Microeconomics: An Introduction to Economic Efficiency

VIDEO LECTURE NOTES

Lessons ~/~ Video Lecture Notes ~/~ Mic Web App ~/~ Web Quizzes
Review Quizzes ~/~ Flashcards ~/~ Blackboard ~/~ Textbook Website 20th / 19th

The textbook and the online video lectures are written by different authors and sometimes (often?) different economic authors use different terminology or different approaches to discuss the same concept. This webpage will help you see the connections between our textbook and the online video lectures.

Also, this webpage will allow me to add some of my own comments and explanations. All of my comments begin with "ME".

You should refer to this page when watching the videos. Don't forget the quizzes (Thinkwell Exercises), transcripts, and lecture notes that accompany most of the video lectures. These can be very helpful.

Instructor Notes from the Video Lectures

LESSONS:

Unit 1: 1a - 1b - 1c - 1d - 2a - 3a - 3b - 3c - 5a - 5b

Unit 2: 4a - 4b - 6a - 7a - 7b - 7c

Unit 3: 8/9a - 8/9b - 10a - 10b - 11a - 11b

Unit 4: 12a - 13a - 20a - 22a

UNIT 1

An introduction to Economics (LESSONs 1a, 1b, 1c, and 1d)

LESSON 1a - BASIC MATH SKILLS

Videos are usually between 5 and 10 minutes long and most of them have a written transcript available and a multiple choice question review quiz. 
Instructions on how to purchase and access the video lectures can be found in our syllabus. 

 

REVIEW OF GRAPHING CONCEPTS

1.2.1 (9:50) Using Graphs to Understand Direct Relationships - 1a

1.2.2 (9:57) Plotting A Linear Relationship Between Two Variables - 1a

1.2.3 (8:42) Changing the Intercept of a Linear Function - 1a

1.2.4 (7:28) Understanding the Slope of a Linear Function - 1a

OPTIONAL: SIMPLE MATH, ALGEBRA AND GEOMETRY FOR ECONOMICS STUDENTS

How to Multiply and Divide Fractions in Algebra for Dummies (YouTube fordummies 1:50) - 1a
http://www.youtube.com/watch?v=B7MtFQW7i_I

Simple Equations (11:06) - 1a
http://www.khanacademy.org/math/algebra/solving-linear-equations-and-inequalities/v/simple-equations

Solving One-Step Equations (1:54) - 1a
http://www.khanacademy.org/math/algebra/solving-linear-equations-and-inequalities/v/solving-one-step-equations

Solving One-Step Equations 2 (2:23) - 1a
http://www.khanacademy.org/math/algebra/solving-linear-equations-and-inequalities/basic-equation-practice/v/solving-one-step-equations-2

Solving Ax + B = C (8:41) - 1a
http://www.khanacademy.org/math/algebra/solving-linear-equations-and-inequalities/basic-equation-practice/v/equations-2

Area and Perimeter (12:20) - 1a
http://www.khanacademy.org/math/geometry/basic-geometry/v/area-and-perimeter

 

 

 

   

LESSON 1b - THE 5Es OF ECONOMICS

 
LESSON 1c - SCARCITY AND BUDGET LINES

1.1.1 (6:35) Scarcity - Defining Economics - 1c

1.1.2 (13:20) What Economists Do - 1c

 

 

 

 

1.1.3 (11:21) Microeconomics and Macroeconomics - 1c

BUDGET LINES

3.2.1 (9:36) Constructing a Consumer's Budget Constraint - 1c

3.2.2 (5:02) Understanding a Change in the Budget Constraint - 1c

LESSON 1d - PRODUCTION POSSIBILITIES and BENEFIT COST ANYALYSIS

1.4.1 24:46) Understanding the Concept of Production Possibilities Frontiers - 1d

 

 

 

1.4.2 (10:10) Understanding How a Change in Technology or Resources Affects the PPC - 1d

 

1.4.3 (21:58) Deriving the Algebraic Equation for the Production Possibilities Frontier - 1d

 

MAKING CHOICES: THE ECONOMIC WAY OF THINKING -- BENEFIT-COST ANALYSIS (also called Marginal Analysis or Cost-Benefit Analysis)

Thinking at the Margin (LearnLiberty 4:32) - 1d
http://www.youtube.com/watch?v=tMhdTn-5fu8

Incentives and Marginal Analysis (MrHurdleHistory 8:54) - 1d
http://www.youtube.com/watch?v=dN9KyDCur2Y

 

