Macroeconomics ECON 144
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Date Created: 02/09/15
Microeconomics ECON 142 01282015 D Chapter 1 D Economics De nition D Choices people person rmcountrylj make to attain their goals given their scarce resources Economics Decision D D D Micro A single person rmindustry P16 D Macro The economics as a wholeunemploymentin ationde citdebt D D Three ideas P45 D People are rational D People respond to economic incentives D Optimal decisions are made at the quotmarginquot P67 margin small Increase unit At the margin bene ts vs costs P7 It matters on who out weights who Normative vs Positive P1213 Positive statements are facts and normative statements contain udgments or words like quotshould bequot Market B Set of buyers and sellers whose actions affect the price of the market Market Economy V Centrally Planed Economy P1011 Market Economy goods services produced demand and supply Opportunity cost P8 the value of the thing with the most valuable that you didn t do Productive efficiency vs allocative efficiency P11 Market Economy Market Set of buyerssellers demandsupply Market economy v centrallyplanned economy P9 llllllllllllllllllllllllllllllllll Chapter 3 Demand Law of demand P71 D At a lower price a larger quantity will be demanded vise versa As the price changes the quantity demanded will change All else held equalceteris paribusP72 D P71 Demand curve slope down Changing of the price causes a movement along the demand curvechange in the quantity demanded P73 B When demand increasesdecreases the demand curve shifts to the rightleft P73 D D Five demand shifters D 1 for most goods normal goods increase means an increase shift right in demand But for quotinferiorquot goods demand for it decreases shift left when income increases I 2 a change in the price of one good good x can cause a change in the demand for good y P7374 I substitutes a price increase of substitutes cause demand decreases the target goodsshift left I complements a price increase of complements cause demand increases the target goodsshift right I 3 tastes change more popular shift right P74 D 4 expectations expect the price increases in the future demand more today shift right expect the price decrease in the future demand less today shift decrease P73 I 5 Population and demographics the number of buyers P74 D D D D Supply D At a high price a large quantity of goods are supplied 0 A change in price causes movement along the supply curve It changes the quantity supplied Supply curve slope up D D D Supply shifters D 1 a positive technology development shift supply curve to the right Negative technology shock shifts supply left P80 D 2 a change in the price of inputs Increase of price of inputs cause supply shift left D 3 a change of expectation lf expect the price to decrease in the future supply increase today and shift right P82 D 4 a change of the number of sellers a decrease in the number of sellers shift the supply left D 5a change in prices of substitutes in production The price substitute increase the supply decrease and shift left P8081 D D equilibrium P82 D the direction which the market price is going toward by the pressures D equilibrium price and equilibrium quantityP85 D B when both curve moves B if they move in the same direction you will know quantity but you won t know the price B if they move in opposite directions you will know the price but you won t know the quantity B First exam next Monday D D Demand curve H Price athe intersect between curve and yaxis bsope Quantity D Quantity a Priceb D D Supply curve H Price a b Q U Q P ab Equilibrium When price price nd quantity When Q Q nd P Chapter 4 Consumerproducer surplus P102 llllllllllllll Consumer surplus the difference between the price consumers are willing to pay and the price they have to pay D It s the area normally a triangle below the demand curve and above the equilibrium price line or some price consumers actually pay D If consumer surplus gets bigger consumers are better off D Changing either curve or both curve will affect the value of consumer surplus D D Producer surplus the difference between the price producers are willing to take to produce and the price it actually cost to produce P105 It s the area between the supply curve and the equilibrium price D ne D If producer surplus is bigger producers are better off D Changing either curve or both curve will affect the value of producer surplus too D I The economic surplus the consumer surplus produce surplus 108 D The government steps in to set the price It decrease the economic surplus D D Deadweight loss the reduction in economics surplus that results when the market is not efficient P108 D H Price ceiling H Price ceiling a level the price can t go above I When the price is low the demand is high while the supply is low which leads to a shortage P112 D So it matters for government to set a price D If the price ceiling is higher than the market price it doesn t cause a shortage D D Example of price ceiling D Rent control apartment H Price ceiling on gasoline D H Price oor a level the price can t go below B When the price is high the supply surpasses the demand It cause a surplus P110 B When qupply gt Qdemand market price reduces towards the equilibrium D D Examples of price ceiling D Minimum wage does it cause unemployment D H Price oor only affects when it s too highhigher than the market price price ceiling only affects when it s too lowower than the market price D Exam 1 chapter 1 3 4 Appendix4 Using supply and demand Government intervention Price ceiling Price oor When price ceiling appears above the equilibrium it cause nothing ut when it is under the equilibrium it causes a shortage When price oor appears below equilibrium it cause nothing but hen it s above the equilibrium it causes a surplus O llllllllllllllll lmposing a tax P117 The seller pays it and passes to the buyers When tax is imposed on