COMM171 Principles of Economics Lectures & 2, Fall 2024 PDF

 Syllabus e not needed Textbook library · in Break down Quizzes : 10% (3 quizzes only 2 count twards final mark) Assignments : Co% (apply economic applicat...

 Syllabus e not needed Textbook library · in Break down Quizzes : 10% (3 quizzes only 2 count twards final mark) Assignments : Co% (apply economic applications) Mid-term : 25% 2 Final : 45 % ~optional weekly tutorials * if needed contact commerce office Research participation (one course  key terms (g. S : goods and services Mircoeconomics : how indviduals , households and firms make decisions and how they interact Macroeconomics : how the economy behaves as a whole and how governement and central banks manage : Economy : Micro · System produces goods and services 2: Macro planned gouvernement : (venezuelal Market : private identities · 3: Micro Economics: the social Science that studies the production, distribution and consumption of S g. Invisible hand : the way self interest can lead to good results Market failure : bad resuts for society Carbon Gouvernement · intervention · Opioid crisis (Market fails) Competitive Markets many buyers Four principals of individual choice: 1 Choices. are necessary (sparcel. The true cost 2 (opportunity cost) 3 "How much" margin (Marginal. decision). (Explotation) 4 people response to incentives Lecture 2 specialization gains from I There. are trade something specific you do best) (what Specialization of labour : keep · Comparative Advantage 2 Markets. move towards equilibrium equilibrium · · Ex : coffee companies. 3 effciently achieve resources should be used to society's goal · Equity : "Faire shares 4. Markets (in equilibrim) usually lead to efficiency trade-offs between equity and effciency may justify intervensions. governement 5 interventions can improve society's welfare when markets don't achieve efficiency Three principals that guide econimy is income ones persones Spending a others of overal spending something gets out like with economy's productive capacity governement policies can change spending * factors of impact of lower consomtion * impact for inflation governements on goods A consumtion on consumers  anwsers pink my - blue-right COMM171 PRINCIPLES OF ECONOMICS LECTURES & 2, FALL 2024 If you have questions about these exercises (or you spot a typo), feel free to book an office hour slot with Paula Lopez-Pena [link] or email your question to [email protected]. In-Class Practice. Individually or in groups, try to answer the following questions: 1. What is an economy? A country where the government owns all the firms and decides both what and how much each produces cannot truly be described as having 'an economy.' a) True Planned economy b) False ~ 2. Scarcity, opportunity cost, and trade-offs. Which of the following statements is true? (Choose one) a) If a friend invites you to the cinema and offers to pay for your ticket. Hence, there is no opportunity cost for you. False (always one opportunity cost) b) A working parent can earn $25 CAD/hour; : nanny costs $20 CAD per hour. The parent should work as much as possible because the opportunity cost of not working stands at $5 CAD per hour. false There is an opportunity cost whenever you use any scarce resource-be it time, money, attention, or willpower. ~ d) None of the above. 3. Principles of economics. Which of the following economics principles have been completely disregarded here? (Select all that apply.) a) Labor specialization allows people to produce more of some GrowA Large good. Grop - Of Different b) Trade is most beneficial when each person exploits their (lawn) Food u. We Coold 4/ comparative advantage. comparative advantage Producing a good is not free: it has an opportunity cost. - Trade With Eachother d) None of the above And Eat For Pactically FREE ( grow Food not Launs Possibility Production Frontier 4. You are stranded on an island rich in clams and mangos. If you spend all your time harvesting clams, you can get 100 clams weekly. If you spend all your time collecting mangos, you can get 200 mangos weekly. Assume it is possible to collect fractional amounts of both goods and draw a sketch of your. production possibility frontier for a week. (Place mangos on the x-axis and clams on the y-axis.) Show that your opportunity costs are as follows: 1 mango costs 1/2 clam; 1 clam costs 2 mangos. 100 clams weekly 200 mangos weekly  Models in economics Model : a simplified reprsentation of a real situation used to better understand and predict > - key insites PPF assummed all graphs are to not change - goods----not I peasible X= 0 inefficien goods X max x = c y A person firm country has comparative , or a advantage................ D- not feasible : PPFe inefficiency , opportunity cost and economic growth Calculations : - rise Slope : run 3 6 30 Slope : = = - unit opportunity cost 40 4.. for every additional small jet you produce you give up to 3/4 dreamline full officenticy capacity every point below the line is when avent the (idol you making ↓ inefficiency throughout says nothing about economy distributes ethically how well an Curves : more like these questions on the exam PPF helps demonstrate · ------ benifits comparative advantage brazil has the comparative advantage on small jets * different C A specialize. in their own then trade with diff comparative A  5. Match the column. Match each item from the first column with the correct item from the second column to form a complete and correct answer. 1. PPF frontier represents... The maximum amount of good 1 that can be produced if we give up to producing good 2 entirely 2. PPF intersections with the Inefficient/unfeasible production options axes represent... 3. Points inside/outside the The maximum amount of good 1 that can be produced PPF represent... given how much of good 2 is being produced 6. Fill in the blank table using the information from the below graph: U.S. Chinese (a) U.S. Production and Consumption (b) China's Productior and Consumption Quantity of Quantity of Opportunity Opportunity trucks U.5. production trucks China's production with trade China's Cost Cost and consumption 100,000 consumption autarky with trade U.S. consumption with trade China's 1m - ↓ 62.50C L 50,000 U.S. production 50,000 production phones 1000 250 and consumption 37,500 in autarky truck 1000 & 250 50 75 100 0 100 125 200 Quantity of phones Quantity of phones 100, 000 (millions) 50, 000 (millions) : 1000 : 250 100 200 7. Consider the following opportunity cost table. Which of the following statements are TRUE? · a. The US should specialize on small jets U.S. Brazil b. The US should specialize on large jets Opportunity Opportunity C. For the US, selling 8 small jets to Brazil in Cost Cost exchange for 8 large jets is a beneficial trade deal O d. For Brazil, selling 12 small jets to the US in 1 small jet 3/4 large jet 1/3 large jet exchange for 2 large jets is a beneficial trade deal large jet 4/3 small jets 3 small jets INTRODUCTION TO COMPARATIVE ADVANTAGE Final takeaways 1) Opportunity costs determine your comparative advantage as a person, firm, or country 2) Trade allows everyone to consume more when they specialize in whatever they have a comparative advantage at 3) The PPF illustrates many important economic concepts we have covered in Lectures 1-2, including: opportunity cost (trade-offs), comparative advantage, and inefficiency in production, and gains from trade. 4) But, as every model, the PPF makes unrealistic simplifying assumptions and is silent on many important aspects on an economy-e.g., whether everyone in a country gets a chance to enjoy the benefits from trade. Lecture 3 : Law of demand Demand curve represents buyers' (consumers') behavior It shows demanded. the quantity (Qd) at various points. 1) substitution effect bananas if expensive : by apples are 2) Income effect : can't afford so many apples you along the demand movement curve in factors changes other than the good's price A shift in demand is "increase rightward an in demand 6 factors I. Change in price of related goods : substitutes 2 in price of. Change related goods: Complements. 3 Change in buyers in come 4. Change in buyers taste 5. of Changes in the number consumers 6. Change in buyers expectations Individual Demand vs. Market Demand  COMM171 PRINCIPLES OF ECONOMICS LECTURE 3, FALL 2024 If you have questions about these exercises (or you spota typo), feel free to book an office hour slot with Paula Lopez-Pena [link] or email your question to [email protected]. In-Class Practice. Individually or in groups, try to answer the following questions: 1. Suppose that Coca-Cola decides to products unliterally. Assume nothing else happens in increase the price of its the market for cola drinks ("ceteris paribus"). Draw two graphs to show how the demand curve will change in the Coca-Cola and Pepsi markets (one graph for each market). P P B pepsi 42 I col....... Pl - I -....... D Q P----- D. 2. Which of these diagrams illustrates the effect of decrease in income on Walmart's "Great Value" products? a) A and C b) Green Glant A only Green F Geant Vert c) B only Pois verts d) Conly > $2 69 $ 4 33 Great Value Grade Green Peas Green Giant Cda Summer Sweet Peas (118) A**** (142) 1 each 750 g 3. When the price of petroleum goes up, the demand for natural gas the