1. The seller’s problem has three parts: production, costs, and revenues
2. An optimizing seller makes decisions at the margin
3. The supply curve reflects a willingness to sell a good or service at various price levels 4. Producer surplus is the difference between the market price and the marginal cost curve 5. Sellers enter and exit markets based on profit opportunities
● Total revenue = Price x Quantity Sold
● In a perfectly competitive market, firms have no control over price and are price takers and can only decide the quantity they produce
General rule for firms: choose to produce where MC = MR
Profits = Total revenue Total cost
Total cost = ATC x Q
Profit = (P x Q) (ATC x Q) = (P ATC) x Q If you want to learn more check out What is the difference between positive and negative punishment?
Price Elasticity of Demand = (% change Q) / (% change P)
1. The invisible hand efficiently allocates goods and services to buyers and sellers 2. The invisible hand leads to efficient production within an industry
3. The invisible hand allocates resources efficiently across industries
4. Prices direct the invisible hand
5. There are tradeoffs between making the economic pie as big as possible and dividing the pieces equally
Selfinterest ≠ selfish
Maximum well-being ≠ fairness
We are examining how efficient markets lead to the maximum level of wellbeing
Efficiency getting the most out of scarce resources Don't forget about the age old question of Where was muhammad born?
● Making the pie as big as possible
We are ignoring fairness (equity) currently
1. The production possibilities curve tells us how much we can produce from existing resources and technology
2. The basis for trade is comparative advantage
3. Specialization is based on comparative, not absolute, advantage
4. There are winners and losers in trading states and countries
5. The winners from trade can more than compensate the losers
6. Important arguments against free trade exist
Production Possibilities Curve
● Underlying motivation of trade we’re all better off by trading because trade allows total production to be maximized
● Plot this with a production possibilities curve: relationship between max production of one good for a given level of production of another good
○ Points on PPC are efficient and attainable
○ Points inside PPC are attainable but inefficient
○ Points outside PPC are unattainable
● PPC is similar to budget constraint concept tells us how much we can produce from existing resources If you want to learn more check out Who is adolf hitler?
● Opportunity Cost = slope = |loss
1. There are important cases in which free markets fail to maximize social surplus 2. Three such cases are: externalities, public goods, and common pool resources 3. One common link among these three examples is that there is a difference between the private benefits and costs and the social benefits and costs If you want to learn more check out People tend to believe that a statement is true or valid simply because it has been repeated repeatedly. what is it?
If you want to learn more check out What is the meaning of mcdonaldization?
We also discuss several other topics like Motor (efferent) division means what?
4. Government can play a role in improving market outcomes in such cases
1. In the United States, governments tax citizens and corporations to correct market failures and externalities, raise revenues, redistribute funds, and finance operations 2. Through direct regulation and price controls, governments can intervene to influence market outcomes
3. Although government intervention sometimes creates inefficiencies, it often results in improved social wellbeing
4. Weighing the tradeoffs between equity and efficiency is one task of an economist 5. It’s up to individuals to decide when government intervention makes the most sense