MNOTES1
CHAPTER 1
Objectives of this chapter:
1. Define economics
2. The student will be able to differentiate
positive economics versus normative economics.
3. The student will be able to develop a systematic
method for analyzing economic problems.
4. The student will be able to apply definitions of
economic efficiency, equity, and liberty.
MICROECONOMICS - The branch of economics that examines the
functioning of individual industries and behavior of individuals
decision-making units, that is, business firms and households. Pg
7
ECONOMICS is the study of how individuals and societies choose to
use the scarce resources that nature and previous generations have
provided. (Pg 2) Economics studies decision making regarding the
allocation of scarce resources in individual households and firms
to satisfy human wants.
1. [Who uses resources to produce goods and services.?]
Resources are goods and services that are used to produce other goods
and
services.
Resources
are:
Natural,
labor,
capital,
entrepreneurship. All these resources are used to produce goods and
services within a specific time frame. Time may be the ultimate
constraint faced by individuals and economies. All economies have
these resources but not necessarily in the same quantities. The
resources are scarce because human wants are unlimited. The goods
and services people want far exceed any nations productive capacity
to produce them.
Four characteristics used to describe entrepreneurs
A. Entrepreneurs view change(globalization) not as a obstacle but
as a opportunity.
B. Entrepreneurs exploit innovation to create opportunity.
C. Entrepreneurs build and grow companies to bring their innovation
to market.
D. Entrepreneurs take significant calculated, personal risks in
building their companies. Main Street Economist June 2003
AThe U.S. Stays Out of the Way of Entrepreneurs@ The Regional
Economist Oct 04
Entrepreneurship and Policy Environment Review St Louis m/Ap 2006
2. [Give an example of each type of resource.]
3. [Now make a
resources.]
list
of
some
things
produced
with
these
AN ECONOMIST SHOULD BE ABLE TO:
I. IDENTIFY PROBLEMS
NORMATIVE
VERSUS
POSITIVE ECONOMIC PROBLEMS - Page 9
WHAT SHOULD BE?
WHAT IS?
Positive economics - An approach to economics that seeks to
understand behavior and the operation of systems without making
judgements. It describes what exists and how it works. Pg 8
Normative economics - An Approach to economics that analyzes outcomes
of economic behavior, evaluates them as good or bad, and may prescribe
preferred courses of action - Pg 8
An example of a positive economic question is, "What is the
unemployment rate?" A normative economic question is, "Should the
government attempt to lower the unemployment rate?
Answers to
positive and normative economic questions are based on a set of
assumptions.
Positive economic questions ask facts about a current market
or our economy. Examples of positive economic questions are: What
is the current wage for unskilled labor? , What was the wage of
unskilled labor five years ago? , What is the industrial safety
level?, What quantity of cocaine is being consumed in the U.S.?, What
percent of people are using seat belts?, How many abortions occur
in the U.S.?, What is our budget deficit?, How many imported goods
do we consume?, How many doctors are licensed each year in our state?
What is the inflation rate?, What quantity of money exists in the
U.S.?, What is the current level of crime?
4. [List some normative questions that would relate to the above
positive economic questions.]
II. People’s Actions are dictated by Incentives
5. [List some monetary and non-monetary incentives.]
Monetary
Non-monetary(Intrinsic)
3
Income
Price
Wealth
Profit
satisfaction
Love
Hate
Revenge
Fear
Sex
8/30/08
Wal-Mart’s Emergency Relief Team WSJ A3 Profit incentive
III. PROCESS INFORMATION ABOUT THE ECONOMY IN A LOGICALLY CONSISTENT
MANNER - CRITICAL THINKING.
1. Opportunity cost
- Page 2
Super Bowl chatter costs $821.4 million WSJ 1/25/04
7/12/04 AStep Right Up!@ WSJ
24 hour a day
[Question #1 page 17]
7/3/10
Strapped Police Run on Fumes, and Federal Pot-Fighting
Cash
http://www.bls.gov/tus/charts/home.htm
2. Marginal analysis in decision making - Pages 3, 170-171
Identifying things that change as a result of a decision or
action and identifying things that do not change as a
result of the decision or action.
11/30/09
Get Smart About Product Returns WSJ R7
3. Cause and Effect decision making
- Page 3
ceteris paribus
9/7/07 ADope Smokers@ WSJ A14 Cigarette
tax
More Punitive to the People 6/2/04
Post Hoc, Ergo Propter Fallacy (after this, therefore
because of this)
- Page 11
In 1970 known reserves of oil were 531 billion barrels
world consumption was 16.5 billion barrels per year. When should the
world run out of oil? Current known reserves are about 1.4 trillion
barrels
4. Fallacy of composition in decision making - Page 12
5. Recognizing assumptions
6. Incentives
6. [Does anything have a zero opportunity cost?]
7. [Will a heavier stronger football helmet reduce injuries?}
Is It Time to Retire the Football Helmet? 11/11/09 WSJ Yes, if you assume ceteris
paribus
4
8. [Current known reserves of oil in the world is 1,342,207,000,000
barrels www.doe.gov Current world usage is 85,085,664 barrels
per day. How long will the oil last?]
9. [Assume 10 billion is in estates each year and the economy is
contemplating an inheritance tax of 50%. The estimate is the
government will take in 5 billion in revenue. Is this correct?
What critical thinking skill is important in your answer?]
9/7/07 Dope Smokers WSJ
1/19/07 Pricier Puffing Wis State Journal
3/2/09 Pressure’s on Smokers Wis State Jour
www.tobaccofreekids.org
5/14/10
South Carolina, a Holdout, to Lift Cigarette Tax WSJ A4
10.
[ARed-meat consumption began declining around the same
time that women in large numbers entered the work force@ Women
entering the work force caused red-meat consumption to decline.
WSJ article (2/20/02) If this conclusion is not correct what
critical thinking has been over looked?]
11.
[AOnly 38% of U.S. households with children eat their main
meal together, according to a 2001 Gallop poll study. In 1990,
half of families dined together regularly. Not surprisingly,
the cuts of meat whose popularity has declined most sharply are
those that take the longest to cook@ WSJ 2/20/02 Which critical
thinking skill can explain the above conclusion?]
12.
[AEmployees who huddle in groups or around watercoolers
to discuss the big game are costing their employees $2.59 every
10 minutes thanks to lost productivity.@ WSJ 1/25/04]
13.
[ABut after the incident, the Federal Aviation
Administration decided not to require mandatory shoe
inspections, apparently finding that the increase in protection
would not be worth the added delays.@ Wis. State Journal
12/26/01 Which critical thinking skill does this statement
illustrate?]]
14.
[Advertisers paid an average of $2 million for 30 seconds
of television commercial time on the January 2001 super bowl(2.3
million 1/25/04WSJ, 2.4 1/6/05WSJ, 2.6 million 06, 2.7 million
08). How some of the advertised products fared during 2001. WSJ
5
1/28/02
Master Card
Dentyne Ice
Doritos
Visa
Pepsi-Cola
Budweiser
Cingular
Gained or
27.0
14.9
37.6
50.5
14.4
12.1
7.0
lost
+1.4
+0.6
-0.1
-0.2
-0.4
-0.5
-3.0
A. To determine the true effect that advertising on the Super Bowl
had on market share, we need to compare a variety of firms
advertising on the Super Bowl with similar
products and
management.
B. Advertising on the Super Bowl caused market share to decline.
C. Advertising on the super bowl hurt some companies; therefore,
no company should advertise on this year=s super bowl.
D. Companies that advertised on the Super Bowl game could have
spent the money on plant expansion.
E. The decision to advertise on the Super Bowl should be made if
the additional benefits of advertising on the super bowl will
exceed the additional costs of
advertising on the Super
Bowl
Match each of the above statements to the appropriate critical
thinking skill listed below:
Opportunity Cost
Marginal Analysis
Ceteris paribus
Post Hoc Fallacy
Fallacy of composition]
The seven step procedure below will be used to analyze normative
economic problems in this text.
2
pts
Step 1
Specify the parts of the article which are at
issue and state the issue clearly. The main
6
issue should always be stated as a question.
Determine if you are analyzing a private or
public policy issue. A public policy issue is
one that requires action by government
(either local, state or federal). A private
policy analysis is one that requires
individuals, households, or firms to take
action.
3
pts
Step 2
Determine the primary area of concern
relating to this issue. If this is a current
policy or program, discuss the motivating
factor(s) that caused this policy or program
to be adopted. If this is a new policy or
program to be adopted, discuss the main
concerns behind this new policy or program.
9
pts
Step 3
Discuss potential consequences of answering
this question on efficiency, equity or on
other identifiable aspects of individual and
social well-being. Thoroughly discuss the
assumptions behind any changes in efficiency,
equity, and liberty that may occur. Indicate
which part of product market efficiency is
affected. (Allocative, technical efficiency or
both)
If you have selected a public policy issue start with the following
definitions of efficiency, equity, and liberty:
Product market efficiency:
1.
Right goods and services are produced in the right
quantities.
831/10 U.S. Wants Report Card for Cars WSJ B1
A
2. The least value of resources are used in producing
a good or service. Or the maximum amount of goods
and services are produced with the existing
resources.
T
12.
[How does the textbook define efficient markets? Pg 14]
13.
[Is the definition above consistent with the textbook
definition?]
Equity
- Fair access to goods and services
7
Goods and services are distributed in accordance with society=s
wishes. In the U.S. we believe fair access to goods and services
implies:
1. People who contribute the most to society consume the most
2. People who want the good the most consume it.
3. For some goods and services but not all, people who make
little to no contribution to society deserve access to these special
goods and services. Society may decide certain groups should have
more goods and services and others have less.
2/1/10
Heists Targeting Truckers on Rise WSJ A3 Equity
14.
[List methods society uses to distribute goods and
services based on criteria one, two and three above.]
This implies, people who make little to no market contribution
to society deserve some goods and services. The poor will be helped
if goods or services are produced at the lowest possible price.
Society may decide certain groups should have more goods and services
and others have less.
Market Liberty - The freedom to use your resources as you see fit
as long as the use of those resources does not significantly affect
others.
3
pts
Step 4
Discuss which assumptions you have made in step
3 you believe to be most valid by placing a
S(strong), W(weak), or D(difficult to assess)
after each assumption.