LESSON 2a - MARKET ECONOMIES AND TRADE

ECONOMIC SYSTEMS

1.1.4 (10:50) An Overview of Economic Systems - 2a

Power of the Market (LibertyPen 1:14) - 2a
http://www.youtube.com/watch?v=4FHxpoQqPTU

17.5.3 (12:16) Comparative Economic Performance - 2a

  • Forced the movement from a decentralized economy to a centrally planned economy in Russia in the early 20th century
    • they nationalized capital -- the government took over businesses
    • goal was to increase the standard of living
  • With no motivational incentives to produce high quality goods, production slowed considerably
    • in the 1950s and 60s the economy of the Soviet union grew at a grate of 5%-6% -- about the same or faster than other countries with market economies
    • 1970s this rate slowed to about 2-3%, 1980s 1-2%, 1990s recession (decline)
  • Why?

  • government took too many resources -- 15% of GDP used for national defense vs. 6% in the US
  • lack of incentives for workers ;ME: the "incentive problem" from the textbook
  • misallocation of resources caused shortages; ME: the coordination problem from the textbook
  • Soviet technology was a decade behind because there was no profit motive to encourage investment in new technology
  • A two-class society developed
  • ME: see the textbook for
    • the incentive problem
    • the coordination problem

  • In the late 1980s, through Mikhail Gorbachev's ideals of glasnost and perestroika, the Soviet Union began its transformation in response to the failed planned economy
  • Resources were privatized
    • ownership would serve as an incentive to achieve efficiency
  • Government printed rubles (money) causing inflation
  • prices of goods and services were deregulated and allowed to be set by supply and demand (ME: lessons 3a, 3b, and 3c)
  • Russia did not have the financial institutions that established free market economies did; little protection of property rights
  • organized crime rose in the early 1990s ; a mafia arose
  • Economic growth slowed

SPECIALIZATION AND GAINS FROM TRADE

1.5.1 (22:40) Defining Comparative Advantage with the Production Possibilities Curve - 2a

1.5.2 (6:46) Understanding Why Specialization Increases Total Output - 2a

 

1.5.3 (25:35) Analyzing International Trade Using Comparative Advantage - 2a

 

Supply and Demand (LESSONs 3a, 3b, and 3c)

LESSON 3a - DEMAND

2.1.1 (11:58) Understanding the Determinants of Demand - 3a

2.1.2 (11:54) Understanding the Basics of Demand - 3a

 

2.1.3 (8:13) Analyzing Shifts in the Demand Curve - 3a

 

2.1.4 (10:43) Changing Other Demand Variables - 3a

 

2.1.5 (9:16) Deriving a Market Demand Curve - 3a

 

LESSON 3b - SUPPLY 

2.2.1 (6:00) Understanding the Determinants of Supply - 3b

 

2.2.2 (9:49) Deriving a Supply Curve - 3b

 

2.2.3 (6:52) Understanding a change in Supply versus a Change in Quantity Supplied - 3b

  • what happens if the price of resources used to produce the good (inputs) increase?
    • profit will go down
    • and businesses will produce less
  • on the supply schedule we will see a smaller quantity supplied AT EVERY PRICE;
    • so on the supply schedule we will see lower quantities supplied; at each price the quantity supplied is lower; there is a new supply schedule
  • Graphing a change in supply
    • so if the price of inputs goes up, this will cause the supply curve to shift (move) to the left
      • so on the supply curve there is a new supply curve further to the the left; the supply has DECREASES (shifted to the left)

 

2.2.4 (8:47) Analyzing Changes in Other Supply Variables - 3b

 

2.2.5 (7:16) Deriving a Market Supply Curve from Individual Supply Curves - 3b

 

LESSON 3c - MARKET EQUILIBRIUM and EFFICIENCY

2.3.1 (11:04) Determining a Competitive Equilibrium - 3c

 

2.3.2 (7:02) Defining Comparative Statics - 3c

 

 

2.3.3 (13:04) Classifying Comparative Statics (should be 3.4-2, but the link works) - 3c

  • Pe would cause an increase in demand today
  • Psub would cause an increase in demand
  • Pcomplement would cause an increase in demand
  • I would cause an increase in demand for a normal good
  • I would cause an increase in demand for an inferior good
  • Npot would cause an increase in demand
  • Tastes turning favorable for a product would cause an increase in demand