the seller the supply curve shifts up because the price of input of producing increase for the same amount of the tax price for every product the seller produce D The demand curve doesn t change because the amount of product supplied doesn t change D D If the slope of the supply curve is smallless tilted the buyers burry the burden of imposing a tax D llllEll S P 10 230 D P 34 ZQ And impose a tax of 8 dollar S P 18 230 Chapter 5 llll D Demand curve represents the value or bene ts people see in the good D Supply curve represents the cost associated with the good D E Market failure P140 D A situation where the market falls to produce the ef cientbest correct optimal level of output D It justi es the government intervention into the economy D D Cases of market failure B Public goods P155 B Public goods are D 1 Nonrival consumption D most goods if I consume it someone else can t consume the same good but for public good someone consumes it can t stop someone else to consume the same single one good It s non rival D 2 Nonexclusive B if you don t pay you don t get the good but for public good not paying don39t prevent you form getting it It s non exclusive D D mosquito spray example D Because of the freerider problem there would be no demand and it leads to no supply So the market will fail with the goods D D Four categories of goods P154 l Excludable Nonexcludable D Rival private goods common resources D Nonrival public goods national defense D B Is the internet a public good D D Externalities P138 D Externalities a cost or a bene t that cost by a transaction that aren t part of the transaction spill over effect D Coworkers getting u shots you bene t D D Cost or bene t caused by the transaction that are not part of the transaction D A bene t or a cost that affects someone who is not H D Private v external costs and bene ts D Positive v negative externalities D I The sets of costs P138 D Private cost material D External cost pollution D Social costs private costs external costs can be negative D D The demand and supply curve indicate only private bene ts and costs We are adding the external bene ts and cost by shifting the curves D When there is a extra external costs to producer we shift the supply curve up D If we incorporates external costs quantity to produce is smaller D Like tax on cigarettes to reduce the external cost D When there is a extra bene t to consumer we shift the demand c D Like student loans to improve the bene t of more graduates to bene t the society And tax break Both increase positive externalities Mr Pigou Idea of using taxessubsides to address externality Chapter 6 Price Elasticity Law of demand when the price changes the quantity demanded will be changed Bread shoes Elasticity Responsiveness ll How much would the price changing affect quantity demanded The atter the graph is the bigger elasticity gets To measure the quantity demanded that is caused by price hanging Your demand is elastic when the quantity demanded change D The bigger change in quantity demanddemand more or demand less the bigger elasticity of demand gets the demand is more elastic D If the price changed and you buy the same amount you were going to buy anyway you didn t respond your demand is not elastic D D Elasticity determines how much revenue you earn D The law of demand when the price is set at a low price quantity demanded is high when price is high quantity demanded is low E Which option is going to make more money Total revenue quantity demanded price D D D What make a good have a demand that is elastic or inelastic D 1 number of substitutes D more substitute elastic D less or no substitute inelastic D 2 luxury or necessity D luxury is elastic D necessity is inelastic D 3 how broadly the market is de ned B if it s de ned narrowly elastic B if it s de ned broadly inelastic U More requirement more speci c elastic less requirement of consuming inelastic D 4 Size of the good in the consumer s budget price relative to income D large part of budget elastic small part of budget inelastic 5 the amount of time consumer adjust to the new price The more time consumer use to adjust to the new price the more lastic the demand gets In the short term inelastic in the long term elastic D D D e D D I How elastic works P183 D Demand is you total revenue D Elastic lower price increase D Elastic higher price decrease D lnelastic lower price decrease D lnelastic higher price increase D D D D D D D Calculating Elasticity The original price New price Original quantity demanded New quantity demanded H Price elasticity change in quantity demanded average quantity demanded change in priceaverage price Quantity in on the top H D Elasticity is a negative number but if absolute value of price elasticity is between 0 1 the demand is inelastic D If it is greater than 1 the demand is elastic D Using elasticity D H Price elasticity change in quantity demanded average quantity demanded change in priceaverage price D Quantity in on the too D D change in quantity demanded change in price elasticity D B using this we are able to calculate the quantity demand after the change of the price and the new revenue after the price change D D The elasticity changes as you move along the demand curve if the demand curve is a straight line The top part is elastic and the lower part is inelastic D The top part is more expansive then it39s more likely to be a bigger part of people s budget so it s more elastic D B Cross price elasticity of demand P185 B When we are talking about changing price of one goods affects the substitutes the cross price elasticity is positive B When we are talking about change price of complements the cross price elasticity is negative D D Elasticity of supply P190 Elasticity of supply change in quantity supplied average quantity supplied change in priceaverage price D Quantity in on the top As more time passes the elasticity becomes more elastic Income elasticity