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UNIT 1: Introduction to Microeconomics: 1a - 1b - 1c - 1d - 2a - 3a - 3b - 3c - 5a - 5b |
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UNIT 2: Elasticity, Consumer Choice, and Costs: 4a - 4b - 6a - 7a - 7b - 7c |
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UNIT 3: Product Markets and Efficiency: 8/9a - 8/9b - 10a - 10b - 11a - 11b |
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UNIT 4: Resource Markets, Inequality, and Immigration: 12a - 13a - 20a - 22a |
1a Introduction |
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. I have posted a practice math quiz on our Blackboard site. Please take the 20 question math quiz. If you score less than 14 or 15, consider dropping ECO 211 and taking a math class first. Contact your instructor if you have questions or concerns.
This course will cover the area of economics commonly defined as MICROECONOMICS which is concerned with the individual parts of the economy such as individual businesses or industries, individual consumers, and individual products. Our goal is to study whether the economy uses our limited resources to obtain the maximum satisfaction possible for society. We will concentrate on three issues or goals: ALLOCATIVE EFFICIENCY, PRODUCTIVE EFFICIENCY, and EQUITY.
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 |
pp. 24-28, (19th, pp. 22-26) "Graphs and Their Meaning"
Syllabus On-Campus / Syllabus Online
Start: 5Es online reading
1a Assignments: Video Lectures |
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 PointsKhan 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 8:24 - begin at 3:55)
1a Outcomes - What you should learn |
How to find class information:
Basic math skills:
1a Key Terms |
The Class:
Required Activity, Yellow Pages, Tomlinson Videos on Thinkwell, Video Notes, LESSONS webpage, Pre-quiz, Clicker Quiz, Web Quiz,
The Math:
horizontal (x) axis, vertical (y) axis, origin, direct (positive) relationship, inverse (negative) relationship, slope of a line, positive slope, negative slope, marginal, average
1a Web Quiz (Click Here) |
1a Key Formulas |
Slope = vertical change / horizontal change
Slope = marginal value of the total
Marginal = change in total / change in quantity
The area under a marginal curve = the total
Average = total / quantity
Total = average x quantity
Total = the sum of the marginal
Total = the area under the marginal
1a Key Graphs |
Any Point on a Graph Represents Two Numbers
Direct Relationship
Inverse Relationship
Calculating Slope
The area under a marginal curve = the total
1a Review Videos |
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 MICWEBAPP or the LESSONS link for these assignments.
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.
The "5Es" of Economcs are:
1. Economic Growth
2. Allocartive Efficiency
3. Productive Efficiency
4. Equity
5. Full Employment
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 off one fifth of its workforce. Or, that the price of gasoline may be too low. Really!
1b Something Interesting - Why are we studying this? |
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 |
5Es online reading (VERY IMPORTANT!)
pp. 64-65, (19th, 58-59) "Efficient Allocation"
pp. 153-155, (19th 117-119) "Law of Diminishing Marginal Utility"
1b Assignments: Video Lectures |
1b Outcomes - What you should learn |
OUTCOMES:
1b Key Terms |
Key Terms:
5Es, scarcity, economic growth, allocative efficiency, productive efficiency, equity, full employment, marginal, law of diminishing marginal utility, President Trump example
1b Key Problem |
How EQUITY Increases Society's Satisfaction
How does a fair distribution of goods and services increase society's satisfation? Since it is difficult for us to agree on a definition of "fairness", let me see if I can come up with an extreme example on which we can all agree. What if President Trump owned everything? I mean EVERYTHING - all the land, all the buildings, all the food, all the clothes all the cars, -- everything in the country. Therefore, the rest of us own nothing. We are homeless, starving, and naked. Not a pretty picture, but I think we can all agree that this is NOT FAIR (not equitable)?
Now, let's say that President Trump gives us each a pair of pants. We should be able to agree that this is MORE FAIR, more equitable. So what happens to society's satisfaction when we go from NOT FAIR to MORE FAIR? By "society" I mean all of us, including President Trump. The 300 million of us who received the pants are more satisfied since each of us has a pair of pants, but President Trump is less satisfied because he has 300 million fewer pairs of pants.
So what happens to society's TOTAL satisfaction? "Society" is us and Trump. It depends on HOW MUCH happier we are and HOW MUCH less happy President Trump is. This brings us to the Law of Diminishing Marginal Utility (you may want to look this up in the index of your textbook).
Utility is the reason we consume a good or service. You might call it the satisfaction that we get when we consume something. I get satisfaction (utility) when I drive my boat. I get utility (satisfaction) when I go to the dentist.
"Marginal" means EXTRA or ADDITIONAL. So if I drive my boat a second time I get some additional (marginal) utility.
According to the law of diminishing marginal utility, the EXTRA (not the total) utility diminishes for each additional unit consumed. The first time I drive my boat in the spring I really enjoy it. But after a few weekends of boating it doesn't give me as much additional satisfaction as the first time. I still go boating. My total utility still goes up. But the MARGINAL (extra) utility I get from one more day goes down.
Back to the President Trump Example. Since we start with no pants, the FIRST PAIR we get from President Trump gives us A LOT of utility (satisfaction). But, since President Trump STILL HAS BILLIONS of pairs of pants left, giving us 300 million causes his utility (satisfaction) to go down only A LITTLE. Therefore, when we went from NOT FAIR to MORE FAIR we gained more satisfaction than Trump lost. Overall, a more fair distribution of pants caused society's total utility (remember, "society" includes all of us AND President Trump ) to increase.
1b Web Quiz - Click Here |
1b Key Graphs |
The 5Es of Economics
1b Review Quiz |
1b Review Videos |
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 MICWEBAPP or the LESSONS link for these assignments.
1c Introduction |
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?
The paragraph below 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.
"We live in a complex world with diverse people, firms, and governments whose behaviors aggregate to produce novel, unexpected phenomena. We see political uprisings, market crashes, and a never ending array of social trends. How do we make sense of it? Models. Evidence shows that people who think with models consistently outperform those who don't. And, moreover people who think with lots of models outperform people who use only one [emphasis added]. Why do models make us better thinkers? Models help us to better organize information - to make sense of that fire hose or hairball of data (choose your metaphor) available on the Internet. Models improve our abilities to make accurate forecasts. They help us make better decisions and adopt more effective strategies. They even can improve our ability to design institutions and procedures. In this class, I present a starter kit of models: I start with models of tipping points. I move on to cover models explain the wisdom of crowds, models that show why some countries are rich and some are poor, and models that help unpack the strategic decisions of firm and politicians. "
OPTIONAL - More information about the importance of using models:
1c Assignments: Readings |
Ch 1, pp. 4-11, (19th, 3-11), "The Economic Perspective", "Theories, Principles, and Models", "Microeconomics and Macroeconomics", "Individual's Economizing Problem"
1c Assignments: Video Lectures |
1.1.1 Scarcity - Defining Economics 6:35 [MyNotes]1.1.2 What Economists Do 13:20 [ Summary] [Quiz] [MyNotes]
1.1.3 Macroeconomics and Microeconomics 11:21 [MyNotes]
EconMovies- Episode 2: Monty Python and the Holy Grail - Marginal Analysis (YouTube ACDCLeadership) 5:27
BUDGET LINES
3.2.1 Constructing a Consumer's Budget Constraint 9:36 [MyNotes]3.2.2 Understanding a Change in the Budget Constraint 5:02 [MyNotes]
1c Outcomes - What you should learn |
OUTCOMES
1c Key Terms |
Key Terms Flash Cards - Click Here
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, resource, land, labor, capital, entrepreneurial ability
1c Key Problems |
Assume the Price of X (Px) is $1 and the Price of Y (Py) is $2 and you have $10 to spend. (income - $10).
1. Draw the budget line.
2. What happens to the budget line if your income decreases to
$6?
3. Assume your income is $10, and the Px is $1 and Py is $2. What
happens to the budget line if Py decreases to $1?
4. Assume your income is $10, and the Px is $1 and Py is $2. What
happens to the budget line if Px increases to $2?
1c Web Quiz - Click Here |
1c Key Graphs |
Budget Line
Budget Line: Income Increases
Budget Line: Price Decreases
1c Review Quiz |
1c Review Videos |
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 MICWEBAPP or the LESSONS link for these assignments.
1d Introduction |
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 lesson 6a we will use BCA to decide how much to buy to maximize our satisfaction. In lessons 8/9a, 8/9b, 10a, 10b, 11a, and 11b we will use it to decide how much to produce to maximize profits. In lessons 12a and 13a we use BCA to decide how many to hire to maximize profits.
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 Benefit-Cost Analysis (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? |
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)? ANSWER: airbags reduce the extra costs of driving fast by making a crash safer.
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
1d Assignments: Readings |
pp. 10-18, (19th, 11-20), "Society's Economizing Problem", "Production Possibilities Model", "Optimal Allocation" especially Fig 1.3, "The Economics of War" (box), "Unemployment, Growth, and the Future"
pp. 6-7, (19th, 5), "Marginal Analysis: Comparing Benefits and Costs"
Drivers with airbags may take more risks
1d Assignments: Video Lectures |
1.4.1 Understanding the Concept of Production Possibilities Frontiers 24:46 [MyNotes]1.4.2 Understanding How a Change in Technology Affects the PPF 10:10 [MyNotes]
ECONMOVIES Episode 3: Monsters Inc. and the Production Possibilities Curve
MAKING CHOICES: THE ECONOMIC WAY OF THINKING -- BENEFIT-COST ANALYSIS (also called Marginal Analysis or Cost-Benefit Analysis)
EconMovies- Episode 2: Monty Python and the Holy Grail - Marginal Analysis (YouTube ACDCLeadership 5:27)Thinking at the Margin (YouTube LearnLiberty 4:32)
Incentives and Marginal Analysis (YouTube MrHurdleHistory 8:54)
CIRCULAR FLOW MODEL
Micro 1.1 The BIG Picture- AP Economics Overview (with links to playlists) (YouTube ACDCLeadership 12:49)10.1.2 The Circular Flow Model 9:38 [MyNotes]
1d Outcomes - What you should learn |
OUTCOMES
Production Possibilities
Benefit Cost Analysis
1d Key Terms |
Key Terms:
PPC:
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 growthBCA:
marginal costs (MC), marginal benefits (MB), MB=MC Rule, sunk (fixed) costs
1d Key Problems |
Production Possibilities Curve (PPC) - Click Here
Using Benefit Cost Analysis (BCA) - Click Here
Click here to see PPC questions
Using Benefit Cost Analysis (BCA) Question:
Use the above information on four different
highway programs of increasing scope to decide which program the
government should do.
All numbers are in billions of dollars.
Use Benefit Cost Analysis to answer the question.
1d Web Quizzes - Click Here |
1d Key Graphs |
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The Production Possibilities Curve (PPC) PPC: Unemployment to Full Employment and Productive Inefficiency to Efficient (Achieving the Potential)
PPC and Economic Growth (Increasing the Potential)
Benefit Cost Analysis
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1d Review Quiz |
1d Review Videos |
- Shifting
the Production Possibilities Curve (PPC)- Econ
1.2
[5:35 YouTube ACDC Leadership]
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 MICWEBAPP or the LESSONS link for these assignments.
2a 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 lessons 3, 5, and lessons 8 to13. 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 government. 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 lesson 1d.