demand for coal and the demand for solar power (Assume gas, coal, and solar power are substitutes for petroleum.) e) Increases; increases; increases f) Increases; increases; decreases g) Decreases; decreases; increases h) Decreases; decreases; decreases 4. Which of the following will cause an increase in the demand for autos? a) The price of car tires has increased because of a Malaysian rubber shortage. b) Concrete steel reinforcing rods are replaced by aluminum along the Atlantic coast to prevent rusting. c) Gasoline prices drop by 50% when OPEC nations increase production. d) McDonald's increases its hamburger production in response to consumer trends. Note: The Organization of the Petroleum Exporting Countries (OPEC) is a group of oil-producing countries that have an agreement to control the amount of oil that each country can produce and sell. It includes Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.  TRY TO DRAW A GRAPH TO ANSWER THE FOLLOWING QUESTIONS: 5. If garden gnomes regain popularity, what will happen? a) Equilibrium price and quantity both fall. b) Equilibrium price and quantity both rise. c) Equilibrium price falls and quantity rises. d) Equilibrium price rises and quantity falls. 6. If the cost of wood falls, what will happen to equilibrium price and quantity in the violin market? a) Both fall. b) Both rise. Price falls and quantity rises. Price rises and quantity falls. 7. Consumers in Mayville consider houses and apartments to be substitutes. There is an increase in the price of houses in Mayville at the same time three new apartment buildings open there. In the market for apartments in Mayville: a) The equilibrium price will rise. b) The equilibrium price will fall. The equilibrium quantity will rise. d) The equilibrium quantity will fall. > Hint: There are three possible correct graphs. The chosen response must be true in any and all of them. Supply Curve and Schedule of Supply Curve represents the behavior sellers Quantity Supplied (Qs) : The quantity produces are willing and able to sell at a particular price Reasons: I changes in input prices (opportunity cost) 2 changes in prices of related goods/services.. 3 Changes in technology ↑ of producers 4. Changes in number P opparate without goemement intervensions * > at pH Q Q Surplus moving along the demand curve find theSweet spot (Equilibrium price) Q At pl QD) Qs Shortage : - equilibrium price Pr ·  Lecture 4 : Economic well-being interference Why governement reduce economic will in markets can being consumers enjoy a surplus when the price they pay for a good or service is lower than the price they one willing to pay for it producers enjoy a surplus when the price they can charge a good or sener is higher than the min Producer Surplus: difference between Straight line price and the price - market at which firms ore willing to the product P S supply Total Surplus S lly , P restrictions price controls : legal on how high or low a market price may ge Maximum price celing : Before floor Minimum price : governement imposes a pC (price celling Demand curve will show how many people will purchase the supply consumer surploce is the are inbetween the Os and demand ame It effect Deadweight : loss CDWL : economic well-being lost Closs at Surplus associated with units of the good that are no longer produced/ purchased and effect : ↓ PS : 3rd effect : Cs ? (unknown) Win or lose us us can purchase no longer able to cheaper bread purchase Surplus There has been a transfer from producers to consumers 3.Wasted resources 4. inefficiently low quality 5. Black markets Sometime governements intervene to push market prices up instead of down How price floors cause in efficiency 3. Waste of resources · 4. inefficiently high quality. Black 5 market I DWL. 2 &CS firms. win : who can sell at a higher price 3 PS. lose : no longer profitable/cannot sell the good transfer of surplus from consumers and producers imposing a high price imposes an inefficent allocation of sales opportunity cost for higher than buyers are willing to pay mutially benifical No control is better for the enionement price Governement controls quality Quata When theres a scarcity the price gas up  COMM171 PRINCIPLES OF ECONOMICS LECTURE 4, FALL 2024 If you have questions about these exercises (or you spot a typo), feel free to book an office hour slot with Paula Lopez-Pena [link] or email your question to [email protected]. In-Class Practice. Individually or in groups, try to answer the following questions: 1. Consider the below table. If a price ceiling of $700 is imposed on this market, the result will be an inefficiency in the form of a million apartments. Rent Quantity Demanded Quantity Supplied 1. Shortage of 0.6 (per apartment (millions of (millions of 2. Surplus of 0.2 per month) apartments) apartments) $1,400 1.6 2.4 3. Shortage of 0.2 1,300 1.7 1,200 2.3 4. Surplus of 0.6 1.8 1,100 2.2 1,000 2.1 2.0 2.0 900 2.1 800 1.9 2.2 700 1.8 600 2.3 1.7 2.4 2. Consider the below figure. One effective price ceiling would be there would be the price indicated at point and a equal to the difference between points Price] 1. d; surplus; e and h Supply 2. b; surplus; f and e 3. b; shortage; f and e 4. d; shortage; i and h > -- "Demand Quantity 3. A price ceiling on good often results in: 1. More communication between buyers and sellers about the appropriate price. 