of demand P186 How does the quantity change when income changes Combining elasticity with tax imposed on demand and supply curves Percentage of any tax that will fall on the buyers Elasticity of supplyelasticity of supply elasticity of demand Percentage of any tax that will fall on the sellers Elasticity of demandelasticity of supply elasticity of demand the more elastic the supply is the more of the tax falls on the buyer the more elastic the demand is the more of the tax falls on the eller Exam 2 next Monday Chapter 56 using elasticity 7 Chapter The Economics of Healthcare In the US lllllllMllllllllllllllllllllllllllllll D Most people don39t pay for healthcare but insurance and their insurance company pays for the health care D Some people get insurance through their work 64 Some people get insurance through government 36 Through the market 10 Without insurance 16 Going without health care vs going without insurance In the US no one goes without health care people can always go to emergency room But emergency room only treat acute cases not required to treat chronic cases and it s not free D D Single payer system insurance from the government D In Canada people don t pay premium but pay taxes to the government The hospital is paid by the government but doctors are not a government s employees People get health insurance form the government D D Socialize Medicine health care from the government D In UK people don t pay premium but pay taxes to the government The hospital is government s hospital and doctors are government s employees D D Third party payer system P215 llllllll D In the US people pay for insurance then the insurances pay for doctor s service D Party consuming the product is not the party bene ts D D The principalAgent Problem B One party is acting on behalf of another party D Example Professor acting on behalf of the school management acting on behalf of firm s shareholders B One party is able to disobey what s required for them to do by their customers D D Economic information P213 D Asymmetric lnformationincomplete information B When one party to a transaction has less information than the other pa y D Example car dealers used cars D D The market for lemonsow quality used cars P213 D George Akerlof D Because the seller always has more information than the buyer the market can quotbreak downquot D The incomplete information causes the market for high quality used cars breaks down because the amount of money people are willing to pay for a used care is less than the market price of good used cars So every car dealers sell lemons instead D E Market function badly when information is incomplete market is more efficient when information is more complete D D Adverse Selection P213 B When a party to a transaction takes advantage of other party s lack of information D The hidden information U Bad customers or bad producers are more likely to be selected due to asymmetric information B When sellers have more information and can take advantage like taxi drivers D Hidden information for the insurance provider bad customers take advantage of the asymmetric information The insurance company don t know what bad habits their customers have Customers have bad or dangerous habits are more likely to buy insurance Risk Pooling P214 Way to reduce adverse selection in insurance States require driver to have insurances 2010 s healthcare reform requires all people to purchase insurance risk pooling ensures that insured population represents the overall population Not only bad customers purchase insurance Then insurance company has overall less chance to pay for the accidence of their customers D risk pooling ensures insurance companies are able to make pro ts D D Moral Hazard P214 llllllll D Actions one party takes after entering into transaction that take advantage of other party s lack of information D Customer change their behavior after being insured Customs become more careless after being insured People go to the doctor more often after buying health insurance Driving more reckless after buying insurance Coinsurance Copays customers pay some and insurance pay some Deductible customers pay for the rst certain P217 Many aspects of health care involves externality lf healthcare is left to the market the quantity if healthcare produced and demanded is too low Then the positive externality is too low No one will get a u shot and no others will not bene t form it D should the government be involved llllllllllllll Yes Public goods nonrival and nonexcludable P219 A u shot Rival and excludable So it doesn t qualify as a public good Healthcare is not public good But it s has some positive externality to the society So it s somewhere in between public and private goods llllllllllllllllll 36 od people get insurance form the government 51 of the tax spend on the 36 of them When the cost of healthcare increases the tax revenue are used to cover healthcare is going up then other spending will decrease or tax will increase D D What s making the costs of healthcare rise D m paper work not malpractice insurance unnecessary tests higher cost in emergency room D They play some role but no the key drivers D Reasons D 1cost disease D low productivity in service industries cause higher costs The more people take care of the patient the lower the productivity is D 2the population is aging D health care spending on people over age 65 is 6 times greater then young people with age between 18 to 24 D 3distorted economic incentives moral hazard P223 when people are insured they tend to go to the doctor more Affordable Care Act Obama care P226229 It is not socialized medicine It is not a singlepayer system Q a set of adjustments to our current third party payer system ACA of 2010 Individual Mandate Requires all individual to have insurance OR pay a ne The idea is risk pooling low income people will be offered tax credits to offset the cost of uying insurance they