ECO 2620 Notes
-
Upload
zelin-wang -
Category
Documents
-
view
230 -
download
0
Transcript of ECO 2620 Notes
-
8/13/2019 ECO 2620 Notes
1/68
Eco 2620 08/07/2013 19:45:00
Chap. 1 Ten Principles of Economics
marinal anal!sis
o"ernmen#/mar$e# o%#comes
marinal chanes: small incremen#al a&'%s#men#s #o plan
r%le: chose s%ch #ha# marinal (enefi# is e)%al #o or rea#er #han
marinal cos# *+,-+C
mar$e# fail%re: si#%a#ion in hich mar$e# lef# on i#s on fails #o
alloca#e reso%rces efficien#l!
ca%ses
1 e#ernali#!
2 mar$e# poer
Chap. 2 Thin$in i$e n Economis#
economics: social science s#%&! of ho socie#! manaes i#s scarce reso%rces
ass%mp#ions
role of ass%mp#ions:
1 simplif! pro(lem/s#%&!
2 ma$e &a#a a#herin more prac#ical
3 ma$e easier #o %n&ers#an& rela#ionships (/ "aria(les *#he
orl& in eneral
ce#eris pari(%s e"er!#hin else e)%al
economic mo&els
-
8/13/2019 ECO 2620 Notes
2/68
roles:
1 simplif! %n&ers#an&in
2 pre&ic# (eha"ior
mo&el 1 circ%lar flo &iaram
o inner flo inp%#s/o%#p%#so o%#er flo mone!
fac#ors of pro&%c#ion *inp%#s:
1 lan&
2 la(or
3 capi#al e)%ip./mach. *ph!sical no# financial
mo&el 2 pro&%c#ion possi(ili#ies fron#ier *PP
o shos com(ina#ions of o%#p%# an econom! can pro&%ce i"en
a"aila(le fac#ors of pro&%c#ion
o ass%mp#ions *in i"en #ime:
1 reso%rces fie&
2 reso%rces f%ll! %#ili;e&
3 cons#an#/fie& #echnolo!
no#e: mo"emen# alon PP represen#s opp. cos# of one
oo& #o pro&%ce ano#her
o so%rces of economic ro#h:
1 chanes in la(or reso%rces
2 chanes in #echnolo!
posi#i"e an& norma#i"e anal!sis
#o schools of #ho%h#
1 posi#i"e &eals / a! orl& is #he #heore#ical *&a#a
-
8/13/2019 ECO 2620 Notes
3/68
e. ,%sh #a c%#s cos#
-
8/13/2019 ECO 2620 Notes
4/68
)%es#ions:
1 ho can e pro&%ce chanes in )%an#i#! &eman&e& from
chanes in priceB
2 if a firm an#s #o increase #o#al re"en%e *PF sho%l& i# raise or
loer priceB
elas#ici#! of &eman&: responsi"eness of chane in )%an#i#! &eman&e& of
oo& #o chane in price of oo&
EG *H I )#! &eman&e&/*H I price
e. EG ice cream 2.0 an& !o% raise price 10H #hen fall in )%an#i#!
&eman&e& is 20H
EG 20H/10H 2.0
s%ppose !o% ha"e 2 p#s alon &eman& c%r"e *P1 F1 an& *P2 F2.
%sin mi&poin# form%laJ
EG *F2F1/K*F2LF1/2M/*P2P1/K*P2LP1/2
ill !iel& nea#i"e sin (%# inore
res%l#s
o elas#ic 1 l%%ries
o %ni#ar! 1 in&ifferen#
o inelas#ic D1 necessi#ies
elas#ic: )#! &eman&e& respon&s s%(s#an#iall! #o price chanes
inelas#ic: )#! &eman&e& respon&s onl! slih#l! #o price chanes
1 a"aila(ili#! of close s%(s#i#%#es
o close s%(s#i#%#es elas#ic
o no close s%(s#i#%#es inelas#ic
2 necessi#ies "s. l%%ries
-
8/13/2019 ECO 2620 Notes
5/68
o inelas#ic/elas#ic
3 mar$e# &efini#ion
o narrol! &efine& elas#ic
o (roa&l! &efine& inelas#ic
4 #ime hori;ono lon#erm elas#ic
o shor##erm inelas#ic
responsi"eness:
EG 1 s%(s#an#iall! responsi"e
EG 1 slih#l! responsi"e
EG D 1 minimall! responsi"e
EG infini#! perfec#l! elas#ic
EG 0 perfec#l! inelas#ic
elas#ic loer price
%ni# elas#ic loer/raise price
inelas#ic raise price
#o#al re"en%ePF
P=PE Price =pposi#e T@ Elas#ic
fla##er c%r"e more elas#ic
-
8/13/2019 ECO 2620 Notes
6/68
s#eeper c%r"e more inelas#ic
o#her &eman& elas#ici#ies:
1 income elas#ici#! of &eman&
Ei *H IF/*H I>pos. *L normal oo&
ne. * inferior oo&
2 cross price elas#ici#! of &eman&
Ecp *H IF oo& 1/*H IP oo& 2
pos. *L s%(s#i#%#e oo&
ne. * complemen# oo&
elas#ici#! of s%ppl!: EA*H IFs%pplie&/*H IP
in"en#or! con#rol
&e#erminan#s:
1 #ime hori;on
lon#erm elas#ic
shor##erm inelas#ic
2 scarce "s. a"aila(le oo&s
a"aila(le elas#ic
scarce inelas#ic
Chap. 6 A%ppl!/Geman& ?o" Policies
-
8/13/2019 ECO 2620 Notes
7/68
con#rols on prices
price ceilin: leal ma. price a# hich oo&s can (e sol& *(in&in
ceilin
o helps cons%mers
o res%l#s in shor#aeo sellers ma! ra#ion
o e. as pri;e free;e ren# con#rol Cana&ian &r%s
price floor: leal min. price a# hich oo&s can (e sol& *(in&in
floor
o helps sellers
o res%l#s in s%rpl%s
o e. farm price s%ppor#s min. ae la
#aes
#a on (%!er (%!ers re&%ce &eman& (! amo%n# #a an& (ear
#a (%r&en
#a on sellers sellers re&%ce s%ppl! (! amo%n# of #a an& (ear
#a (%r&en
#a inci&ence: meas%re of ho pa!s #a *ho has #a (%r&en
concl%sions
1 #aes &isco%rae mar$e# ac#i"i#! (/c &eman&/s%ppl! are re&%ce&an& )#! of oo&s sol& &eclines
2 (%!ers an& sellers share #a inci&ence he#her #a (%r&en is on
(%!ers or sellers *ass%mes no# perfec#l! inelas#ic/elas#ic
Chap. 7 Cons%mers Pro&%cers an& Efficienc! of +ar$e#s
elfare economics: s#%&! of ho alloca#ion of reso%rces affec#s economic
ell(ein
-
8/13/2019 ECO 2620 Notes
8/68
cons%mer s%rpl%s
illinness #o pa!: ma amo%n# (%!er is illin #o pa! for oo&
cons%mer s%rpl%s: (%!erNs illinness #o pa! for oo& min%s ac#%al
amo%n# pai& *meas%re of cons%mer economic ell(ein
o loer price raises cons%mer s%rpl%s larer s%rpl%s (e##er off c%s#omer*s
more (%!ers en#er mar$e#
pro&%cer s%rpl%s
cos# "al%e of ha# seller m%s# i"e %p #o pro&%ce oo& *incl%&es
ac#%al cos# an& oppor#%ni#! cos#
pro&%cer s%rpl%s: amo%n# pai& #o seller for oo& min%s sellers cos#
of pro&%cin oo& *meas%re of pro&%cer economic ell(ein
o hiher price raises pro&%cer s%rpl%s
larer s%rpl%s (e##er off pro&%cers
more sellers en#er mar$e#
mar$e# efficienc!
#o#al s%rpl%s cons%mer s%rpl%s L pro&%cer s%rpl%s
o if #o#al s%rpl%s is maim%m mar$e# is efficien#
e"al%a#in mar$e# e):
1 free mar$e#s alloca#e s%ppl! of oo&s #o (%!ers ho "al%e#hem mos# hihl!
2 free mar$e#s alloca#e &eman& of oo&s #o sellers ho
pro&%ce a# leas# cos#
3 free mar$e#s pro&%ce )#! of oo&s #ha# maimi;es #o#al
s%rpl%s
ca%ses of mar$e# inefficiencies
1 o". policies
-
8/13/2019 ECO 2620 Notes
9/68
2 e#ernali#ies
3 mar$e# fail%re
Chap. 8 pplica#ion: Cos#s of Taa#ion
re"ie #a sharin:
1 #a places e&e (/ (%!ers an& sellers *rear&less ho #a
falls on
2 )%an#i#! of oo&s falls
&ea&eih# loss of #aa#ion
#a re"en%e #a )#! sol&
&ea&eih# loss: fall in #o#al s%rpl%s from mar$e# &is#or#ion *e.
