ECO 211 Microeconomics: An Introduction to Economic Efficiency

UNIT 1: Introduction to Microeconomics
1a - 1b - 1c - 1d - 2a - 3a - 3b - 3c - 5a - 5b

UNIT 3: Product Markets and Efficiency
8/9a - 8/9b - 10a - 10b - 11a - 11b

UNIT 2: Elasticity, Consumer Choice, and Costs
4a - 4b - 6a - 7a - 7b - 7c

UNIT 4: Resource Markets, Inequality, and Immigration
12a - 13a - 20a - 22a

Unit 1: Markets are Efficient, Except . . . Intro to Microeconomics

Lesson 1a: The Class and the Math

1a Day One- An Introduction to ECO 211

Welcome to ECO 211! My name is Mark Healy. I will be your economics instructor for the semester. Please call me "Mark".

Many students end up dropping or failing this course due to the lack of basic math skills. If your math skills are weak you should consider building them before taking this course. If you are required to take MTH 060 or MTH 082 and have not yet done so, do not take this economics course until you have successfully completed one of them. The face-to-face sections will take a practice math quiz on the first day of class. For the online section I have posted the math quiz on our Blackboard site. Take the math quiz on Blackboard or in class. If you score less than 14 or 15, consider dropping ECO 211 and taking a math class first.

1a Something Interesting - Why are we studying this?

 Optional: a funny look at some major ideas of economics by the "Stand-up Economist".

Principles of economics, translated (5:20)

1a Assignments: Readings

Syllabus On-Campus / Syllabus Online

5Es online reading

Lecture Outline

1a Assignments: Video Lectures

OPTIONAL: YouTube: Principles of economics, translated by Yoram Bauman

1a Outcomes - What you should know
  • basic math skills
  • how to find class information

1a Key Terms

 

Key Terms Flash Cards - Click Here

The Class:

Required Activity, Yellow Pages, Tomlinson Videos on Thinkwell, Video Notes, LESSONS webpage, Pre-quiz, Clicker Quiz, Practice Exercises,

The Math:

horizontal (x) axis, vertical (y) axis, origin, direct (positive) relationship, inverse (negative) relationship, slope of a line, positive slope, negative slope, marginal

1a Formulas

Slope = rise/run

Slope = vertical change / horizontal change

Slope = marginal value of the total

1a Key Graphs

 

Any Point on a Graph Represents Two Numbers

Direct Relationship

Inverse Relationship

Calculating Slope

1a Review Videos

Episode 5A: Models & Theories

[3:26 YouTube mjmfoodie]

Episode 6: Graph Review
[4:22 YouTube mjmfoodie]

NOTE: These are REVIEW videos only. In order to learn the material you must read the assigned textbook readings, watch the assigned lecture videos, and do problems. See the LESSONS link on Blackboard for these assignments.  

Unit 1: Markets are Efficient, Except . . . Intro to Microeconomics

Lesson 1b: The 5Es of Economics

1b Introduction

 

The "5Es of Economics" are not from the textbook. I borrowed the concept (with many modifications) from another textbook many years ago. I believe it concisely explains the purpose of economics. Also, it begins to introduce students to the economic way of thinking. The economic problem that we all face, that all countries face, that the world faces, is SCARCITY. Economics is the study of how we can reduce scarcity. What I like about the 5Es model is that it shows us that there are only five ways to reduce scarcity. Only five. I call them the "5Es" of economics.

For each of the 5Es:
(1) learn the definition,
(2) understand examples, and
(3) most importantly, know how they reduce scarcity and help to increase society's satisfaction.

This is where you learn that it may be good when the price of plywood increases greatly as the result of a hurricane. And why it might be good when Coca-Cola lays of one fifth of its workforce. Or, that the price of gasoline may be too low. Really!

1b Something Interesting - Why are we studying this?

When a hurricane hits the coast of Florida, prices of many necessities like food, water, hotel rooms, gasoline, and even plywood, tend to increase. Some governments try to prevent such price increases and call them "price-gouging".

See: http://www.csmonitor.com/1992/0910/10083.html

But economists think that such price increases are GOOD for the people ravaged by the hurricane. WHY? Why is it GOOD when the prices of products (like plywood) increase during a natural disaster?

See: https://www.masterresource.org/price-gouging-law/defense-price-gouging/

 ANSWER: Allocative Efficiency

1b Assignments: Readings

Syllabus On-Campus / Syllabus Online

5Es online reading (VERY IMPORTANT!)

Ch. 3: "Efficient Allocation" pp. 58-59

Ch. 3 and 6: "Diminishing Marginal Utility" pp. 49 and 117

Ch.1, Appendix on Graphing

Lecture Outline

1b Assignments: Video Lectures

REVIEW OF GRAPHING CONCEPTS

1.2.1 Using Graphs to Understand Direct Relationships 9:50 [MyNotes]

1.2.2 Plotting A Linear Relationship Between Two Variables 9:57 [MyNotes]

1.2.3 Changing the Intercept of a Linear Function 8:42 [MyNotes]

1.2.4 Understanding the Slope of a Linear Function 7:28 [MyNotes]

OPTIONAL:

Khan Academy Exercise: Graphing Points

Khan Academy Exercise: Graphing Points 2 

OPTIONAL: MATH, ALGEBRA, AND GEOMETRY FOR ECONOMICS STUDENTS

How to Multiply and Divide Fractions in Algebra for Dummies (YouTube fordummies 1:50)

Simple Equations (Khan Academy 11:06)

Solving One-Step Equations (Khan Academy 1:54)

Solving One-Step Equations 2 (Khan Academy 2:23)

Practice (Khan Academy )

Solving Ax + B = C (Khan Academy 8:41)

Area and Perimeter (Khan Academy 12:20)

Readings:

  • Syllabus
  • 5Es online reading (VERY IMPORTANT!)
  • Ch. 3: "Efficient Allocation" pp. 58-59
  • Ch. 3 and 6: "Diminishing Marginal Utility" pp. 49 and 117
  • Ch.1, Appendix on Graphing
  • Lecture Outline

Topics:

  • 5Es of Economics
  • algebra and graphs

Video Lectures: [login] [notes]

Must Know / Outcomes:

  • What is "SCARCITY" as it is defined in economics?
    (What two things cause the scarcity of goods and services?
  • What is "erskinite"? Is erskinite scarce?
  • What is the goal of economics? 
  • What are society's three options for dealing with scarcity?
  • What do the 5Es do?
  • For each of the 5Es:
    • Define
    • Explain how it affects society's satisfaction
    • Give an example

    • ECONOMIC GROWTH
    • ALLOCATIVE EFFICIENCY
    • PRODUCTIVE EFFICIENCY
    • EQUITY
    • FULL EMPLOYMENT

  • How does economic growth differ from the other Es? 
  • What are the three ways to achieve economic growth?
  • What are the three ways to achieve productive efficiency?
  • What is the President Obama example? Explain how it can be used to show that equity can increase society's satisfaction. Why did we use such a strange example?
  • What is the law of diminishing marginal utility? What does "marginal" mean?
  • How does our definition of full employment differ from what you will hear on the news?
  • KEY TERMS: scarcity, economic growth, allocative efficiency, productive efficiency, equity, full employment, marginal, law of diminishing marginal utility, President Obama example, direct (positive) relationship, inverse (negative) relationship, slope of a line, positive slope, negative slope, origin, horizontal (x) axis, vertical (y) axis, economic cost, shortage, quintile.

Discussion Questions:

  • Why it is GOOD for the people of Florida if, after a hurricane strikes, the price of plywood (or other products) increases from $10 a sheet to $30 a sheet?
  • Why it was GOOD when the Coca-Cola company (or other companies) lays off 6000 workers as they did in the year 2000?
  • Why the price of gasoline in the United States is TOO LOW? (We may have to wait until after we finish chapter 5 to truly understand this.)
  • Explain the "President Obama Example" of how equity increases society's satisfaction.
Key Figure:

The 5Es of Economics

1c  Scarcity and Budget Lines

Lesson Introduction: So, do you agree that it is GOOD for the people of Florida if, after a hurricane strikes, the price of plywood (or other products) increases from $10 a sheet to $30 a sheet? Or, that it was GOOD when the Coca-Cola company (or other companies) layed off 6000 workers as they did in the year 2000 assuming that they could still produce the same quantity, but with fewer workers? Even if you do not agree, do you understand that these things will reduce scarcity and increase society's satisfaction? In chapter five we will learn why the prices of gasoline, soda pop, and junk food, may be TOO LOW. (Isn't this fun?)

Lesson 1c introduces our first graphic MODEL: the budget line. For many students microeconomics is a difficult course. I think there are two reasons for this. First, we will learn theories or models, rather than facts. Facts are easy to memorize. Theories or models have to be learned and practiced. And second, we will express our theories or models on graphs, and many students do not like graphs. If you want to be successful in this course you must learn to use our graphical models. You must be able to draw the graphs correctly from memory, you must understand what each line on the graph represents, and you must know why each line has the shape that it does. For each graph be able to: DEFINE, DRAW, DESCRIBE its shape. Be sure to study the graphs in the textbook carefully and plot all the graphs in the yellow pages. Finally, an easier way to view graphs is to remember that each point on a graph represents two numbers. Find a point on a graph, then find the two number from the graph's axes.

Note: not all models are graphs. For example, the 5Es of Economics is a model of the issues studied by economists.

1c Something Interesting (Why are we studying this?)

USING MODELS: In this lesson we will learn our first MODEL - the budget line. We will study many MODELS this semster and most models will be represented by graphs. Why do economists use so many models?

Read the first paragraph only of the link below. It introduces a MOOC from the University of Michigan called "Model Thinking". I was a bit surprised that there is a whole couse just on using models, but it highlights the importance of models in understanding the world around us.

https://www.coursera.org/learn/model-thinking

OPTIONAL - More information about the importance of using models:

Readings:

Topics:

  • Definition of economics
  • Economic models
  • Budget lines
  • Resources (Four Factors of Production)

Video Lectures: [login] [notes]

Must Know / Outcomes:

  • Define economics and describe the four components of the definition:
    • social science
    • choice
    • scarcity
    • maximizing satisfaction
  • What are economic models and why do economists use them?
  • Explain the importance of ceteris paribus in formulating economic principles.
  • Differentiate between microeconomics and macroeconomics.
  • Defne and draw budget lines. Explain what happens to a budget line when income and prices change.
  • How does the budget line illustrate the necessity of making choices?
  • Define and give examples of the four types of resources (factors of production) and know the payment for each
  • KEY TERMS: economics, economic model, microeconomics, macroeconomics, utility, rational choice, opportunity cost, benefit-cost analysis (marginal analysis), ceteris paribus (other things equal assumption), budget line, budget constraint, factors of production, land, labor, capital, entrepreneurial ability,

Discussion Questions:

  • Why do economists use all those graphs (models)?

Key Graphs:

Budget Line

Budget Line: Income Decreases

Budget Line: Price Decreases

1d   Making Choices: Production Possibilities Curve (PPC) and Benefit Cost Analysis (BCA)

Lesson introduction: Here we will study our second graphical model: the Production Possibilities Curve (PPC), and we then will learn a tool for making decisions that we will use throughout the course: Benefit-Cost analysis (BCA). Basically what we are doing is setting the stage for making economic decisions. Remember: economics is the social science concerned with how we choose to use our limited resources to maximize society's unlimited wants, or, how we make decisions.

The production possibilities curve will show us that we must make choices and all choices have costs. Economists call these "opportunity costs". ALL COSTS IN ECONOMICS ARE OPPORTUNITY COSTS. Whenever we discuss the "costs" of doing something we will mean the complete opportunity cost.

Benefit-cost analysis (BCA) is a model that explains how to make the best decision possible. BCA means we should select all options where the marginal benefits (MB) are greater than the marginal costs (MC) -- up to where MB = MC. When the MB = MC then we have made the best decision possible. NOTE: "marginal" means "extra" or "additional". So to make the best decision possible select all options where the extra benefits that you get from the decision are greater than the extra costs of the decision. One more thing: to make the best decisions we look only at MARGINAL costs and benefits and we ignore FIXED, or SUNK, costs (i.e. ignore things that will not change no matter what choice is made).

We will use BCA many times throughout this course. In chapter 6 we will use BCA to decide how much to buy to maximize our satistisfaction. In chapters 8-11 we will use it to decide how much to produce to maximize profits. In chapters 12 and 13 we use BCA to decide how many to hire to maximize profits (Ch. 12 and 13).

Notice that economists look at EXTRA benefits and EXTRA costs. We call this "thinking on the margin". Students are used to thinking about TOTAL benefits and TOTAL costs. We do not want total benefits to equal total costs, but we do want MB to equal MC. You probably know that it is best if the total benefits are a lot higher than total costs. What you will learn is that when MB = MC, then the difference between total benefits and total costs will be the greatest.

Be sure you understand BCA!

What is the connection between the PPC and BCA? Well, when studying the PPC you will learn the important concept of "opportunity cost". Learn the definition well. Since all costs in economics are opportunity costs, then when using BCA, "marginal costs" mean the additional opportunity costs.

1d Something Interesting (Why are we studying this? )

The link below discusses a study that concludes that drivers of cars with air bags have more accidents. Why would airbags in cars cause more accidents (see the link below)?

