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Microeconomic Principles

by: Junior Yost

Microeconomic Principles Econ 103

Marketplace > George Mason University > Economcs > Econ 103 > Microeconomic Principles
Junior Yost
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Donald Boudreaux

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Donald Boudreaux
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This 22 page Class Notes was uploaded by Junior Yost on Monday September 28, 2015. The Class Notes belongs to Econ 103 at George Mason University taught by Donald Boudreaux in Spring 2014. Since its upload, it has received 49 views. For similar materials see Microeconomics in Economcs at George Mason University.

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Date Created: 09/28/15
economics is about choices amp why we make them Adam Smith 7 founder of modern economics 0 O O O O O 1776 7 wrote The Wealth of Nations 9 never been out of print I An Inquiry into the Nature amp Causes ofthe Wealth ofNatz39ons Noticed that full nations were emerging from poverty in the mid18Lh century I Bc was a private tutor so traveled a lot and saw this Also noticed that though everyone thought Spain was the richest country their ppl were impoverished Smith says wealth is the ability of ordinary ppl to doconsume the things they want to Wealth has causes 9 we are lucky that wealth is the norm 7 lucky that we can ask what the causes of poverty are 9 so what are the causes Specialization Economics are not planned Fundamental Building Blocks of Economics 1 9 0 Our world is one of incurable scarcity 9 resources are scarce a A resource is scarce if there is not enough of it to satisfy everyone s desire for it if it were free Scarcity implies choice which implies cost a The fact that you can t have anything you want means you must make choices which means there is a cost b Cost is the value to you by giving up what you choose i The fact cost exist means you have options More is preferred to less in general All social order emerges from individual choices amp actions amp must be explained as such a Methodological individual b Only individuals themselves have minds Ppl are rational amp selfinterested a Ppl act w purposesmotivesgoals b Ppl learn c Ppl s preferences are transitive not unchanging just transitive d Self interested i Not that ppl only care about themselves ii Means ppl care about himherself loved ones amp friends more than they care about strangers Ppl respond predictably to incentives a If you make it more costly for someone to do something ppl will do less of it 9 make it less costly they ll do more Ppl are rational amp selfinterested regardless of who pays their salary Tastes are subjective a The only person who really knows what I want is me b The economist says that if you like something that is your choice amp no one else s 9 ie smoking 9 economist says smoking is good to the smoker it is not bad 9 Decisions are made the margin a Diamondwater paradox Adam Smith 9 ppl will choose water over diamonds if facing eternal thirst amp yet diamonds are way more i Marginal revolution when ppl choose we don t choose all or nothing choose a little bit more of a little bit less 10 Costs are not the same thing as prices a Cost of going to school is far greater than just tuition i Cost includes your possible income during these 4 years 11 Intentions are not results amp results do not necessarily re ect intentions a w pencil ex person mining graphite intends to do just that 7the fact that it goes into a pencil is an unintended result of person mining graphite General Rules for Sound Thinking 0 Economics is a positive science 9 thinking seriously about the world 7 not thinking about anyone s opinion just the facts I Positive analysis 7 can be checked objectively I Normative analysis 7 cannot be checked objectively opinions 0 Makes use of modelstheory I Simpli ed version of reality which helps you understand that reality Fallacies o Posthoc Fallacy7 cause amp effect assumption 0 Fallacy of Composition 7 fallacy to say that just b c something is true for one person it is also true for the larger group 0 Naturalistic Fallacy 7 fallacy to say that just bc something is that it should be I Something s common existence does not make it ethical ie slavery 0 Reverse Naturalistic Fallacy 7 fallacy to say that just bc something should exist that it does exist I Don t be too romantic or too gullible about the world 0 Ad Hominen Fallacy 7 fallacy to judge the rightness or wrongness of an argument by the identity of the person who delivers it Varieties of Entrepreneurship o Entrepreneurs see the world differently than other ppl 0 Development theory has focused on I Finance gaps amp poverty traps 7 some ppl are just poor 1 we all started out poor wealth wasn