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BROWN U / Economics / ECON 0110 / What are the type of goods?

What are the type of goods?

What are the type of goods?

Description

School: Brown University
Department: Economics
Course: Principles of Economics I
Professor: Rachel friedberg
Term: Fall 2018
Tags: Economics
Cost: 50
Name: ECON 110 Midterm #2 Study Guide
Description: These notes cover Chapters 9-18. I included points from lectures and the textbook (some of which she did not cover thoroughly).
Uploaded: 10/20/2018
21 Pages 4 Views 17 Unlocks
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Chapter 9: International Trade 


What are the type of goods?



Review 

Main Topics 

● Equilibrium without Trade

● Exporting Country

● Importing Country

● Tariffs

● Quotas

● Arguments for Restricting Trade

Equilibrium Without Trade 

1. Market consists solely of the country’s buyers and sellers

2. Domestic price adjusts to balance the domestic demand and supply of the good

Exporting Country 

● Country will export when they have the Comparative Advantage ● Comparative Advantage → if the world price of the good is higher than the domestic price of the good, the country has a comparative advantage in producing/selling this good


What are the arguments for restricting trade?



○ The country will EXPORT this good.

● The domestic price of the good will increase up to the world price ○ Producers sell at higher price → better off

○ Consumers buy at higher price → worse off

Don't forget about the age old question of what is the difference between Adenylate Cyclase and Phospholipase C?

Before Country Exports

- Consumer Surplus → A + B

- Producer Surplus → C

- Total Surplus → A + B + C

When Country Exports

- Consumer Surplus → A (Loss = B)

- Producer Surplus → B + C + D (Gain = B + D)

- Total Surplus → A + B+ C + D (Gain = D)


Social value includes the private value of the good.



We also discuss several other topics like what is population regression?

Total surplus increases when the country EXPORTS, so the country is better off as a whole (economic well-being rises). If you want to learn more check out What is the Missouri Compromise?
Don't forget about the age old question of Who is Lauren Olamina?

Importing Country 

● Country will export when they have a Comparative Disadvantage ● Comparative Disadvantage → if the world price of the good is lower than the domestic price, the country has a comparative disadvantage in producing/selling this good

○ The country will IMPORT this good.

● The domestic price of the good will decrease to the world price

○ Producers sell at lower price → worse off

○ Consumers buy at lower price → better off

Before Country Imports

- Consumer Surplus → A

- Producer Surplus → B + C

- Total Surplus → A + B + C

When Country Imports

- Consumer Surplus → A + B + D (Gain = B + D)

- Producer Surplus → C (Loss= B)

- Total Surplus → A + B + C + D (Gain = D)

Total surplus increases when the country IMPORTS, so the country is better off as a whole. (economic well-being rises) Don't forget about the age old question of What is ethnography?

Tariffs 

● A tax on imported goods

● A tariff rises the price of the imported good above the world price by the amount of the tariff

○ New price = world price + tariff

● Producers sell at higher price → better off

● Consumers buy at higher price → worse off

● Government makes revenue → but there is some deadweight loss If you want to learn more check out what homogeneous mixture means?

Before Tariff

- Consumer Surplus → A + B + C + D + E + F

- Producer Surplus → G

- Government Revenue → none

- Total Surplus → A + B + C + D + E + F + G

- Deadweight Loss → none

After Tariff

- Consumer Surplus → A + B (Loss = C + D + E + F)

- Producer Surplus → C + G (Gain = C)

- Government Revenue → E (Gain = E)

- Total Surplus → A + B + C + G (Loss = D + F)

- Deadweight Loss → D + F

Quotas 

● Restricts national trade by putting limits on how much of a good a country can import

○ Reduces quantity of imports

○ Raises domestic price of the good

○ Decreases the welfare of domestic consumers

○ Increases the welfare of domestic producers

○ Causes deadweight loss

● Does not bring any revenue for the government

Arguments for Restricting Trade 

● The Jobs Argument

○ Trade with other countries destroys domestic jobs

○ Free trade decreases price of good → reduces quantity produced → reduces employment for the industry of that good

● The National Security Argument

○ Free trade allows importing countries to become dependent on other countries for a specific good

○ If war breaks out → foreign supply would be interrupted → importing countries are unable to produce as much as they were importing

● The Infant Industry Argument

○ New industries argue for temporary trade restrictions in order to help them get started