After studying this lesson you should be able to use Benefit-Cost Analysis (MB=MC) to answer this question. When airbags were first put in cars how did that change the extra benefits of driving fast (MB) and the extra costs of driving fast (MC)?

Drivers with airbags may take more risks

A similar question for skiers is why did the invention of avalanche airbags cause more people to become caught in avalanches (see below)? After studying this lesson you should be able to use Benefit-Cost Analysis (MB=MC) to answer this question.

In a March 2013 blog post written by Utah Avalanche Center Director Bruce Tremper . . . Tremper says airbags are providing a false sense of security, leading more skiers into high-consequence terrain, and thus decreasing the effectiveness of said airbag.
"Each gizmo we buy to increase our safety usually cause us to increase our level of risk at the same time. For instance, when we added seat belts and airbags to cars, yes fatalities decreased, but it also allowed us to drive faster, farther, crazier and talk on our mobile phones at the same time. So safety measures usually work but not nearly as well as we would hope because people just increase their risk (and “utility”) at the same time. In avalanche airbag case, we will also get more powder, more fun, and more risk in the bargain . . . . people will increase their exposure to risk because of the perception of increased safety, which will cancel out some, but not all, of the effectiveness of avalanche airbag."

What are avalanche airbags?
https://www.youtube.com/watch?v=h7QFRXc0R8M

Reading:

Topics:

  • Society's Economizing Problem: Production Possibilities
  • How to Make Choices: Benefit-Cost Analysis

Videos: [login] [notes]

Outcomes / Must Know:

PPC

  • Construct a production possibilities curve (PPC) when given appropriate data; what is the production possibilities curve (PPC) or production possibilities frontier (PPF)?; what does it show?
  • What are the assumptions behind the PPC
  • Illustrate the following using the production possibilities curve:
    • we must make choices
    • choices have opportunity costs
    • the law of increasing costs
    • the effect of unemployment
    • the effect of productive inefficiency
    • how present choices affect future possibilities
    • the effect of international trade
    • two types of "economic growth"
    • it does NOT show the optimum product mix (allocative efficiency)
  • Explain WHY the PPC has the shape that it does -- concave to the origin. What is the law of increasing cost?
  • What would the PPC look like if there were constant costs?
  • What does a point outside the PPC represent?
  • What two things (2 Es) would a point inside the PPC indicate?
  • Give some real-world applications of the production possibilities concept.
  • Summarize the general relationship between investment and economic growth.
  • What is the difference between "achieving the potential" and "increasing the potential"? Show the difference on a PPC.
  • What would cause a PPC to shift inward?
  • Use a PPC to illustrate the effect of international trade

Benefit Cost Analysis

  • define benefit cost analysis (BCA) and use it to solve problems
  • define "marginal" and give examples
  • define marginal benefits (MB) and marginal costs (MC)
  • explain why we ignore fixed, or sunk, costs ("Don't cry over spilt milk.")
  • know what happens if MC increase? decrease?
  • know what happens if MB increase? decrease?
  • draw MB and MC on a graph and explain their shapes
  • be able to find the optimum choice from a table of total costs and total benefits and from a table of marginal costs and marginal benefits
  • use BCA to explain why Drivers with airbags may take more risks or why skiers with air bags may take more risks
  • what is a "sunk cost" (or fixed cost) and why are they ignored when using benefit-cost analysis?

KEY TERMS: production possibilities, necessity of choice, law of increasing costs, concave to the origin, opportunity cost, constant cost, benefit-cost analysis (marginal analysis), economic growth, consumer goods, capital goods, shrinking PPC, nonproportional growth, marginal costs (MC), marginal benefits (MB), MB=MC Rule, sunk (fixed) costs

Discussion Questions

"Don't cry over spilt milk " If you are deciding whether or not to come to class today, why does it not matter that you have already paid tuition? Why is the fact that you have paid tuition irrelevant when trying to decide whether to attend class today or skip?

Key Graphs:

Achieving the Potential: Prod. Efficiency and Full Employment

Increasing the Potential: Economic Growth

Benefit-Cost Analysis: Graph: best quantity = 200,000 pizzas

 

2a   Market Economies and Trade

Lesson Introduction: One reason why I use our textbook is because they have a chapter on market economies and they used to have a chapter on command economies (now just a small section). In this lesson we find out for the first time that competitive market economies are efficient, both allocatively and productively. This is the result of the "invisible hand" of capitalism. This is a general theme for the whole course that we will discuss again in chapters 3, 5, and 8-13. Many textbooks simply assume that students know what a capitalist economy (market economy) is because we live in one here in the United States. But, I learned long ago that students do not understand the characteristics of captialism nor the benefits of, or the problems with, market economies. All over the world countries are moving away from command economies toward a market economy. Why? We will learn it is because market economies are better at achieving allocative and productive efficiency, and economic growth, but they do seem have a problem with equity and at times full employment.

One characteristic of a market economy is a limited role for governement. Periodically we will discuss just WHAT IS the economic role of government? What should the government do, or not do? This is where Republicans and Democrats seem to have a fundamental disagreement, but I think they agree more than they believe. Remember this: the economic goal of society is to maximize its satisfaction (reduce scarcity as much as possible). And they do this by achieving the 5Es. The economic role of government then ALSO should be to achieve the 5Es. We will return to this issue of the economic role of government at different times thoughout the course.

Our first discussion of this economic role for government will be FREE TRADE. Should the United States have free trade with other countries like Mexico and China, or should the government impose trade restrictions? We will examine this question by using the production possibilities model that we learned in chapter 1.

2a Something Interesting (Why are we studying this?)

Read the first four paragraphs of The Mystical Power of Free Trade.

After studying this lesson you should understand:

  • why "society benefits from allowing its citizens to buy what they wish--even from foreigners." (i.e. free trade helps society),
  • and why "people resist this conclusion, sometimes violently"

Readings:

Topics:

  • How Countries Make Economic Choices: Economic Systems
    • Market Economies
    • Command Economies
  • Capitalism and the Five Fundamental Questions
  • Capitalism and Efficiency (the invisible hand)
  • The Gains from Trade

Video Lectures: [login] [notes]

Must Know / Outcomes:

  • Pure Laissez-faire economic system
  • Centrally Planned Economy
  • mixed economic systems
  • The Bolshevik Revolution
  • Contributing factors to the collapse of the Soviet Union
  • characteristics of the market system
  • the important role of profits and losses
  • property rights
  • the "invisible hand" of capitalism
  • the coordination problem
  • the incentive problem
  • be able to draw and explain the Circular Flow Model

 

  • calculate how specialization and trade increases output using the production possiblilities tables and graphs of two different countries
  • straight line PPCs (constant costs)
  • absolute advantage
  • comparative advantage
    • calculate comparative advantage
    • specialization and trade
  • calculate the gains from specialization and trade

 

  • KEY TERMS: economic system, command system (centrally planned, socialism), market system (capitalism, laissez-faire), mixed economic system, Bolshevik revolution, self interest, private property, freedom of enterprise and choice, competition, market, specialization, consumer sovereignty, dollar votes, invisible hand, creative destruction, coordination problem, incentive problem, circular flow diagram, product market, resource market, opportunity cost, absolute advantage, comparative advantage, gains from trade, free trade.

Discussion Questions:

  • Why are market economies more efficient than command economies both allocatively and productively?
  • What is the "invisible hand" of capitalism
  • How does trade increase productive efficiency and therefore output?

Key Graphs

 

3a   Demand

Lesson introduction: If the price of pizza goes up, what happens to the demand for pizza? . . . . . . . . . . . . . . . . . . . NOTHING! Nothing happens to the demand for pizza if the price changes!

The next three lessons introduce the demand and supply model for explaining how prices arise and change in a market economy. Learn these lessons well. Do the assigned problems. Draw the graphs in the yellow pages and while you are reading and studying. DRAW GRAPHS! Get used to using the graphs to help you answer questions. If you are avoiding drawing the graphs you will do poorly and not get the practice that you need to learn the concept. Be sure to LABEL the axes of every graph that you draw.

So why doesn't the demand for pizza change if the price changes? Because economists have a different definition of "demand". Demand is NOT the quantity that we buy. If the price of pizza goes up we will buy less, but that is not what "demand" means in economics. Economists tend to be precise with their definitions and sometimes their definitions are different than the more commonly used definitions. Things like "scarcity", "investment", "cost", "demand", and "supply", have different definitions in economics than what you may already know. Learn our definitions! Demand is not how much we buy. Demand has a different definition in economics. "Demand" means the "demand graph".

Remember, that econmists use models (like the supply and demand model) to simplify the real world. They do this by isolating certain variables from all the clutter found in reality. Then by changing one variable at a time economists can see what effect it will have. In this lesson we will learn the economic definition of DEMAND and plot the demand graph. Then, we will look at one variable at a time to see what effect they have on the demand curve. We call these variables the "non-price determinants of demand". They are: Pe, Pog, I, Npot, T (P,P,I,N,T). LEARN THEM! LEARN THEM WELL! Know how each one affects the demand curve. Be sure to do the yellow pages.

3a Something Interesting (Why are we studying this?)

What is that Campbell's Pork and Beans can doing on the display for VanCamp's Pork and Beans?

  • After studying this lesson you will be able to draw a graph illustrating what happened to the demand for Campbell's Pork and Beans when a customer took a can out of their shopping cart and placed it on this display of VanCamp's Pork and Beans that were on sale.
  • Which non-price determinant of demand explains why that Campbell's soup can is there?

Readings:

Topics

  • Definition of demand
  • Changes in Demand vs. Changes in Quantity Demanded
  • Non-price determinants of demand and they affect the demand curve

Video Lectures: [login] [notes]

Must Know / Outcomes:

  • define demand (note: it has a DIFFERENT DEFINITION in economics)
  • If the price of pizza goes up, why does the demand for pizza stay the same?
  • be able to correctly draw and label a demand graph
  • why do economists employ the ceteris paribus assumption when creating a demand curve?
  • what is the law of demand?
  • why is the demand curve downward sloping (three explanations)
  • list the non-price determinants of demand (Pe. Pog, I, Npot, T) or (P, P, I, N, T ) and understand how they affect the demand schedule and curve. This is VERY IMPORTANT. BE ABLE TO DO THIS! See the 3a/3b/3c yellow pages.
  • explain the difference between the a "change in the quantity demanded" and a "change in demand"
  • what is an "increase in demand" and a "decrease in demand" and show how they affect the demand schedule and the demand curve
  • what is "market demand"?
  • what is that Campbell's Pork and Beans can doing on the display for VanCamp's Pork and Beans (see picture at left)? Which non-price determinant of demand explains why that Campbell's soup can is there? Draw a supply and demand graph illustrating what happened in the market for Campbell's Pork and Beans when VanCamp's were put on sale.
  • KEY TERMS: demand, quantity demanded, law of demand, market demand, horizontal summation, income effect, substitution effect, diminishing marginal utility, change in demand, change in quantity demanded, increase in demand, decrease in demand, non-price determinants of demand, normal good, inferior good, substitute good, complementary good (complement), independent goods

Discussion Questions:

  • If the price of pizza increases why does the demand for pizza not change?
  • What are Pe, Pog, I, Npot, T (PPINT)?
  • what is that Campbell's Pork and Beans can doing on the display for VanCamp's Pork and Beans? Which non-price determinant of demand explains why that Campbell's soup can is there? Draw a supply and demand graph illustrating what happened in the market for Campbell's Pork and Beans when VanCamp's were put on sale.

Key Graphs:

 

3b   Supply

Lesson Introduction: If the price of pizza goes up what happens to the SUPPLY of pizza? . . . . . . . . . . NOTHING! A change in the price of a product does not affect its supply, or its demand. When the price goes up the QUANTITY SUPPLIED will increase, but the supply does not change. Learn the difference between "supply" and "quantity supplied". "Supply" does NOT MEAN the quantity available for sale. Supply has a different definition in economics. "Supply" means the "Supply graph".

So what would cause the supply graph, or supply itself, to change? Those things that cause supply to change are called the "non-price determinants of supply". They are: Pe, Pog, Pres, Tech, Tax, Nprod (P,P,P,T,T,N). See the Yellow Pages.

Remember, the goal of chapter 3 is to learn a model that will help us understand why prices are what they are and why prices change. In the next lesson we will put demand and supply together and use the model (graph) to find the prices of products. Then, and more importantly, we will see what causes prices to change. If you hear on the.news, or read in your news app, that the price of gasoline is going down, we will be able to explain WHY. The causes of changes in prices of products are the five non-price determinants of demand (Pe, Pog, I, Npot, T) and/or the six non-price determinants of supply (Pe, Pog, Pres, Tech, Tax, Nprod.). Whenever you hear that the price of something is changing think of these 11 possible causes.

3b Something Interesting (Why are we studying this?)

Read the short news article below on the declining price of gasoline (Dec. 2015). Paragraph 10 states "Plunging oil prices are the main factor driving down the price at the pump. "

Gas falls below $2 a gallon
http://money.cnn.com/2015/12/20/news/economy/aaa-2-dollar-gas/index.html

After studying this lesson you should be able to (1) list the non-price determinants of supply, (2) select the determinant that is the cause of the decline in gasoline prices discussed in the news article, and (3) graph the effect that the change in the determinant will have on the supply curve for gasoline.