t just lying around Import substitution strategies 7 spending too much elsewhere amp make everything yourself 1 but if countries make everything themselves they won t have much that is very good Dependency theories 7 poor bc are dependent on past colonial leaders 1 but the US was a colony amp we re doingjust f1ne same w other former colonies I Role of institutions 7 wealthy countries have certain institutions 1 ie the way the court systems how ppl can own property church etc 2 wealthy countries generally have free press ppl can do biz low cost less corruption in gov t ppl can ownsell property more acceptable to fail 9 w out failure no innovation entrepreneurship I Interest in doing biz l easier it is to do biz the more biz will ourish I Entrepreneurs take many shapes 1 traditional 7 meet consumers needs innovate amp drive change do more w less 2 social 7ppl who start a biz to solve a social problem Q ll gaps where gov t fails 3 policy 7 ppl who try to make it easier for the lSt 2 to do what they do 4 together they can drive effective social change amp build the missing middle I Roll of the middle class promote stability amp better governance demand more transparency amp accountability protect amp secure property dispersing power 5 middle class helps limit predation 0 Landscape of Africa 7 developing countries I Small of large firms in formal sector I Large of biz in informal sector I Incentives promote informality 7 diff to get biz loans tax rates high I Institutional environment limits growth 0 Largescale Entrepreneurship in South Africa I Largest economy in SubSaharan Africa I Agricultural pop 14 of total population I Farming sector oriented towards commercial farming I Majority make gt 357 I 34 have no income I Monsanto 9 co took interest in poor farmers 1 introduced CombiPacks 9 3 types of seed herbicide pictogram instructions one pack plants 1 hectare 0 costs N 35 2 benefits does not require a plowtractor 0 reduced labor costs amp time increased yields increased food security greater stability in yields increased opportunities to pursue other entrepreneurial ventures 99 000 0 Most are small scale 7 social entrepreneur Man in South Africa 7 making sandwiches amp selling them to schools amp to tourists Private schools being opened in slums etc 0 Policy entrepreneurship in Nambia Devolves legal rights to manage wild life amp benefit from tourism to local ppl 7 shifts incentives in positive direction Support from donorsNGOs to build capacity White people had similar rights since 1975 Result empowered a local ppl to act entrepreneurially to create a more positive future 1 livelihoods diversified 2 environment improves 3 tourism increases 4 incomes rise What did Adam Smith identify as the cause of the wealth of nations 0 Pg 1 of Wealth ofNations specialization oflabor Pin example from Smith 20 pinsday to 4800 pinsday bc specialization 1 higher productivity more 0 So how do people know what to specialize in 0 Why does output increase when workers specialize I Workers don t waste time moving from task to task When ppl specialize they become better we they re doing The greater degree of specialization the more likely it is someone will create a machine that can perform the task 7 workers being replaced can be used elsewhere Important piece of econ that is not intuitive o Principle of Comparative Advantage Bananas Fish 50 David Ricardo 1 On the Principles of Political Economy amp Taxation 0 Ch 7 principle of comp adv Assuming we have 2 ppl in the world 7 Don amp Luis both stranded on an island 7 only two goods they care about bananas amp fish Could produce 200 Spending all your time gathering one no time for the other good 7 tradeoffs Do produce 39 25 Can only consume what you produce 100 I Luis tells Don he will give him 37 sh for 25 bananas 7 Don wants to still have bananas 7 can do so if specializes in bananas Bananas Fish After trac I Don better bananaer I Luis better sherman 1 So if both only do what they re good at amp then trade 9 both win I To have comp adv in good A must have loss in good B I How much does it cost for each person to make a good 1 whichever is lower wins I The more ppl amp products you add the more true it becomes I Extension of Don Luis example 1 Nothing Smith talked about is in here 7merge Ricardo amp Smith 2 Luis becomes better sherman 7 300 shmo 7 Luis is better off 7 is Don 0 Yes 7 comparatively better bananaer 3 Introduce machinery 7 shing net 7must make said net so needs to use time to make it 7 will only spend that time if output will increase 0 Consumer good hamburger music download etc 0 Capital good things that help us get M o Takes 1 mo To make net 7 must sacri ce BampF to make net amp then increase amt of sh I Saves up on BampF over time so he can make net amp increase F 7 accept now bananas even less ef