FHCE 5100 Unit 1
Mayer says..
"The strongest test of the value of a particular type of consumer information is its ability to change consumer behavior as measured in the marketplace." Ex: A report publishing the unreliability and overall disapproval of the CVT transmission may cause consumer unrest and automakers to ditch CVT's and go with more traditional 4 Speed, 6 Speed, etc. Automatic Transmissions. Simply put, if this information negatively alters the consumer's mindset about the product and the manufacturer reacts to this new mindset, that consumer information is pretty valuable!
free market
"buyers must benefit from what they buy and sellers must benefit from what they sell. When people buy something, they generally pay less than what they were willing to pay for the good or service: the difference between the willingness-to-pay price and the market price is the consumer surplus. Likewise, sellers can sell a product at a higher price than their economic cost to produce a product: the difference between the economic cost and the market price is the producer surplus."
Why may Choice Facilitation be a bad thing?
(1.) Facilitation may ignore the fact that many consumers do not fit the model of being well-educated, well-informed, etc. Ex: Think of children. What if we just let children watch The Wolf Wall Street as long as they are shown a quick warning before the movie starts. You'd have some horrified parents if we gave children the choice to watch R rated movies. (2.) Consumers are prone to information overload. This is problematic when they start using shortcuts to guide their consumer decisions. Ex: Think of my dad. He may be so overwhelmed by all the choices of couches that he will just simply buy the most expensive one because he lives by the mantra "You get what you pay for".
Problems with Preemptive Choice..
(1.) It limits consumer freedom (2.) The Lulling Effect -- When you have a lot of safety features, you tend to engage in riskier behavior which balances out or even exceeds the initial danger. Ex: A Car with blind spot monitors may cause you to stop looking over your shoulder when changing lanes; what happens if it malfunctions? BANG. Remember.. There is a balance. There is a fine line between protecting consumer from themselves and from each other.
Again, 3 reasons why the market cares about experts?
(1.) Sellers acknowledge the experts' existence by giving them special attention in promotional campaigns, customer relations programs, and regulatory monitoring activities. (2.) Word of mouth seems to be prevalent between experts and non experts. (3.) Large numbers of consumers seem to react strongly to either good or bad publicity about sellers.
Why does the Market care about the "Market Mavens"?
(1.) Sellers acknowledge the experts' existence by giving them special attention in promotional campaigns, customer relations programs, and regulatory monitoring activities. Ex: Google Pixel commercial has Marques Brownlee touting its strengths; this is a well known reviewer in the Android community and directly appeals to the people who care the most. (2.) Word of mouth seems to be prevalent between experts and nonexperts Ex: Dr. Oz has a show where his recommendations about products, diets, etc. are taken very seriously by watchers of the show. (3.) Large numbers of consumers seem to react strongly to either good or bad publicity about sellers. Ex: Anthem's INC gigantic leak of consumer information has led to the majority of people not trusting this company at all anymore.
Measures to correct market failure..
- State provision - Taxation - Subsidies - Regulation - Prohibition - Positive Discrimination (Affirmative Action) - Redistribution of Income
Mayer's View on Consumer Protection Policies?
1. INDIRECTLY (Firm to Firm) by altering the way in which firms INTERACT WITH EACH OTHER and 2. DIRECTLY (Firm to Consumer by changing the way in which firms INTERACT WITH CONSUMERS.
Are markets fair? Two rules of fairness..
1. It's not fair if the RULES aren't fair 2. It's not fair if the RESULTS aren't fair
Michael Walden's two ways to protect consumers from risks?
1. LABELS AND WARNINGS --> Some medications like Advil are not recommended to use for pregnant women. However, there is nothing outright banning ibuprofen use; it is just a warning and it is up to the woman to heed the warning on the bottle. 2. PROHIBITIONS --> An example of a prohibition would be preventing anyone from killing owls. They are important to our ecosystem and the rules need to be cut and dry; no killing owls or face severe punishment.
Scarce resources can be allocated by..
1. Market Price 2. Command 3. First Come First Served 4. Sharing Equally 5. Lottery 6. Personal Characteristics 7. Force
Source of Market Failure or Obstacles to Efficiency
1. Price and Quantity Regulations 2. Taxes and subsidies 3. Externalities 4. Public Goods and Common Resources 5. Monopolies 6. High Transaction Costs
4 assumptions about efficiency and allocation of resources
1. Private Goods 2. All of the value of utility of the good to potential consumers is reflected in the DEMAND FUNCTION for that good. 3. All of the costs of producing the good are reflected in the SUPPLY FUNCTION. 4. . It is assumed that markets are COMPETITIVE.