2. Black market or underground transactions of the good. A more efficient allocation of the good to buyers. 4. A surplus of the product. Look at the below figure The Market for Hybrid Cars. What area represents consumer surplus if there 4. is a binding price floor at P1? Price] 1. a+b+c 2. a 3. a+b+d 4. a+b Q; Quantity  5. Consider the below graph. A price floor has been set at results from this point b. The area of deadweight loss that price floor is: Price 1. fgi Supply 2. egh 3. efg 4. ghi Demand Quantity 6. The the persistent unwanted surplus that results from a price floor causes inefficiencies that include all of following EXCEPT: 1. The temptation to break the law 2. by selling below the legal price. Wasted resources. 3. Inefficiently low quality. 4. Inefficient allocation of sales among sellers. 7. Consider the graph from the lecture notes titled "Effect of a quota on the market for taxi rides." Draw a new graph that shows the supply curve before and after the quota (S1 and S2) and identify the areas corresponding to the new consumer and producer surplus (CS and PS). Fare (per ride) $7.00 Deadweight loss 6.50 6.00 The 5.50 "wedge" 5.00 - 4.50 4.00 3.50 3.00 0 8 10 11 12 13 Quantity of rides (millions per year)  consumer surplus producer surplus ① Calculate the p" amount at eqularibrium 54 = 270- Sp · supply QS = 10p e = 10(18) = 180 = 180...... : 270 - 5p = 10D ⑧ Demand P = 18 equlibrium o 180 Demand equation 270-5p : o = supply = 0 = 10p p = 54 P = 0 Consumer surplus is the area above the demand curve and above the market price Producer Surplus is the above the below the market price area supply curve and Production is the process of turning imports into outputs 12 fixed inputs quantity is fixed for a period of time and cannot be varied vanable input firm any time : an input whose quantity the can vany at is period in be long run the which all inputs can varied short run is the period in which at least one input is fixed Marginal product of an input is the additional quantity of output that is produced by using one more unit of input farm 2 = 20 acres = 18 - 12x8 Total ATXQ cost : p = curve - TC = 18 - 12x8 = 48 = FC + VC Steeper as more output is produced , as a result of diminishing returns as output increases due to diminishing returns to labor Mc = TC/ Q Where : change = TC = total cost Q = quantity of output Fixed cost is the same cost curve Variable cost increasing small amount of fixed cost TC VC more sell you fixed cost Worker producing less and less - I TC + Fc = VC Average fixed cost decreases Price - ATC. Q 18-  COMM171 PRINCIPLES OF ECONOMICS LECTURE 5, FALL 2024 Individually or in groups, try to answer the following questions: 1. Consider the below table. What is the marginal product of labor of the 5th worker? Marginal product Quantity Quantity flabor 64 of labor L of wheat Q MPL = AQ/AL a) (workers) (bushels) 0 (bushels per worker) b) 75 G c) 11 0 19 36 17 d) 9 15 51 13 64 C 75 91 96 2. Consider the below table. The marginal product of the fourth unit of labor hired is: a) 10 Quantity of labour Total output b) 3 12 O c) 4 25 d) 0 36 40 43 baskets, three workers make 45 baskets, and four workers 3. If one worker makes 14 baskets, two workers make 34 make 50 baskets, which worker yielded the highest marginal product? Try to fill the table to help you find the right answer: AL MPL = AQ/AL The first worker 14 O The second worker The third worker The fourth worker of the: 4. Marginal product is the slope a) Marginal cost curve. G b) Total product curve. c) Long-run average total cost curve. d) Total cost curve. 5. You own a deli. Which of the following is most likely a fixed input at your deli? Ca) the dining room b) the bread used to make sandwiches the tomato base used to make soups d) the employees  6. produce widgets. Currently, you produce 4 widgets at a total cost of $40. Suppose you could produce one You more widget (the fifth) at a marginal cost of $5. If you do produce that fifth widget, what will your average total cost be? Has your average total cost increased or decreased? Number of Total Cost Average a) Your average total cost has decreased to $11. Total Cost Widgets b) Your average total cost has decreased to $9. 