Economics Notes 9/24/15
Economics Notes 9/24/15 ECON 201
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This 6 page Class Notes was uploaded by Joanna Tang on Friday September 25, 2015. The Class Notes belongs to ECON 201 at University of Tennessee - Knoxville taught by Dr. Ken Baker in Fall 2015. Since its upload, it has received 41 views. For similar materials see Intro to Economics in Economcs at University of Tennessee - Knoxville.
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Date Created: 09/25/15
Economics Notes 92415 Market Failure What is it A situation Where the market equilibrium results in too few or too many resources used in production Sometimes government policies can help improve the situation The job of market is to tell you how much of something you need Some Causes Lack of Competition Externalities Public Goods Income Inequality Others a Asymmetric information b Moral hazard 9999 When might the market do a bad job What are the results A perfect example What does a Perfect Market look like 1 Demand is composed of lots of buyers a Buyers compete and can t direct the outcome 2 Supply is composed of lots of sellers a Sellers compete and can t direct the outcome 3 The market finds the correct price a P accurately re ects the value of the product 4 The market finds the correct quantity a We as a society actually want this much of the product b We want to use resources to make only this much NO ONE BUSINESS OR BUY CONTROLS THE PRICE NO MARKET IN REAL LIFE WORKS PERFECTLY Lack of Competition The Problem Sometimes firms get greedy They reduce output and drives up prices to buyers This increases their profits Buyers end up paying more for product Resources are NOT allocated efficiently The Solution The government has passed several antitrust laws 0 It is illegal for firms to restrict trade fiX the market 0 Corporations can be fined 0 Individuals perpetrators can be fined and sent to jail When firms collude they generally agree to collectively reduce their output This works like a decrease in market supply The reduction in supply makes the products more scare and valuable As a result firms can raise the price Your supply curve shifts left Externalities Externality A cost or benefit imposed on people third parties other than the direct private consumersproducers Externalities can be negative or positive 0 Mgative extemalities when market participants impose some cost on outside parties 3rd parties non market participants 0 Positive extemalities when market participants impose some benefit on outside parties Negative Extemalities The Problem Production of some goods create special costs that aren t taken into account 0 Therefore the cost of production is too low I Thus too much of the good is produced Q is too high I The price is too low P is too low 0 Resources are NOT allocated efficiently The Solution Two common methods to force firms to reduce production 1 TaX goods that cause negative extemalities 2 Regulate the production of goods that cause negative externalities Either method attempts to reduce Q Public Goods Some goods have unique properties that make it difficult for normal firms to profitably provide Public Good A good or service with the following properties 1 Users collectively consumeenjoy the benefits 2 There is now way to bar non payers free riders from consuming the good Question Why is this a problem Answer Free Riders people who get to enjoy the benefit of the good wo having to pay Example Firework Show Free Markets and the Economic Pie The Economic Pie represents the total value of what a country produces It represent the goods amp services produced that we all enjoy It also represents income as these are ultimately sold to buyers Size of the pie using the free market system Size of the pie using a different economic system Most people more or less agree that the free market system results in a larger p3 Income Inequality The market is an amoral entity The market doesn t care about the outcome generated The market doesn t care if person X has 4 homes and Y is homeless The market doesn t care that social workers earn 40000 and Kim K earns 40000000 But as a society do we care Wealth Inequality in America Several government programs aim to provide a some minimum standard of living for the very poor 0 Progressive income tax social security unemployment compensation Food Stamp Program Temporary Assistance for Needy Families Minimum wage program Demand Elasticity Elasticity is used to measure the strength of a relationship between any two variables Elasticity measures the responsiveness of one variable in response to changes in a related variable sensitivity of one variable in response to changes in a related variable Speci cally it measures the change in one variable when another variable changes by 1 Price Elasticity of Demand Measures the responsiveness of QD to changes in P We know that when price falls consumers tend to buy more but how much more Measures the change A in Q1 when P changes by 1 ED A QDAP Price Elasticitv of Supplv Measures the responsiveness of QS to changes in P We know that when price falls firms tend to produce less but how much less Measures the change A in QS when P changes by 1 Es AQsAP Possible Values for ED and ES 0 lt E lt 1 Inelastic Unresponsive Qd or Qs is not responsive sensitive to changes in price 0 E 1 Unit Elastic Qd or Qs change by the same percentage as price 0 1 lt E Elastic Qd or Qs is responsive sensitive to changes in price