15.
[Define an assumption.]
1
pts
Step 5
Assess the source or sources of this article.
Discuss any bias you perceive in the author of
the article. Discuss any preferences you may
have on this issue.
5
pts
Step 6
Based on which assumptions in step 4 you
believe to be most valid, make a decision on
the question you posed in step 1. Your grade
will be determined on how consistent your
decision is with steps 3 and 4, and how well
you have considered alternative viewpoints.
You should also consider if the concerns you
listed are adequately addressed by the
proposed solution in step #2. If you decide
to reject this policy, state an alternative
solution. If no good alternative can be
8
found, maybe a second best solution will have
to do.
2 pts
Step 7
Identify pivotal assumptions that
would cause you to reverse your conclusion in
step #6.
The seven-step procedure is demonstrated below:
Michael Vincents= parents suggest to him that he should study more
hours in the week.
STEP #1
Should you study more hours per week?
Step #2
Students' grades are not high enough - allocative efficiency.
16.
[Why is subject of high grades an allocative efficiency
issue? Application]
Step #3
Benefits of studying more hours per week would be to get better
grades(allocative efficiency), and ultimately, perhaps, a better job
(technical efficiency and equity)
Benefit of Studying more hours per week
Allocative efficiency
increases
time
cost.
Assumptions
1. Student values more study
more than the opportunity
2. Grades improve
Technical efficiency
increases
3. Student is more productive
Equity increases
4. Pay increases as a result of
being more productive
s
9
Potential Costs of studying more hours
Allocative efficiency decreases
5. Student values more study time
less than the opportunity
cost.
6. Grades get worse
Technical efficiency
decreases
7. Student is less productive as a
Result of studying more hours
8. Pay does not as a result of
being more productive
Webster=s dictionary defines
assumption as Aanything taken
for granted.@ If I suggest
allocative efficiency increases
if a student studies more, what
factors are taken for granted?
17.
[Ask the class two questions: How many people drove to
campus today? How many people will drive off campus today? Which
is a positive economic question? Which of these responses is
based on assumptions? Application]
Step #4
The student should place an S(strong), W(weak), or D(difficult
to assess) after assumption 1-8. Parents and students may assess
these assumptions differently.
Now evaluate the assumptions behind each of the benefits and costs.
If the student values the additional study time more than the
alternative, than place a S (for strong assumption) by assumption
#1. Opportunity cost may include many things such as: lost wages,
lost friends (people who study more must decline more invitations),
less of other leisure activities (T.V., hobbies)etc. If the student
believes grades will actually increase as a result of more study,
place an S by assumption 2. If the student believes they will become
more productive as a result of additional study hours, than place
a S by assumption 3. If the student believes that additional
productivity will be rewarded in the job market, place an S by
assumption 4. If assumptions 1-4 are rated as strong, 4-8 must be
rated as weak. Both assumptions 1 and 4 can not be rated as strong,
but the both could be rated as difficult.
10
Hint:
When listing assumptions for step #3 look for the counter opposites
and place them under costs. If you have assumptions listed under cost,
check to see if the counter opposite is listed under benefits.
Step #5
Did the person suggesting the increase in study hours present
all sides of the issue? Is the person making the decision
comprehending all sides of this issue?
Step #6
Now make a decision regarding study hours.
Step #7
Which of the six assumptions (1-8) are critical to your
decision? That is, if your rating changed from strong to weak or from
strong to difficult, your conclusion in step 6 could change.
If a student decides to study more hours in a week, the potential
benefit are higher grades, more personal satisfaction, and better
pay. Higher grades is a potential benefit, because some assumptions
have to be made. It is not certain that more study hours will increase
grades and that higher grades will make the person better off.
If a student decides to study more hours there are costs. The
opportunity cost represents benefits from the activity or activities
will be foregone as a result of increased study time. Even if the
student devotes more time to studying, it is not certain his or her
grades will increase. It is possible that, if the student studies
more, and grades go up, as a result, the student is worse off
nonetheless. For example, as a result of more study time, his girl
friend leaves him.
ECONOMIC THEORY - A STATEMENT OR SET OF RELATED STATEMENTS ABOUT
CAUSE AND EFFECT, ACTION AND REACTION, IN ECONOMIC LIFE. - Pg 10
III. UNDERSTAND THE CONCEPT OF CETERIS PARIBUS - Pg 11
The bottom line in economic analysis is placed on three crucial
issues listed below. - Pg 13-14
Economic Goals
1. Efficiency
Micro
Macro
11
Growth
Stability
Inflation - Hyperinflation
2. Equity
Inflation
3. Market Liberty - The right to use our
resources as we see fit as long as the use of those resources does
not significantly affect others.
The primary assumption most economists make when deciding on issues
relating to efficiency, equity, and liberty is rationality.
Rationality implies people act in there own best interests, even if
these interest do not seem logical to us. It may not be rational for
me to smoke, but it can be a rational decision for someone else.
Economic efficiency has two components: 1) microeconomic efficiency
and macroeconomic efficiency.
The first principle of microeconomic efficiency is called
technical efficiency. (T)
The least value of resources are used in producing
the good or service. Or the maximum amount of goods
and services are produced with the existing
resources.
T
The second principle of efficiency is called allocative
efficiency. The correct amount of resources are being allocated to
the production of this good or service. Pg 14
GRAPHS AND CHARTS Pg 18-23
OBJECTIVES:
1. Student should be able to compute the slope of a line or a
curve.
18.
[What does slope measure?]
2. Student should understand the relationship between slope and
marginal analysis.
3. Student should be able to explain the concept of opportunity
cost by using graphical analysis.
12
SCARCITY AND CHOICE CHAPTER 2
Objectives:
1. The student will understand and apply the concept
of opportunity cost.
2. The student will understand how efficiency, equity
and liberty relate to the production possibilities
curve.
3. The student will be able to apply production
possibilities curve analysis to their life.
(International Trade Page 667-674)
4. The student will be able to differentiate between
different types of economic systems.
ALL SOCIETIES MUST ANSWER THREE BASIC QUESTIONS:
1. What will be produced?
2. How will it be produced?
3. To Whom - who will get what is produced? - Pg 26
19.
[Does your family answer these questions? If the answer
is yes to the previous question, name some goods and services
it produces. What criteria does your family use to answer the
above questions?]
20.
[How does society answer these questions?] - Economic
Problem Pg 36
Resources are goods or services that are used to produce other goods
and services.
1. Natural Resources
2. Labor
3. Capital
4. Entrepreneurship
To produce any good or service you need resources and time.
13
21.
[Which resource makes the biggest contribution to economic
growth?]
22.
[Write a list of things you would like to have.]
23.
[Why don=t you have all the things on your wish list?]
The object of the economic game is to maximize social welfare. Social
Welfare will be maximized when the right goods are produced in the
right quantities at the lowest cost to society (Least Resources) and
the right people consume them while maintaining market liberty.
(Allocative Efficiency) (Technical)
(Equity)
Right Goods
Least Resources
Right People
Right Quantities
{WSJ article 10/22/01}
PRODUCTION POSSIBILITY FRONTIER - A graph that shows all the
combinations of goods and services that can be produced if all of
society's resources are used efficiently - Pg 31
The assumptions behind the production possibilities curve are:
(1) Fixed amounts of resources, (2) Fixed level of technology, (3)
A fixed time period, (4) Resources are not equally productive in all
areas.
Marginal Rate of Transformation - Pg 34
Opportunity Cost - That which we forgo, or give up, when we make a
choice or a decision. Pg 27
APPLICATIONS
1. Depression
2. Imperfect Competition
3. Economic growth Pg 35
A. Capital deepening
B. Labor productivity - skill levels
C. Multifactor productivity growth On Reserve Jan01
4. Family Production Possibilities Curve
5. Comparative advantage a person or country is said to
have a comparative advantage in producing a good or
service if it is relatively more efficient than a
trading partner. Pg 28 Pg 667-674
14
A politician suggests increasing military expenditures.
24.
[What questions would an economist, who is aware of the
production possibilities concept, ask this politician?]
25.
[How does efficiency, equity and liberty relate to the
production possibilities curve?]
26.
[Four individuals employed by a business that produces
computers and software. The computers require assembly and the
software requires programming of computer code. Use the following
information to construct a production possibilities frontier for
this company:
Employees
Computers
Code
A
8
1.0
B
5
5.0
C
10
.5
D
1
10.0
Put computers on the horizontal axis and code on the vertical axis.]
Economic Methods of Thinking Illustrated by The Production
Possibilities Curve
1. Opportunity Cost
2. Marginal Analysis
3. Technical efficiency
4. Technical inefficiency
5. Ceteris paribus
Absolute advantage - One country(business, family) uses fewer
resources to produce a good or service Pg 701
Comparative advantage - The advantage in production of a product
enjoyed by one country over another when that product can be produced
at lower cost in terms of other goods than it could be in the other
country. Pg 28 and 701
Marginal rate of transformation is a measure of comparative
advantage.
27.
[Who has the comparative advantage in producing computers?
Code?]
15
28. Assume Tom Gates can earn $100 per minute and can type 100 words
per minute. Mr. Gates is considering hiring a secretary. The secretary
will earn $20 per hour and can type 60 words per minute.
A. Compute the marginal rate of transformation of typing for the
secretary and Tom Gates.
B. Who has the absolute advantage in producing income and typing?
C. Who has the comparative advantage in income and typing?
29. [John Executive is an excellent administrator and typist. John earns $600 an
hour and can type 120 words per minute. John is considering hiring a secretary
that can type 80 words per minute and costs $15 per hour. Use the concept of
comparative advantage to determine if John should hire the secretary.]
8/15/02 WSJ
30. [Answer problem #5 page 42.]