#aes
o cons%mer an& pro&%cer s%rpl%ses (o#h fall
o fall in (o#h s%rpl%ses ecee&s #a re". so &ea&eih# loss is
loss #o (o#h (%!ers an& sellers *opp. cos# no# offse# (!
increase in #a re". *lea$ae ha# o". &oes no# e#
represen#s los# pro&%c#ion an& cons%mp#ion
&e#erminan#s of &ea&eih# loss
$e! p#. price elas#ici#ies of &eman&/s%ppl! &e#ermine amo%n# of&ea&eih# loss
concl%sions
1 #a raises price pai& (! (%!ers so #he! cons%me less
2 #a loers price recei"e& (! sellers so #he! pro&%ce less
3 rea#er elas#ici#! of &eman&/s%ppl! rea#er &ea&eih# loss
4 larer #a larer &ea&eih# loss
-
8/13/2019 ECO 2620 Notes
10/68
no#e: if #a is so lare re&%ces mar$e# )#! so m%ch #a raises small
amo%n# of re"en%e affer c%r"e
Chap. 9 pplica#ion: >n#Nl Tra&e
orl& price: price of oo& #ha# pre"ails in orl& mar$e# for #ha# oo&s
no#e: can (e hiher/loer #han &omes#ic price
inners an& losers from #ra&e
epor#in co%n#r! ins if orl& price is rea#er #han &omes#ic price
o res%l#
s%rpl%s a# orl& price so epor# s%rpl%s
cons%mer s%rpl%s falls
pro&%cer s%rpl%s rises
#o#al s%rpl%s rises
o concl%sion
&omes#ic pro&%cers/ cons%mers (e##er/orse off
#ra&e raises economic ell(ein *ains losses
impor#in co%n#r! ins if orl& price is less #han &omes#ic price
o res%l#
shor#ae a# orl& price so impor# shor#ae
cons%mer s%rpl%s rises pro&%cer s%rpl%s falls
#o#al s%rpl%s rises
o concl%sion
-
8/13/2019 ECO 2620 Notes
11/68
&omes#ic pro&%cers/cons%mers orse/(e##er off
#ra&e raises economic ell(ein *ains losses
mar$e# &is#or#ion effec# on #ra&e
#ariff: #a on oo&s pro&%ce& a(roa& an& sol& &omes#icall!o res%l#
&omes#ic price rises
cons%mer s%rpl%s falls
pro&%cer s%rpl%s rises
impor#s re&%ce&
o". e#s re"en%e
impor# )%o#a: limi# on oo&s pro&%ce& a(roa& an& sol& &omes#icall!
o res%l#
&omes#ic price rises
cons%mer s%rpl%s falls
pro&%cer s%rpl%s rises
re&%ce& impor#s
no o". re"en%e (enefi# oes #o &omes#ic pro&%cers
concl%sions
1 #ariffs an& impor# )%o#as raise &omes#ic price of oo&
2 cons%mers orse off pro&%cers (e##er off3 &ea&eih# loss crea#e&
-
8/13/2019 ECO 2620 Notes
12/68
ar%men#s for res#ric#in #ra&e
1 'o(s
2 na#ional sec%ri#!
3 infan# in&%s#r!
4 %nfair compe#i#ion5 (arainin chip
6 main#ain &omes#ic mar$e# poer
Chap. 13 Cos#s of Pro&%c#ion
pro&%c#ion an& cos#s
pro&%c#ion f%nc#ion: rela#ionship (/ )#! of inp%#s %se& #o ma$e
oo& an& )#! of o%#p%# of #ha# oo&
marinal pro&%c# *+P: increase in o%#p%# from a&&i#ional %ni# of
inp%# *or$er
o +P I #o#al o%#p%#/I no. of or$ers
la of &iminishin marinal pro&%c#: marinal pro&%c# of inp%#
&eclines as )#! of o%#p%#s increases
meas%res of cos# *shor#r%n
fie& cos#s *C: cos#s #ha# &o no# "ar! / )#! of o%#p%# pro&%ce&
"aria(le cos#s *OC: cos#s #ha# "ar! / )#! of o%#p%# pro&%ce& #o#al cos#s *TC: fie& pl%s "aria(le cos#s
o TC C L OC
a"erae fie& cos# *C C/*)#! of o%#p%#
a"erae "aria(le cos# *OC OC/*)#! of o%#p%#
-
8/13/2019 ECO 2620 Notes
13/68
a"erae #o#al cos# *TC TC/*)#! of o%#p%#
marinal cos# ITC/*I )#! of o%#p%#
o(ser"a#ions of cos# c%r"es
1 C con#in%o%sl! falls as fie& cos#s are sprea& o%# o"er la(orinp%#
2 OC is shape& rises as &iminishin +P se#s in
3 TC is shape& rises as &iminishin +P se#s in
4 +C is risin as &iminishin +P se#s in
5 +C in#ersec#s TC a# i#s minim%m efficien# scale )#! of
o%#p%# #ha# minimi;es TC
no#e:
1 hen +C TC TC is increasin (/c of sinifican# effec#s of
&iminishin +P
2 hen +C D TC TC is &ecreasin (/ of no or insinifican#
effec#s of &iminishin +P *speciali;a#ion
cos#s in shor# an& lon r%n
shor#r%n: perio& of #ime hen some cos#s are fie& *i.e. m%s# hire
more or$ers #o increase o%#p%#
lonr%n: perio& of #ime hen are cos#s (ecome "aria(le *i.e. firmcan epan& (l& p%rchase ne capi#al #o increase o%#p%#
no#e: lon r%n TC *TC #races (es# shor# r%n TC possi(ili#ies for
each firmNs si;e
economies of scale *as F increases TC &ecreases
reasons
1 speciali;a#ion of la(or
2 increasin efficienc! of capi#al
-
8/13/2019 ECO 2620 Notes
14/68
3 in&i"isi(le inp%#s canN# (e scale& &on *(ro$en %p all
cos# is %pfron#
&iseconomies of scale *as F increases TC increases
reasonso 1 (%rea%crac!
o 2 %nions
o coor&ina#ion pro(lems
o increasin inp%# cos#s
cons#an# re#%rns #o scale *as F increases TC remains cons#an#
Chap. 14 irms in Compe#i#i"e +ar$e#s
ha# is compe#i#i"e mar$e#
1 man! (%!ers/sellers
2 no in&i"i&%al can infl%ence mar$e# price *firms are price #a$ers
3 oo&s offere& are larel! same of i&en#ical
4 firms can freel! en#er/ei# mar$e# *fe (arriers
meas%res of re"en%e
a"erae re"en%e *@ T@/*)#! of o%#p%# marinal re"en%e *+@ IT@/*I )#! of o%#p%#
no#e: ,/c T@ P F an& is fie& in mar$e# *price #a$er chanes in T@
are propor#ional #o chanes in F. %r#hermore P +@ @ an& is firmNs
&eman& c%r"e *perfec#l! elas#ic.
-
8/13/2019 ECO 2620 Notes
15/68
profi# maimi;a#ion
chap. 13
o economic profi# #o#al re"en%e #o#al cos#
here #o#al cos# eplici# *ac#%al cos# L implici# *opp. cos#acco%n# profi# #o#al re"en%e eplici# cos#
implica#ions
1 economic profi# normall! less #han acco%n# profi#
2 ;ero #olerance profi# means acco%n#in profi# is pos.
chap. 14
o profi# maimi;a#ion r%les *shor#r%n:
1 #o maimi;e profi# pro&%ce a# o%#p%# a#
hich +@ +C
2 if +@ +C increase o%#p%#
3 if +@ D +C &ecrease o%#p%# *or s#op increasin
no#e: +C c%r"e is firmNs s%ppl! c%r"e
al#erna#i"e form%la for profi#:
profi# T@ TC
profi# *T@/F TC/F Fprofi# *P TC F
-
8/13/2019 ECO 2620 Notes
16/68
shor# r%n an& lon r%n &ecisions:
firm ma! &eci&e #o #emporaril! sh%# &on
o if i# sh%#s &on
1 loses all re"en%e
2 pa!s fie& cos# (%# sa"es "aria(le cos#3 sh%#s &on if re"en%e *T@ D "aria(le cos# *OC
P D OC sh%#&on con&i#ion
4 P OC sh%#&on poin# *min. of OC c%r"e
firm ma! &eci&e #o ei# mar$e#
o if i# ei#s
1 loses all re"en%e
2 sa"es on fie& an& "aria(le cos#s
3 ei#s if re"en%e *T@ cos# *TC
P D TC ei# con&i#ion
4 P TC ei#/en#r! price *min. of TC c%r"e
s%ppl! c%r"es in compe#i#i"e mar$e#
shor# r%n
o ass%me rela#i"el! fie& no. of firms a# i"en #ime
1 mar$e# s%ppl! s%m of in&i"i&%al shor# r%n s%ppl! c%r"es
2 shor# r%n e). is a# )#! here +@ +C *profi# is ma
lon r%no ass%me en#r!/ei# an& firms ha"e similar cos# c%r"es
1 if firms ini#iall! ma$in profi# *P TC ne firms en#er
-
8/13/2019 ECO 2620 Notes
17/68
res%l#: firms increase s%ppl! increases price
&ecreases profi#s &ecrease
2 if firms ini#iall! ha"e losses *P D TC eis#in firms ei#
res%l#: firms &ecrease s%ppl! &ecreases price
increases profi#s/losses increase/&ecrease3 remainin firms ma$e ;ero economic profi#
4 lon r%n e). is a# )#! here P +@ +C TC *efficien#
scale
h! s#a! in (%siness if profi#0B
1 T@ compensa#es #o $eep (%siness r%nnin
main#ain mar$e# share
3 can s#ill ma$e profi# in shor#r%n
4 fie& cos#s *ma! (e rela#i"el! lare
Chap. 15 +onopol!
monopol!: firm #ha# is sole seller of pro&%c#
charac#eris#ics
1 no close s%(s#i#%#es or compe#i#ors
2 price ma$er
3 &oes no# ma$e %nlimi#e& profi#4 price chare& #!picall! ecee&s marinal cos#
5 enerall! res%l# in inefficiencies
h! monopolies eis#
f%n&amen#al reason (arriers *o(s#acles #o en#r!