cient Saving increases productivity by turning consumer goods into capital goods What directs Don to collect bananas amp Luis to go shing 0 Money I Serves two chief functions 1 medium of exchange 2 unit of account money expands of ppl we can buy stuff from better than barter system bc now Don can buy a bottle of wine wo trying to exchange it for an econ lecture I banks serve as connection btw savers amp investors Specialization 7 how do ppl know what to specialize in 0 How are resources allocated Production Possibility Curve 7 shows boundaries btw possibilities amp impossibilities I Shows all combos that are possible for ppl in this econ to produce I To max out one good have none of the other and vice versa I TANSTAAFL 7 there ain t no such thing as a free lunch I In a growing econ we want a moving outward of the PPC I Maximum efficiency of society must be somewhere on this curve 0 Determinants of PPC position moving out I Increase in resources I Increase in machinery capital equipment I More efficient use of resources 9 advances in technology amp knowledge 9 ie how to better organize a work force I Better laws policies institutions amp regulations Supply amp Demand 0 Prices are set in markets 0 In market there are buyers amp sellers 0 Buyers I Anyone who wants to acquire something is a buyer I Seek to maximize their utility 9 satisfaction that buyers want get I Law of Diminishing Marginal Utility 1 the more you have of some item the less utility you get from any one unit of that item marginal utility 7 utility you get from the last unit of something you get 0 ie amt of utility you get from having 2 pairs of your favorite jeans instead of one pair ex you are massively hungry amp you eat 3 burgers 7 utility of lst is greater than the 2quot which is greater than the 3r ex rich uncle is the prez of Levi s amp gives you 20 pairs of jeans not just one 7 now utility is much higher w 20 pairs than 1 0 now he takes them away amp the loss of the 2quotd to last pair is far greater than the loss of the 201h to last pair ex Gabe buys an HP computer for 1000 amp he buys one not two 0 bc he has one computer amp it works fine 7 utility of the 2quotd is less so he would not buy another for 1000 0 to get buyers to buy more sellers must lower their price b c of this law Law of Demand 7 when demand changes quantity changes in opposite direction 0 See Demand Curve 1 o inverse relationship btw price amp quantity demanded 0 price is not the only thing that controls quantity ppl want but practically speaking it is most important 0 N E 9 V39 0 Types consumer surplus how much more you are willing to pay for something than you actually pay 1 See Demand Curve 2 of demand curves Individual demand curve Market demand curve 0 Why isn t the demand curve in position of d1 See Demand Curve 3 0 Price E Where consumer is on a demand curve is determined by price 1 change in price only causes movement along a demand curve 0 movement along demand curve is called a change in quantity demanded 2 movement of demand curve is called change in demand 0 when something other than price changes like quantity someone wants to buy while the price stays the same Change in demand never caused by change in price 7 so what causes demand to change change in consumer s taste 2 change in consumer s income 0 normal good 7 income changes amp demand for that good changes in same direction 0 inferior good 7 income changes amp demand for that good changes inversely 3 changes in the prices of substitute goods 0 substitutes if as the price of one changes the demand for other changes in the same direction ex price of Pepsi A demand for Coke A 4 complementary goods 0 complements if as price of one changes demand for other changes in other direction 5 expectations 0 if consumers expect the product will be more dif cult to get in the future the demand for it today will rise amp vice versa 6 changes in of ppl in the market in regards to market d curve 0 more ppl demand curve moves out inverse applies lasticity of Demand Elasticity i slope of demand curve See Demand Curve 4 Formula of Elasticity E A Qd A P l E elasticity 2 A delta 3 Qd quantity demanded P price ifE gt 1 9 elastic ifE lt l 9 inelastic 7 ifE l 9 unitelastic I So what 1 total revenue price quantity 0 demand is elastic if as price changes TR A in opp direction 0 demand is inelastic if as price changes TR A in same direction Elasticity i slope of demand curve b c elasticity changes as you move along demand curve See Demand Curve 5 What determines elasticity l of available substitutes for a product 0 How easy it is for consumers to sub it out o The A of subs the more elastic the demand amp vice versa I ie bottled water 7 if Desani raises price consumer can then nd another seller 7 demand v elastic ie insulin 7 if insulin seller raises price consumer