ECON 200 Week 8 Notes
ECON 200 Week 8 Notes ECON 200
Popular in Microeconomics
verified elite notetaker
Popular in Department
This 10 page Class Notes was uploaded by Rachel Pollard on Friday February 26, 2016. The Class Notes belongs to ECON 200 at University of Washington taught by Haideh Salehi-Esfahani in Winter2015. Since its upload, it has received 11 views.
Reviews for ECON 200 Week 8 Notes
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 02/26/16
Session 14 Tuesday, February 23, 2016 10:29 AM Five Major Insights Today: • Marginal Cost rises. If we want more of a good we have to give up increasing amounts of other goods for every extra unit. • Rising MC implies there is rent (producer surplus) • Rents in a market based system help match the private interest of suppliers with the public interest of consumers. • Rents are an important tool for the efficient allocation of our scarce resources. • Having markets and a system of private property rights does create an efficient allocation but also creates inequality. Deriving the economy's PPF with many producers • The PPF with Tom and Don: • Up to 10 coconuts, the MC of coconut is: 1/2 fish foregone • If we want more than 10 coconuts of an additional coconut is: 1 f ish foregone. • Now suppose we add one more person, Kathryn, to this island economy: • MC: 4/5 • Adding Kathy to the joint PPF of Tom and Don: • The maximum amount of fish is 13 (4+9) and the maximum amount of coconuts is 19 (5+14). • The Productive Possibility Frontier with many producers - deriving the MC (supply) curve: • A Smooth PPF • • If you have many producers, you'll ultimately have a rather smooth curve • Concave curve • Trade-offs: civilian goods and defense goods • Looking at the Marginal Cost of Butter • Point A: there's no butter, every resource has gone to guns. • Point B: the MC of butter. 10 units of guns have to be given up for the first 10 units of butter. • Point C: Give up 20 units of guns in order to obtain another 10 un its of butter. • Point D: For the next ten units of additional butter, 30 units of guns must be given up. • Continuous marginal cost curve (in orange) • Why does the marginal cost of production of butter rise as we produce more butter? o Because you run out of the suitable resources for that good. • This is called: Increasing Costs at the Extensive Margin o At the level of the economy • The definition of MC: the MC of production of a good is what must be given up from the production of other goods and services in order t o produce an extra unit of this good. • Why does the Marginal Cost of a good rise as the level of output of this good increases? • How do firms choose their level of production? o Marginal cost and supply • Suppose an oil company is drilling for oil in a vast ar ea. • This firm has various drilling sites. • Each site produces 1000 barrels per day. • These sites are not uniform in that some sites are easy to get the oil out of and in some, oil is in deep ground and requires more drilling, and it is more costly. • Consider the easiest drill site first. Suppose it costs $ 5 per barrel to drill the 1000 barrels a day in this site. nd • For the second 1000 barrels, we have to go to the slightly deeper site (2 site) and that costs $10 per barrel to dig the oil out. For the 3 1000 barrel, it costs $15 per barrel and so forth. • The total cost of 1000 barrels of production of oil is $5,000. • For 2000 barrels, the total cost is $5,000+$10,000=$15,000. • For 3000 barrels, $5,000+$10,000+$15,000=$30,000 . • It is $50,000 for 4000 barrels per day. • This represents society's cost of producing 4000 barrels per day. This means that labor and other resources that must be used to produce 4000 barrels per day, could have been used to produce $50,000 dollars worth of other goods and service s in this economy. • Clicker Question: The total cost of producing 4000 barrels of oil can be interpreted as: what the of oil must give up of production of other goods and services to produce this amount of oil. • Now suppose that the market price of oil is $15 per barrel and at that price, consumers will buy whatever output this firm produces. Which sites will be drilled and what is the total cost to the society of this output? o Three sites will be drilled, the North Sea will not be drilled at all. • The first drill site can produce 1000 barrels at $ 5 per barrel, and selling it for $15 so there is a $10 profit per barrel. o The firm will (will or will not) voluntarily employ the first site for production of 1000 barrels of oil. nd • For the 2 site, it costs $10 per barrels, and the firm can make profit of $5 per barrel so the 2 site will also be drilled. rd • For the 3 , it costs $15 and the price is $15 so the firm is indifferent. According to our earlier reasoning (on consumer demand, chapter 2) the producers do indeed take up this site too.th • For the 4 drill site, it costs $20 per barrel and the firm makes a loss (profit or loss) of $5 per barrel so it will not (will or will not) drill this site. th o If the firm uses the 4 site, the value of output in this ec onomy would decrease by the excess cost over consumers’ MV of oil. o The drill site 4 costs consumers $20,000 worth of other goods in the economy while they only value it at $15,000. o Since this cost is borne by the operators of the drill site, no coercion is necessary to stop them from drilling, they would do so voluntarily. • Therefore: o If rights to the operation of drill sites are clearly defined, the private interest of the mine operator and the public interest of consumers coincide. o The definition of supply behavior: the supply schedule shows the quantity of the good offered for sale at each given market price. • If the price of oil goes