICAL DEMAND
PROBLEM:
FREE RIDERS
GOAL:
OPTIMAL Q OF PUBLIC GOODS
EXTERNALITIES
GOAL:
INCORPORATION OF ALL COSTS (MARGINAL SOCIAL COST)
MARKET POWER
PROBLEM:
INDUSTRIAL CONCENTRATION
GOAL:
TO MAINTAIN COMPETITION
DISTRIBUTION(REDISTRIBUTION)
OF INCOME
PROBLEM:
WHAT IS FAIR VS WHAT IS EFFICIENT?
GOAL:
ACHIEVE THE CORRECT BALANCE
ALLOCATION OF RESOURCES
PROBLEM:
SOME RESOURCES UNDERDIRECTED
GOAL:
ACHIEVE THE CORRECT BALANCE
POLICY TOOLS
REGULATION/REVIEW
MINIMUM PRICE
GOVERNMENT
SPENDING VS GOVERNMENT FINANCING
TAXES
TAXES AS A COST
TAX
AND SUPPLY
TAX
AND EQUILIBRIUM
EFFECT
ON
PRICE
QUANTITY
COMPARE
MINIMUM PRICE, MAXIMUM PRICE, AND TAX OUTCOMES
ALL
REDUCE THE Q THAT IS ACTUALLY BOUGHT AND SOLD
REGULATION
GOVERNMENT SPENDING VS GOVERNMENT
FINANCING
PUBLIC CHOICE
SELF
INTERESTED DECISIONS
ELASTICITY OF DEMAND
DEFINITION
ELASTIC
VS INELASTIC
PERFECTLY
ELASTIC/PERFECTLY INELASTIC
REVENUE
AND PRICE PATTERNS
PRICE
ELASTICITY AND TOTAL REVENUE
ALMOST
EVERYTHING IS MORE ELASTIC IN THE LONG RUN
UTILITY THEORY
MARGINAL
UTILITY
DIMINISHING
MARGINAL UTILITY
CONSUMERS
BUY AS LONG AS MU > PRICE
CONSUMER
SURPLUS
CHOICE THEORY
THE
LOGIC OF CHOICE
REVEALED
PREFERENCE
BUDGET CONSIDERS AFFORDABILITY
WITHOUT CONSIDERING
LIKES/DISLIKES/INCOME
WHERE CHANGES IN THE BUDGET SET COME
FROM
CHANGES
IN INCOME
CHANGES
IN PRICES
THE
ONLY FACTORS WHICH CAN CHANGE BUDGET SET
TASTES
ARE NOT CONSIDERED
IMPLICATIONS IF WE ASSUME PEOPLE LIKE
MORE RATHER THAN LESS
HIGHER
INCOMES MAKE PEOPLE BETTER OFF
LOWER
PRICES MAKE PEOPLE BETTER OFF
A
GOOD SYSTEM WOULD PROVIDE
1.
HIGH INCOMES AND
2.
LOW PRICES
BUDGETS AND CHOICE THEORY
SHOW
CHOICE PROCEDURE
EFFECT
OF PRICE CHANGE
EFFECT
OF INCOME CHANGE
DEMAND CURVE CONSTRUCTION
INDIVIDUAL
DEMAND TO MARKET DEMAND
PRODUCTION FUNCTION
PRODUCTIVITY
GROWTH IN
AVERAGE PHYSICAL PRODUCT OF LABOR
EFFECT ON UNIT
LABOR COST
MARGINAL PHYSICAL PRODUCT OF LABOR
SPECIALIZATION
AND RISING MPPL
DIMINISHING
RETURNS
COST CONCEPTS
STARTING
PREMISIS: EFFICIENCY
SUNK COSTS
NOT RELEVANT TO
PRODUCTION DECISION
VALUABLE FOR
LEARNING
FIXED COST (OVERHEAD)
VARIABLE COST (OPERATING EXPENSES)
ATC = AVC + AFC AND SKETCH
MARGINAL COST
HOW TO SHOW COST PATTERNS
EFFECT OF QUANTITY
CHANGE
EFFECT OF COST
CHANGES
LONG RUN AVERAGE COST (LRAC)
SHORT RUN / LONG
RUN RESOURCE USE
ECONOMIES OF
SCALE (FALLING LRAC)
DISECONOMIES OF
SCALE (RISING LRAC)
CONSTANT RETURNS
TO SCALE
ALL COSTS ARE
VARIABLE IN LONG RUN NO LRATC, LRAVC, LRAFC
LRAC DOES NOT
INCLUDE JUST/ALL LOW POINTS FROM ATC CURVES
WHAT DOES LRAC
IMPLY FOR THE DEGREE OF COMPETITION?
