Econ midterm 2: chapters 7-12

types 2

- A price change is not an externality- increases negatively affect demand but positively affect supply- still a demand- totaling effects generates neither costs nor benefits- a redistribution between buyers and sellers- externalities are about side effects on people whose interests aren't taken into account- bystanders, side effects not mediated by market

types

- A side effect that harms bystanders is called a negative externality- pollution- positive externalities- side effects that benefit bystanders- vaccines- negative externalities impose costs on others- stand up at a concert, smoke, too many antibiotics, huge truck accident, talking in class, trolling- people don't take their harm into account, people do more of these activities than is in society's best interest - Positive externalities generate benefits for others- plant a tree, big TV, paying taxes, scientific breakthrough, study with others, exercise on health insurance- positive externalities seem good but stil lead to market failure because people don't take full account of benefits- do less of these socially useful activities than society's best interest- even better outcomes could occur- use cost benefit principle and might decide costs too large without account for societal benefits

ca 5

- Add up at bottom to show how they are better off- specializing according to comparative advantage- not from working harder or longer but reallocating- rearranging- by ensuring each task is done at the lowest opportunity cost, you produce more in the same amount of time- this extra output is called the gains from trade because get gains only from trading- reallocate to get more output with lower opportunity cost- specialization- people focus on specific tasks, spending more of their time on what they're relatively good at, and less of their time doing other things Comparative Advantage in Action - Use to assign workers to tasks- think about different skill levels like doctors vs nurses and assistants- delegate takss whenever you can delegate them to someone with a lower opportunity cost- free you to spend time where you have comparative advantage

price aggregates information

- Aggregates information- learn how to interpret what it's saying to make better decisions- clearest example in prediction markets, in which people trade contracts whose payoffs are linked to whether an uncertain event occurs- buy a share worth if it wins- price effectively communicates a prediction- share worth 1 if a candidate wins and the price of stock is .60 then they think they have 60% chance of winning - Process of buying and selling aggregates information- useful forecasts because prices aggregate ifnromation- someone who sees lots of stickers and signs for a candidate might buy stock, but someone who saw a bad speech might sell, good polling numbers- the price effectively communicates a prediction- the price will come to reflect and aggregate all of these different occurrences and information- prediction markets yield more accurate than public opinion polls, statistical models, televised experts

PS 3

- Any job you would've done for less than paid for you are earning producer surplus- workers are suppliers and hourly wage is the price- marginal cost is the opportunity cost- next best use of that hour- if wage exceeds how much you value that alternative use of time you're earning producer surplus

positive externalities

- Assess externalities- demand only measures private benefits- marginal external benefit- social benefit lies above demand curve- find socially optimal quantity following rational rule for society where marginal social benefit equals social cost- as long as no negative externalities supply curve is also the marginal social cost curve- where these two cross- compare forecasts of equilibrium with socially optimal quantity- positive externalities are underproduced- do less than they should in society's best interest

market gains from trade

- Broader lesson- markets offer the opportunity to specialize according to comparative advantage- logic still works if they don't know each other, strangers specialize according to comparative advantage- do when opportunity cost is low and rely on others when high- might pay someone to do things not good at and start a business for what they are good at- gains from trade are just as great here - Comparative advantage explains why there are gains from trade in markets- specialize in things you have an advantage and give them to others even if you don't know them so they can spend time where they have comparative advantage- explains why people specialize- buy stuff from people who are good at it and ensure each product made at lowest opportunity cost- do more of what you're relatively good at and less of the other stuff- includes all types of good and opportunity costs- technological change can change comparative advantage

gs 2

- Businesses try to turn public goods into club goods- public goods rarely profitable for business to provide- keep nonpaying customers out- transform public good to club good- now excludeable but still nonrival- pay to join the club but not hurting others- can get profits from this- radio charging, club goods become local monoplies and higher prices so less than socially optimal quantity- underprovide which is also a problem

PS 1

- Buyers aren't the only ones who benefit from a transaction- selelrs also gain something- when you gain economic surplus from selling something, economists refer to it as producer surplus, because you're earning that surplus in your role as a producer- you gain producer surplus when you sell something at a higher rpice than the marginal costs you incur - Producer surplus is the price minus the marginal cost- the price is the marginal benefit, the cost is the materials and labor- the producer surplus is how much better off the trade made the producers- the gain a producer gets from selling something at a higher price than necessary for them to want to supply the item (MC)- price minus marginal cost= PS = Price - MC

hiring 2

- Calculate the marginal cost and benefit of another worker- marginal cost is increase in businesses cost due to hiring one more or the weekly wage you pay that worker- marginal benefit is the extra revenue you earn- extra output you produce from hiring extra worker is called the marginal product of labor- most businesses experience diminishing marginal product- at some put output increases get smaller and smaller- measure MB in extra dollars of revenue so focuses on marginal revenue product- which is the marginal product of labor multipled by price of output- extra revenue produced by hiring an additional worker

ca 2

- Comparative advantage is all about opportunity cost- opportunity cost- reminds you that the true cost of somethingis what you must give up to get it- ask or what- opportunity cost is the output of if they had done the other task- minimize what you have to give up to get the task done- if Helen vacuums the house the opportunity cost is the number of meals she could otherwise have made - To get most output with given inputs, allocate each task to the person with the lowest opportunity cost- do it at lowest opportunity cost- the person with the lower opportunity cost of completing a particular task has a comparative advantage at that task- comparative because OC compares what you can produce if assigned one task with what you would produce if you spent time on another task- advantage because a lower opportunity cost means you give up less to get a task done, so more efficient for you to do that

rrs 3

- Compare- negative externality means more produced than socially optimal- - Negative externalities are overproduced- find ways to make polluters bear costs of their actions like cost of pollution to counter incentives that lead to overproduction of products with negative externalities - There is a socially optimal quantity of pollution- overproduced but still can be positive for there to be some- eliminating means cutting off so many other industries so too high a cost- figure out right balance- less vs eliminate- stop driving?

market failure

- Competitive markets lead to efficient production and allocation at lowest cost and highest benefit at efficient quantity and greatest surplus- perfect competition but our world is not Market Failure - Market failure occurs when forces of supply and demand lead to an inefficient outcome, common and frequency and severity should temper enthusiasm for market forces- five main sources - Market failure 1: Market power undermines competitive pressures- arises when markets don't meet the perfectly competitive ideal of many sellers selling identical products- dominated by handful of companies, limited competition by charging higher prices and consumers buy smaller quantity- market power leads to underproduction as businesses with market power tend to produce less than efficient quantity- how much less depends on their power