don39t have to buy insurance young people are able to stay with their parents until the age of 26 cheap insurance until 30 Preexisting conditions stops insurance companies form denying or charging more on coverage to people because of preexisting condition D if patient start to buy insurance when they find out they are diagnosed with some disease the amount of premium the patient pays is way less than the amount money the insurance company pays for the treatment Than the insurance companies are more likely to go out business D D Employer mandate llllllollllllllllllllllllllllllll D Require all rms have more than 200 people to offer insurance to employee D Require all rms have more than 50 people to offer insurance or pay a fee D Firms with less than 50 employees are not affected D D Create quotstate health exchangesquot D idea is bring together the buyers and sellers of insurance D Insurance company will compete for customers D U More people quali ed for Medicaid D Medicaid is governmentprovided insurance for lowerincome persons D People with incomes gt 2000000 will see some tax increase D D Lifetime maximum payout are prohibited D D The idea is to have more people insured and reduce the cost of healthcare D D READ P159 D Healthcare is not market based because there is no price for certain therapy D D Chapter 7 D Consumer behavior what we demand why we demand Utility The happiness satisfaction contentment from consuming Assumption people consume in such a way as to maximize their utility subject to how much they can afford Marginal Utility The addition utility you get from consuming 1 more unit of a thing the same thing The graph of marginal utility only go down Diminishing Marginal Utility P202 The second beer is always not as good as the rst one Total utility P202 Going up to a peak and start to go down Chapter 2 and 9 International trade D D D D D D D D D D D D D D D D D Trade de cit when there are more import than export The US import form China Canada Mexico and European Union The US export to Canada Mexico China and European Union Oil Less oil import in the US because the US became the largest oil roducer in 2014 Production possibility frontierPPF or PPC P39 All possible combinations of output that can be produced Like Levi s can produce some amount of jeans or some amount of jean jackets with some of it s input There are three options to produce all jeans all jean jackets or some of each D p D D D D D P43 PPC D the quantity of each goods are on each axis D U PPC can represent a rm or a entire country P48 D It represent the tradeoff the resources used on one production and another D It s the fact that one country is better on producing a certain goods and another country is better on producing another goods D So of they specialize the goods they are good at producing and trade then both counties end up better off people in the counties consume more than counties operate by themselves B Any point to the right of a country s PPF means quothaving morequot It more than the country can produce on it own The country is better off D D Terms of trade I S Using money as tool of trading 2 goods for 4 goods is the same term of trade as 2000 for 4000 When a country is better at both goods trading still make it better Comparative advantage P47 A country has a comparative advantage in the thing where the opportunity cost is lowest D The country should export the thing where the opportunity cost is lowest The country has the comparative advantage on this thing and the other country must have comparative advantage on the other goods D D D D off D D D Calculating Opportunity cost Country A Number produced of anumber produced of a Number produced of bnumber produced of a Country B Number produced of anumber produced of a Number produced of bnumber produced of a llllllllllllllllll Compare the opportunity cost who has the lower opportunity cost n which goods should trade out that goods llo Absolute Advantage P276 lllllllllllllllllllllllllllll lllllll Autarkydon t trade P277 Decided the term of trade Find the number falls in between the opportunity cost of the each ood of each country Find the common denominator and look for the number in between If the opportunity costs are 14 and 34 Then we nd 12 Then the term of trade would be 1 and 2 or 2 and 1 Who doesn39t like the trading Producer The looser from free trade Free trade produces net bene t 5 for both countries Policy that restrict trade P285 Tariffs Quotas Also known as barriers to trade Ta riffs Tariffs are simply taxes on imports politically strategy specific tariffs an amount of speci c Ad valorem tariffs the percentage of value The price increase the axes will increase Fun facts SmootHawley Taxes on older laborincentive industries imports clothing textiles shoes taxes should be put on products imported that compete with what produced in the country SmootHawley put taxes even on goods not produced in US which made the depression worse D B When tariffs is impose on imports P285 llllllllf 39Illlll D The international price is shifted up to the new price it s added on the tariffs imposed D the quantity of imports is reduced D the price consumer pays is higher D the price the producers within the country is higher D and the quantity supplied by domestic producers increase D D The area of the rectangle is the amount of the revenue that government earns by imposing the tariffs The width of the rectangle is the amount imported D D After free trade the consumer surplus increase dramatically the producer surplus decrease the economic surplus increase in total but the producer are worse off B after imposing the tariff the import price increase with the country producer are better off but it cause dead weight loss most economists don39t support this Quotas P286 Simply a numerical restriction on the quantity of a good that can be mported lll Impacts of quota Same as tariff in terms of higher prices being