Readings:

Topics

  • Definition of supply
  • Changes in Supply vs. Changes in Quantity Supplied
  • Non-price determinants of supply and how they affect the supply curve

Video Lectures: [login] [notes]

Must Know / Outcomes:

  • define supply (note: it has a DIFFERENT DEFINITION in economics)
  • be able to correctly draw and label a supply graph
  • if the price of pizza goes up why does the supply not change?
  • why do economists employ the ceteris paribus assumption when creating a supply curve?
  • what is the law of supply?
  • why is the supply curve upward sloping (two explanations)
  • list the non-price determinants of supply (Pe, Pog, Pres, Tech, Taxes, Nprod) or (P,P,P,T,T,N) and understand how they affect the supply schedule and curve. This is VERY IMPORTANT. BE ABLE TO DO THIS! See the 3a/3b/3c yellow pages.
  • explain the difference between the a "change in the quantity supplied" and a "change in supply"
  • what is an increase in supply and a decrease in supply and show how they affect the supply schedule and the supply curve
  • what is "market supply"?
  • KEY TERMS: supply, quantity supplied, market supply, horizontal summation, law of supply, change in supply, change in quantity supplied, increase in supply, decrease in supply, non-price determinants of supply,

Discussion Questions:

  • If the price of pizza increases why does the supply of pizza not change?
  • What are: Pe, Pog, Pres,Tech, Taxes, Nprod (P,P,P,T,T,N)?
  • Read the following and answer these questions:
    • Which determinant has changed?
    • Will it affect S or D of gasoline?
    • Will the S or D of gasoline increase or decrease? Shift to the right or to the left?

    "According to the Lundberg Survey, the average price for regular gasoline dropped 3.99 cents over the three weeks up to July 11 to $3.6699 per gallon. . . . Lundberg explained that the average gasoline price continues to decrease because refiners, enjoying the lower crude oil prices in the market, are passing down the savings to the consumers. "

  • From: http://www.techtimes.com/articles/10378/20140714/average-price-of-gasoline-in-u-s-drops-four-cents-now-at-3-67-a-gallon.htm

Key Graphs:

 

3c   Market Equilibrium and Efficiency

Lesson introduction: We are going to learn two very important things in this lesson.

First, we will put demand and supply together and learn how to use the model to to see why products have the prices that they do. Then, and more importantly, we will see what causes prices to change.

If you hear on the news or read in your news app ,that the price of gasoline is going down, we will be able to explain WHY. The causes of changes in prices of products are the five non-price determinants of demand (Pe, Pog, I, Npot, T) and/or the six non-price determinants of supply (Pe, Pog, Pres, Tech, Tax, Nprod.). Whenever you hear that the price of something is changing think of which of these 11 possible causes have changed, draw the graph and shift the appropriate demand and/or supply graph, and the graph will show the price changing.

Second, after we learn that in a competitive market economy the interaction of demand and supply will determine what the prices of products will be and how much people will buy at that price, we will ask: Is this the allocatively efficient quantity and price? Our goal is to show that in a competitive market the price will change until allocative efficiency is achieved. In chapter 2 we learned that markets are allocatively efficient. This means they will produce the quantity of goods that maximizes the society's satisfaction. After studying chapter 3 we will bew able to show the allocatively efficient price and quantity on a graph.

Competitive markets are efficient.

3c Something Interesting (Why are we studying this?)

Read the first fewparagraphs of Hybrid Car Prices Increasing Due To High Gas Prices.

In lesson 3a you learned how the non-price determinants of demand (Pe, Pog, I, N, T) affect the demand curve. In lesson 3b you learned how the non-price determinants of supply (Pe, Pog, Pres, Tech, Tax, Nprod) affect the supply curve.

After studying this lesson you will be able to use these determinants and the demand and supply graphs to explain why prices change. For example you will understand why: "It's becoming almost an annual tradition: As fuel prices rise in the spring, so do the prices of hybrid cars. "

Readings:

Topics

  • Market Equilibrium
  • Market Equilibrium and Changes in D and S
  • Market Equilibrium and Allocative Efficiency
    • MSB=MSC
    • maximum consumer plus producer surplus

Video Lectures: [login] [notes]

Must Know / Outcomes:

Equilibrium

  • what are the two assumptions of a competitive equilibrium?
    • there are many buyers and sellers in the market
    • who have no influence over the price; i.e. they are price takers
  • define equilibrium; define market equilibrium
  • what happens if the price is below the equilibrium price? If it is above it?
  • how to find the equilibrium price and quantity on a supply and demand schedule and graph
  • define "shortage" and "surplus" and explain using a supply and demand graph
  • what is the "bidding mechanism"?
  • the three (or four) steps to finding a new equilibrium when a non-price determinant changes and how to use them
  • what happens to the equilibrium price and quantity if (1) demand increases, (2) demand decreases, (3) supply increases, and (4) supply decreases.
  • what happens if both supply and demand change

Markets and Efficiency

  • be able to use two models to show why competitive market economies achieve allocative efficiency
    • MSB=MSC
    • maximum consumer plus producer surplus
  • define consumer surplus and shade it in on a supply and demand graph
  • define marginal social benefit and explain why it is often measured by the demand curve
  • define producer surplus and shade it in on a supply and demand graph
  • define marginal social cost and explain why it is often measured by the supply curve
  • define deadweight loss and be able to locate it on a supply and demand graph if too much or too little is produced
  • explain why allocative inefficiency occurs where MSB > MSC causing an underallocation of resources (too little produced); show on graph using the MSB=MSC model and show the deadweight loss on the consumer and producer surplus model
  • explain why allocative inefficiency occurs where MSB < MSC causing an overallocation of resources (too much produced); show on graph using the MSB=MSC model
  • be able to find WHAT WE GET and WHAT WE WANT on the MSB=MSC model graph

KEY TERMS: equilibrium, market equilibrium, bidding mechanism, surplus, shortage, scalping, productive efficiency, allocative efficiency, marginal social benefits, marginal social costs, "what we get", "what we want", profit mximizing quantity, underallocation of resources, overallocation of resources, consumer surplus, producer surplus, deadweight loss, MSB = MSC

Discussion Questions:
 

Key Graphs:

5a   Government Interference in Markets and Market Failures (Negative Externalities)

Lesson introduction: In lesson 3c we learned that competitive markets are efficient and we learned two models to show that markets are efficient: (1) MSB = MSC, and (2) maximum consumer plus producer surplus. You must understand these models to understand chapter 5. In chapter 5 we learn that SOMETIMES markets are NOT efficient.

When are product markets not efficient?

  1. when the government sets the price (price ceilings and price floors - lesson 5a, chapter 3, pp 61-64 )
  2. when the supply curve does not include all of the costs of producing or consuming the product (negative externalities - lesson 5a, chapter 5)
  3. when the demand curve does not include all of the benefits of consumption (positive externalities - lesson 5b, chapter 5)
  4. when the products are "public goods" (lesson 5b, chapter 5).
  5. when there is not competition (monopolies and oligopolies - chapters 10 and 11)

In this lesson we also will begin our look at the role of the government in a market economy. This would be a good time to review chapter 2. In chapter 2 we learned that there is a limited role for government in market economies. We learned in lesson 3c that markets are efficient, so there is little need for the government. In this lesson we will see what happens if the government interferes in markets. We will learn that sometimes governments will set prices (price ceilings and price floors), rather than letting the market set the price. In other words: SOMETIMES GOVERNMENTS CAUSE ALLOCATIVE INEFFICIENCY. (This is the plywood after a hurricane example discussed in the 5Es reading in lesson 1b.)

Then we will begin to look at examples of when the markets on their own fail to achieve allocative efficiency and examine what the government can do to correct these market failures. SOMETIMES MARKETS BY THEMSELVES ARE INEFFICIENT and the government may try to modify the market to help it achieve allocative efficiency. There are three MARKET FAILURES that we will look at in chapter 5. A "market failure" occurs when the market fails to achieve allocative efficiency. In lesson 5a we look at the market failure caused by negative externalities - when the supply curve does not include all of the costs to society of producing and consuming the product. Then in lesson 5b we look at the market failures caused by positive externalities and public goods.

We will assume that businesses will always produce the profit maximizing quanitity since their goal is to maximize profits. The profit maximizing quantity is also the equilibrium quantity that we studied in chapter 3, when the Qs = Qd. This is WHAT WE GET. We get whatever they produce and they will produce the quantity that gives them the biggest profits. The goal of business is not to be efficient. Their goal is to maximize their profits. If a business can make larger profits by being inefficient then they will be inefficient. Or if they can make larger profits by being efficient they they will be efficient. The main point is that efficiency is not their goal, rather, maximizing profits is their goal.

The allocatively efficient quantity is what society wants. We learned at the end of chapter 3 that allocative efficiency occurs at the quantity where MSB = MSC. This is WHAT WE WANT. We want to maximize our satisfaction and we learned in chapter 1 that this occurs when we achieve the 5 Es. Allocative efficiency is one of the 5 Es.

When the profit maximizing quantity equals the allocatively efficient quantity then markets are efficient . This means that profit maximizing businesses are producing the quantity that maximizes society's satisfaction. WHAT WE GET = WHAT WE WANT. This is the INVISIBLE HAND of capitalism that was discussed in chapter 2. It's as if there is an invisible hand guiding businesses to not only make decisions that maximize their profits, but also to maximize society's satisfaction. As if they don't even know it is happening.

When markets fail to achieve allocative efficiency, the profit maximizing quantity (WHAT WE GET or the equilibrium quantity from chapter 3) is not the same as the allocatively efficient quantity (WHAT WE WANT or the quantity where MSB=MSC). Since one of the economic goals of government is to help the economy achieve efficiency, governments often get involved to correct for market failures. If the market produces too much (negative externalities cause allocative inefficiency because of an overallocation of resources) the government tries to get it to produce less. If the market produces too little (positive externalities and public goods causing allocative inefficiency resulting in an underallocation of resources) the government tries to get it to produce more.

5a Something Interesting (Why are we studying this?)

Cities, states, and countries are debating whether to add taxes, or raise taxes, on gasoline, soda, and junk food. Why? Why would it be good for society to raise these taxes?

Below are a small sample of the many news articles about these taxes

After studying this lesson you should be able to discuss how negative externalities associated with these products are the reasons for such taxes and illustrate the effects of negative externalities on a demand and supply graph. You should understand why many people support these taxes.

Readings:

Topics:

  • Price Ceilings
  • Price Floors
  • Negative Externalities

Video Lectures: [login] [notes]

Must Know / Outcomes:

Price ceilings and floors

  • define price ceiling and give examples
    • how do price ceiling affect allocative efficiency (too little being produced; underallocation of resources), explain using the MSB=MSC model and the consumer and producer surplus (dead weight loss) model
    • what other effects do price ceilings have?
    • what happens if the government sets a price ceiling rate that is lower than the equilibrium?
  • define price floor and give examples
    • explain the efficiency effects of a price floor using the MSB=MSC model and show on a graph (too much being produced; overallocation of resources)
    • what happens if the government sets a price floor that is higher then the equilibrium?

Market Failure: negative externalities (also called external costs or spillover costs)

  • what is a market failure?
  • what is an externality?
  • define negative externalities (external costs or spillover costs)
  • give examples of negative externalities
  • use the MSB=MSC model to show the effects (overallocation) on allocative efficiency of negative externalities
  • what can the government do to correct the market failure caused by negative externalities and show the effects of these policies on the MSB=MSC model
  • why is the MSC curve not the same as the supply (or MPC, marginal private costs) curve when there are negative externalities?
  • what is an excise tax?
  • what is the Coase theorem?
  • explain how according to the Coase Theorem that under certain circumstances bargaining can solve the problems created by negative externalities without the government using an example
  • what are the necessary condition needed for the Coase Theorem to work?
  • what is the tragedy of the commons?
  • KEY TERMS: price ceiling, rent controls, price floor, market failure, externality, negative externality (esxternal cost, spillover cost), internalizing the externality, excise tax, incidence of a tax, cap and trade, Coase Theorem,

Discussion Questions:

  • Supply is usually equal to MSC, but when there are negative externalities the supply curve is to the right of the MSC curve. Why?

Key Graphs:

Price Ceiling (causes a shortage)

Price Floor (causes a surplus)

Negative Externality

Negative Externality and Taxes

5b   Market Failures Continued (Positive Externalities and Public Goods)

Lesson introduction: We have learned that competitive markets are usually efficient. This is one of the benefits of a market economy or capitalism (chapter 2) . But sometimes even markets can be allocatively inefficient. In lesson 5a we learned that when negative externalities exist, a market will produce too much of a good or service (an overallocation of resources) and therefore the government should tax the product (like gasoline taxes) to get consumers to buy less, i.e. without the tax the price of gasoline is too low.

In this lesson we will look at two other market failures, but this time the market produces too little (an underallocation of resources) because the demand curve for the product does not include all of the benefits. This occurs when there are positive externalities and when there are "public goods". Be careful - remember - economists often change the definitions of words. Public schools and public parks are not public goods according to our definition. Since markets produce too little when there are negative externalities or public goods, the goal of government is to increase production.