CS 2

- Consumer surplus is the area below the demand curve and above the price- of all purchases in a market, it's the same but just for a market demand curve- the demand curve is the marginal benefit curve so each point on it reveals individual marginal benefit- surplus gained is the marginal benefit minus price- that's why it's that area- from a single purchase- different between point on curve minus price and add this up to be total area- total consumer surplus in a market is the area under the market demand curve and above the price, out to the quantity sold - Remember area of a triangle is half the base times the height

cap and trade

- Corrective taxes change prices, this changes quantity- cap negative externalities using quantity regulation- a quota is a limit or cap on the maximum quantity of a good or service that can be sold- when a quota is binding, it requires the quantity produced to be less than it would be at the supply-demand equilibrium- reduces overproduction- best outcome is when set this quantity cap equal to socially optimal outcome- Your choice between quantity regulation and taxes depends on what you know- same outcome could be achieved but if you have marginal external cost then set corrective tax and will find quantity- if you know socially optimal quantity use that to set quota and price will find- increase efficiency by allowing businesses to trade their permits- determine socially optimal quantity and how much each supplier is allowed to produce- differences in efficiency makes this hard, favoritism, corruption

rr workers

- Cost-benefit of working one more hour- benefit is wage you earn and cost is hour of leisure you'll do without- rational rule for workers- work one more hour as ong as the wage is at least as large as the marginal benefit of another hour of leisure- keep going until leisure equals wage- labor demand all about marginal revenue product, labor supply all about marginal benefit of leisure- labor supply depends on two factors- the wage and the marginal benefit of leisure- when wage rises there are two different effects - Substitution effect says that higher wages make work relatively more attractive- when wage goes up, opportunity cost of hour of leisure goes up- giving up more money- higher wages are an incentive to work- why people work longer hours when wages rise, upward individual labor supply curve- change in relative prices

deadweight loss

- Costs of market failure measured by calculating how much it reduces economic surplus- deadweight loss- the difference between the largest possible economic surplus (at efficient quantity) and actual level of economic surplus - Economic surplus and deadweight loss focus on MB and MC- measure economic surplus at efficient Q and actual Q- remember how to find ES - Shortcut- look at supply and demand curves- when no market failure demand curve corresponds with MB and supply with MC and economic surplus is area between- market failure makes curves bad measures of MB/MC- because economic surplus is difference between MB and MC- economic surplus of entire market is area between the MB and MC curves out to the quantity - Producing less than efficient quantity creates deadweight loss

externalities

- Decisions have external effects- traffic, pollution, accidents, harming roads- externality- a side effect on bystanders whose interests aren't fully taken into account- important because they lead to market failure, producing inefficient outcomes that aren't in society's best interests- failure arises when there are bystanders who are affected by your choices but can't easily shape them, interests ignored or underweighted- when people make decisions without facing full consequences of actions- bad outcomes can result

who gets what

- Demand side- millions want products- who should get a lot/a little, want them to go to people who really value them, efficient allocation maximizes benefits- efficient allocation occurs when goods are allocated to create the largest economic surplus from the allocation, which requires each good goes to the person who gets the highest marginal benefit from it (at least measured by WTP)- - Efficient- going to person with highest MB, largest economic surplus- consider alternative allocations to compare based on marginal benefits- forces of supply and demand lead to most efficient in terms of WTP, competitive, largest marginal benefit

how much gets bought and sold

- Do forces of supply and demand lead to efficient quantity- quantity that produces largest possible economic surplus- rational rule for markets says to produce until marginal benefit equals marginal cost- how many tomatoes will produce largest economic surplus- marginal principle- focus on simpler question- should we produce one more- cost-benefit principle- will it increase economic surplus or is MB at least as large as MC - Rational rule for markets: to increase economic surplus, produce more of an item if the marginal benefit of one more is greater/equal to marginal cost- get largest possible surplus if keep producing until marginal benefit=marginal cost - Supply and demand produce the surplus-maximizing quantity- forces produce the quantity- supply curve is MC and demand is MB- equilibrium where MB=MC- largest possible economic surplus

voluntary 2

- Economic surplus is the area between the demand and supply curves- consumer surplus triangle plus producer surplus triangle- BUT WHAT IF THEY OVERLAP?- area between demand and supply curves to the left of the quantity bought and sold - Think of economic surplus from single transaction as being marginal benefit minus cost- add across all items purchased and is difference between MB/demand curve and MC/supply curve- that's why

efficient 2

- Efficient outcomes won't make everyone happy- rarely makes everyone happy, most policies help some but harm others- simply assesses whether economic surplus rises, which can occur only if the gains in economic surplus to those who are helped are larger than declines among those who are harmed- but some are still harmed and will be unhappy- Uber could harm taxi drivers and make them unhappy - Efficient outcomes hold the POTENTIAL to make everyone better off- relying on economic efficiency implicitly involves some difficult value judgements- embeds judgement that harm is reasonable price to pay for benefits, one argument for focusing on efficiency is that whenever economic surplus rises, it's possible for those who benefit to compensate those who were harmed and to do so in a way that ensures everyone's better off- bigger pie is always possible to slice so everyone gets a bigger slice- small tax and proceeds go to the person who suffers costs

hiring workers

- Employer is a buyer- buying time and effort of workers How Many Workers Should You Hire at What Price? - Remember perfectly competitive- lots of businesses looking to hire from pool of many workers with similar skills - In competitive labor market, employers pay the market wage- pay less go to competititors, hire as many as needed at market wage- apply core principles of economics to figure out how many to hire- how many, marginal principle- hire one more? Cost benefit- only if yields marginal benefit greater than marginal costs- use opportunity cost- or what? Hire extra or keep cost and production at current levels

trade 4

- Exchange rate manipulation changes the price of your goods in foreign markets- change or reset the exchange rate to increase costs and protect local industries- cheaper yuan makes cheaper for Americans to import goods from China but changing exchange makes US producers in exporting and import-competing industries lose business but US consumers gain from buying Chinese goods at lower prices- devalue currency to increase exports and reduce imports

ca and international trade

- Explains why we trade internationally- trading enables them to get these tasks done at lowest opportunity cost- trade with foreigners for same reason we trade with locals- gains from trade, comparative advantage, extends far- trade with someone to be better off even overseas- comparative advantage is about reallocating resources to their better uses- selling stuff, reallocating for comparative advantage, gains from trade and all better off, a win-win situation -

export 3

- Exporters and import-dependent businesses support international trade- favor are those who want to export their stuff or who import cheaper raw materials, consumers get involved

public goods

- Externalities that occur when a product is nonexcludeable, which means other people cannot easily be excluded from using it- depends on one other characteristic- whether your using the good actually harms me, when something is nonrival, one person's enjoyment or use of it doesn't subtract from another person's enjoyment or use- externality problems- government provision of public goods and assigning ownership rights solve these problems when something is nonrival, nonexcludable, or both

rational rule for society

- Forces of supply and demand often yield good outcomes for buyers and sellers but not necessarily for everyone else- externalities- bystanders- market forces typically fail to find the most efficient outcome in the presence of externalities The Rational Rule for Society - Socially optimal quantity- the quantity that's most efficient for society as a whole, with all the costs and benefits whether they accrue to buyers, sellers, bystanders- what quantity yields largest possible economic surplus- marginal principle- will society be better off if it produces one more gallon of gas- cost-benefit principle- marginal social benefit vs marginal social cost- opportunity cost principle- consider the opportunity costs for others asking or what- less pollution- includes private benefit- produce until marginal social benefit equals marginal social cost:

government support for public goods

- Government purchase public goods for everyone to use paid by tax revenues- military, police, public parks, research- just because the government provides it doesn't mean that it is a public good- mail, just because something is a public good doesn't mean government should fund it- cost-benefit principle on social benefits and costs and good of community- just because the government should fund a public good doesn't mean that the government should provide it- fireworks, raise revenue and pay private company to do it- public goods can be provided by communities- TV and splitting costs, clean spaces

voluntary exchange and gains from trade

- Grateful to gain producer and consumer surplus- voluntary transactions create both consumer and producer surplus- both the buyer and seller gain from trade- buying and selling isn't zero sum and only one wins- win-win- gains from trade - Voluntary exchange ensures both buyer and seller enjoy gains from trade- only if they want to- cost-benefit principle- will buy only if MB is at least as high as price or yields consumer surplus- supplier following cost-beenfit principle will sell jeans only if price is at least as large as marginal cost- producer surplus - Markets are about competition and cooperation, doesn't mean that they share equally though but both still benefit if rational and follow cost-benefit principle Economic surplus is marginal benefit minus marginal cost- sum of consumer surplus by buyer (MB-P) and producer (P-MC)- add them up and economic surplus is this

robots

- Higher wages create inventive to invest in capital- higher wages could make you choose machines over humans- change ways deploy capital- effects slowly, long-run- price elasticity of demand for most goods becomes more elastic over time as people gain flexibility to adapt- true for elasticity of demand for workers- new technology helps the owners of the robots at the expense of the workers Demand for labor pretty inelastic with unemployment, long term adatpign technology- end of some jobs and birth of others- demand for skilled increases and unskilled decreases- interdependence principle- technology increases demand and lowers price so new jobs

comparative advantage

- How best to allocate tasks among people? Same thing on whole economy- millions of workers and skills or machine- how to allocate? Goal to be to allocate to whoever can produce the same quality work at the lowest cost- allocating to the lowest-cost producer allows tasks to be produced at the lowest cost- comparative advantage helps you do this- center of a lot of economic thinking and organizing lives Introducing Comparative Advantage - Two people allocate two tasks- who does what? - Absolute advantage tells you who's best at a task, but not who should do the task- one might say someone should do all the chores because they're better at all of them/takes them less time- if we measured costs in time this might be true- based on idea of absolute advantage- the ability of one person to do a task using fewer inputs than someone else- this is wrong because not thinking about opportunity costs

how much 2

- If they produce less than equilibrium quantity, marginal benefit to buyers exceeds marginal cost to sellers, and could increase economic surplus by increasing production- if produce more marginal cost to sellers exceeds marginal benefit to buyers and could increase economic surplus by decreasing production-quantity that maximizes surplus is also equilibrium quantity- lead to efficient quantity - It's as if all economic activity is being directed by an invisible hand- organizing economy is difficult and no group of experts could do it but individual buyers do it- maximize surplus, lowest marginal cost, goes to largest MB, self-interest

exports surplus

- Imports raise total economic surplus- exports? Also raise economic surplus- - Start by assessing economic surplus when there's no international trade to set a baseline- the intersection- consumer plus producer surplus- more expensive exports raise producer surplus- raises the price they can get for them because buyers willing to pay more- produce larger quantity- surplus rises- producer surplus is area above the domestic supply curve but below the new higher price or world price- export- domestic consumers lose consumer surplus due to foregin competion- domestic buyers worse off, price they pay rises, reduces quantity demanded- area below the demand curve but above higher price so reduces- benefits exceed costs and exports raise total economic surplus

rrw 2

- Income effect says higher income makes leisure more attractive- income effect- change in income- leisure is a normal good, so rise in income means an increase in marginal benefit of leisure- choose more leisure- don't need to work as much to get what purchasing before- downward labor supply curve - Labor supply curve depends on balance of income and substitution effects- rational rule for workers- two effects- raises marginal benefit of working another hour and raises marginal benefit of an extra hour of leisure- opposite directions- if substitution effect is dominant than individual labor supply surve is upward and if income downward and if exactly offset each other then individual labor supply curve is vertical, if income effect becomes more important when wage is higher, might change from upward sloping when wage is low to vertical to downward sloping when wage is high- depends on person and values of money vs time- won't work at all when wage is low, then work, eventually few

extensive margin

- Intensive margin- the number of hours each worker supplies, a measure of how intensively existing workers supply their labor- extensive margin- number of people in the workforce- a measure of the extent of work - Whether or not to join workforce- cost-benefit principle- benefits exceed costs- opportunity costs and benefits- nonwage benefits, wages, and boosting future earnings- or what? Opportunity cost could be small or large like watching kids or retirement, searching, clothes, commute, child care are other costs- higher wages lead more people to enter the labor force- higher wage the larger share of population where benefits exceed costs

globalization

- Interdependence principle- decisions made by others, around the world, increasing global integration of economies, cultures, political institutions, ideas called globalization- trade costs have declined and furthered this Globalization and the Labor Market - Selling your product internationally is selling your labor- labor does compete embodied in goods and services that are traded between countries - Productivity determines average wages- worry globalization will lower wages but not all workers are the same- higher productivity so willing to pay more - International trade is raising income inequality within the US- raises some wages while lowering others, exports skill-intensive goods, foreign demand increases and demand for workers- raised income of highly educated workers- importing low skill things- decrease demand and wages- reduces wages of workers in inmport sectors and less educated

labor supply shifts

- Interdependence principle- increase in labor supply shifts curve to right while decrease shifts to left - Shifter 1: changing wages in other occupations- wage increases in jobs that compete for similar workers reduce the supply of labor, shifting the supply curve to the left - Shifter 2: changing the number of potential workers- population growth- increases labor supply, age distribution and immigration - Shifter 3: changing benefits of not working- comparing wage with leisure- changing benefits of leisure- college more affordable is left temporarily, lower cost of childcare and social security, programs helping people without a job- increase opportunity cost of not working

globalization 2

- International trade can have same effect as immigration- foreign laborers can't enter but foreign labor can- same effect immigration would have- exploited or opportunity? Consider the opportunity cost principle- or what- if we stopped would alternative be working for a lower wage, improvement in quality of life- fair trade- pay higher price for imports for reasonable standard of living and minimum wage- reduce quantity and might reduce jobs

rre 2

- Labor demand is equal to the marginal revenue product of labor- keep hiring until wage equals marginal revenue product of last workers hired- demand curve is same- wage at which you will buy each quantity of labor-marginal revenue product of labor varies with quantity of labor demanded- labor demand is downward sloping because of diminishing marginal product- greater quantity when wage is lower- lower price, larger demand, diminishing marginal product- each worker less productive

labor leisure

- Labor supply- the time you spend working in the market Your Individual Labor Supply: Allocating Your Time Between Labor and Leisure - Treat time as scarce resource and make best choices you can- the opportunity cost of working is everything you do when you're not working- one less available for everything besides paid work- this time is called paid work- relaxing, fun, care-giving, classes, sleep etc- not all fun- the cost of paid work is forgoing time spent on leisure- choosing the number of hours you work is choosing hours for other stuff- labor supply all about choices between labor and other stuff- leisure- choose how many hours at the margin- how many, one more hour? Overtime or different job with extra hours- still choose hours you work