How might we change the suing system?
1. Set federal procedures for settling claims. 2. Set a cap on certain noneconomic losses (Pain and suffering likes aches, depression, scarring, etc.)
Maynes six significant consumer problems that work against consumer sovereignty...
1. There is asymmetric power that favors firms 2. Disadvantaged consumers 3. Informationally imperfect consumer markets 4. The Classical Monopoly Problem 5. Consumer Grievances 6. Under-representation of Consumer Interest "Ally's D is making c's under"
Felcher's 3 problems with the CPSC?
1. Unattainable mandates due to large volume of cases and few workers. 2. Small Budget 3. Policy Hurdles
market failure occurs where (Stevens)
1.) Knowledge is not perfect - ignorance 2.) Time Lags 3.) High Transaction Costs 4.) Goods are differentiated 5.) Resource Immobility 6.) Market Power 7.) Services and goods would or could not be provided in sufficient quantity by the market. 8.) Existence of external costs and benefits 9.) Inequality exists
how many product categories are there?
15,000
difference between sellers and consumers..
A great example is a car dealership. When you simplify it to its core, there are two types of people in the dealership. There are people walking the lots looking to purchase a new car (at the lowest price possible) and then there are people assisting them and trying to sell that car (at the highest price possible).
externalities
A side effect of an action that affects a third party other than the buyer or seller. Think about positive externalities. Think of a drug company that does Research and Development to learn more about lung cancer to create a cure. Maybe they fail at creating a cure and thus consider the project a failure and stop doing it in the future. However, their project has positive externalities as research and development can help society as it may lead to breakthroughs and increased knowledge by others. By simply focusing on private returns, the company is under producing in regards to research and development which can provide positive externalities to society.
Externalities
A side effect or consequence of an industrial or commercial activity that affects other parties without this being reflected in the cost of the goods or services involved, such as the pollination of surrounding crops by bees kept for honey. Ex: Your neighbor doing engine swaps in his driveway all the time and making a lot of noise may lower the resale value of your home.
the invisible hand
A term used by Adam Smith to describe his belief that individuals seeking their economic self-interest actually benefit society more than they would if they tried to benefit society directly. An example would be selling a car on craigslist. By everybody doing what is in their best interest (buyers trying to buy low and sellers trying to sell high) it creates the best price for all sides. As more people make transactions, the market takes shape which causes the prices of these cars at the optimal levels (For example: the market ensures people aren't going to be selling their 1999 Toyota Corolla for $20,000).
market failure
An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers does not equate to the quantity supplied by suppliers. One example --> You make 100 donuts and you only sold 20 of them. You made way too much and overestimated consumer demand.
contest
An event where there is a winner and there is a loser; a contest allocates resources to a winner (or a group of winners). Ex: Amazon's bid for a headquarters location. Areas like Atlanta, Charlotte, and Austin are all competing to house Amazon's Headquarters. There will only be one winner and this winner will receive the benefits of increased jobs, public transportation, image, etc. Even the losers may benefit because they worked hard to improve their cities.
external benefit
An external benefit occurs when producing or consuming a good causes a benefit to a third party. Ex: By riding your bike to work everyday using the bike lanes, you are not only helping to reduce your car costs and improve your health. You are taking one car off the road reducing traffic for other motorists (which is good) and by having one less car and less people waiting in traffic, you are reducing pollution which is good for society.
goods and services are differentiated
Branding causes people to pay more for goods of very similar quality. Ex: Branding brainwashes people into thinking Nike shirts will help them play better basketball than BCG shirts at 3 times the price. Even though they are the same material, their branding allows them to charge more and people will pay more.
consumer surplus formula
CS = (Marginal Benefit - Price) Divided by Quantity
Goods or services are what economists call PRIVATE GOODS, for which the following are true...