31. [Review question 1,3,7,8 page 41-42]
Benefits and Costs of Trade - Pg 750-752 ch 35 Softcover Ch 18 Pg 413-417
1. Improves technical efficiency - Personal example
Thanks Not Buying American pg 14
Exports are good and imports are bad. Exports create jobs imports cost
jobs
Protecting an Industry from foreign competition
Keeping unemployment low
Hurt the environment
Recover from a recession
2/6/09 Nations Rush to Establish New Barriers To Trade WSJ A1
2. Improves Equity
3. Improves market liberty
4. International relations - Tariff Tsuanmi
5. Reduces terrorism
8/13/08
Free Trade Can Fight Terror WSJ A15
4/12/09 N. Korean Defectors Staggered By South Washington Post A1
http://www.xtranormal.com/watch/7781737/
Made in the Earth (notes10)
EC Sept 1 02
Free Trade and TariffsB An Uneasy Mix
11/6/03 AWe Want Trade, Not Aid@ WSJ
10/21/04 AAs Shrimp Industry Thrives in Vietnam Trade Fight Looms@ WSJ
1/6/05 ATariff Tsunami@ WSJ
2/3/04 AUncork the Law@ WSJ
16
6/9/05 AThe Laptop Trail@ WSJ
9/26/05 Sweet and Lowdown WSJ
8/11/05 AAid to Workers Hurt by Trade Comes in Trickle@ WSJ
10/4/05 Tariffs for the Rich WSJ A269/26/05 Sweet and Lowdown WSJ A18
9/6/08
Shot in the Foot WSJ A10
9/11/08
Exports Bolster Local Economies WSJ A1
8/13/09
Food Firms Warn of Sugar Shortage
9/22/09
To Outfox the Chicken Tax, Ford Strips Its Own Vans WSJ A1
Current account = (Exports - imports) + Net Income payments(income paid to us from foreign investments
- income owed to foreigners) + Net Unilateral transfers JEL Summer 2002 Pg 132
NIP = payments to foreigners due to investments in U.S.
WSJ 9/20/02
TYPES OF ECONOMIC SYSTEMS - Pg 40 and page 769-782
1.Market system (Capitalism) - Laissez-faire - "allow (them) to do"
Capitalism is defined as a system of economic organization
characterized by the
private ownership of the means of production and distribution and their operation for profit under
predominantly competitive conditions. A crucial aspect of capitalism is the concept of private
property. Individuals must be allowed to accumulate and trade private property. This explains laws
against theft.
32. What is the incentive for allocative and technical efficiency under capitalism?
Market systems decides the question of "To Whom" first.
CONSUMER SOVEREIGNTY - The idea that consumers ultimately dictate what will be
produced (or not produced) by choosing what to purchase – Pg 40
The general that directs all economic activity in a market economy is price.
Price of Everything, Russell Roberts
17
Free enterprise – The freedom of individuals (market liberty) to start and operate private
businesses in search of profits. Pg 40
Entrepreneurs look at what is purchased and then determine what will be produced.
33. [What method of economic organization is likely more allocatively efficienct and list any
important assumptions?]
Basic assumption of capitalism is consumer rationality.
34. [What is the opportunity cost of a purchase?]
35. [How do consumers answer the questions of; What to buy?, and
therefore "who"
gets the goods that are produced?]
Market - The institution through which buyers and sellers interact and engage in exchange.
Prerequisites of a the market system
1. Private property-Moving resources to highest valued
use
Goods and services
Your labor - Draft
Savings - Inheritance
Intellectual Property (Patent laws)
Ability borrow and lend
12/11/03 AThe Link Between patents and Prosperity@ WSJ
Property rights and the Wealth of Nations -Volume 23 Cato Institute 4/1/05
2/20/07
AThe Virtue of Patents@ WSJ A17 Intellectual property rights
36. [How does the answer to the above question relate to the tragedy of the commons (page
739) softcover 454]
2. Self Interest-Rationality-Choice
3. Social overhead
18
A. General accepted accounting principles -Enron
(Standardized accounting system)
WorldCom Inc. WSJ 3/1/05
B. Stable currency
C. Sound financial institutions
Credit systems are accessible and reliable
D. Legal System
Right of Contract Infrastructure and the Wealth of nations EC Jan 15,
02
Rule of Law and Economic Growth Inter Nat Trends Fed of St Louis
8/04
4. Capital infrastructure
Infrastructure and the Wealth of nations Economic Commentary Jan 15,
2002
3/21/11
Putting a Price on Clean Water WSJ A15
5. Perfect Competition
Efficiency
Micro
Technical
Allocative
Equity
Macro
Unemployment
Growth
Stability
Inflation
Infrastructure - Economic Commentary1/15/02
Government expenditures
National Income
Distribution
Inflation
35. [How do producers answer the questions of; What to produce?,
goods and services?, and Who gets the goods
How to produce
and services?]
36. [How do the above questions relate to efficiency, equity, and
liberty?]
19
WSJ 6/19/01 Mark-up law for gasoline
2. Command system (Socialism) is defined as a system of economic organization,
characterized by the public ownership of the means of production and distribution.
http://cafehayek.com/2010/08/worth-a-thousand-words.html
Command is defined as a system of economic organization in which a
central government either directly of indirectly sets output targets,
incomes, and prices. Pg 39
In a command economy the questions of what? how? And to whom? are
answered by a central authority.
Socialism today has come to be associated with a welfare state. The
state through a wide variety of transfer payments assumes
responsibility for protecting its citizens. Private ownership of the
means of production is permitted, with the state ownership of the means
of production and distribution considered vital to society.
37. [Does command system emphasize the question of "What" , "How", or "To Whom"?]
12/26/09
Venezuela's President Threatens Toyota, GM WSJ A1
Assumption of a command system is government knows better.
Command systems first decides the To Whom questions.
The five factors of production and returns to each are
FACTORS OF PRODUCTION
summarized below.
PRIVATE RETURNS
(Market)
1. Natural Resources------------- ECONOMIC RENT
2. LABOR ------------------------
WAGES
3. CAPITAL ---------------------- INTEREST
4. ENTREPRENEURSHIP ---- PROFITS
Price of Everything, Russell Roberts
20
In pure socialism, land and capital are owned by the
are no entrepreneurs since the
therefore, the
government and there
government takes all the risks of production,
income earned is totally related to wages. Central planning
committees decide the important questions of, what, who and who.
FACTORS OF PRODUCTION
PRIVATE RETURNS
(Command)
1. Natural Resources------------ ZERO
2. LABOR ----------------------- WAGES
3. CAPITAL --------------------- ZERO
4. ENTREPRENEURSHIP ---- ZERO
38. [Does a football team best represent a market system or command system?]
Many times private interest and (goals) may differ from social interest (goals).
Capitalism believes in:
1. Private property
2. Consumer sovereignty
3. Maximizing social welfare based on the individual preferences
39. .[What is the objective of the economic game?]
37. [Give some examples where private and social interest may differ.]
Private and social interest
Capitalism
Command
Economic Incentives
Yes
No
Competition
yes
No
property rights for resources
yes
No
21
price reflect resource cost
Yes
No
Corruption in government
Yes
Yes
38. [In a command system are the social returns to land, and capital zero?]
39. [Which method of economic organization i.e., command or market is likely to have a bigger
gap between private and social goals?]
40. [Land includes all natural resources on the earth: air, water, timber, coal, oil and others.
Compare how people under market and command systems would treat land(pollution), maintain
capital, and value entrepreneurship.]
41. [What incentive do people under command systems have to invent new products and start
new businesses?]
ABlack Village= Testifies To Communism=s Toll On the Environment@ 1/9/02 WSJ
1/27/02 ACapitalism for Consenting Adults WSJ
9/20/04 ACan Socialism Survive@ WSJ Football and socialism
10/2/06
AWhy Beijing Is Trying to Tally The Hidden Costs of Pollution As China=s Economy
Booms@ WSJ A2
9/30/06
ABeneath the Dow=s Surge, Investors Find a Mixed Bag@ A1
9/14/10
Cuba to Cut State Jobs in Tilt Toward Free Market WSJ A1
3. The traditional economic system is one in which the questions of what? how? and to
whom? are answered "traditionally." Typically, an elaborate system of customs, social mores,
and accepted practices determine what goods and services get produced, lhow resources are
combined to produce those goods and services, and whose wants get satisfied by consuming
those goods and services.
Although the Amish, the ante bellum South, and the Melanesian potlatch are frequently
used examples of traditional economic systems, as with capitalism and socialism, no purely
22
traditional economic system exists. Nonetheless, many vestiges of tradition are to be found in the
U.S. economy, influencing decisions of what? How? and To Whom? Examples include the large
proportion of children who follow in their parents' career footsteps; use of queuing to ration
available goods and services, stereotyping certain service workers; and division of household
production tasks among household members, especially by gender.
5. Mixed Systems - Pg 40
Can Socialism Survive? 9/20/04 WSJ
Capitalism consumers individual decisions to purchase goods and services decide the
basic questions of what, and who producers decide the question of How.
Socialism the government help decides the basic questions of what, how and who.
Command the government decides the basic questions of
what, how and who.
Communism the people decide by a collective decision making process basic question of
what, how and who are decided by some central authority.
Mixed economy consumers decide the basic questions of what,
some goods and government decides the
questions of what, how and who for other
goods. Most economies let the market, government, and tradition decide
what, how, and who. The precise combination
traditional forces
how and who for
the questions of
of market forces, government forces, and
determine whether the system is called capitalism,
socialism, or
traditional.
43.
[In the U.S. give some examples of government answering the basic questions of
what, how and who. Hint: F.D.A. Social security, OHSA, Unemployment insurance, Unfair sales
act 100.30 Wis. Statute - AThe practice of selling certain items of
merchandise below cost in order to attract patronage is generally
a form of deceptive advertising and an unfair method of competition
in commerce@, Wine Lovers See Red(WSJ 9/24/08), CAFÉ, No Child let
behind law, minimum wage, E.P.A.] CAFÉ JEL Fall 2003, WSJ 11/14/05,
Government bails out AIG, GM, and Chrysler, Government owns 61% of
GM.
44.
[“Currently it can take $1 billlion, thousands of patients
23
and more than a decade to gather the evidence necessary to
approve a new cancer drug.” ESJ10/2 C1”]
Let's now examine the various forms of economic organization in
relationship to the economic goals discussed above.
Market
Efficiency
Liberty
Equity
Stability
45.
Command
Equity
Efficiency
Liberty
Stability
Traditional
Stability
Equity
Liberty
Efficiency
[How does market price affect efficiency, equity, liberty?]
Chapter 3 and 4 Demand, Supply, and Market equilibrium
Objectives:
1. The student will be able to define four types of
market organizations.
2. The student will understand the effect market
organization has on the economic goals of
efficiency, equity and liberty.