still needs it amp will still buy it 7 demand v inelastic 2 amt of time consumers have to adjust to price change 0 A time A elasticity of demand amp vice versa 3 consumer s budgetincome spent on good 0 A budget A elasticity of demand amp vice versa 999 Supply 0 Change in quantity supplied is movement along supply curve 0 Shifting of supply curve is change in supply 0 Law of Diminishing Marginal Returns I Law of production describing general case of what happens when things get produced I Combo of at least two inputs 7 ie land amp laborer 1 one input must be xed in quantity 7 other inputs is variable I curve shows lowest price for any one quantity l point of diminishing returns bc going up slower rate 2 point of negative returns o Equilib law says that as add more units of variable input to fixed input there will come a point when output continues to increase but a diminished pace A price A quantity supplied What causes change in supply 1 anything that changes cost of production 2 as cost in production increases supply decreases shown by supply curve moving to left 3 A price A supply vice versa 4 there is elasticity of supply as well 5 See Supply Curve 1 rium See Supply and Demand Curve 1 Quantity demanded gt quantity supplied shortage 7 tends to correct self Quantity demanded lt quantity supplied surplus Stable equilibrium sh bowl equilib 7knocked out of equilib price will move back Unstable equilib knife edge equilib 7 contrasting effect Change in demand changes equilibrium price 1 See Supply and Demand Curve 2 Change in supply change in equlib quantity in same direction converse change in price 1 See Supply and Demand Curve 3 0 Amount Consumers Actually Get Curve 0 Supply 4 77 V See Supply and Demand Curve 4 7 green highlighted sideways and demand of plywood after a natural disaster Rise in price i greed Demand rises supply sinks price gauging See Supply and Demand Curve 5 Lecture 1 February 2 2011 1776 Adam Smith published The Wealth of Natures 1St economics book Since Industrial Revolution life expectancy has increased Tuberculosis and flu main causes of death Starvation chief cause of death before Industrial Age Privacy was an 18th century inventionquot Beer was often a substitute for water cause water was dirty Human population barely reached 1B before 1350 today is about 68B Earth today keeps alive about 7 times more than it has throughout its entire history 48B of the 68B people today live far richer than the past Typical American makes 500 working for 15 minutes 2000 per hour Lecture 2 February 9 2011 Fundamental Building Blocks of Economics 1 Scarcity is unavoidable Scarcity implies choice Choice implies cost 2 More is generally preferred to less 3 There isn t such a thing as a free lunch 4 Everything we consume costs something to someone else Cost is not the money it s what you could have bought with it instead Everything in society is done by individuals individuals act and choose not large groups like America 5 People are generally rational and self interested Being rational means to learn from experience to act purposefully and preferences are transitive Everyone cares more about themselves loved ones and friends self interested 6 People respond to incentives 7 Tastes are subjective 8 Decisions are made at the margin 9 Safety is not free Intentions are not consequencesresults 10 Beware of unintended consequences quotad hominem means quotthe man don t just based on the speaker Post hoc ergo proctor hoc because A happened first before B it means A caused B Falacy of composition occurs when it is believed that what is held true for individual is held true for the larger whole group Naturalistic fallacy just because something exists that it ought to be Reverse naturalistic fallacy just because something should exists that it must exist Economics positive science aims at understanding the way things are Economics is the matter offact not opinions Lecture 3 February 16 2011 Capitalism has tons of capital goods extremely efficient Economic growth production possibilities curve moves outward As specialization rises production possibilities curve moves outward Mercantilism Wealth is money Money is metals gold silver Country s wealth is determined by amount of money government has Smith quotWealth is not money it is access to things by the general publicquot Standard of Living 1 With the division of labor people spend less time moving from task to task 2 When we specialize in doing something we become better at doing something 3 When labor becomes specialized it is more likely that someone will invent a machine to do the labor forcing the laborer to do something else Thomas Malt David Ricardo English business man in late 18th19th century Comparative advantage a law in economics 9 refers to ability of a party to produce a particular