paid Only difference is tariff revenue becomes quota rent Rent in an economics class in not what you pay your landlord Rent is additional lmpose a quota on goods imported Price will increase until the quota ts the gap between the demand urve and supply curve by the domestic producers The steps of sample question 1take demand and supply solve them for Q 2make difference between them 30 3 nd the P that makes that happen Effects of tariffs and quotas are the same consumers are worse off domestic producers who compete with imports are made better off lllllllllllllllnllllllllllllllllll both create dead weight loss Argument in support of tariffs and quotas P293294 1saving jobs increase employment but the increasing price caused by tariffs and quotas hurts more people who are in the market of good competed by domestic producers and imports lllllllll D tariff increase costs to customers D 2protecting higher wages D 3protecting infant industry P293 D growing industry It will be competitive will become bigger Quota will protect them until them become strong D but we spends more time and effort keeping protection then receiving bene ts from the growing 4protecting national security Next exam is next Monday Chapter 2 9 11 and part of 12 Chapter 11 Firms Production is what rms do they take inputs and make output How much a rm can produce the supply side lllllllllllllll Inputs Fixed don t have to increase to increase output Variable do need to increase to increase output graph of total output P358 Production function relationship of the maximum output that can be produces with different combinations of inputs P356 D D D D D D Marginal product of labor P357 D The addition output a rm produces when it hires one more unit of inputabor D Marginal product change in production output change in input D D The law of diminishing marginal productivitydiminishing marginal returns P357 B When adding units of variable input to xed input total output will increase but the increase will get smaller D There are less thing for more labor to do Average product total outputquantity of input Quantity total output total product lllllll What is the right amount of inputs and outputs D D D Costs D 1Tota cost xed costs Variable costs B when the total cost increases the variable cost increases but the xed cost stay the same D 2Average total costATCtotal inputs total output P355 D 3the shape of the graph U shaped D 4marginal cost D the change in total costthe change in total output D the change in total cost when produce one more or one less P361 D the graph of the marginal cost is the one starts with going down and shots up P362 D 5Average Variable costs variable costtotal outputs D the shape of the curve is U shaped D D Formulas TC FC VC ATC TCQ AVC VCQ AFC FCQ MC CHANG IN CCHANG IN Q TC Q ATC llllll VC Q AVC Average variable cost is always lower that average total cost D D D D D Exam cover until Chapter 12 P395 D Relationship between MC and AVC and MP and AP If labor is the variable input W is wage MC WMP AVC WAP When the scale of the rm changes the xed input changes Cost curves would shifts Changing the xed input take the production form short run from long run In the long run every inputs will change which causes a new good amount to produce if xed input increase the productivity will increase if the scale of the rm expands too big the productivity of the production will decrease P368 Long run cost curve Economies of scale When MC and LRAC decrease when output increase lt s related to the scale of return Scale of return often resulted by large xed costs the average cost reduces because the cost is spread on more products which is on the left side of the minimum Chapter 12 D Market structure D What is market D The set of buyers and sellers whose actions affect the price of a product or service D D Market structures D 1 Monopoly D Single rm provides this goodservice no close substitutes no other providers D Example local water company D 2 Oligopoly D small number212 of rms provide this goodservice D competing with each other substitutes for each other the price is charge based on the price other rms in the oligopoly charge D Example over night delivery D 3 Monopolistic Competition D large number of rms provide these goods or services D substitutes for each other D Example fast food restaurants Service industry D 4 Perfect competition D Very large number of rms provide the same good or service D Easy to enter the market as a seller D All rms produce the same product D Identical product that rms have no control over the price the price is set in the over all market D There are so many substitutes B Any rm increase the selling price will not sell any thing D The demand curve of a single rm production in a perfect competition market is a horizontal line The price in the market stays the same The demand is perfect elastic P395 D B When the marginal cost is bigger than the price the pro t starts to go down D We look for the point where the marginal cost is smaller and closest to the price which is the point where the rm is making the most pro t D For this rm price marginal revenue P280 D Marginal revenueprice in the table the change in total revenuechange in Quantity D The change in total revenue by selling one mire good D Where the P come close to the MC D In the table and the intersection of two curves in the graph D P283 Pro t per unit P ATC the vertical distance between the intersection between P curve and MC curve and the ATC curve B Total unit Pro t per unit X number of pro ts which is the squire D D D D D D Perfect competition D For a perfect competition rm who has no control over price D To determine the output level to make the most pro t B When the marginal cost is bigger than the price the pro t starts to go down D We look for the point where the marginal cost is smaller and closest to the price which is the point where the rm is making the most pro t D Or if the company