  • Pe would cause a decrease in demand today
  • Psub would cause a decrease in demand
  • Pcomplement would cause a decrease in demand
  • I would cause a decrease in demand for a normal good
  • I would cause a decrease in demand for an inferior good
  • Npot would cause a decrease in demand
  • Tastes turning against a product would cause a decrease in demand

  • Pe would cause an increase in supply today
  • Pog would cause an increase in supply
  • Pres would cause an increase in supply
  • an improvement in Tech would cause an increase in supply
  • Tax would cause an increase in supply
  • Subsidy would cause an increase in supply
  • Nprod would cause an increase in supply

  • Pe would cause a decrease in supply today
  • Pog would cause a decrease in supply
  • Pres would cause a decrease in supply
  • a reversion to a worse Tech would cause a decrease in supply
  • Tax would cause a decrease in supply
  • Subsidy would cause a decrease in supply
  • Nprod would cause a decrease in supply

3c - MARKETS AND EFFICIENCY

Consumer and Producer Surplus in the Linear Demand and Supply Model (10:01) - 3c
Free at: http://www.econclassroom.com/?p=2599

Supply, Demand, and Economic Efficiency - 3c
Read: http://www.harpercollege.edu/mhealy/eco211/lectures/s%26d/sdeff.htm

Efficiency and Equilibrium in Competitive Markets (11:48) - 3c
Free at: http://www.econclassroom.com/?p=2611
assumes knowledge of consumer and producer surplus, also uses benefit cost analysis

Market Failures and Externalities (LESSONs 5a and 5b)

LESSON 5a - GOVERNMENT INTERFERENCE IN MARKETS and NEGATIVE EXTERNALITIES

GOVERNMENT INTERFERENCE IN MARKETS: Price Ceilings and Floors

2.5.1 (9:38) Understanding How Price Controls Damage Markets (Price Ceilings) - 5a

2.5.2 (14:47) Understanding the Problem of Minimum Wages in Labor Markets (Price Floor) - 5a

 

Determining the Effects of Price Ceilings and Price Floors - 5a
http://www.econclassroom.com/?cat=13

MARKET FAILURE: EXTERNALITIES

Negative Externalities

8.4.1 (5:46) Defining Externalities - Negative Externalities - 5a

 

Internalizing an Externality

8.4.2 (11:58) Explaining How to Internalize External Costs (Negative Externalities) - 5a

8.5.1 (12:21) Finding a Market Solution to External Costs - 5a

 

Introduction to Market Failure and Negative Externalities of Production (econclassroom.com 14:45) - 5a
http://www.econclassroom.com/?p=2850

Coase Theorem

8.5.2 (12:45) Finding a Negotiated Settlement to an External Cost - 5a

8.5.3 (7:02) Applying the Coase Theorem - 5a

 

LESSON 5b - POSITIVE EXTERNALITIES and PUBLIC GOODS

 

8.4.3 (5:34) Explaining How to Internalize External Benefits (Positive Externalities) - 5b

Market Failure: Positive Externalities of Consumption (econclassroom.com 10:61) - 5b
http://www.econclassroom.com/?p=2871

 

MARKET FAILURE: PUBLIC GOODS

8.2.1 (13:32) Defining Public Goods - 5b

 

The Tragedy of the Commons as a Market Failure (econclassroom.com 14:29) - 5b
http://www.econclassroom.com/?p=2945

UNIT 2
 

Elasticity (Lessons 4a and 4b)

LESSON 4a - PRICE ELASTICITY OF DEMAND AND TAX INCIDENCE

 

2.4.1 (4:47) Defining Elasticity - 4a

 

2.4.2 (11:43) Calculating Elasticity - 4a

2.4.3 (8:42) Applying the Concept of Elasticity - 4a

 

 

OPTIONAL: Introduction to Price Elasticity of Demand - Calculating PED Using Data from a Demand Diagram (econclassroom.com 11:46) - 4a

OPTIONAL: Price Elasticity of Demand and the Total Revenue Test (econclassroom.com 13:24) - 4a

 

2.4.4 (6:50) Identifying the Determinants of Elasticity - 4a

 

Examining the Effect of an Excise Tax on an Inelastic Good -- Cigarettes (12:41) - 4a
http://www.econclassroom.com/?p=2771

