ECN 150: Week 4 Notes
ECN 150: Week 4 Notes ECN 150
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This 3 page Class Notes was uploaded by Alexis Ibarra on Monday February 15, 2016. The Class Notes belongs to ECN 150 at La Salle University taught by Francis Thomas Mallon in Summer 2015. Since its upload, it has received 12 views. For similar materials see Macroeconomics in Economcs at La Salle University.
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Date Created: 02/15/16
WEEK 4 NOTES 2/8/16 Step by Step Sequence (Example 3): Assuming oranges and grapefruits are substitutes for one another: the growing conditions of oranges have an adverse impact on the production of oranges. What will happen in the grapefruit market? (An increase in demand: SHIFT of the entire curve.) Has an outside variable changed? (yes; poor growing conditions for oranges) If so, which curve is effected by this outside variable (supply or demand)? (demand) Does the effected curve increase or decrease? (increase in demand for grapefruits) Given the shift of the effective curve, is there immediately a surplus or a shortage created? (shortage) Given the presence of a surplus or shortage, what will be the natural workings of the marketplace to restore equilibrium? (price will rise) (increase in quantity supplied, decrease in quantity demanded) The cost to sift gas decreases and it becomes more economically friendly: What happens to gas? Lowering of production cost will cause an increase in supply. Being more economically friendly would cause an increase in demand. What happens to the price of gas?: When both curves (supply & demand) are shifting in the same direction, the impact on price is indeterminate. If a price proves to be prohibitive, the market will lower the price. 2/10/16 If the market price that’s established efficiently is less than the suppliers cost to produce the good, what will happen to that producer? They are inefficient. They will be forced to become equally efficient as competing producers or they will stop making the product. Some producers find that their own inefficiencies cause their costs to be so high that they are greater than the market price of the good. (These inefficient producers are wasting resources). If the producer doesn’t become efficient, society will force them out of business. Then the resources they previously had will get redeployed. Machines/land will find new uses the people will find new jobs. If a product is very efficient and has a strong market price, more suppliers will want to produce it. This will increase the amount of resources dedicated to the production of this product. Public Goods: Goods that have external consumption affects. Although essential for the best interest of the society, no one individual would elect to provide these goods as they would benefit everyone. If you built a road to get to your favorite place, you wouldn’t do it because once you went through all the trouble (money, work, labor) to build the road, other people would use it for free. Those outside of the buyer would get the right to be able to use the product/good. This is why nobody elects to do the work to provide these things for other people to use for free. Government Involvement Socialism: Extreme government involvement Capitalism: No government involvement USA is a mixed capitalistic society: Government doesn’t control our money. The government runs on a fiscal budget. TaxRevenues−Governmentspending=¿deficit>¿surplus If the amount of spending exceeds amount of revenues: deficit This will result in borrowing money! (selling government securities) If the amount of revenues exceeds amount of spending: surplus Governments need to intervene in the case of a negative externality which is also known as spillover costs. It is a negative byproduct generated in the course of producing some primary good. The cost of eliminating this externality would not be addressed by the system of markets and prices. Washing paint brushes with chemicals and putting the chemicals down the drain. That doesn’t cost the company anything (zero dollar disposal cost) but it has an ecological cost. Government has to intervene. Supply and demand curves are not affected by the negative externality. However, the companies who buy this paint could stop buying because of it or the general public could protest if they knew what was going on. 2/12/16 The government will step in and could force the company to put the chemicals in barrels and have a government authorized people come in and dispose of the waste properly. The government’s intervention affects the supply curve. It causes a decrease in supply. Has an outside variable changed? (yes; government intervention) If so, which curve is effected by this outside variable (supply or demand)? (supply of primary good) Does the effected curve increase or decrease? (decrease) Given the shift of the effective curve, is there immediately a surplus or a shortage created? (shortage) Given the presence of a surplus or shortage, what will be the natural workings of the marketplace to restore equilibrium? (the price of the good will raise) Positive externality, or spillover benefit: A byproduct created in the course of producing some primary good. A plant will kill cows to produce the primary product (meat). However, during this process they are able to recover a gland from the brain of the cow which is worth hundreds of dollars. These glands are a spillover benefit, or positive externality. If there is a spillover benefit, government intervention could come with subsidy or tax relief which would cause more output of the primary good and thus more output of the positive externality. Government will also intervene when the selling price of a good is too low. The government can demand a higher market price. Example: The concept of minimum wage (Market of unskilled labor). The employers are demanding labor, and the workers are supplying labor. The government can establish a higher minimum wage which will cause a price floor. Price floor: A government imposed price set above equilibrium to deny the market rate to fall below the government price. The higher wage rate will cause companies to have to fire some workers. The workers who get to keep their jobs will be happy, but the other workers will lose their job. Agricultural support programs are another example of price floors Price support programs Crop restriction programs
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