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Eco 2010 microeconomics

by: Chana Singal

Eco 2010 microeconomics ECO2010

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Chana Singal
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micreconomics full class notes. email me if you have any questions:
Principles of Microeconmics
igor Moscow
Class Notes
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Date Created: 08/10/16
Economics Lecture 1: January 11th Opportunity cost-what you give up when you make a choice. In the 5 - 15 century after the fall of Rome feudalism began 
 Feudalism- an economic social system that has a king hierarchy. King The serfs worked the lands of the employer in return
 royal family for protection, the serfs kept a small percentage. lords Market economy- in order to create a market economy you need
 1. Commanities (goods that are made to be sold or exchanged) 
 serfs/ peasants 2. Factors of production (land labor and capital)
 3. Markets There were no Commanities in the middle ages. The lords had control over trading rules, and since land determines status in society, land wasALWAYS kept in the family, and never given up. Therefore land couldn’t be a commodity either. For the F.o.P. they had land and labor, but they didn’t have capital, they didn’t have technology or factories yet. Bastiat- “The Broken Window” The broken window is an analogy to the seen and unseen benefits of decisions. When people make decisions they can be very short sighted and not pay attention to the unseen costs of a decision. Abad economist relies on visible effect while a good economist takes both the seen and unseen into account. The thought process of the broken window is that you should destroy a window so you will enjoy a new window, give business to the glazier, but the window company that you used might lose business and credibility because of you, and you could’ve used that money towards something else like shoes, so now the shoemaker lost business, and so forth… To build a bridge… The seen costs or benefits The unseen costs or benefits There are jobs available to build it Now you need to tax citizens to pay for the bridge. 
 Lecture 2: January 13 th How did they go from having no commodities to having an abundance?
 -There was social upheaval. People didn’t like the feudal system, and revolutions came. 
 -the enlightenment era
 -the great exploration ear, colonization and new continents brought in trade that was not available before. Like silk, spices, tobacco, etc. bourgeois merchants helped bring the new trade back to Europe. By trading they became richer but they couldn’t become aristocratic because that was based on family not suddenly you have these merchants becoming rich off trade and they have no political or social status so that leads to social upheaval. Middle class has the money and the aristocracy has the social standard After this they have more of an egalitarian society- more equal society.
 Aristocrats know that there is money to be made in the society now so they want to get rid of their serfs and graze sheep to sell. So they kicked the serfs off their land and they all commuted to the big cities. Right now there is an overwhelming presence of peasants in the city. How will they get jobs?All they know is their family’s farm that they just got kicked out of. At that time, James Wolf invented the steam engine. Proletariat- people looking for jobs. 
 Steam engine + proletariat = MODERN FACTORY 
 and so the industrial revolution began… labor becomes commodity now. People are willing to sell their labor to work. Land is a commodity now because the lords are using it to graze sheep to sell off.And the capital are factories that are being made. Industrial Revolution- 1760-1840 
 this is a major transformation. For generations serfs lived in farms doing the same routine. Now they all moved to the city. Adam Smith 1723-1790
 he is a part of the Scottish enlightenment. He lived in Glasgow, Scotland and was a professor on moral philosophy. He sees the social upheaval and asks. Why? He then comes up with a solution.
 The Invisible Hand- this is the unintended consequence of an economic decision.
 There can be social processes that no one plans. There is no central control of a society. The king doesn’t decide, how come we know that we produce enough of something or too little of something? Price acts as a signal!! You have 2 shoemakers who sell shoes, if one charges too high them no one will buy, if one charges to low they will run out.Amount of product sold depends on the price! If no one can raise their price because then they will lose business, how would they get more money? You can lower the costs of production. 
 Let’s say the shoemaker sells shoes for $100 a pair.And the cost is $80- you make a $20 profit.
 But if you bring down the cost to make them $70- you will have a greater profit without changing the price. 
 With competition companies have incentive to lower their cost and increase profit. 
 Adam Smith says “private vices leads to greater virtue” (written in “the wealth of nation)
 greed of business man will lead to more goods at cheaper prices. THE MOTIVATION IS TO INCREASE PROFITAND THE COSUMER GETS LOWER PRICES
 Specialization- when people do one part of the job that they learn to excel in. e.g. the assembly line, one person did one job, rather than creating a full car himself. Cuts time and more product. 
 David Ricardo- (1772-1823) he applied the reasoning of specialization to international trade. 
 Everything is made from china. Why? The production in china is extremely cheap, and including all the expenses of importing its more worth it. China has that specialization.
 Gains from trade- everyone benefits from these trades. Chinese get money and we buy it cheaper. Karl Marx- (1818-1883) “communist manifesto” he said that the economy will go from market to social economy. 
 Social economy- is that the state owns the factors of production and the state chooses what gets produced. It’s a centralized decision.
 Market economy- the people own the businesses and the market chooses. It’s a decentralized decision based on the demands of the people.
 “Labor Theory of Value” – do we base value of an object on labor? No! the value is in the eyes of the beholder. If no one wants to buy it then it has no value, which is the “subjective theory of value.” The classical economists all have one belief in common which is the labor theory of value. Neoclassical economists believe in the subjective theory of value. The market economy followsAdam Smith. 
 While the Social economy follows Karl Marx. We chose a market economy because no central planner can know the needs and wants of the people and therefore can’t set good prices. Consumers won’t buy. 