In later chapters (10 and 11) we will discuss another market failure: the lack of competition. If a market is not competitive, like when it is a monopoly or an oligopoly, then profit maximizing businesses will produce less than the allocatively efficient amount. The invisible hand of capitalism does not work well if the market is not competitive.

5b Something Interesting (Why are we studying this?)

Why does the government do what it does? Governments in the United States, build and run schools, libraries, and parks, but not gas stations, clothing stores, or grocery stores? Why some things and not other things? Does it make sense or is it just random?

We have learned that competitve markets achieve efficiency, both allocative and productive. And we learned that compeititve markets have a limited role for government. So why does the government do public schools, public libraries, and public parks, and we could add roads, bridges, airports, football stadiums, and vaccinations. Why these things and not other things? Why not let private businesses do these things like they do gas stations, clothing stores, and grocery stores?

If markets are efficient, then, if the government is doing something rather that the market, WE SHOULD ASK, WHY?

In this lesson you will learn two reasons that explain much of why the government does what it does: POSITIVE EXTERNALITIES and PUBLIC GOODS.

One other interesting question: public schools, public libraries, and public parks ARE NOT PUBLIC GOODS? Why not?

Readings:

  • Chapter 5: pp 99-110, "Public Goods", "Externalities" and "Government's Role in the Economy"
  • Lecture Outline

Topics:

  • positive externalities
  • public goods
  • tragedy of the commons

Video Lectures: [login] [notes]

Must Know / Outcomes:

Market Failure: positive externalities (also called external benefits or spillover benefits)

  • define positive externalities (external benefits or spillover benefits)
  • give examples of positive externalities
  • use the MSB=MSC model to show the effects on allocative efficiency of positive externalities
  • what can the government do to correct the market failure caused by positive externalities and show the effects of these policies on the MSB=MSC model
  • why is the MSB curve not the same as the D (or MPB) curve when there are negative externalities?

Market Failure: Public Goods

  • define "public goods (public goods are non-exclusive and non-rival)"
  • give examples of public goods and explain why they are public goods
  • define private (exclusive) goods" and give examples
  • define "rival goods" and give examples
  • what is the "free rider problem"?
  • explain how to derive the demand curve for public goods
  • what effect do public goods have on allocative efficiency?
  • what can the government do to correct for the market failure of public goods?

Market Failure: Tragedy of the Commons

  • what is the Tragedy of the Commons (common goods non-exclusive but rival)
  • how does the tragedy of the commons affect allocative efficiency?
  • what can be done to better achieve allocative efficiency when there is a tragedy of the commons?

KEY TERMS: positive externalities (external benefits or spillover benefits), private goods, public goods, rivalry (rival goods, nonrival goods) excludability (exclusion principle, exclusive goods), nonexcludability, (nonexclusive goods), free-rider problem, marginal-cost-marginal-benefit rule, tragedy of the commons

Discussion Questions:

  • Demand is usually equal to MSB, but when there are positive externalities the demand curve is to the left of the MSB curve. Why?

  • Are positive externalities (spillover benefits) good or bad for society? Why or why not?
  • Why are public schools, public parks, and public libraries NOT "public goods"? If they are not public goods then why does the government produce them?
  • Comment on:

Key Graphs

Positive Externalities

Positive Externalities and the Role of Government: Increase Demand

Positive Externalities and the Role of Government: Increase Supply

 

 

Unit 2: MAKING CHOICES

ELASTICITY, CONSUMER CHOICE, and COSTS

4a  Price Elasticity of Demand and Tax Incidence

Lesson Inroduction: We learned in chapter 3 that when the price of pizza goes up the quantity demanded goes down. (What happens to demand? . . . . NOTHING.) So we know when the price of a product goes up then the quantity demanded goes down and when the price goes down the quantity demanded goes up. We called this the "law of demand" in chapter 3. What we are going to learn in chapter 4 is HOW MUCH?

If the price of pizza goes up, HOW MUCH less will we buy? A LITTLE less or A LOT less? The price elasticity of demand will answer this question and it will also explain why farm incomes were high during a year of a record drought and were low during a year of a record harvest.

You already understand elasticity. Think about this:

  1. if the price of gasoline goes up HOW MUCH less will consumers buy? A little less or a lot less?
    I believe most students will say A LITTLE less.
  2. If the price of a Big Mac goes up, HOW MUCH less will consumers buy? A little less or a lot less?
    I bet most of you answered A LOT less.
  3. If the price of salt goes up, how much less will consumers buy? A little less or a lot less?
    Correct. Only A LITTLE less.
  4. If the price of a new car goes up, how much less will consumers buy? A little less or a lot less?
    A LOT less.

The price elasticity of demand measures how responsive consumers are to changes in prices. Don't confuse elasticity with the law of demand. The law of demand tells us that when prices go up, the quantity demanded will go down. Elasticity tells us HOW MUCH it will go down.

  • Chapter 3 - law of demand:
    if the P Qd
  • Chapter 4 - price elasticity of demand:
    if the P does Qd or Qd ?
    if price changes, HOW MUCH will the Qd change? A little or a lot?

In chapter 3 we learned the direction of the arrows (up or down). In chapter 4 we learn the size of the arrows (big or small).

4a Something Interesting (Why are we studying this?)

In 2012 there was a severe drought in the US corn growing region. In 2014 the weather was great and the corn crop was at a record high. In which year did farmers make the most money?

They made more in 2012 when the weather was bad !!! After studying this lesson you should understand why good farming weather results in low farm incomes and bad farming weather results in high farm incomes. Really!

See:

ANSWER: The answer to this paradox is that the demand for corn and soybeans is price INELASTIC. You will learn that bad weather causes the price of crops to increase whch causes farm incomes to increase and good weather causes the price of farm corps to decrease causing incomes to decrease BECAUSE THE DEMAND FOR CORN AND SOYBEANS IS PRICE INELASTIC.

Readings:

  • Chapter 4: pp. 75-84,
  • Chapter 4: pp 86-87, Last Word
  • Chapter 16: pp 347-354, "Tax Incidence and Efficiency Loss
  • Lecture Outline

Topics:

  • price elasticity of demand
  • tax incidence and efficiency loss

Video Lectures: [login] [notes]

Must Know / Outcomes:

  • define price elasticity of demand
  • compare "the law of demand" with "price elasticity of demand"
  • calculate the coefficient of price elasticity of demand using the midpoint formula
  • explain why the midpoint formula is used
  • know how to interpret the coefficient (what does the number mean?)
  • price elastic demand
  • price inelastic demand
  • unit elastic demand
  • how does the price elasticity of demand change along a single demand curve?
  • perfectly price elastic demand (graph)
  • perfectly price inelastic demand (graph)
  • total revenue test (how do price changes affect total revenue with different elasticities (show graphically)
  • P x Q = TR
  • explain how the shape of the total revenue graph is explained by the price elasticity of demand
  • know the determinants of price elasticity of demand and be able to use them to make an educated guess as to whether a product has an elastic or inelastic demand
  • Why might farm incomes fall if crops are good (bumper crops)?
  • how does the price elasticity of demand explain the rise in street crime after a major drug bust?
  • how does price elasticity of demand help explain how the minimum wage affects unemployment?
  • define price discrimination and explain the role of the price elasticity of demand
  • define "excise tax" and give examples
  • understand the connection between price elasticity of demand and the effect of excise taxes on (1) tax incidence (burden), (2) tax revenue, and (3) allocative efficiency (social welfare)
  • explain the efficiency loss of excise taxes using the (1) MSB = MSC model and (2) the consumer and producer surplus model (dead weight loss)
  • the role of excise taxes in income redistribution and reducing negative externalities
  • KEY TERMS: elasticity, price elasticity of demand, midpoint formula, coefficient of price elasticity of demand, price elastic demand, price inelastic demand, unit elastic demand, perfectly elastic demand, perfectly inelastic demand, total revenue, price discrimination, excise tax, tax incidence (tax burden), efficiency loss of a tax, payroll tax,

Discussion Questions:

Key Graphs

 

4b   Other Types of Elasticity

Lesson Introduction: Elasticity tells us HOW MUCH one variable changes in response to a change in another variable.

Chapter 3: If price increases what happens to the quantity demanded?
Chapter 4: If price increases HOW MUCH does the quantity demanded decrease?

We will study four different types of elasticity:

1. price elasticity of demand (lesson 4a)
(If price changes, HOW MUCH does quantity demanded change?)

2. price elasticity of supply (lesson 4b)
(If price changes, how HOW MUCH quantity supplied change?)

3. cross elasticity of demand (lesson 4b)
(If the price of one product changes, HOW MUCH does the quantity of another product change?)

4. income elasticity of demand (lesson 4b)
(If income changes, HOW MUCH does the quantity of a product purchased change?)

4b Something Interesting (Why are we studying this?)

  • No case study yet. (xxxx)

Readings:

Topics:

  • price elasticity of supply
  • cross elasticity of demand
  • income elasticity of demand

Video Lectures:[login] [notes]

Must Know / Outcomes:

Price Elasticity of Supply
  • define price elasticity of supply
  • calculate and interpret the coefficient of price elasticity of supply using the midpoint formula
  • determinants of price elasticity of supply
  • price elasticity of supply and the market period, the short run, and the long run

Cross Elasticity of Demand

  • define cross elasticity of demand
  • interpret the coefficient of cross elasticity of demand including both its value and the sign (substitutes, complements, and unrelated goods)

Income Elasticity of Demand

  • define income elasticity of demand
  • interpret the coefficient of income elasticity of demand including both its value and the sign (inferior goods, normal goods, luxury goods)

KEY TERMS: price elasticity of supply, coefficient of price elasticity of supply, midpoints formula, market period, short run, long run, cross elasticity of demand, substitute good, complement good, income elasticity of demand,

Discussion Question:

  • What is the difference between the "Law of Supply" and the "Price Elasticity of Supply"?
  • Interpret this coefficient of cross elasticity of demand: Eab = -2
  • Interpret this coefficient of income elasticity of demand: Edy = + 0.5

Key Graphs:

 

6a   Consumer Decisions: Utility Maximization

Lesson Introduction: When I go into the grocery store why do I buy 12 cans of pop, 3 frozen pizzas, and 1 pound of hamburger? Why don't I buy 12 pounds of hamburger and 1 can of pop? In this lesson we will use benefit-cost analysis to understand why we buy what we do. We will calculate the marginal benefits (MB) of consuming something and the marginal costs (MC) of consuming something. Remember: all costs in economics are opportunity costs.

If our goal is to maximize our satisfaction we will consume the quantity of goods and services where MB = MC.

First, we will examine the benefits we get from consumption. Economists call these benefits "utility". We will calculate and graph total utility (TU) and marginal utility (MU). As always, be sure you understand the SHAPES of these graphs. Remember: Define, Draw, Describe.

Then, we will use the utility maximizing rule,

MUx/Px = MUy/Py = MUz/Pz,

to calculate how much we should buy in order to maximize our satisfaction (utility).

Be sure that you can see that the utility maximizing rule is really just a version of benefit cost analysis, MB=MC. If I am thinking about going skiing today, the MB would be the extra utility that I get from a day of skiing: MBskiing = MUskiing. Since all costs are opportunity costs, the marginal cost of skiing would be the utility that I would lose because I am not doing something else like going to a movie with my wife: MCskiing = MUmovie

Finally, why do we divide the MU by the price? It doesn't make sense to compare a $45 ski ticket with a $12 movie ticket. By dividing by price we end up comparing $1 worth of skiing with $1 worth of a movie.

So, to maximize my utility I should go skiing and go to movies with my wife so the:

MUskiing/Pskiing= MUmovie/Pmovie.

So even though MUx/Px = MUy/Py looks different than MBx=MCx, it is really the same thing. Be sure you do the exercises in the yellow pages.

6a Something Interesting (Why are we studying this?)

In October and November ski resorts in the west begin to open with just a few runs open and large crowds of skiers and snowboarders. In late April most western ski areas have a lot of snow and are mostly 100% open but few skiers and snowboarders come. Why? Why are there so many customers when the snow is bad in the fall and so few when the snow is good in the spring?

Read the following from an online skiing discussion forum: http://www.epicski.com/t/39322/skiing-in-past-march-why-not-popular
Note: "PNW" means the "Pacific northwest" (i.e. the states of Oregon and Washington).

The skier asks, "But, for some reason, people just stop skiing (in April). WHY? I just don't understand."
After studying this lesson you should be able to explain WHY to the skier who posted on the forum

Here is another interesting question: Why do pop vending machines allow you to only get one can at a time while newspaper vending machines allow you to take as many as you want when you only pay for one?

ANSWER: The answer to both questions has to do with the "law of diminishing marginal utility".