-
8/13/2019 ECO 2620 Notes
18/68
o so%rces:
1 monopol! reso%rce: $e! reso%rce one& (! sinle
firm
2 o". crea#e& pa#en#s an& cop!rih# las as ell
as p%(lic in#eres#3 na#%ral monopol! lare cos#s of pro&%c#ion *fie&
cos#s ma$e sinle firm more efficien# economies of
scale
no#e: man! o". crea#e& so #he! are no# orrie& a(o%# loss of profi#
from compe#i#ion
pro&%c#ion/pricin &ecisions
no#e: monopolis#s &eman& c%r"e is mar$e# &eman& c%r"e
re"en%e of monopol!
1 +@ is loer #han &eman& c%r"e (/c &eman& is &onar&
slopin
2 #!picall! P +@ (/c hen i# increases pro&%c#ion m%s#
re&%ce price an& re"en%e falls
profi# maimi;a#ion r%les *shor# r%n:
1 pro&%ce a# o%#p%# hich +@ +C
2 chare price P +@ rea#er #han +@ +C #he price on&eman& c%r"e
3 if +@ +C increase o%#p%#
4 if +@ D +C s#op increasin or &ecrease o%#p%#
profi# maimi;a#ion r%les *lon r%n:
o same
h!B (arriers #o en#r! firm &oes no# ha"e #o accep# ;ero economic profi#.
elfare cos# of monopol!
monopolies are inefficien# (/cJ
-
8/13/2019 ECO 2620 Notes
19/68
1 pro&%ce less #han compe#i#i"e firm
2 chare hiher price #han compe#i#i"e firm
3 loss in #o#al s%rpl%s *&ea&eih# loss
p%(lic polic! #oar& monopolies1 enco%rae compe#i#ion %se an#i#r%s# las
a (rea$ %p monopolies
( (loc$ merers
2 re%la#ion
a price *marinal cos# pricin se# P +C
lo price for cons%mer (%# loss for firm
pro"i&e s%(si&!
( profi# man&a#e P TC for ;ero profi#
hiher price for cons%mer
no nee& for s%(si&!B
3 #%rn in#o p%(lic onership o". r%n *less efficien#B
4 &o no#hin
price &iscrimina#ion
price &iscrimina#ion: sellin same oo& #o &ifferen# c%s#omers a#
&ifferen# prices
o ass%mp#ions1 no ar(i#rae *(%!in oo& an& sellin a# hiher price
2 a(ili#! #o con#rol price *price ma$er
o h! &iscrimina#eB
-
8/13/2019 ECO 2620 Notes
20/68
-
8/13/2019 ECO 2620 Notes
21/68
o o%#p%# effec# if P +C increase pro&. #o increase o%#p%#
o price effec# increasin pro&. increases #oal s%ppl! an&
mar$e# price falls
concl%sion: *ass%mes ma. profi#1 oliopol! price less #han monopol! more #han compe#i#i"e
2 oliopol! )%an#i#! more #han monopol! less #han compe#i#i"e
3 as no. of firms ros firms ac# more compe#i#i"e
o increasin pro&. %n#il price is &ri"en #o here P +C TC
h! li"e compe#i#i"e firmB
(/c (! increasin pro&. #he! consi&er o%#p%# effec# price effec#
li$e comp. firm *since no price effec# price #a$ers of
compe#i#ion
Chap. 16 +onopolis#ic Compe#i#ion
monopolis#ic compe#i#ion: mar$e# here #here are man! sellers offerin
similar (%# no# i&en#ical pro&%c#s
charac#eris#ics
1 man! compe#in sellers/(%!ers2 pro&%c# &ifferen#ia#ion slih# &ifferen# oo&s
3 some free en#r!/ei#
4 loer concen#ra#ion ra#ios #han oliopolies
compe#i#ion / &ifferen#ia#e& pro&%c#s
shor#r%n: li$e monopol! *shor#r%n
-
8/13/2019 ECO 2620 Notes
22/68
o profi# ma. is )#! here +@ +C an& P +@ alon &eman&
c%r"e (/c pro&%c# is &ifferen#ia#e& faces &onar&
&eman& c%r"e
lonr%n : li$e compe#i#ion
o (/c of fe (arriers en#r!/ei# #!picalo pro&%ce )#! here +@ +C an& chare P TC
here economic profi# is ;ero
mono. comp. "s. perfec# comp.
1 ecess capaci#! mono. comps. pro&%ce a# less #han
efficien# scale hen TC is fallin
no#e: can increase o%#p%# hile main#ainin price an&
increase profi# since TC is loer *%p #o eff. scale
2 mar$ %p o"er +C
P +C (/c of some mar$e# poer
3 G &ecreases as pro&. increases #o eff. scale
4 e#ernali#ies
pro&%c# "arie#! *L
(%siness s#ealin *
#oo fe/man! pro&%c#s *
a&"er#isin emphasi;e:
1 )%ali#!
2 (ran& name
(/c of pro&%c# &ifferen#ia#ion P +C an& profi# is ma. *shor#r%n
Chap. 18 +ar$e#s for ac#ors of Pro&%c#ion
-
8/13/2019 ECO 2620 Notes
23/68
&eman& for la(or
is &eri"e& &eman& from firmNs &ecision #o s%ppl! oo&
ass%mes: compe#i#i"e firm/mar$e# for la(or
"al%e of +P *O+P: marinal pro&%c# of inp%# #imes price of o%#p%#o O+P +P Poo&
no#e: O+P follos #ren& of +P (/c of &iminishin re#%rns
hirin &ecisions:
1 hire %p #o p#. here "al%e of +P e)%als ae ra#e
O+P
if O+P increase no. of or$ers
if O+P D s#op increasin/&ecrease no. of or$ers
2 O+P c%r"e is &eman& c%r"e
fac#ors #ha# affec# &eman& for la(or:
1 o%#p%# price as o%#p%# price increases O+P increases an& la(or
&eman& c%r"e shif#s
2 #echnolo!: a&"ances increase +P an& la(or &eman& c%r"e
3 s%ppl! of o#her fac#ors a"aila(ili#! of o#her e)%ipmen# or la(or
%se& in pro&. ca%ses la(or &eman& #o shif#
s%ppl! of la(or:
-
8/13/2019 ECO 2620 Notes
24/68
s%ppl! of la(or &eri"e& from #his
fac#ors #ha# affec# s%ppl! of la(or:
1 chanes in #as#e more omen in la(or force shif#s la(or s%ppl!
2 chanes in al#erna#i"e in&%s#ries people si#chin oppor#%ni#ies shif#s
la(or s%ppl!
3 immira#ion more immira#ion increases la(or s%ppl! shif#s la(or
s%ppl!
la(or mar$e# e).
1 O+P
2 a&'%s#s #o (alance s%ppl!/&eman& for la(or
concl%sions: an! e"en# #ha# chanes s%ppl!/&eman& for la(or m%s# chane
e). ae an& +P (! some amo%n# since #hese m%s# remain e)%al a# e).
o#her fac#ors: lan& an& capi#al
ha# &e#ermines ho m%ch oners of lan&/capi#al earn for
respec#i"e con#ri(%#ionsB
1 fac#or price &epen&s on p%rchase price #o on lon
#erm "s. ren#al *%se shor# #erm
no#e: firm compares c%rren# "al%e of +P "s. epec#e& f%#%re "al%e
of +P #o &eci&e he#her p%rchase or ren#
2 each fac#ors ren#al price e)%als O+P for fac#or a# e).
-
8/13/2019 ECO 2620 Notes
25/68
3 chane in s%ppl! of one fac#ors al#ers earnins of all o#her
fac#ors calle& lin$aes an& &omino effec#
consi&er min. ae la:1 a&&i#ional %nemplo!men# crea#e&
2 or$ers ho main#ain 'o(s (enefi# from hiher ae
on hiher pro&%c#i"i#!:
no#e: perio& 19591973 ha& fas#es# ro#h
3 $e! &e#erminan#s
1 ph!sical capi#al
2 h%man capi#al
3 #echnolo! mos# sinifican#
Chap. 19 Earnins/Giscrimina#ion
&e#erminan#s of e). aes
1 compensa#in &ifferen#ials &ifference in aes #o offse#
nonmone#ar! charac#eris#ics of &ifferen# 'o(s
e. shif# premi%ms *more &iffic%l# lifes#!le professors earn less #han &oc#ors / same e&%ca#ion *(%#
ha"e more in#rinsic 'o( "al%e
2 h%man capi#al acc%m%la#ion of in"es#men#s of people
increases pro&%c#i"i#!
e. on#he'o( #rainin
-
8/13/2019 ECO 2620 Notes
26/68
3 a(ili#! effor# chance personal here&i#ar! fac#ors
e. ma'or "s. minor lea%e (ase(all
4 sinalin charac#eris#ics #ha# sinal emplo!ers of hih a(ili#!
an& po#en#ial #o increase pro&%c#i"i#!