 Lecture 3: January 20th Neoclassical economists-Alfred Marshall is a big name when we think of neoclassical eco. they believe in the “subjective theory of value”, 
 an example of this is: you spend a lot of time on a scrapbook, a lot of time and a lot of labor, it doesn’t have value to the average consumer, no one will buy it. Another belief of neoclassical economists is the Principle of Utility Maximization 
 utility is any pleasure that we derive from an event. We try to maximize the pleasure that we can get from something. 
 The utility of sitting in this class and passing > having to pay more tuition to retake the class Thinking on the margin- in economics you ask questions like either/ or how much more/less
 with thinking on the margin you decide whether to produce more or less of something to gain more profit. Example: if I brush my teeth 10 seconds longer do the chances of getting a cavity decrease?And by how much? Is it worth it for that extra 10 seconds of my time? Everything that we are going to study this semester is neoclassical economics Economists: Keynes- he was a macro-economist during the great depression and WW2. He came up with a general theory- If you run a household and things are going bad in the economy, what people do usually is cut down on costs- to save more. But if everyone cuts down on costs, the demand for goods and services will go down, and then the government has to intervene and spend money to keep the economy running. Hayek-1944 (wrote a book- “road to serfdom”)
 after WW2 he wanted to return to classical economists.After the war there was a big push for government involvement over the economy. But we learned that when government makes policies on the prices, it won’t meet the demand of the people so consumers won’t buy products. This will lead to black markets becoming more popular so people can meet their demands he was against excess government involvement in the economy. Even though this was written in 1944 it still applies today. (math review on blackboard) Lecture 4: January 25 10 Principles of Economics 1. Scarcity- there are limited resources and unlimited wants 2. Trade-offs- choosing one thing over another. 
 a big trade-off is efficiency vs. equality. Example: a store owns a parking lot, they want to maximize the use to be the most efficient during busy store hours. If they don’t put in handicap spaces (which a lot of the time don’t get used) it will give space for another person to park, making it more efficient. But then you have equality, which says handicapped people have a disadvantage and should be treated with fairness. 3. Opportunity cost- cost of something. Going to college vs. working/making money
 the highest thing you are giving up is the money that you would’ve been making.
 Nothing is ever free because there is always an opportunity cost! 
 in 1900’s the women’s work force was 6%, in 2005 It is 60% the opportunity cost decreased tremendously over the century due to the technology made to do the domestic jobs that women would have be doing when they are working 4. Marginal analysis- how much more or less something is by a very small amount. Example- should I work 7 hours today or 8 hours today. Marginal analysis ISN’T if you should work half time vs. full time. The famous Diamond vs. water, since water is way cheaper it’s easy to drink that extra glass then it is to get that additional diamond. 5. Incentives- induce people to act. Its motivation. Examples, speeding tickets, cash for grades, seatbelts- the argument about seatbelts is that if you wear one, you take more risks at the expense of pedestrians who don’t have the protection of seatbelts. Do seatbelts really save lives? 6. Gains from trade- we differentiate between specialization and self-sufficiency. Specialization is better and more efficient. It leads to quantity which leads to cheaper prices 7. Markets move towards equilibrium- no individual will be better off without making others worse. Lines in supermarkets will always become equal. The market moves towards an equilibrium always. 8. Government intervention- property rights. Without ownership their won’t be any incentives to do anything. People don’t give a car wash to a rent-a-car.Artists rely on this intervention of property rights this is their form of profit. Patents are made for the rights of the creators, what happens when a classic movie can’t get republished because the artist is dead and the people can’t watch it because the patent is still on it. No one is benefiting. But there would be no incentive to create if there weren’t property rights 9. Standard of living depends on productivity- productivity is the amount of goods and services produced by each unit of labor input. Standard of living changes because if productivity goes up, quantity goes up, prices go down, and more people can buy. 10. Printing money causes inflation- money goes up, and prices of gods change. 
 t-shirt- $20, income $100-buy 5 t-shirt
 t-shirt- $25 income $100- buy 4 t-shirts…prices will go up if there is more printed money
 t-shirt- $25 income $125- buy 5 t-shirts 11. Short-run trade-off inflation/ unemployment- government prints money to keep the economy up. chapter 2: thinking like an economist. economics is a science, economics deals with human, society, life. policy advisor: they try to analyze economic laws, develop and apply it in policy advice. (they don't do direct experiments, they deal with models) economic model- tries to emulate the world. To the most simplest way to see how it would behave in a certain event. circular flow diagram ***world trade and government influence aren't in the model so technically there is more complicated system. 
 for factors of production the households give land labor and capital. and in return the firms give them wage for labor rent for land, and in return for capital they give interest from the money loans that households give them. This model is Simplified to the real world. 
 economic calculation- can the government know the wants of the people? no, the market knows based on prices. prices is info. the PPF shows the given resources available in the economy and the most efficient way to use them. tons of 50,000 labor hours
 wheat 1 computer= 100 hours
 1 ton of wheat= 10 hours
 1 ton of wheat= 1/10 computer the slope tells the opportunity cost
 slope is change in y / change in x
 computers labor hours production computer wheat computer wheat 50,000 0 500 0 0 50,000 0 5000 economic growth- if technology improves we can improve productivity and the PPF moves to the right.