laws rules regulations

- Laws solve problems of negative externalities- noise, speed, zoning, safety- workplace rules target externalities- protections- golden rule- zero sum gains and competition provide negative externality for competition- rules are blunt instrument- can hurt competition and interrupt market forces- just eliminate rather than reduce- poorly dsigned regulations that specify how to achieve given objective lead to inefficiency- elimate incentive to innovate

its 3

- Lawsuits, norms, social sanctions are like corrective taxes- law and sueing others is negative externality and threat provides incentive to internalize- corrective tax- norms like farting are negative externality because social sanctions- corrective tax- talking during movies, being late- a warm glow and social recognition are like corrective subsidies- help others, give blood, cookie, sticker, social media- corrective taxes and subsidies fix distortions caused by market failures- if market failure can offset wedge between private and social benefits or costs

choosing occupation

- Likely earnings and wages- market wage- higher income higher benefit- wages are important signal directinginto different occupations- think more broadly about costs and benefits - Consider hours you need to work and extra hours, other nonmonetary benefits, do what you love and interests, outside benefits, future professional life, comparative advantage, trajectory of wage, risks in profession, volatility- economy and commissions- whether or not to work, how many hours, what kind of work- The Market Labor Supply Curve - Labor supply curves are upward- higher wage more willing to work- new people will be induced to enter workforce- better than alternatives- existing workers may put in more hours- small effect- some people may switch occupations for this- which occupations is important enough to always make it upward sloping- even if individual curves aren't

imports surplus

- Lower-priced imports raise consumer surplus- lower price and then larger quantity- more surplus- below the demand curve but above the pice buyers pay (world price)- larger area - Domestic producers lose producer surplus due to foreign competition- have to sell shirts at lower price so not profitable to sell as many- area above supply curve but below price they charge- reduces surplus to smaller area- the benefits exceed the costs and imports raise total economic surplus- what's net effect-

mf 2

- Market failure 2: Externalities create side effects- arises whenever the choices that buyers and sellers make have side effects on others- coal has side effects like smog, acid rain, greenhouse gases- affected by side effects no matter what- don't take account will produce more pollution than society's best interest- tend to produce more than efficient quantity of products with negative side effects- o Externalities aren't always negative- some activities have side effects that help other people like shots/vaccines- if they don't take account, they'll do fewer of these activities than in society's best interests o Whether good or bad they interfere with ability of markets to produce efficient quantity- - Market failure 3: Information problems undermine trust- a seller knows more about quality of car than you can mess up transactions- private information undermine trust and change whether sold at efficient quantity

mf 3

- Market failure 4: irrationality leads to bad decisions- not in best interests, ignore Rational Rule for buyers- doesn't reflect marginal benefits so not efficient- same for rational rule for sellers - Market failure 5: government can impede market forces- regulations and taxes- lead to lower quantity bought/sold, regulating prices that can be charged- sometimes exist to combat above market failures but sometimes create own distortions

price aggregates info

- Market prices broadcast useful information- same idea applies to other markets- many financial prices that yield business intelligence- price of contracts reveals odds rates will rise, price of future contract- where a buyer will agree to buy something in future- is a bet on the future price of these commodities- tracking price provides useful intel about future disruptions to input costs- because price aggregates info, provides business intelligence- sports-betting markets

price as message

- Markets allocate tasks to get gains from trade- everyone focus on tasks with comparative advantage, each resource has most relative value- what's where prices come in- already thought about role quantity supplied/demanded respond to changes in price but what role do prices play- information and incentives- organizing all the tasks, right inputs and outputs and allocation- message, incetive, aggregates information- - Local international foods become trends in US- price acts as a messenger communicating sharp increase in demand- skyrocketing price sends important messages, creating line of communication between buyers and sellers - Message to potential suppliers- might not know about demand and trends but know the price which shows how buyers value prodcuts by revealing MB or WTP - Message to potential buyers- when price rises tells you it's scarce and to buy less- how expensive to produce and marginal cost

who makes what

- Markets- determine what products are made, how much, who makes/gets what, price, income, what you can afford- most countries/economists prefer market-based economies because yield more efficient outcomes- maximize economic surplus- answer questions who makes what, who gets what, how much is bought and sold Who Makes What? - Who should produce how much? Who should stay in business? A market can answer - Efficient production minimizes cost- occurs when we produce a given level of output at the lowest possible cost- requires allocating production so each item is produced at the lowest marginal cost

dwl 2

- Measure economic surplus at efficient quantity following rational rule for markets (MB=mC)- intersection- economic surplus is area between curves out to efficient quantity, largest possible ES- when smaller actual quantity is sold- area between MB and MC out to smaller actual quantity- measures ES lost and how far this actual economic surplus falls short of larger ES- lost economic surplus- failure to execute potentially advantageous transactions- shaped like arrowhead pointing towards efficient quantity - Producing more than efficient quantity also creates deadweight loss- failure leads to overproduction- exceeding efficient quantity

limiting international trade

- National security requires we produce strategically important goods ourselves- uncomfortably reliant on foreign markets, weapons, masks, food- trade restraints can hurt our national security too - Protection can help infant industries develop- stopping competition helps create new industries and businesses- these businesses often fail- makes high prices and inefficient business- government doesn't know which industry to protect - Anti-dumping laws prevent unfair competition- shield from unfair competition, lower prices a lot to hurt foreign competitiors and dump goods and then raise them a lot with no competition- hard to figure out if dumping or efficient, unfair competition or not

international trade policy

- Navigate government policies and foreign governments to win over competition- how regulate trade and how affect market- examine global trade agreements Tools of Trade Policy - Compete in market for best goods at lowest price and political marketplace- lobby to government for policies - Tariffs are a tax on imported goods- increase trade costs- can use demand/supply curves to find out consequences of higher trade cost- - Find out new price- draw new horizontal fixed line for price- determine quantities demanded and supplied by domestic buyers and sellers at this new price- at new higher price quantity demanded is lower but quantity supplied is higher- assess quantity that will be traded- imports make up gap between demanded and supplied- gap shrinks, imports fall

efficiency and equity

- Need a way to judge which policy yields better outcomes- need a way to evaluate how a policy affects how well people are doing in terms of happiness, well-being, prosperity- their welfare- already have tools to do this kind of normative analysis - The outcome that yields the most economic surplus is the most efficient outcome- economists evaluate policies using criterion of economic efficiency- an outcome is more economically efficient if it yields more economic surplus- more economic surplus that's generated, the better the outcome- economic surplus- the total benefits minus total costs flowing from a decision; it measures how much a decision has improved your well-being, measures the benefits from a decision less the costs you incur, gains generated when bought or sold- at the extreme, the efficient outcome yields the largest possible economic surplus- economic surplus measures the size of the economic pie and more pie is always better