5 s%pers#ar phenomenon &ifferences in incomes i#hin sameocc%pa#ion (/c of #o mar$e# charac#eris#ics:
a e"er! c%s#omer an#s #o en'o! oo& s%pplie&
( e"er! c%s#omer can en'o! oo& s%pplie& (/c of lo cos# "ia
#echnolo!
e. Ca#herine ?allaher
TO i&ol ,ill Q%n
6 a(o"e e). aes
a min. ae las
( %nions/s#ri$es
c efficienc! ae a(o"e e). ae pai& #o increase or$er
pro&%c#i"i#!
e. lea&ers pa! sales commission
economics of &iscrimina#ion
&iscrimina#ion: offerin &ifferen# aes *oppor#%ni#ies #o similar
or$ers ho &iffer (! ae se race e#hnic or o#her charac#eris#ics
no#e: &iffic%l# #o &e#ermine m%s# compare similar e&%ca#ion on
#he'o( #rainin ser"ice !ears performance appraisals
&o &ifferences in aes represen# &ifferences in h%man capi#al or
o#her charac#eris#icsB
Chap. 11 P%(lic ?oo&s/Common @eso%rces
$in&s of oo&s
-
8/13/2019 ECO 2620 Notes
27/68
-
8/13/2019 ECO 2620 Notes
28/68
Eco 2620 08/07/2013 19:45:00
oi$onomos econom!
scarci#!: limi#e& na#%re of socie#!Ns reso%rces an& #herefore ina(ili#!
#o pro&%ce all oo&s an& ser"ices people ish #o ha"e
economics: s#%&! of ho socie#! manaes i#s scarce reso%rces
mos#l! alloca#e& #hro%h com(ine& ac#ions of millions of ho%sehol&s
an& firms
o(ser"es ho people ma$e &ecisions *or$ (%! sa"e in"es# e#c.
o(ser"es in#erac#ions (e#een people
anal!;e forces an& #ren&s affec#in econom! *income ro#h
&isa(le& pop%la#ion frac#ion increasin price ra#es e#c.
Ten Principles of Economics
1 people face #ra&eoffs
o %ns an& (%##er more a socie#! spen&s on na#ional
&efense less spen# on cons%mer oo&s
o clean en"ironmen# "s. income le"el
o efficienc! "s. e)%ali#!
o"ernmen# re&is#ri(%#ion of income from rich #o poor
re&%ces rear& for or$in har& people or$ less
an& pro&%ce feer oo& an& ser"ices
efficienc!: socie#al proper#! of e##in maim%m
(enefi#s from scarce reso%rces
e)%ali#!: socie#al proper#! of &is#ri(%#in (enefi#s
%niforml! amon socie#!Ns mem(ers
2 cos# of some#hin is ha# is i"en %p
o ma$in &ecisions re)%ires comparin cos#s an& (enefi#s of
al#erna#i"e co%rses of ac#ion
o
oppor#%ni#! cos#: ha#e"er m%s# (e i"en %p #o o(#ain somei#em
3 ra#ional people #hin$ a# marin
o ra#ional people: people ho s!s#ema#icall! an& p%rposef%ll!
&o (es# #o achie"e o('ec#i"es i"en a"aila(le oppor#%ni#ies
-
8/13/2019 ECO 2620 Notes
29/68
o marinal chanes: small incremen#al a&'%s#men#s #o eis#in
plan of ac#ion
&ecisions rarel! (lac$/hi#e
marinal (enefi#s "s. marinal cos#s
a#er cheap &iamon&s epensi"e (ase& on marinal (enefi# #ha# e#ra %ni# of oo&
o%l& !iel& hich is (ase& on %ni#s alrea&!
possesse&
a#er plen#if%l small +.,.
&iamon&s rare lare +.,.
4 people respon& #o incen#i"es
o incen#i"e: some#hin #ha# in&%ces person #o ac# s%ch as
p%nishmen# or rear&
ra#ional people respon& #o incen#i"es
hiher price in mar$e# pro"i&es incen#i"e for (%!ers #o
cons%me less an& incen#i"e for sellers #o pro&%ce more
5 #ra&e can ma$e e"er!one (e##er off
o #ra&e (/ #o co%n#ries can ma$e each (e##er off
o allos each person #o speciali;e lea&in #o (%!in rea#er
"arie#! of oo&s an& ser"ices a# loer cos#
6 mar$e#s are %s%all! oo& a! #o orani;e economic ac#i"i#!
o comm%nism cen#ral planners &eci&e ha# oo&s an&ser"ices are pro&%ce& ho m%ch as pro&%ce& an& ho
pro&%ce& an& cons%me& #hese oo&s an& ser"ices
#heor! onl! o"ernmen# co%l& orani;e economic
ac#i"i#! #ha# promo#e& ell(ein for co%n#r!
o mar$e# econom!: econom! #ha# alloca#e& reso%rces #hro%h
&ecen#rali;e& &ecisions of man! firms an& ho%sehol&s
in#erac#in in mar$e#s for oo&s an& ser"ices
&am Ami#hNs eal#h of Ra#ions in"isi(le han&
lea&s ho%sehol&s an& firms #o ma$e &esira(le mar$e#
o%#comes
7 o"ernmen#s can some#imes impro"e mar$e# o%#comes
o in"isi(le han& onl! or$s if o"ernmen# enforces r%les an&
main#ains ins#i#%#ions $e! #o mar$e# econom!
-
8/13/2019 ECO 2620 Notes
30/68
o proper#!: a(ili#! of in&i"i&%al #o on an& eercise con#rol o"er
scarce reso%rces
o mar$e# fail%re: si#%a#ion in hich mar$e# on i#s on fails #o
pro&%ce efficien# alloca#ion of reso%rces
ca%ses e#ernali#!: impac# of one personNs ac#ions on
ell(ein of (!s#an&er
e. poll%#ion
mar$e# poer: a(ili#! of sinle person *or small
ro%p #o %n&%l! infl%ence mar$e# prices
e. monopolies
o mar$e# econom! rear&s people accor&in #o a(ili#! #o
pro&%ce #hins #ha# o#her people are illin #o pa! for
in"isi(le han& &oes no# ens%re s%fficien# foo& clo#hin
an& heal#hcare for e"er!one
p%(lic policies *income #a elfare s!s#em e#c.
aim for more e)%al &is#ri(%#ion of economic ell
(ein
8 co%n#r!Ns s#an&ar& of li"in &epen&s on a(ili#! #o pro&%ce oo&s
an& ser"ices
o merica:
-
8/13/2019 ECO 2620 Notes
31/68
-
8/13/2019 ECO 2620 Notes
32/68
Eco 2620 08/07/2013 19:45:00
economis#s are scien#ific #he! &e"ise #heories collec# &a#a an&
anal!;e #o "erif! or ref%#e #hese #heories
scien#ific me#ho&: &ispassiona#e &e"elopmen# an& #es#in of #heories
a(o%# ho #he orl& or$s
con&%c#in economic eperimen#s is of#en &iffic%l# an& some#imes
impossi(le
economis#s ha"e #o ma$e &o i#h &a#a #he orl& happens #o i"e
#hem
ass%mp#ions simplif! comple orl& an& ma$e easier #o %n&ers#an&
economis#s %se &ifferen# ass%mp#ions hen s#%&!in shor#r%n an&
lonr%n effec#s of chane
economis#s %se mo&els #ha# omi# man! &e#ails #o sho ha# is #r%l!
impor#an#
circ%larflo &iaram: mo&el #ha# simplifies econom! #o incl%&e
onl! #o #!pes of &ecision ma$ers i#h firms pro&%cin oo&s an&
ser"ices %sin fac#ors or pro&%c#ion hile ho%sehol&s on fac#ors
of pro&%c#ion an& cons%me pro&%ce& oo&s an& ser"ices
o fac#ors of pro&%c#ion: inp%#s s%ch as la(or lan& an& capi#al
*(%il&ins an& machineso ho%sehol&s an& firms in#erac# in #o mar$e#s
mar$e#s for oo&s an& ser"ices ho%sehol&s are
(%!ers an& firms are sellers oo&s an& ser"ices
mar$e#s for fac#ors of pro&%c#ion ho%sehol&s are
sellers an& firms are (%!ers inp%#s
pro&%c#ion possi(ili#ies fron#ier: raph shoin "ario%s
com(ina#ions of o%#p%# #ha# econom! can possi(l! pro&%ce i"en
a"aila(le fac#ors of pro&%c#ion an& a"aila(le pro&%c#ion #echnolo!#ha# firms %se #o #%rn fac#ors in#o o%#p%#
o efficien# o%#come econom! is e##in all i# can from
a"aila(le reso%rces
o &emons#ra#es #ra&eoffs #ha# socie#! faces in #erms of
oppor#%ni#! cos# of one oo& meas%re& in #erms of ano#her
-
8/13/2019 ECO 2620 Notes
33/68
slope of PP is oppor#%ni#! cos#
#ra&eoff can chane o"er #ime
fiel&s of economics
microeconomics: s#%&! of ho ho%sehol&s an& firms ma$e &ecisionsan& ho #he! in#erac# in specific mar$e#s
macroeconomics: s#%&! of econom!i&e phenomena
scien#is#s #r!in #o eplain orl&
polic! a&"isors #r!in #o help impro"e orl&
in"ol"es "ies on e#hics reliion an& poli#ical philosoph!