 shape of PPF:
 linear- slope is constant and opportunity cost stays the same. 
 bow-shape- the opportunity cost isn’t constant microeconomics- how households and firms make decisions and interact with markets
 macroeconomics- the study of economic wide phenomena, including inflation, & unemployment positive statements - describes the world how it is. not always something good. “will” normative statements - how the world should be. (moral judgement) chapter 3: interdependence and gains from trade why do nations trade? resources aren’t equally distributed absolute advantage- if you can have both things better you have the absolute advantage. (it takes less labor hours for USAto produce then Japan bill gates is good at typing and computer programing. but he gets a secretary to help him type because the opportunity cost is too much to spend time typing instead of programming. relative/comparative advantage- to produce at a lower opportunity cost. so for japan and USA, USAhas the absolute advantage for wheat and computers, but japan has a lower opportunity cost and therefor has comparative advantage. self interest helps everyone. that’s what the invisible hand is. trade helps everyone. japan- 30,000 hours 1 computer= 5 wheat united states- 50,000 hours 1 computer=10 wheat Japan should specialize in computers because the opportunity cost is less to make computers exports vs. imports 
 united states makes 3400 tons of wheat. and exports 700 tons they’ll be left a consumption of 2700 tons of wheat. the opportunity cost is lower for united states to make wheat… japan- 30,000 hours 1 wheat= 1/5 computer united states- 50,000 hours 1 wheat= 1/10 computer ….it’s better for U.S. to trade the wheat. We trade globally because then the world will consume more. AFull Problem: Argentina: 10,000 hours 1 lbs. coffee- 2 hours 1 bottle of wine- 4 hours Brazil: 10,000 hours 1 lbs. coffee- 1 hour 1 bottle of wine- 5 hours If each country only makes one good…. Brazil can make 10,000 coffee or 2,000 wine Argentina can make 5,000 coffee or 2,500 wine SO Brazil has absolute advantage over Coffee andArgentina has absolute advantage over wine To calculate the opportunity cost make the ratio of coffee to wine each in country Brazil- 10,000/ 2,000 = 5/1 1 bottle of wine = 5 pounds of coffee 1 pound of coffee = 1/5 bottle of wine Argentina- 5,000/2,500 = 2/1 1 bottle of wine = 2 pounds of coffee 1 pound of coffee = 1/2 bottle of wine Brazil has a comparative advantage of coffee because it only needs to give up 1/5 bottle of wine whileArgentina gives up ½ bottle of wine. The opportunity cost is lower Argentina has a comparative advantage of wine because it only needs to give up 2 lbs. of coffee while Brazil needs to give up 5 pounds of coffee What are the advantages of trade? If both countries split their time equally between the 2 goods… Argentina: 5,000 hours on each 1 lbs. coffee- 2 hours 1 bottle of wine- 4 hours Brazil: 5,000 hours 1 lbs. coffee- 1 hour 1 bottle of wine- 5 hours Argentina can make 2,500 coffee or 1,250 wine Brazil can make 5,000 coffee or 1,000 wine The total consumption of each good will be: Coffee- 7,500 wine- 2,250 But if each country specializes in their comparative advantage good …. Brazil would make 10,000 coffees Argentina would make 2,500 wine That is a greater consumption if they each specialize So the steps are: 1. Calculate totals 2. Calculate absolute advantage 3. Calculate opportunity cost 4. Calculate comparative advantage Chapter 4: supply and demand market- group of buyers and sellers of a particular product
 competitive market- many buyers and sellers each having a negligible effect on prices. 
 perfectly market- all goods exactly the same- buyers and sellers are so numerous they can’t control the price. each is a price taker quantity demand- amount of goods that buyers are WILLING andABLE to purchase law of demand- the claim that quantity demanded of a good falls when the price of the good rises (other things equal) market demand curve is the demand curve of quantities from 2+ companies quantity of demand = amount demanded at a given cost quantity supply- amount supplied at a given cost law of supply- when supply of a good goes up the price of a good rises Shifts of the supply/demand curve Movements along the supply/demand curve Shifts in the demand curve 1. Amount of buyers > shifts to the right Amount of buyers < shifts to the left 2. income > normal good shifts to the right Income > inferior good shifts to the left Normal good- good that the demand increases when income increases. Ex. 5 star hotels Inferior good- a good that demand decreases when income increases ex. Fast food, motels 3. Prices of related goods- substitute vs. complement Substitute- 2 goods are substitutes if when one variable goes up the quantity demanded of the other variable goes up also. Px increases QDy increases. Ex. Colgate vs crest Complements- 2 goods are complements if when one variable goes up the quantity demanded of the other variable goes down. Px increases QDy decreases Ex. Lettuce and salad, gas and driving places 4. Expectation- if you are expecting income but you don’t have it yet, you will still spend the money now even though you don’t have it. 
 consumption of goods depends on expectation. Expectation increases then quantity demanded increases Movements in demand: Summary- copy from slides Ipods and music downloads example Shifts in supply: Shifts: 5. Amount of sellers > shifts to the right Amount of sellers < shifts to the left 6. input > QS decrease (if wage costs more, or materials cost more) Input < QS increase (if milk costs less, you will sell more lattes at bigger price) 7. Expectations of prices > supply < in order to save and sell more in future Expectation of prices < supply > sell more now while prices are still high equilibrium- when quantity demanded = quantity supplied QD=QS 
 they buy and sell at equilibrium price. 