good or service at a lower opportunity cost than another party Our civilization consumes way more than we could ever produce Special trade allows us to tap into the talent of other people As you become better at one thing you comparatively become worse at something else By becoming better at one thing you re setting up your trade partner to be better as well whether or not you charge anything Saving makes the economy more productive Lecture 4 February 23 2011 Microeconomics price theory theory of price asserts that the market prices reflect interaction between 2 opposing considerations 1 side demand considerations based on marginal utility other side supply considerations based on marginal cost Prices are the exchange ratio of goods to money Money allows you to get something from someone else in exchange for something they want To have exchange you need a buyer and b seller Buyers have money and want to acquire something The law of marginal utility utility means the felt sense of happiness satisfaction the more of something you have access to the lower is the utility that you get from any one unit of that thing ex thirsty drink a glass of water the 2nd one won t be as good Sellers want to satisfy the buyers needs and make money The law of demand when the demand for a product falls the price will fall as well If the demand increases so will the price A movement along the demand curve is from change in price not from change in quantity change in quality demand It only changes from the price ofthe good An increase in demand will show by a change to the right Determinates of Demands Consumers taste and preferences Consumers or buyers income Norma if as consumers income changes the demand for the good changes in the same direction nferior if as consumers income changes the demand for the good changes in opposite direction Changes in the prices of substitute goods 2 goods are substitutes if as price of one changes the demand for the other changes in same directions Ex Coke amp Pepsi Changes in the prices of complementary goods They are complementary ifthe prices of one good changes and the demand for another good changes in the opposite direction Ex coffee amp Styrofoam cups Change in the number of consumers in market Concept of relative demand elasticity the greater the responsiveness to the change in price the more elastic Elasticity is the percent change of quantity demanded divided by the percent change in price Total revenue is total money the seller takes from sales Lecture 5 March 2 2011 3 Determinates of Elasticity 1 Number of available substitutes for good The greater the number of substitutes for good the more elastic is the demand 2 Time the consumer has to adjust The more time the consumer has to adjust to higher prices the more elastic is demand 3 Percent of budgetincomethat is spent on good The greater the percentage of your income that is spent on the good the more elastic is demand When high ticket items cars house etc rise in price it s more difficult to adjust to the prices Supply The higher the price of something the greater is the willingness of people that own that to sell it The lower the price of something the less is the willingness of people that own that to sell it Production requires inputs Inputs are factors of productions Ex Inputs insurance parts mechanics etc Output automobile Ex Inputs land workers seeds etc Output corn crops Fixed Inputs Amounts used in production don t change Law of Diminishing Marginal Returns In the process of combining variable inputs with a fixed input there will come a point at which output increases but at a decreasing rate Ifthe law weren t true you could feed the whole world with a flower potquot Famous economics quote As with demand we distinguish with change in supply ncrease in supply supply curve moves to the right A change in quantity supply is caused by change in price NEVER causes the supply to change A change in supply is a shift of the supply in any direction The main determinant of supply is cost As cost and production rise supply falls As production and cost falls supply increases Technoogy is the other determinant of supply Plans of buyers are coordinated with plans of sellers QampA Sessions Monday at 1900 in Robinson B105 8 Wednesday at 1500 in JC Cinema If you value something more intensely you re willing to pay more for it The higher price is what entices sellers to bring more to the market Price rises because the demand increases Price fails because the demand falls Higher price coordinates plans of buyers with plans of sellers The Law of One Price For any product it will tend to be sold at only one price equilibrium price Lecture 6 March 23 2011 Price ceiling price cap when the government puts a legal limit on how high the price of a product can be In order for a price