Can't have multiple people using the same specific resource, is divisible, and can be excludable. My example of a private good is an airplane ticket. When you purchase this ticket, it ensures that you and only you can be sitting in that seat when it takes off. This ticket is excludable in the sense that it is not my god given right to get this seat and if I don't meet certain requirements (citizenship, security clearance, etc.) then I may not be sold the ticket. Also, plane tickets are divisible in the sense I don't need to buy the whole plane; I can buy one ticket and they can sell me one ticket without issue.
caveat emptor vs caveat venditor
Caveat emptor --> "Let the Buyer Beware" Caveat Venditor --> "Let the seller beware"
monopoly
Complete control of a product or business by one person or group. Their main goal is to maximize profit and they do this by cutting supply and raising prices to achieve better margins. Ex: Think of Directv being the only TV provider in my town. The industry has high barriers to entry which leads to only a select few being able to offer the service. By being the only TV provider in my area, Directv can sacrifice quality while keeping prices high.
disadvantaged consumers
Consumers are either unintelligent or they lack the resources to be properly educated or don't have enough time to make good decisions. Addiction can be a problem when it comes to bargaining capacity. Think of cigarette addiction and how people may prices much higher than they otherwise would have if they weren't addicted. A person who doesn't have a college education may be more prone to accept an adjusted rate mortgage with no down payment as we saw during the housing crisis.
sharing equally
Everyone gets the same amount of the resource. Ex: Think of a soup kitchen. In order to be fair, we give the same amount of soup to each person that comes through the line. It would be unfair to give somebody 5 servings, and another 1.
resource immobility
Ex: A firm may try and do this with their employees to prevent their resources from jumping to other jobs. Google may try to keep their employees engaged and want to come into the workplace; if all else fails, they may have them sign no-compete contracts in order to restrict their human capital from going to a competitor and make them better. In a pefect market, resources should be able to move freely.
It is assumed that markets are COMPETITIVE.
Ex: If Toyota decides that they want to start selling Corolla's at $40k they will not be successful as they can't beat the market. Consumers will scoff at that price and instead go for an alternative like the Hyundai Elantra for $18k. You can't just raise prices or dramatically sacrifice quality if you want to survive in a competitive market.
All of the value of utility of the good to potential consumers is reflected in the DEMAND FUNCTION for that good.
Ex: Most people value a Big Mac at around $5. There have been so many burger sales and this price is what we have generally settled around; not many would buy it if it was $20. Our value of the big mac is based on the demand curve.
All of the costs of producing the good are reflected in the SUPPLY FUNCTION.
Ex: This would be where Neutrogena has figured out that their body wash costs them (factor in the profit) $4.50 per bottle. They would offer their product at exactly $4.50 which would lead to the most efficient outcome.
external costs
External costs are costs that are NOT included in what the business bases its price on. These include: the cost of disposing of the product at the end of its useful life the environmental degradation caused by the emissions, pollutants and wastes from production the cost of health problems caused by harmful materials and ingredients social costs associated with increasing unemployment due to increasing automation Even though external costs are not included in the price of the product they still have to be paid. Society ends up paying them through taxes, accident compensation, medical payments, insurance payments and also through losses in environmental quality and natural capital. Ex: If an an auto company makes a decision that they can increase their profits by laying off workers and having robots doing the simpler tasks; they may not account for the economic damage they can cause to that region where many people depend on jobs in the automotive world.
It's not fair if the RESULTS aren't fair
Fair rules are consistent with allocative efficiency but fear is that distribution might be too unequal. Leads us to trying to make decisions that make the result fair even if the rules may be fair. Think of Affirmative Action.
public good
Goods that are neither excludable nor rival in consumption. In essence, it is a good that benefits everyone and and no one can be excluded from its benefits A public good is something that we need and that the market cannot sufficiently provide. It can lead to free riders. Ex: We need protection from Nuclear Defense so the government creates the Patriot Missile System to shoot down Nukes. Everybody in the US gets the benefits of the defense system regardless of whether or not they helped pay for it. Can lead to problems with people free riding..
rules about externalities
If we don't consider these side benefits (good) or costs (bad).. Positive externalities lead to underproduction. Negative externalities lead to overproduction
de merit goods
In economics, a demerit good is "a good or service whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves". It is over-consumed if left to market forces. Ex: An example of this may be Mountain Dew. At schools for example, if we let kids choose what they want to drink, they may choose this which is nothing but sugar and caffeine. If left to the market, junk food like soda would be super popular.
CPSC Facts?
It was established in 1972 and its main purpose is to protect the public form consumer products. It has authority over specification standards and performance safety standards.
Is negative or positive word of mouth a bigger deal?