exports

- No trade- equilibrium where the cross - Figure out the new price- suppliers won't sell to buyers for less than price and buyers won't pay for more- price is equal to world price for traded goods- determine the quantities demanded and supplied by domestic buyers and sellers at this new price- look across and down to see- assess quantity that will be traded- exports make up gap between quantity supplied by domestic sellers and quantity demanded by domestic buyers- exports lead to higher prices, more domestic production, and less domestic consumption- price rises, price leads to higher quantity supplied by domestic but lower demanded by domestic buyers, exports fill gap between supply and demand

who 2

- No way to produce the given amount with cheaper distribution- lower marginal costs elsewhere Markets distribute production across firms in a way that minimizes costs- by pursuing own self interest and choosing to maximize own profit ensures produce industry's total output at lowest possible cost- competition leads to overall efficient production- in the extreme, perfectly competitive markets ensure that every good is produced by the supplier who can do so at the lowest possible marginal cost

private vs societal interest

- Personal/private interest and society's- private- the costs and benefits you personally incur- society's all costs and benefits- if choices don't affect others these are same but then they do they are different and lead to market failure - Negative externalities create external costs- cost benefit principle to produce but don't focus on external costs- a seller's marginal private cost refers to extra cost seller incurs to produce one moe unit- one it doesn't bear like pollution are external costs- marginal external cost- the extra cost imposed on bystanders from producing one more unit

internal markets

- Pointed towards North vs South Korea economies to show income disparity and benefits of a market economy- market forces make most of gains from trade- pictures from space- market forces have great success allocating scarce resources to most beneficial use- within businesses also act like centralized though Internal Markets Allocate Resources - Internal markets are markets that managers set up within their organization so different divisions can buy and sell scarce resources- idea is to harness more of the power of market forces to help business become more profitable- intenral mrkets can allocate scarce resources to better uses within a company, nonprofit, government agency - CEO heads a bureaucracy that is often centralized, savvy CEOS use markets within own company

positive and normative

- Political debate we all pay key parts in Positive and Normative Policy Analysis - Contribution most valuable if based on careful analysis - Stage 1: positive analysis describes what will happen- purely objective, describing/forecasting- this type of inquiry, an assessment that describes what is happening or predicts what will happen is called positive analysis Stage 2: normative analysis assesses what should happen- which is the better outcome and what policy should the government adopt- value judgement about which outcome is better, not just likely affects

critiques of efficiency

- Politics goes beyond positive to normative- what outcome is better- not just efficiency Critiques of Economic Efficiency - Strong value judgements- distribution matters, and so it's also important to account for equity- largest possible surplus, irrespective of who it goes to- most consider equity too- analyze the distributional consequences of new policies- who gets what and assess whether that seems fair or equitable, how the pie is sliced - Willigness to pay reflects ability to pay, not just marginal benefit- equating willing to pay with marginal benefit- Kim Kardashian problem- can pay more because has more money- partly reflects how much you like and partly reflects your ability to pay - The means matter, not just the ends- all about outcomes- process- if you made the pie you deserve bigger slice, equality of opportunity, process or government- more than just outcome - Use economic efficiency cautiously- must understand to use, more than just it and equity and fairness

society 3

- Positive externalities create external benefits- marginal benefits- extra benefits that accrue to the buyer- marginal private benefit- external benefits because accrue to folks external to the decision that generates them- each extra unit of something with positive externalities has a marginal external benefit, extra benefit enjoyed by bystanders- buyers ignore benefits they don't receive- buyer's marginal private benefit curve- from society's perspective still a benefit- marginal social benefit- the sum of the marginal benefit accuring to the buyer and the marginal external benefit that accrues to bystanders - Marginal social benefit = marginal private benefit + marginal external benefit- drive wedge between demand curve and marginal social benefits, demand curve is marginal private benefit curve- social benefit lies above and wedge is equal to marginal external benefit

rrw 3

- Price elasticity of labor supply measures workers' responsiveness to wages- elasticity, how quantity of labor supplied responds to change in wage, unresponsive to changes in price is inelastic- no exact amount but most agree is inelastic - Labor curve is upward sloping but inelastic- nearly vertical, downward sloping- different evidence- effect of changing wages on individual labor supply is relatively small- nearly vertical for most or not at all, raise likelihood will work at all

supply and demand

- Prices determined by intersection of supply and demand curves- what determines wage- supply and demand- focus on labor market for hair stylists, buy and sell time- units are different- price of an hour of worker's time is their hourly wage- quantities employment place buys are hours of work- labor market switches position- worker is on the supply side, looking to sell labor for highest wage can get- businesses on demand side, looking to hrie the best workers they can find at lowest price possible

what gets traded

- Produce what you're good at and buy what you can't- export with lowest opportunity cost and import rest- however have to consider trade costs - Trade costs determine whether it's worth buying or selling internationaly- are the extra costs aside from the price incurred as a result of buying or selling your goods internationally- shipping costs, extra tax on imports or to foreign government- opportunity cost principle reminds you to consider full set of costs- shipping delays, language barriers and time zones, foreign laws, different ways of business- cost-benefit says trade is only worthwhile if benefit exceeds cost- foreign price is enough of a discount to offset trade costs- only export if price you'll get exceeds local price by enough to offset export-related trade costs

PS 2

- Producer surplus is the area above the supply curve and below the price- total producer surplus in a market is the area below the price and above the supply curve out to the quantity sold - - Why? Supply curve is also seller's marginal cost curve, so each point on supply curve reveals a seller's marginal cost- for any given sale, a seller gains producer surplus equal to the price minus the marginal cost and the marginal cost is the height of the supply curve- add this across all jeans and you will add area above curve and below price out to quantity sold - You earn producer surplus on all but your last sale- according to rational rule keep selling until price equals marginal cost- equal only on the last/marginal pair you sell- with an upward sloping marginal cost curve, the marginal cost every other pair of jeans you make is lower and so you earn a healthy producer surplus on all but last pair of jeans you sell

trade 3

- Red tape raises costs like a tariff but it doesn't raise revenue- bureaucratic hurdles like customs and the time to ship are referred to as red tape- same effect as a tariff- increase trade costs and raise price to foreign buyers- reduces quantity demanded, raises quantity supplied, reduces international trade- red tape is more inefficient because doesn't raise revenue for government - Import quotas have similar effects to tariffs but don't raise revenue- import quota- limits quantity of a good that can be imported can have same effect- sometimes exact same outcome as tax but wouldn't raise revenue like it does with taxes unless it auctioned off licenses

cts 2

- Set a corrective tax equal to the marginal external cost- make choices based on new marginal cost coinciding with social cost- internalize externality- decline in quantity is correcting overproduction that occurs when external costs are ignored- doesn't matter which side makes tax payment- same outcome- smoking, swear job, road tolls - Corrective subsidies can fix positive externalities- corrective subsidy lead people to consider the positive externalities their actions generate- insurance companies subsidize alarms to reduce chance you file for theft- if the problem of positive externalities is that people don't account for the marginal external benefits- subsidy can act as incentive spurring people to do more of them- setting subsidy equal to marginal external benefit leads people to internalize positive externalities

labor demand shifts 1

- Shift labor demand curves: - Changes in demand for your product- workers are input, not desire to consume labor but demand for end result of efforts- call this a derived demand because demand derived from demand for stuff their efforts make possible for you to sell- demand for what you sell increases- price rises, then marginal revenue product is higher- Pick careers where demand for what you produce will grow