is losing pro t the lost comes smallest when the output level is closest to MC For this rm in perfect competition price marginal revenue P396 Marginal revenue the change in total revenuechange in Quantity The change in total revenue by selling one more good In the case of perfect competition P never change so P MR In the table and the intersection of two curves in the graph Pro t per unit P ATC the vertical distance between the D D D D D D D Where the PMR come close to the MC P397 D D D intersection between P curve and MC curve and the ATC curve B D Total unit Pro t per unit number of pro ts D The area of the rectangle D B When a rm is losing pro t due to market price decreasing P401 B When P is above AVC the rm keeps producing B When P drops down AVC the rm should stop the point intersects by P and AVC is called the shut down point D D The MC curve is the competitive rm s supply curve P405 D The shift down of the MC is a right shift of the supply curve B D In the perfect competition market if there is a pro t more and more producers will enter the market and compete the pro t away the supply curve shift right the market price decreases until when P ATC MC no pro t per unit then no pro t D D Zero pro t when pro t is quot0 D In economics we assume the cost calculations contain a reasonable pro t D Zero pro ts mean zero excess pro ts the rm can still run with out those excess pro ts B When P ATC MC P401 D D D D D D equilibrium means rm is breaking even earning no pro ts In a perfect competition market P MC gt ATC make most pro t P gt ATC make pro t P ATC break even no pro t P lt ATC the loss increase P lt AVC stop producing Market and competition Get the government out of the marked Adam Smith There are reason to have the government involved Normal marketexcept perfect competition In the table P varies by a and MR will vary by 2a The Marginal Revenue will go down twice as many as the price Marginal Revenue curve starts at the same point with and is always below the demand curve Anything changes the demand curve will change the MR curveP428 D P439 When MR MC the pro ts are maximized D which is the same concept as when P MC in the perfect competitive market There is no MR in the perfect competitive market because the price stays the same D on the graph the price when MR MC is the price a rm should charge when a rm is making the most pro t The quantity when selling at this price is the level of output the rm should produce to make the most pro ts D the pro t per unit is still P ATC lllllllllllllllllllllllllllllll D Pro ts pro t per unit Q U Firms don t necessary make the most pro ts when the pro t per unit is biggest D Firms should maximize their pro ts but not pro t per unit D D Chapter 13 D Monopolistic Competition D Many rms D Selling products that are substitutes for each other H Easy to enter this market as a seller D Example fast food D B When there is another rm enter the monopolistic competitive market the demand curve of the old rm gets atter and more to the leftshift down D more substitute causes the demand more elastic atter the demand curve will get D D In the short run PCMC earn pro ts pro ts attracts new rms D as rms enter P goes down then PATCMCMR in PC PATCgtMCMR in MC The rms break even earning no pro t P433 graph D in monopolistic competition when P ATC ATC is not minimized there is some inef ciency it s called excess capacity P443 D D Ef ciency of MCM D Not ef cient D Excess capacity D PgtMC D The more similar products are among rms the more close P is to MC D Different rm wants to make their product different and better to increase their price for a reason D D D D E Market power D The ability to change a P gt MC is known as market power E Market power is inversely related to elasticity B When the products get more inelastic the demand curve of the product get atter The rm produces inelastic product has less market power D Oligopoly Small number of rms 2 12 dif cult to enter the market similar or differentiated product interdependence rms in this market makes their decision base on what other rms will do like price or product So few rms Barriers to entry economies of scale P453 ega barriers like patents P454 ownership of key input to production P454 Game Theory Model the behavior and interdependence of rms as a game Firm 1 and rm 2 make decision at the same time if they take discount on the price without knowing what s the decision of the other rm 2X2 game both rms end up better off if they believe other rm will discount then they discount But they are worse off compares to if both of them don39t discount Both rms take the risk of discounting Prisoner s Dilemma P456 2 bank robbers are kept apart to separate jail cells confess or nor confess both prisoner are made worse off than not confess because they can39t talk to each other The opposite of the game theory model Example hoarding drugs Nash Equilibrium A situation when a player make the best decision or choose the best strategy A game can has more than one Nash equilibrium A Nash equilibrium is the strategy makes both rms better off there is no reason for them to change strategy anymore Dominated strategy A strategy that a rm never plays It can be eliminated Dominant strategy A strategy that a rm always play Like to confess Exam 4 on next Monday Chapter 12 13 14 and part of 15 P477 493 and P498 Sequential games The game tree The branches of the game tree represent the boxes in the game box Which rm take actions rst is important which rm take actions rst is out on the left side if the game tree Depends on the matching branches and boxes in the game box we can use data from the box to nd out the payoff to solve the game tree we start from the right start to analyze the tree form the rm who didn39t move rm different rm goes rst will give a different Nash equilibrium First mover advantage Which rm have advantage to move rst it s unusual to have two rms end up having rst