NEGATIVE Word of Mouth! We seem to be doom and gloom type people. Think about Benzoxyl Peroxide Acne medication. There may be a lot of positive publicity about it where it helps to dry up and reduce acne and blemishes. However, there may be bad publicity where people talk about its harsh drying effect that can cause severe skin peeling. Overall, the product probably does more good than harm but consumers are going to be wary because of the unpleasant side effects. Think of Accutane in the same way. Maybe you can think of Plane Safety? Say a new plane has flown thousands of thousands of flights without issue but one flight has a near catastrophic failure. People won't care about all the times it did well; they will care about the time it failed and will not trust this type of plane in the future.
productive efficiency
Production efficiency is an economic level at which the economy can no longer produce additional amounts of a good without lowering the production level of another product. This happens when an economy is operating along its production possibility frontier.
consumer protection
Protection for consumers against unfair, unethical or unjust business practices.
inadequate provision --> (Difference between public goods and merit goods)
Public goods are defined as products where, for any given output, consumption by additional consumers does not reduce the quantity consumed by existing consumers. There are very few absolutely public goods, but common examples include law, parks, street-lighting, defence etc. Merit goods on the other hand are products generally not distributed by means of the price system, but based on merit or need, because people although having perfect knowledge would buy the wrong amount of them. These goods can be supplied by free market, but not on the right quantity. Merit goods are, for example, education and to some extent the health-care.
CPSC developments from 1972 on...
Remember that the CPSC was created in 1972. Early on there was a lot of problems. The 1978 reauthorization of the CPSC led to better results even with severe budget cuts. They introduced some mandatory safety standards but their main breakthrough was in modifying the offeror process and encouraging VOLUNTARY STANDARDS.
child safety protection act 1994
Requires toys with small parts intended for children 3-5 to bear prominent warning of choking hazard. They also required a uniform standard for bike helmets, football helmets, other active toys, etc. Think of happy meals that state the required age and that it could potentially cause choking.
personal characteristics
Resources are allocated based on whom we like. This can be natural and acceptable (Marriage) but can be bad when discriminatory (All CEO's are tall white males). My example is Danny Ainge of the Celtics who drafts players based on aggressiveness and effort. He looks for these traits before even considering them for the draft.
Professor Examples of Indirectly and Directly?
Say there is a zombie apocalypse. To solve the problem, the government can do it indirectly by giving a vaccine to people which would prevent healthy people from getting the disease; the zombie epidemic would eventually die out. A direct example would be giving citizens a survival kit (like a hatchet) to kill the zombies? I don't know, still unclear..
technical efficiency
Technical efficiency is the effectiveness with which a given set of inputs is used to produce an output. A firm is said to be technically efficient if a firm is producing the maximum output from the minimum quantity of inputs, such as labour, capital, and technology. It's on the PPF curve.
consumer grievances
The Consumer Bill of Rights pushed for by John F. Kennedy established four basic rights; the right to safety, the right to be informed, the right to choose, and the right to be heard So we have these rights but the onus is on YOU to take advantage; most people don't. For example: you have the right to complain and return a raw burger that was supposed to be well done AND you shouldn't have to deal with them spitting in your burger because of your grievance. Also there is a big geographic dispersion of sellers and producers -- if I have a complaint, who do I go to? (Should i complain to the Walgreens manager for only having one checkout open or should i complain to their headquarters that sets these policies).
cpsc
The United States Consumer Product Safety Commission (CPSC or Commission) is an independent agency of the United States government. The CPSC seeks to promote the safety of consumer products by addressing "unreasonable risks" of injury (though coordinating recalls, evaluating products that are the subject of consumer complaints or industry reports, etc.); developing uniform safety standards (some mandatory, some through a voluntary standards process); and conducting research into product-related illness and injury.
command
The command system allocates resources by the order (command) of someone in authority. A command system can work in organizations with clear lines of authority but it is bad news when it comes to an entire economy. Think of North Korea. Kim Jong UN devotes most of the economy's resources to producing missiles. This is what he feels is best and because he is the leader, that is what goes.
absolute poverty
The concept of absolute poverty is that there are minimum standards below which no one anywhere in the world should ever fall. Ex: If you fall below $10k, you are poor no doubt about it.
under representation of consumer interest
The firm's lobbyists outweigh the lobbyists of consumers. ALSO, the goals of consumers are more broad while the goals of the firms are more focused. consumer interest is weakened. Ex: If consumers want to implement safety tech on new cars, they probably don't have enough of a voice or power to make this required. However, if Toyota decides that it may help them in the market, there will be safety tech on all Toyota's by next year. In essence, the firm has a lot more control over what gets done than the consumer. One exception of a consumer interest group? --> AARP tries to look out for the elderly in the country... But there are not enough groups that look out for consumers.