up to $20 per barrel, 4 sites will be drilled. • Given a market price, the producer of a good produces a quantity up to where price=MC • The supply curve is the Marginal Cost curve! • How do we define the industry supply curve (with many producers of a good)? o The industry supply curve is simply the lateral sum of the firm's MC curve. • At the MP=$1, 1.5+.5=$2 • At MP=$2, $1+$3=$4 • What are rents and why do rents exist? o Are rents just payments that make some people rich, or are they an essential mechanism of allocating resources to their most valuable use (i.e., efficient allocation)? o Explained in textbook: page 212 o Example: taking a case from privatization of state property in Russia after the fall of socialism. Session 15 Thursday, February 25, 2016 10:27 AM • Importance of rents: suppose the consumers' demand for bred rises in an economy. • Consumers want more bread and they signal this desire to the producers by the way of a higher price that they are willing to pay for this good. • An increase in demand --> demand curve shifts up • The signals: o We want more bread and are willing to pay a higher price for it. o You (the supplier) should bring more resources (labor and capital and land) away from other activities (say, production of shoes) and into production of more bread o If you do this, there is something in it for you. • Higher rents (that is the incentive) • What are private property rights? o The right to own, sell, transfer, or dispose of one's assets. • What do clearly defined property rights have to do with the efficient allocation of resources (and occurrences of rents)? • What happens if property rights are not properly defined, enforced, or protected? • Presence of rents in a system of clearly defined and enforced private property ensures efficiency (maximum gains from trade and allocation of resources to production where consumers value them most). • However, since in th is system some individuals receive rents that other do not, the slices of the large economic pie - distributed to each individual - will be unequally cut. Problem No. 20 from the end of Ch. 6 • Does application of comparative advantage mean that the person who can produce the most of some good is the one who will do it? o No Chapter 7 - The Law of Diminishing Returns and Production with employment of labor • Important concepts and definitions: o What are inputs/factors of production? • Labor, land, capital (human and physical), management (or entrepreneurship) o Can you find examples of inputs as "complements"? • Inputs are used together to produce output • Getting food out of a can o Can you find examples of inputs as "substitutes"? • A good produced with labor versus. capital • Production of laundry services § Done by machine o Marginal Product of an input (labor): • Additional output that is created when an additional unit of labor is applied to a given amount of other inputs. o Total Product for labor: • The difference in output - when some units of labor are used - versus no labor used at all. o What factors affect the marginal Product of Labor (MPL)? o Marginal Value of an input to a firm is the "value" of the marginal product of that input. How do we calculate the Value of MPL? • P * MPL o Using the concepts of MPL and average product of labor in an example. • Consider production of shirts in a factory. There are a fixed number of sewing machines and a limited space (of say, about 1000 square feet). The following table shows the various amounts labor and the output of shirts produced (Q). MPL is the marginal or incremental increase in output of shirts by adding one more unit of labor. The APL is the average product of labor and it is simply the average amount of output created from the employment of a number of workers. For example if 5 workers produce 10 units of output, then APL is 10/5 = 2 units of shirts. [The average product is also termed the “productivity” of labor]. • One important consideration: As we add labor (to the fixed capit al and factory spaces) each additional unit of labor is as good (as suitable) a resource as the previous units of labor. • L Q MPL APL 1 2 2 2 2 7 5 3.5 3 14 7 4.6 4 20 6 5 5 25 5 5 6 29 4 4.8 7 32 3 4.57 8 34 2 4.25 9 35 1 3.88 10 35 1 3.5 11 34 -1 3.09 o Diminishing marginal product of labor as labor of equal quality is added to produce successive units of output. o Where is the MPL increasing? • 1, 2, and 3. • Gains from a specialization o Then starting with the 4th unit of labor, the MPL is falling. Why? o If the MPL is falling with 4th, 5th and 6th etc. units of labor added does it imply that fewer shirts are being produced when we add the 4th, 5th, 6th units of labor? • No • Example: o Suppose labor of equal quality produces shirts in a factory. Each worker is paid $10 per hour. Suppose that we are producing 5 shirts per hour and have 5 workers producing those shifts. Suppose the cost of a shirt is the wage for labor. Wage is $10 per hour. Cost a shift = $10. o With a fixed number of sewing machines and a fixed amount of space in the factory, suppose we decide to increase output. So we bring in a 6 worker, equally capable in shirt production. He gets paid the same wage = $10 per hour. o Due to lack of equipment and congested movements in the factory, this worker takes 2 hour to do the next shirt. Or, in one hour, he only produces 1/2 a shirt (this points to diminished MPL). o How much does the 6th shirt cost? o Every time the productivity falls , the marginal cost rises. o Rents with increasing costs at the intensive margin: just as rents occur due to our inability to replicate resources rents can also occur due to increasing costs at the intensive margin.
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'