3. The student will be able to explain the
relationship between efficiency, equity, liberty
and the five basic assumptions of perfect
competition.
4. The student will be able to understand the
importance of ceteris paribus in making comparisons
be able to apply this concept to business and
households.
5. The student will be able to understand the
variables that shift the demand schedule.
6. The student will be able to understand the
difference between the Demand Schedule and quantity
demanded and apply this to the market place.
7. The student will be able to understand the
difference between supply and quantity supplied and
apply this to the market place.
and
24
8. The student will be able to understand the
variables that shift supply.
9. The student will be able to understand price is the primary
rationing mechanism (answers questions of what, how and who),
but there are other rationing mechanisms.
10. The student will be able to understand the advantages
(benefits) and disadvantages (costs)of using price as
rationing mechanism.
MARKET ORGANIZATION - The way an industry is structured. Structure is
defined by how many firms there are in an industry, whether products
are differentiated or are virtually the same, whether or not firms in
the industry can control prices or wages, and whether or not competing
firms can enter and leave the industry freely.
1. Perfect Competition - Characteristics described above. Pg 105
46.
[A CEO makes decisions of what and how, and government makes
decisions of what, how and to whom in a command system. What is the
important distinction between them?
2. Monopolistic Competition - An industry structure in which many
firms compete, producing similar but slightly differentiated
products. Pg 302
Barriers to Entry
1. Exclusive Control over important inputs
2. Economies of Scale
3. Patents
4. Government Licenses or Franchises Pg 273-274
3. Oligopoly - An industry structure with a small number of
(usually) large firms producing products that range from
highly differentiated (automobiles) to standardized (copper).
Pg 310
Duopoly - An industry dominated by only 2 firms. TeleAtlas and Navteq
WSJ 1/14/08 A2
Collusion Inquiry Targets Ice Companies WSJ 8/07/08
4. Monopoly - An industry structure in which there is only one
large firm that produces a product for which there are no close
substitutes. Pg 272
10/16/09
Wal-Mart Strafes Amazon in Book War A1 Benefits of competition
P.C. ────── M.C. ─────── Oligopoly ──────── Monopoly
47.
[How do you think each firm
market organization will affect
25
efficiency, equity, and liberty?]
48.
[The Wall Street Journal reported the following market
shares for appliances on 7/19/97:
Whirlpool
35%
G.E.
32%
Maytag
15%
A B Electrolux
(Frigidaire)
10%
Raytheon(Amana) 7%
What form of market organization does the appliance industry appear
to follow?]
50.
[The Wall Street Journal reported the following market
shares for beverages on 3/8/99:
Coca-Cola.......44.5%
Pepsi...........31.4
Cadbry Schweppes14.4
Scource:Davenport & Company LLC
What form of market organization does the beverage industry appear to
follow?]
51.
[The Wall Street Journal reported the following market
shares for music on 3/8/99:
Universal/PolyGram...24.5%
Warner Music.........18.2
Sony Music...........16.6
EMI Group PLC........12.9
BMG Entertainment....12.2
Source:Scoop Marketing
What form of market organization does the music industry appear to
follow?]
52.
[The Wall Street Journal reported the following market
shares for Tobacco on:
Philip Morris........66.62%
RJR Nabisco..........12.95
Lprillard ...........11.16
Brown & Williamson... 9.27
Source: WSJ 1/27/04
What form of market organization does the tobacco industry appear to
follow?]
53.
[The Wisconsin State Journal Reported on 1/24/06:
2005
U.S. Sales
World Sales
General Motors....26%
15
Ford..............18
11
26
Daimier-Chrysler..14
Toyota ...........13
Honda ............ 9
Nissan............ 6
Others ...........13
Volkswagen
7
12
5
43
8
Source: Ward=s Automotive Group (wardsauto.com)
What form of market organization does the automobile industry appear
to follow?]
54.
[The Wall Street Journal reported the following market
shares for phones on 3/8/99:
U.S. residential customers, in millions
AT&T/TCI...............80
Bell Atlantic/GTE......41
SBC/Ameritech..........30
MCI WorldCom...........20
What form of market organization does the telephone industry appear
to follow?]
Estimated 2004 market share of the top five U.S. residential
long-distance carriers:
AT&T ................. 30%
Verizon............... 12
SBC .................. 11
MCI .................. 9
Sprint ............... 5.5
6/10/04 WSJ
55.
[The Wall Street Journal reported the following market
shares for furniture on 11/7/98:International Inc (Broyhill, Lane,
and thomasville)Lifestyle Inter Ltd. (Drexel Heritage, Henredon,
Lexington) and La-Z-Boy Inc. have about 20% of the market and 1000
other manufacturers share the rest. What form of market organization
does the furniture industry appear to follow?]
56.
[The Wall Street Journal reported the following market share
at three major airports serving New York City:
2/9/99
98 share
99 share
1. Continental
22.2
WSJ 6/6/00
2. American
13.9
20.0
3. Delta
13.3
22.1
4. US Airways
9.6
5. United
8.1
6. TWA
4.6
11.7
7. Northwest
3.2
8. British Air
1.8
27
57.
What form of market organization does the airline industry
in New York city appear to follow?]
Newark, NJ
Washington Dulles
Pittsburgh
Boston
Orlando
Atlanta
Charlotte
Dallas/Ft Worth
Cleveland
Detroit
Minneapolis
Columbus
Salt Lake City
Denver
Los Angeles
Continental
United
US Airways
US Airways
Delta
American
Delta
US Airways
Southwest
Delta
US Airways
American
Continental
Northwest
Northwest
America West
US Airways
Delta
Delta
United
United
American
Southwest
55.8
54.6
85.9
23
22.1
14.9
31.7
13.9
9.2
75.3
89.6
69.8
56.1
77.6
79.9
23.2
16.7
16
74.4
73.2
26.9
12.1
11.6
58.
[Three companies control about 90% of the radio stations in
the U.S. WSJ 5/01]
59.
[Three companies-AT&T Comcast, AOL Time Warner and Charter
Communications Inc.,-will control 65% of the nation=s cable market.
WSJ 12/21/01]
[Ground shipping
Company
Market Share
UPS
59.8%
U.S. Mail
25.3
Fed Ex
12.9
DHL
2.0
10/6/03WSJ]
2/25/02 AWhy the Sudden Rise In the Urge to Merge And Form Oligopolies?
WSJ
60.
[ Mobile Phones
Company
Motorola
Nokia
Samsung
Siemens
I.G.
Market Share
15.3%
34.5
11.4
8.7
5.8
28
Sony Ericsson
Others
5.4
1
8.9
WSJ10/
30/03]
61.
[Confectionary Market WSJ 9/8/09
Mars
14.8
Cadbury
10.3
Nestle
7.6
Hershey
4.8
Kraft
4.5]
62.
[ Computer Industry
Hewlett
Dell
Toshiba
Apple
Other
Gateway
16
30
28
5
7
14 WSJ 1/3/08
Title Insurers
First American
Fidelity
Land America
Stewart
Old republic
All others
27%
29
18
11
6
8
WSJ 2/12/08 A1
The chicken and egg debate is relevant here. Remember the old
debate which came first the chicken or the egg? Some argue that teaching
good business practices is the best way to improve a flawed system.
I argue that good business practices are a function of the system and
will only change when the system changes.
Does ethics produce a good
system or does the system produce good ethics? Should our society teach
ethics in our schools and hope to produce a good society or should we
have a system that requires good ethics and business practices. Which
do you think will be most successful? Large numbers of buyers and
sellers, easy entry and exit, homogeneous product, perfect
information, and economic incentive mandate good ethics, i.e., good
business practices.
62.
[Which of the following businesses or industries do you
believe would most likely be efficient and equitable: postal
service, Wal-Mart, General Motors, General Mills, wheat
29
farming, and Dick's grocery?]
1. Perfect Competition implies the following assumptions: 1) large
number of buyers and sellers, 2) homogeneous product, 3) easy entry
and exit and 4) perfect knowledge on the part of producer and consumer,
5) economic incentive is present.
Pg 144-145
Let's examine assumption number one. In baseball, the reserve clause
tied baseball players to one team for life. There were not many buyers
for a players services in fact, only one buyer. As a result, players
bargained with only one owner. The owner also knew if the player refused
the contract he was offered, his only opportunity was to quit baseball,
since he could not bargain with another team. As a result, players
became exploited (received salaries below what they were worth to the
team).
In baseball stadiums concessions are generally operated by one
firm, and fans or other firms are forbidden to bring food or drink into
the stadium. What happens to the price of a hot dog compared to street
vendors? You guessed it, whamoo- $3.00 hot dogs. Now who is being
exploited? When there are many buyers and sellers for labor and
products, a fair trade is struck between producer and consumer. Have
you ever noticed that management and employees are more responsive to
consumer demands in Wal-Mart or K-Mart than in the U.S. Postal office?
2. Imperfect competition
1. Imperfect market structure
2. Monopolistic competition
3. Oligopoly
4. Monopoly
5. Monopsony
1/27/04 AHow Driving Prices Lower Can Violate Antitrust Statues@
Stock market AGoogle IPO Aims to Change the Rules@ WSJ 4/30/04
Baseball before free agency
Hot Dogs in the stadium
Postal Service
Microsoft Windows
Beer
Wal-Mart
1 buyer many sellers - Monopsony
1 seller many buyers - Monopoly
??
- ??
??
-
??
63.
[Classify the: postal service, Wal-Mart, wheat farming, and
Piggly Wiggly grocery store, Microsoft, HP computers into the
various types of market structure listed on page 52 of your text?]
64.
[Classify the above product or services from most to least
efficient and explain your answer?]
65.
[How does assumption one relate to the market power of
Wal-Mart and U.S. Post Office?]
30
66.
[List some markets that have large numbers of buyers and
sellers?]
Assumption number two - homogeneous product. This implies that
all the producers are producing the same product. Did you
ever ask yourself which farmer produced the last gallon of milk you
bought? Of course not, it is not important since all milk is identical
no matter which farmer produced it. Farmers are most efficient because
they do not waste time and resources trying to differentiate their
product. Farmers concentrate on lowering costs since product
differentiation does not matter and price is out of their control.