PROFIT AND CAPITAL
NORMAL PROFIT
DEFINITION
ROLE
ECONOMIC PROFIT
DEFINITION
ROLE
PROFITS
ACCOUNTING =
NORMAL + ECONOMIC
NORMAL =
OPPORTUNITY COST OF RESOURCES
VENTURE CAPITAL
ROLE
HIGH FAILURE
RATE/RISK
NECESSARY
RESOURCE
NORMAL PROFIT AS
A COST
SURVIVORSHIP PRINCIPLE I AND II
BUYOUT OF FIRMS
WHO DO NOT MAXIMIZE PROFITS
SHARE PRICES
REFLECT MANAGEMENT'S EXPECTED FUTURE
PROFIT STREAM
IF EVERYBODY
DOES IT IT MUST BE CORRECT
DEFINE
PLANT
FIRM
INDUSTRY
TYPES OF FIRMS/THE SPECTRUM
PERFECT
COMPETITION
MONOPOLISTIC
COMPETITION
OLIGOPOLY
DUOPOLY
MONOPOLY
PRICE TAKING FIRMS
CAUSE
TOO SMALL
TO MAKE A DIFFERENCE
LARGE
NUMBER OF PRODUCERS
HOMOGENEOUS
PRODUCTS
OR
REGULATED PRICE
GOAL: ECONOMIC
PROFIT
OPERATING RULES FOR PRICE TAKING FIRMS
MARKET PRICE = MARGINAL REVENUE FOR PRICE TAKING FIRM
CASE 1... P < MIN AVC
SHORT RUN
BEST Q = 0
SHUT DOWN
PRICE
LOSS =
FIXED COST
LONG RUN
LIQUIDATION
CASE 2... P > MIN AVC BUT P < MIN ATC
SHORT RUN
CHOOSE Q
SUCH THAT MR = P = MC
BREAK EVEN
PRICE
LOSS <
FIXED COST
HOW TO SHOW
ECONOMIC LOSS
LONG RUN
LIQUIDATION
CASE 3... P = MIN ATC
SHORT RUN
P VS AVC
SET Q AT P
= MR = MC
LONG RUN
P VS ATC
SET Q AT P
= MR = MC
HOW TO SHOW
ECONOMIC PROFIT (= 0)
CASE 4... P > MIN
ATC
SHORT RUN
P VS AVC
SET Q AT P
= MR = MC
LONG RUN
P VS ATC
SET Q AT P
= MR = MC
PROFIT
MARGIN = P - ATC
MAXIMUM
PROFIT MARGIN IS NOT MAXIMUM TOTAL PROFIT
PROFIT =
P*Q - ATC*Q
SUMMARY
SUPPLY CURVE OF
FIRM
SHORT RUN
FROM MC CURVE ABOVE AVC
LONG RUN
FROM MC CURVE ABOVE ATC
INDUSTRY SUPPLY CURVE... SHORT RUN
ECONOMIC PROFITS
AND LOSSES AS MARKET SIGNALS
NO ENTRY/EXIT
THE ROLE OF
EQUILIBRIUM
INDUSTRY SUPPLY CURVE... LONG RUN
ECONOMIC PROFITS
AND LOSSES AS MARKET SIGNALS
FREE ENTRY/FREE
EXIT
THE ROLE OF
EQUILIBRIUM
COMPETITIVE INDUSTRY
FREE ENTRY AND
EXIT
HOMOGENEITY
MANY SELLERS
MANY BUYERS
ILLUSTRATE ECONOMIC PROFIT/ECONOMIC LOSS AREA
COMPETITIVE INDUSTRY
FREE ENTRY AND
EXIT
HOMOGENEITY
MANY SELLERS
MANY BUYERS
EFFECT OF DEMAND
CHANGE
SETUP
SHORT RUN
LONG RUN
EFFECT OF COST
CHANGE
SETUP
SHORT RUN
LONG RUN
PRICE TAKER VS PRICE SETTER
P = MIN ATC => BEST FOR CONSUMERS
MINIMUM
POSSIBLE PRICE
PRICE SETTING FIRMS
MARGINAL REVENUE
OPERATING RULES FOR PRICE
SETTING FIRMS
SHORT RUN
CASE STUDIES
LONG RUN
CASE STUDIES
THERE IS NO SUPPLY CURVE FOR FIRM OR FOR INDUSTRY
INDUSTRIAL
STRUCTURE...MONOPOLY
DEFINITION
NO ENTRY, NO EXIT
ENTRY
BARRIERS
INEFFICIENCY AND MONOPOLY
OLIGOPOLY
SMALL NUMBERS OF SUPPLIERS...HOW TO MEASURE SMALL?