 price QD QS $4 10 20 $1 21 5 $3 15 15 at price 4 there is a surplus and at price 1 there is a shortage. price 3 is equilibrium price. how do surpluses come about? shifts in taste, high expectations, lower the prices until you reach equilibrium price. prices go down the demand goes up. how do shortages come about? when not enough is supplied, prices rise until they hit equilibrium price. price goes up the demand goes down. when prices change they move along the curve prices act as signals! steps: 1.decide whether it’s a supply or demand curve that has shifted. 2.decide whether it shifted left or right. 3.draw graph and decide what happened to QS and QD in price. problem: the price of gas increases, what happens to electric cars? (substitute) 
 price of gas increases- the amount of electric cars sold increases. QD shifts to the right
 as we can see the equilibrium price goes up when demand is increased. price quantity demand problem: a new battery advances the sale of electric cars. 
 supply of electric cars increase. supply curve shifts to the right. 
 as we can see the equilibrium price goes down when supply increases. price quantity supply when supply and demand both shift…. Let’s say the gas price risesAND the new battery comes out for electric cars
 both curves are shifting to the right. 
 the demand for electric cars increase and the supply increases. if the demand curve shifts more then the supply curve the E price is higher if the supply curve shifts more then the demand curve the E price is lower price QS/D ——————————————————————————————————————— another problem: EventA- a fall in the prices of CD’s 
 Event B- sellers of music downloads negotiate a reduction with the artist of the amount that they pay for every song that they sell
 Event C- EventsAand B occur eventA- price of cd’s decrease, demand for music download decreases (substitute). Demand curve shifts to the left, price decreases for music downloads. event B- input cost decreased. supply increases at every given price. supply curve increases and shifts to the right. event C- combine them. A B C Price decrease decrease decrease quantity S/D decrease increase ambiguos the last combination is ambiguous because one graph increased and one decreased and we don’t know which one increased more so the answer is ambiguous chapter 5: elasticity: if I raise the price of a good, how much less will I sell.
 Law of supply states that the higher the price the more the company is willing to supply. 
 the supply curve is upward sloping demand is a downward slope. as the price decreases demand increases. 
 elasticity is how one variable responds to a change in another variable. 
 example: if you sell 12 websites at 200 a piece, and you want to raise your rate to 250, how many costumers will you lose because price increases so QD decreases. 
 change/delta to measure elasticity you measure delta x/delta y, which is the change in quantity demand or supply / the change of price 
 Elasticity and it’s application: price elasticity of demand= change in quantity demand/ change in price
 how QD changes in response to price change. an elastic good- >1 (QD is greater) a nonelastic good- <1 (price is greater) unit elastic demand- = 1 a. substitutes available- elastic. QD will be higher 
 no substitutes- inelastic- price will be higher b. luxury- elastic. change in QD > change in P
 necessity- inelastic. change in QD < change in P
 c. broad defined- inelastic. food as a group is very inelastic 
 narrow defined- elastic. cereal in very elastic 
 d. time horizon: 
 long run- elastic
 short run-inelastic
 example: if prices of gas goes up for a short amount of time people will stick it out (inelastic), but if you know the price will stay high you will be more willing to buy a gas efficient car (elastic). QD1-QD2/ P1-P2 example: Q falls by 15%, P rises by 10% - 15/10 elasticity is 1.5 (elastic) in order to get the change in QD or P, you need to make them a percentage. We get percentages using the formula B-A/C x100. C= average of B andA. to calculate C= B+A/2 example: P1- $135 P2- $165 C- 150 B-A/C 165- 135/150= 30/150= 20%
 QD1- 8600 QD2- 7400 C-8000 B-A/C 7400-8600/8000= -15% elasticity= (absolute value- 15/20- .75) .75<1 therefore its inelastic variety of demand curves: the flatter the slope the more elastic the steeper the slope the more inelastic illustrate with a graph how a steeper or flatter slopes affect elasticity. Inelastic Graph: the change in P is a greater change as you can see because the space is greater between P1 and P2 than QD1 and QD2 change in P change in QD elastic graph the change in QD is a greater change as you can see because the space is greater between QD1 and QD2 than P1 and P2 change in P change in QD extreme cases of elasticity: 1. perfectly inelastic demand: the change in QD/ the change in P would be 0%/10% = 0 D curve is vertical, elasticity is 0 an example of this is food as a group . people would still buy food even though the price goes up. because it’s a necessity. 2. unit elastic demand - when the change of QD/ the change of P= 1
 elasticity is 1 3. 2 exact goods in front of you and one is cheaper. you will always pick the cheaper one when the change in QD/ change in P= any #%/ 0% elasticity is infinite. #/0 Nowadays surveys are done to find elasticity based on goods and their sale prices. *** in a linear curve you should know that the top of a slope has a higher elasticity then at the bottom of the slope. the higher on the curve you are, the more elastic you are. the lower on the curve you are, the more inelastic you are. elasticity and total revenue revenue= price x quantity so.. TR=PQ (if more then one product P1Q1+P2Q2 etc) The question is… is prices go up will the TR go down? 