2a Something Interesting - Why are we studying this? |
The Gains from Trade:
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"
2a Assignments: Readings |
pp. 31-51 (19th ed. Ch. 2 ALL), "The Market System and Circular Flow"
pp. 534-542, (19th, 474-482), "The Economic Basis for Trade"
A Comparison of Market Economics and Command Economies
2a Assignments: Video Lectures |
1.1.4 An Overview of Economic Systems 10:50 [MyNotes]Power of the Market (YouTube LibertyPen) 1:14 [MyNotes]
17.5.3 Comparative Economic Performance 12:16 [MyNotes]
OPTIONAL: Paul Solman Video: Capitalism vs. Socialism - The Cuban Quandary (YouTube PBS NewsHour) 13:56
SPECIALIZATION AND GAINS FROM TRADE
1.5.1 Defining Comparative Advantage with the Production Possibilities Frontier 22:10 [MyNotes]1.5.2 Understanding Why Specialization Increases Total Output 6:46 [MyNotes]
1.5.3 Analyzing International Trade Using Comparative Advantage 25:35 [MyNotes]
KEY PROBLEM: The gains from trade
2a Outcomes - What you should learn |
OUTCOMES
Economic Systems
Gains From Trade
2a Key Terms |
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.
2a Key Problem |
Click on the link above to learn how to do this problem.
Assume that prior to specialization and trade, Japan produced at point D and Switzerland produced at point E. Calculate the possible gains from specialization and trade.
2a Web Quiz - Click Here |
2a Key Graphs |
Comparative Advantage and the Gains from Trade
Circular Flow Model of Capitalism
2a Review Quizzes |
2a Review Videos |
- Comparative
advantage specialization and gains from trade | Microeconomics | Khan
Academy
[8:55 YouTube Khan Academy]
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 MICWEBAPP or the LESSONS link for these assignments.
3a Introduction |
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? |
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.
What happend to the demand for Campbell's and which non-price determinant of demand explains why that Campbell's soup can is there?
ANSWER: The demand for Campbell's decreased because the price of a substitute good, VanCamp's, decreased. There has been no change in the demand for VanCamp's.
3a Assignments: Readings |
pp. 53-59, (19th, 47-53), "Markets", "Demand"
3a Assignments: Video Lectures |
2.1.1 Understanding the Determinants of Demand 11:58 [MyNotes]
2.1.2 Understanding the Basics of Demand 11:54 [MyNotes]
2.1.3 Analyzing Shifts in the Demand Curve 8:13 [MyNotes]
2.1.4 Changing Other Demand Variables 10:43 [MyNotes]
2.1.5 Deriving a Market Demand Curve 9:16 [MyNotes]
OPTIONAL Snow Day Lecture - During the 2018-2019 school year we had a snow day when lesson 3a was scheduled in our on-campus class. To avoid losing a day of class I recorded the lesson 3a lecture and posted it online. Here it is: Lesson 3a Snow Day lecture (1hour 15 minutes)
OPTIONAL:
The Law of Demand (econclassroom.com 11:24)Changes in Demand versus Changes in Quantity Demanded (econclassroom.com 5:52)
The Determinants of Demand (econclassroom.com 11:07)
3a Outcomes - What you should learn |
OUTCOMES
3a Non-Price Determinants of Demand and Supply |
Pe -- expected price
Pog -- price of other goods1) substitute goods
2) complementary goods
3) independent goodsI -- income
1) normal goods
2) inferior goodsN -- number of POTENTIAL consumers
T -- tastes and preferences
Non-Price Determinants of Supply (PPPTTN)
Pe -- expected price
Pog -- price of other goods produced by same firm
Pres -- price of resources
T --technology
T --taxes and subsidies
N -- number of producers/sellers
NON-PRICE DETERMINANTS OF DEMAND
Pe -- expected price
Pe in the future
Pe in the future
Pog -- price of other goods
1) substitute goods
2) complementary goods
I -- income
1) normal goods
2) inferior goods
Npot -- number of POTENTIAL consumers
T -- tastes and preferences
NON-PRICE DETERMINANTS OF SUPPLY
Pe -- expected price
Pog -- price of other goods also produced by the same firm
Pres -- price of resources
Tech --technology
Improved technology
Tax --taxes and subsidies
N -- number of producers/sellers
3a Key Terms |
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
3a Video Lectures - Click Here |
3a Web Quiz - Click Here |
3a Key Graphs |
The Demand Curve
Changes in Demand
Increase in Demand
Decrease in Demand
Market Demand (horizontal summation of individual demand curves)
3a Review Videos |
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 MICWEBAPP or the LESSONS link for these assignments. .
3b Introduction |
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 lessons 3a, 3b, and 3c 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? |
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.
3b Assignments: Readings |
pp. 59-62, (19th, 53-56), "Supply"
http://www.npr.org/blogs/parallels/2015/01/28/382173205/where-is-all-that-excess-oil-going
[Why are they storing oil? What is happening to supply? Which
determinant has caused the supply to change?]
3b Assignments: Video Lectures |
2.2.2 Deriving a Supply Curve 9:49 [MyNotes]
2.2.3 Understanding a Change in Supply versus a Change in Quantity Supplied 6:52 [MyNotes]
2.2.4 Analyzing Changes in Other Supply Variables 8:47 [MyNotes]
2.2.5 Deriving a Market Supply Curve from Individual Supply Curves 7:16 [MyNotes]
3b Outcomes - What you should learn |
OUTCOMES
"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. "
3b Non-Price Determinants of Demand and Supply |
Pe -- expected price
Pog -- price of other goods1) substitute goods
2) complementary goods
3) independent goodsI -- income
1) normal goods
2) inferior goodsN -- number of POTENTIAL consumers
T -- tastes and preferences
Non-Price Determinants of Supply (PPPTTN)
Pe -- expected price
Pog -- price of other goods produced by same firm
Pres -- price of resources
T --technology
T --taxes and subsidies
N -- number of producers/sellers
NON-PRICE DETERMINANTS OF DEMAND
Pe -- expected price
Pog -- price of other goods
1) substitute goods
2) complementary goods
I -- income
1) normal goods
2) inferior goods
Npot -- number of POTENTIAL consumers
T -- tastes and preferences
NON-PRICE DETERMINANTS OF SUPPLY
Pe -- expected price
Pog -- price of other goods also produced by the same firm
Pres -- price of resources
Tech --technology
Improved technology
Tax --taxes and subsidies
N -- number of producers/sellers
3b Key Terms |
Key Terms:
supply, quantity supplied, market supply, law of supply, change in supply, change in quantity supplied, increase in supply, decrease in supply, non-price determinants of supply
3b Web Quiz - Click Here |
3b Key Graphs |
The Supply Curve
Changes in Supply
Increase in Supply
Decrease in Supply
3b Review Videos |
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 MICWEBAPP or the LESSONS link for these assignments.
3c Introduction |
First, we will put demand and supply together and learn how to use the model to to see how much businesses will produce to maximize their profits (WHAT WE GET) and why products have the prices that they do. We will learn how to use the model to 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 (WHAT WE WANT)? Our goal is to show that in a competitive market prices and quantities will change until allocative efficiency is achieved.
In lesson 2a we learned that competitive markets are allocatively efficient. This means they will produce the quantity of goods that maximizes the society's satisfaction. After studying lessons 3a, 3b, and 3c we will be able to show the allocatively efficient price and quantity on a graph. We will learn two of the three ways to find the allocatively efficient quantity: (1) quantity were MSB = MSC, and (2) the quantity where consumer surplus plus producer surplus is maximized. In Unit 3 we will learn a third way to find the allocatively efficient quantity" the quantity where P = MC (price equals marginal cost).
Competitive markets are efficient.
3c Something Interesting - Why are we studying this? |
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 supply and demand 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. "
3c Assignments: Readings |
pp. 62-67, (19th, 56-61), "Market Equilibrium", "Changes in Supply, Demand, and Equilibrium"
pp. 75-80, (19th, 69-74 ), "Additional Examples of Supply and Demand"
pp. 85-90, (19th, 93-99), "Efficiently Functioning Markets "
Supply, Demand, and Economic Efficiency
3c Assignments: Video Lectures |
2.3.1 Determining a Competitive Equilibrium 11:04 [MyNotes]2.3.2 Defining Comparative Statics 7:02 [MyNotes]
2.3.3 Classifying Comparative Statics 11:54 [MyNotes]
AC Micro 2.4 Double Shifts in Supply and Demand: Econ Concepts in 60 Seconds (2:34)
EconMovies: Episode 4: Indiana Jones (Demand, Supply, Equilibrium, Shifts) (7:02)
MARKETS AND EFFICIENCY
Consumer and Producer Surplus in the Linear Demand and Supply Model (econclassroom.com 10:01)Efficiency and Equilibrium in Competitive Markets (econclassroom.com 11:48)
3c Outcomes - What you should learn |
OUTCOMES
Equilibrium
Markets and Efficiency
3c Non-Price Determinants of Demand and Supply |
Pe -- expected price
Pog -- price of other goods1) substitute goods
2) complementary goods
3) independent goodsI -- income
1) normal goods
2) inferior goodsN -- number of POTENTIAL consumers
T -- tastes and preferences
Non-Price Determinants of Supply (PPPTTN)
Pe -- expected price
Pog -- price of other goods produced by same firm
Pres -- price of resources
T --technology
T --taxes and subsidies
N -- number of producers/sellers
NON-PRICE DETERMINANTS OF DEMAND
Pe -- expected price
Pog -- price of other goods
1) substitute goods
2) complementary goods
I -- income
1) normal goods
2) inferior goods
Npot -- number of POTENTIAL consumers
T -- tastes and preferences
NON-PRICE DETERMINANTS OF SUPPLY
Pe -- expected price
Pog -- price of other goods also produced by the same firm
Pres -- price of resources
Tech --technology
Improved technology
Tax --taxes and subsidies
N -- number of producers/sellers
3c Key Terms |
Market Equilibrium
equilibrium, market equilibrium, bidding mechanism, surplus, shortage, scalping,
Efficiency
productive efficiency, allocative efficiency, marginal social benefits, marginal social costs, "what we get", "what we want", profit maximizing quantity, underallocation of resources, overallocation of resources, consumer surplus, producer surplus, deadweight loss
3c Key Problems |
Click on the links above to learn how to use a supply and demand graph to show why prices and quantities change. The exam 1 extra credit question will be similar to these problems.
Use the four-step process to explain what happens to PRICE (P) and QUANTITY (Q) of the following goods using the information provided in the short news articles below.
Four Step Process1. Which determinant has changed?
2. Will it affect Supply (S) or Demand (D)?
3. Will S or D increase or decrease?
4. GRAPH IT and show what happens to P and Q.Non--Price Determinants of Demand (PPINT)
Pe -- expected price
Pog -- price of other goods (subs and Complw)
I - income (normal and inferior goods)
N -- number of POTENTIAL consumers
T -- tastes and preferencesNon-Price Determinants of Supply (PPPTTN)
Pe -- expected price
Pog -- price of other goods PRODUCED. BY THE SAME FIRM
Pres -- price of resources
T - technology of production
T -- taxes and subsidies
N -- number of sellersProduct: Beef. What happens to P and Q? Circle and label determinants. Show effects on a graph.
http://www.bloomberg.com/news/articles/2014-11-18/us-beef-supply-will-fall-again-in-2015-chicken-demand-will-riseDomestic beef production has been waning [decreasing] for years because of rising feed and energy prices. A drought in 2012 caused feed prices to spike and, in response, farmers thinned their herds.Product: Chicken. What happens to P and Q? Circle and label determinants. Show effects on a graph.
http://www.bloomberg.com/news/articles/2014-11-18/us-beef-supply-will-fall-again-in-2015-chicken-demand-will-riseIt's been an expensive year to eat beef, and 2015 doesn't look any cheaper. . . . Consumers have traded down to less expensive meats such as chicken.Product: Almonds. What happens to P and Q? Circle and label determinants. Show effects on a graph.
http://www.cnbc.com/2016/08/29/california-almond-harvest-may-break-records-despite-drought.htmlWith the drought easing in parts of California, this year's almond harvest is shaping up to be a record haul …. Consumers have already taken an interest in almond products because of their "heart health" benefits.Product: McDonald's meals. What happens to P and Q? Circle and label determinants. Show effects on a graph.
http://www.bloomberg.com/news/articles/2014-10-20/mcdonald-s-costly-burgers-send-diners-to-fancier-rivalsMike Hiner used to take his grandsons to McDonald's when they wanted a treat. With higher wage and food costs pushing up prices at the Golden Arches, he's increasingly taking them to IHOP, Denny's and Chili's instead . . . . The chain's diminishing appeal among budget diners -- coupled with rising meat costs -- are projected to take a bite out of third-quarter earnings due to be reported tomorrow.