market price
The market price is the current price at which an asset or service can be bought or sold. Economic theory contends that the market price converges at a point where the forces of supply and demand meet. So this is the price where supply and demand intersect. My example --> There is a market for student housing in Athens. To get a decent one bedroom, it should be around $500. If complexes price their rooms too high then people won't rent and if it is too low, there will be a shortage.
producer surplus
The producer surplus is the difference between the market price and the lowest price a producer would be willing to accept. Ex: Samsung may be happy to sell a 50 inch TV for $400 while the market allows them to sell it for $600 in stores. Samsung has a producer surplus of $200. PS = (Price of Good - Opportunity Cost of Production) divided by Quantity
high transaction costs (stevens)
There are costs like obtaining and evaluating information / negotiating contracts / monitoring / evaluating contracts, etc.
Credence goods
These are products and services, such as vitamins or frequent oil changes, whose value can never really be known with certainty. The value is often a matter of faith or belief. It is hard to tell whether it was worth it or not. "Difficult to value even after it has been consumed." The Oil Change example is a good one. Somebody whose car made it to 100k miles swears by changing the oil every 2k miles. The car reached that milestone but would it have still reached it if they had only changed the oil every 5k miles? It is hard to say but the consumer believes it is the reason. How about Legal Advice? A lawyer may tell you what to say but how are you to know whether they are offering advice that will help you win your case or ultimately doom your case. It's really hard to judge the effectiveness of this during the process and may be hard to evaluate after as well; I.e. Was refusing to answer one question the reason I got off?
Experience goods
These goods are products and services whose value can only be truly determined by consuming or experiencing them. These goods are typically purchased upon reputation and recommendation since physical appearance is little use. The best example would be a bottle of wine; you need to taste the wine to truly judge its quality. Another example may be lipstick. You can only glean so much from looking at it; you need to actually apply it to yourself to see if you like it or not.
Examples of Indirectly and Directly?
Think of a Government trying to limit teen pregnancies. An example of Indirectly would be having public schools have sexual education courses. These courses would educate people and reduce the risk. Also, they may push for an increased acceptance of Abstinence as good and sexual activity as bad. Whether it's education or a culture shift, this is an example of INDIRECTLY trying to lower the birth rate. As for Directly, this would be when public schools offer sexual protection like condoms and birth control. This wouldn't decrease sexual activity but it directly deals with the birth rate issue as it would decrease the chances of births occurring.
flammable fabrics act 1953
Think of baby pajamas. You don't want it to be made out of material that will go up in flames; you want it to smolder.
Difference between Facilitation and Preemptive Choice Policies?
Think of it like "Suggesting" vs "Forcing" FACILITATING consumer decision making is done through education or information disclosure. An EXAMPLE would be putting a warning label on a hair dryer that prolonged exposure to skin can cause burns! PREEMPTING CHOICE is done by forcing firms to provide and consumers to accept prescribed levels of quality or price. An EXAMPLE would be requiring backup cameras and sensors in all new cars because we don't trust all drivers to look over their shoulders and be safe. The purpose of this would be twofold; to force car manufacturers to include safety features in all cars and for drivers to minimize the risk of accidents. Maybe a funny example would be requiring babies to wear diapers in the pool? It wouldn't be an option, it is mandatory for obvious reasons.
poison prevention packaging act of 1970
Think of the push to open caps on the prescription bottles.
contributors to inequality
Think poverty - absolute and relative. Distribution of income Wealth distribution Discrimination Housing
refrigerator safety act 1956
This act requires a mechanism that enables the door to opened from the inside in event of accidental entrapment. Any refrigerator made after 1958 must be child-safe.
first come first served
This allocates resources to those who are in line and is awarded in chronological order. Ex: Think of a homeless shelter. They may divvy up the beds by giving them to the people who have stood in line the longest (first to last). If you're the second in line you are good to go; if you're the 300th, you may be out of luck if you use this system.
the classical monopoly problem
This generally leads to higher prices, lower quality, reduced output. They aren't quite as problematic before due to increased regulation but there are still examples. For me, it would be Directv being the only television provider in my town. Because there the only one, they can offer substandard service and higher prices due to lack of competition.
common resource
This is a resource owned by no one but used by everyone. They are natural resources that generally lead to congestion or overuse due to everybody looking out for number one. Ex: Think of a fishing ground. If everyone overfishes and nobody is looking out for the fish populations, people's greed will destroy the resource for everyone as no fish will be left (Think Tragedy of the Commons).