 answer- based on it’s elasticity it will either go up or down. *** by law of demand if price goes up demand goes down. keep this in mind. change of QD > change of P >1 =elastic price goes up- QD goes down, it’s more then the price so TR goes down change of QD < change of P <1= inelastic price goes up- QD goes down, (its less then the price)- so the TR goes up illustrate the concept above: Drug war: does making drugs illegal increase or decrease drug related crime? policy 1- decreasing supply of drugs
 policy 2- increase education about drug addiction. ex. “just say no” drugs are inelastic because its a necessity because its an addiction. people will pay any price. policy 1: supply curve shifts left because supply input costs increase because its illegal. price increases, QD goes down. 
 inelastic so change of QD< change in P. therefore P is dominant and TR=QP and TR increases. so crime rate increases with policy 1. policy 2: the demand curve shifts to the left. demand goes down as a result of the policy to increase education
 (change of taste= shift) QD decreases P decreases the TR decreases. in conclusion there is a decrease in total spending on drugs and in drug related crime w/ policy 2 Income Elasticity of Demand: change of QD/ change in M …M=income income -normal > 0 -1. necessity - low elasticity
 2. luxury- high elasticity (when income goes down, luxury goes down, its high elasticity) - inferior < 0 cross price elasticity of demand: measures the response for one good to change in the price of another good. 2 different goods. change in Q1% / change in P2% 
 these two goods can be compliments or substitutes.
 complements- < 0 P2 increases Q1 decreases (price of gas goes up, quantity for cars go down)
 substitutes- >0 P2 increases Q1 increases ( price of coke goes up, quantity of pepsi will go up) price elasticity of supply Pincreases QS increases 
 change in QS%/ change in P % A+B/C / A+B/C Extreme cases of supply inelasticity perfectly inelastic supply = 0 unit elastic of supply = 1 perfectly elastic how can price elasticity of supply vary? slope change and elasticity changes. slope becomes relatively flatter as it gets more elastic 
 1. beachfront property is inelastic (steeper) Q increases 
 change in P> change in Q 2. toothpaste is elastic (flatter) QD increases change in P< change in Q Chapter 6: supply, demand, and government policies 1. price ceilings - maximum price floors - minimum example: minimum wage, and rent control 2. Taxes- government can make buyers or sellers pay price controls: a price ceiling- limits how high rent can go. if equilibrium isABOVE the price ceiling- it has a BINDING CONSTRAINT if equilibrium is BELOW the price ceiling- its NOT BINDING price ceilings creates artificial shortages. shortages rations- 1) long lines (can’t bribe)
 2) discrimination according to seller’s biases at $6- the 500 jobs supplied are demanded at $7.25 the amount demanded- 550 and the amount supplied 400 there is a labor surplus. many people want to work at this price and not enough supplied. minimum wage creates unemployment for the unskilled. when M.wage goes up, technology replaces people. to know: elastic >1 flatter, smaller slope inelastic < 1 steeper, larger slope TAXES: buyers can pay taxes and sellers can pay taxes taxes:
 - percentages (6% of sum)
 - lump sum $2 per unit if their is a tax, price goes up demand shifts to the left. the shortage price will rise until the QD=QS the governments revenue is the QS x Tax per unit (400 x 1.50) no tax- buyers $10 sellers $10 tax- buyers $11 sellers $9.50 incident of taxes- buyers pay $1 sellers pay $0.50 ***taxes on sellers is the same thing, if the supply curve shifts to the left the price goes up. conclusion- it doesn't matter if taxes are imposed on sellers or buyers, the elasticity is what matters. demand inelastic- buyers pay more of the tax. ex. insulin tax supply inelastic- sellers pay more of the tax ex. limited edition shoes why would a seller pay a bigger share of tax then the buyer?
 government decides to tax yachts, since they are a luxury, they are elastic demand 
 and inelastic supply, therefore sellers pay more of the tax, therefore sellers pay their workers less. so government is really taxing the working class and not the rich people who they meant to tax. steps: a wedge between supply and demand curve to match the tax amount 2.find your PS PB & Q…… PB-PS= tax 3.calculate the incident, who’s paying more. tax vs. without tax 4.Demand - inelastic- buyers pay more IF Supply- inelastic= sellers pay more graphs: S 110 100 90 80 50 D 80 90 100 110 120 130 140 the tax is $30, and goes from $80-$110
 equilibrium is $100 without seller tax with tax- PS- 110 and PB- 80 110-80=30=tax incident of tax: before tax: sellers receive- $100 buyers pay- $100 after tax: seller’s receive- $80 buyers pay- $110 buyers pay 10 sellers pay 20- inelastic supply midterm 1 until here Chapter 7: February 29th welfare economics:
 the wellbeing of the consumers $$ WTP= the willingness to pay. Dovid= $300 300
 meir= $250
 selim= $200 250
 ari = $150 200
 (this is a step function ) 150 dovid meir selim ari it’s in the shape of steps to make it clearer.