Readings:

Topics:

  • diminishing marginal utility
  • utility maximization

Video Lectures: [login] [notes]

Review Videos

Must Know / Outcomes:

  • Define, Draw, and Describe the total utility and marginal utility graphs
  • Understand the relationship between the total utility and marginal utility graphs
  • Understand the law of diminishing marginal utility.
  • Describe how rational consumers maximize utility by using benefit-cost-analysis. (Utility maximizing rule; MUx/Px = MUy/Py = MUz/Pz )
  • Explain how a demand curve can be derived by observing the outcomes of price changes in the utility-maximization model
  • KEY TERMS: law of diminishing marginal utility, utility, total utility (TU), marginal utility (MU), rational behavior, benefit-cost analysis, budget constraint, utility-maximizing rule, marginal utility per dollar (MU/P), "util", income effect, substitution effect, diamond-water paradox

Discussion Questions:

  • Read the following from an online skiing discussion forum and answer the question that was asked: "But, for some reason, people just stop skiing. WHY? I just don't understand."
    http://www.epicski.com/t/39322/skiing-in-past-march-why-not-popular
    Note: "PNW" means the Pacific northwest (i.e. the states of Oregon and Washington).
  • If lobster was free and if lobster was your favorite food, would you eat lobster for every meal everyday? Why or why not? (Please use the concepts you learned in this chapter in your discussion.)
  • Why do pop vending machines allow you to only get one can at a time while newspaper vending machines allow you to take as many as you want when you only pay for one?
  • Why do we have to divide by price in the utility maximizing rule?
    • Benefit Cost Analysis: MB = MC
  • Utility Maximizing Rule: MUa/Pa = MUb/Pb

Key Graphs:

Total Utility (TU) and Marginal Utility (MU)

Remember: the marginal is the slope of the total. The slope of the TU curve is getting smaller and smaller (less steep) as the quantity consumed increases. At the same time MU is less and less. AT its peak the slope of the TU curve is zero and at this quantity MU is zero (it crosses the X axis).

 

WHY?

 

7a   Economic Profit and the Production Function

Lesson Introduction: In chapters 7, 8, 9, 10, and 11 we will be at looking the producer decision of HOW MUCH TO PRODUCE. We will use benefit cost analysis (MB=MC) to find the profit maximizing quantity or WHAT WE GET. Once we know how much businesses will produce, we will ask: Is this quantity efficient (both allocatively and productively)?

To find the profit maximizing quantity we will use benefit-cost analysis: MB=MC. So, what are the extra benefits of producing one more unit of output? How do businesses benefit when they produce one more? Well, they get more money, called revenue. Even if they are earning losses, they receive more revenue when they sell more. The extra revenue that businesses get when they produce and sell one more unit is their marginal revenue (MR). This is the MB of producing one more.

But there are also extra costs of producing one more unit of output. We call these the marginal costs (MC). When MR=MC (MB=MC) their profits will be maximized. NOTE: when MR=MC profits are not necessarily zero, but they are as large as possible. We will calculate these profits in chapters 8, 9, 10, and 11.

In this chapter, chapter 7 we begin by looking at the MC. Then in chapters 8, 9, 10, and 11 we add the MR.

In chapter 7 we will introduce three new sets of graphs. First (lesson 7a) we will look at the production function thast shows how output changes when we add more resources. We will then (lesson 7b) use the production function graph to understand the SHAPES of the other two sets ofgraphs. The two sets of cost graphs show us what happens to costs when we produce more. These two sets of cost graphs are the total cost graphs (TC, TVC, and TFC) and the average cost graphs (ATC, AVC, AFC, and MC).

Let's begin with the production function, or HOW DOES OUTPUT CHANGE WHEN WE ADD MORE RESOURCES?

One more thing. If a firm is earning zero economic profits, that is OK!!! But a zero economic profit is NOT the same as a zero accounting profit. A zero economic profit could be an accounting profit of $1 million dollars a year! Be sure you learn the difference between an "economic profit" and an "accounting profit" and understand WHY the difference exists. (Hint: It has to do with the fact that economists always use "opportunity costs" and accountants don't.)

Key Graph: The Production Function:

7a Something Interesting (Why are we studying this?)

Assume your GPA is 3.0. A "B" average. Let's call the GPA that you get this semester your MARGINAL grade point (MGP; Remember "marginal" means "extra".)

  • What happens to your 3.0 GPA if you get straight C's this semester? (What happens to your grade point AVERAGE if your MARGINAL grade point is lower?)
  • What happens to your 3.0 GPA if you get straight A's this semester? (What happens to your grade point AVERAGE if your MARGINAL grade point is higher?)

What happens to the AVERAGE Product (AP) if the MARGINAL Product (MP) is above it? ANSWER: if MP is greater than AP then AP will rise.

What happens to the AVERAGE Product (AP) if the Marginal Product (MP) is below it? ANSWER: if MP is less than AP then AP will fall.

Marginal Product curve crosses the Average Product curve where?

For all graph: DEFINE, DRAW, DESCRIBE the shape.

Readings:

Topics:

  • accounting and economic profits
  • production function: how output changes with inputs

Video Lectures: [login] [notes]

Optional Review Videos:

Must Know / Outcomes:.

  • Distinguish between explicit and implicit costs, and between normal and economic profits
  • Explain why a normal profit is an economic cost, but an economic profit is not
  • Why is a zero economic profit OK?
  • What are sunk (fixed) costs and why are they ignored?
  • Explain the law of diminishing (marginal) returns
  • Differentiate between the short run and the long run.
  • Compute and graph marginal product and average product when given total product data
  • Explain the relationship between total product, marginal product, and average product
  • Explain the shape of the total product, marginal product, and average product graphs (specialization and teamwork, congestion, and overcrowded)
  • differentiate between production, productivity, and productive efficiency
  • KEY TERMS: economic cost, explict cost, implicit cost, accounting profit, economic profit, normal profit, production function, short run, long run, total product (TP), marginal product (MP), average product (AP), law of diminishing returns, increasing marginal returns, diminishing marginal returns, negative marginal returns, specialization and teamwork, congestion (getting crowded), overcrowded,
    productivity vs. production vs. productive efficiency

Discussion Questions:

  • Why are zero economic profits OK for businesses?"
  • Explain what is meant by: the MP curve is the slope of the TP curve?
    (Note: All marginal curves are the slopes of their total curves.)
  • Assume your GPA is 3.0. What happens to your GPA if your you get straight C's this semester? Straight A's this semester? What happens to the AP curve if the MP is above it? Below it?
  • Explain the shape of the total, marginal, and average product graphs (Use the ideas of: specialization and teamwork, congestion, and overcrowded).

KEY GRAPHS:

The Production Function: Total Product (TP), Average Product (AP), and Marginal Product (MP)

 

NOTICE:

The marginal is the slope of the total.

The slope of the TP curve is gets bigger (steeper) at first then it gets smaller and smaller (less steep) as the quantity of the resources increases. At the same time MU at first goes up then gets less and less. At its peak the slope of the TP curve is zero and at this quantity MP is zero (it crosses the X axis). MP is at its highest when TP is at its steepest point.

MP crosses AP when AP is at its peak. Another way of saying this is when MP is above AP, then AP is increasing. When MP is below AP then AP is decreasing.

 

WHY?

 

7b   Production Costs in the Short Run

Lesson Introduction:

OK. Now that we know about (1) specialization and teamwork, (2) getting crowded, and (3) overcrowded, from lesson 7a, that is, we know why the TP curve has the shape that it does, we are ready to look at the graphs that we will be using most in this class: the cost curves (both total and average). Remember, we are studying economic costs so that we can calculate the MC - the extra costs of producing one more unit of output. In chapters 8, 9, 10, 1nd 11 we will combine MC with MR (the extra benefits of producing and selling one more unit of output ) so that we can find the profit maximizing quantity of output, or the quantity where MR=MC. This is WHAT WE GET.

The costs curves show us how costs change with output. The production function in lesson 7a showed us how output changes when we add more resources. They are related. We studied the production function so that we could learn about (1) specialization and teamwork, (2) getting crowded, and (3) overcrowded, because these concepts will help us understand the shapes of the cost curves. Remember: whenever we learn a new graph we must understand it shape (For all graphs: DEFINE, DRAW, DESCRIBE its shape).

In this lesson we will be looking at the SHORT RUN COST CURVES. We studied the definition of "short run" in lesson 4b. It doesn't really have much to do with time. The short run in some industries is longer than the long run in other industries. In the short run the quantity of at least one resource is fixed, does not change. We will usually assume that the number of factories or the size of the factory does not change. So in the short run we are adding more resources to an EXISTING factory . . . and it may get crowded or overcrowded. We will look at the long run costs (when we can change the number of factories or the size of the factories) in the next lesson, 7c.

Finally, we will be looking at three types of costs: fixed, variable, and total (total equals fixed plus variable), and three "families" of costs: total, average, and marginal. By the end of this lesson you should be able to correctly Calculate, Define, Draw, and Describe the shapes of: TFC, TVC, TC, AFC, AVC, ATC, and MC. (For all graphs: DEFINE, DRAW, DESCRIBE its shape).

Key Graph: Short Run Total Cost Graphs:

Key Graph: Short Run Average Cost Graphs:

7b Something Interesting (Why are we studying this?)

  • if SR costs increase what happens to marginal costs? xxxx

Readings:

Topics:

  • short run cost curves

Video Lectures: [login] [notes]

PRACTICE PROBLEMS

Optional Review Videos:

Must Know / Outcomes:

  • Distinguish between fixed, variable and total costs
  • Explain the difference between average and marginal costs
  • Compute and graph AFC, AVC, ATC, and MC when given total cost data
  • Know how and why we graph the MC "at the midpoints".
  • Explain how TC, TVC, and TFC relate to one another
    • do TC and TVC get closer together?
  • Explain how AVC, ATC, and MC relate to one another
    • do ATC and AVC get closer together?
    • why does MC cros ATC and AVC at their lowest points?
  • Explain the shapes of the total, average, and marginal cost curves (TC, TVC, TFC, ATC, AVC, AFC, and MC)
  • Relate average product to average variable cost, and marginal product to marginal cost
  • Explain what happens to the cost curves if there is a change in fixed costs; variable costs (what can cause cost curves to rise or fall?)
  • KEY TERMS: short run, fixed costs, variable costs, total fixed cost (TFC), total variable cost (TVC), total cost (TC), average fixed cost (AFC), average variable cost (AVC), average total cost (ATC), marginal cost (MC)

Discussion Questions:

  • Do the TC curve and TVC curve get closer together?
  • Do the ATC curve and AVC curve get closer together?
  • Where does the MC curve cross the ATC and the AVC curves?
  • What happens to TC when MC is declining? when MC is increasing?

Key Graphs:

Total Cost Curves:
  • Total Cost (TC)
  • Total Variable Cost, (TVC)
  • Total Fixed Cost (TFC)
Average Cost Curves and Marginal Cost:
  • Average Total Cost (ATC)
  • Average Variable Cost, (TVC),
  • AverageFixed Cost AFC)
  • Marginal Cost (MC)

 

 

Which Graph below is drawn Correctly?

 

WHY?

 

7c   Production Costs in the Long Run

Lesson Introduction: In lesson 7c we claculated and graphed SHORT RUN costs when the size of the factory was fixed (did not change). chapter 4). Here we will learn how costs change in the LONG RUN. In the long run we can change the size of the factory. Be sure that you can define "short run" and "long run".

As always, be sure you know why the long run ATC curve has the shape it does; For all graphs: DEFINE, DRAW, DESCRIBE the SHAPE.

Note that in the next unit (unit 3) we will use long run graphs to find the allocatively efficient quantity and the productively efficient quantity.

7c Something Interesting (Why are we studying this?)

Why are there many hardware stores in Illinois but only two automobile production plants?

ANSWER: The answer has to do with the different shapes of the long run ATC curve for retail stores and for automobile production.

Readings:

Topics:

  • short run cost curves continued
  • long run costs

Video Lectures: [login] [notes]

Must Know / Outcomes:

  • Explain the difference between short run and long run costs
  • State why the long run average cost is expected to be U shaped
  • List and explain the causes of economies and diseconomies of scale
  • Indicate the relationship between economies of scale and number of firms in an industry and their sizes
  • KEY TERMS: short run, long run, economies of scale, diseconomies of scale, constant returns to scale, minimum efficient scale, natural monopoly

Discussion Question:

  • Why are there many hardware stores in Illinois but only two automobile production plants?

Key Graphs:

Economies of Scale over a wide range of output

Diseconomies of Scale begin at a relatively low level of output

Constant Returns to Scale over a wide range of output

 

 

 

Unit 3: ARE BUSINESSES EFFICIENT?

PRODUCT MARKETS and EFFICIENCY

8/9a   Pure Competition - Characteristics and Short Run Equilibrium

Lesson introduction: In chapters 8, 9, 10, and 11 we will be looking at the producer decision of HOW MUCH TO PRODUCE. We will use benefit cost analysis (MB=MC) to find the profit maximizing quantity which is WHAT WE GET. Once we know how much businesses will produce, we will ask: Is this quantity efficient (both allocatively and productively) which is WHAT WE WANT?.

We already know that businesses will maximize profits when they produce the equilibrium quantity (where Qs=Qd chapter 3). We also know that for competitive markets this will be the efficient quantity (except in a few situations where the market fails - chapter 5).

We will begin by looking at competitive markets in chapters 8 and 9. We should not be surprised that in competitive markets when businesses produce the profit maximizing quantity, they will also be producing the allocatively and productively efficient quantities. Competitive markets are efficient.