Paternalism
This is action limiting a person's or group's liberty or autonomy which is intended to promote their own good. Or, you could think of it like Adults making decisions for children. Ex: Having laws where children have to ride in rear facing child seats.
Who likes Facilitation?
This is for the consumers who like new information and are undaunted by uncertainty, adaptive, and not affected by the action of others. In general, these people are educated and embrace the opportunity to make a decision. Maybe this could be for people who want to legalize Marijuana? They are well educated on the topic and know the potential risks (and benefits) of smoking pot. Thus, they'd like the government to provide warnings on its use but not to ban its use altogether. Give the informed people the opportunity to partake in it legally or to abstain from it.
Who likes Preemptive Choice?
This is for the poorly informed consumers who are immobilized by uncertainty, creatures of habit, and are strongly influenced by the decisions of others. This is for the people who are not well educated and who don't want to have to make a decision for themselves. Going off that previous example, the Prohibition of Alcohol during the early 1900's may be an example of this. For a myriad of reasons, alcohol was deemed a burden on society. Instead of letting the people make the choice on whether to consume or abstain alcohol, the government outlawed its sale and usage. They preemptively took the choice away from the consumers.
social efficiency
This is the optimal distribution of resources in society, taking into account all external costs and benefits as well as the internal costs and benefits. Social Efficiency occurs at an output where Marginal Social Benefit (MSB) = Marginal Social Cost (MSC).
quantity regulations
This is when the government limits the amount of product that a firm, individual, etc. can produce. Ex: Think of Zoning restrictions that limit construction in subdivisions. The city is putting a restriction on the amount of hours that builders can work construction in order to limit annoyances to neighbors.
inefficient markets = market failure
This is where the market mechanism fails to allocate resources efficiently. This differs from.. 1.) Social Efficiency 2.) Allocative Efficiency 3.) Technical Efficiency 4.) Productive Efficiency
lotteries
This method allocates resources to those who pick the winning number, draw the luck cards, or come up lucky on some other gaming system. This works well when we can't think of another way to fairly decide. Ex: Vietnam draft. We would go through names and age brackets where random people would be selected to serve. War is not attractive and they thought the fairest way to decide who goes is by randomly choosing; in theory everyone has the same chance.
force
This protects the rule of law and facilitates economic activity. Force helps to uphold law by protecting private property and allowing for a system where VOLUNTARY exchange can occur, and wealth can be transferred from the rich to the poor. Ex: Making the burning and selling of DVD's illegal. It is one thing to have it as a law but if there is no punishment, people probably won't stop doing it. If the courts establish that a 100 year sentence will be attached to all cases of privacy; people might find legal purchases more attractive.
specification standards
This refers to how the product is made. One example would be the new business building -- there needs to be a certain amount of exits on every floor in order to be compliant. Another example are modern cars. Their hoods are built in a way to crumple on impact to dissipate the force; new cars have to meet these minimum safety standards.
performance safety standards
This refers to how the product is used. My example would be using a PS4 as a fly swatter. It is meant to be stationary, on a cool surface, and plugged into a tv to play video games. If you start using it to smash bugs, that is simply not what it was designed to do and can cause injury or damage.
asymmetry of power in favor of businesses
Three consumer handicaps off of this.. 1. Person's interest as a consumer is secondary to being a producer. 2. Consumer activities are dispersed; producer activities are focused. 3. Lack of recognition of the "purchasing agent" role Summary: Businesses have a lot more resources to persuade you and the government. They are huge and you are small so they inherently have more power. Finally, firms are so much more focused on their end (it's their job) than you are as a consumer. This shifts the power.
majority rule
We allocate resources based on what the majority of voters decide on (>50%). The Local Town decides to vote on whether they want to use tax dollars on providing Chromebooks for all public school students. They decide to cast a vote where a majority (>50% in favor) will provide Chromebooks. 53% of the town agrees; funds are allocated for Chromebooks. This works well when the decision affects lots of people and self-interest must be suppressed to use resources efficiently.
It's not fair if the RULES aren't fair
We want equality of opportunity. Robert Nozick (Anarchy, State, and Utopia) says.. 1. The state must enforce laws that establish and protect private property. 2. Private property may be transferred from one person to another only by voluntary exchange.
So.. Is there coercion in our marketplace?