 marginal buyer- someone who would leave the market if it just a tad bit higher in price. consumer surplus- the WTP- what he really pays= CS 
 consumer surplus is an area on the graph. look at the slideshow to get a good view of the graphs**** if the price is $260 then Dovid will have a CS of $40 if the price is $220, then then Meir will have a CS of $30, and Dovid will increase his CS to $80 
 and the Total Consumer Surplus will be, adding them together which will be $110 the step function is not used in markets today. we have smooth curves. marginal buyer- CS= 0 how to calculate TCS if the price is set at $50, and the buyers WTP= $60- there is a CS of $10
 if WTP > 50 they will buy if WTP< 50 they won’t buy
 if the price lowers to $30, then what is the TCS calculate the area of the triangle= 1/2 Base x Height P x Q/ 2 WTP= 60 P=30 then height is 60-30=30 
 PRICE 45 existing buyers 40 35 50 buyers entering the 30 market 25 20 15 D 0 10 20 QUANTITY find the marginal buyer at Q =10……….. $30 whats the CS for price $30 in the market- 40-30=10 x 10 / 2 = $50 suppose P falls to $20.. how much more will the CS increase due to a. the buyers entering the market b. existing buyers paying lower prices calculate the entire triangle then subtract the triangle that was made already and subtract. then use more geometry to calculate the difference. big triangle: 20 x 20 / 2 = 200 minus the 50 from the small triangle. 150 is the new area. now the existing buyers are B x H which is 10 x 10= 100 which leaves the last area to be 50. a. = $100 b. = $50 that was the demand side… now for the supply side: cost: all resources to produce goods, material, time, opportunity cost, etc. cost is the measure of WTS - willing to sell. jack’s cost = $10 so therefore he will only sell for more then $10 Janet’s cost= $20 so therefore she will only sell for more then $20 Chrissy’s Cost= $35 so therefore she will only sell for more then $35 marginal sellers leave the market if price were any lower because it’s not worth it for them PS= price minus cost S sellers remaining that left sellers that the market lose PS CS= WTP-P PS= P-C TCS= (WTP-P) 1/2 x Q TPS= (P-C) 1/2 x Q price decreases CS increases and PS decreases Price increases CS decreases and PS increases Total Surplus= CS + PS = total gain in a market a market economy is decentralized. (LAISSEZ FAIRE) 
 its determined on WTP and WTS.
 an efficient market makes the most of each the PS and CS Taxes drive a wedge. the incidence of taxes falls on the elastic curve. If sellers have inelastic supply they have greater taxes
 If buyers have inelastic demand they have greater taxes how do taxes affect surplus? taxes drive a wedge between buyer’s pay and sellers receive
 raises the price buyers pay at and lowers the money sellers receive. 
 reduces the quantity bought and sold. If you want less of something in the economy- Tax it because it reduces the equilibrium quantity. Revenue from tax= T x Qt = taxes x quantity of tT= PB-PS
 PS= D + E + F A CS=A+ B + C B C tax revenue= 0 because there is no tax D E but once tax is instated it drives a wedge 
 and makes C and E deadweight loss= DWL
 F Tax takes over B and D
 CS=Aand PS= F
 The tax is apart of the Total Surplus TS
 and C and E are the only surplus lost
 TS goes down when Tax is instated
 to find Total Surplus with a tax, PS+CS+TR 
 QT and subtract it from original TS before Tax to get
 the DWL… full problem: 400 400 250 200 150 0 0 100 75 calculate for exampleA- CS, PS, TS CS= 10,000
 PS= 10,000
 TS= 20,000
 DWL= 0 now instate in example B is a $100 tax
 calculate CS, PS, TR, TS, DWL CS= 5,625
 PS= 5,625
 Tax revenue= 7,500
 TS= 18,750
 DWL= 1,250 Deadweight Loss: the goal is to eliminate DWL. its more efficient tax if the DWL is less
 inelastic demand eliminates DWL, therefore inelastic demand is more efficient tax
 more efficient to tax, sunscreen, short run objects, or necessities marginal tax rate
 labor taxing- depends if supply of labor is elastic or inelastic. price elasticity of supply- change of QD/ change of price
 elastic- if P decreases QS decreases 
 inelastic- if P decreases, QS decreases a little inelastic labor, deadweight loss is small, we would work full time no matter what the tax
 if labor supply is elastic which it is in some cases, people would just wait rather then having to pay labor tax. for ex.
 retiring early, not having 2 incomes per home, black market economy. Do Taxes increase revenue? 
 Doubling taxes causes DWL to more then double
 Tripling taxes causes DWL to more then triple
 tripling Taxes lowers Total revenue
 The laffer curve shows that the more you raise taxes the less TR you receive. 
 tax revenue tax size this graph shows that with increasing taxes revenue decreases. The design of the tax system: practical- 
 -a government can sometimes improve market outcomes:
 - providing public goods
 - regulating use of common resources (water)
 - remedying the effects of externalities (property rights) GEP- all income from individuals in one year. how much of the pie is consumed by the government. tax is distributed with more tax money given to federal and less to state. when comparing different countries taxes have in mind culture, background, or religion 
 American government: income tax, social insurance tax, gas tax, etc….. 
 if a country has a smaller corporate tax people will be willing to build a branch of business there. sales tax 6%- individual income tax in michigan
 make a tax system- lower cost to tax payment - administrative burden - none of us know what it is.. its complicated
 - tax payments
 -DWL - how do taxes act as incentives?