  • we know that taxes decrease supply
    • a $2 tax will shift the S=MC curve "upwards" by $2. At every quantity sold, the cigarette producers face an additional $2 cost, in the form of the tax that they must pay to the government
    • the amount of the tax is the vertical distance between the two supply curves
  • what happens to the equilibrium price and quantity as a result of the $2 tax?
    • equilibrium quantity will go down; people will buy fewer packs of cigarettes
    • But notice that a $2 tax does NOT increase the price by $2;
  • who pays the tax (bears the burden of the tax), or how much the price increases, depends on the price elasticity of demand
    • if the demand for cigarettes was perfectly inelastic (if the demand curve was vertical) then a $2 tax would cause the price to increase by $2
    • but demand is not perfectly inelastic so customers do not pay the whole amount of the tax
      • so if producers did raise the price by the whole $2 they would make much less profits as they will lose many customers
      • so producers will raise the price by less than the amount of the tax ($1.20 in the example) and the producers will pay the rest of the tax ($0.80) themselves
      • Tax burden (or tax incidence) refers to the amount of the tax paid by producers and the amount of the tax paid by consumers; ME: our textbook uses the term "tax incidence"
      • notice that the consumers bear a higher burden of the tax
  • how much tax is collected by the government is calculated by taking the amount of the tax ($2) times the quantity sold (25) = $50
    • consumers pay $1.2 times 25 = $30 = blue rectangle
    • producers pay $0.80 times 25 = $20 = green rectangle
  • what happen to social welfare (allocative efficiency)?
    • let's assume that there are no externalities associated with cigarettes, then the original S = MSC and D = MSB and the original equilibrium quantity of 30 would maximize society's satisfaction or it is the allocatively efficient quantity; this is when the consumer and producer surplus is maximized
    • but with the tax the quantity that consumers buy is lower; this represents allocative inefficiency because consumers are buying less;
    • another way to show this is by measuring the dead weight loss
      • consumer surplus decreases (purple triangle)
      • producer surplus also decreases (yellow triangle)
      • government gains $50 in tax revenue (government surplus?) which can be seen as a benefit to society (red rectangle = CB + PB)
      • dead weight loss of the tax = loss of social welfare (satisfaction) caused by the tax (black triangle)

  • Summary: if we add an excise tax to a product
    • supply will decrease causing the price to increase and the quantity to decrease
    • the amount of the tax is the vertical distance between the two supply curves
    • the excise tax is shared between the consumers and producers; the incidence of the tax depends on price elasticity of demand
      • if the demand is relatively inelastic then the consumers will pay most of the tax
      • if the demand is relatively elastic then the producer will pay most of the tax
    • the amount of tax revenue collected by the government is the amount of the tax times the new equilibrium quantity
      • if the demand is relatively inelastic then the government will collect more tax revenue
      • if the demand is relatively elastic then the government will collect less tax revenue
    • social welfare (allocative efficiency) decreases; there is a loss of satisfaction to society (dead weight loss ) due to the excise tax because less will be produced
      • if the demand is relatively inelastic then there will be a small loss of satisfaction to society (only a little allocative inefficiency)
      • if the demand is relatively elastic then there will be a large loss of satisfaction to society (a lot of allocative inefficiency)
      • we will see in the next video lecture that the amount of dead weight loss is greater if demand is elastic and smaller if demand is inelastic

Examining the Effect of an Excise Tax on an Elastic Good -- Candy Bars (8:08) - 4a
http://www.econclassroom.com/?p=2774

  • supply decreases (supply shifts up by $2) causing the price to increase and the quantity to decrease;
    • since the demand is elastic the quantity demanded (equilibrium quantity) will decrease A LOT.
    • and since the demand is elastic the equilibrium price paid by consumers will increase only a little
  • the incidence of the tax on consumers (consumer tax burden) is smaller than the producer tax burden; the producer will pay most of the tax
  • the amount of tax revenue collected by the government, tax revenue = $2 excise tax times quantity, (the blue + green rectangles ) is small because the quantity sold decreases a lot
  • there is larger dead weight loss (black triangle), i.e. loss of satisfaction to society

LESSON 4b - OTHER TYPES OF ELASTICITY

Elasticity of Supply (Khan Academy 9:33) - 4b
http://www.khanacademy.org/finance-economics/microeconomics/v/elasticity-of-supply

CROSS ELASTICITY OF DEMAND

Cross Elasticity of Demand (Khan Academy 11:20)- 4b
http://www.khanacademy.org/finance-economics/microeconomics/v/cross-elasticity-of-demand

INCOME ELASTICITY OF DEMAND

Income Elasticity of Demand (Gale Pooley 3:14)- 4b
http://www.youtube.com/watch?v=Tct2EmT9iNE