Assumption number three - Easy entry and exit into and out of
the marketplace. In the 1950's, 60's and 70's G.M., Ford and
Chrysler had very few rivals because of many barriers to entry such
as capital costs (the cost of starting an automobile company is hundreds
of millions of dollars or more), trade tariffs and quotas. What
incentive did the big three auto producers have to produce a quality
product? Quality at Ford, G.M. and Chrysler did not start to become
job #1 until the tariffs and quotas started to disappear.
Easy
entry forces companies to be consumer conscious. If one firm does not
deliver what the consumer wants, another will. In fact, large numbers
may not be as important as easy entry in maintaining efficiency. If
there is only one seller, but this seller is aware the market is easy
to enter, prices are restrained. The threat of additional competition,
if prices are raised too high, counterbalances few sellers.
Most cable TV companies are given a monopoly in their market area
(one seller). To counter balance this market power the cable companies
are regulated as to price.
3/28/03 AWisconsin lags in disciplining doctors, national report
says@ Wis. State Journal Repeat offenders from Web.
Market power is the ability to raise without quantity demanded
falling to zero. If all the competitive assumptions were valid, firms
will have no market power.(Page 263) What would happen to cable
companies prices and offerings if any firm who wanted to offer cable
could enter your local market? We shall soon find out.
05/15/08 Wal-Mart Raises Bar on Toy-Safety Standards WSJ B1
67.
[How has easy entry and exit affected professional sports?]
68.
[Will a sports monopsony affect entry or exit?]
69.
[A Market system Aincessantly revolutionizes the economic
system destroying the old one, incessantly creating a new one@
Capitalism, Socialism, and Democracy by Joseph Schumpter
31
How does this quote by Joseph Schumpter relate to the assumption
regarding easy entry and exit? How does this statement relate to the
AOn Reserve@ article of January 2001?]
Judge Opens Information Services to Bells
"Federal Judge Harold Greene, in an unusual order that warned of
flagrant anti-competitive behavior, allowed the regional Bell
telephone companies into the information-services market."1 This could
eventually result in telephone companies competing with cable TV
companies. Easy exit is as important as easy entry. If a firm is
not delivering the best product at the lowest price and is faced with
many sellers, the firm dies. But death of firms, unlike people, is not
final because these resources (labor, capital, land, entrepreneurial
ability and time) can be used elsewhere, dictated by consumer demands.
Socialism is the perfect example where business was not allowed to fail,
as a result, goods were few and of poor quality. An economist once said
there is no such thing as a free lunch. The freedom to fail produces
economic efficiency but it has its costs. People suffer the hardship
of unemployment, and as a result of unemployment, divorce, theft and
suicides occur.
70.
[How does the government attempt to minimize this cost?]
Assumption number four - Perfect Information about products and
production methods. No market will ever have perfect information, but
the importance of this assumption is that more information is better
than less. The better informed people are the better choices people
make in the market place, and as a result, markets function more
efficiently. Markets most often fail because information about the
product is lacking. As an example, someone advertises an imitation
diamond ring for $24.95. The seller is aware of the quality of the
imitation but the buyer is not. The purchaser receives the ring and
is disappointed. An inefficient trade has resulted in making the seller
better off but the buyer worse off as a result of insufficient
information.
10/24/09
Learning to Love Insider Trading WSJ W1
7/31/10
Sites Feed Personal Details To New Tracking Industry WSJ A1
Benefits and costs of the internet
http://www.newsweek.com/photo/2010/12/08/things-that-killed-the-in
ternet.html
1"Judge
Opens Information Services to Bells", Wall Street
Journal, July 26, 1991
32
People spend thousands, and sometimes millions, of dollars to
acquire more information. Think about how much money is spent each day
by all the stock analysts and accountants who provide private
individuals with better information on the financial status of
companies. Many companies hire economists to improve the information
about the future of the economy and their product. Magazines such as
Consumer Reports are published because individuals want more
information about: autos, T.V.s, stereos, boats and other products.
1/15/08
6/26/08
Insurers Stop Paying for Care Linked to Errors WSJ D1
How Technology Can Help Trim Auto Insurance WSJ D1
71.
[What is the main concern of most people when they purchase
a used cars? How does this concern relate to the assumptions of
perfect competition?]
72.
[Should the government insure no jobs are lost making CD’s,
phonebooks etc?]
10/21/03 AWhat would Adam Smith Say? WSJ e-commerce trade and
information
Information and Prices EC May 1, 2003
Radio Frequency identification Chips WSJ 5/13/05=Track inventory or
casino customers
Credence goods March 06 JEL pg 5 Goods or services where an expert knows
more about the quality a consumers needs. Auto repair, taxi cab ride
in a strange city,doctors www.wipricepoint.org
Rent Versus Purchase
Someone on a business trip needs transportation for two days. The
decision is to rent a car or buy a car and sell it two days latter.
The decision seems easy almost everybody rents the car.
73.
How does this decision to rent the car relate to imperfect
competition? Analysis]
Assume the same individual knows someone in the city that is
selling a car similar to the one he was going to rent. He also is aware
of another potential buyer. Dr. Ronald Coase won a Nobel Prize in
economics by showing how markets are affected by transaction costs.
Parts of the transaction cost of buying and selling a car is the cost
of acquiring information of what cars are available, the quality of
the cars, and potential buyers for those cars.
74.
Would you now rent or buy the car? Evaluation]
Some people lease cars (rent) instead of purchasing them because
33
the lease payments are less than the purchase payments. Others lease
because of tax advantages.
75.
Most people rent a vacation home for one or two weeks. Why
not buy it and sell it? Analysis How do time shares fit into this?
Analysis]
76.
[Give an example of how information makes your life more
technically and allocatively efficient.]
77.
[How will the world wide web affects these assumptions?]
A large employer can buy health insurance at a cheaper cost per
employee than a single individual. Economists call this asymmetrical
information. The buyer of health insurance has more information about
his or her health than the seller.
76.
[List other cases where asymmetrical information exists]
Assumption five - Economic incentive
Payment
Consumer ---------------- Producer
---------------Product
Consumer Insurer - Producer
Objectives
- (profits)- Objectives
T
P
N
A
E
Y
M
M
Y
E
A
N
P
T
Consumer -------------------- Producer
Product
77.
[List the objectives of the consumer, insurer, and
producer.]
78.
[Do the objectives of the consumer, insurer, and producer
coincide?]
79.
[Why do you think hospitals can charge significantly
different prices for the same quality care?]
34
80.
[What affect do the above six assumptions have on efficiency,
equity, and liberty?]
The chicken and egg argument does ethics produce a good system
or does the system produce good ethics. Should our society rely on
teaching business ethics in our schools and hope to produce a good
system, or should we teach business ethics and model our system in such
a manner that its operation requires good ethics and sound business
practices? Re-examine questions 32 in chapter 2. Countries that have
economic systems further from the competitive model have more
corruption. The economic freedom index, Ashows a strong correlation:
more economic freedom, less corruption.@2
When economics conflicts with ethics, economics usually wins.
Imperfect market structure often provides opportunities for economics
to conflict with ethics. When profits and ethics conflict, usually
profit wins. The NCAA, illegal drugs, and the stock market are a few
examples of economics conflicting with ethics. The NCAA regulates
college sports. Federal law prohibits the sale of certain drugs. The
Securities and Exchange Commission regulates activity in the stock
market.
The 117 division I-A schools in 2002 generated $454 million of
revenue, $219 million profit, on men=s basketball. CBS is paying the
NCAA $6 billion over the next 11 years to broadcast the men=s basketball
tournament; the money is shared among NCAA schools. AAmong other things
it shows how colleges, in their zeal to field teams that win games and
draw big money are tempted to look the other way when it comes to
enforcing academic standards@3
The office of National Drug Control Policy estimates for the year
2000 Americans spent about $36 billion on cocaine, $10 billion on
heroin, $5.4 billion on methamphetamine, $11 billion on marijuana, and
$2.4 billion on other substances. A seven-step analysis of illegal
drugs is given in chapter 8. Certainly here is a case where economic
interest conflicts with social interest.
Insider trading (trading on information not available to the
general public) is illegal in the stock market. The SEC has the
difficult task of trying to prohibit insider trading. When millions
and possibly billions of dollars can be made with inside information,
profits again conflict with ethics.
81.
[How successful will teaching business ethics be in
imperfect competition? Evaluation]
2Infrastructure
and the Wealth of Nations, Economic Commentary,
Federal Reserve Bank of Cleveland, January 15, 2002
3A
College Coach Pushed the Limits To Sign Top Talent, Wall
Street Journal 4/7/03
35
82.
[Identify specific assumptions in perfect competition that
will produce good business behavior i.e., from the perspective
of society. Analysis]
83.
[Would the ENRON scandal have occurred in perfect
competition? Analysis]
CIRCULAR FLOW DIAGRAM - Pg 47
Households - The consuming units in the economy. Households exist to
maximize peoples satisfaction. Households maximize satisfaction by
producing household goods and consuming both household and market
goods. Pg 46
Firm - An organization that transforms resources (inputs) into products
(outputs). Pg 46
THE DEMAND SCHEDULE IN PRODUCT (OUTPUT) MARKETS
The law of demand states that quantity demanded varies inversely
with the relative price of the product, other things remaining equal
(ceteris paribus). The variables that affect the quantity purchased
are:
1. Price of the product – quantity demanded
2. Income Demand
Buying Wine on the Dime 2/19/09 WSJ D1
Normal vs inferior goods
3. Wealth Demand
4. Price of other products Demand
5. Tastes
Demand
6. expectations of future price changes
Demand
36
Quantity demanded - The amount of a product that a household would
buy in a given period if it could buy all it wanted at the current market
price ceteris paribus. Pg 56 Quantity demanded changes when product
price changes and all other factors are held constant. Factors 2-6
determine the level of demand.
Cause and Effect reasoning has many potential pitfalls students should
be aware of these three:
1. Ceteris paribus
2. Post Hoc Fallacy
3. Fallacy of composition
UNDERSTAND THE CONCEPT OF CETERIS PARIBUS - Pg 11
84.
[Each one of these tests are trying to determine the cause
and effect. Determine if the following experiments are valid, if
not, determine what critical thinking skill would be important
to improve the test i.e., make a more accurate determination of
cause and effect.]