○ Free trade allows consumers to import goods from other countries, so the new domestic industry will not grow if people are buying from someone else

● The Unfair Competition Argument

○ Not all countries play by the same rules

○ Some governments are giving industries subsidies → allows them to produce more of the good at a cheaper cost to them

○ Government laws and regulations are different in every country ■ might help/hurt countries in producing that good

● The Protection-as-a-Bargaining-Chip Argument

○ Trade restrictions are useful when bargaining with trade partners ○ E.g. threatening to impose a tariff unless the other country removes their tariff

○ Problem: the threat might not work

■ Might lose potential trade affairs

Chapter 10: Externalities 

Review 

Main Topics 

● Negative Externalities

● Positive Externalities

● Government Solutions to Externalities

● The Coase Theorem

Negative Externalities 

● Negative externalities cause the cost to society of producing the good to be greater than the cost to producers of the good.

○ Example: pollution → affects health of society

● Social Cost: includes the private costs of the good + the costs to the bystanders who are affected by the negative externality (e.g. pollution)

● Social cost curve is above the SUPPLY curve because it takes into account the external costs imposed on society by the production of the good

. ● When there is negative externality, the social cost exceeds the private cost. The Optimal Quantity is now smaller than the Equilibrium Quantity.

Internalizing the Externality 

Makes sure buyers and sellers take into account the external effects of the production of the good.

● How can we achieve the optimal outcome?

○ Tax producers for each unit of the good produced

● Tax should reflect the external cost of producing the good

○ New supply curve would shift upward by the amount of the tax ○ Supply curve after tax should coincide with the social cost curve

Positive Externalities 

● Positive externalities yield benefits to the society from producing the good. ○ Example: Education → informed voters (better gov.), lower crime rates, technological advances (higher productivity and wages)

● Social Value: includes the private value of the good + the external benefits to society

● Social value curve is above the DEMAND curve because it takes into account the external benefits on society.

● When there is a positive externality, the social value exceeds the private value. The Optimal Quantity is now larger than the Equilibrium Quantity.

Internalizing the Externality 

Government solutions in order for the production of the good to increase up to the amount that is socially desirable.

● How can we achieve the optimal outcome?

○ Subsidize the production of the good (e.g. public schools subsidized by the government)

● Subsidy should reflect the external benefits of the good

○ New demand curve will shift upward by the amount of the subsidy ○ Demand curve after subsidy should coincide with the social value curve.

Government Solutions 

● Command-and-Control Policies

○ Regulate behavior directly → requiring or forbidding certain behaviors ○ Example: Environmental Protection Agency (EPA) dictates a maximum level of pollution that a factory may emit

● Market-Based Policies

○ Provide incentives so that private decision makers will choose to solve the problem on their own

○ Corrective Taxes & Subsidies: the government taxes activities that produce negative externalities (corrective taxes) and subsidies activities that produce positive activities

○ Tradable Pollution Permits: EPA requires factories to reduce pollution to a limited amount per year. (e.g. 300 tons a year). Firms might buy or sell pollution permits from/to one another.

○ Firms who can reduce pollution as a low cost will SELL permits ○ Firms who can only reduce pollution at a high cost will BUY permits

The Coase Theorem 

● If private parties can bargain costlessly over the allocation of resources, they can solve the problem of externalities on their own.

○ Government regulation NOT NEEDED in order to solve the externalities problem ● Furthermore, regardless of how legal rights are distributed, the parties will reach the efficient allocation.

Chapter 11: Public Goods and Common Resources 

Review 

Main Topics 

● Types of Goods

● The Free Rider Problem / Gov. Solutions to Problem

● The Tragedy of the Commons / Gov. Solution to Problem

Types of Goods 

● Excludable

○ People can be prevented from using the good

● Rival

○ One person’s use of the good reduces another person’s ability to use it ● Private Goods

○ Both excludable and rival in consumption

○ You don’t get the good unless you pay for it, and once you have it, you’re the only person who benefits from it

○ Example: ice cream cone → can prevent someone from eating it if you don’t give it to them (excludable), someone else can’t eat the same ice cream cone you are eating (rival)

● Public Goods

○ Neither excludable or rival in consumption

○ People cannot be prevented from using a private good

○ One person’s use of a public good does not reduce another’s ability to use it

○ Example: fire alarm → everyone can hear it (not excludable) and everyone gets the benefit of the warning (not rival)