 sin taxes- alcohol cigarettes etc. they wanna minimize the consumption, it increases DWL, but thats what they want
 taxes act as a social policy, it can stop consumption - income tax vs. consumption tax - consumption- labor supply inelastic, taxes increased 30-50% savings tax 25% interest 8% with interest- $106 with tax on the on the interest= $108 income= 100……. 30% tax …… $70…..50% tax……$100…paid less, same hours
 there is an argument against consumption…. 30,000 spends 95% on consumption, if income is 300,000 spends 25% on consumption you can reimburse for poor people or subsidize people, there are ways around it but poor people pay the biggest share average tax rate total taxes/total income marginal tax rate- the extra tax paved on the last dollar lump sum tax- same for every person lump sum- 4,000 income is $20,000 tax is 20% income is $40,000 and tax is 10% larger income- less tax average Proportional tax you pay a % not a certain amount no matter how rich or poor.. same % FLAT TAX RATE Regressive Tax
 high income taxpayers pay smaller fraction of income, lower income pays more, if rich you are less % you pay Progressive Tax
 Less income you have, less you pay Taxes and marriage income tax rate is 25% 1st 20,000 is excluded, anyone under 20,000 pays nothing. 
 married couple pay jointly. or you can file single
 Same and Diane each make 50,000 unmarried: .25 x (50,000-20,000) 7,500 each, 15,000 together 15,000/100,000= 15% married: 100,000-20,000= 80,000 x .25= 20,000/10,000 - 25% = higher taxes if joint. IF YOU HAVE SIMILAR INCOMES…FILE SEPARATELY- IF NOLT SIMILAR INCOME FILE JOINTLY harry- $0 sally- $100,000 
 unmarried- 20% 
 married- 100,000-40,000 = 20% Tax Incidence/ Equity: yacht incident, Luxury, so the manufacturers paid most of the tax. tax on fur coats fur is an elastic luxury- majority of tax on suppliers
 TAKE EVERYTHING INTOACCOUNT WITH TAX corporate income tax USA= 35% who pays? raise price- consumers paying more corporation receives less money workers are being hurt. That’s why people want to eliminate corporate taxes
 efficiency vs. equity tradeoff… we can tax income- we can tax consumption Chapter 9: welfare economics, CS PS and TS 
 comparative advantage leads to international trade.. opportunity cost for making product is lower
 New Concepts Pw- world price
 Pd- domestic price
 small country- therefore it is a price takers- can’t influence, the world price
 cereal- Pw- price that is in the world Pd price one country makes it for
 Import- XY country will import cereal if PW<PD
 export- XY country will export if PW> PD
 countries that exports soybeans A 6 B D 4 C 500 300 750 
 without trade: Pd= $4 Q= 500 
 Pw- 6 Pd- 4 
 Pw< Pd this country exports
 Qd= 300 
 Qs= 750 
 if there was no trade there will be a surplus
 surplus is 450, therefore they will export 450 before trade:
 PS- C
 after trade:
 PS - B,C,D (increased)
 TS- increased fromA,B,C, toA,B,C, and D a country that imports Plasma T.V.s A 3000 B D 1500 C 200 600 PD- 3000
 PW- 1500
 PW>PD= import QD- 600
 QS- 200
 QD-QS= 400 imported - shortage
 CS -AtoABD increased
 PS- B, C to C decreased
 TS- increased!ABC toABCD
 D is the gain from trade imports fulfill shortages while exports fulfill surpluses Exports Imports PS benefits CS benefits TS increases TS increases Pd<Pw Pd<Pw 
 even though there are a lot of loses, the benefits outweigh the losses Benefits of international trade: 1.imports increase variety- consumers like variety 2.when produce on larger scale= cheaper 3. monopolists have market power, they can change what they want
 so foreign firms can come in and change price because competition, increases incentive for lowering price. enhances flow of ideas facilitates the spread of technology around the world using existing resources better Trade restrictions: -benefits distribute widely and losses are distributed narrowly.. (benefits can be distributed over the whole USApopulation but the loses can affect the jobs of a small town in Pennsylvania) - Tariffs- tax on imports
 PW<PD now is PW + T
 A B $30 C E D F $20 G 25 40 70 80 imports: Pw<Pd before tariff:
 QD- 80
 QS- 25
 80-25= 55 imports CS=A, B,C,D,E,F
 PS= G
 TS=A,B,C,D,E,F,G, after tariff:
 QD- 70
 70-40=30 imports D, and F= DWL ….E is tariff, it is included in TS, because it’s for the government CS= A,B, decreased
 PS= C,G increased
 TS=A, B, C, G, E decreased
 TS decreases with Tariffs
 Restrict Trade: -import quota= limit on amount of goods imported
 - NAFTA- NorthAmerican Free TradeAgreement… this results in loss of jobs because losses are distributed narrowly
 -TS increases with imports and exports
 -We pay for imports with exports, we lose jobs in goods that we don’t have comparative advantage in and we gain jobs where we do have comparative advantage in. 
 -Jobs are reallocated when we lose business. there is a shift from low skill jobs to high skill jobs
 look at the graph…
 creative destruction- when an iPod was created so Cd sales went down. In the process of creating you are destroying a lot of jobs in the process. 
 Arguing for restricting trade: - child labor- people are poor and need the extra income that a child can bring in. once it becomes illegal they won’t pay as much because the opportunity cost of being caught is very high. It will hurt the economy of that country even more. it’s either work or starve.
 - it’s difficult for the government to determine which industries will eventually be able to compete. and wether benefits of establishing industries cost to consumers..
