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Basic Concepts

Basic Concepts. Basic Concepts Terms. Scarcity Opportunity cost Comparative Advantage Marginal Analysis. Basic Concepts Production Possibilities and Trade. Comparative Advantage Specialization Trade. Supply and Demand. Supply and Demand. Supply and Demand. Price Controls.

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Basic Concepts

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  1. Basic Concepts

  2. Basic ConceptsTerms • Scarcity • Opportunity cost • Comparative Advantage • Marginal Analysis

  3. Basic ConceptsProduction Possibilities and Trade Comparative Advantage Specialization Trade

  4. Supply and Demand

  5. Supply and Demand

  6. Supply and Demand • Price Controls

  7. Supply and Demand Factors shifting supply curves Input prices Technology Expectations Number of sellers

  8. Supply and Demand Factors shifting supply curves • Consumer income • Prices of related goods • Tastes • Expectations • Number of buyers

  9. Elasticity

  10. Elasticity classification • Price elasticity of demand is greater than 1 then demand is elastic • Price elasticity of Demand is less than 1 demand is inelastic • Price elasticity of Demand = 1 demand is unit elastic • The flatter the demand curve the more elastic the demand

  11. Calculating the elasticity • Simple formula • Price Elasticity of Demand = • Using the Midpoint to calculate %age s • Point A: Price = $4 quantity = 120 • Point B: Price = $6 quantity = 80 • (6-4)/5* 100 = 40% • (120-80)/100*100 =40% • 40/40 =1 • Elasticity = 1 % age in quantity demanded %age in price

  12. Surplus

  13. Consumer and Producer Surplus

  14. Deadweight Loss

  15. Production and cost

  16. Production and Cost Diminishing Returns

  17. Production and Cost Cost Curves

  18. ATC in short ATC in short ATC in short run with run with run with ATC in long run small factory medium factory large factory $12,000 10,000 Constant Economies returns to of Diseconomies scale scale of scale 1,000 1,200 Economies of Scale Average Total Cost Quantity of 0 Cars per Day

  19. Economies and Diseconomies of Scale • Economies of scalerefer to the property whereby long-run average total cost falls as the quantity of output increases. • Diseconomies of scalerefer to the property whereby long-run average total cost rises as the quantity of output increases. • Constant returns to scalerefers to the property whereby long-run average total cost stays the same as the quantity of output increases.

  20. Why these Occur • Economies of scale:A firm experience’s economies of scale when its Average Costs fall with increasing output. • Specialization and division of labor • Technical • Bulk buying • Constant returns to scale: occur when the percentage increase in output equals the percentage increase in inputs. • Diseconomies of scale: occur when a business grows so large that the costs per unit increase. • Poor communication • Lack of motivation • Loss of direction and co-ordination

  21. Market Structures

  22. Profit MaximizationMC=MR

  23. Market Structures • Perfect Competition • Large number of buyers and sellers, identical products, act independently, well informed, free entry and exit • Monopolistic Competition • Perfect competition with product differentiation • Monopoly • One firm controls the industry • Oligopoly • Few firms control the industry • Collusion, cartels, Game theory (Nash equilibrium)

  24. Perfect Competition Cost Curves

  25. Exit vs Shut down

  26. Exit vs Shut down

  27. Monopoly Cost Curves

  28. Government Control • Antitrust aimed at making markets more competitive • Government regulation aimed at regulating the behavior of monopolies • Turning private monopolies into public enterprises • Do nothing

  29. Oligopolies and the Prisoners Dilema

  30. The Prisoners’ Dilemma • The prisoners’ dilemmaprovides insight into the difficulty in maintaining cooperation. • Often people (firms) fail to cooperate with one another even when cooperation would make them better off. • Self-interest makes it difficult for the oligopoly to maintain a cooperative outcome with low production, high prices, and monopoly profits. • Firms that care about future profits will cooperate in repeated games rather than cheating in a single game to achieve a one-time gain.

  31. Externalities • Positive • Negative • Remedies • Negative externalities lead markets to produce a larger quantity than is socially desirable. • Positive externalities lead markets to produce a larger quantity than is socially desirable.

  32. Negative Externalities • Internalizing an externality involves altering incentives so that people take account of the external effects of their actions. • To achieve the socially optimal output… • the government can internalize an externality by imposing a tax on the producer to reduce the equilibrium quantity to the socially desirable quantity.

  33. Positive Externalities • Subsidies • Used as the primary method for attempting to internalize positive externalities. • Industrial Policy • Government intervention in the economy that aims to promote technology-enhancing industries • Patent laws are a form of technology policy that give the individual (or firm) with patent protection a property right over its invention. • The patent is then said to internalize the externality.

  34. PRIVATE SOLUTIONS TO EXTERNALITIES • Government action is not always needed to solve the problem of externalities. • Types of Private Solutions • Moral codes and social sanctions • Charitable organizations • Integrating different types of businesses • Contracting between parties Sometimes the private solution approach fails because transaction costs can be so high that private agreement is not possible.

  35. Public Goods and common resources

  36. Free Rider • The government can decide to provide the public good if the total benefits exceed the costs. • The government can make everyone better off by providing the public good and paying for it with tax revenue. • Tragedy of commons • Common resources tend to be used excessively when individuals are not charged for their usage. • This is similar to a negative externality.

  37. Criteria • Excludability • refers to the property of a good whereby a person can be prevented from using it. • Rivalry in consumption • refers to the property of a good whereby one person’s use diminishes other people’s use.

  38. Four Types of Goods • Private Goods • Goods that are both excludable and rival in consumption • Public Goods • Goods that are neither excludable nor rival in consumption • Common Resources • Goods that are rival in consumption but not excludable • Natural Monopolies • Goods that are excludable but not rival in consumption

  39. Public Goods

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