48 4/48 = 18 c) Your average total cost has increased to $9. d) Your average total cost has increased to $11. 45 45/5 = 9 7. When output equals 15, average total cost is $12. When output equals 16, average total cost is $13. The marginal cost of the sixteenth unit is: O a) 28 b) 12 c) 13 d) 14 8. At high levels of output the spreading effect is: O a) stronger than the diminishing returns effect. b) weaker than the diminishing returns effect. 9. Why does the Marginal Cost curve "cut" the Average Total Cost curve from below? The key is the difference between "marginal" and "average." Suppose there are two individuals in classroom (#1 and #2). Person 1 weights 70 kg. and person 2 weights 80 kg. A third person (the marginal person) enters the room. Fill up the gaps in the below tables: Person Individual Average Person Individual Average Weight Classroom Weight Classroom Weight Weight 1 70 70 70 70 80 (70+80)/2 =75 80 (70+80)/2 =75 3 (Marginal Person) 74 L75 3 (Marginal Person) 76 7 75 What happens to the average classroom weight when the third person enters the room? ↑ the marginal person's weight is above the current average weight. · It when It when the marginal person's weight is below the current average weight. 10. Can the average cost (AVC) fall while the marginal cost (MC) increases? O Yes b) No Clue: Consider how you calculate your grades. If you are normally an A student and have an 80% average in Accounting, you will likely be disappointed if you received a 50% on a Midterm. Say, on the next midterm, you receive 65% this better than the 50% from last time but is still bringing you down from the A average you had hoped for. This is similar to the case of MC and AVC. MC is like the midterm grades - even when it is increasing, if it is still below your average, it will continue to bring it down, and when it is greater than average, it will bring it up. [Source: Hutchinson, E, 2016. Principles of Microeconomics. University of Victoria.] Short-run Production: Takeaways Lecture 5 covers how firms make production decisions in the short run, where at least one input (e.g., land) is fixed. Long-run production decisions, when all inputs can change, are not covered in this course. Understanding production and cost curves is essential for understanding how firms decide when to enter, stay, or leave a market. The "big picture: will become clearer in Lecture 6, which focuses on these decisions. The most important cost curves are Marginal Cost and Average Total Cost. The rest of the concepts and curves covered in Lecture 5 will help you understand where MC and ATC come from. voice Lecture Perfect competition and the supply curve perfect Competition (PC) is a model (Baseline Model) no real world situation fully matches the model , but Some Situations come closer PC is helpful because it gives clear predictions about prices quantites , and surpluses property of The baseline po has the nice being efficient Efficient : made off without pareto optimal better : no one can be making someone wrose No missed opportunities All mutually beneficial : trades occure PC.. key characteristics 1. Many buyers and sellers , each with a small market share. Market Share : The fraction of the total industry output accounted for by that producers out Both sellers and buyers are price-takers Each participant is a drop in the bucket Defirenciate from. The product 2 is standardized across sellers. competitors Consummers regard different sellers' products as equivalent. Free entry 3 and exit can easily entre and exit the industry ! profit maximizing - Production and Profits Total revenue= price x quantity sold Profit = total revenue-total cost economic profit I Accounting profit Definition ummun implicit Marginal Revenue : increase in revenue results C profit that from the sale of one additional unit opportunity Optimal output rule : is maximized by of output ! of output best pos producing the quantity at which the marginal of the last unit Marginal Cost : revenue produced is equal to it's marginal. Change in total production cost. Marginal Revenue : MR ATR/AQ cost that comes from producing v one additional unit 1 extra unit/ cannot influence Why is profit maximized where MRF MC Each time the firm produces another unit , there are extra costs and revenues If profit producing another unit adds more to revenue than its costs , will increase. -if MR MC , profit MC 6th unit is expensive producting