For each of the four product market models (chapters 8-11) you should use the following general outline to guide your studying:

General Outline for Each Model:

1. Know the model's characteristics and examples (See the "Ch. 8 - 4 PRODUCT MARKET MODEL" quiz on our Blackboard site.)
2. Be able to explain the shape of the demand curve
3. Draw the short run equilibrium graphs for (a) profit maximizing firms, (b) loss minimizing firms, and (c) firms that will shut down
4. Draw the long run equilibrium graph and find the profit maximizing quantity (WHAT WE GET), allocatively efficient quantity (WHAT WE WANT), and the productively efficient quantity. See the 3 Rules and 4 Models Yellow (or BLUE) Pages.
5. Understand any other issues associated with the model

Keep in mind that there are thousands of business firms. And when a business starts they do not look at an economics textbook to see what model they want to be in. With only four product market models many businesses will not fit exacltly into one of the four models. . Think of the four product market models as a continuum (see below) with pure competition on one end and pure monopoly on the other end and all businesses will fall somewhere in-between even though they my not fit neatly into any one single model.

There are few real world examples of competitive industries. Agriculture comes close. But, we do not study pure competition just to understand agriculture. We study pure competition because IF it did exist then it would be efficient (both allocatively and productively). Pure competition then helps us to better learn what efficiency means. Once we know this, we will study the "real world" in chapters 10 and 11 and compare the real world with a competitive world. We therefore use pure competition as a standard against which we can compare the real world, a standard of efficiency.

For each of the four product market models (chapters 8-11) you should use the following general outline to guide your studying:

General Outline for Each Product Market Model:

1. Know the model's characteristics and examples (See the "Ch. 8 - 4 PRODUCT MARKET MODEL" quiz on our Blackboard site.)
2. Be able to explain the shape of the demand curve
3. Draw the short run equilibrium graphs for (a) profit maximizing firms, (b) loss minimizing firms, and (c) firms that will shut down
4. Draw the long run equilibrium graph and find the profit maximizing quantity (WHAT WE GET), allocatively efficient quantity (WHAT WE WANT), and the productively efficient quantity. See the 3 Rules and 4 Models Yellow (or BLUE) Pages.
5. Understand any other issues associated with the model

Never forget this: To maximize profits business will produce the quantity where MR=MC.

8/9a Something Interesting (Why are we studying this?) -- Are businesses efficient?

Click on the link below and read the answer to these questions.

ANSWER: Whenever you are asked questions like:

  • "what quantity will be produced?",
  • "what price will be charged?",
  • "what is the profit maximizing quantity?",
  • "what is the equilibrium quantity?", etc.,

the first thing you do is calculate MR and MC.

Then, as long as the firm earns more (MR) than it costs (MC) they will produce. They will produce ALL where MR>MC, up to where MR=MC, but never where MR<MC.

Readings:

Topics:

  • characteristics of the four product market models
  • pure competition - short run equilibrium

Video Lectures: [login] [notes]

Must Know / Outcomes:

  • List the four basic market models and know characteristics and examples of each.
  • Describe characteristics and examples of a purely competitive firms and industries.
  • Explain how a purely competitive firm views demand for its product and marginal revenue from each additional unit sale.
  • Compute and graph average revenue (also called price), total revenue, and marginal revenue when given a demand schedule for a purely competitive firm.
  • Use both total revenue minus total cost approach and the marginal revenue = marginal cost approach to determine the short run price and output that maximizes profits (or minimizes losses) for a competitive firm.
    • with a table of data
    • on a graph with numbers
    • on a graph using geometry (graph with letters)
  • Draw the short run equilibrium graphs for a purely competitive firm that (a) maximizes profit, (b) minimizes loss, and (c) shuts down
  • Find the short run supply curve when given short run cost schedules for a competitive firm.
  • KEY TERMS: pure competition, pure monopoly, monopolistic competition, oligopoly, imperfect competition, standardized (homogenous) product, differentiated product, nonprice competition, perfectly elastic demand, market power, price taker, average revenue (usually price), marginal revenue, total revenue, MR=MC rule (profit maximization rule), short-run equilibrium, short-run supply curve

Discussion Questions:

  • Why is the demand curve horizontal (perfectly price elastic) for purely competitive firms?
  • If MR = MC, what will a firm's profits be?

Key Graphs:

Pure Competition: Short Run Earning Profits

Pure Competition: Short Run Earning Losses

 

Pure Competition: Short Run Shut Down

 

 

 

8/9b   Pure Competition - Long Run Equilibrium and Efficiency - Are Businesses Efficient?

Lesson Introduction: Again, we return to the central issue of economics: reducing scarcity (the 5Es). In chapters 9, 10, and 11 we will see if industries are (1) allocatively efficient, and (2) productively efficient, in the long run.

This would be a good time to review the 5Es online reading from lesson 1b and reacquaint yourself with the definitions and examples of allocative and productive efficiency. Allocative efficiency means producing the mix of goods and services that maximize society's satisfaction and productive efficiency means producing at a minimum cost.

What else do we know? In chapter 1 we learned about benefit-cost analysis (marginal analysis). From chapters 3 and 5 we know that we find the allocatively efficient quantity where MSB = MSC and where consumer plus producer surplus are maximized. In chapter 4 we learned the definitions of short run and long run.

In chapters 9, 10, and 11 we will put all of this together to see if businesses are efficient. Of course we do not have time to study every individual business or industry, so we will examine the efficiency of four groups of industries or the four product market models.

In chapter 2 we learned that competitive markets are efficient. In chapter 8 we learned the characteristics of competitive markets and how competitive businesses find the profit maximizing quantity to produce (where MR=MC or WHAT WE GET). Here, we will learn that since there are no barriers to entry in the long run the competitive markets will produce the allocatively efficient quantity that people want at the lowest possible cost (productive efficiency). Be sure to see the "Three Rules and Four Models" Yellow (Blue) Page.

Finally, once we learn that the allocatively efficient quantity occurs where P = MC, we will look at ways this might be used to improve the allocation of resources and reduce scarcity. (MC Pricing).

Never forget this: To maximize profits business will produce the quantity where MR=MC.

8/9b Something Interesting (Why are we studying this?) -- Are businesses efficient?

Why will purely competitive firms always earn zero economic profits (called normal profits) in the long run?

Why are zero economic profits good (or at least OK)?

Readings:

Topics:

  • pure competition - long run equilibrium
  • pure competition and efficiency
  • marginal cost pricing

Video Lectures: [login] [notes]

Must Know / Outcomes:

  • Distinguish between the short run and the long run in pure competition.
  • Explain the long run equilibrium position for a competitive firm using entry and exit of firms to explain adjustments from nonequilibrium positions.
  • Describe the role of profits and losses in achieving the long run equilibrium
  • Explain the shape of long run industry supply curves in constant cost and increasing cost industries.
  • Differentiate between productive and allocative efficiency.
  • Explain why allocative efficiency and productive efficiency are achieved where P = minimum ATC = MC.
  • Understand the adjustment process from the short run to the long run and the role of barriers to entry (why do competitive firms earn zero economic profits in the long run?)
  • Draw the long run equilibrium graph for a purely competitive firm and indicate the profit maximizing quantity, the allocatively efficient quantity, and the productively effeicient quantity.
  • Explain why allocative efficiency and productive efficiency are consistent with maximizing consumer and producer surplus and an efficient use of resources.
  • Evaluate the impact of creative destruction on purely competitive industries
  • KEY TERMS: long-run equilibrium, long-run supply curve, constant-cost industry, increasing-cost industry, decreasing-cost industry, productive efficiency, allocative efficiency, consumer surplus, producer surplus, invisible hand of capitalism, creative destruction, marginal cost pricing, dynamic efficiency

Discussion Questions:

  • How do you find the profit maximizing quantity?
  • How do you find the alocatively efficient quantity?
  • How do you find the productively efficient quantity?
  • Why does a purely competitve firm earn zero economic profits (normal profits) in the long run?

Key Graph

Pure Competition: Long Run Equilibrium

Q is the profit maximizing Quantity (MR=MC); What We Get
Q is the allocatively efficient quantity (P=MC); What We Want
Q is the prodictively efficient quantity (MC=ATC); Producing at a Minimum Cost

 

10a  Monopoly: Characteristics and Short-Run Equilibrium - Are Businesses Efficient?

Lesson Introduction: We learned in lesson 2a that competitive markets are efficient (except when there are externalities or public goods - ch.5). But what happens if markets are NOT competitive? We said that competition is the "invisible hand" that forces businesses to be efficiency. If the market is not competitive we will not get the efficient quantity. This means that the profit maximizing quantity that businesses will produce (WHAT WE GET) will not be the same as the allocatively efficient quantity that society wants (WHAT WE WANT).

Remember the word "competition" has a different meaning in economics. This is NOT the competition that occurs between Ford and Chevrolet. "Competition" in economics means there are many buyers and sellers in the market so that firms have no influence over the price; i.e. they are price takers. Much of the business world is not competitive, and therefore, not efficient.

In this lesson we will look at monopolistic industries - industries with only one firm. There are few pure monopolies. Even though there are few true monopolies they do exist, but we will also study monopolies because most firms are a combination of competition and monopoly.

For each of the four product market models (chapters 8-11), including monopolies, you should use the following general outline to guide your studying:

General Outline for Each Product Market Model:

1. Know the model's characteristics and examples (See the "Ch. 8 - 4 PRODUCT MARKET MODEL" quiz on our Blackboard site.)
2. Be able to explain the shape of the demand curve
3. Draw the short run equilibrium graphs for (a) profit maximizing firms, (b) loss minimizing firms, and (c) firms that will shut down
4. Draw the long run equilibrium graph and find the profit maximizing quantity (WHAT WE GET), allocatively efficient quantity (WHAT WE WANT), and the productively efficient quantity. See the 3 Rules and 4 Models Yellow (or BLUE) Pages.
5. Understand any other issues associated with the model

Never forget this: To maximize profits business will produce the quantity where MR=MC.

10a Something Interesting (Why are we studying this?) -- Are businesses efficient?

See: What's so bad about monopoly power?
http://www.cbsnews.com/news/whats-so-bad-about-monopoly-power/

ANSWER: "The bottom line is that when companies have a monopoly, prices are too high and production is too low. There's an inefficient allocation of resources."

Readings:

Topics:

  • monopoly - short run equilibrium

Video Lectures: [login] [notes]

Must Know / Outcomes:

  • List the five characteristics of pure monopoly.
  • Explain the difference between a "pure" monopoly and a "near" monopoly.
  • List and give examples of the four barriers to entry.
  • Describe the demand curve facing a pure monopoly and how it differs from that facing a firm in a purely competitive market.
  • Compute marginal revenue when given a monopoly demand schedule.
  • Explain why the marginal revenue is equal to the price in pure competition but marginal revenue is less than price in monopoly.
  • Determine the price and output level the monopoly will choose given demand and cost information in both table and graphic form.
  • Draw the short run equilibrium graphs for a purel monpoly that (a) maximizes profit, (b) minimizes loss, and (c) shuts down .
  • KEY TERMS: pure monopoly, barriers to entry, economies of scale, patent, natural monoply, price maker,

Discussion Questions:

  • Why is the demand curve for a monopoly downward sloping?
  • Why is the MR curve below the demand curve?
    OR:
    Why is the extra revenue that a monopoly receives from selling one more unit (MR) less than the price that they charge for that unit (D)?

Key Graphs:

 Monopoly: Short Run Earning Profits

Monopoly: Short Run Earning Losses

 

Monopoly: Short Run Shut Down

 

 

10b Monopoly: Long-Run, Efficiency, Price Discrimination, and Regulation - Are Businesses Efficient?

Lesson Introduction:

In chapter 9 we learned that in the long run purely competitive firms are both allocatively and productively efficient. They maximize society's satisfacton. In lesson 10a we learned how find the quantity produced by monopolies. Here in lesson 10b we will learn if that quantity that we get, the profit maximiing quantity is the efficient quantity. Are monopolies efficient? Are businesses efficient?

In chapter 9 we also learned that if purely competitive firms have short run profits, then in the long run new firms will enter. This will increase the supply of the product because if the number of producers increases then supply increases (chapter 3). When supply increases it causes the price to drop and this will reduce the profits of the firms. This will continue to happen until there are just normal profits. In the long run, purely competitive firms earn only normal (zero) profits BECAUSE THERE ARE NO BARRIERS TO ENTRY.

So, what about monopolies? In this lesson we will learn that SINCE MONOPOLIES DO HAVE BARRIERS TO ENRTY (entry is blocked) they will earn economic profits in the long run, Also, at the profit maximizing quantity (what we get) monopolies will be both allocatively and productively INEFFICIENT. When monopolies produce the quantity that maximizes their profits they will be producing less than the allocatively efficient quantity (underallocation of resources) AND they will not be producing at the lowest possible cost per unit (productive inefficiency).

Next, we will look at PRCE DISCRIMINATION. What if instead of charging the same price to all customers, a monopoly charged different prices to different customers for the same product? We will learn that if monopolies price discriminate then they will produce more and the market will be MORE allocatively efficient.

Finally, since momopolies are inefficient the government usually prevents them from forming (anti-trust laws), but sometimes the government will allow a monopoly to exist if it is in the public interest, like when it is a natural monopoly, but they will then regulate it, i.e. set its price.