Consumer Behavior

LESSON 6a - CONSUMER DECISIONS: UTILITY MAXIMIZATION

3.1.1 (4:31) Understanding Utility Theory - 6a

3.1.2 (4:47) Optimal Consumer Choice - Finding Consumer Equilibrium - 6a

Professor Harmon Calculates the Utility Maximizing Bundle in 5 mins (YouTube - 02001orh) - 6a
http://www.youtube.com/watch?v=LY1slp1dacA

The Costs of Production (LESSONs 7a, 7b, and 7c)

LESSON 7a - ECONOMIC PROFITS AND THE PRODUCTION FUNCTION

AN ECONOMISTS VIEW OF COSTS AND PROFIT

5.1.4 (13:54) Finding Economic and Accounting Profit -7a

 

 

PRODUCTION IN THE SHORT RUN

4.1.1 (8:48) Understanding Output, Inputs, and the Short Run - 7a

 

4.1.2 (15:57) Explaining the Total Product Curve - 7a

  • Properties of the total product curve
    • ME: whenever we create a new graph we always explain its shape!
    • S-shape with three different parts
      • at first the curve is increasing at an increasing rate (getting steeper or convex)
      • then the curve is still increasing but at a decreasing rate (getting flatter or concave but still going up)
      • finally the curve reaches a maximum and then if we add more worker we produce LESS and the curve goes down
      • Why? We will explain the shape of the TP graph by discussing the marginal product of labor (MP)

 

4.1.3 (7:22) Drawing Marginal Product Curves - 7a

 

 

4.1.4 10:32) Understanding Average Product - 7a

 

 

 

LESSON 7b - PRODUCTION COSTS IN THE SHORT RUN

4.2.1 (4:23) Defining Variable Costs - 7b

 

 

 

4.2.2 (4:57) Graphing Variable Costs - 7b

 

4.3.1 (6:41) Defining Marginal Costs - 7b

 

4.3.2 (10:59) Deriving the Marginal Cost Curve - 7b

 

4.3.3 (10:26) Understanding the Mathematical Relationship between Marginal Cost and Marginal Product - 7b

 

4.4.1 (5:37) Defining Average Variable Costs (AVC) - 7b

 

4.4.3 (7:54) Understanding the Relationship between Marginal Cost and Average Variable Cost - 7b

 

4.5.1 (6:55) Defining and Graphing Average Fixed Cost and Average Total Cost - 7b

 

4.5.2 (4:51) Calculating Average Total Cost - 7b

4.5.3 (4:51) Putting the Cost Curves Together - 7b

   

4.6.4 (3:26) Shifts in the Cost Curves - 7b

 

LESSON 7c - PRODUCTION COSTS IN THE LONG RUN

4.6.1 (5:55) Defining the Long Run - 7c

 

4.6.2 (9:01) Determining the Firm's Return to Scale - 7c

 

4.6.3 (15:06) Understanding the Short Run and Long Run Average Cost Curves - 7c

 

UNIT 3

Pure Competition (Lessons 8/9a and 8/9b)

LESSON 8/9a - PURE COMPETITION: CHARACTERISTICS AND SHORT RUN EQUILIBRIUM

MARKET STRUCTURE

5.1.3 (10:55) Understanding Market Structure - 8/9a

WHAT IS A PERFECTLY COMPETITIVE MARKET? (PURE COMPETITION)

5.1.2 (3:43) Understanding the Role of Price - 8/9a

 

5.1.1 (3:36) Calculating Total Revenue - 8/9a

 

 

PURE COMPETITION - SHORT RUN PROFIT MAXIMIZATION

5.2.1 (14:24) Finding the Firm's Profit Maximizing Output Level - 8/9a

5.2.2 (4:20) Proving the Profit Maximizing Rule (Pure Competition) - 8/9a

5.2.3 (12:26) Calculating Profit (Pure Competition using the cost curves) - 8/9a

 

 

 

 

 

 

5.2.4 (9:13) Calculating Loss (Pure Competition) - 8/9a

 

5.2.5 (8:35) Finding the Firm's Shut-Down Point (Pure Competition) - 8/9a

 

 

PURE COMPETITION - SHORT AND LONG RUN MARKET SUPPLY

5.3.1 (20:44) Deriving the Short-Run Market Supply (Pure Competition) - 8/9a

 

5.3.4 (9:13) Deriving the Long-Run Market Supply Curve (Pure Competition) - 8/9a

LESSON 8/9b - PURE COMPETITION - LONG RUN EQUILIBRIUM AND EFFICIENCY

From Short-run to Long-run in Perfectly Competitive Markets (econclassroom.com 21:23) - 8/9b
http://www.econclassroom.com/?p=3018

Why a firm in a perfectly competitive market will only earn normal profits (zero economic profits) in the long run.