mover advantage normay second moving rm will have second moving advantage Oligopoly Bertrand model Cournot model Dominant rm model Cartel model Group of rms that acts as a single rm regarding decisions on pricing and output Price collusion P469 Agreement that rms set price at a same level lllegal in the US If both rms in the oligopoly agree secretly to both charge the same high prices both rms will end up in the lower right box in the game box Then in order to make more pro ts both rms will secretly lower their price to intend to end up better of and make their competitor worse off If both rms do so they will be back to end up in the up left box Monopoly A single rm provide the typical good Not substitute Is any rm really a monopoly Only seller for a product that has no close substitutes Close enough to compete away pro ts For a monopoly the demand curve for the market for the good is the demand curve of the rm Since there is only one rm in the monopoly the pro t the rm is making will stay the same in the long run because no one is coming into the market to compete away the pro t The only rm in the market will make the best decision to maintain the highest pro ts D Barriers to entry P479 D 1economy of scale cheaper for one rm to serve a entire market than a lot of little rm D 2egal barriers like patents D 3contro over the input D D D D Welfare losses of Monopoly Inef cient create dead weight loss when government intervention happens to Monopoly P is set to equal to MC B when the rm in the monopoly makes its most pro t MC MR it creates dead weight loss D D t We are able to calculate the consumer surplus using data from the able B using P when Q 0 and P when Q is the level to produce to gure out the height and the waist is the level of output which Q To calculate the dead weight loss using the difference of P and MC to determine the ef ciency loss P492 any rm has a downward sloping demand curve undergoing an ef ciency loss llllllll Market power when demand is inelasticsteep demand curve MP is large when demand is elastic MP is small when the P a rm charging is higher than MC the rm has MP whie MP is getting larger the number of substitutes change from many to less the property of the good or service changes from luxury to necessity the elasticity of demand changes from elastic to inelastic llllllll Lerner Index P MCP 1elasticity Natural monopoly P498 Cheaper for one rm to serve a entire market than a lot of little rm Government steps in to regulate the price which normally is setting P MC D But for a natural monopoly of P is set to equal MC the natural monopoly is suffering losses so government set the P ATC in order to keep the natural monopoly from going out of business llllllllll 7Chapter 16 Price Strategy Law of one price Identical products should sell for same price everywhere P508 Only if the transaction costs are llllllllll Arbitrage P508 D Buying with a low price in one place and sell it to a higher pricing place D don t last forever due to price affected by demand and supply of the good D H Price discrimination D Charging different prices to two different group of people for the same product service B if the goods have different cost and different quality that s not price discrimination D 3 necessary conditions for price discrimination P511 market power consumers must have different willingness to pay different price rms must be able to separate customer in to group and prevent reselling D D D D D D 3 forms of price discrimination B First degree perfect price discrimination customer is charged the price they are willing to pay E Second degree the price of one unit depends on how many unit is sold D Third degree customers are split into different groups and each charged a different price D senior discount student ticket plane ticket booked early D different groups of people have different elasticity of demand Instate students demand is more elastic than outstate student B when demand is more inelastic the price is charged higher D D Maximizing pro ts using third degree price discrimination D To determine pricing output level to maximize the pro ts P513 D eve of output in each market where MR in market A MR in market B MC D charge a high price in the inelastic market D D Cost Plus Pricing P520 D 1take the average cost at the same level of output D 2 place a mark up D 3one way to spread xedcosts over many parts of revenues D 4a bad idea D ineastic market is affected less by the mark up D D twopart tariff D pays one initial price to enter and another price to buy goods and services per unit D admission to amusement and extra pay for each amusement device For twopart tariff structure the total happiness customers get are the total amount of money the customer pays plus the customer surplus D If rice lowered in a twotariff structure P523 D the consumer surplus will increase D the quantity customers will purchase will increase D the lower the price the more products will be sold the more pro ts will be made until the price is lowered to the marginal cost D which is for a twotariff structure market the entry fee should be charged to be the consumer surplus when P MC D when P MC the P is the per round fee change the entry fee is the consumer surplus D D Chapter 10 D The start the of ECON 520 D Utility the happiness or satisfaction you receive from buying one more goods D Utility is what drives demand D assume that people consume in such a way as to maximize their utility subject to how much they can afford D D Marginal Utility P307 D The addition utility you get from consuming 1 more unit of the same thing the same product D The graph of marginal utility only goes down Diminishing Marginal Utility The second beer is always not as good as the rst one The marginal utility will always decrease Total utility P308 Going up to a peak and start to go down llllllllllllll As long as the marginal utility is positive you are get some sort of satisfaction