Yes. Firms open businesses in strategic places, firms set prices, firms develop products, etc.
information overload
a condition in which the volume of information received exceeds the person's capacity to process it. This is a BIG problem with Warning Labels. We have to find a balance. If we have warning labels on everything no matter the level of danger, you run the risk of people just ignoring all warning labels in the future because there is just too many warnings. Think of it like baseball. Baseball games feel endless (3+ hours 162 games a year). Eventually if you have too much of a product and it requires too much effort to watch, you'll have the effect where casual fans will just stop watching the games. That's how information overload works. Too much!
Search Goods
a product or service where consumers know of the quality before purchase and use. In other words, the quality is readily observable prior to purchase. An example of this might be a tablet. You are able to read the specifications (battery, screen, etc.) on the side of the box and are able to read reviews (both professional and consumer) before purchase. So before purchasing the product, you have a pretty damn good idea of what the product looks like and how it will work.
collusion
an agreement among firms to divide the market, set prices, or limit production
market
an arrangement that allows buyers and sellers to exchange things. This occurs in the ABSENCE OF COERCION.
relative poverty
an inability to meet the average standard of living within a society
merit goods
are those goods and services that the government feels that people will under-consume, and which ought to be subsidised or provided free at the point of use so that consumption does not depend primarily on the ability to pay for the good or service. Ex: You can argue that Obamacare was a merit good when it was enacted. Some people may wrongly not see the value of healthcare and opt to not buy it. With this law, government provided these people with healthcare because they felt it was good for society and people would otherwise underconsume. Socially desirable and at risk of underconsumption
imperfect knowledge
consumers do not have adequate knowledge / advertising can mislead or misinform (Think Prevagen and memory)/ decisions are often based on past experience rather than future knowledge.
subsidy
government payment to encourage or protect a certain economic activity This lowers the prices paid by buyers and increases the prices received by sellers. My example would be the government offering big tax credits to consumers who buy all electric cars. These are done in order to make more people curb their pollution but it could potentially lead to inefficiency as it may distort market forces.
taxes
increase the prices paid by buyers and lower the prices received by sellers. Remember that taxes are money that is demanded by the government of its citizens to support various services facilities, etc. in the form of income tax, property tax, etc. You will get underproduction with taxes because people don't like them. Ex: Federal Tax of 18 cents per gallon on gasoline. If taxes on gasoline become too much and consumers aren't willing to pay the prices; this will lead to decreased demand and underproduction of gas by sellers if they can't sell the product.
tort law
involving an act that brings harm to a person or damage to property. With tort law you must establish fault and these cases are tried in local courts subject to state laws.
freedom of information act 1966
is a federal law that generally provides that any person has a right, enforceable in court, to obtain access to federal agency records. o This provides the public with direct access to documents held by federal agencies but they can black out sections and can take a lot of time to pass.
law of diminishing marginal utility
is a law of economics stating that as a person increases consumption of a product while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product.
public goods (stevens)
is a product that one individual can consume without reducing its availability to another individual, and from which no one is excluded. Economists refer to public goods as "nonrivalrous" and "nonexcludable." Again think of our nuclear defense system
pareto efficient allocation
is a state of allocation of resources from which it is impossible to reallocate so as to make any one individual or preference criterion better off without making at least one individual or preference criterion worse off. The concept is named after Vilfredo Pareto (1848-1923).
efficient allocation
is a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing. Ex: Nintendo offering the exact amount of Nintendo Switches that people would be willing to buy.
allocative efficiency
is a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing. This is where society produces goods and services at a minimum cost that are wanted by consumers.
class action lawsuit
is a type of lawsuit where one of the parties is a group of people who are represented collectively by a member of that group
civil law
is the court-based process through which Person A can seek to hold Person B liable for some type of wrong. Usually, if Person A is successful, he or she will be awarded compensation for the harm that resulted from Person B's action or inaction.
deadweight loss
is the fall in total surplus that results from a market distortion, such as a tax. In economics, a deadweight loss (also known as excess burden or allocative inefficiency) is a loss of economic efficiency that can occur when equilibrium for a good or service is not achieved or is not achievable. "the total loss of producer and consumer surplus from underproduction or overproduction" Think of minimum wage being instituted. Mcdonald's would have hired a cashier at $7.50 but not at $15. This leads to them not hiring people and replacing them with kiosks. This leads to a shortage of jobs for minimum wage workers and overall loss to society.
government
is the system or group of people governing an organized community, often a state. They may constrain or limit individual actions to attain group goals. they do THIS BY COERCION. Ex: Think of the federal government mandating all public schools to offer healthier lunches in the cafeterias. They made a decision that they felt would benefit the collective youth and help to reduce obesity rates.