more will add to P more MR = - if MR MC. producing less will add to profit than the 5th marginalrevenue Stop selling when MC is Since MRFP for competitive firms , the profit-maximizing rule is : exactly equal to MR Choose the of output P MC quantity where = As long as increasing production by one more unit creates more MR than MC , it make sense to use this method provided on the left Stop producing when you stop making profit o economies : The Break-even price of a conclusion firm one price-taking the market One unit at a time price at which earns O economic profit -  NOTES : no every unit is equal in price profit TR-TC - = = PPQ - ATC * Q = (P- ATC) · Q Finding your profit 1) Optimal output rule : Qat MR = P = MC C profit will be the (p-ATCa) xQ A+ p = 18 Q = 50 = = (18 - 14 40). x50 = (3 60) x50. = $180. 00 Qat p = 10 ? = 30 10 00. - 14 67. = (10. 00 - 14 67). + 30 = - 4 67. = ( 4 67)x30 -. = (-140 00). Loses don't immediate Shut down; fixed cost must paid of weather the firm- mean be regardless produces in the short un Firms will choose to produce (even at a loss) if they can cover their variable AND SOME of their fixed cost Ignore sunk cost (cost that have already been incurved and cannot be replaced) The short-run industry supply curve. The industry supply curve shows the relationship between the price of a good and the total · output of the industry as a whole The Short-run industry supply curve shows how the quantity supplied by an industry depends on the market price given a fixed number of producers There is short-run market equilibrium quanity · a when the supplied equals the quantity demanded taking , the number of producers as given  COMM171 PRINCIPLES OF ECONOMICS LECTURE 6, FALL 2024 Individually or in groups, try to answer the following questions: Q1. Which of the following markets is likely to be the most competitive? cable television b) automobiles and trucks c) oil refining d) farm commodities 02. If a firm is earning positive economic profit, it must be the case that: a) price is less than average cost. price is equal to average cost. c) price is equal to total cost. O d) price is greater than average cost. 03. If Gnomes-R-Us (a competitive firm) produces where the marginal cost curve intersects with the average total cost curve at its minimum point, the firm will earn: a) positive economic profits. zero economic profits. c) a short-run loss. Q4. The next five questions refer to the graph: Costs and Price (Y-axis) - Quantity of Output (X-axis) 04.1. At an output of units, what is the average fixed cost? a. $3 b. $4 c. $5 d. $6 04.2. At an output of 2 units, what is the total fixed cost? a. $3 Price b. $4 c. $5 Price and d. $6 04.3. What is the profit at a price of $12? Costs a. $0 b. $60 c. $84 d. $144 04.4. At a price of $4 what will the firm do? a. Shut down and save fixed costs 78 9 10 11 12 13 14 15 16 17 18 Quantity of Output b. Increase output to increase total revenue C. Stay open and earn short-run loses d. Exit the industry Q4.5. At what price will the firm shut down? a. $3.50 b. $4 c. $4.50 d. $5  esc MC curve a point on its (and is producing at faces short-run losses tab keep producing even if it as. Should a competitive firm tat is above the minimumnormal AVC curve)? profits. Yes, it is earning costs and some fixed costs. b) Yes, because it covers its variable incur losses. firms: No, it should never firms results in all c) industry with identical Q6. The long-run market equilibrium in a perfectly competitive economic profit. their break-even price. a) earning zero hift b) producing the quantity associated with at which MR = MC. c) producing the profit-maximizing quantity true. d) All of the above statements are the following are true? Which of into a competitive market. to S3, the new equilibrium 07. The below graph represents firms' entry a) When supply increases from 52 b) individual Fim break-even price price is the some break-even price, b When the equilibrium price is the (a) Marki they earn zero profit. of tree of tree 5, firms exit the market because the price drops from to S3, When supply increases from 51 $18 to $16 When supply is S1, the optimal amount of output for an d) 50 and its profit is $180 individual firm is 10,000 Quantity of trees Quantity of tree increase in demand. an industry responds in the short and long term to an Q8. The graph below shows how (b) Short-Run and Long-Run c) Existing Firm Response to Market Response to New Entrants (a) Existing FIrm Response to Increase In Demand Increase In Demand Price, Higher industry Price cost Price, output from new Long-run cost An Increase entrants drives industry supply in demand price and profit