 LOOKAT SLIDES - national security- we shouldn't depend on foreign policy Chapter 10:
 externalities- uncompensated impact on a 3rd party
 example: pollution- anyone who is influenced by the pollution that you didn't compensate. there are negative and positive externalities negative- barking dogs, night parties private cost: (supply)
 Private value: (deamand) social cost: private + external cost
 external cost= value of negative impact on bystanders external cost Social cost Private cost price goes up and quantity goes down
 if private value exceeds social cost buyer value exceeds seller cost, then you would engage in transaction. Internalize the Externalities:
 make it your own. It’s more expensive for you and you respond to price. negative externalities: P increases Q decreases supply shifts left 
 positive externalities: P decreases Q increases demand shifts right examples of positive externalities:
 education: more high educated people in community, less crime
 R and D: creates knowledge other people can use. available for others
 Vaccines: you are less likely to get sick, people around are less likely also effects of externalities:
 negative: Tax
 positive: subsidize- payment from government as an incentive to do it. Public Policies Towards Externalities benefits of trade widely distributed and losses of trade are narrowly distributed command and control policy- regulate behavior directly. ex. you can only make cars at least 20 miles per gallon.
 Market Based Policies - provide incentives so that private decision makers will choose to solve the problem on their own.
 corrective tax and subsidies- ex. tradable pollution permits
 Pigouian Taxes
 Corrective Tax- a tax designed to induce private decision makers, to take account of the social costs that arise from a negative externality.
 The goal is to internalize externalities. eliminate the negative externalities. 
 Tax < externalities …there is an unaccounted ext.
 Tax > externalities … tax is exactly ext. Ideal corrective Tax= external cost 
 *** we don’t calculate externalities with #’s
 for activities with positive externalities
 ideal corrective subsidy= extend value= look at slides!! example of corrective tax: gas tax targets 3 negative externalities
 congestion, accidents, pollution. Tradable Permits: cap and trade: you allow people to trade permits to pollute and you can sell extra permit you have incentive to pollute less and trade permits for money The difference between Cap & Trade and Pigouin (corrective) Tax corrective tax: 
 the higher the tax the less you use
 carbon taxes you pay the amount you pollute Cap & Trade:
 market of tradable permit to pollute
 sell permits for money review: 
 negative externalities= tax
 positive externalities= subsidize how to get rid of externalities:
 golden rule- moral code.
 social sanctions- disapproval of community can overthrow even if it’s legal
 charities- get rid of ext.
 contracts between market participants and bystanders 
 The Coase Theorem:
 if private parties can costly bargain over the allocation pf resources, they can solve the externalities problem on their own. pre-conditions: 1. low transaction costs 2. well defined property rights
 example: a dog named spot. he barks and disturbs Jane who is Dick’s neighbors Socially efficient Outcome vs. private outcome
 Case 1: 
 When Dick has a right to keep spot:
 benefit of Dick having spot= $500 cost to jane of spots barking= $800
 she will pay him between $500-800 Case 2: 
 When Dick has a right to keep spot:
 benefit of Dick having spot= $1000 cost to jane of spots barking= $800
 Jane won’t pay because she doesn't want to pay over $800 Case 3: 
 Jane has legal right to peace and quiet:
 his benefit is $800
 her cost is $500
 dick pays $500-800 Case 4 is on the test…
 jane has the legal right to keep spot
 dick’s benefit: $800
 jane’s cost: $1000
 he would get rid of the dog, because it’s not worth paying more another example: value of swimming in a lake is $100,000, a factory nearby pollutes and it’s $50,000 to get the non-polluting equipment. when the factory has the right to pollute: 
 residents would pay the 50,000, because they will still have benefit of 50,000 when the swimmers have the right to swim:
 the factory would pay the 50,000 because it is less than compensating 100,000 why private solutions don’t always work? 1. transaction costs- to high of a cost might make it impossible to reach an agreement 2. Stubbornness- even if the agreement is possible 3. Coordination Problems- if the number of parties is very large, coordinating may be difficult Chapter 11:
 Public goods and common resources:
 we consume goods without paying. examples: national defense, clean air, water when goods have no prices the market forces that normally allocate resources are absent. The private markets may fail to provide the social efficient quantity of such goods. characteristics of goods: excludable
 prevented from using for public use rival
 Private Goods
 Common Resources
 if one person uses it, it can’t be used again ex. food ex. fish in Ocean non-rival Club Goods
 Public Goods
 could be re-used ex. cable TV ex. national defense Aroad, depending on tolls or traffic can be any of these four. Private Goods:
 rival and excludable
 Free Rider:
 is a person who receives benefit of goods but avoids paying. 
 none of us have incentives to pay radio stations peace they are common resources, so they have to sell advertisements. we are free riders, but it can result of the resource not being produced Cost benefitAnalysis: 
 a study that compares the cost and benefits of providing a public good. the government can take Taxes by the amount that free riders benefit. Common Resources:
 If they don’t get compensated they won’t provide the good. Tragedy of Commons:
 Aparable that illustrates why common resources get used more than is socially desirable.
 The tragedy is due to an externality:Allowing one’s flock to graze on the common land reduces its quality for other families. People neglect this external cost, resulting in overuse of the land. What can they do to fix this?
 1. Impose a corrective tax on the use of the land to “internalize the externality.”
 2. Regulate use of the land (the “command-and- control” approach).
 3.Auction off permits allowing use of the land.
 4. Divide the land, sell lots to individual families; each family will have incentive not to overgraze its own land.


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