● Common Resources

○ Rival in consumption but not excludable

○ Example: fishing → when one fisherman catches a fish, there are less fish for others to catch (rival), but you can’t prevent others from fishing (not excludable)

● Club Goods

○ Excludable but not rival in consumption

○ Example: Netflix subscription → no one else can watch movies from your account (excludable), but you watching movies does not prevent others from watching movies on their account (not rival)

The Free-Rider Problem 

● Free-rider → A person who receives the benefit of the good without paying the cost for the good

○ Example: firework show → people will not buy a ticket for the show because they can watch the fireworks from outside for free

● Because public goods are not excludable, the free-rider problem prevents the private market from providing the efficient outcome, so government must provide them

● Government Solution

○ Taxes

○ Example: government can raise everyone’s taxes by $2 in order to pay someone to put on a “free” firework show

The Tragedy of the Commons Problem 

● Tragedy of the Commons arises because of an externality. Once a good is provided, there is no control on how much of it people use.

● When one person uses a common resource, they diminish other people’s enjoyment of it.

● Common Goods are not excludable therefore people can use however much of it that they want to, reducing the quality / quantity of the good

● Government Solution

○ Regulation taxes

○ Reduce consumption of the common resource

■ Can sometimes turn common goods into private goods

Chapter 13: The Costs of Production 

Review 

Main Topics 

● Costs

● Production Function

● Total-Cost Curve

● Measures of Cost

● Costs in the Short Run

● Costs in the Long Run

Key Terms 

● Total Revenue: the amount that the firm receives for the sale of its output ○ The quantity of the output produced by the firm multiplied by the price at which it sells its output

■ TR = Q x P

● Total Cost: the amount that the firm pays to buy inputs

○ The sum of the firm’s explicit and implicit costs

● Profit: a firm’s total revenue - its total costs

○ Accounting Profit: total revenue - explicit costs

○ Economic Profit: total revenue- total costs

Costs 

● Explicit Costs: input costs that require an outlay of money by the firm ○ Examples: raw materials, worker’s wages, equipment

● Implicit Costs: input costs that do not require a cost outlay by the firm ○ Examples: foregone earnings, foregone interests

Production Function 

● The relationship between the quantity of inputs (number of workers) and the quantity of outputs (amount of the good produced)

● Production function gets flatter as the quantity of inputs increases because of Diminishing Marginal Product.

○ The increase in the quantity of output obtained from an additional unit of that input.

○ As the number of inputs increase→ the marginal product declines

ΔQ

○ MP = > 0 ΔL 

ΔMP 

○ DMP = < 0 ΔL 

Example: Caroline’s Cookie Factory

Total-Cost Curve 

● The relationship between the quantity produced and the total cost ● Total-cost curve gets steeper as the amount produced rises because producing more outputs means there are more costs involved (e.g. paying more workers) ○ Also due to the Diminishing Marginal Product

■ As more workers are hired, each one adds less to the production

and increases the costs

Measure of Cost 

1) Fixed Costs (FC)

○ Costs that do not vary with the quantity of output produced

○ Incurred even if the firm produces no outputs

■ Ex: the rent paid for the factory

■ Fixed cost goes down as the quantity produced increases

2) Variable Costs (VC)

○ Costs that do vary with the quantity of output produced

■ Ex: workers, supplies

■ Cost goes up as the quantity produced increases

3) Total Costs (TC)

○ TC = FC + VC

● Average Fixed Cost

○ The fixed cost divided by the quantity of output

FC 

○ AFC = Q 

● Average Variable Cost

○ The variable cost divided by the quantity of output

V C 

○ AVC = Q 

● Average Total Cost

○ The total cost divided by the quantity of output

○ ATC = QTC 

○ Tells us the cost of the typical unit of output, but does not tell us how

much total cost will change as the firm alters its level of production

● Marginal Cost

○ The change in total cost as quantity of output increases from one level to another

ΔTC 

○ MC = ΔQ 

○ Tells us the increase in total cost that arises from producing an additional level of output

Example: Conrad’s Coffee Shop

Three Properties to Remember

● Marginal cost eventually rises with the quantity of output

● The average-total-cost curve is U-shaped

● The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.