MC raises price back down, and profit. Quantity Q, Quantlty Quantity Increasein output wentrants are true? Which of the following increased from Qx to Qz After the initial increase in demand, the quantity exchanged a from $18 to $14 b) After the initial increase in demand, the price dropped and the price dropped from $18 to $14 quantity supplied increased to Qz, c When new firms entered the market, the individual supply curve from Y to Z d) When the price dropped from $18 to $14, existing firms moved along their PERFECTLY COMPETITIVE MARKETS PRODUCTION AND THE SUPPLY CURVE IN Final Takeaways questions that define the supply curve: 1) How do firms decide how much to produce at each market price Lecture 6 answers two key to maximize profits? and 2) When should a firm enter, stay, or leave a market? Firms produce every unit that brings a profit, matter how small (optimal output rule) > Graphically, this level of output no is given by the intersection of the MC and the market price (Q* at which MC=P) we look at The economic profit determines whether a firm enters, stays, or leaves the market. To calculate economic profit, we calculate Profit= (P-ATC) x Q* the Q* for which MC-P, and then find the ATC associated with that output level. Then You enter a market when profit>0 and stay when profit ≥ 0. But sometimes, you also stay when profitMSB b) MPB>MSC MSB>MPB d) MPB>MSB the market tends to produce: Q8. When the consumption of good generates positiveexternal external benefits, benefits from the consumption of the good a too much of the good, since there are positive market does not take into account the positive external benefits from the b) too little of the good, since the consumption of the good  Q8. When a positive externality exists, the marginal social benefit curve is above... a) The supply curve b) The demand curve 09. The graphbelow represents the market for flu shots. Q9.1. Which of the following is true? a. The quantity of flu shots without government intervention is 530 b. The quantity of flu shots with a consumer tax of 180 640 580 is 400 C. The quantity of flu shots with a consumer subsidy of MSB 180 is 530 400 d. The price of flu shots without government MPB intervention is 580 Q9.2. How much would the government earn/spend to ensure the quantity of flu shots is socially optimal? 400 530 Quantity 120 Q10. Pharmaceutical R&D advances global health by developing vaccines that reduce the spread of infectious diseases. Suppose government decides to subsidize pharmaceutical companies to achieve the socially optimal number of R&D projects: Q10.1. Draw a graph and label the market equilibrium without the intervention and the new equilibrium under the subsidy to pharmaceutical companies. Q10.2. Shade the area representing the government expenses resulting from a subsidy to achieve the socially optimal quantity of R&D projects. EXTERNALITIES AND GOVERNMENT INTERVENTION Key Takeaways Until now, we have shown that free markets can achieve socially optimal outcomes and that government intervention can reduce society's economic well-being-e.g., quantity/price controls. This lecture shows that markets can overproduce goods that are harmful to society or underproduce beneficial ones. Indeed, markets can fail in the presence of externalities-i.e., when the production or consumption of a good harms or helps people who are neither consuming nor producing that good. When markets fail, government intervention (taxes, subsidies, and regulation) can lead consumers and producers to exchange the socially optimal quantity of a good that affects third parties. These policies can increase government expenditures or revenue. Finally, there's the possibility of private solutions. According to the Coase Theorem, people can negotiate cheaply, they might resolve externalities on their own. However, this proves difficult in practice, especially when many parties are involved, making private bargaining very hard and costly.  Externalities (spillovers) : the impact on third parties of transaction between others + (MSC) Negative externalities total 20s cost & opt for which MSB = MSC a Dunegativesocieties oc surplus cost of production only Plastic bags PMSCMSB S = Private Marginal cost (to firms producing plastic bags). Punk HIT Cost of "I Negative Externality recycling bags mantaining land fills and cleaning * : , rivers. Benifit (MPB) Social Benifit (MSB) i D = Marginal Private : Marginal Q them Popt plastic bags only benifit purchase QiURK those who < Marginal Social cost. ) Marginal product cost & WL is of it you get out then what more costly P 1SC = S2 = S' + tax unitper ETax S = MPC (Marginal cost) -E I S ! Q Gopt QMKT