Review:

 

Long Run Equilibrium

A normal profit (zero economic profits) is what we would expect individual firms in a perfectly competitive market to earn in the long run because there are no barriers to entry.

And in long run equilibrium the P = MC (allocative efficiency, more later) and P = minimum ATC (productive efficiency, more later).

The individual firms are producing the quantity where their costs per unit (the ATC) are the lowest.

if the firms produce any other quantity (less or more) then the costs per unit (ATC) will be higher than the price and they would earn economic losses [ME: meaning that they could make more by quitting this business and going to their next best alternative.]

Why do perfectly competitive firms only earn a normal profit in the long run?

 

Allocative and Productive Efficiency in Perfectly Competitive Markets (econclassroom.com 19:35) - 8/9b  
http://www.econclassroom.com/?p=3066

 Why a firm in a perfectly competitive market will achieve allocative and productive efficiency in the long run.

Introduction

Review

 

How Perfectly Competitive Markets achieve Productive Efficiency in the long Run

How Perfectly Competitive Markets achieve Allocative Efficiency in the long Run

 

Perfectly competitive firms achieve both productive and allocative efficiency in long run equilibrium

 

Pure Monopoly and Regulation (LESSONS 10a and 10b)

LESSON 10a - MONOPOLY: CHARACTIERISTICS AND SHORT RUN EQUILIBRIUM

MONOPOLY

6.1.1 (10:10) Barriers to Entry - Defining Market Power - 10a

6.1.2 (12:43) Defining Marginal Revenue for a Firm with Market Power - 10a

 

PROFIT MAXIMIZATION FOR A MONOPOLY

6.1.3 (14:18) Determining the Monopolist's Profit Maximizing Output and Price - 10a

 

6.1.4 (6:24) Calculating a Monopolist's Profit and Loss - 10a

LESSON 10b - MONOPOLY: LONG RUN EQUILIBRIUM, EFFICIENCY, AND REGULATION

 

THE SOCIAL COST OF MONOPOLY

6.2.1 (12:22) Determining the Social Cost of Monopoly - 10b

6.2.2 (15:23) Calculating Deadweight Loss - 10b

Price Discrimination and its Effects on Efficiency in a Monopolistic Market (econclassroom.com 14:51) - 10b
http://www.econclassroom.com/?p=3118

Outline:

Definition: Price discrimination occurs when a firm with market power charges different prices to consumers for an identical product.

ME: Note that the word "discrimination" does not mean that this is a bad thing. All "discrimination" means is that different customers are treated differently, i.e. they pay different prices. We will find out that price discrimination may actually be GOOD for society.

Examples:

  • Movie theaters: Charge different prices based on age. Seniors and youth pay less since they tend to be more price sensitive.
  • Gas stations: Gas stations will charge different prices in different neighborhoods based on relative demand and location.
  • Quantity discounts: Grocery stores give discounts for bulk purchases by customers who are price sensitive (think “buy one gallon of milk, get a second gallon free”& the family of six is price sensitive and is likely to pay less per gallon than the dual income couple with no kids who would never buy two gallons of milk).
  • Hotel room rates: Some hotels will charge less for customers who bother to ask about special room rates than to those who don’t even bother to ask.
  • Telephone plans: Some customers who ask their provider for special rates will find it incredibly easy to get better calling rates than if they don’t bother to ask.
  • Airline ticket prices: Weekend stayover discounts for leisure travelers mean business people, whose demand for flights is highly inelastic, but who will rarely stay over a weekend, pay far more for a round-trip ticket that departs and returns during the week.

 

Three conditions necessary for price discrimination to occur:

  1. firm must have market power (therefore purely competitive firms cannot price discriminate, but monopolies can
  2. firm must be able to segregate customers with different willingnesses to pay which means with different price elasticities of demand
    • ME:
      • those with a less elastic demand are charged a higher price. So what happens to total revenue (TR)? We know that if demand is inelastic and price goes up, TR increase.
      • those with elastic demand are charged a lower price. So what happens to TR? We know that if demand is elastic and price goes down, TR increase.
      • Our textbook defines price discrimination as "the selling of a product to different buyers at different prices when the price differences are not justified by differences in cost.
        • so charging more for a car in Alaska and less for one in Detroit because it costs more to ship the car to Alaska is NOT price discrimination
      • But, since we assume that the costs (TC) are the same, the result of price discrimination is higher TR with the same TC, So, HIGHER PROFITS
  3. buyers are prevented from reselling the product to someone else