#o #!pes of s#a#emen#s
posi#i"e s#a#emen#s: claims #ha# a##emp# #o &escri(e orl& as i# is
norma#i"e: claims #ha# a##emp# #o prescri(e ho orl& sho%l& (e
reasons for &issen# amon economis#s
economis#s ma! &isaree a(o%# "ali&i#! of al#erna#i"e posi#i"e
#heories a(o%# ho orl& or$s
economis#s ma! ha"e &ifferen# "al%es an& norma#i"e "ies a(o%#
ha# polic! sho%l& #r! #o accomplish
ca%se an& effec#
omi##e& "aria(le: #hir& "aria(le ca%sin chanes in o#her "aria(le
ass%me& #o (e res%l# of ano#her "aria(le
re"erse ca%sali#! ca%ses , , ca%ses
-
8/13/2019 ECO 2620 Notes
34/68
Eco 2620 08/07/2013 19:45:00
a(sol%#e a&"an#ae: a(ili#! #o pro&%ce oo& %sin feer inp%#s #han
ano#her pro&%cer
oppor#%ni#! cos#: ha#e"er m%s# (e i"en %p #o o(#ain some i#em
compara#i"e a&"an#ae: a(ili#! #o pro&%ce oo& a# loer
oppor#%ni#! cos# #han ano#her pro&%cer
possi(le for one person #o ha"e a(sol%#e a&"an#ae in (o#h oo&s
impossi(le for one person #o ha"e compara#i"e a&"an#ae in (o#h oo&s
oppor#%ni#! cos# of oo& is in"erse of oppor#%ni#! cos# of oo& ,
#ra&e can (enefi# e"er!one in socie#! (/c allos speciali;a#ion in
ac#i"i#ies in hich #he! ha"e compara#i"e a&"an#ae for (o#h par#ies #o ain from #ra&e #ra&e price m%s# lie (/ #o
oppor#%ni#! cos#s
impor#s: oo&s pro&%ce& a(roa& an& sol& &omes#icall!
epor#s: oo&s pro&%ce& &omes#icall! an& sol& a(roa&
-
8/13/2019 ECO 2620 Notes
35/68
Eco 2620 08/07/2013 19:45:00
s%ppl! an& &eman&: forces #ha# ma$e mar$e# economies or$ as ell
as &e#ermine )%an#i#! of oo& pro&%ce& an& sellin price
-
8/13/2019 ECO 2620 Notes
36/68
-
8/13/2019 ECO 2620 Notes
37/68
normal oo&: oo& for hich increase in income lea&s #o increase in
&eman& an& "ice "ersa
inferior oo&: oo& for hich increase in income lea&s #o &ecrease
in &eman& an& "ice "ersa
s%(s#i#%#es: #o oo&s for hich increase in price of one lea&s #oincrease in &eman& for o#her an& "ice "ersa
complemen#s: #o oo&s for hich increase in price of one lea&s #o
&ecrease in &eman& for o#her an& "ice "ersa
economis#s normall! &o no# #r! #o eplain #as#es (/c (ase& on
his#orical an& ps!choloical forces (e!on& realm of economics
eamine ha# happens hen #as#es chane
epec#a#ions a(o%# f%#%re ma! affec# presen# &eman& for oo& or
ser"ice
n%m(er of (%!ers can increase/&ecrease mar$e# &eman&
)%an#i#!
)%an#i#! s%pplie&: amo%n# of oo&s or ser"ices #ha# sellers are
illin an& a(le #o sell
la of s%ppl!: claim #ha# )%an#i#! s%pplie& of oo& rises hen priceof oo& rises an& "ice "ersa
s%ppl! sche&%le: #a(le shoin rela#ionship (/ price of oo& an&
)%an#i#! s%pplie&
s%ppl! c%r"e: %par& raph of rela#ionship (/ price of oo& an&
)%an#i#! s%pplie&
mar$e# s%ppl!: s%m of s%pplies of sellers
chanes in s%ppl! c%r"e
o increase in s%ppl! shif# #o rih#
o &ecrease in s%ppl! shif# #o lef#
a&"ances in #echnolo! raise s%ppl!
-
8/13/2019 ECO 2620 Notes
38/68
epec#a#ions a(o%# f%#%re ma! &e#ermine s%ppl! #o&a!
n%m(er of sellers &e#ermines mar$e# s%ppl!
e)%ili(ri%m: si#%a#ion in hich mar$e# price has reache& le"el a# hich)%an#i#! s%pplie& e)%als )%an#i#! &eman&e&
e)%ili(ri%m price: price #ha# (alances )%an#i#! s%pplie& an& )%an#i#!
&eman&e&
e)%ili(ri%m )%an#i#!: )%an#i#! s%pplie& an& )%an#i#! &eman&e& a#
e)%ili(ri%m price
e)%ili(ri%m price is also mar$e#clearin price (%!ers ha"e (o%h#
all #he! an# #o (%! an& sellers ha"e sol& all #he! an# #o sell
s%rpl%s *ecess s%ppl!: si#%a#ion in hich )%an#i#! s%pplie& is rea#er
#han )%an#i#! &eman&e&
shor#ae *ecess &eman&: si#%a#ion in hich )%an#i#! &eman&e& is
rea#er #han )%an#i#! s%pplie&
la of s%ppl! an& &eman&: claim #ha# price of an! oo& a&'%s#s #o
(rin )%an#i#! s%pplie& an& )%an#i#! &eman&e& in#o (alance
-
8/13/2019 ECO 2620 Notes
39/68
Eco 2620 08/07/2013 19:45:00
elas#ici#!: meas%re of ho m%ch (%!ers an& sellers respon& #o
chanes in mar$e# con&i#ions
price elas#ici#! of &eman&: meas%re of ho m%ch )%an#i#! &eman&e&
of oo&s respon&s #o chane in price of oo&
elas#ic s%(s#an#ial response
inelas#ic slih# response
&e#erminan#s of elas#ici#!
a"aila(ili#! of close s%(s#i#%#es
o close/&is#an# s%(s#i#%#es elas#ic/inelas#ic
necessi#ies "s. l%%ries
o
necessi#ies/l%%ries inelas#ic/elas#ico (ase& on (%!er preferences
mar$e# &efini#ion
o narrol!/(roa&l! &efine& elas#ic/inelas#ic
#ime hori;on
o lon/shor# elas#ic/inelas#ic
price elas#ici#! of &eman& *H I )%an#i#! &eman&e&/*H I price
mi&poin# me#ho& *F2F1/K*F2LF1/2M/*P2P1/K*P2LP1/2M
economis#s classif! &eman& c%r"es accor&in #o elas#ici#!
1 elas#ic
D1 inelas#ic
-
8/13/2019 ECO 2620 Notes
40/68
1 %ni# elas#ic
in #erms of raphsJ
fla##er more elas#ic
s#eeper less elas#ic
#o#al re"en%e: amo%n# pai& (! (%!ers an& recei"e& (! sellers of oo&
PF
&epen&s on elas#ici#!
o inelas#ic increase/&ecrease in price increase/&ecrease
in #o#al re"en%e
o elas#ic increase/&ecrease in price &ecrease/increase in
#o#al re"en%e
income elas#ici#!: meas%re of ho )%an#i#! &eman&e& chanes as
cons%mer income chanes
income elas#ici#! of &eman& *H I )%an#i#! &eman&e&/ *H I
income
#!pes of oo&s
o normal posi#i"e
o inferior nea#i"e
crossprice elas#ici#! of &eman&: meas%re of ho )%an#i#! &eman&e&
of oo& respon&s #o chane in price of ano#her oo&
crossprice elas#ici#! of &eman& *H I )%an#i#! &eman&e& of oo&
1/ *H I price of oo& 2
#!pes of oo&s
o s%(s#i#%#es posi#i"e
o complemen#s nea#i"e
-
8/13/2019 ECO 2620 Notes
41/68
price elas#ici#! of s%ppl!: meas%re of ho m%ch )%an#i#! s%pplie&
respon&s #o chanes in price
elas#ic s%(s#an#ial chane
inelas#ic slih# chane
&epen&s on flei(ili#! of sellers #o chane amo%n# of oo&
more elas#ic/inelas#ic lon/shor# #erm
price elas#ici#! of s%ppl! *H I )%an#i#! s%pplie&/*H I price
-
8/13/2019 ECO 2620 Notes
42/68
Eco 2620 08/07/2013 19:45:00
con#rols on prices can (e no# (in&in or (in&in cons#rain#
price ceilin: leal maim%m on price a# hich oo& can (e sol&
res%l# in shor#aes
sellers m%s# ra#ion scarce oo&s
e. ren# con#rol as prices
price floor: leal minim%m on price a# hich oo& can (e sol&
res%l# in s%rpl%ses
e. minim%mae las
price ceilins an& floors can (e s%(s#i#%#e& *e. ren# an& ae
s%(si&ies (%# #hese replacemen#s cos# o"ernmen# mone! hich meanshiher #aes
#a inci&ence: (%r&en of #a &is#ri(%#e amon "ario%s people ho
ma$e %p econom!