shift 3/4

- Shifter 3: better management and productivity gains- produce more per week, increase demand and marginal revenue product if price stays same- want to higher more workers when each worker generates more revenue- new tech, shift up and right - Shifter 4: nonwage benefits, subsidies, taxes- workers more expensive than accounted for, nonwage benefits- take into account all costs, not just wage- insurance, benefits, days off, taxes, subsidies or tax cuts- costs change labor demand curve shifts- nonwage costs rise, demand decreases and goes left

gains from trade

- Swap stuff with other people so better off- the benefits you get from reallocating stuff to its better uses are called the gains from trade- reallocate resources, goods, services to better uses to generate gains from trade- buy and sell goods using money- money is convenience for more complicated trades- allocate all kinds of things including time and labor- sell your own labor to employers and buy something- trade your time for that thing- everyone gains- using markets to allocate people to tasks and tasks to people

trade policy 2

- Tariff- increase price, decrease Q demanded increase Q supplied, decrease imports- domestic buyers unhappy because higher price adds- consumer surplus falls- domestic suppliers are happy because more profit and quantity- producer surplus increases- government also gains with $4 of revenue for each T-shirt- revenue equal to tax/height times total number of imports- add up consumer loss, producer gain, government gain to find change in economic surplus- - Tariffs reduced total economic surplus- consumers suffer- tariff revenue paid by consumers to the government- distorts quantity- buy less- producers supply more, beyond the point where foreign producers are more efficient, reduce economic surplus

imports change market

- The domestic demand curve illustrates quantity of goods domestic buyers- all Americans together- plan to buy at each price - Domestic supply curve- illustrates quantity of goods domestic producers plan to sell at each price- - Evaluate the equilibrium when there's no trade- intersection of domestic demand and supply curves- figure out how imports shape markets: figure out the new price- international options means sellers won't accept less than world price and buyers won't pay more than so price is the world price- determine the quantities demanded and supplied by domestic buyers and sellers at this new price- go horizontal across for price to point and then down to quantity to how much demanded- assess the quantity that will be traded- international trade makes up the gap between the quantity demanded by domestic buyers and the quantity supplied by domestic sellers- if want to buy more than producers supply, imports make up difference

market failure vs government failure

- The efficiency of well-functioning markets points to the importance of market forces- good produced by business at lowest MC and to highest MB/WTP- productive and allocative efficiency- lead to efficient outcome- produce largest possible economic surplus - Market failure points to an important role for government- common, worse outcomes than ideal, deadweight loss- good policies can limit market failure, reduce DWL, more efficient outcomes- how big should the role be? Organize/regulate, taxes/subsidies/quantity regulations, special programs - Government failure limits the extent to which we should rely on government- government failure- when government policies lead to worse outcomes, politicians make choices not in public interest/efficiency- only interested in some voters or what is popular- government can make market worse, worse in nondemocratic countries, compare losses and varies across policies and markets and time

im 2

- The knowledge problem means that managers can't get the information they need- feeding America example- knowledge problem- knowledge or information you need to make a good decision may be so broadly dispersed that it's not available to any individual decision maker- map where everyone has really small pieces- people might only know their own marginal benefits and costs - Markets solve the knowledge problem- create an internal market- ex: give people points and bidding- doesn't rely on a centralized decision maker but on knowing own marginal benefit and following it- navigation point - Use internal markets to allocate scarce resources- helps you do a better job, product teams compete and trade - Internal prediction markets can help improve your forecasts- let employees bet on outcome to get more accurate forecasts of sales

rrs 2

- The rational rule for society: produce more of an item as long as its marginal social benefit is at least as large as the marginal social cost- stop where MSB=MSC- the socially optimal quantity occurs where MSB=MSC- application of rational rule from society's perspective- predict the equilibrium to forecast what will happen, assess externalities involved, find socially optimal quantity in society's best interest, compare forecast of equilibrium quantity with socially optimal quantity- - Only private- no bystanders- bad outcome potential- - Positive or negative, how large, all relevant side effects, help or hurt- draw social cost line- understates marginal costs if negative- - Rational rule for society- marginal social benefit equals marginal social cost- negative leads to marginal social cost curve to lie above supply curve- if no demand then demand curve is also marginal social benefit curve- where marginal social cost curve crosses demand curve-

society 2

- The supply curve is the marginal private cost curve- society's perspective all of these costs are relevant no matter who imposed on- relevant marginal cost of an extra gallon of gas is the marginal social cost- the sum of the marginal private costs paid by the seller and the marginal external costs borne by bstanders - Marginal social cost = marginal private cost + marginal external cost - Negative externalities drive wedge between supply curve and marginal social cost curve- marginal social cost curve lies above supply curve and wedge between them is equal to the marginal external cost

choosing trading partner sources of comparative advantage

- Trade costs continue to fall, new opportunities for comparative advantage- what is your comparative advantage- relatively abundant inputs, specialized skills, benefits of mass production - Source 1: Abundant inputs- take advantage of what you have to get what you want- more access to resource than competitotrs, climate, geography, resources, people, businesses, countries, strategic investments- import scarce resources- relative abundance matters- more partner differs the greater the gains because different opportunity costs- skill intensive goods and educated - Source 2: develop a specialized skill- what are you best at- skills, production methods, expertise to lower costs, learning by doing - Source 3: exploit the benefits of mass production- produce millions, specialized robots and production lines, mass production

trade 2

- Trade costs limit how important international trade is in your sector- high trade costs unlikely importing or exporting will pass cost-benefit but worthwhile if low, trade costs determine whether international trade will be a big factor in market- none with music, few with clothes, but no dentists or houses- determine also how much is traded- declining trade costs today- global trade is rising- globalization- eliminated extra tariffs, reduced red tape that hinders trade, standardization of shipping and English and internet, trade more intermediate inputs and have global supply chain

limit trade

- Trade shouldn't be a way to skirt regulations- minimum standards and regulations- drive costs up- but get something in return like social benefits- prevent unsafe practices at home also want to do this internationally- refusing to work with these countries only leads to more poverty- economic development to make more feasible in long run - Foreign competition may lead to job losses- uncompetitive business lay off workers, restricting may preserve in import-competing sectors but destroys in ones that rely on imported inputs- causes export sectors to expand which restrictions prevent- find new jobs- temporary adjustments caused by trade last for a long time though - Manufacture in America or just manufacture inputs in America- most want made in America but inefficient and not always good for cost

comparative international trade

- Trade with other countries? Can a better deal- choose to import- buy goods or services for foreign sellers when foreign products are a better deal- American businesses choose to export- sell their goods or services to foreign buyers when they can make money than they would if they just sold in US- more WTP of 8 billion vs Americans Comparative Advantage and International Trade - Comparative advantage- if at a task you have a lower opportunity cost than someone else- should specialize in these activities and rely on trading partners for other stuff- more of what you're relatively good at to make everyone better off- produce more together- borders are irrelevant to the logic of comparative advantage- same applies to other countries- better off if trade with foreigners sometimes- comparative advantage drives international trade- same principles apply- produce and export those goods where opportunity costs are low and import those goods where opportunity costs are high- both sides gain