INTERDEPENDENCE OF DECISIONS
BARRIERS TO ENTRY
OFTEN LARGE CAPITAL INVESTMENT REQUIRED
KINKED DEMAND CURVE
RIVALS MAY NOT MATCH PRICE INCREASES
MONOPOLISTIC COMPETITION
RELATIVELY FREE ENTRY AND EXIT
LONG RUN EQUILIBRIUM
COMPARE PRICE TO COMPETITIVE MARKET
SIMULTANEOUS ENTRY/EXIT EXPLANATIONS
INFORMATION PROBLEM
NEW FIRMS COME IN BECAUSE THEY EXPECT PROFIT
OLD FIRMS LEAVE BECAUSE THEY CAN'T DELIVER PROFIT
INDIVISIBILITY PROBLEM
INEFFICIENCY
PRICE DISCRIMINATION
MULTI-PLANT OF MULTI-NATIONAL FIRMS
MARKET DIVISION
BARRIERS TO RESALE
MARGINAL REVENUES EQUAL OVER ALL MARKETS
COSTS OF REGULATION
ADMINISTRATIVE
COSTS OF ENFORCEMENT
COMPLIANCE
COSTS
EFFICIENCY(SECONDARY)
COSTS
MARKET POWER
NUMBER OF
SUPPLIERS
SIZE OF MARKET
LEADERS
CONCENTRATION
RATIO
MAY COME FROM INNOVATION, MERGER, OR ACQUISITION
BARRIERS TO ENTRY
AVAILABILITY OF
SUBSTITUTE GOODS
NATURAL MONOPOLY... A SPECIAL CASE?
RELATED TO HIGH FIXED COST/DECLINING ATC
MONOPOLY YIELDS LOWER PRICES TO CONSUMERS
OPTIMUM ENVIRONMENTAL
MSC = MSB
NOT ZERO
PROBLEMS OF MEASUREMENT
PROBLEMS WITHOUT BORDERS
MARKET INCENTIVES
MARKETABLE PERMITS / VOUCHER MARKET
COST
EFFECTS ON ENVIRONMENT
EFFICIENCY
SUBSIDIES
COST
EFFECTS ON ENVIRONMENT
EFFICIENCY
TAXES
COST
EFFECTS ON ENVIRONMENT
EFFICIENCY
INTRODUCTION TO FACTOR MARKETS MRP = MFC
DEFINE FACTOR OF PRODUCTION
MARGINAL REVENUE PRODUCT
PRICE
TAKING OUTPUT MARKET
PRICE
SETTING OUTPUT MARKET
COMPARE NUMBER OF JOBS IN EACH CASE
MARGINAL FACTOR COST
PRICE
TAKING FACTOR MARKET
PRICE
SETTING FACTOR MARKET
COMPARE
NUMBER OF JOBS IN EACH CASE
LOGIC FOR OVERTIME PAY
LABOR FORCE PARTICIPATION RATE
(LFPR)
EFFECTS OF COST SAVINGS ON
EQUIPMENT/AUTOMATION
EFFECT
ON LABOR MARKET
SUBSTITUTION
EFFECT => LESS LABOR
OUTPUT
EFFECT => MORE LABOR
NET
EFFECT => UNCERTAIN
EVIDENCE
SINCE 1945
LABOR MARKET DISCRIMINATION