So in this lesson we will study three things:

1. monopolies are allocatively and productively inefficient
2. monopolies that price discriminate may be allocatively efficient
3. monopolies are often prevented from forming or are broken up by the government, but the government will allow a natural monooploy to exist and will regulate its price.

10b Something Interesting (Why are we studying this?) -- Are businesses efficient?

Why do state governments prevent competition in the distribution of electricity? In northern Illinois only ComEd can run electricity wires from house to house.

ANSWER: The distribution of electricity is a natural monopoly. It is productively more efficient to have only one company running wires from house to house. With fewer wires we can get the same amount of elctricity. So, the government only gives a license to one company to distribute electricity because it saves resources compared to having several companies distribute electricity in the same neighborhood.

Once the government creates the monopoly like ComEd, why will they then regulate the price of electricity? In Illinois the state run Illinois Commerce Commission sets the price of electricity.

ANSWER: In this lesson we will learn that monopolies are allocatively inefficient. They will charge a high price and sell less to maximize profits. This is bad for society so the government regulates the price.

Readings:

  • Ch 10, pp, 203-214
  • Chapter 18:
    • pp. 376-382 Antittrust Policy: Issues and Impacts
    • pp. 381-383 Industrial Regulation
    • pp. 383-384 Deregulation
  • Chapter 4: Last Word (box) - Elasticity and Pricing Power: Why Different Consumers Pay Different Prices, pp. 86-87 (Price Discrimination)
  • Lecture Outline

Topics:

Monopoly

  • Long Run Equilibrium
  • Monopolies and Efficiency (Inefficiency)
  • Price Discrimination
  • Natural Monopolies and Regulation

Video Lectures: [TW login] [notes]

Must Know / Outcomes:

  • Discuss the economic effects of pure monopoly on price, quantity of product produced, allocative and productive efficiency, distribution of income, and technological progress.
  • Understand the adjustment process from the short run to the long run and the role of barriers to entry (why do monopolistic firms earn economic profits in the long run?)
  • Draw the long run equilibrium graph for a pure monopoly and indicate the profit maximizing quantity, the allocatively efficient quantity, and the productively effeicient quantity.
  • Give examples of how new technology has lessened monopoly power.
  • Define price discrimination, list three conditions necessary for price discrimination, explain how price discrimination affects allocative efficiency, explain why profits and output will be higher for a discriminating monopoly.
  • Identify two pricing strategies of monopoly regulation and explain the dilemma the regulators face in utilizing these strategies
  • Explain why a regulated monopoly does not have an incentive to reduce costs.
  • KEY TERMS: allocative inefficiency, productive inefficiency, deadweight loss, economies of scale, natural monopoly, X-inefficiency, anti-trust policy, price fixing, tying contract, public interest theory of regulation, legal cartel theory of regulation, deregulation, price discrimination, regulated monopoly, natural monopoly, socially-optimal price (allocatively efficient price), fair-return price (average-cost price), dilemma of regulation

Discussion Questions:

  • Why does a monopoly earn economic profits in the long run?
  • We know that single price monopolies are allocatively inefficient in the long run. What happens to allocative efficiency if the monopoly can price discriminate?
  • Why does the Illinois government allow ComEd to have a monoply on the distribution of electricity in northern Illinois?

Key Graphs:

Monopoly: Long Run Equilibrium

  • M is the profit maximizing quantity (MR=MC); What We Get
  • Q is the allocatively efficient quantity (P=MC); What We Want
  • N is the productively efficient quantity (MC=ATC); producing at a minimum cost

 

 

Regulated Natural Monopoly

  • Q3 is the proftit maximizing quantity (MR=MC) if unregulated
  • Q2 is the allocatively efficient quantity (P=MC)
  • Q4 is the productively efficient quantity (MC=ATC)
  • Q1 is the "fair return" quantity if regulated

 

 

Monopoly with Perfiet Price Discrimination

  • M is the profit maximizing quantity (MR=MC) if no price discrimination (single price monopoly); What We Get
  • Q is the profit maximizing quantity (D=MR=MC) IF there is perfect price discrimination
  • Q is also the allocatively efficient quantity (P=MC); What We Want
  • N is the productively efficient quantity (MC=ATC); Producing at a Minimum Cost

11a Monopolistic Competition - Are Businesses Efficient?

Lesson Introduction:

Competitive firms are efficient and monopolies are inefficient, but there are few if any cpurely ompetitive markets or purely monopolistic markets (monopolies). So what happens in the real world? Are businesses efficient?

We learned that competitive firms earn zero long run profits because there are no barriers to entry and monopolies do earn long run profits because entry is blocked. What about monopolistically competitive markets where there are LOW BARRIERS? What about oligopolistic markets where there are HIGH BARRIERS? Guess what? If there are low barriers firms will earn zero long run profits (monopolistic competition) and if there are high barriers firms will earn long run economic profits (oligopolies).

What about efficiency? We will learn that both monopolistically competitive firms and oligopolies are inefficient but not to the same degree. Monopolistically competitive frms are only slightly inefficient and they do provide society some additional benefits, but oligopolies are very inefficient and are closely watched by the government.

General Outline for Each Product Market Model:

1. Know the model's characteristics and examples (See the "Ch. 8 - 4 PRODUCT MARKET MODEL" quiz on our Blackboard site.)
2. Be able to explain the shape of the demand curve
3. Draw the short run equilibrium graphs for (a) profit maximizing firms, (b) loss minimizing firms, and (c) firms that will shut down
4. Draw the long run equilibrium graph and find the profit maximizing quantity (WHAT WE GET), allocatively efficient quantity (WHAT WE WANT), and the productively efficient quantity. See the 3 Rules and 4 Models Yellow (or BLUE) Pages.
5. Understand any other issues associated with the model

Never forget this: To maximize profits business will produce the quantity where MR=MC.

11a Something Interesting (Why are we studying this?) -- Are businesses efficient?

Why are there so many different kinds of hamburgers?

Wikipedia has a list of over 30 different types of hamburgers [https://en.wikipedia.org/wiki/List_of_hamburgers]. Why are there so many? Why do different restaurants continue to invent their own "new" hamburger?

ANSWER: In this lesson you will learn that firms gain market power through product differentiation - making their product different from their competitiors. This allows them to charge a higher price and increase their profits. BUT, other restaurants can always copy the new hamburger recipe stealing away those profits. Welcome to Monopolistic Competition: part "monopoly" because of product differentiation and part "pure competition" because of low bariers to entry.

Readings:

Topics:

  • monopolistic competition

Video Lectures: [login] [notes]

Must Know / Outcomes:

  • List the characteristics of monopolistic competition.
  • Explain how product differentiation occurs in similar products.
  • Determine the profit maximizing price and output level for a monopolistic competitor in the short run when given cost and demand data.
  • Explain why a monopolistic competitor will realize only normal profit in the long run.
  • Draw the short run equilibrium graphs for a monopolistically competitive firm that (a) maximizes profit, (b) minimizes loss, and (c) shuts down
  • Understand the adjustment process from the short run to the long run and the role of barriers to entry (why do monopolistically competitive firms earn zero economic profits in the long run?)
  • Draw the long run equilibrium graph for a monopolistically competitive firm and indicate the profit maximizing quantity, the allocatively efficient quantity, and the productively effeicient quantity.
  • Identify the reasons for excess capacity in monopolistic competition.
  • Explain how product differentiation may offset these inefficiencies.
  • KEY TERMS: monopolistic competition, product differentiation, collusion, nonprice competition, four-firm concentration ratio, Herfindahl index, normal profit, excess capacity,

Discussion Questions:

  • Why does a monopolistically competitive firm earn zero economic profits (normal profits) in the long run?
  • Are monopolistically competitive firms inefficient?

Key Graph

Monopolistic Competition in Long Run Equilibrium
- D is the profit maximizing quantity (MR=MC); What We Get
- G is the allocatively efficient quantity (P=MC); What We Want
- E is the productively efficient quantity (MC=ATC): Produce at a Minimum Cost

 

11b Oligopoly - Are Businesses Efficient?

Lesson Introduction:

Oligopolies are industries with just a few firms because there are high barriers to entry. So do they earn long-run profits (YES) and are they efficient (NO)?

Oligopolies are more complex than the other three models. Instead of one model to explain how oligopolies determine price and quantity we will have four:

1. kinked demand model
2. collusion
3. price leadership
4. game theory

General Outline for Each Product Market Model:

1. Know the model's characteristics and examples (See the "Ch. 8 - 4 PRODUCT MARKET MODEL" quiz on our Blackboard site.)
2. Be able to explain the shape of the demand curve
3. Draw the short run equilibrium graphs for (a) profit maximizing firms, (b) loss minimizing firms, and (c) firms that will shut down
4. Draw the long run equilibrium graph and find the profit maximizing quantity (WHAT WE GET), allocatively efficient quantity (WHAT WE WANT), and the productively efficient quantity. See the 3 Rules and 4 Models Yellow (or BLUE) Pages.
5. Understand any other issues associated with the model

Never forget this: To maximize profits business will produce the quantity where MR=MC.

11b Something Interesting (Why are we studying this?) -- Are businesses efficient?

Are these mergers good for society ? How do they affect efficiency? Just skim the first few paragraphs of the following:

ANSWER: It is often up to the US Justice Department to determine whether or not to allow businesses to merge into one single business. Such mergers can reduce competition, raise prices, and cause allocative and productive inefficiency. "Their job, essentially, is to figure out whether a merger would reduce competition so much that a company could raise prices without losing business to competitors."

Readings:

  • Ch. 11, pp. 223-240
  • Ch 11 appendix, pp. 241-244
  • Ch. 18 Mergers, pp. 379-380
  • Lecture Outline

Topics:

  • oligopoly
  • mergers
  • game theory

Video Lectures: [login] [notes]

Must Know / Outcomes:

  • Describe the characteristics of an oligopolistic industry.
  • Differentiate between homogeneous and differentiated oligopolies.
  • Identify and explain the most important causes of oligopoly.
  • Describe and compare the concentration ratio and the Herfindahl index as ways to measure market dominance in an industry.
  • Distinguish between three types of mergers. (Ch. 18)
  • Explain how the Herfindahl index is used as a guideline by the government in deciding whether to permit horizontal mergers. (Ch. 18)
  • Use a profit-payoffs matrix (game theory) to explain the mutual interdependence of two rival firms and why oligopolists might tempt to cheat on a collusive agreement.
  • Identify three possible models of oligopolistic price-output behavior.
  • Use the kinked demand curve theory to explain why prices tend to be inflexible.
  • Understand the adjustment process from the short run to the long run and the role of barriers to entry (why do oligopolistic firms earn economic profits in the long run?)
  • Draw the long run equilibrium graph for a kinked demand oligopoly and indicate the profit maximizing quantity, the allocatively efficient quantity, and the productively effeicient quantity.
  • Explain the major advantages of collusion for oligopolistic producers.
  • List the obstacles to collusion behavior.
  • Draw the long run equilibrium graph for a collusive oligopoly and indicate the profit maximizing quantity, the allocatively efficient quantity, and the productively effeicient quantity. (Hint: the long run monopoly graph.)
  • Explain price leadership as a form of tacit collusion.
  • Explain why oligopolies may prefer nonprice competition over price competition.
  • List the positive and negative effects of advertising.
  • Explain why some economists assert that oligopoly is less desirable than pure monopoly.
  • Explain the three ways that the power of oligopolists may be diminished.
  • KEY TERMS: oligopoly, homogeneous (standardized) oligopoly, differentiated oligopoly,, mutual interdependence, interindustry competition, collusion, kinked demand, cartel, price leadership, merger, horizontal merger, vertical merger, conglomerate merger, game theory, strategic behavior, prisoner's dilemma, dominant strategy, Nash equilibrium, self enforcing agreement

Discussion Questions:
Key Graphs:

Oligopoly Kinked Demand Long Run Equilibrium
- 10 is the profit maximizing quantity (MR=MC) What We Get
- 14 is the allocatively efficient quantity (P=MC); What We Want

 

Oligopoly Game Theory

Unit 4: LABOR AND EFFICIENCY

RESOURCE MARKETS, INEQUALITY, and IMMIGRATION

12a Demand for Resources

Lesson Introduction:

In unit 3 we studied the FOUR PRODUCT MARKET MODELS to learn how product prices and quantity are determined. We learned characteristics and examples of each model. We discussed the differences between their demand curves. We drew their short run equilibrium graphs and found the long run equilibrium quantity, allocatively efficient quantity, and the productively efficient quantity. Finally we discussed other issues associated with some of the models.

In unit 4 we will discuss the EIGHT LABOR MARKET MODELS to learn how wages and the level of employment are determined. We will learn what determines how much will people be paid and how many people will be hired. We will finish the unit by looking at two important issues associated with labor markets: income inequality and immigration.

This lesson begins our study of the labor markets by looking at the demand for resources, the elasticity of demand for resources and the first two labor market models: (1) a competitive labor market working in a competitive product market, and (2) a competitive labor market working in an imperfectly competitive product market (like a monopoly or oligopoly).

We will use benefit-cost analysis (BCA) throughout this unit. It would be useful to review BCA in lesson 1d. For example, to find the profit maximizing quantity of workers to hire firms will continue to hire up to the point where MRP = MRC.

12a Something Interesting (Why are we studying this?)

Why are people paid differently? (Look at the websites below.)