ceiling to be effective it must be set below the natural market equilibrium When a price ceiling is set a shortage occurs Raises market value of good or service Market Value MV If you make something more that is scarcer it s more valuable Lecture 7 April 6 2011 Only logical thing to do with a US dollar is spend them in America Foreigners can spend dollars is purchase goods services or assets Things we sell are calls exports Lecture 8 13 2011 Lecture 9 April 20 2011 Public Choice greatest hits quotThe Bundling effectquot you want what you put in your own grocery basket when there are grocery baskets already filled up with stuff you might not necessarily needwant everything in it Voters in elections sometimes vote on just one issue choose the pre made grocery basket because of one thing in it 9When government deals with a lot of different issues each candidate for office necessarily represents a stand on each of the issues taxes transportation war etc So each candidate is a bundle of positions and cannot be unbundled can t vote for Obama on his war position and McCain on his tax policy you have to choose one or the other Capture Theory of RegulationEven if regulation of an industry is begun with the intention of helping the public by controlling the industry begun with the best intentions the regulators get captured by the people they are regulating The regulators get captured by the peopleparties they are regulating Ex regulation of utility rates usually private Government says that they have to get approval from the regulative body to change anything Baptists amp BootleggersWhen a particular proposal is most likely going to get enacted into law because a lot of people support it A proposal supported by both a group of people with a non monetary interest Baptists and a group of people who have monetary interest bootleggers in it is the proposal that is most likely going to get enacted into law quotEx Keep alcohol illegal A public good if it is supplied to one person it is necessarily supplied to other people at the same time So can t exclude other people Ex THE classic public good National defense a TRUE public good has 2 aspects to it cannot exclude people 1 Non exclude ability It is impossible to prevent other people from enjoying it People can free ride since there is no way to exclude them Ex Cant prevent people who did not pay for it from enjoying it 2 Wide consumption ability if provided to one person a bunch of other people can enjoy it Ex if pollution is reduced it doesn t help just one person helps a bunch of others too A rock concert has wide consumption but it has a way of excluding people if they don t buy a ticket So a rock concert is not a public good it just a good since it can be privatized Public Goods Problem Can t supply to just one person have to supply to everyone Negative Externalities When 2 people engage in a transaction that has an effect on a third party who had no say in that transaction Solving externality problems is a public good Public finance how government acquires and spends money Income tax 3 basic kinds are possible 1 ProportionalFlat taxes Rate does not change with level of income 2 Progressive As income rises the rate of taxation rises 3 Regressive Opposite of progressive You start with high income tax rates and then then fall as you make more money No country uses this Only 2 practical types proportional and progressive nfation causes bracket creep The LafferCurve f tax rate is 0 the government will get 0 If the tax rate goes from 0 to 100 the government will also get 0 because no one will wor Laff pointed out that you can get the same amount of revenue from cutting the tax rate from r to r39 Or ifjust lower a little bit to rquot you get more revenue Shown in 2 d grap At higher income tax rates 2 things happen 1 Amount of work effort decreases 2 Amount of tax avoidance and tax evasion increases Tax avoidance taking steps to legally not pay taxes Ex put money in tax free bonds Tax evasion illegal not paying taxes Cutting tax rates and tax revenue are 2 DIFFERENT things Cutting tax rates is good and can help Eclum 111sz 421111 by tzxzttun and 2H busstbte rates uf tzxzttun tn changestnthe rate uftzxzttun m Revenue quot 15 m Yax ale scutttng tax rate makes tax revenue rtse revenuetnst tsbest tuwer une ts better rshuutd never se 2 2x rate ntgnertnsn rt une tn tne rntddte uf curve ertght tee wet Ctzrke Muurttztrt cttrnbtng Destns39 pregnanctes tn tne Jeansernsde btrtn cuntrut szurdzbte and essv tn access makes tncrezsed nurnber uf unwanted pregnanctes stncumetzx tsz tsx tevted un tne tncume uf tndtvtdustsur bustnesses tne EDS uf setttng tne zpptes r nen setters cu tn ressetne suppty curve sntrtsbsck e sArty decrease tn suppty makesequtttbrtum prtce ntgner sBy rststng EDS uf bruducttun subbtytng tt wttt