Costs in the Short-Run 

● Companies can’t increase the size of their factories over night

● Only way firms can increase production in the short run is to hire more workers ○ Cost of the factories is a fixed cost in the short run

Costs in the Long-Run 

● Over a period of year, companies can expand their factories to increase

production

○ Cost of the factories is a variable cost in the long run

Chapter 14: Firms in Competitive Markets 

Review 

Main Topics 

● Competitive Market

● Revenue

● Marginal Cost Curve

● Short-run Shut Down vs Long-run Exit

● Short-run Market Supply vs Long-run Market Supply

● Measuring Profit

Competitive Market 

● Characteristics of a competitive market:

○ Many buyers and sellers

○ Goods offered by the sellers are largely the same (identical products) ○ Free entry or exit to the market

● Actions of any single buyer or seller in the market has very little impact on the market price

● Buyers and sellers are “Price Takers” → take the price as given

The Revenue of a Competitive Firm 

● Total Revenue

○ Price of the good multiplied the the quantity produced

■ TR = P x Q

● Average Revenue

○ Total revenue divided by the amount of output

■ AR = QTR 

○ Tells us how much revenue a firm receives for the typical unit sold ■ Average revue = the price of the good

● Marginal Revenue

○ Change in total revenue from the sale of each additional unit of output ΔTR 

■ MR = ΔQ 

○ “When Q rises by one unit, total revenue rises by P dollars”

■ marginal revenue = the price of the good

Example: Vacas Family Dairy Farm (Production of Milk)

Marginal Cost Curve 

● Marginal Cost is increasing → bc of diminishing marginal product ● Crosses the Average-Total-Cost curve at it’s minimum point ● Marginal Cost > Marginal Revenue → decrease output

● Marginal Cost < Marginal Revenue → increase output

● Marginal Revenue = Marginal Cost → profit-maximizing level

● Marginal Cost curve determines the quantity of the good the firm is willing to supply

○ Marginal Cost curve = competitive firm’s Supply Curve

Short-run Shut Down 

● Short-run decision not to produce anything during a specific period of time ○ Due to current market conditions

● Firm that shuts down temporarily still has to pay its fixed costs ○ Referred to as “sunk costs”

● A firm will stay in business as long as it can cover its variable costs ● Shut down if

○ TR < VC

○ P < AVC

Long-Run Exit 

● Firm’s decision to leave the market

● If the firm exits → will save variable AND fixed costs

● Firm exits the market if the revenue it would get from producing is less than its total cost

● Exit if:

○ TR < TC

○ P < ATC

Measuring Profit 

● Profit = Revenue - Cost

○ = (P x Q) - (ATC x Q)

○ = (P - ATC) x Q

● Profit is the area between P and ATC

● Losses are the are between MC and ATC

Short-run Market Supply 

● Number of firms in the market is fixed

● Supply curve reflects the individual firms’ marginal cost curves Long-run Market Supply 

● Firms are able to enter and exit the market

● When firms enter → quantity supplied increases → prices & profits decrease

● When firms exit → quantity supplied decreases → prices & profits increase ● At the end of the entry and exit process, firms that remain in the market must be making zero economic profit

● Entry and exit process ends when price and average total cost are equal ○ Enter → Price > ATC

○ Exit → Price < ATC

● Long-run supply curve is horizontal at the minimum of ATC

Chapter 15: Monopoly 

Review 

Main Topics 

● Monopoly

● Barriers to Entry

● Revenue & Profit

● Efficiency

● Price Discrimination

● Public Policies

Monopoly 

● One seller → decides the price of the good (relatively high)

● No close substitutes

● Barriers to entry → other firms cannot enter the market & compete

Barriers to Entry 

● Monopoly Resources:

○ A key resource required for production is owned by a single firm ○ Examples: one oil well, diamond mine, etc.

● Government Regulation:

○ The government gives a single firm the exclusive right to produce some good or service

○ Examples: Book copyrights, patents

● The Production Process:

○ A single firm can produce output at a lower cost than can a larger number of firms

○ When more firms enter, their ATC rises which each level of output, in a

monopoly → more output decreases ATC

○ Examples: high fixed costs → water, electricity, gas

Example: A Monopoly’s Total, Average, and Marginal Revenue

Revenue 

● Selling more means reducing the price of all units, therefore marginal revenue is always below the price of the good.

ΔTR 

○ MR = ΔQ 

● Average revenue always equals the price of the good.