ANSWER: The supply and demand for labor helps explain why different people and different jobs receive different wages. But there are also other factors that we will need to explore. We will end up with 8 to 10 different labor market models that will help us answer this question.

Readings:

  • Chapter 12:
    • pp. 248-257
    • pp. 260-261
  • DO NOT STUDY: "Optimal Combination of Resources", pp. 257-260
  • Lecture Outline

Topics:

  • The Profit Maximizing Quantity to Hire
    • MB = MC
    • MRP = MRC
  • Finding the Resource Demand Curve
  • Determinants of Resource Demand
  • Elasticity of Resource Demand

     

 Video Lectures: [login] [notes]

Must Know / Outcomes:

  • Present four major reasons for studying resource pricing.
  • Explain the concept of derived demand as it applies to resource demand.
  • Determine the marginal-revenue-product schedule for an input when given appropriate data.
  • State the principle employed by a profit maximizing firm in determining how much of a resource it will employ.
  • Apply the MRP = MRC principle to find the quantity of a resource a firm will employ when given the necessary data.
  • Explain why the MRP schedule of a resource is the firm's demand schedule for the resource in a purely competitive product market.
  • Explain why the resource demand curve is downward sloping when a firm is selling output in a purely competitive product market; an imperfectly competitive product market.
  • List the three determinants of demand for a resource and explain how a change in each of the determinants would affect the demand for the resource.
  • Explain what demand factors have influenced the growth and decline of the occupations listed in Tables 12.5 and 12.6.
  • List three determinants of the price elasticity of demand for a resource, and state how changes in each would affect the elasticity of demand for a resource.
  • Explain the marginal productivity theory of income distribution and present two criticisms of it.

 

  • Derived Demand
  • Determine the marginal-revenue-product schedule for an input when given appropriate data.
  • Apply the MRP = MRC principle to find the quantity of a resource a firm will employ when given the necessary data.
  • Explain why the MRP schedule of a resource is the firm's demand schedule for the resource in a purely competitive product market.
  • Explain why the resource demand curve is downward sloping when a firm is selling output in a purely competitive product market; an imperfectly competitive product market.
  • List the three determinants of demand for a resource and explain how a change in each of the determinants would affect the demand for the resource.
  • List three determinants of the price elasticity of demand for a resource, and state how changes in each would affect the elasticity of demand for a resource.
  • KEY TERMS: derived demand, productivity, marginal product (MP), marginal revenue product, (MRP), marginal resource cost (MRC), profit maximizing rule for hiring resources (MRP=MRC rule), value of the marginal product (VMP), substitution effect, output effect, elasticity of resource demand, marginal productivity theory of income distribution,

Discussion Questions:

Key Graphs

Competitive Labor Market in a Competitive Product Market

Competitive Labor Market in a Imperfectly Competitive Product Market

13a Wage Determination (Labor Markets)

Lesson Introduction:

Eight Labor Market Models

1. Competitive labor market in a competitive product market
2. Competitive labor market in an imperfectly competitive product market
3. Monopsony
4. Union Model: increasing demand for labor
5. Union Model: craft (exclusive) union
6. Union Model: industrial (inclusive) union
7. Union Model: bilateral monopoly
8. Minimum Wage (three models)
a. traditional minimum wage model
b. minimum wage in a monopsony
c. minimum wage and the price elasticity of demand for labor

For EACH model know the following:

1. assumptions, characteristics, and examples
2. graph
3. find the profit maximizing quantity of labor (this is the quantity that WILL BE HIRED, where MRP = MRC)
4. find the allocatively efficient quantity of labor (where VMP = W or Qd=Qs)

You will find a summary of each of these eight (actually ten) models in our Yellow Pages. It is strongly recommended that you study these summaries.

REMEMBER: to find the profit maximizing quantity of workers to hire firms will continue to hire up to the point where MRP = MRC.

So for any questions that ask "how many will be hired?" or "what will the wage be?" the first thing you do is calculate MRP and MRC and then hire all where the MRP is greater than MRC (MRP > MRC) up to where MRP = MRC.

13a Something Interesting (Why are we studying this?)

What if the federal miniumum wage doubled to $15 an hour. Would this help or hurt fast food workers?

ANSWER: After studing this lesson you should be able to explain this statement found in this news report:

" . . . if we woke up tomorrow and fast food restaurants had doubled worker pay tomorrow . . . I'm sure you would see a lot of jobs lost , . . . But that’s only part of the story, Baker argues. Even if there was, let’s say, a 20 or 30 percent drop in employment at these places (Saltsman told me he projects there could be up to a 27 percent drop), the remaining workers would still “take home twice as much pay. They're still way better off,” says Baker."

To understand and explain this statement you need to discuss price elasticity of demand for workers. Does Baker think that the price elasticity of demand for fast food workers is elastic or inelastic? [Answer: Inelastic]

Readings:

Topics:

  • productivity
  • 8 labor market models
  • why wages differ

Video Lectures: [login] [notes]

Must Know / Outcomes:

  • List those factors that have led to an increasing level of real wages in the U.S. historically.
  • Determine the equilibrium wage rate and employment level when given appropriate data for a firm operating in a:
    • purely competitive product and labor market;
    • a firm operating in a monopolistically competitive product market and a purely competitive labor market;
    • and a firm operating in a purely competitive product market and a monopsonistic labor market.
  • Illustrate graphically how wage rates are determined in purely competitive and monopsonistic labor markets.
  • List the methods used by labor organizations (labor unions) to increase wages and the impact each has on employment. Give specific examples.
  • Illustrate graphically how an inclusive (industrial) union and an exclusive (craft) union would affect wages and employment in a previously competitive labor market.
  • Explain and illustrate graphically wage determination in the bilateral monopoly model.
  • Present the major points in the cases for and against the minimum wage.
  • Explain the demand factors that create wage differentials.
  • Explain the supply factors that create wage differentials.
  • Describe briefly salary systems in which pay is linked to performance rather than to time.
  • KEY TERMS: wage rate, purely competitive labor market, monopsony, exclusive (craft) union, occupational licensing, inclusive (industrial) union, bilateral monopoly, minimum wage,

Discussion Questions:

  • Explain, be sure to discuss price elasticity of demand for workers: " . . .if we woke up tomorrow and fast food restaurants had doubled worker pay tomorrow . . . I'm sure you would see a lot of jobs lost , . . . But that’s only part of the story, Baker argues. Even if there was, let’s say, a 20 or 30 percent drop in employment at these places (Saltsman told me he projects there could be up to a 27 percent drop), the remaining workers would still “take home twice as much pay. They're still way better off,” says Baker." From:
    http://www.marketplace.org/topics/wealth-poverty/fast-food-strike-walk-outs-and-drive-throughs

Key Graphs:

Comp. Labor Market and
Comp. Product Market

Comp. Labor Market and
Imperfect Product Market

Monopsony

Union: Increase Demand

Union: Craft (Exclusive)

Union: Inclusive (Industrial)

Union: Bilateral Monopoly

Minimum Wage Models:

|

|

|

Min. Wage Traditional Model:
employment decreases

Min. Wage in a Monopsony:
employment increases

Does the Minimum wage help the poor?

YES if the demand for labor is inelastic because total income increases from 0ADF to 0BCE

Does the Minimum wage help the poor?

NO if demand for labor is elastic because total income decreases from 0adf to 0bce

 

 

20a Income Inequality and Discrimination

Lesson Introduction:

The gap between the rich and the poor is getting wider and income inequality has become an important political issue. We will learn that the 85 richest people on Earth now have the same amount of wealth as the bottom half of the global population. 85 people have the same amount of wealth as the poorest 3.5 billion (3,500,000,000) !

We will first look at some data on the distribution of income and learn how to measure it.

Then we will learn two models concerning income distribution:

1. The Case for Equality Model: Maximizing Total Utility This is the President Obama Example of lesson 1b (fig. 20.3) and
2. The Occupational Discrimination (Crowding) Model

The Yellow Pages have one page summaries of each of these models. You should find them and study them.

20a Something Interesting (Why are we studying this?)

Read: Oxfam report highlights widening income gap between rich, poor
http://www.latimes.com/business/la-fi-income-inequality-20140121-story.html#axzz2r2RGEtdE

  • "The 85 richest people on Earth now have the same amount of wealth as the bottom half of the global population, according to a report released Monday by the British humanitarian group Oxfam International."
    85 = 3,500,000,000
  • Think about it.

Readings:

Topics:

  • Describing Income Distribution
  • Government Redistribution
  • Growing Inequality
  • The Equality Model (Pres. Obama)
  • The Occupational Crowding Model

Video Lectures: [login] [notes]

Must Know / Outcomes:

  • Describe the distribution of income in the United States by personal income categories by households and quintile distribution by households.
  • Explain how Lorenz curves and Gini ratios are used to describe income inequality.
  • Discuss the impact of income mobility on income distribution data.
  • Explain the broadened concept of income, which includes the effects of taxes and transfer payments, and how this affects the extent of inequality of income and poverty in the U.S.
  • List seven causes of an unequal income distribution.
  • Describe changes and causes for the changes in inequality since 1970.
  • State and evaluate the cases for and against income inequality, using the equality vs. efficiency argument ["The Case for Equality: Maximizing Total Utility = The President Obama Example (fig. 20.3)]
  • Occupational Discrimination - The Crowding Model - The Model (figure 20.7)
  • KEY TERMS: income inequality, quintile, Lorenz curve, Gini ratio (Gini coefficient), income mobility,transfer payment, progressive income tax, noncash transfers, equality-efficiency trade-off, discrimination, occupational segregation, President Obama example,

Discussion Questions:

Key Graphs:

Lorenz Curve

 

The Case for Equality = the President Obama Example
The Utility Maximizing Distribution of Income

 

The Occupational Segregation Model of Discrimination

 

 22a Immigration

Lesson Introduction:

Immigration is another labor issue that has become an important political topic. We will first study some historical data on U.S. immigration then we will look at two immigration models:

1. a simple immigration model showing the "Impact on Wage Rates, Efficiency, and Output", and

2. a model showing the impact of illegal workers in a low wage labor market

The Yellow Pages have one page summaries of each of these models. You should find them and study them.

22a Something Interesting (Why are we studying this?)

Read this short news article from 2013:
http://www.nytimes.com/2013/02/17/magazine/do-illegal-immigrants-actually-hurt-the-us-economy.html

From the eighth paragraph of the above website:

Nearly all economists, of all political persuasions, agree that immigrants — those here legally or not — benefit the overall economy. “That is not controversial,” Heidi Shierholz, an economist at the Economic Policy Institute, told me. Shierholz also said that “there is a consensus that, on average, the incomes of families in this country are increased by a small, but clearly positive amount, because of immigration.

After studying this lesson you should be able to discuss the effect of immigration on substitute resources and complementary resources.

1a Something Interesting (Why are we studying this?) *

Optional: a funny look at some major ideas of economics by the Stand-up Economist. Take a look at it again and see if you understand more. Is it funnier now?

Principles of economics, translated
https://www.youtube.com/watch?v=VVp8UGjECt4

Readings:

Topics:

  • Economic immigration
  • Economic effects of immigration
  • The illegal immigration debate

Video Lectures: [login] [notes]

Must Know / Outcomes:

  • Understand the historical pattern of legal and illegal immigration the United States.
  • Understand what motivates an individual to migrate.
  • List the factors influencing the decision to migrate.
  • Understand the potential impact immigration can have on wage rates, efficiency, and output. "Impact on Wage Rates, Efficiency, and Output" (Figure 22.3)
  • Understand how immigration can affect income shares.
  • Identify potential complications with the traditional model of immigration: Remittances, Full-Employment or Unemployment, and Complements and Substitutes.
  • Understand the effect immigration to the United States has on Federal, State, and Local governments' fiscal position.
  • Understand the illegal immigration debate in the context of " job crowding-out". ["Impact of Illegal Workers in a Low Wage Labor Market"]
  • Explain the potential price effects that illegal immigration can have on an economy.
  • Understand the concept of 'optimal' immigration.

KEY TERMS: immigration, emigration, economic immigrants, legal immigrants, illegal immigrants,human capital, beaten paths, backflows, efficiency gains from migration, brain drain, remittances, complementary resource, substitute resource, fiscal impacts of immigration

Discussion Questions:

  • Do Illegal Immigrants Actually Hurt the U.S. Economy? Discuss the effect on substitute resources and complementary resources
    http://www.nytimes.com/2013/02/17/magazine/do-illegal-immigrants-actually-hurt-the-us-economy.html
  • Comments? From page 2 of the above website: "Nearly all economists, of all political persuasions, agree that immigrants — those here legally or not — benefit the overall economy. “That is not controversial,” Heidi Shierholz, an economist at the Economic Policy Institute, told me. Shierholz also said that “there is a consensus that, on average, the incomes of families in this country are increased by a small, but clearly positive amount, because of immigration.”

Comments?
"Give Me Your Tired, Your Poor, and Your Economists, Too" http://www.nytimes.com/2013/02/10/business/how-economics-has-benefited-from-immigration.html By N. GREGORY MANKIW, Published: February 9, 2013

Key Graphs:

Simple Immigration Model

Impact of Illegal Workers in a Low Wage Labor Market

  [MyNotes]