cause prtcetu rtse mus eventczt dtslzrtce between 2 tstne srnuunt uftzx e suppty uf zpptestu fatt rsuppty and dernsnd zthysdetemttrte wnst tne edutttbrturn prtce wttt be stht tstne burden uf tnetsx Andwnu besrstnst burden sBurden furbuyers ts uw much tney buypay beruretsx curnbsred tn stter sBurden fursetters tsnuw muchthey purchase befuretzx cumpzredtu after sBurden uftzx ts snared by buyerszrtd setters tax revenue gues duwn wnen tax rate gues ub Price Control 7 legislation by a government that makes it illegal for a price to go above or below a certain price Price ceilingcap 7 price can t go above a certain point 0 Intended to make a good more affordable available 0 Always causes shortage that cannot correct itself 0 Makes good more costly not expensive but costly o Necessitates some other means of distributing the good I Must nd another way to get value 0 Price ceiling means value reported of the good is false 7 forces the market to lie 0 Prices spike after natural disasters b c demand is greater of goods services one might need 7 price cap prevents this amp drives supply down amp cost up 0 Examples I Gas in 1970 s 7 cost of gas v high not just in terms of I Hardware in Charleston SC 7 drove hardware biz to surrounding areas I Rent control in New York 0 Reduced quality of apartments that exist 0 Creates incentive to destroy property 0 More condos built less apartments available Price Floor 7 price can t go below certain point 0 Causes surplus 0 Example I Minimum wage 0 Does not cause in ation o Supposed to benefit lowskill workers so they can acquire skills and go on to earn more money Most lowskill jobs can now be done by machine Supply curve of unemployment moves out b c limits of jobs available Estimated that for ev 10 minimum wage goes up teenage unemployment goes up 1 0 Competitive prices in work place are good b c it eliminates discrimination in workers so price oors encourage worker discrimination International Trading Mercantilism 7 protectionism 0 Smith first antimercantilist 0 Purpose of trade is to accumulate for suppliers 0 So trade is more successful the more exports a country has amp fewer imports 0 So trade is a zerosum game Economics of trade 0 Assumption there are two countries in the world China amp US I Also Chinese hate all things American so no shipping to US 7 won t get v far 0 Chinese export cars to US US sends 1 million to Chinese 0 The more cars from Chinese the less Americans will buy Americanmade cars more unemployment in U S BUT the 1 million will come back to US somehow amp the story goes on 7 must look further into analysis I 3 things foreigners can and will buy from US goods services assets 0 US export lumber to Chinese Chinese send 1 million to US 0 Doesn t reduce employment just shifts it from one industry to another 0 0 Imports 7 goods services a country buys from foreign country 0 Exports 7 goodsservices a country sells to foreign country I Remember countries don t trade people trade 0 Tariff 7 tax on imports 0 Merchandise 7 anything you can touch I Trade account measures trade only in merchandise 9 value of merchandise imports gt value of merchandise exports 0 Current account 7 measures trade in goods AND services not investments 0 Capital account 7 measures trade in investment ows across borders I Current account capital account zero 0 Will always cancel each other out o No such thing as un balanced trade 0 Trade 7 machine for making something we have into something we want Assumption now there are three countries in the world US China and Brazil I China can sell to US but not buy anything bc can buy from Brazil 0 China exports cars to US US sends 1 million to China US exports software to Brazil Brazil sends 1 million to US Brazil exports coffee to China China sends 1 million to Brazil 0 Current account is balanced o Often discussed but totally irrelevant US trade de cit with China 7 again only looking at a small part of a larger picture I No need to punish China 0 Ultimate value of trade is how much you can consume not how much you sell 0 Realcash balance effect 7 when money supply falls purchasing power of the remaining goes up 0 I No evidence that suggests the 1 million that goes from Us to China won t eventually come back 7 in long run employment will not suffer I Changes in intemational trade will result in job loss amp will create other jobs but so will any kind of economic change 0 Example polio vaccine 7 V effective 7 loss ofj obs for wheelchaircrutch factories iron lung makers etc 7 not thought of as bad 0 Creative destruction 7 new ways of doing things destroy old ways of doing things 7 ongoing process I Trade is a part of creative destruction 0 Does trade put downward pressure on wages I Us is a highwage place 7 so how can American workers compete with foreign workers Why don t businesses