3c Web Quiz - Click Here |
3c Key Graphs |
Market Equilibrium
Changes in Demand and Supply and the Effects on Equilibrium P and Q
Market Equilibrium is Efficient
MSB = MSC Model
Maximum Consumer + Producer Surplus Model
3c Review Quiz - Lessons 3a, 3b, and 3c |
3c Review Videos |
- Shifting
Demand and Supply- Econ 2.3
[4:49 YouTube ACDC Leadership]
- Double
Shifts- Econ 2.5 (Technical Tuesday)
[3:26 YouTube ACDC Leadership]
- Micro
4.13 Dead Weight Loss- Key Graphs of
Microeconomics
[4:45 YouTube ACDC Leadership]
- Micro
2.7 Consumer and Producer Surplus and Dead Weight
Loss
[3:42 YouTube ACDC Leadership]
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 MICWEBAPP or the LESSONS link for these assignments.
5a Introduction |
When are product markets not efficient?
1. when there is not competition (monopolies and oligopolies - lessons 10a, 10b, 11a, and 11b)
2. when the government sets the price (price ceilings and price floors - lesson 5a)
3. when the supply curve does not include all of the costs of producing or consuming the product (negative externalities - lesson 5a)
4. when the demand curve does not include all of the benefits of consumption (positive externalities - lesson 5b)
5. when the products are "public goods" (lesson 5b).
6. when there is a Tragedy of the Commons (lesson 5b)
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 lesson 2a. In lesson 2a 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 lessons 5a and 5b. 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 lesson 3c, 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 then 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 in lesson 3c 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 lessons1b 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 lesson 2a. 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 lesson 3c) 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? |
Below are a small sample of the many news articles about these taxes
Why gasoline prices might be too low:
http://www.npr.org/templates/story/story.php?storyId=4858826Soda Is About To Get Pricier For Another 5 Million Americans [Huffington Post, 1/11/2016 03:12 pm ET, Joseph Erbentraut]
http://www.huffingtonpost.com/entry/cook-county-soda-tax_us_58250427e4b0c4b63b0c0fe4Why Mexico taxes junk food and soda:
http://www.politico.com/story/2014/01/mexico-soda-tax-101645Top Economists Back New Carbon Tax Plan, But It Still Wouldn't Be Enough
https://www.huffingtonpost.com/entry/top-economists-back-new-carbon-tax-plan_us_5c40a641e4b0a8dbe16e9075A Tax on Meat?
For Health Reasons
https://www.cbsnews.com/news/is-it-time-to-put-a-tax-on-meat/To Reduce Climate Change
https://thehill.com/opinion/energy-environment/458606-meat-is-taxing-the-planet-so-we-should-tax-meat
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.
5a Assignments: Readings |
pp. 67-70, (19th, 61-64), "Application: Government Set Prices", "Last Word: A Legal Market for Human Organs?"
Audio: http://www.marketplace.org/2013/08/29/fast-food-strike-walk-outs-and-drive-throughs
p. 84, (19th, 93), "Market Failures in Competitive Markets"
pp. 96-103,(19th, 104-111), "Externalities", "Society's Optimal Amount of Externality Reduction", "Consider This: The Fable of the Bees", "Last Word: Carbon Dioxide Emmissions, Cap and Trade, and Carbon Taxes"
Read: http://economics.about.com/od/externalities/ss/A-Negative-Externality-on-Production.htm
Read: https://www.yaleclimateconnections.org/2017/10/mexico-launches-a-carbon-market/
Read: Top Economists Back New Carbon Tax Plan, But It Still Wouldn't Be Enough
5a Assignments: Video Lectures |
2.5.1 Understanding How Price Controls Damage Markets 9:38 [MyNotes]2.5.2 Understanding the Problem of Minimum Wages in Labor Markets 14:47 [MyNotes]
Determining the Effects of Price Ceilings and Price Floors (econclassroom.com 12:04)
MARKET FAILURE:NEGATIVE EXTERNALITIES
EconMovies 7: Anchorman (Efficiency and Market Failures)8.4.1 Defining Externalities 5:46 [MyNotes]
8.4.2 Explaining How to Internalize External Costs (Negative Externalities) 11:58 [MyNotes]
8.5.1 Finding a Market Solution to External Costs 12:21 [MyNotes]
Negative Externalities of Production (econclassroom.com 13:02)
8.5.2 Finding a Negotiated Settlement to an External Cost -- the Coase Theorem 12:45 [MyNotes]
8.5.3 Applying the Coase Theorem 7:02 [ [MyNotes]
5a Outcomes - What you should learn |
OUTCOMES
Price ceilings and floors
Market Failure: negative externalities (also called external costs or spillover costs)
5a Key Terms |
Key Terms:
price ceiling, rent controls, price floor, market failure, externality, negative externality (external cost, spillover cost), internalizing the externality, excise tax, incidence of a tax, cap and trade, Coase Theorem
5a Key Problem |
Negative Externalities - Click Here
Click on the link above to learn how to use a supply and demand graph to show the economic effect of negative externalities.
5a Web Quiz - Click Here |
5a Key Graphs |
Price Ceiling (causes a shortage)
Price Floor (causes a surplus)
Negative Externality
Negative Externality and Taxes
5a Review Videos |
[4:34 YouTube ACDC Leadership]
- Pollution,
the Government, and MSB=MSC- Microeconomics
6.2
[3:25 YouTube ACDC Leadership]
- Micro
6.3 Negative Externalities: Econ Concepts in 60
Seconds-Externality
[2:31 YouTube ACDC Leadership]
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 MICWEBAPP or the LESSONS link for these assignments.
5b Introduction |
We have learned in lessons 2a and 3c that competitive markets are usually efficient. This is one of the benefits of a market economy or capitalism. But sometimes markets fail to 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 three other market failures, positive externalities, public goods, and the tragedy of the commons. With the first two the market produces too little (an underallocation of resources) because the demand curve for the product does not include all of the benefits. The goal of government then is to increase production. With the tragedy of the commons the market produces too much and the goal of government is to reduce production.
Be careful. Remember, economists often change the definitions of words. When we discuss "public goods" we do NOT mean public schools, public parks, or public libraries. They are NOT public goods according to our definition.
In later lessons (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.
When do product markets fail to be allocatively efficient?
1. when there is not competition (monopolies and oligopolies - lessons 10a, 10b, 11a, and 11b)
2. when the government sets the price (price ceilings and price floors - lesson 5a)
3. when the supply curve does not include all of the costs of producing or consuming the product (negative externalities - lesson 5a)
4. when the demand curve does not include all of the benefits of consumption (positive externalities - lesson 5b)
5. when the products are "public goods" (lesson 5b).
6. when there is a Tragedy of the Commons (lesson 5b)
5b Something Interesting - Why are we studying this? |
We have learned that competitve markets achieve efficiency, both allocative and productive. And we learned that competitive markets have a limited role for government. So why does the government do schools, libraries, and 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 than 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?
5b Assignments: Readings |
p. 84, (19th, 93), "Market Failures in Competitive Markets"
pp. 90-100, (19th, 99-110), "Public Goods", "Externalities"
p. 400, "Consider This: The Tragedy of the Commons"
5b Assignments: Video Lectures |
MARKET FAILURE: POSITIVE EXTERNALITIES
8.4.3 Explaining How to Internalize External Benefits (Positive Externalities (5:34) [MyNotes]Market Failure - Positive Externalities of Consumption (econclassroom.com 10:51)
MARKET FAILURE: PUBLIC GOODS
8.2.1 Defining Public Goods 13:32 [MyNotes]
TRAGEDY OF THE COMMONS
The Tragedy of the Commons as a Market Failure (econclassroom.com 14:29) [MyNotes]Tragedy of the Commons (YouTube - LearnLiberty - 3:19)
5b Outcomes - What you should learn |
OUTCOMES
Market Failure: positive externalities (also called external benefits or spillover benefits)
Market Failure: Public Goods
Market Failure: Tragedy of the Commons
5b Key Terms |
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, benefit-cost analysis (marginal-cost-marginal-benefit rule), tragedy of the commons, common access resources
5b Key Problem |
Click on the link above to learn how to do this problem.
5b Web Quiz - Click Here |
5b Key Graphs |
Positive Externalities (underallocationn of resources)
Positive Externalities and the Role of Government: Increase Demand
Positive Externalities and the Role of Government: Increase Supply
5b Review Quiz - Lessons 5a and 5b |
5b Review Videos |
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 MICWEBAPP or the LESSONS link for these assignments.
4a Introduction |
We learned in lesson 3a that when the price of pizza goes up the quantity demanded goes down. (What happens to demand when price goes up? . . . . 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 lesson 3a. What we are going to learn in lesson 4a 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:
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.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.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.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.
Lesson 3a - law of demand:
if the P
Lesson 4a - price elasticity of demand:
if the Por Qd
?
if price changes, HOW MUCH will the Qd change? A little or a lot?
In lesson 3a we learned the direction of the arrows (up or down). In lesson 4a we learn the size of the arrows (big or small).
4a Something Interesting - Why are we studying this? |
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:
Sept. 2012: Despite Record Drought, Farmers Expect Banner YearSept. 2014: Corn, soybean crop expected to hit record high -- Great season could mean bad prices for farmers ("This year, farming income is expected to drop by 14 percent.")
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.
4a Assignments: Readings |
pp. 134-143, (19th, 75-84), "Price Elasticity of Demand'
pp. 146-147, (19th, 86-87), "Last Word - Elasticity and Pricing Power: Why Different Customers Pay Different Prices"
pp. 416-419, (19th, 347-354), "Tax Incidence and Efficiency Loss"
4a Assignments: Video Lectures |
2.4.2 Calculating Elasticity 11:43 [MyNotes]
2.4.3 Applying the Concept of Elasticity 8:42 [MyNotes]
2.4.4 Identifying the Determinants of Elasticity 6:50 [MyNotes]
2.4.5 Understanding the Relationship between Total Revenue and Elasticity 8:09 [MyNotes]
Examining the Effect of an Excise Tax on an Inelastic Good -- Cigarettes (econclassroom.com) 12:41
Examining the Effect of an Excise Tax on an Elastic Good -- Candy Bars (econclassroom.com) 8:08
OPTIONAL: Calculating and Interpreting Price Elasticity of Demand (econclassroom.com ) 11:46
OPTIONAL: Price Elasticity of Demand and the Total Revenue Test (econclassroom.com) 13:24
4a Outcomes - What you should learn |
OUTCOMES
4a Determinants of Price Elasticity of Demand and Supply |
Number of Substitutes
Many
Few
Luxury or Necessity
Luxary
Necessity
Price of the product as a percent of sonsumer income
Price is a large percent of consumer income
price is a small percent of consumer income
Time
Long time betweenprice and when we measure quantity
Short time between
DETERMINANTS OF PRICE ELASTICITY OF SUPPLY
Time
More time for producers to respond to the
Less time for producers to respond to the
Ease of Storage
Easy and cheap to store the product
Difficult and expensive to store the product
Available Excess Capacity
A lot of extra room in the factory
Little extra room in the factory
Characteristics of the Production Process
Easy to expand capacity
Difficult to expand capacity
4a Key Terms |
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
4a Key Problems |
Calculate Ed using the Midpoints Formula and Interpret the Results - Click Here
Elasticity and Total Revenue (TR) - Click Here
Elasticity and the Incidence of Excise Taxes - Click Here
Click on the links above to learn how to do these problems:
CALCULATE Ed USING MIDPOINTS FORMULA
Calculate the price elasticity of demand between a price of $2.40 and a price of $2.30 using the midpoints formula and interpret the coeficient.