concl%sion
1 #aes &isco%rae mar$e# ac#i"i#! )%an#i#! of #ae& oo& sol&
is smaller in ne e)%ili(ri%m
2 (%!ers an& sellers share #a (%r&en (%!ers pa! more sellers
recei"e less
lama$ers can &eci&e he#her #a comes from (%!erNs or sellerNs poc$e#
(%# canno# leisla#e #r%e (%r&en of #a
#a (%r&en &epen&s on forces of s%ppl! an& &eman&
#a (%r&en falls more hea"il! on mar$e# si&e #ha# is less elas#ic
-
8/13/2019 ECO 2620 Notes
43/68
Eco 2620 08/07/2013 19:45:00
elfare economics: s#%&! of ho alloca#ion of reso%rces affec#s
economic ell(ein
-
8/13/2019 ECO 2620 Notes
44/68
e)%ili(ri%m of s%ppl! an& &eman& in mar$e# maimi;es #o#al (enefi#s
recei"e& (! (%!ers an& sellers
illinness #o pa!: maim%m amo%n# #ha# (%!er ill pa! for oo& meas%res ho m%ch (%!er "al%es oo&
cons%mer s%rpl%s: amo%n# (%!er is illin #o pa! for oo& min%s
amo%n# ac#%all! pai&
meas%res (enefi# recei"e& from par#icipa#in in mar$e#
marinal (%!er: (%!er ho o%l& lea"e mar$e# firs# if price ere an!
hiher
area (elo &eman& c%r"e an& a(o"e price meas%res cons%mer s%rpl%s
cos#: "al%e of e"er!#hin seller m%s# i"e %p #o pro&%ce oo&
meas%re of illinness #o sell
pro&%cer s%rpl%s: amo%n# seller is pai& for oo& min%s sellerNs cos# of
pro"i&in
marinal seller seller ho o%l& lea"e mar$e# firs# if price ere
an! loer
area (elo price an& a(o"e s%ppl! c%r"e meas%res pro&%cer s%rpl%s
#o#al s%rpl%s: s%m of cons%mer an& pro&%cer s%rpl%ses
-
8/13/2019 ECO 2620 Notes
45/68
"al%e #o (%!ers cos# #o sellers
efficienc!: proper#! of reso%rce alloca#ion of maimi;in #o#al s%rpl%s
recei"e& (! mem(ers of socie#!
e)%i#!: proper#! of &is#ri(%#in economic prosperi#! %niforml! amon
mem(ers of socie#!
mar$e# o%#comes
1 free mar$e#s alloca#e s%ppl! of oo&s #o (%!ers ho "al%e mos#
hihl!
2 free mar$e#s alloca#e &eman& for oo&s #o sellers ho pro&%ce
a# leas# cos#
3 free mar$e#s pro&%ce )%an#i#! of oo&s #ha# maimi;es #o#al
s%rpl%s
mar$e# poer: a(ili#! #o infl%ence prices
e#ernali#ies: si&e effec#s #ha# affec# no# onl! pro&%cers an&
cons%mers (%# man! o#hers
mar$e# fail%re: ina(ili#! of some %nre%la#e& mar$e#s #o alloca#ereso%rces efficien#l!
-
8/13/2019 ECO 2620 Notes
46/68
Eco 2620 08/07/2013 19:45:00
&ea&eih# loss: fall in #o#al s%rpl%s #ha# res%l#s hen #a *or some
o#her polic! &is#or#s mar$e# o%#come
#aes ca%se &ea&eih# losses (/c pre"en# (%!ers an& sellers from
reali;in some ains from #ra&e
price elas#ici#ies of s%ppl! an& &eman& &e#ermine he#her &ea&eih#
loss from #a is lare or small
more elas#ic/inelas#ic (ier/smaller &ea&eih# loss
marinal #a ra#e #a on las# &ollar of earnin
increase #a (! #imes increase &ea&eih# loss (!
2
#imes
(/c #aes re&%ce mar$e# si;e #a re"en%e &oes no# con#in%all!
increase / increase in #aes
s%ppl!si&e economics "ies of affer an& @eaan #ha# loer #aes
o%l& i"e people proper incen#i"e #o or$ hich o%l& raise economic
ell(ein an& perhaps e"en #a re"en%e
-
8/13/2019 ECO 2620 Notes
47/68
Eco 2620 08/07/2013 19:45:00
orl& price: price of oo& #ha# pre"ails in orl& mar$e# for oo&
price #a$ers #a$e orl& price as i"en
anal!sis of epor#in co%n#r!
1 hen co%n#r! allos #ra&e an& (ecomes epor#er of oo&
&omes#ic pro&%cers are (e##er off an& &omes#ic cons%mers are
orse off
2 #ra&e raises economic ell(ein of na#ion *ains losses
anal!sis of impor#in co%n#r!
1 hen co%n#r! allos #ra&e an& (ecomes impor#er of oo&
&omes#ic cons%mers are (e##er off an& &omes#ic pro&%cers areorse off
2 #ra&e raises economic ell(ein of na#ion *ains losses
#ariff: #a on oo&s pro&%ce& a(roa& an& sol& &omes#icall!
res%l#
o re&%ces &omes#ic )%an#i#! &eman&e&
o raises &omes#ic )%an#i#! s%pplie&
#h%sJ mo"es &omes#ic mar$e# closer #o e)%ili(ri%m /o
#ra&eo &omes#ic sellers/cons%mers (e##er/orse off
o o"ernmen# raises re"en%e
o#her (enefi#s of in#Nl #ra&e
increase& "arie#! of oo&s
loer cos#s #hro%h economies of scale phenomenon #ha# some
oo&s can (e pro&%ce& a# lo cos# onl! if pro&%ce& in lare
)%an#i#ies increase& compe#i#ion
-
8/13/2019 ECO 2620 Notes
48/68
enhance& flo of i&eas
ar%men#s for res#ric#in #ra&e
'o(s
na#ionalsec%ri#! infan#in&%s#r!
%nfaircompe#i#ion
(araininchip
approaches #o achie"in free #ra&e
%nila#eral approach remo"e #ra&e res#ric#ions alone
m%l#ila#eral approach re&%ce #ra&e res#ric#ions hile o#her
co%n#ries &o same
o can res%l# in freer #ra&e (/c can re&%ce #ra&e res#ric#ions
a(roa& as ell as home
o can pro"i&e poli#ical s%ppor#
-
8/13/2019 ECO 2620 Notes
49/68
Eco 2620 08/07/2013 19:45:00
in&%s#rial orani;a#ion: s#%&! of ho firmsN &ecisions a(o%# prices an&
)%an#i#ies &epen& on mar$e# con&i#ions
#o#al re"en%e: amo%n# #ha# firm recei"es for sale of i#s o%#p%#
#o#al cos#: amo%n# #ha# firm pa!s #o (%! inp%#s
profi#: firmNs #o#al re"en%e min%s i#s #o#al cos#
profi# T@ TC
o('ec#i"e ma$e profi# as lare as possi(le
cos# of pro&%c#ion s%m of eplici# an& implici# cos#s
eplici# cos#s: inp%# cos#s #ha# re)%ire o%#la! of mone! (! firm
implici# cos#s: inp%# cos#s #ha# &o no# re)%ire o%#la! of mone! (!
firm
economis#s eplici# an& implici# cos#s
acco%n#an#s eplici# cos#s
economic profi#: #o#al re"en%e min%s #o#al cos#s *eplici# an& implici#
cos#s
acco%n# profi#: #o#al re"en%e min%s #o#al eplici# cos#
pro&%c#ion f%nc#ion: rela#ionship (/ )%an#i#! of inp%#s %se& #o ma$e oo&
an& )%an#i#! of o%#p%# of oo&
marinal pro&%c#: increase in o%#p%# #ha# arises from a&&i#ional %ni# of inp%#
&iminishin marinal pro&%c#: proper#! here(! marinal pro&%c# of inp%#
&eclines as )%an#i#! of inp%# increases
opposi#e of #o#alcos# c%r"e inefficiencies lea& #o hiher cos#s
-
8/13/2019 ECO 2620 Notes
50/68
-
8/13/2019 ECO 2620 Notes
51/68
-
8/13/2019 ECO 2620 Notes
52/68
Eco 2620 08/07/2013 19:45:00
mar$e# poer: a(ili#! of firm #o infl%ence mar$e# price of oo& i# sells
compe#i#i"e mar$e#: mar$e# / man! (%!ers an& sellers #ra&in
i&en#ical pro&%c#s so #ha# each (%!er an& seller is price #a$er
(%!ers an& sellers price #a$ers
firms can freel! en#er or ei# mar$e#
a"erae re"en%e: #o#al re"en%e &i"i&e& (! )%an#i#! sol&
for all firms e)%als price of oo&
marinal re"en%e: chane in #o#al re"en%e from a&&i#ional %ni# sol&
for compe#i#i"e firms e)%als price of oo&
concl%sions:1 P @ +@ +C increase pro&%c#ion
2 P @ +@ D +C &ecrease pro&%c#ion
3 P @ +@ +C main#ain pro&%c#ion
no#e: (/c firmNs +C c%r"e &e#ermines )%an#i#! of oo& firm is illin #o
s%ppl! a# an! price +C c%r"e is also firmNs s%ppl! c%r"e
sh%#&on: shor#r%n &ecision no# #o pro&%ce an!#hin &%rin specific perio&
of #ime (/c of c%rren# mar$e# con&i#ions
ei#: lonr%n &ecision #o lea"e mar$e#
s%n$ cos#: fie& cos# #ha# canno# (e reco"ere&
-
8/13/2019 ECO 2620 Notes
53/68
firm sh%#s &on if re"en%e from pro&%c#ion is less #han "aria(le cos#s of
pro&%c#ion
T@ D OC P D OC
firm ei#s mar$e# if re"en%e from pro&%c#ion is less #han #o#al cos#s T@ D TC P D TC
no#e: firm ill en#er if P TC
profi# T@ TC
profi# *T@/F TC/F F
profi# *P TC F
no#e: a# en& of en#r! an& ei# process firms #ha# remain in mar$e# m%s#
ma$e ;ero economic profi# *P TC +C
TC +C a# minim%m of a"erae #o#al cos#
o in lonr%n e)%ili(ri%m firms opera#e a# efficien# scale
incl%&es oppor#%ni#! cos#s acco%n#in profi# is posi#i"e
no#e: (/c firms en#er an& ei# more easil! in lonr%n #han shor#r%n
lonr%n s%ppl! c%r"e #!picall! more elas#ic #han shor#r%n s%ppl! c%r"e
-
8/13/2019 ECO 2620 Notes
54/68
Eco 2620 08/07/2013 19:45:00
monopol!: firm #ha# is sole seller of pro&%c# /o close s%(s#i#%#es
(arriers #o en#r!