Example: Airline tickets

ME: airlines have market power which means that they can set their own price

ME: business travelers have a less elastic demand curve than vacation travelers, but how can the airline know if a ticket buyer is a business traveler or a vacation traveler? One way is to require a Saturday night stay for customers buying round-trip tickets. Business travelers prefer to be home on weekends and vacation travelers tend to want to be on vacation over the weekend

resale is prevented because your name is on the ticket and you must have a matching ID

Three types (degrees) of price discrimination

3rd Degree: where consumers are divided into GROUPS. For example, age groups with different price elasticities (movies tickets are cheaper for children and more expensive for adults), or time of purchase (people who buy early pay less than those who buy at the last moment).

2nd Degree: where price discrimination is based on the quantity purchased. For example, buying in bulk (large quantities) is cheaper than buying small quantities or two-for one (or buy two get one free). the more you buy the less you pay per unit

1st Degree: Also called "Perfect Price Discrimination". This is where each individual consumer pays a different price, each consumer pays the highest price that he or she is willing to pay based on their demand. This way there will be no consumer surplus but a lot of producer surplus.

The Effect of Perfect Price Discrimination on Efficiency (graph showing 3rd degree price discrimination)

REVIEW: Graph of a "single-price" monopolist maximizing profit. "Single-price" means that there is no price discrimination

So, if this monopolist did not price discriminate they would produce quantity Qm and charge price Pm. (They will produce the quantity where MR=MC.) ME: and at Qm, P > MC so the monopolist is not allocatively efficient.

PRICE DISCRIMINATION: But notice that the demand curve goes above Pm, meaning that there are customers willing to pay more than Pm. What would happen if the monopolist could charge these customers more since they are willing to pay more? What happens is: if the monopolist can charge each customer the highest price that they are willing to pay, then MR will be the same as price (or demand). D = MR or P = MR

So, what quantity will the perfectly price discriminating monopolist produce to maximize profits? This is always where MC=MR. Always.

On the graph, if P = MR then MR = MC where P = MC. You should remember that this is the formula used to find allocative efficiency (the socially optimal quantity)

Results of perfect price discrimination:

  • more will be produced than a single-price monopolist (Qp=MC on the graph below)
  • some consumers will pay higher prices than they would if there was no price discrimination (Pm), but other consumers will pay lower prices
  • profits will be greater (the blue plus the yellow areas on the graph below)
  • AND MOST IMPORTANTLY the perfectly price discriminating monopolist will produce the allocatively efficient quantity!

Conclusion:

  • 1st degree price discrimination is almost impossible and therefore very uncommon.
  • 2nd and 3rd degree price discrimination are more common
  • but, 2nd and 3rd degree price discrimination do not achieve the same increase in output as perfect price discrimination and therefore do not achieve the same level of allocative efficiency, but they are still better than a single-price monopolist.
  • effects:
    • more is produced
    • consumer surplus is transferred to the producers in the form of higher revenues and profits
    • Is price discrimination good for society? it depends:
      • YES - it is better for the monopolist because they get higher profits
      • YES - it does improve allocative efficiency
      • NO - if you are one of the customers who has to pay an even higher price
      • YES - if you are one of the customers who gets the product at a lower price, and if there were no price discrimination, you would not get the product at all

 

REGULATING NATURAL MONOPOLIES

Natural Monopoly and the need for Government Regulation - 10b
http://www.econclassroom.com/?p=3115

What is a "Natural Monopoly"?

Compare graphs:

So, Society is better off (lower costs) if only one firm produces the product, BUT:

To really benefit society, natural monopolies need to be regulated by the government

 

  • ME: our textbook says that there are two solutions to the problem of natural monopolies earning a loss at the allocatively efficient price:
    • provide a subsidy to cover their losses
      • but this may be politically unpopular. Would you support higher taxes to give money to Commonwealth Edison electric company?
    • the other solution that is used a lot in the united states is AC pricing, where the government does not set a price ceiling at the allocatively efficient price (Pso), but rather they put the price ceiling at a prise where D=ATC (where the demand curve crosses the ATC curve).

    • If the price is Pac then the firm will produce Qac
      • is the allocative efficient? NO, but it is closer to Qso
      • will the firms earn profits or losses? They will earn normal profits (profits = zero) and they will be able to stay in business. (Remember: economic costs include the explicit costs AND the implicit cost which means that investors are earning a return on their investment approximately equal to their next best alternative.)