1. Test the corrosive power of two acids. The acid tested on
steel has much more corrosive power.
PROCEDURE: One acid is tested on steel the other on aluminum.
2. Test the effectiveness of two new drugs for healing cuts. The
drug tested on the 25 year old male healed the cut much
faster.
PROCEDURE: A doctor tests one drug on a 25 year old male
another drug is tested on a 60 year old female.
3. Test the relationship between price and quantity demanded. The
retiree purchased more at a higher price.
PROCEDURE: An individual asks a college student what
quantity would he or she buy at $10 per unit and
then asks a retiree what quantity he would buy at
$20 per unit.
4. Test for wage discrimination. The average wage of men in the
company is greater than the average wage of women.
PROCEDURE: An individual calculates the average earnings of
blacks versus whites.
5. Test the performance of the public school systems of various
countries. The country that has the highest score has the
best school system.
PROCEDURE: An individual examines the average performance of
high school seniors by giving a standardized test
of math and science skills.
85.
[What problem do all of the following experiments have in
common?]
37
Remember Michael Vincent wanted to raise his G.P.A.. Michael
decided that the cause of his low grade point was not enough study hours.
If Michael studies more hours and raises his G.P.A., can we conclude
that everybody can raise their G.P.A. by studying more hours. This is
an example of the fallacy of composition. What works for one individual
may not work for everyone.
86.
[Why would this decision to study more hours not have the
same effect for everyone? Analysis]
Michael=s friend observed he has been studying more lately and
his G.P.A. in the next three semesters has gone up. If Michael=s friend
attribute the increase in G.P.A. to additional studying she might be
making post hoc fallacy. Because the increase in G.P.A. followed the
increase in study hours it may not be the cause of the improvement in
G.P.A..
87.
[What other factors could cause an increase in Michael=s
G.P.A.? How does ceteris paribus relate to your answer?]
An individual was surveyed to determine the quantity of candy bars
he would buy at various prices. This schedule is called a demand for
candy bars and is shown below.
Quantity demanded
Causes
P 
Causes
Q

Demand (Page 52-53)
Income
Wealth
Price of other
products
Tastes
Future price changes
#Individuals
Table 4.1
Demand Schedule for Candy Bars
┌──────────────────────────┐
│
Price Quantity/per wk│
│
$1.00
1
A
│ 1 unit quantity demanded at $1.00
│
$ .75
2
B
│ 2 units quantity demanded at $ .75
│
$ .50
3
C
│ 3 units quantity demanded at $ .50
│
$ .25
4
D
│ 4 units quantity demanded at $ .25
│
│
──────────────────────────┘
Quantity demanded is represented by specific prices and the resulting
quantity purchased. Demand represents all prices and quantities that
will be purchased at these prices. Demand is the entire schedule in
the box above.
38
Demand #1
1.2
A
1
B
0.8
0.6
C
Deamnd #1
0.4
D
0.2
0
1
2
3
4
The equation for this line is Qd = 5 – 4P
Look at question 9 chapter 3.
Demand Schedule #2 - Change in Wealth
┌───────────────────────┐
│Price Quantity/per wk │
│$1.00
2
E
│ 2 units quantity demanded at $1.00
│$ .75
3
F
│ 3 units quantity demanded at $ .75
│$ .50
4
G
│ 4 units quantity demanded at $ .50
│$ .25
5
H
│ 5 units quantity demanded at $ .25
└───────────────────────┘
Graphically this is shown below as a shift to the right of the demand
schedule in figure 4.2 below.
The equation for this line is Qd = 6 – 4P
39
1.4
1.2
E
1
A
F
0.8
Demand #1
B
0.6
Deamnd #2
G
C
0.4
D
0.2
0
1
2
Demand Schedule #3
┌────────────────────────┐
│ Price Quantity/per wk │
│
$1.00
0 I
│ 0
│
$ .75
1 J
│ 1
│
$ .50
2 K
│ 2
│
$ .25
3 L
│ 3
└────────────────────────┘
3
4
- Change in Taste
units
unit
units
units
quantity
quantity
quantity
quantity
demanded
demanded
demanded
demanded
Graphically this is shown below in figure 4.3.
The equation for this demand line is:
Qd = 4 – 4P
at
at
at
at
$1.00
$ .75
$ .50
$ .25
40
Figure 4.3
Demand Schedule #3 - Change in Taste
Dollar Price
1.2
A
1
B
0.8
J
0.6
Demand #1
C
Demand #3
K
0.4
D
L
0.2
0
1
2
3
4
Demand Schedule #4 - Change in the relative price of a substitute
┌─────────────────────────┐
│ Price Quantity/per wk │
│ $1.10
1
M
│ 1 unit quantity demanded at $1.10
│ $ .83
2
N
│ 2 units quantity demanded at $ .83
│ $ .55
3
O
│ 3 units quantity demanded at $ .55
│ $ .28
4
P
│ 4 units quantity demanded at $ .28
└─────────────────────────┘
The equation for this demand line is:
Qd = 5.02 -3.65P
Candy bar B would be defined as a substitute good. Substitutes are goods
or services that cause the demand schedule for good A to shift right
when the price of good B increases and vice versa. Coke and Pepsi could
be substitutes.
88.
[Think of substitutes for: butter, gasoline, milk, casino
gambling, new cars, and cocaine.]
An increase in the price of a substitute will shift the demand for a
product or service to the right, increasing quantity purchased at every
price as shown in figure 4.4 below.
41
1.2
1
M
A
N
0.8
B
O
0.6
Demand #1
Demand #4
C
0.4
P
D
0.2
0
1
2
3
4
89.
[What would happen to the demand for the substitutes you just
named if the price of butter, gasoline, milk, casino gambling,
new cars, and cocaine increased?]
Winds Shift for Renewable Energy As Oil Price Sinks, Money Gets Tight
By TOM W RIGHT 10/20/08
90.
[Does zero percent financing on new cars affect the used car
market? If so, how?]
91.
[What might cause the price of these goods to go up?]
Assume this individual loves to drink a can of M.V. soda with the
candy bar. The price of M.V. soda doubles tomorrow, relative to the
price of other soft drinks. How will this price increase effect the
demand for other competing soft drinks and the demand for candy bars?
M.V. soda and candy bars for this individual are complements.
Complements are goods or services that cause the demand schedule for
good A to shift right when the price of good B decreases and vice versa.
Soda and potato chips are complements.
92.
[Think of some goods that are complements.]
93.
[Classify the book and the lectures in this course as either
substitutes or complements? Explain]
As the price of a complement increases the demand for complementary
goods decreases. This is shown as demand #5 in table 4.5 below.
42
Table 4.5
Demand Schedule #5 ┌───────────────────────┐
│Price Quantity/per wk │
│$1.00
0 Q
│
│$ .75
1 R
│
│$ .50
2 S
│
│$ .25
3 T
│
└───────────────────────┘
A change in the price of a complement
0
1
2
3
units
unit
units
units
quantity
quantity
quantity
quantity
demanded
demanded
demanded
demanded
at
at
at
at
$1.00
$ .75
$ .50
$ .25
The demand is shown in graphically form in figure 4.5 below.
Figure 4.5
Demand #5 - A change in the price of a complement
1.2
1
A
B
0.8
R
Demand #1
0.6
C
Demand#5
S
0.4
D
T
0.2
0
1
2
3
4
94.
[What are complements to butter, gasoline, milk, casino
gambling, new cars, and cocaine?]
Chief Executive Carly Fiorina of H-P, AShe says she is willing to allow
the computer=s $22 billion computer division to do little more than
break even because PC sales help H-P make money on printers, consulting
and consumer electronics.@ WSJ 5/12/2004
1/31/09
The Economics of Giving It Away WSJ W1
95.
[Are movies in the theater and movies on DVD substitutes or
complements?]
43
96.
[How will the quantity of video rentals be affected if movie
the industry lowers the price of tickets?]
97.
[How many markets will be affected by a change in the relative
price of butter, oil, milk, casino gambling and cocaine?]
98.
[Government announces a plan to pass a law freezing the price
of gasoline. Would this law impact other markets?]
The government announces a new snack tax of 10% which will apply
to candy bars next week. A snack tax law was passed in California.
Assume: 1) a snack tax is passed in this state and will take affect
next week, 2) The consumer is initially at demand schedule #1 shown
in table 4.1, 3) ceteris paribus(everything else remains constant).
Then the demand schedule is likely to change to demand #6 shown in table
4.6 below:
Table 4.6
Demand Schedule
┌───────────────────────┐
│Price Quantity/per wk │
│$1.00
6
U
│
│ .75
7
V
│
│ .50
8
W
│
│ .25
9
X
│
└───────────────────────┘
#6
6
7
8
9
units
units
units
units
quantity
quantity
quantity
quantity
demanded
demanded
demanded
demanded
at
at
at
at
$1.00
$. 75
$ .50
$ .25
1.2
U
A
1
0.8
B
V
0.6
Series 1
W
C
Series 2
0.4
D
0.2
0
1
2
3
4
5
The equation for this demand is:
6
7
8
9
44
Qd = 10 – 4P
Consumers expectations of future price changes have been affected by
the imposition of this snack tax. This shift (shown in figure 4.6 below)
in demand will not be permanent. Demand will revert back to normal
(Demand #2) after the tax becomes effective. Consumers respond to an
increase in the price of the product like any other increase and
quantity demanded will decrease. The new demand for candy bars is shown
in table 4.7.
99.
[How do entrepreneurs use consumer expectations of price
changes to their advantage to stimulate the shift in the demand
schedule for products?]
100.
[Does it make any difference to the producer if the demand
schedule
increases(shifts
right)
or
quantity
demanded
increases?]
101.
[When a merchant has a price markdown sale, is she/he relying
on a change in the demand schedule or quantity demanded to increase
sales?]
102.
[ When the same merchant advertises on T.V. claiming his or
her product is of better quality than the competitor=s product,
is the advertisement trying to increase sales by shifting the
demand schedule or quantity demanded?]
103.
[Decide if each of following events affect demand or quantity
demanded for cigarettes:
Event
a. Cigarettes cause cancer
b. In the market for Marlboro, competing brands
sell for
less.
c. Price of matches goes up
d. Government announces a tax on cigarettes starting tomorrow
e. Government announces a tax on cigarettes starting today
f. Per capita income increases
g. The price of cigarettes increases.