o monopol! reso%rce $e! reso%rce re)%ire& for pro&%c#ion
is one& (! sinle firm
o o"ernmen# re%la#ion o"ernmen# i"es sinle firm
ecl%si"e rih# #o pro&%ce some oo& or ser"ice
o pro&%c#ion process sinle firm can pro&%ce o%#p%# a#
loer cos# #han larer n%m(er of pro&%cers
na#%ral monopol!: monopol! #ha# arises (/c sinle firm
can s%ppl! oo& or ser"ice #o en#ire mar$e# a# smaller
cos# #han #o or more firms
o%#p%# effec# more o%#p%# sol& hich #en&s #o increase #o#alre"en%e
price effec# price falls hich #en&s #o &ecrease #o#al re"en%e
price &iscrimina#ion: (%siness prac#ice of sellin same oo& a# &ifferen#
prices #o &ifferen# c%s#omers
pre"en#e& (! ar(i#rae process of (%!in oo& in one mar$e#
an& sellin in ano#her mar$e# a# hiher price
perfec# price &iscrimina#ion: si#%a#ion in hich monopolis# $nos
eac#l! illinness #o pa! of each c%s#omer an& can chare each
c%s#omer &ifferen# price
e. mo"ie #ic$e#s airline prices &isco%n# co%pons financial ai&
)%an#i#! &isco%n#s
o"ernmen# response #o monopol!
increase compe#i#ion in monopoli;e& in&%s#ries
re%la#e monopoliesN (eha"ior
#%rnin pri"a#e monopolies in#o p%(lic en#erprises &oin no#hin a# all
s!neries merers mean# #o loer cos#s #hro%h more efficien#
'oin# pro&%c#ion ra#her #han compe#i#ion re&%c#ion
-
8/13/2019 ECO 2620 Notes
55/68
Eco 2620 08/07/2013 19:45:00
oliopol!: mar$e# s#r%c#%re in hich onl! fe sellers offer similar or
i&en#ical pro&%c#s
seller can ha"e lare impac# on profi#s of o#her sellers
in#er&epen&en# firms
ame #heor!: s#%&! of ho people (eha"e in s#ra#eic si#%a#ions
&%opol!: simples# oliopol! / #o mem(ers
car#el: ro%p of firms ac#in in %nison
coll%sion: areemen# amon firms o"er pro&%c#ion an& price
in effec# forms monopol!
hin&ranceso o"ernmen# an#i#r%s# las prohi(i# eplici# areemen#s
o s)%a((les o"er ho #o &i"i&e profi#
Rash e)%ili(ri%m: si#%a#ion in hich economic ac#ors in#erac#in / one
ano#her choose (es# s#ra#e! i"en s#ra#eies all o#her ac#ors ha"e chosen
o%#p%# effec#: (/c price +C sellin 1 more %ni# ill raise profi#
price effec#: raisin pro&%c#ion ill increase #o#al amo%n# sol& hich ill
loer price an& profi# on all o#her %ni#s sol& *no#e: effec# &isappears /
more an& more firms
prisonersN &ilemma: par#ic%lar ame (/ #o cap#%re& prisoners #ha#
ill%s#ra#es h! coopera#ion is &iffic%l# #o main#ain e"en hen m%#%all!
(eneficial
&ominan# s#ra#e!: s#ra#e! (es# for pla!er in ame rear&less of s#ra#eies
chosen (! o#her pla!ers
-
8/13/2019 ECO 2620 Notes
56/68
resale price main#enance *fair #ra&e: man&a#e of firm #o re#ailer #o sell oo&
a# specific price
pre"en#s freeri&er pro(lem
no incen#i"e #o &isco%rae compe#i#ion amon re#ailers
no#e: (%siness prac#ices #ha# appear #o re&%ce compe#i#ion ma! ha"e
lei#ima#e p%rposes
pre&a#or! pricin: firmNs price c%#s in#en&e& #o &ri"e ano#her firm o%#
of mar$e# #o recap#%re monopol! an& raise prices aain
no#e: firms ha"e #o (alance o%#p%# an& price effec#s
-
8/13/2019 ECO 2620 Notes
57/68
Eco 2620 08/07/2013 19:45:00
imperfec# compe#i#ion: si#%a#ion of man! in&%s#ries #ha# fall
somehere (/ polar cases of perfec# compe#i#ion an& monopol!
e. oliopol!: mar$e# s#r%c#%re in hich fe sellers offer similar or
i&en#ical pro&%c#s
o concen#ra#ion ra#io: meas%re of mar$e# &omina#ion (! small
n%m(er of firmsS percen#ae of #o#al o%#p%# in mar$e# (! fo%r
lares# firms
o monopolis#ic compe#i#ion: mar$e# s#r%c#%re in hich man!
firms sell pro&%c#s #ha# are similar (%# no# i&en#ical
man! sellers
pro&%c# &ifferen#ia#ion
free en#r!/ei#
monopolis#icall! compe#i#i"e firm chooses )%an#i#! an& price '%s# as
monopol! &oes similar in shor# r%n
profi#s/losses enco%raes en#r!/ei# hich shif#s &eman& c%r"es face&
(! inc%m(en# firms #o lef#/rih# %n#il ;ero economic profi#
no#e: P +C (%# TC
ecess capaci#!: more profi#a(le pro&%c#ion (elo efficien# scale (!
monopolis#ic compe#i#i"e firms
mar$%p o"er marinal cos#: price ecee&in marinal cos# (/c firm has
some mar$e# poer
e#ernali#ies
mar$%p of price o"er marinal cos# &ea&eih# loss
n%m(er of firms ma! no# (e i&eal #oo m%ch/li##le en#r!o pro&%c#"arie#! *L
o (%sinesss#ealin *
a&"er#isin firms sellin &ifferen#ia#e& pro&%c#s a(o"e marinal
cos# ha"e incen#i"e #o a##rac# more (%!ers
-
8/13/2019 ECO 2620 Notes
58/68
-
8/13/2019 ECO 2620 Notes
59/68
#hree mos# impor#an# lan& la(or an& capi#al
&eman& for fac#or of pro&%c#ion &eri"e& &eman& from &ecision
#o s%ppl! oo& in ano#her mar$e#
pro&%c#ion f%nc#ion: rela#ionship (/ )%an#i#! of inp%#s %se& inpro&%c#ion an& )%an#i#! of o%#p%# from pro&%c#ion
marinal pro&%c# of la(or: increase in amo%n# of o%#p%# from
a&&i#ional %ni# of la(or
&iminishin marinal pro&%c#: proper#! here(! marinal pro&%c#
of inp%# &eclines as )%an#i#! of inp%# increases
"al%e of marinal pro&%c#: marinal pro&%c# of inp%# #imes price of
o%#p%#
o marinal re"en%e pro&%c# e#ra re"en%e firm e#s from
hirin a&&i#ional %ni# of fac#or of pro&%c#ion
o O+P +P Poo&
compe#i#i"e profi#maimi;in firm hires or$ers %p #o poin# here
O+P e)%als ae
O+P c%r"e is la(or&eman& c%r"e for compe#i#i"e profi#maimi;in
firm
ca%ses #ha# shif# la(or&eman& c%r"e
o%#p%# price
#echnoloical chane
o la(ora%men#in increase& O+P
o la(orsa"in &ecrease& O+P
s%ppl! of o#her fac#ors
ca%ses #ha# shif# la(ors%ppl! c%r"e
-
8/13/2019 ECO 2620 Notes
60/68
-
8/13/2019 ECO 2620 Notes
61/68
Eco 2620 08/07/2013 19:45:00
compensa#in &ifferen#ial: &ifference in aes arisin from
nonmone#ar! charac#eris#ics of &ifferen# 'o(s
e. hiher aes for more &anero%s/%n&esira(le/&iffic%l# 'o(s
h%man capi#al: acc%m%la#ion of in"es#men#s in people
e. e&%ca#ion
poor are e##in poorer hile rich are e##in richer increasin
in#erna#ional #ra&e an& #echnoloical chane
a(ili#! effor# an& chance
e. sales commission chanin mar$e# con&i#ions
(ea%#! inna#e a(ili#! or in&irec# a(ili#! or &iscrimina#ionB
sinalin e&%ca#ion &oesnN# raise pro&%c#i"i#! (%# ra#her sinals
hiher a(ili#!
con#rar! #o h%mancapi#al #heor! pro(a(l! mi of (o#h
s%pers#ar phenomenon
e. (es# a#hle#e/ac#or ma$es more #han (es# pl%m(er/carpen#er
a(o"ee)%ili(ri%m aes
minim%mae las
%nion: or$er associa#ion #ha# (arains / emplo!ers o"er aes
an& or$in con&i#ions
o s#ri$e: orani;e& i#h&raal of la(or from firm (! %nion
efficienc! aes: a(o"ee)%ili(ri%m aes pai& (! firms #o increase
or$er pro&%c#i"i#!