Then how much is the satisfaction worth to you D D D D Utility per dollar the marginal utility the price D We want to have the highest utility per dollar B When the utility of a thing increase like when you haven t had a steak for a long time the utility per dollar would increase as well D D To maximize the utility to buy the thing that gives you the highest D If two things that give you the same MUP buy both if you can afford When the price of goods changes demand changed along the curve because people maximum their utility D Indifference Curves Tool that economists use to analyze choices made by individuals rms and country Set of combinations of good with a same certain utility straight line connects all the dots of combinations llljllllllll no price on the indifference curve all the combinations on the graph give the same utility Marginal rate of substitution People are willing to give up one product because of getting a different product The slope of sections on the indifference curve varies section to section Margina rate of substitution changes depends on where it is on the graph It tells about people s preferences Utility function Utility of good A of good B substitutes Utility of good A X of good B complementary utiity functions are from market research and data utiity functions produce the indifference curves Many indifference curves make a indifference map the curve locates higher means more utility utility doesn t change on the curve we assume that the more is better indifference curve can t cross each other because when the two curve across each other the intersection isn t showing the two curves have same utility Budget constraints Spend budget to different combination that people can afford everything below the budget line is opportunity set which means what people can afford If we put both of the indifference curve and the budget constraints on the same graph it shows both what customers like and what they can afford so depends on the curve we are able to nd a point where gives you the most utility and blow or touches the budget line When price of good B drops you demand more of good B and less good A then they are substitutes Elasticity The formulas calculating elasticity Change in priceaverage price change in quantity demandedaverage quantity demanded elasticity Final Exam May 11th 1030am Entire course chapter 1610 appendix 10 17 Chapter 17 The market for labor The market for labor is like a market for anything else lllllllllllll Demand for labor is derived demand D If no demand for the thing that labors produce there is nor demand for labor demand for labor is a downwards sloping curve productivity affect the demand curve B D D I marginal revenue product P535 D the change in total revenue divided by the change in quantity of labor D the change in total revenue as a result of hiring one more worker D it measures how much a labor worth for a company U Need to be differ from marginal product and marginal revenue D it sets a upper limit to the wage an employer would pay a new labor Employer should keep hiring as long as the MRP of each labor is higher than the wage level D the demand curve is the marginal revenue product curve for labor P535 D D If we are talking about the perfect competition D MRP MP X P D Because P doesn t change in the perfect competition market D it doesn t apply to other market structures because the price changes D D What makes the demand curve for labor shift P537 D 1chang in human capital D higher education level D 2change in technology D better tool to produce D 3change in the price of product produced by labors D 4change in the quantity of other inputs D 5change in the number if rms in the market D 124 can be category together to be change in the productivity of labor when labors become more productive the MRP curve the demand urve for labor is shifted to the right Opportunity cost Pay more for labor to work for longer extra hours Opportunity cost f leisure time become more valuable when the wage payed increases price is the wage the curve slops up D c D D The supply of labor P538 D D o D D D Backwardbending labor supply curve P539 B when the wage is high enough since labors are earning enough the amount of labor force they supply will decrease which is the quantity D D D D D What makes the labor supply curve shifts P539 1increase population immigrants more number of labors enter the market the total amount of labor increase thus the number of inputs increase which shifts the demand curve to the right which increase the wage of high skilled workers D 2changing demographics D 3changing alternatives explaining difference in wages P554 abors have different market value they produce different MRP some labors are more productive thus their market value is higher The supply of labor P538 Opportunity cost Pay more for labor to work for longer extra hours Opportunity cost of leisure time become more valuable when the wage payed increases price is the wage the curve slops up D D D Backwardbending labor supply curve P539 B when the wage is high enough since labors are earning enough the amount of labor force they supply will decrease which is the quantity D D D D D What makes the labor supply curve shifts P539 1increase population immigrants more number of labors enter the market the total amount of labor increase thus the number of inputs increase which shifts the demand curve to the right which increase the wage of high skilled workers D 2changing demographics D 3changing alternatives D D explaining difference in wages P554 D abors have different market value they produce D different MRP D some labors are more productive thus their market value is higher D discrimination P548 D differences in educationexperimentpreference in jobsgenderrace D women are more likely to leave the work force due to having children and have less labor force supplied D
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