imports raise economic surplus

- US consumers gain when they import shirts because get lower prices- but US producers lose because foreign competition forces them to lower their prices or lose customer- cost-benefit principle suggests policy makers should make decisions based on whether gains exceed losses- assess balance of these effects, compare how much consumer surplus buyers gain with how much producer surplus supplier lose- - Start by assessing economic surplus when there's no international trade to set a baseline- where domestic supply and demand curves cross- domestic buyers earn consumer surplus when buy price lower, consumer surplus is area below the domestic demand curve but above the price- domestic suppliers earn producer surplus when price is above marginal cost- producer surplus is area above domestic supply curve and below price- total economic surplus

current trade policy

- US trade policy largely embraces free trade- low tariffs on imports, protects specific industries like dairy products, tobacco, sugar, steel- free trade- US signed many free trade agreements- exports depend on country- free trade agreements and low tariffs- World Trade Organization tries to reduce trade barriers- most-favored-nation status- treat all members equally, national treatment principle- treated equally once entered your country, settle disputes, now trade focuses on facilitating trade in services, reducing red tape, protecting intellectual property, environmental standards

corrective taxes and subsidies

- Use prices to change the incentives- taxes and subsidies to correct the market price in way that leads to internalize externalities- corrective taxes can solve negative externalities- ignore external costs they impose on bystander, they will pay attention to a tax on them- per-unit tax equal to the marginal external cost leads people to make choices as if they're accounting for MEC of their action- also called a Pigouvian tax- internalizes externality to cost-benefit- supply curve understates true marginal social costs by amount equal to marginal external cost- overproduction- new supply curve correspond with marginal social cost curve

ca 3

- When everyone focuses on task they have a comparative advantage, group will produce more- due to gains from trade from reallocating/trading tasks- comparative advantage - Calculate the opportunity cost of each task- output you could produce in your next best alternative task- opportunity cost of a task = hours this task takes/hours required to produce alternative output - Takes x hours to do this but if he spent same amount of time doing that, divide to find out output as opportunity cost- shift from rate of production to opportunity cost- what else they could do- what are they foregoing to do the job and who is foregoing less - Everyone has a comparative advantage- some might lack absolute advantage at both tasks but still can help produce more- something better than nothing- opportunity cost helps you think of all possible uses of someone's time- task she is least bad at relative to the other person

fr 2

- When goods or services are rival and it's easy to exclude those who don't pay, there's no free rider problem- rival good- one for which your use of it comes at someone else's expensive- eat a cookie, someone else can't- no externalities from one person's decision market produces socially optimal quantity - Public goods are nonrival goods suffering from the free-rider problem- nonrival and nonexcludeable good is subject to free rider problem- public good- the military, national security- markets underproduce public goods- positive externalities

public goods free-rider

- When people cannot be easily excluded from using something- free-rider problem- occurs when someone can enjoy the benefits of something without bearing the costs- architecture, clean air, eradiciation of disease- nonexcludable- can't prevent those who don't pay from enjoying benefits, bystanders enjoying positive externalities- market ignores these interests and may underproduce or not produce at all - With nonrival goods, free riders enjoy positive externalities without hurting others- clean apartment even if didn't help, flowers, beneficiaries of policy- benefit from actions even if didn't contribute- you still get to enjoy, helps you even if it also helps others- nonrival- whenever bystanders benefit without contributing (something is nonexcludeable) and benefits don't subtract from someone else's (nonrival)- positive externality- underproduced because ignore free riders

assign ownership rights for common resource problems

- When rival goods are nonexcludable- goods that are rival but nonexludeable are common resources- private gains but shared costs- catching a fish- privately benefit but cost shared by everyone- this causes a negative externality Tragedy of the commons- commons for sheep to graze for free but everyone doing it so much that overgrazed- overconsume common resources- too many activities and not enough paying cost- better off if agree to limit consumption of common resources- occurs whenever rival goods are nonexcludeable, fishing in oceans, fewer fish tomorrow, congestion, internet- assign ownership rights to solve-

consumer surplus

- When you gain economic surplus from buying something, economists refer to it as consumer surplus- the economic surplus you get from buying something, consumer surplus = marginal benefit - price- because you're earning that surplus in your role as a consumer, gain when you buy something for a cheaper price than the marginal benefit you get from it - Consumer surplus is your marginal benefit minus the price- what you're willing to pay minus the price, the gain from buying something at a price below the highest price you were willing to pay, which is your marginal benefit

solving externalities

- Worse outcomes by ignoring bystanders- how to fix- depends on setting but to get people to act as if taking marginal external costs and benefits into account- realign incentives so people take account of/internalize the effects of their actions on bustanders- internalize the externality

CS 3

- You earn consumer surplus on all but your last purchase- rational rule for buyers- keep buying until price equals marginal benefit on last pair- last pair MB should equal cost, consumer surplus would come from all proceeding purchases - Enjoy a lot of consumer surplus in life- price you pay doesn't always indicate benefits- think about water- a lot of it doesn't matter if you lose a little, but that first gallon has a huge marginal benefit- cheap price doesn't mean it's not valuable, just means consumer surplus is great- antibiotics might cost little but great consumer surplus, think about the free internet- price doesn't indicate economic importance

ca 4

- You have comparative advantage in task you are least bad at- everyone has in something even without absolute advantage, everyone must be least bad at something as long as people have different opportunity costs - A three step recipe identifies who has a comparative advantage in each task- determine how long each task would take each person (cost of producing each good, in hours), convert this into a measure of opportunity cost by calculating how much of the alternative good you could have produced in that time, evaluate who has a comparative advantage at each task by assessing who can produce each good at the lowest opportunity cost - Rearranging who does what increases output- rearranging allocation can produce more of same inputs- reallocate tasks so everyone does their comparative advantage and less of other tasks

sd

- labor supply is upward loping- if wage is low would take another job or be unemployed- opportunity cost- the or what question- if wage is higher, many work longer hours- marginal principle- work here more- interdependence- seek out work- cost-benefit- quantity of hours supplied in market for worker typically rises with wage- upward slopping- demand- looking to hire- wage too hire will higher fewer and sell fewer- opportunity cost- lower- might stay open longer or more days- cost-benefit

price as incentive

- message- These messages help coordinate better outcomes- coordinate chain of events and complication, prices understood in all languages- - High price makes you cut back but makes suppliers expand and the opposite it true - Price is incentive for suppliers to expand with new profit opportunities, switch industries and change jobs and start businesses- mobilization - A price is an incentive for buyers- high price raises opportunity cost of consuming- consume less- switch shopping and supplying habits and portions - A price provides incentive for stranger to cooperate- high price means sell rather than keep

pb 3

- private bargaining can solve externality problems when bargaining costs are low- simple, few parties involving, negotiating not too costly and high benefit for stakes- cost benefit principle predicts, private bargaining likely to succeed when benefits from solving externality problem are high and costs of bargaining to find a solution are low- when bargaining is difficult, externalities remain a problem- difficult/costly- climate change, millions of people, future

ct 2

- set number of permit that gives right to produce certain quantity of output- buy and sell/trade these permits- price in between to sell permit and both companies will have their profits boosted- profitable only when more efficient business buys permits from a less efficient business- redistributing production and letting government correct negative externality with maximum output- regulate pollution rather than output- beyond output if you regulate the externality makes incentive to research better production methods/greener- more output with no pollution- caps, optimal amount of output and quantity regulations, socially optimal, trade so forces determine best allocation- linked to pollution rather than production ideally- cap and trade- cap- regulates quantity of negative externalities directly