&iscrimina#ion: offerin of &ifferen# oppor#%ni#ies #o similar in&i"i&%als
ho &iffer onl! (! race e#hnic ro%p se ae or o#her personal
charac#eris#ics
-
8/13/2019 ECO 2620 Notes
62/68
Eco 2620 08/07/2013 19:45:00
charac#eris#ics of oo&s
-
8/13/2019 ECO 2620 Notes
63/68
-
8/13/2019 ECO 2620 Notes
64/68
pro(lems
o no o(ser"a(le price sinals hen e"al%a#in
o nonmone#ar! (enefi#s e. h%man life
Trae&! of #he Commons: para(le ill%s#ra#in h! common reso%rcesare %se& more #han is &esira(le from s#an&poin# of socie#!
no one famil! or person has incen#i"e #o re&%ce si;e of floc$ (/c
in&i"i&%al con#ri(%#ion represen#s small par# of pro(lem
pre"en#a#i"e s#eps &i"i&e lan& amon families e. 17#h
cen#%r! enclos%re mo"emen# in Enlan&
common oo&s
clean air an& a#er
cones#e& roa&s
fish hales an& o#her il&life
-
8/13/2019 ECO 2620 Notes
65/68
Eco 2620 08/07/2013 19:45:00
na#ional o"ernmen#
receip#s
o #a lia(ili#!: ho m%ch oe& in #aes (! a famil!
(ase& on #o#al income
o marinal #a ra#e: #a ra#e applie& #o each a&&i#ional &ollar of
income
o social ins%rance #aes: #aes #ha# enera#e re"en%e #o pa! for
Aocial Aec%ri#! an& +e&icare
pa!roll #a: #a on aes #ha# firm pa!s i#s or$ers
o corpora#e income #a: #a on corpora#ion (ase& on i#s profi#
corpora#ion: (%siness #ha# is se# %p as separa#e leal
en#i#!
o
ecise #aes: #aes n specific oo&s li$e asoline ciare##esan& alcoholic (e"eraes
spen&in
o #ransfer pa!men#: o"ernmen# pa!men# no# ma&e in
echane for oo& or ser"ice
o (%&e# &efici#: ecess of o"ernmen# spen&in o"er
o"ernmen# receip#s
o (%&e# s%rpl%s: ecess of o"ernmen# receip#s o"er
o"ernmen# spen&in
s#a#e an& local o"ernmen#
receip#s
o sales an& proper#! #aes
o in&i"i&%al an& corpora#e income #aes
o s%(s#an#ial f%n&s from fe&eral o"ernmen#
o fishin/h%n#in licensin fees roa&/(ri&e #olls p%(lic
#ranspor#a#ion fares
spen&ino e&%ca#ion
o p%(lic elfare #ransfer pa!men#s #o poor
-
8/13/2019 ECO 2620 Notes
66/68
o hiha!s
o li(raries police ar(ae remo"al fire pro#ec#ion par$
main#enance sno remo"al
cons%mp#ion #a: al#erna#i"e #a s!s#em #ha# ra#her #han #ainamo%n# #ha# people earn #aes amo%n# #ha# people spen&
o%l& no# &is#or# peopleNs sa"in &ecisions
a"erae #a ra#e: #o#al #aes pai& &i"i&e& (! #o#al income
marinal #a ra#e: e#ra #aes pai& on a&&i#ional &ollar of income
l%mps%m #aes: #a #ha# is same amo%n# for e"er! person
#a e)%i#!
(enefi#s principle: i&ea #ha# people sho%l& pa! #aes (ase& on
(enefi#s recei"e& from o"ernmen# ser"ices
a(ili#!#opa! principle: i&ea #ha# #apa!ers i#h rea#er a(ili#! #o
pa! #aes sho%l& pa! larer amo%n#s
o "er#ical e)%i#!: i&ea #ha# #apa!ers i#h rea#er a(ili#! #o pa!
#aes sho%l& pa! larer amo%n#s
propor#ional #a: #a for hich hih an& lo income
#apa!ers pa! same frac#ion of income reressi"e #a: #a for hich hihincome #apa!ers
pa! smaller frac#ion of income #han loincome
#apa!ers
proressi"e #a: #a for hich hihincome #apa!ers
pa! larer frac#ion of income #han loincome
#apa!ers
o hori;on#al e)%i#!: i&ea #ha# #apa!ers i#h similar a(ili#ies #o
pa! #aes sho%l& pa! same amo%n#
fl!paper #heor!: #heor! #ha# #a (%r&en falls li$e fl! on fl!paper #o
here"er i# firs# lan&s rarel! "ali&
-
8/13/2019 ECO 2620 Notes
67/68
Eco 2620 08/07/2013 19:45:00
po"er#! ra#e: percen#ae of pop%la#ion hose famil! income falls
(elo a(sol%#e le"el calle& po"er#! line
po"er#! line: a(sol%#e le"el of income se# (! fe&eral o"ernmen# for
each famil! si;e (elo hich famil! is &eeme& #o (e in po"er#!
o race ,lac$s an& Qispanics 3 #imes more li$el! #han hi#eso ae chil&ren/el&erl! more/less li$el! #o (e mem(ers of
poor families #han a"erae
o famil! composi#ion femalehea&e& an& spo%seless
families more li$el! #o li"e in po"er#!
pro(lems in meas%rin ine)%ali#!
in$in& #ransfers: #ransfers #o poor i"en in form of oo&s an&
ser"ices ra#her #han casho e. foo& s#amps ho%sin "o%chers me&ical ser"ices
o no# incl%&e& in s#an&ar& meas%remen#s of ine)%ali#!
life c!cle: re%lar pa##ern of income "aria#ion
permanen# income: personNs normal income
o more rele"an# #han #ransi#or! income
no#e: ine)%ali#! in ma#erial s#an&ar&s of li"in is m%ch smaller #han
ine)%ali#! in ann%al income
economic mo(ili#!
mo"emen#s %p/&on income la&&er oo& l%c$/har& or$ or (a&
l%c$/la;iness
"er! fe families chronicall! li"e in po"er#!
mos# millionaires are selfma&e
%#ili#arianism: poli#ical philosoph! accor&in #o hich o"ernmen# sho%l&
choose policies #o maimi;e #o#al %#ili#! of e"er!one in socie#! fo%n&e& (! Enlishmen erem! ,en#ham an& ohn A#%ar# +ill
%#ili#!: le"el of happiness or sa#isfac#ion #ha# person recei"es from
circ%ms#ances
-
8/13/2019 ECO 2620 Notes
68/68
o &iminishin marinal %#ili#!: #heor! #ha# as personNs income
rises e#ra ell(ein &eri"e& from a&&i#ional &ollar of
income falls
re'ec# comple#e e)%ali;a#ion of incomes incen#i"es
li(eralism: poli#ical philosoph! accor&in #o hich o"ernmen# sho%l&
choose policies &eeme& '%s# as e"al%a#e& (! impar#ial o(ser"er (ehin& "eil
of inorance
fo%n&e& (! ohn @als
maim%m cri#erion: claim #ha# o"ernmen# sho%l& aim #o maimi;e
ell(ein of ors#off person in socie#!
s#ill allos &ispari#ies in income incen#i"es
social ins%rance: o"ernmen# polic! aime& a# pro#ec#in people
aains# ris$ of a&"erse e"en#s
li(er#arianism: poli#ical philosoph! accor&in #o hich o"ernmen#
sho%l& p%nish crimes an& enforce "ol%n#ar! areemen#s (%# no# re&is#ri(%#e
income
fo%n&e& (! @o(er# Ro;ic$
if income &is#ri(%#ion is '%s# res%l#s are fair no ma##er ine)%ali#!
policies #o re&%ce po"er#! minim%mae las
elfare: o"ernmen# prorams #ha# s%pplemen# incomes of nee&!
nea#i"e income #a: #a s!s#em #ha# collec#s re"en%e from hih
income ho%sehol&s an& i"es s%(si&ies #o loincome ho%sehol&s
in$in& #ransfers
an#ipo"er#! prorams an& or$ incen#i"es
o or$fare: s!s#em re)%irin an! person collec#in (enefi#s #o
accep# o"ernmen#pro"i&e& 'o(