move to Mexico 0 Price is not all that matters 0 American productivity is much higher than Mexican productivity bc Americans have higher capital to work w machines infrastructure etc Economics of Politics James Buchanan amp Gordon Tullock 7 saw overreaction against communism during the Cold War 0 Politicians in democracies do not not think about themselves 0 Said we should apply economics to politics 0 The Calculus of Consent Kenneth Arrow 7 mathematician o Decided to prove democracy was as good as we say it is o Arrows Impossibility Theorem 7 proved that in general popular opinion doesn t matter what matters is how the choices are presented I Results of majority rule are surprisingly arbitrary 0 Example Don Dan Cynthia A C B B A C C B A 0 To order collectively at a restaurant must vote to come to one answer Pairwise voting 7 works b c is arbitrary way to stop voting 0 A vs B 7 2 to l 7 bananas are out so A vs C 7 l to 2 7 cantaloupe wins 0 Suppose B vs C 7 2 to l 7 cantaloupe wins so B vs A 7 l to 2 7 apples win 0 Any of the options can win a majority I Exceptions to Theorem 0 Don Dan Cynthia A A C B B B C C A o Condorcet 7 one option will always win 0 UNLESS we introduce specials 7 can always add more options Don Dan Cynthia A D B A B D B D C C A 0 Again winner will depend on where voting starts I So who decides the order of the voting 0 Agenda setter 7 why it s so important to be speaker of the house 0 There is no righ outcome Another example ltw0 w0Ugt gt0Uw gt0Uw s B 7 B wins even though technically B vs D D would win even though initially D only had 10 of the vote Don Dan Cynthia A A C B B B C C A I Voting only reveals order of someone s preferences amp not the intensity of those preferences 0 Ideas from Buchanan Tullock amp Olson I Special interest group effect SIG effect 0 Example price of sugar is arti cially high in US o Dislike this but can twon t do anything about it 0 Just bc a program exists doesn t mean it s good or makes sense 0 Might mean it s in the interest of a special group I Rational Ignorance o Re ects idea that knowledge which is scarce or costly is not worth having 0 Example oflight bulbs in ceiling ofthis room 0 Example voters are rationally ignorant about what they are voting for I Rentseeking Theory 0 Rent payment that recipient doesn t really deserve bc of special privileges o Gov t can grant such privileges so ppl seek them in order to get richer o Raise taxes tariffs etc gt waste of timeresources I Bundling Effect 0 Typically applies to voters choosing candidates for office 0 Get some of the stuff you like amp some of what you don t like I Bootleggers amp Baptists Coalition 0 Bootleggers are the ppl who stand to gain nancially from a program that makes alcohol illegal 0 Don t want alcohol to be legal b c will lose biz but can t speak up about it o Baptists are ppl who support the program and are pure 0 Sincerely believe it is evil to drink 0 Baptists can speak up for both parties and work together to bring about the outcome they want Economics of Taxes and Federal Spending Only had state taxes for everyone since industrial revolution Income amp sales taxes fairly new also 7 UK lsL country to have them 0 Not source of Us revenue til 1913 7 until then it was tariffs amp alcohol taxation 0 Goal to show that the gov t didn t like rich ppl 7 not meant to take in income Not until 1943 that the average American income earner paid income tax Got prohibition bc of income tax 7 got rid of prohibition b c of income tax and Depression Proportional Flat Tax 0 Every dollar of income is taxed at fixed rate let s say 10 no matter how small your income is Progressive Tax 0 As income M rate of taxation M 9 incomes broken into tax brackets Regressive Tax 0 Opposite of Progressive 9 no one uses it In ation causes bracket creep 7 gov t pushes them into higher tax bracket but person doesn t benefit or suffer from it See notes 7 La er Curve 7 graph 1 When gov t imposes a tax it is incorrect to say that party is impacted by that tax 0 That it is only costly for the party the tax it is imposed on o Excise tax 7 taxes per unit on a good exchanged I Good or bad 7 depends on how the gov t spends the I Ex tax on apples 0 gov t makes apple seller responsible for tax 7 seller not the only one effected 0 see notes 7 graph 2 0 Sin tax 7 tax whose purpose is to discourage consumption of that product O O The manner in which the taX burden is shared btw buyers and sellers is determined by the relative elasticity of supply amp demand The more elastic demand is relative to supply the greater the burden of the tax is on sellers I The more elastic demand is the less tolerant buyers are of raising prices The more elastic supply is relative to demand the greater the burden of the tax is on buyers


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