time lags
markets react slowly to changing conditions / production isn't usually instantaneous. Ex: Think of declining police officer applicants due to all of the social unrest, diminished attractivenss of the job, and increased danger faced by police officers in today's environment. There are less people lining up to replace retired officers; this may take a while to iron out these problems; we can't just say poof and magically have more applicants. May take more salary, lessening of standards, etc.
possible remedies for market inefficiencies
o Price and Quantity Regulations → Remove regulations by majority rule. o Taxes and subsidies → Minimize deadweight loss by majority rule. o Externalities → Minimize deadweight loss by majority rule. o Public Goods → Allocate by majority rule o Common Resources → Allocate by majority rule o Monopoly → Regulate by majority rule o High transaction costs → Command or first come first served.
market mavens
opinion-leading consumers who are very involved in the marketplace. These people are really good at gaining information and are subsequently able to discipline firms and the market in a way that lesser skilled consumer benefit from the maven's efforts.
price regulations
refers to the policy of setting prices by a government agency, legal statute or regulatory authority. Under this policy, minimum and/or maximum prices may be set. (Blocks price adjustments). Ex: Government stipulates that the minimum amount a teacher with a college degree in history should make $100k. Schools may feel this is way overpaid and look to alternatives to hiring teachers with these credentials. This will ultimately lead to schools hiring less of these people due to the high minimum price (higher than the market).
federal hazardous substances act 1960
requires precautionary labeling on the immediate container of hazardous household products to help consumers safely store and use those products and to give them information about immediate first aid steps to take if an accident happens. The Act also allows the Consumer Product Safety Commission to ban certain products that are so dangerous or the nature of the hazard is such that the labeling the act requires is not adequate to protect consumers.
marginal benefit
the additional benefit to a consumer from consuming one more unit of a good or service. It has to be in THE SAME SITTING. Ex: If I have watched 4 episodes of Breaking Bad, how much marginal benefit will I get from watching one more episode in the same sitting (probably less than the first..)
consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. Ex: A consumer is willing to pay $8 for 1 milkshake when McDonald's offers them for $4. This means I WIN! I get a consumer surplus of four dollars.
informationally imperfect consumer markets
the correlation between price and quality is near zero. MARKET INDUCED CAUSES -Technical complexity makes it hard to figure out what is good and what isn't, price discrimination (GNR tickets), Affluence has increased the choices (harder to determine quality when there are so many choices; what is the best bread in the aisle?) SELLER INDUCED CAUSES - Businesses control the information. / Business makes money selling their product, not the one that is the best value (how can we trust them) / Selling messages are biased and misleading, making it hard to find the truth. EX: Think of Prevagen claiming it can recover memory when it probably isn't true.
marginal cost
the increase in total cost that arises from an extra unit of production. Ex: Wendy's. How much will making one extra cheeseburger contribute to the total costs of the day. We then determine if it is worth it.
price fixing
the maintaining of prices at a certain level by agreement between competing sellers.
consumer sovereignty
the power of consumers to decide what gets produced In essence, this is the situation in an economy where the desires and needs of consumers control the output of producers. Consumers hold the power to determine what products live, and what products die! (Crocs)
rigging of markets
the practice of unfairly or illegally controlling the sale or the price of products, shares, etc.
total surplus
the sum of consumer surplus and producer surplus.
Big tradeoff
the tradeoff between efficiency and fairness If we promote equality, we will have more income redistribution through taxes, more fairness, and a common living standard. However, economic efficiency will suffer and our economic pie will grow more slowly. By contrast, economic competition leads to more efficiency, more entrepreneurial energy, more economic growth and a bigger pie. But, is it fairer to be able to keep more of what you earn? So the greater the income tax, the greater the inefficiency, and the smaller the economic pie. Ex: So if we raise taxes on the rich to 50%, we will be able to help the poor with more tax dollars but we also may stunt our economic growth potential as there will be less incentive to be wealthy. They want to make poor off as well as they possibly can be.
high transaction costs
transaction costs are the opportunity costs of making trades in a market. Ex: Think of a US investor wanting to convert his currency into British Pounds. This is not easy to do and will require an extra financial charge (a transaction cost) to achieve what you want. So international exchanges of funds generally have high transaction costs.
allocative efficiency
when the mix of goods being produced represents the mix that society most desires. An example of this would by Hyundai. If they have allocative efficiency, it would not be possible to make another Elantra without taking sales away from their Tucson line.