H. Price of nicotine patch increases.
I. Cigarettes companies announce a price increase next week
Why does it require a lower price for consumers to purchase more goods
or services? The answer is diminishing marginal satisfaction. Pg
142-147
The level of satisfaction gained from consumption exhibits diminishing
marginal levels of satisfaction as additional units of a product are
consumed. Pg 111
45
Market demand Pg 56
The Demand Schedule = F(I,Wt,T,Pc,Ps,Pe,#I) A change in product price
will never cause a change in the demand schedule.
I = Income
Wt = Wealth
T = Taste
These variables will
Pc = Price of a complement
shift the demand
Ps = Price of a substitute
schedule and cause a
Pe = Future price expectations of the
change in product
product
price assuming ceteris
#I = Number of individuals
paribus.
Quantity demanded is only affected by product price
Red
(ABCD)
Blue (EFGH)
Green (IJKL)
Brown (MNOP)
Purple(QRST)
Black (UVWX)
-
Original demand for candy bars
Change in income/wealth
Change in tastes
Change in a price of a substitute
Change in a price of a complement
Change in expectations
One characteristic of an efficient market, as defined above, is
a large number of buyers and sellers. A market demand schedule adds
the quantity demanded at every price by all consumers of the product.
Look at the two individual demand schedules shown in table 4.8 below:
Table 4.8
Michael's Demand Schedule
Anne Marie's Demand Schedule
┌──────────────────────┐
┌────────────-────────┐
│Price Quantity/per wk │
│Price Quantity/per wk|
│$1.00
0
Q
│
│$1.00
2
U
│
.75
1
R
│
│ .75
3
V
│
.50
2
S
│
│ .50
4
W
│
.25
3
T
│
.25
5
X
│────────────────---───┘
└─────────────────────┘
Assume these two consumers make up the market for candy bars.
104.
[What happens if a third consumer is added to the market
place? Synthesis]
46
1.2
Q
1
U
0.8
R
V
Michael
0.6
Anne Marie
S
W
Market
0.4
T
X
0.2
0
0
1
2
3
4
5
6
7
8
105.
[What happens to market demand if one consumer leaves the
market for candy bars? Analysis List some ways in which a market
can expand or contract. Analysis]
106.
[Determine what will happen to the demand schedule for a
computer word processing program if: 1 the price of computers
decreases, 2. consumers expect computers to fall in price, 3.
consumers expect software to fall in price, 4. consumers become
wealthier. Synthesis]
Below is a bus schedule with 5 arrival and departure times, for
the Askil Bus Company. Before the customer knows which bus she wants
to take, she must first decide on a departure time.
Arrivals
9:05 a.m.
11:05 a.m.
1:05 p.m.
3:05 p.m.
5:05 p.m.
Departures
10:00 a.m.
Noon
2:00 p.m.
4:00 p.m.
6:00 p.m.
This bus schedule represents all the possible arrival and departure
times of the Askil Bus Company. When you think of a bus schedule, you
think of a list of arrival and departure times. The demand schedule
represents all the possible price and quantity combinations of a good
and service that will be sold in a specific time period. If the bus
company states all arrivals and departures will be delayed by I hour
47
the entire schedule changes. If a friend tells you she will be departing
at two o=clock you now know when she will be arriving. When you think
of a demand schedule you should also think of many different prices
and quantities.
Supply schedule - A table showing how much of a product firms will
supply at different prices per unit in the short run, ceteris paribus.
Pg 80
The variables that motivate producers are:
1. Price of the product
2. Cost of production per unit
3. Profitability of related products
pg 62
Quantity supplied - The amount of a product that a household would
buy in a given period if it could buy all it wanted at the current market
price ceteris paribus. Pg 62 Quantity demanded changes when product
price changes and all other factors are held constant. Factors 2 and
3 determine the level of supply.
Supply Schedule #1 - Supply of candy bars
┌───────────────────────┐
│Price Quantity/per wk │
│$1.00
4000
AF
│ 4000 units quantity supplied at $1.00
│ .75
3000
AE
│ 3000 units quantity supplied at $ .75
│ .50
2000
AD
│ 2000 units quantity supplied at $ .50
│ .25
1000
AC
│ 1000 units quantity supplied at $ .25
└───────────────────────┘
The above is a supply schedule of candy bars for A.M. Candies. The
assumption here is that each level of production at the various prices
represents the profit maximizing level. This schedule can be shown
graphically in figure below. All the assumptions of perfect competition
apply. Intuitively the price must rise for the entrepreneur to produce
a larger quantity because the costs of production must rise.
Qs = 4000P
48
Supply
1.2
AF
1
1
AE
0.8
0.75
0.6
Supply
AD
0.5
0.4
AC
0.2
0.25
0
1000
2000
3000
4000
The following variables would cause A.M. Candies to change the desired
level of production (shift supply) at each price: cost of production,
technology, taxes, subsidies, and profit expectations of alternative
production. The supply schedule is upward sloping (larger quantity
supplied if prices increases) because cost increases as quantity
produced increases.
107.
[How do you think the supply schedule for A.M. candies would
look if the price of chocolate went up?]
The new supply schedule #2 is shown below in figure 4.11.
Table 4.11
Supply Schedule #2 - A Change in
┌──────────────────────┐
│Price
Quantity
│
│$1.10
4000
AG
│ 4000 units
│$ .85
3000
AH
│ 3000 units
│$ .60
2000
AI
│ 2000 units
│$ .35
1000
AJ
│ 1000 units
└──────────────────────┘
Cost
quantity
quantity
quantity
quantity
supplied
supplied
supplied
supplied
at
at
at
at
$1.00
$ .75
$ .50
$ .25
Quantity supplied refers to a specific quantity offered for sale at
a specific price. The supply curve has an infinite number of quantity
supplied points determined by each and every possible price of the
product. Only four of those points are shown above in table 4.11 and
below in figure 4.11. Supply represents the entire schedule shown in
figure 4.11.
49
This can be shown graphically in figure 4.11 below.
Qs= 4000P - 400
Figure 4.11
Supply Schedule of Candy Bars #2 - A change in the price of
1.2
AG
1
AF
AH
0.8
AI
AE
0.6
0.4
0.2
Supply #1
Supply #2
AD
AJ
AC
0
1000
2000
3000
4000
chocolate
108.
[What other costs of production could change the quantities
offered at each price (shift supply)?]
109.
[What happens to the supply schedule if the price of
chocolate decreases?]
Assume an assembly line is created that allows the production of
more candy bars with the same amount of labor. Assume the cost of setting
up this assembly line is negligible. How will the above supply curve
be affected? Any improvement in technology will act like a decrease
in costs and increase quantities offered at each price (shift the supply
curve to the right). This is shown in table 4.12 below.
Table 4.12
Supply Schedule #3 - A Change in Technology
┌──────────────────────┐
│Price
Quantity
│
│$ .90
4000
AK
│ 4500 units quantity supplied at $1.00
│ .65
3000
AL
│ 3500 units quantity supplied at $ .75
│ .40
2000
AM
│ 2500 units quantity supplied at $ .50
│ .15
1000
AN
│ 1500 units quantity supplied at $ .25
└──────────────────────┘
This can be shown graphically in figure 4.12 below.
50
Figure 4.12
Supply Schedule #3 - A Change in Technology
1.2
AF
1
AE
0.8
0.6
AK
Supply # 1
AL
AD
Supply # 3
0.4
AC
AM
0.2
AN
0
1000
2000
3000
4000
Qs= 4000P +400
Dollar Price
Now assume the government will tax candy manufacturers $.125 for
each candy bar sold. This tax is called an excise tax. An excise tax
is a tax which is levied on specific commodities. This tax will act
like an increase in cost and the price necessary to produced each unit
will increase (shift to the left of the supply schedule). Given the
firm is on supply schedule #4, the new supply schedule will be shown
in table 4.13 and figure 4.13.
Table 4.13
Supply Schedule #4 - An Excise Tax on Candy Bars
┌──────────────────────┐
│Price
Quantity
│
│$1.125
4000
AR
│ 4000 units quantity supplied
│ .875
3000
AQ
│ 3000 units quantity supplied
│ .625
2000
AP
│ 2000 units quantity supplied
│ .375
1000
AO
│ 1000 units quantity supplied
└──────────────────────┘
This can be shown graphically in figure 4.13 below.
Figure 4.13
An Excise Tax on Candy Bars
at
at
at
at
$1.00
$ .75
$ .50
$ .25
51
AR
AQ
AP
Supply # 1
AO
Supply #4
AD
AC
1000
2000
3000
4000
Qs = 4000P - 500
Supply Schedule of Candy Bars #5 - A government subsidy 5 cents
per unit.
┌────────────────────────┐
│Price
Quantity
│
│$ .95
4000
AV
│ 3500 units quantity supplied at $ .95
│ .70
3000
AU
│ 2500 units quantity supplied at $ .70
│ .45
2000
AT
│ 1500 units quantity supplied at $ .45
│ .20
1000
AS
│ 500 units quantity supplied at $ .20
└────────────────────────
Qs = 4000P + 200
110.
[Draw a supply curve for A.M. candies assuming the government
gives the company 5 cents for each candy bar produced.]
52
1.2
AF
1
AV
0.8
AE
AU
0.6
Supply #1
AD
0.4
Supply #5
AT
AC
0.2
AS
0
1000
2000
3000
4000
Assume A.M. Candies produces other snack foods such as potato
chips. Assume also that A.M. Candies expects the profitability of
potato chips to increase 12.5 cents relative to candy bars.
11/25/08 Cotton Can’t Weather the Downturn WSJ B1
111.
[How would this change in expectations of the relative price
and profitability of potato chips affect A.M. Candies= decision
to produce candy bars? How has the opportunity cost of producing
a candy bar changed?]
112.
[How would this change in expectations of the relative price
and profitability of potato chips affect A.M. Candies' decision
to produce potato chips?]