○ AR = QTR 

Profit 

● Maximizes profit at the quantity where the marginal revenue = the marginal cost. ● Use the demand curve to find the highest price that consumers are willing to pay for that quantity

● When MC < MR → can increase profit by producing more output

● If MC > MR → can increase profit by producing less output

● P > MR = MC

● Price - ATC = the Monopolist’s profit

Efficiency 

● The socially efficient quantity is where the demand curve and the marginal-cost curve intersect.

● Quantity produced & sold by a monopoly is below the socially efficient level ○ Deadweight loss

Price Discrimination 

● Sell good at different prices to different consumers

● Can restore efficiency

○ Sell at higher price for those willing to pay more

○ Sell at lower price (but still above MC) for those willing to pay less ○ Multiple prices → more profit → NO consumer surplus

Public Policies 

● Anti-Trust Laws

○ Preserve competition

○ (break up monopolies, prevent mergers)

● Regulation

○ Government regulates utility rates (water, electricity, etc.) but forcing P = MC means negative profits. So government must subsidize the firms. (...but taxes also involve deadweight loss)

○ Government regulates the prices of the company

● Public Ownership

○ Government can run the monopoly itself

○ Inefficient: bureaucrats have no incentive to cut costs

Chapter 17: Oligopoly 

Review 

Main Topics 

● Oligopoly

● Equilibrium

● Game Theory

Oligopoly

● Small group of sellers

● Similar products

● One firm’s actions affect the other firms

○ Each decides how much to produce

● As more firms enter oligopoly → more like a competitive market Example: Jack & Jill’s Water Production

Equilibrium 

● Nash Equilibrium: situation in which economic actors interacting with one another choose their best strategy given the strategies that the others have chosen

○ Neither of the firms has an incentive to produce more or less because then they will lose profit

● Firms in an oligopoly produce a quantity greater than a monopoly but less than that of perfect competition.

● Competitive Price < Oligopoly price < Monopoly Price

Game Theory 

● Study of how people behave in strategic situations

○ Take into consideration how others might respond to your decisions ● Dominant Strategy: most payoff regardless of what the other person might do ● Oligopolists “play a game” in trying to reach the monopoly outcome

○ Firms agree to a specific quantity of output to keep price & profit high ○ Each decides if they are going to cooperate and live up to the agreement or “cheat” and produce more than the agreed output

Example: Jack & Jill Water Production (Cont.)

Chapter 18: The Markets for the Factors of Production 

Review 

Main Topics 

● Production Function

● Profit- Maximization

● Shifts in the Labor-Demand Curve & Labor-Supply Curve

● Equilibrium

● Other Factors of Production

Production Function 

● Describes the relationship between the quantity of inputs used and the quantity

of outputs produced

○ Input → labor (# of workers)

○ Output → quantity of the good

Example: Apple Producer

Diminishing Marginal Product → as the # of workers increases, the marginal product of labor declines

Value of the Marginal Product → marginal product of the input multiplied by the

market price of the outcome

- The extra revenue a firm gets from hiring an additional worker

Profit Maximizing

● Hire workers up to the point where the value of the marginal product of labor EQUALS the wage.

● Above this level of employment → VMPL < Wage

○ Unprofitable

● Below this level of employment → VMPL > wage

○ Hiring another worker increases profit

Shifts in Labor-Demand Curve 

● Output Price

○ When output price changes the value of the marginal product changes so labor-demand shifts

○ Increase in price → raises VMPL → increases labor-demand

○ Decrease in price → decrease in the VMPL → decrease in labor-demand ● Technological Change

○ Advances in technology → increases VMPL → increases labor-demand ■ Workers are more productive with higher technological advances ○ “Labor-saving” technology → reduce the VMPL → decrease

labor-demand

■ Example: robots that do all the work

● Supply of Other Factors

Shifts in Labor-Supply Curve 

● Changes in taste

○ Example: more women work instead of staying home

● Changes in Alternative Opportunities

○ Some jobs offer higher wages so people prefer to work there and supply of labor falls for the first firm

● Immigration

○ When immigrants come into a country, the supply of labor increases

Equilibrium in the Labor Market 

● Wage adjusts to balance the supply and demand of labor

● Wage = VMPL

● Firm has hired until the VMPL = the wage (maximizing profit)

Other Factors of Production 

● Land

○ Natural resources

● Capital

○ Equipment and structures used to produce outcome

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