2

- someone owns common resource- acting like no one owns it, if someone does have incentive to ensure it's not overused- might charge and limits because interest in preserving- costs and benefits become own costs and benefits, internalize, nonexcludeable goods create externality problems- can't exclude nonpayers there are externalities, type depends on type of good involved- when nonrival then it's public and positive externalities, rival good and tragedy of the commons and common resource and negative externality- - More nuanced sometimes- possible to exclude free riders but difficult and costly to do so, in between goods can share but undermines experience, spectrum

ct 3

- trade by issuing permits that can be traded- tradeable emissions permits- emissions permits are worth more to efficient green producers- produce a lot of output for each ton of pollution values permits highly because each lets them expand a lot but tiny, dirty, inefficient values less because less opportunities to expand- like a corrective tax- opportunity cost- corrective tax raises direct financial cost of producing more cast- raises the opportunity cost- emit more means using permit rather than selling it- more costly to pollute by pay or possible revenue which internalizes the externality- laws when these don't work

dwl 3

A larger quantity is produced- MB is less than MC- reduces economic surplus- cost exceeds benefits- amount equal to difference between MC and MB- deadweight loss due to overproduction is area between MB and MC curves from efficient quantity to actual quantity- looks like arrowhead pointed at efficient quantity- pointing from actual to efficient- do better if we move this way- quantities rather than prices are essential to measuring deadweight loss- consequences of producing larger or smaller quantity than efficient- price only redistributes economic surplus- net amount of economic surplus doesn't change if price changes- quantity that determines- need to analyze price only if you want to figure out whether buyers or sellers enjoy more of that economic surplus

exports 2

Domestic producers gain more than consumers lose so net gain in positive- consequences of allowing exports- increases the producer surplus and decreases consumer- - You import to get a lower price on stuff you buy, and export to get a higher price on stuff you sell- higher prices leads buyers to reduce quantity they demand and increase quantity they supply- consumers like low and producers high - International trade increases economic surplus, but not everyone wins- raises living standards of both importers and exporters, also redistributes and expands the pie- some better and worse off- depends on buyer or seller - Import-competing businesses oppose international trade- argue most against trade are those who stand to lose- businesses leaders in industries that compete for imports, exporting raises the price which hurts domestic buyers

efficiency 3

Equity is also important, but ignored by efficiency- in reality, it's rare for new policies to compensate the people they harm, argument it can make everyone off is just a possibility- policies change both level of economic surplus and distribution of that surplus- real world debates are rarely about efficiency alone-they are also about equity, which means they are concerned with whether a policy will yield a fair distribution of economic benefits- account for how pie is sliced- a measure of fairness, an outcome yields greater equity if it results in a fairer distribution of economic benefit

3

Find difference- overall good for economy, net gain- helps consumers so much- buy more shirts- which amplifies their gains- sellers lean away from unprofitable production and miminize their losses by supplying fewer- amplified gains outweigh- competition causes price of goods we import to fall, buyers respond by raising the quantity they demand while sellers respond by reducing quantity they supply, with imports filling the difference- lower price increases consumer surplus of buyers and decreases producer surplus of sellers- boost economic surplus

imports 2

Imports lead to lower prices, less domestic production, and more domestic consumption- lower quantity supplied domestically but higher quantity demanded so imports fill gap

rational rule for employers

Marginal benefit is marginal revenue product- marginal product times price- marginal cost is wage- hire one more if marginal revenue product of labor is greater than or equal to wage- rational rule for employers- similar to rational rule for buyers- rational rule for employers just applies this to hiring- - Marginal product and marginal revenue product are additional, marginal, not overall number- rational rule for employers- assume when exactyly equal- lead firm to largest profits possible- - Total revenue- price times number sold, total costs- wage times number of workers, profits- revenue minus costs

private bargaining and the coarse theorem

Negotiate, better outcome, search for creative bargain to make all better off- side payments can solve externalities- if someone else's actions harm you, you can pay them to do something else instead- price willing to pay to change someone's choice, pay them to do a choice that would benefit you- pay them to do more- both examples of the Coarse Theorem- if people can bargain costlessly and legal rights and clear and enforced, then externality problems can be solved by private bargaining, paying neighbor to dial down music you raise the opportunity cost of them playing loud music because they are foregoing 5 dollars- given incentive- private bargaining can restore socially optimal outcome-

shift 2

Shifter 2: changes in the price of capital- machines, tools factories, stuff produced alongside workers, complement or competition like machines being used vs replacing people- price of capital or invention of new tech can lead to increase or decrease in labor demand- scale effect- when price of capital goods/inputs declines, canproduce output at lower cost so sell larger quantity- larger scale, more workers, increase demand- also substitution effect countering this- price of machines falls, demand for workers to do tasks that can be substituted with machines also decreases- if scale dominates then are complements- decrease in price of capital shift labor demand curve right- if substitution then substitutes and decrease will lead to left shift- effect domination differs by occupation- routine tasks are substitute

world market

World supply and world demand determine the world price- many manufacturers, price determined by interactions of all buyers and sellers- world market is world supply and world demand intersection- world supply- total quantity of shirts produced by all manufactuers in world at each price- world demand- total quantity of shirts demanded across all shirt buyers in the world at each price- jointly determine the world price- the price that a traded good sells at in the world market- the price consumers pay to buy imported and price - When the US is a small player, take the world price as given- actions of one barely affect price- US buyers and sellers are price-takers- can take the world price as given, only big players need to think about how decisions change world price

ca im 2

design iPhone in US and manufacture in China- division of labor- does comparative advantage really drive international trade? Make these decisions in simple amy- cost benefit principle tells you to pay attention to price- price is equal to marginal cost- compare price of imported and domestic shirt- comparing their marginal costs- opportunity cost principle reminds you marginal cost should include all relevant opportunity costs- evaluating what was made at lowest opportunity cost by looking for lower priced shirt- following comparative advantage

pb 2

willing to pay up to amount of marginal external cost imposing on you- private cost plus opportunity cost of not getting side payment- opportunity cost equal to side payment which set equal to marginal external cost- leads to internalize externality and more likely to choose socially optimal outcome- private bargaining, no government intervention- - more efficient outcome is enough of incentive to make people start bargaining and find creative ways to split gains- strategic investments can also solve externality problems- different type of private bargain- putting investments into areas where there are larger positive externalities- Google crisis- mergers can solve externality problems- merge with network provider to internalize the externality- externalities spill over different markets, business operate in each market to internalize