PRICE ELASTICITY OF DEMAND AND TOTAL REVENUE
MULTIPLE CHOICE: Suppose that this total revenue curve (see graph above) is derived from a particular linear demand curve (see graph above). This demand curve must be:
A. inelastic for price declines that increase quantity demanded from 6 units to 7 units.
B. elastic for price declines that increase quantity demanded from 6 units to 7 units.
C. inelastic for price declines that increase quantity demanded from 4 units to 3 units.
D. elastic for price increases that reduce quantity demanded from 8 units to 7 units.
ELASTICITY AND INCIDENCE OF EXCISE TAXES
See the graphs above. Compare the following when demand is more elastic (like in Richmond, IL on the Wisconsin border), and less elastic (like in Bloomington IL in the center of the state):
(1) incidence of the excise tax
(2) effect on allocative efficiency
(3) effect on government revenue
4a Web Quiz - Click Here |
4a Key Formulas |
total revenue
TR = P x Q
4a Key Graphs |
Price Elasticity of Demand
Total Revenue and Price Elasticity of Demand
If the price decreases from $80 to $70 and
Total Revenue increases from $2400 to $2800,
then demand is price elastic.
4a Review Videos |
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 MICWEBAPP or the LESSONS link for these assignments.
4b Introduction |
Demand - Lesson 3a:
If price increases what happens to the quantity demanded?Supply - Lesson 3b:
If price increases what happens to the quantity supplied?Price elasticity of demand - Lesson 4a
If price increases HOW MUCH does the quantity demanded decrease?Price elasticity of supply - Lesson 4b:
If price increases HOW MUCH does the quantity supplied increase?
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 does 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? |
The business term for this is "loss leader". A business will sell one item at a loss to "lead" people into their store who will buy lots of other related (complementary) items.
Before Thanksgiving in November the demand for turkeys goes up so we would expect the price of turkeys to go up, but if you have ever shopped for your Thanksgiving turkey you found that they are usually on sale at low prices! Why?
The turkey is a loss leader. Selling turkeys at
a low price will bring more customers into the store who will buy
lots of other complementary items. This is because there is a high
and negative CROSS ELASTICITY OF DEMAND between turkeys and all
the other food we put on the Thanksgiving table.
4b Assignments: Readings |
pp. 143- 149, (19th, 84-89), "Price Elasticity of Supply", "Cross and Income Elasticity of Demand"
4b Assignments: Video Lectures |
Elasticity of Supply (Khan Academy 9:33)OPTIONAL http://www.youtube.com/watch?v=nyKmrDYrkQ4 (YouTube TheWyvern66 9:48)
CROSS ELASTICITY OF DEMAND
Cross Elasticity of Demand (Khan Academy 11:20)
INCOME ELASTICITY OF DEMAND
Income Elasticity of Demand (YouTube Gale Pooley 3:14)
4b Outcomes - What you should learn |
Cross Elasticity of Demand
Income Elasticity of Demand
4b Determinants of Price Elasticity of Demand and Supply |
Number of Substitutes
Many
Few
Luxury or Necessity
Luxary
Necessity
Price of the product as a percent of sonsumer income
Price is a large percent of consumer income
price is a small percent of consumer income
Time
Long time between
Short time between
DETERMINANTS OF PRICE ELASTICITY OF SUPPLY
Time
More time for producers to respond to the
Less time for producers to respond to the
Ease of Storage
Easy and cheap to store the product
Difficult and expensive to store the product
Available Excess Capacity
A lot of extra room in the factory
Little extra room in the factory
Characteristics of the Production Process
Easy to expand capacity
Difficult to expand capacity
4b Key Terms |
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, normal good, inferior good
4b Key Problems |
Click on the links above to watch these Key Problems:
INCOME ELASTICITY OF DEMAND - MULTIPLE CHOICE
1. Income elasticity of demand measures how sensitive purchases of a specific product are to changes in:
A. the price of some other product.
B. the price of that same product.
C. income.
D. the general price level.
2. The formula for income elasticity of demand is percentage change in:
A. quantity demanded of X / percentage change in price of X.
B. quantity demanded of X / percentage change in income.
C. quantity demanded of X / percentage change in price of Y.
D. price of X / percentage change in quantity demanded of Y.
3. Which type of goods are most affected by recessions (by a decrease in income)?
A. Goods for which the income elasticity coefficient is relatively low.
B. Goods for which the income elasticity coefficient is relatively high.
C. Goods for which the cross elasticity coefficient is positive.
D. Goods for which the cross elasticity coefficient is negative.
4. Suppose the income elasticity of demand for boats is +2.0. This means that:
A. a 10 percent increase in income will increase the purchase of boats by 20 percent.
B. a 10 percent increase in income will decrease the purchase of boats by 20 percent.
C. a 10 percent increase in income will increase the purchase of boats by 2 percent.
D. a 10 percent increase in income will increase the purchase of boats by 2 percent.
5. Suppose the income elasticity of demand for ramen noodles is -2.0. This means that:
A. a 10 percent increase in income will increase the purchase of ramen noodles by 20 percent.
B. a 10 percent increase in income will decrease the purchase of ramen noodles by 20 percent.
C. a 10 percent increase in income will increase the purchase of ramen noodles by 2 percent.
D. a 10 percent increase in income will increase the purchase of ramen noodles by 2 percent.
6. Suppose the income elasticity of demand for electricity is +0.5. This means that:
A. a 10 percent increase in income will increase the purchase of electricity by 50 percent.
B. a 10 percent increase in income will decrease the purchase of electricity by 50 percent.
C. a 10 percent increase in income will increase the purchase of electricity by 5 percent.
D. a 10 percent increase in income will increase the purchase of electricity by 5 percent.
7. income elasticity can be used to tell if a product is a normal good or inferior good. Which income elasticity coefficient below indicates that the product is an inferior good?
A. Edy = +2.0
B. Edy = -2.0
C. Edy = +0.5.
D. Edy = 1.
8. income elasticity can be used to tell if a product is a luxury or a necessity. Which income elasticity coefficient below indicates that the product is a necessity?
A. Edy = +2.0
B. Edy = -2.0
C. Edy = +0.5.
D. Edy = -0.5.
CROSS ELASTICITY OF DEMAND - MULTIPLE CHOICE
1. Cross elasticity of demand measures how sensitive purchases of a specific product are to changes in:
A. the price of some other product.
B. the price of that same product.
C. income.
D. the general price level.
2. The formula for cross elasticity of demand is percentage change in:
A. quantity of X / percentage change in price of X.
B. quantity of X / percentage change in income.
C. quantity of X / percentage change in price of Y.
D. price of X / percentage change in quantity demanded of Y.
3. We would expect the cross elasticity of demand between Pepsi and Coke to be:
A. negative and therefore these goods are substitutes.
B. negative and therefore these goods are complements.
C. positive and therefore these goods are substitutes.
D. positive and therefore these goods are complements.
4. Suppose that a 20 percent increase in the price of good Y causes a 10 percent decline in the quantity demanded of good X. The coefficient of cross elasticity of demand is:
A. Negative (complements) and cross elastic.
B. Negative (complements) and cross inelastic.
C. positive (substitutes) and cross elastic.
D. positive (substitutes) and cross inelastic.
5. Suppose the cross elasticity of demand for Mobil gasoline and BP gasoline is +2.0. This means that:
A. a 10 percent increase in price of Mobil gasoline will increase the purchase of BP gasoline by 20 percent.
B a 10 percent increase in price of Mobil gasoline will decrease the purchase of BP gasoline by 20 percent.
C. a 10 percent increase in price of Mobil gasoline will increase the purchase of BP gasoline by 2 percent.
D. a 10 percent increase in price of Mobil gasoline will decrease the purchase of BP gasoline by 2 percent.
6. Suppose the cross elasticity of demand for movie tickets and movie popcorn is -2.0. This means that:
A. a 10 percent increase in price of movie tickets will increase the purchase of movie popcorn by 20 percent.
B. a 10 percent increase in price of movie tickets will decrease the purchase of movie popcorn by 20 percent.
C. a 10 percent increase in price of movie tickets will increase the purchase of movie popcorn by 2 percent.
D. a 10 percent increase in price of movie tickets will decrease the purchase of movie popcorn by 2 percent.
7. Suppose the cross elasticity of demand for butter and margarine is +0.5. This means that:
A. a 10 percent increase in the price of butter will increase the quantity of margarine by 50 percent.
B. a 10 percent increase in the price of butter will decrease the quantity of margarine by 50 percent.
C. a 10 percent increase in the price of butter will increase the quantity of margarine by 5 percent.
D. a 10 percent increase in the price of butter will decrease the quantity of margarine by 5 percent.
8. Cross elasticity can be used to tell if two products are substitutes or complements. Which cross elasticity coefficient below indicates that the products are complements?
A. Eab = +2.0
B. Eab = -2.0
C. Eab = +0.5.
D. Eab = 1.
4b Web Quiz - Click Here |
4b Key Formulas |
cross elasticity of demand
income elasticity of demand
4b Key Graphs |
Perfectly Elastic and Inelastic Supply
4b Review Quiz - Lessons 4a and 4b |
4b Review Videos |
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 MICWEBAPP or the LESSONS link for these assignments.
6a Introduction |
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,
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 that the:
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? |
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".
6a Assignments: Readings |
pp. 152-162, (19th, 116-125), " Law of Diminishing Marginal Utility", "Theory of Consumer Behavior", "Utility Maximization and the Demand Curve", "Income and Substitution Effects", "Applications and Extensions"
6a Assignments: Video Lectures |
Plotting MU at the Midpoint (4:50)
3.1.2 Finding Consumer Equilibrium - The Utility Maximizing Quantities to Buy 4:47 [MyNotes]
Professor Harmon Calculates the Utility Maximizing Bundle in 5 mins (YouTube - 02001orh) 4:58
6a Outcomes - What you should learn |
OUTCOMES
6a Key Terms |
Key Terms:
utility, total utility (TU), marginal utility (MU), law of diminishing marginal utility, rational behavior, benefit-cost analysis, budget constraint, utility-maximizing rule, marginal utility per dollar (MU/P), "util", income effect, substitution effect, diamond-water paradox
6a Key Problems |
How to plot MU at the midpoint - Click Here
How to find the Utility Maximizing Quantities to Buy - Click Here
Click on the links above to learn how to do these problems:
HOW TO PLOT MARGINAL UTILITY (MU) AT THE MIDPOINT
HOW TO FIND THE UTILITY MAXIMIZING QUANTITIES TO BUY
Use the data below to calculate the utility maximizing quantities to buy (What quantities would a rational consumer buy?) AND what is the maximum total utility (TU) possible?
Assume the price of X is $2 and the price of Y is $4. The consumer has $20 of income to spend.
6a Web Quiz - Click Here |
6a Key Formulas |
MU =TU /
benefit-cost analysis
MB = MC
utility-maximizing rule
MUa/Pa = MUb/Pb = MUc/Pc = . . .
6a 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).
6a Review Quiz |
6a Review Videos |
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 MICWEBAPP or the LESSONS link for these assignments.
7a Introduction |
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 lessons 8/9, 10, and 11.
In lessons 7a, 7b, and 7c we begin by looking at the MC. Then in lessons 8/9, 10, and 11 we add the MR.
In lessons 7a, 7b, and 7c 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 of graphs. 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.)
7a Something Interesting - Why are we studying this? |
What happens to your 3.0 GPA if you get straight C's this semester? (What happens to your grade point AVERAGE, 3.0 if your MARGINAL grade point, 2.0, is lower?)
What happens to your 3.0 GPA if you get straight A's (4.0) 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 graphs: DEFINE, DRAW, DESCRIBE the shape.
7a Assignments: Readings |
pp. 196-202, (19th, 140-147), "Economic Costs", "Short-Run Production Relationships"
7a Assignments: Video Lectures |
5.1.4 Finding Economic and Accounting Profit 13:54 [MyNotes]
PRODUCTION IN THE SHORT RUN
4.1.1 Understanding Output, Inputs, and the Short Run 8:48 [MyNotes]4.1.2 Explaining the Total Product Curve 15:57 [MyNotes]
4.1.3 Drawing Marginal Product Curves 7:22 [MyNotes]
How to Plot MP at the Midpoint 6:54
4.1.4 Understanding Average Product 10:32 [MyNotes]
7a Outcomes - What you should learn |
OUTCOMES
7a Key Terms |
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
7a Key Problem |
How to plot MP at the midpoint - Click Here
Calculate, Plot, and Describe TP, MP, AP
Click on the links above to learn how to do this problem:
HOW TO PLOT MARGINAL VALUES AT THE MIDPOINT
CALCULATE, PLOT, and DESCRIBE TP, MP, AP
Use the data below to:
Graph the quantity produced (total product,
TP)
Calculate and graph marginal product (MP) at the midpoints.
Calculate and graph average product (AP).
Describe (explain) the shape of the TP and MP graphs.
Describe (explain) the shape of the AP and MP graphs.
7a Web Quiz - Click Here |
7a Key Formulas |
accounting profitacct. profit = total revenues - explicit costs
economic profit
econ. profit = total revenue - (expicit costs + implicit costs)
marginal product (MP)
MP =
average product (AP)
AP = TP / Qres
7a 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 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.
7a Review Videos |
- Diminishing
Marginal Returns- Micro 3.1
[5:53 YouTube ACDC Leadership]
- Micro 3.1 The Law of Diminishing Marginal Returns - Econ Concepts in 60 Seconds (YouTube, ACDC Leadership 5:30)
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 MICWEBAPP or the LESSONS link for these assignments.
7b 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 lessons 8/9, 10, and 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). |
7b Assignments: Readings |
pp. 202-209, (19th, 147-152), "Short-Run Production Costs"
7b Assignments: Video Lectures |
4.2.1 Defining Variable Costs 4:23 [ [MyNotes]
4.2.2 Graphing Variable Costs 4:57 [MyNotes]
4.2.3 OPTIONAL: Graphing Variable Costs Using a Geometric Trick 5:04
4.3.1 Defining Marginal Costs 6:41 [MyNotes]
4.3.2 Deriving the Marginal Cost Curve 10:59 [MyNotes]
4.3.3 Understanding the Mathematical Relationship between Marginal Cost and Marginal Product 10:26 [MyNotes]
4.4.1 Defining Average Variable Costs 5:39 [MyNotes]
4.4.2 OPTIONAL: Understanding the Relationship between Average Variable Costs and Average Product 6:06 [MyNotes]
4.4.3 Understanding the Relationship between Marginal Cost and Average Variable Cost 7:54 [MyNotes]
4.5.1 Defining and Graphing Average Fixed Cost and Average Total Cost 6:55 [MyNotes]
4.5.2 Calculating Average Total Cost 4:50 [MyNotes]
4.5.3 Putting the Cost Curves Together 10:09 [MyNotes]
4.6.4 Shifts in the Cost Curves 4:49 [MyNotes]
7b Outcomes - What you should learn |
OUTCOMES:
7b Key Terms |
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)
7b Key Problems |
Graph TC, TVC, TFC and ATC, AVC, MC (YP 40)
On a Graph with Numbers find TC, TVC, TFC, ATC, AVC, AFC, MC (YP 38-39)
On a Graph with Letters (geometry) find TC, TVC, TFC, ATC, AVC, AFC, MC (YP 44)
How to find TVC on a graph with letters given AVC - Click Here
On a Graph with Numbers find TC, TVC, TFC, ATC, AVC, AFC, MC
On a Graph with Letters (geometry) find TC, TVC, TFC, ATC, AVC, AFC, MC
How to find TVC on a graph with letters given AVC
Use the figure below. If output equals 0n, what are the total variable costs (TVC)?
7b Web Quiz - Click Here |
7b Key Formulas |
AVC = TVC / Q
ATC = TC / Q
AFC + AVC = ATC
TFC + TVC = TC
MC = TC
/
Q
7b 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), and Marginal Cost (MC)NOTICE: MC crosses ATC and AVC at their lowest points
Which graph below is drawn correctly?
Which colored rectangle below is largest (assume the ATC and AVC curves are identical)?
7b Review Videos |
- Costs of Production- Microeconomics 3.3 (Part 1) [5:16 YouTube ACDC Leadership]
- Cost Curves- Microeconomics 3.3 (Part 2) [3:13 YouTube ACDC Leadership]
- Marginal Cost and Average Total Cost- Micro 3.4 [3:16 YouTube ACDC Leadership]
- Micro 3.5 AP Economics Marginal Product and Marginal Cost: Econ Concepts in 60 Seconds Review [4:54 YouTube ACDC Leadership]
- Marginal Cost and ATC - Why do cost curves do that? [YouTube, ACDC Leadership, 3:16]
- How to find TVC on a graph with letters [Screencast by your instructor]
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 MICWEBAPP or the LESSONS link for these assignments.
7c Introduction |
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? |
ANSWER: The answer has to do with the different shapes of the long run ATC curve for retail stores and for automobile production.
7c Assignments: Readings |
pp. 209-216, (19th, 152-162 ), "Long-Run Production Costs", "Applications and Illustrations"
7c Assignments: Video Lectures |
4.6.2 Determining the Firm's Return to Scale 9:01 [MyNotes]
4.6.3 Understanding the Short Run and Long Run Average Cost Curves 15:06 [MyNotes]
7c Outcomes - What you should learn |
OUTCOMES:
7c Key Terms |
Key Terms:
short run, long run, economies of scale, diseconomies of scale, constant returns to scale, minimum efficient scale, natural monopoly
7c New Video Lectures (due to the Coronavirus restrictions) CLICK HERE |
7c Web Quiz - Click Here |
7c Key Graphs |
7c Review Quiz - Lessons 7a, 7b, and 7c |
7c Review Videos |
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 MICWEBAPP or the LESSONS link for these assignments.
8/9a Introduction |
In lessons 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 (lesson 3c). We also know that for competitive markets this will be the efficient quantity (except in a few situations where the market fails - lessons 5a and 5b).
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 exactly 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.
We will begin by looking at competitive markets in lessons 8/9a and 8/9b. 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.
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 lessons 10a, 10b, 11a, 11b 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 (lessons 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 "8/9a QUIZ - 4 PRODUCT MARKETS" 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 last 13 pages of the Unit 3 Yellow Pages ("3 Rules and 4 Models").
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? |
Click on the link below and read the answer to these questions.
- Why must MC=MR to achieve the maximum profit or to have the lowest loss?- Why must Marginal Cost be equal to Marginal Revenue? Won't that earn nothing?
Yahoo!
Answers: Profit Maximizing Question - MC=MR?
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.
8/9a Assignments: Readings |
pp. 220-238, ALL, (19th, Ch. 8, ALL),"Pure Competition in the Short Run"
PRACTICE QUIZ - 8/9a - on Blackboard
8/9a Assignments: Video Lectures |
5.1.3 Understanding Market Structure 10:55 [MyNotes]
WHAT IS A PERFECTLY COMPETITIVE MARKET? (PURE COMPETITION)
5.1.2 Understanding the Role of Price 3:43 [MyNotes]5.1.1 Calculating Total Revenue 3:36 MyNotes]
PURE COMPETITION - SHORT RUN PROFIT MAXIMIZATION
5.2.1 Finding the Firm's Profit Maximizing Output Level 14:24 [MyNotes]5.2.2 Proving the Profit Maximizing Rule 4:20 [MyNotes]
5.2.3 Calculating Profit 12:26 [MyNotes]
5.2.4 Calculating Loss 9:13 [MyNotes]
5.2.5 Finding the Firm's Shut-Down Point 8:35 [MyNotes]
PURE COMPETITION - SHORT AND LONG RUN MARKET SUPPLY
5.3.1 Deriving the Short-Run Market Supply 20:44 [MyNotes]
8/9a Outcomes - What you should learn |
OUTCOMES
8/9a Key Terms |
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
8/9a New Video Lectures (due to the Coronavirus restrictions) - Click Here |
8/9a Key Problems |
Finding the profit maximizing quantity on a table - 1 - Click Here
Finding
the profit maximizing quantity on a table - 2 - Click
Here
[works for me if I save the file to my computer first, then open
it[
Finding the profit maximizing quantity on a graph with numbers - Click Here
Finding the profit maximizing quantity on a table - 1
1. MULTIPLE CHOICE: Refer to the above data. If the market price for the firm's product is $12, the competitive firm will produce:
A. 4 units at a loss of $109
B. 4 units at an economic profit of $31.75
C. 8 units at a loss of $48.80
D. zero units at a loss of $100
Finding the profit maximizing quantity on a table - 2
Answer this question on the basis of the following cost data for a purely competitive seller.
MULTIPLE CHOICE: Refer to the above data. If the product price is $45, the firm will:
A. shut down
B. produce 4 units and realize and $120 economic profit
C. produce 5 units and realize and $15 economic profit
D. produce 6 units and realize and $100 economic profit
Finding the profit maximizing quantity on a graph with numbers
MULTIPLE CHOICE: What is the profit maximizing level of output?
A. 15
B. 31
C. 28
D. 20
8/9a Web Quiz - Click Here |
8/9a Key Formulas |
Profit = TR - TC
TR = P X Q = AR x Q
AR = TR / Q = P = Average Revenue
MR = TR
/ Q
Profit Maximization Rule: MR=MC
8/9a Key Graphs |
Pure Competition: The Demand Curve
Pure Competition: Short Run Earning Profits
Pure Competition: Short Run Earning Losses
Pure Competition: Short Run Shut Down
8/9a Review Videos |
[4:49 YouTube ACDC Leadership]
- Micro
3.7 The Shut Down Rule- ACDC Econ
[2:20 YouTube ACDC Leadership]
- Finding the profit maximizing quantity on a table
- Finding the profit maximizing quantity on a graph with numbers
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 MICWEBAPP or the LESSONS link for these assignments.
8/9b Introduction |
Again, we return to the central issue of economics: reducing scarcity (the 5Es). In lessons 8/9, 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 lesson 1d we learned about benefit-cost analysis (marginal analysis). From lessons 3 and 5 we know that we find the allocatively efficient quantity where MSB = MSC and where consumer plus producer surplus are maximized. In lesson 4b we learned the definitions of short run and long run.
In lesson 2a we learned that competitive markets are efficient.
In lessons 5a and 5b we learned that sometimes markets fail to achieve efficiency. One of the market failures occurs when the markets are not competitive. We will explore imperfectly competitive markets in lessons 10a, 10b, 11a, and 11b.
In lesson 8/9a 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; where MC = ATC). Be sure to see the last 13 pages of the Unit 3 Yellow Pages ("3 Rules and 4 Models").
In lessons 8/9, 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 this lesson (8/9b) we again learn that competitive markets achieve allocative and productive efficiency. Finally in this lesson, 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? |
- WATCH: Micro 3.10 Perfect Competition in the Long Run- AP Micro (ACDC 2:04)- ANSWER: because there are no barriers to entry
Why are zero economic profits good (or at least OK)?
- WATCH: Economic Profit and Costs- ACDC Econ - Micro 3.6 (3:47)- ANSWER: because economists include implicit costs when they calculate total costs (i.e. you pay yourself as much as you could have made in your next best opportunity).
8/9b Assignments: Readings |
239-253, (19th, Ch. 9, ALL), "Pure Competition in the Long Run"
Advantages and Disadvantages of Perfect Competition (Efficiency of Pure Comp.)
8/9b Assignments: Video Lectures |
Allocative and Productive Efficiency in Pure Competition (econclassroom.com 19:35)
5.3.4 Deriving the Long-Run Market Supply Curve 9:13 [MyNotes]
8/9b Outcomes - What you should learn |
OUTCOMES
8/9b Key Terms |
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, X-efficiency, normal profit
8/9b New Video Lectures (due to the Coronavirus restrictions) Click Here |
8/9b Key Problem |
Pure Competiton - Long Run Equilibrium and Efficiency - Click Here
Explain why Purely Competitive firms earn zero economic profits in the long runDraw the long run equilibrium graph for Pure Competition
Explain why Purely Competitive firms are efficient in the long run and show the following on the graph:
- the profit maximizing quantity
- the allocatively efficient quantity
- the productively efficient quantity
8/9b Web Quiz - Click Here |
8/9b Key Formulas |
How to find the allocatively efficient
quantity:
P = MC
How to find the productively efficient
quantity:
MC = ATC or minimum ATC
8/9b Key Graphs |
Pure Competition: Long Run Equilibrium
- Q is the profit maximizing Quantity (MR=MC); What We Get
- Q is also the allocatively efficient quantity (P=MC); What We Want
- Q is also the prodictively efficient quantity (MC=ATC); Producing at a Minimum Cost
8/9b Review Quiz - Lessons 8/9a and 8/9b |
8/9b Review Videos |
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 MICWEBAPP or the LESSONS link for these assignments.
10a Introduction |
We learned in lesson 2a that competitive markets are efficient (except when there are externalities or public goods). But what happens if markets are NOT competitive? We said that competition is the "invisible hand" that forces businesses to be efficient. 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; quantity where MR=MC) will not be the same as the allocatively efficient quantity that society wants (WHAT WE WANT; quantity where P=MC).
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 (lessons 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 "8/9a QUIZ - 4 PRODUCT MARKETS" 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 last 13 pages of the Unit 3 Yellow Pages ("3 Rules and 4 Models").
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? |
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."
10a Assignments: Readings |
Ch 12, pp. 254-263, (19th, 194-203), "An introduction to Pure Monopoly", "Barriers to Entry", "Monopoly Demand", "Output and Price Determination"
10a Assignments: Video Lectures |
6.1.1 Defining Monopoly (Market) Power 10:10 [MyNotes]6.1.2 Defining Marginal Revenue for a Firm with Market Power 12:43 [MyNotes]
PROFIT MAXIMIZATION FOR A MONOPOLY
6.1.3 Determining the Monopolist's Profit Maximizing Output and Price 14:18 [MyNotes]6.1.4 Calculating a Monopolist's Profit and Loss 6:24 [MyNotes]
OPTIONAL
Introduction to Pure Monopoly (econclassroom) 14:11Profit Maximization, Revenue Maximization and PED in Pure Monopoly (econclassroom) 17:11
10a Outcomes - What you should learn |
OUTCOMES
10a Key Terms |
Key Terms:
pure monopoly, barriers to entry, economies of scale, patent, natural monopoly, price maker
10a New Video Lectures (due to the Coronavirus restrictions) |
10a Key Problems |
How to find monopoly quantity, price, and profits on a graph
How
to find monopoly quantity, price and profits on a
table
[works for me if I save the file to my computer, then open
it]
Click on the links above to learn how to do these problems.
How to find monopoly quantity, price, and profits on a graph
MULTIPLE CHOICE: Use the graph above. The maximum profits for this monopolist can be represented by which area on the graph?
1. 0KBD
2. 0HCX
3. HKBN
4. 0HNV
MULTIPLE CHOICE: Use the graph above. What are the profits earned by this monopolist at the profit maximizing level of output?
1. $ 2275
2. $ 1750
3. $ 4275
4. $ 525
Find the profit maximizing quantity, price, and profits, using the table of data below.
Demand Data
Price
$5.50
5.00
4.50
3.85
3.35
2.90
2.50
10a Web Quiz - Click Here |
10a Key Graphs |
Monopoly: Short Run Earning Profits
Monopoly: Short Run Earning Losses
Monopoly: Short Run Shut Down
10a Review Videos |
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 MICWEBAPP or the LESSONS link for these assignments.
10b Introduction |
In lesson 8/9b 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 to 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 that we want. Are monopolies efficient? Are businesses efficient?
In lesson 8/9b 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 (lesson 3b). 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 PRICE 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 monopolies are inefficient, the government usually prevents them from forming (anti-trust laws). 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 monopoly to exist and will regulate its price.
10b Something Interesting - Why are we studying this? |
- 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 a 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 goverment regulates the price.
10b Assignments: Readings |
pp. 263-273, (19th, 203-214), "Economic Effects of Monopoly", "Price Discrimination", "Regulated Monopoly"
pp. 431-438, (19th, 376-384), "Antitrust Policy: Issues and Impacts", "Industrial Regulation"
pp. 146-147, (19th, 86-87), "Last Word - Elasticity and Pricing Power: Why Different Consumers Pay Different Prices"
10b Assignments: Video Lectures |
6.2.1 Determining the Social Cost of Monopoly 12:22 [MyNotes]6.2.2 Calculating Deadweight Loss 15:23 [MyNotes]
PRICE DISCRIMINATION
Price Discrimination and its Effects on Efficiency in a Monopolistic Market (econclassroom.com) 14:51
REGULATING NATURAL MONOPOLIES
Natural Monopoly and the Need for Government Regulation (econclassroom.com) 14:14
10b Outcomes - What you should learn |
OUTCOMES
10b Key Terms |
Key Terms:
allocative inefficiency, productive inefficiency, deadweight loss, economies of scale, natural monopoly, X-inefficiency, dynamic efficiency, 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)
10b New Video Lectures (due to the Coronavirus restrictions) |
10b Key Problems |
Monopoly - Long Run Equilibrium and Efficiency - Click Here
Price
Discrimination - How to find the profit maximizing quantity on a
table - Click Here
[works for me if I save the file to my computer first, then open
it]
Monopoly - Long Run Equilibrium and Efficiency
Explain why Monopolies earn economic profits in the long runDraw the long run equilibrium graph for a Monopoly
Explain why Monopolies are inefficient in the long run and show the following on the graph:
- the profit maximizing quantity
- the allocatively efficient quantity
- the productively efficient quantity
Price Discrimination - How to find the profit maximizing quantity on a table
MULTIPLE CHOICE:
10. Refer to the above data for a nondiscriminating monopolist. This firm will maximize its profit by producing what quantity?
A. 3 units
B. 4 units
C. 5 units
D. 6 units
11. If the above data was for a PERFECTLY PRICE DISCRIMINATING MONOPOLIST it would maximize its profit by producing what quantity?
A. 3 units
B. 4 units
C. 5 units
D. 6 units
12. If the above data was for a PERFECTLY PRICE DISCRIMINATING MONOPOLIST what would its total revenue be at the profit maximizing quantity?
A. $ 60
B. $ 300
C. $ 400
D. zero
13. If the above data was for a PERFECTLY PRICE DISCRIMINATING MONOPOLIST what would its profit be at the profit maximizing quantity?
A. zero
B. $ 152
C. $ 248
D. $ 400
10b Web Quiz - Click Here |
10b 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 profit 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 Perfect Price Discrimination
- M is the profit maximizing quantity (MR=MC) if no price discrimination; 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
10b Review Quiz - Lessons 10a and 10b |
10b Review Videos |
[5:34 YouTube ACDC Leadership]
- Micro
4.8 Price Discriminating Monopoly (First
Degree)
[4:41 YouTube ACDC Leadership]
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 MICWEBAPP or the LESSONS link for these assignments.
11a Introduction |
Competitive firms are efficient and monopolies are inefficient, but there are few if any purely competitive 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 firms are only slightly inefficient and they do provide society some additional benefits, but oligopolies can be 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 "8/9a QUIZ - 4 PRODUCT MARKETS" 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 last 13 pages of the Unit 3 Yellow Pages ("3 Rules and 4 Models").
5. Understand any other issues associated with the model
Never forget this: To maximize profits businesses will produce the quantity where MR=MC.
11a Something Interesting - Why are we studying this? |
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 a little different from their competitors.
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.
11a Assignments: Readings |
pp. 278-286, (19th, 216-223), "Monopolistic Competition", "Price and Output in Monopolistic Competition", "Monopolistic Competition and Efficiency", "Product Variety"
11a Assignments: Video Lectures |
6.4.2 Understanding Pricing and Output in Monopolistic Competition - Short-Run Profit Maximization for a Monopolistically Competitive Firm - 8:58 [MyNotes]
Monopolistic Competition (econclassroom.com -- efficiency begins at 15:00) 20:51
Monopolistic Competition in the Long-Run: Econ Concepts in 60 Seconds with AP Economics Teacher (ACDCEcon) 3:25
11a Outcomes - What you should learn |
OUTCOMES
11a Key Terms |
Key Terms:
monopolistic competition, product differentiation, collusion, nonprice competition, four-firm concentration ratio, Herfindahl index, normal profit, excess capacity
11a New Video Lectures (due to the Coronavirus restrictions) |
11a Key Problem |
Monopolistic
Competition - How to find the quantity, price, and profit on a graph
- Click Here
[works for me if I save the file to my computer first, then open
it]
Monopoly - Long Run Equilibrium and Efficiency - Click Here
Monopolistic Competition - How to find the quantity, price, and profit on a graph
3.MULTIPLE CHOICE: Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. This firm will realize an economic:A. loss of $320
B. profit of $480
C. profit of $280
D. profit of $600
Monopolistic Competition - Long Run Equilibrium and Efficiency
Explain why Monopolistically Competitive firms earn zero economic profits in the long runDraw the long run equilibrium graph for Monopolistic Competition
Discuss the efficiency of Monopolistically Competitive firms in the long run and show the following on the graph:
- the profit maximizing quantity
- the allocatively efficient quantity
- the productively efficient quantity
11a Web Quiz - Click Here |
11a Key Formulas |
MARKET SHARE SQUARED
HI =
ms12 + ms22 +
ms32 + ms42 +
ms52 + .. . . .
"
"means "sum" or "add all together"
"ms" means "% market share"
11a Key Graphs |
Monopolistic Competition in Short Run Equilibrium
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
11a Review Quiz |
11a Review Videos |
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 MICWEBAPP or the LESSONS link for these assignments.
11b 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 "8/9a QUIZ - 4 PRODUCT MARKETS" 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 last 13 pages of the Unit 3 Yellow Pages ("3 Rules and 4 Models").
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? |
- The T-Mobile-Sprint Merger: The End Is Near (2019)- Airline Mergers Push Fares Higher (2013)
- Beer merger will not bring Budweiser, Miller under same roof (2015)
- U.S. Justice Department urges judge to block AT&T-Time Warner merger (2018)
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."
11b Assignments: Readings |
pp. 286-299, (19th, 223-240), "Oligopoly", "Oligopoly Behavior: A Game-Theory Overview", "Three Oligopoly Models", "Oligopoly and Advertising", "Oligopoly and Efficiency", "Last Word - Internet Oligopolies"
pp. 304-309, (19th, 241-242), "Additional Game Theory Applications"
pp. 433-434, (19th, 379-380), "Mergers"
11b Assignments: Video Lectures |
Game TheoryEconMovies 8: The Dark Knight (Oligopolies and Game Theory) 7:016.3.1 Introducing Oligopoly and the Prisoner's Dilemma 17:26 [MyNotes]
6.4.3 Understanding Monopolistic Competition (Oligopoly ???) as a Prisoner's Dilemma - Advertising and Brand Names 6:44 [MyNotes]
6.3.2 Understanding a Cartel as a Prisoner's Dilemma 10:47 [MyNotes]
Kinked Demand Model
6.3.3 Understanding the Kinked-Demand Curve Model 4:22 [MyNotes]Kinked Demand Model of Oligopoly Pricing (econclassroom.com) 14:06
Other
Oligopolies, Duopolies, Collusion, and Cartels (Khan Academy) 8:26Episode 30C: Mergers (YouTube: mjmfoodle) 4:36
SUMMARY
Determining the Efficiency of Firms in Different Market Structures (econclassroom.com) 18:23
11b Outcomes - What you should learn |
OUTCOMES
11b Key Terms |
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
11b Video Lectures (due to coronavirus resrrictions) - Click Here |
11b Key Problems |
Oligopoly: The Kinked Demand Model - Click Here
Oligopoly - Long Run Equilibrium and Efficiency - Click Here
Oligopoly: The Kinked Demand Model
What are the assumptions behind the model?
Why is the demand kinked (bent)?
Use the graph above to find:- the profit maximizing price and quantity
- the long run profits
- the allocatively efficient Q
- the productively efficient QHow does the model show price inflexibility?
What are the criticisms of the model?
Oligopoly - Long Run Equilibrium and Efficiency
Explain why Oligopolies earn economic profits in the long runDraw the long run equilibrium graph for a Kinked Demand Oligopoly
Discuss the efficiency of Oligopolies in the long run and show the following on the kinked demand graph:
- the profit maximizing quantity
- the allocatively efficient quantity
- the productively efficient quantity
11b Web Quiz - Click Here |
11b 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
11b Review Quiz |
11b Review Quiz - All Product Market Models |
11b Review Videos |
[2:02 YouTube ACDC Leadership]
Micro
4.9 Oligopolies and Game Theory: Microeconomics Concepts in 60
Seconds with Mr. Clifford
[3:24 YouTube ACDC Leadership]
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 MICWEBAPP or the LESSONS link for these assignments.
12a Introduction |
In unit 4 we will discuss the TEN LABOR (or resource) MARKET MODELS to learn how wages and the level of employment are determined. We will learn what determines how much people will be paid and how many people will be hired, i.e. the profit maximizing quantity to hire. Then we will determine whether businesses hire the allocatively efficient quantity of labor.
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 find the profit maximizing quantity of labor (and wage) that will be hired and the allocatively efficient quantity of labor that would maximize society's satisfaction
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? |
Look at the websites below.
Lowest Paying College Majors:http://money.cnn.com/2015/05/08/pf/college/lowest-paying-college-majors/index.htmlHighest Paying College Majors:
http://money.cnn.com/2015/05/07/pf/college/highest-paying-college-majors/index.html
Why are people paid differently?
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.
12a Assignments: Readings |
pp. 312-321, 322-324, (19th, 248-257, 260-261), "Significance of Resource Pricing", "Marginal Productivity Theory of Resource Demand", "Determinants of Resource Demand", "Elasticity of Resource Demand", "The Profit-Maximizing Rule", NOT "The Least Cost Rule"
12a Assignments: Video Lectures |
7.1.3 Analyzing the Labor Market 15:24 [MyNotes]
(THE LOST EPISODES) Factor Market Overview (YouTube mjmfoodle) 1:27
(The Lost Episodes) Perfectly Competitive Factor and Output Markets (YouTube mjmfoodle) 5:14
5.2 Perfectly Competitive Labor Market and Firm: Econ Concepts in 60 Seconds (YouTube ACDC Econ) 3:27
Micro 5.3 Comparing Product and Resource Markets: Econ Concepts in 60 Seconds- Review (YouTube ACDC Econ) 2:24
OPTIONAL Snow Day Lecture - During the 2018-2019 school year we had a snow day when lesson 12a was scheduled in our on-campus class. To avoid losing a day of class I recorded the lesson 12a lecture and posted it online. Here it is: Lesson 12a Snow Day lecture (1hour 15 minutes)
12a Outcomes - What you should learn |
OUTCOMES
12a Determinants of Labor Demand and Elasticity of Labor Demand |
DETERMINANTS OF LABOR DEMAND
1. Changes in Demand for the Product (derived demand)
2. Productivity Changes
- the quantity of nonlabor inputs used: more other resources used with labor = more productivity of labor
- technological progress: more technological progress = more productivity of labor
- labor quality: better quality = more productivity
3. Changes in the Prices of Other Resources (Substitutes and Complements)
DETERMINANTS OF THE ELASTICITY OF LABOR DEMAND
1. Ease of Resource Substitutability
2. Elasticity of Product Demand
3. Labor-Cost to Total-Cost Ratio
12a Key Terms |
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), substitute resources, complementary resources, substitution effect, output effect, elasticity of resource demand, marginal productivity theory of income distribution
12a Video Lectures (due to Coronavirus restrictions) - Click Here |
12a Key Problem |
Finding the Quantity to Hire: Competitive Labor Market in an Imperfectly Competitive Product Market
Competitive Labor Market in a Competitive Product Market - Problem 1
Answer the questions below on the basis of the information given in the following table.
The labor market is competitive where the wage rate is $10.
Refer to the above data. How can you tell that this firm is selling its product in a purely competitive product market?
MULTIPLE CHOICE: Refer to the above data. If the firm is hiring workers under purely competitive conditions at a wage rate of $10, it will employ:
A. 2 workers
B. 3 workers
C. 4 workers
D. 5 workersRefer to the above data. What is the labor demand schedule for this firm?
Refer to the above data. What is the allocatively efficient quantity to hire?
Competitive Labor Market in a Competitive Product Market - Problem 2
Use the data above to calculate: (1) the quantity of labor that this firm will hire to maximize profits, and (2) the allocatively efficient quantity to hire.
Assume the firms hires labor, its only variable input, under competitive conditions at a wage rate of $70 and sells its products under competitive conditions for a price of $10.
Competitive Labor Market in an Imperfectly Competitive Product Market - Problem 1
Answer this questions below on the basis of the information given in the following table.
The labor market is competitive where the wage rate is $10.
Refer to the above data. How can you tell that this firm is selling its product in an imperfectly competitive product market like a monoploy, oligopoly, or monopolistic competition?
MULTIPLE CHOICE: Refer to the above data. If the firm is hiring workers under purely competitive conditions at a wage rate of $10, it will employ:
A. 2 workers
B. 3 workers
C. 4 workers
D. 5 workersRefer to the above data. What is the allocatively efficient quantity to hire?
Competitive Labor Market in an Imperfectly Competitive Product Market - Problem 2
Use the data above to calculate: (1) the quantity of labor that this firm will hire to maximize profits, and (2) the allocatively efficient quantity to hire.Assume the firms hires labor, its only variable input, under competitive conditions at a wage rate of $70 and sells its products under imperfectly competitive (monopoly) conditions at the prices listed.
12a Web Quiz - Click Here |
12a Key Formulas |
TP
/ Qres
marginal revenue product: MRP = TR
/ Qres
marginal resource cost: MRC = TC
/ Qres
profit maximizing rule for hiring resources: MRP=MRC
value of the marginal product: VMP = P x MP
allocative efficiency quantity of resources: VMP = W
12a Key Graphs |
Circular Flow Model: 4 Product Market Models and 8 (10) Labor Market Models
Competitive Labor Market in a Competitive Product Market
Competitive Labor Market in an Imperfectly Competitive Product Market
12a Summaries of the Labor Market Models - Click Here |
12a Review Videos |
- Micro
5.3 Comparing Product and Resource Markets: Econ Concepts in 60
Seconds- Review
[2:27 YouTube ACDC Leadership]
-
Micro 5.4 Resource Market, MRP and MRC: Econ Concepts in 60 Seconds-
Factor Market
[2:54 YouTube ACDC Leadership]
NOTE: Mr Clifford says "MRP = P x MP" This is true ONLY IF we have a
competitive labor market (wage is constant). I prefer to use the
formula: "MRP = change in TR / change in Qlabor", because this works
for ALL labor market models
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 MICWEBAPP or the LESSONS link for these assignments.
13a Introduction |
Ten 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 (price floor)
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 ten models in our YELLOW PAGES, on the LESSONS webpage, and on the MICWEBAPP. 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 studying this lesson you should
be able to explain the following statement found in this news
report:
http://www.marketplace.org/topics/wealth-poverty/fast-food-strike-walk-outs-and-drive-throughs
" . . . 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]
13a Assignments: Readings |
330-351, (19th, Ch. 13, ALL)
Summary of the 8 Labor Market Models (The last 17 pages of the Unit 4 Yellow Pages)
Audio: Fast food strike: Of walk outs and drive-throughs
Economists disagree on whether the minimum wage kills jobs. Why?
Interesting: "Minimum Wage Would Be $21.72 If It Kept Pace With Increases In Productivity: Study"
13a Assignments: Video Lectures |
Micro 5.1 Market and Minimum Wage: Econ Concepts in 60 Seconds:- Economics Lesson (YouTube ACDC Econ 3:26)
11.4.2 An Analysis of Labor Unions and Unemployment (7:27) [MyNotes]
11.4.1 Minimum Wage Laws (7:31) [MyNotes]
11.4.4 The Theory of Efficiency Wages (10:54) [MyNotes]
OPTIONAL: 11.4.3 Something Interesting: "La Causa": The United Farm Workers (5:10) MyNotes]
13a Outcomes - What you should learn |
OUTCOMES
13a Key Terms |
Key Terms:wage rate, purely competitive labor market, monopsony, exclusive (craft) union, occupational licensing, inclusive (industrial) union, bilateral monopoly, minimum wage
13a Video Lectures (due to Coronavirus restrictions) - Click Here |
13a Key Problem |
Monopsony - Table - Click Here
Minimum Wage - Traditional Model - Click Here
Minimum Wage in a Monopsony Model - Click Here
Minimum Wage and Price Elasticity of Demand for Labor Model - Click Here
Use the data above to calculate (1) the quantity of labor this firm will hire to maximize its profits, and (2) the allocatively efficient quantity of labor to hire.
Assume the firm hires labor, its only variable resource, under monopsonistic conditions and sells its product under competitive conditions.
MULTIPLE CHOICE:
1. In the labor market shown above, with NO
MINIMUM WAGE, the equilibrium quantity employed will be:
A. 0 B. 10 C. 12 D. 14
2. In the labor market shown above, if the
minimum wage is set at Wm, the equilibrium quantity employed will
be:
A. 0 B. 10 C. 12 D. 14
3. In the labor market shown above, the
allocatively efficient quantity to employ is:
A. 0 B. 10 C. 12 D. 14
4. In the labor market shown above, if the
minimum wage is set at Wm, the amount of unemployment created by the
minimum wage is:
A. 2 B. 4 C. 12 D. 14
5. In the labor market shown above, if the
minimum wage is set at Wm, it will cause:
A. Employment to increase from 10 to 12
B. Employment to increase from 12 to 14
C. Employment to decrease from 14 to 12
D. Employment to decrease from 12 to 10
MULTIPLE CHOICE:
1. Use the figure above to answer this
question., If the minimum wage is set at Wmin, what will happen to
employment in this monopsonistic labor market?
A. Employment will decrease
B. Employment will increase
C. Employment will stay the same
D. Employment may increase but usually it tends to stay the same
2. Use the figure above to answer this
question. Senator Approximire opposes a proposal that the monopsonist
pay a minimum wage of at least Wmin stating "Even if the labor market
is monopsonistic, economic theory unambiguously demonstrates that
imposing a minimum wage causes employment to fall." Senator
Approxmire is:
A. Correct because the law of demand states that as the wage
rises, the firm demands less labor
B. Incorrect because the monopsonist would offer a wage of
WA,
which is higher than Wmin, and maintain its employment level at
L1
C. Incorrect because the monopsonist's effective MRC curve becomes
ABCD, which means that it will choose to hire more workers, from L1
to L2.
D. Correct because the graph indicates that at the wage of Wmin, the
monopsonist would not make a profit from hiring labor and so would
not hire any at all
3. Use the figure above to answer this
question,. If the minimum wage is set at Wmin then:
A. this labor market will become less efficient
B. this labor market will become more efficient
4. Use the figure above to answer this
question. The allocatively efficient quantity of labor is:
A. L1 B. L2 C. L3
MULTIPLE CHOICE:
1. Use the figure above to answer this
question. If the minimum wage is increases from Wmin1 to Wmin2 what
will happen to the income received by minimum wage workers in Labor
Market 1?
A.decrease from 0BCD to 0ADF
B.decrease from 0ADF to 0BCD
C.increase from 0ADF to 0BCE
D.increase from 0BCE to 0ADF
2. Use the figure above to answer this
question. If the minimum wage is increases from Wmin1 to Wmin2 what
will happen to the income received by minimum wage workers?
A. Total incomes decrease for minimum wage workers in Labor
Market 1 because the demand for labor is elastic
B. Total incomes increase for minimum wage workers in Labor Market 2
because the demand for labor is elastic
C. Total incomes increase for minimum wage workers in Labor Market 1
because the demand for labor is inelastic
D. Total incomes decrease for minimum wage workers in Labor Market 2
because the demand for labor is inelastic
3. Use the figure above to answer this
question. In which labor market is the demand for labor less price
(wage) elastic?
A. Labor Market 1
B. Labor Market 2
4. Use the figure above to answer this
question. Which of the following is correct if the minimum wage is
increased from Wmin1 to Wmin2 ?
A. Total revenues increase in Labor Market 1 and decrease in
Labor Market 2
B. Total revenues decrease in Labor Market 1 and increase in Labor
Market 2
C. Total revenues increase in both labor markets
D. Total revenues decrease in both labor markets
5. So, even if raising the minimum wage
causes more unemployment, does such an increase help minimum wage
workers?
A.Yes
B. No
C. It depends on the price elasticity of demand for low skilled labor
13a Web Quiz - Click Here |
13a Key Graphs |
Competitive Labor Market in a Competitve Product Market
Competitive Labor Market in an Imperfectly Competitive Product Market
Monopsony
Union: Increase Demand
Union: Craft (Exclusive)
Union: Inclusive (Industrial)
Union: Bilateral Monopoly
Minimum Wage Traditional Model:
employment decreases
Minimum 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 (red to blue)
Does the Minimum Wage help the poor?
NO if demand for labor is elastic because total income decreases from 0adf to 0bce (red to blue)
13a Summaries of the Labor Market Models - Click Here |
13a Review Videos |
- Micro 5.1 Market and Minimum Wage: Econ Concepts in 60 Seconds:- Economics Lesson
[3:26 YouTube ACDC Leadership]
- Minimum
Wage Misconceptions with Jacob Clifford
[5:09 YouTube ACDC Leadership]
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 MICWEBAPP or the LESSONS link for these assignments.
20a 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 42 richest people on Earth now have the same amount of wealth as the bottom half of the global population. 42 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 Trump Example from lesson 1b and
2. The Occupational Discrimination (Crowding) Model
The YELLOW PAGES, the LESSONS webpage, and the MICWEBAPP have one page summaries of each of these models. You should find them and study them.
20a Something Interesting - Why are we studying this? |
Jan. 2018: According to an Oxfam report just 42 people now hold as much wealth as the poorest 3.7 billion. In the U.S., the country’s 3 richest people have the same wealth as the poorest half of the American population.
https://www.huffingtonpost.com/entry/billionaires-oxfam-inequality_us_5a657e61e4b0022830041a7ahttps://www.oxfamamerica.org/static/media/files/bp-reward-work-not-wealth-220118-en.pdf
In Jan. 2014 the number was 85 of the world's richest people owned the same amount of wealth as the bottom half of the global population and in Jan. 2017 it was 61 people.
Think about it. The wealth of the 42 richest people = the wealth of the 3.5 billion poorest.
And, the gap between the rich and the poor is widening.
20a Assignments: Readings |
pp. 324-326, (19th, 260-262), "Marginal Productivity Theory of Income Distribution"
pp. 465-475, (19th, 410-419), "Facts about Income Inequality", "Causes of Income Inequality", "Income Inequality over Time", "Equality versus Efficiency"
pp. 482-485, (19th, 426-427), "Occupational Segregation: The Crowding Model"
Oxfam report highlights widening income gap between rich, poor
Researchers Examine Gap between Rich and Poor (NPR Morning edition, 1/28/2014) Read or listen 5:43
Guaranteed Basic Income / Universal Basic Income
20a Assignments: Video Lectures |
10.3.4 Hot Topic: Income Distribution in the U.S. 5:20 [MyNotes]
Wealth Inequality in America (Politizane YouTube) 6:24
20a Outcomes - What you should learn |
TOPICS
OUTCOMES
20a Key Terms |
Key Terms Flash Cards - Click Here
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 Trump example", guaranteed basic income (also called "universal basic income" and "unconditional basic income")
20a Video Lectures (due to Coronavirus restrictions) - Click Here |
20a Key Problems |
The Case for Equality Model Click Here
The Occupational Discrimination Model - Click Here
MULTIPLE CHOICE: Refer to the above diagrams which show identical marginal utility curves for Person X and Person Y. Assume a given income of $80,000 is initially distributed so that Person X receives $60,000 and Person Y $20,000.
1. The marginal utility:
1. of the last dollar will be greater for
Person Y than for Person X
2. derived from the last dollar will not be comparable between the
two income receivers
3. of the last dollar will be the same for both Person X and Person
Y
4. of the last dollar will be greater for Person X than for Person
Y
2. Which is true about redistributing the income?
1. no judgement can be made as to the effect of
a redistribution on total utility
2. this initial distribution of income is maximizing the combined
total utility of the two consumers
3. the combined total utility of the two consumers can be increased
by redistributing income from Person Y to Person X
4. the combined total utility of the two consumers can be increased
by redistributing income from Person X to Person Y
3. If this income is redistributed equally then the total combined utility will:
1. increase by DEFGH minus LMNOP
2. increase by LMNOP minus DEFGH
3. increase by LMN minus GH
4. increase by GH minus LMN
5. decrease by GH
ASSUMPTIONS:
(1) the labor force is comprised of 6 million men and 6 million women workers;(2) the economy has 3 occupations, A, B, and C, each having identical demand curves for labor;
(3) men and women workers are homogeneous with respect to their labor-market capabilities;
(4) women are discriminated against by being excluded from occupations A and B and are confined to C; and
(5) aside from discrimination, the product and labor markets are competitive, therefore D = MRP = VMP = P x MP
QUESTION: Refer to the above diagram and list of assumptions. If discrimination is ended what happens to output?
20a Web Quiz - Click Here |
20a Key Formulas |
Gini Ratio
20a Key Graphs |
Lorenz Curve
The Case for Equality = the President
Trump Example
The Utility Maximizing Distribution of Income
The Occupational Segregation Model of Discrimination
20a Key Models |
The Case for Equality Model: Maximizing Total Utility. (This is the President Trump Example from lesson 1b)
The Occupational Discrimination (Crowding) Model
20a Review Videos |
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 MICWEBAPP or the LESSONS link for these assignments.
22a Introduction |
1. a simple immigration model showing the "Impact on Wage Rates, Efficiency, and Output", and2. a model showing the impact of illegal workers in a low wage labor market
The YELLOW PAGES, the LESSONS webpage, amd the MICWEBAPP have one page summaries of each of these models. You should find them and study them.
22a Something Interesting - Why are we studying this? |
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 effects of immigration on substitute resources and complementary resources.
22a Assignments: Readings |
pp. 513-529, (19th, Ch. 22, ALL)
"Three Ways To Totally Transform U.S. Immigration Policy" NPR, Planet Money, Feb. 21, 2013
1. The Best And The Brightest
2. The Highest Bidder
3. Let 'Em In
"Do Illegal Immigrants Actually Hurt the U.S. Economy?" Adam Davidson, New York Times, Feb. 12, 2013
"Give Me Your Tired, Your Poor, and Your Economists, Too" By N. Gregory Mankiw, Feb. 9, 2013
22a Assignments: Video Lectures |
- Immigrants do depress wages
- Immigrants are not a net gain
- Allow immigrants but support labor unions
- CNN Report on the economics of immigration (2:24)
22a Outcomes - What you should learn |
TOPICS
OUTCOMES
From paragraph 8 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?
22a Key Terms |
Key Terms:
economic immigrants, legal immigrants, illegal immigrants, human capital, beaten paths, backflows, efficiency gains from migration, brain drain, remittances, complementary resources, substitute resources, fiscal impacts
22a Video Lectures (due to Coronavirus restrictions) - Click Here |
22a Key Problems |
Simple Immigration Model - Click Here
Illegal Immigration Model - Click Here
Economic Effects of Immigration - The Simple Immigration Model
See the assumptions below, then answer these questions:
1. How many will migrate from the low wage country X to the high wage country Y?
2. What happens to the wage rate in X and in Y?
3. What happens to output in X, in Y, and total output?
4. What would happen to output if initially there was unemployment in low wage country X?
5. How do remittances affect low wage country X?
Assumptions:
1. Dx is the demand for labor in country X. Dy is the demand for labor in country Y.
2. Before migration the labor force in country X is 5 and the labor force in country Y is 2.
3. Neither country has any unemployment.
4. Migration (1) has no costs, (2) occurs only in response to wage differentials, and (3) is unimpeded by law in both countries.
5. Labor markets and product markets are competitive so Dlabor = MRP = VMP = P x MP
Answer:
Impact of Illegal workers in a Low Wage Market - The Illegal Immigration Model
MULTIPLE CHOICE:
Assumptions:
1) Employers in this market are willing and able to ignore minimum wage laws;
2) Sd represents the supply of domestically-born and legal immigrant workers;
3) St represents the total supply of workers in this labor market (St = Sd + illegal immigrants);
4) Unless otherwise stated, illegal immigration is not effectively blocked by the government.
1. Refer to the above figure. The equilibrium wage and level of employment are, respectively:
1. $5.50 and 250,000
2. $5.50 and 350,000
3. $8.00 and 350,000
4. $5.50 and 450,000
2. Refer to the above figure. How many domestically-born and legal immigrant workers will be hired at equilibrium?
1. 200,000
2. 250,000
3. 350,000
4. 450,000
3. Refer to the above figure. How many illegal immigrant workers will be hired at equilibrium?
1. 200,000
2. 250,000
3. 350,000
4. 450,000
4. Refer to the above figure. If the government effectively prevents illegal immigrants from working in this labor market, the equilibrium wage and level of employment are, respectively:
1. $5.50 and 250,000
2. $5.50 and 350,000
3. $8 and 350,000
4. $5.50 and 450,000
5. Refer to the above figure. Assume initially that government does not effectively block illegal immigration. If the government then finds a way to prevent all illegal immigrants from working in this labor market:
1. 100,000 domestically-born workers will gain employment at the expense of 200,000 illegal immigrants.
2. 200,000 domestically-born workers will gain employment at the expense of 200,000 illegal immigrants.
3. 100,000 domestically-born workers will gain employment at the expense of 250,000 illegal immigrants.
4. 100,000 domestically-born workers will gain employment at the expense of 100,000 illegal immigrants.
22a Web Quiz - Click Here |
22a Key Graphs |
Simple Immigration Model
Impact of Illegal Workers in a Low Wage Labor Market
22a Key Models |
A simple immigration model showing the "Impact on Wage Rates, Efficiency, and Output"
A model showing the impact of illegal workers in a low wage labor market
22a Review Videos |
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 MICWEBAPP or the LESSONS link for these assignments.