The new supply schedule would shift from supply #1 to supply #6 as shown
in figure below
┌─────────────────────────┐
│ Price Quantity/per wk │
│
S#1
S#6│
│$1.00
4000 AF
│-4000
│$1.125
4000
AF' │-3500
│ .75
3000 AE
│-3000
| .875
3000
AE' │-2500
│ .50
2000 AD
│-2000
│ .625
2000
AD' │-1500
│ .25
1000 AC
│-1000
│ .375
1000
AC' │- 500
└─────────────────────────┘
units
units
units
units
units
units
units
units
quantity
quantity
quantity
quantity
quantity
quantity
quantity
quantity
supplied
supplied
supplied
supplied
supplied
supplied
supplied
supplied
at
at
at
at
at
at
at
at
$1.00
$1.00
$ .75
$ .75
$ .50
$ .50
$ .25
$ .25
53
1.2
AF'
1
AF
AE'
0.8
AD'
AE
Supply # 1
0.6
AC'
Supply #6
AD
0.4
0.2
AC
0
1000
2000
3000
4000
Black (AC,AD,AE,AF) - Original supply
Green (AG,AH,AI,AJ) - Change in cost
Red
(AN,AM,AL,AK)
- change in technology
Blue
(AO,AP,AQ,AR) - change in an excise tax
Violet (AS,AT,AU,AV) - change in the profitability of a other good or
service
The Supply Schedule = F(C(Tx, Sb, Tc),Pr,#F) Changes in the price of
the product never cause a change in the supply schedule.
C
= Cost of production
Tc = Technology
Tx = Excise Taxes
Sb = subsidies per unit of
Production
Pr = Profitability on related
Production
#Fr = Number of producers in the industry
Changes in these
variables will cause
a shift in the supply
schedule and result in
a change in price
assuming ceteris paribus
Quantity Supplied is only affected by the market price.
MARKET EQUILIBRIUM Pg 62
Applications of the demand and supply schedule.
113.
Assume the individual demand relationship is represented by
the graph on page 34 or the equation Qd=5-4P. The market supply
relationship is represented by the graph on page 44 or equation
Qs=4000P. What is the equilibrium price of candy bars?]
54
114.
[List some alternative methods to ration goods other than
price. Which of these methods of rationing goods would be most
efficient and equitable?] Pg 97-105
Shortage of parking spaces on campus - Exponent Sept 19
Shortage of student planners - Exponent 9/19/02
http://www.washingtonpost.com/wp-dyn/content/article/2010/10/11/AR
2010101104496.html?hpid=topnews
In the market for candy bars the price of ice cream decreases and
candy makers union gets a wage increase.
In the market for candy bars the price of soda decreases and
a chocolate increases.
the
the price
In the market for candy bars today the state will place a $.50 tax on
each candy bar tomorrow.
In the market for candy bars consumers become weight conscious and a
new piece of capital equipment allows twice as many candy bars to be
made in one hour.
Examples of excise taxes would be a tariff on the importation of
foreign products and luxury taxes. The federal government in 1990,
passed a 10% luxury tax on cars costing $30,000 or more and boats costing
$100,000 or more. Recently this tax has been repealed.
115.
[How will this affect the supply schedule of these expensive
cars and boats?]
116.
[How will cold weather in Florida affect the demand and
supply for tomatoes?]
3/3/10
Tomatoes Get Sliced From Menus WSJ B1
117.
[If you are working for a manufacturer that produces luxury
cars or boats, would you favor this law? Explain.]
118.
119.
of
[Who pays the Realtors fee?]
[How do demand and supply schedules relate to the questions
what, how and who?]
120.
[Decide how each product market will be affected by the
following events:
1. The surgeon general states cigarette smoke is dangerous.
2. You graduate from school and get a $40,000 per year
job and you enjoy sea food.
55
3. You win the lottery and enjoy seafood
4. Price of quarter pounders increases relative to Big
Macs.
5. Restaurants start charging for catsup.
6. State of Wisconsin announces a snack tax of $.50 per
bag effective next week.
7. State of Wisconsin announces a snack tax of $.50 per
bag effective immediately.
8. Airline unions negotiates a wage increase.
9. Tractors become more productive in planting corn
10. Government gives farmers .$50 for each bushel of corn
they produce.
11. Price of wheat rises relative to corn.
12. The number of dairy farmers decrease.]
Other applications of demand and supply
1. free goods
air
pollination
7/11/08
To Be or Not To Be a Beekeeper WSJ A1
2. non-market goods
3. Price ceilings and floors
4. policy analysis
120.
[How does airline pricing relate to demand and supply?
8/26/10
You Paid What for That Ticket WSJ
121.
[Demand and supply questions 1-12 page 72-73]
122.
David Jones of Los Angeles's Water Conservation Team issues a warning
citation Friday because the homeowner allegedly was watering his flowers on the
wrong day of the week and at the wrong hours of the day. The city also has an
anonymous hotline and email address to report water wasters, a practice some
residents embrace and others disdain. WSJ 8/24/09 How does demand and supply
relate to “water wasters”? Is there a better solution?
9/7/05
3/22/10
AIn Praise of >Gouging= WSJ A16
A Fight for Maui's Water WSJ A3
123.
[8/22/02 ADiscounts on Power at Odd Hours@ WSJ Read this
article from the Wall Street Journal. Illustrate the demand
schedule and supply schedule for power during the day and the
evening. Application] Microsoft word file -notes/scan WSJ 5/2/08
B1
124.
[Does power discounts in the evening affect efficiency,
equity, or market liberty? Analysis
If yes, explain if
efficiency, equity or, market liberty increases or decreases.
56
Evaluation ]
5/19/10
10/18/10
Electricity: The New Math WSJ A6
High-Tech Cures for Water Shortages WSJ R1
Price is an efficient and
competitive market place.
Why is price efficient?
efficiency - Pg 6 notes
It
equitable
produces
rationing
technical
mechanism
and
in
a
allocative
STEP #1 - Should the U.S. set a price ceiling on oil?
STEP #2 - Transportation and heat are necessities of life.
STEP #3 - List the predicted consequences of this proposed policy on
efficiency, equity and liberty. Thoroughly discuss the assumptions
behind any changes in efficiency, equity and liberty.
If this policy has benefits i.e., efficiency, equity and/or
liberty increases, list them here and state the assumptions necessary
for efficiency, equity, or liberty to increase. If this policy has
costs i.e., efficiency, equity and/or liberty decreases, list them
here and state the assumptions necessary for efficiency, equity and/or
liberty to decrease.
1. equity increases
1. efficiency decreases
2. equity decreases
Benefits of This Policy
ASSUMPTIONS
1. Sufficient oil is available no shortage
develops
2. No Black Market develops
3. enforcement
Costs of This Policy
ASSUMPTIONS
4. Shortage develops (A)
5. Other markets are affected (A)
6. Sufficient oil is not available
7. Black Market Develops
8. No enforcement
3. Liberty decreases
STEP #4 - Assess the validity of your assumptions in part 3 and
make
a
decision
regarding
the
most
important
benefits
and
costs of this policy, based on which assumptions
appear to be the most feasible. Support your decision
on
57
which
assumptions
are
most
economic theory from this text.
reasonable
by
using
123. [Which of the above assumptions do you believe are most
valid?]
Assumption #3
You must assume strict enforcement of this law. Government
realizes that a price floor with no exceptions would discourage firms
from bringing to the market hard to reach oil. Oil that is very deep,
must be extracted from shale or other rock, or oil from under the
sea would not be brought to the market place. Therefore the government
establishes two price floors one for old easy access oil and the other
for new hard to reach oil.
124. [What is the incentive for oil companies under this two
tiered pricing system?]
When oil is stored it is very difficult to determine if this oil came
from old wells or new wells.
Assumption #4
Given a normal downward sloping demand and upward sloping supply
curve a lower price of oil should have market incentive effects for
producers and consumers. Consumers should react by being less energy
conscious and producers should be less willing to bring oil to the
market place (quantity demanded increases and quantity supplied
decreases).
Price answers questions of What, How, Who, and as a result affects
efficiency and equity.
If the government uses price to answer the "who" question, it
simultaneously affects the "what" and "How question.
AThe Misallocation of Housing Under Rent Control@ AER Sept 03
Chapter 5 Elasticity
Objectives:
1. Students will be able to compute arc elasticity of demand
2. Students will understand the determinants of elasticity
of demand.
3. Students will be able to explain how elasticity of demand
affects total revenue.
58
4. Students will understand pricing decisions based on
elasticity of demand.
ELASTICITY - Used to quantify the response in one variable when
another variable changes. Pg 86
Relatively Elastic
Relatively Inelastic
Unitary Elastic
Ed > 1
Ed < 1
Ed = 1
Midpoint formula Pg 101
Elasticity and total revenue Pg 93

Inelastic
P x Q = TR  Increases
Elastic
Unitary

P x Q
= TR  Decreases
Total revenue does not change
Determinants of Elasticity
1. Availability of substitutes
2. Percentage of our budget
3. Time dimension Pg 94
125. [ Assume the local gas station believes the elasticity of
demand for its= gas is -2.0 and the elasticity of demand for
candy it sells is -.75. The store owner views gasoline and
candy bars as complements. Explain. Application Devise a
pricing policy for this owner for gasoline and candy given
the above elasticities of demand. Application]
126. [What would be your estimate of the elasticity of demand
for electricity? Analysis]
127. [If Wal-Mart lowers the price of gas 1 cent below its
competitors, what do you think Wal-Mart estimates the
elasticity of demand for gasoline to be? . Application
128.
[Estimate the elasticity of the demand for gasoline]
Distributional and Efficiency Impacts of Increased US Gasoline Taxes
59
AEA June 09
129. [Estimate elasticity of demand for heroin and cocaine.
Application]
130.
[The State of Wisconsin has increased the tax on cigarettes
by one dollar (1/19/07). Why?]
131.
[Will the tax increase revenue ceteris paribus? Why is
ceteris paribus violated?]
Other elasticities
1. Income
2. Cross-Price
3. Supply
130. [List 5 products that you think are relatively inelastic
and relatively elastic]
131.
[Problems 1-16 Pg 98-99]
1/99 AThe Great Trade Debate: From Rhetoric to Reality@ Fed of Chicago
Multilateral Trade negotiations: Issues for the Millennium Round
Review(fed of St Louis) July/Aug 2000
AThe Controversy over Free Trade: The Gap Between Economists and the
General Public@ Review(Fed of St Louis) Jan/Feb 2002