 

Monopolistic Competition and Oligopoly (LESSONS 11a and 11b)

LESSON 11a - MONOPOLISTIC COMPETITION

6.4.1 (7:01) Defining Monopolistic Competition - 11a

 

6.4.2 (8:58) Short-Run Profit Maximization for a Monopolistically Competitive Firm - Understanding Pricing and Output in Monopolistic Competition - 11a

Monopolistic Competition (econclassroom.com 20:51) - 11a
http://www.econclassroom.com/?p=3128 (efficiency begins at 15:00)

beginning at 15:00

Monopolistic Competition in the Long-Run: Econ Concepts in 60 Seconds with AP Economics Teacher (ACDCEcon 3:26) - 11a
http://www.youtube.com/watch?v=erdzOu3juNI

 

LESSON 11b - OLIGOPOLY and SUMMARY OF PRODUCT MARKET MODELS

6.3.1 (17:26) Introducing Oligopoly and the Prisoner's Dilemma - 11b

 

 

6.4.3 (6:44) Game Theory and Advertising and Brand Names - Understanding Oligopoly (Monopolistic Competition??) as a Prisoner's Dilemma - 11b

6.3.1 (17:26) should be watched before watching this video

 

6.3.2 (10:47) Understanding a Cartel as a Prisoner's Dilemma - 11b

Yes, if they learn through repeated play that cheating hurts them both and that cooperating is better for them.

 

6.3.3 (4:22) Understanding the Kinked-Demand Curve Model

Kinked Demand Model (econclassroom.com 14:06) - 11b
http://www.econclassroom.com/?p=3144

Preview:

Review - Oligopolies:

Assumptions about oligopoly pricing behavior (kinked demand model)

 

So what does the demand curve look like with these assumption?

So why are firms reluctant to change their prices?

So what does the MR curve look like?

So what will oligopolists do if their costs change? Will they change their prices and quantities?

ME:

 

Oligopolies, Duopolies, Collusion, and Cartels (Khan Academy 8:26) - 11b
http://www.khanacademy.org/finance-economics/microeconomics/v/oligopolies--duopolies--collusion--and-cartels

Introduction

Collusion (acting more like a monopoly)

Oligopolies that are More Competitive

 

 

SUMMARY

Determining the Efficiency of Firms in Different Market Structures (econclassroom.com 18:23) - 11b
http://www.econclassroom.com/?p=4456

Introduction

Perfect Competition Long Run Equilibrium

Monopoly Long Run Equilibrium

Monopolistic Competition Long Run Equilibrium

Summary

 

UNIT 4

LESSON 12a - THE DEMAND FOR RESOURCES

7.1.1 (15:10) Deriving the Factor Demand Curve - 12a

 

7.1.3 (15:24) The Supply of Labor - The Determination of Wages - Analyzing the Labor Market - 12a

 

(THE LOST EPISODES) Factor Market Overview (YouTube mjmfoodle 1:27) -12a
http://www.youtube.com/watch?v=J0LigIdph8I&list=UU_xHLAJ_zqPHkmC2aY2MdcA

 

(The Lost Episodes) Perfectly Competitive Factor and Output Markets 5:14) -12a
http://www.youtube.com/watch?v=OUyvqq6ZY6s&list=UU_xHLAJ_zqPHkmC2aY2MdcA&index=2

 

LESSON 13a WAGE DETERMINATION (LABOR MARKETS)

 

(THE LOST EPISODES) Monopsony Factor Market, Perfectly Competitive Output Market (YouTube mjmfoodle 8:11)
http://www.youtube.com/watch?v=d5mf1hxXBZY

Micro 5.1 Market and Minimum Wage: Econ Concepts in 60 Seconds:- Economics Lesson (YouTube ACDC Econ 3:26)
http://www.youtube.com/watch?v=D649L99JjnY

11.4.2 An Analysis of Labor Unions and Unemployment (7:27)

OPTIONAL: 11.4.3 Case Study: "La Causa": The United Farm Workers (5:10)

11.4.1 Minimum Wage Laws (7:31)

11.4.4 The Theory of Efficiency Wages (10:54)

 

LESSON 20a - INCOME INEQUALITY AND DISCRIMINATION

 

10.3.4 (5:20) Income Distribution in the U.S. and the Poverty Level - 20a

 

LESSON 22a - IMMIGRATION

OPTIONAL: