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Review Question:
why is a tornado warning system a public good?
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it meets the criteria of a public good because it is:
-non-rival
-non-excludable
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review question:
Farmer McDonald gives banjo lessons for $20 an hour. One day, he spends 10 hours planing $100 worth of seeds on his farm.
d) an economic profit?
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McDonald actually earns a negative economic profit, since $200 (TR)- [$100 (fixed cost) * $200 (opp. cost)] = -$100
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Review Question:
the total elimination of pollution would not be in society's best interest. Why? Using economic analysis explain how you would determine the optimal level of pollution.
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-it is costly
-it isn't in the best interest of society becasue the cost is much bigger than benefits
-optimal level of pollution is where the cost of elimination is equal to its benefits (MR=MC)
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Review Question:
How would the imposition of pollution control regulations on US steel companies affect the competitiveness of US steel companies?
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-pollution control regulations make it more costly to produce steel
-resulting in them charging higher prices to cover additional costs, making them less competitive
-consequence= quantity produced decreases
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accounting profit
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total revenue- explicit cost
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Review Question:
Education is produced and sold by private schools. What is the economic justification for the government producing and distributing education?
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-can be private good w/ positive externalities
-private market fails cuz it exclude individuals (can't afford it)
-gov't now produces and distributes education cuz of positive social effects (better citizens, higher taxes, reduces crime)
*high school= public good
public university= non-rival & excludable
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Marginal cost
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the cost of producing one additional unit of a good or service
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variable cost
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expenses that change in direct proportion to the activity of a business
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"Free-Riding"
if enough people don't contribute
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the public good will be underproduced since no one is paying
-results in market failure
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An individual takes good care of their lawn.
Why is this considered a positive externality?
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-maintaing quality of home, other people benefit
indirectly (+ home value, personal enjoyment)
-they have no incentive to maintain their home since they don't take into account social benefits, only their private benefits
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the law of diminishing returns
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after some point, the marginal product diminishes as additional units of a variable resource are added
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Review Question:
using economic analysis, explain why some people disturb others by talking in class.
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a class lecture is a public good: it is non-rival and non-excludable to the class.
-however, not everyone is compelled to contribute and be quiet
-they are free-riders and abuse it by speaking and distracting others
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Production Function
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an equation that defines the combinations of goods you can produce (physical output) given your production input (resources)
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review question:
What costs does farmer Jones control in the following situatons, and what costs does he no longer control when making decisions about planting, picking, and selling strawberries?
a) farmer jones is thinking about putting in a strawb
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at this point he controls all of the costs because no actions have occured
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Review Question:
we have cars, bread, shoes and many other items produced and sold in private market. Why don't we produce and sell national defense in the private market?
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we don't becasue a private market is unlikely to produce the optimim amoutn of any public good.
-important goods like national defense ill be incompatible due to the free-rider problem
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review question:
What costs does farmer Jones control in the following situatons, and what costs does he no longer control when making decisions about planting, picking, and selling strawberries?
c) farmer jones whose strawberries are now picke
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farmer jones only controls the costs of selling the berries. Since the strawberries are now planted and picked, he no longer controls those costs
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A firm produces a great deal of pollution when creating its product.
Why is this considered a negative externality?
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-the pollution created by the firm imposes a cost to those who are not part of the mkt exchange
-the firm has no incentive to stop polluting since it doesn't take into account social costs, only its own private costs
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is the law of diminishing returns a short-run concept?
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it is only a short-run concept,
because all costs (even fixed) can be changed in the long-run
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diseconomies of scale
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increasing quantity produced increases your average total cost
-difficulties of coordinating a large company
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MR<MC
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by producing an additional unit of output adds more to costs than to revenues, thereby decreases profits
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Derived demand
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the demand for labor is derived from the demand for the product produced by the labor
-MP * value of product= worker's value
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perfectly competitive markets
are competitive firms "price takers?"
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yes,
firms have no power to set the price in the market, implies the price elasticity of demand is perfectly elastic
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Spillover Benfit
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(positive externality)
a production or consumption activity that creates an external benefit to individuals or groups other than the person making the decision
(a person learning to cook and shares food w/ neighbors)
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review question:
Farmer McDonald gives banjo lessons for $20 an hour. One day, he spends 10 hours planing $100 worth of seeds on his farm.
b) what costs would his accountant measure?
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McDonald's accountant would measure a cost of $100 (the explicit cost of seeds)
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price discrimination
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charging buyers different prices for the exact same good
*only affective if sellers are able to separate the market and prevent resale
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monopoly characteristics
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-only one of a small # of firms
-unique product (no close substitutes)
-strong barriers to entry (legal or natural)
-price makers (no price pressure from competitors)
-demand for product is highly inelastic (no subs)
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public good examples
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-national defense
-building a dam
-expanding neighborhood pool
*everyone benefits
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Economies of scale
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increasing quantity produced reduces your average total cost (cost per unit)
-specialization of labor
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to get a worker hired
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1. make worker more productive (training)
2. decrease wages
3. increase price of good
*think bakery
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economic profit
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total revenue- (explicit costs + implicit costs)
opportunity costs
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average total cost
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the total cost per unit of output, which equals averaged fixed costs plus average variable closts
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Public goods characteristics
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1. non-rival:
once produced each person can benefit from it w/out hurting others enjoyment
2. non-excludable:
once created, it is very hard to prevent people from gaining access to it
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implicit costs
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the opportunity cost of using resources you already own; no money changes hand
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review question:
What costs does farmer Jones control in the following situatons, and what costs does he no longer control when making decisions about planting, picking, and selling strawberries?
b) farmer jones whose strawberries are now ripe?
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at this point, he controls all the costs associated with picking and selling berries. However, he no longer controls the costs associated with planing
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perfectly competitive markets:
when will the firm produce?
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at MR=MC
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Spillover Cost
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(negative externality)
a production on consumption activity that creates an external cost to individuals or groups other than the person making the decision
(music major playing 24/7)
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short run (SR)
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is the timeframe in which the quantities of at least one resource is fixed
(only involved non-fixed assets like labor)
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Marginal Physical Product
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the change in total output that results from a one unit increase in the quantity of labor employed, all other inputs constant
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MR>MC
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by producing an additional unit of output adds more to revenues than to costs, thereby increases profits
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review question:
What costs does farmer Jones control in the following situatons, and what costs does he no longer control when making decisions about planting, picking, and selling strawberries?
d) farmer jones cuts his price to 5 cents a quar
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farmer jones is not selling below costs, becasue he no longer controls any costs.
all costs- planting, picking & selling are sunk costs
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review question:
Farmer McDonald gives banjo lessons for $20 an hour. One day, he spends 10 hours planing $100 worth of seeds on his farm.
c) if these seeds yield a crop worth $200, does McDonald earn an accounting profit?
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the accountant would register an accounting profit of $100
-recall, $200 (TR)- $100 (fixed cost)= $100
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Free-rider
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an individual that receives the benefits of a good or service w/out paying the cost
-& primary source of public good market failure
*feel don't need to pay if others will do it for them and they still get the benefits
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monopoly barriers to entry
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-government regulations
-patents, licenses, trademarks
-control of production inputs
-trade secrets
-economies of scale
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sunk costs
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s previously incurred and irreversible cost
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perfectly competative market characteristics
(know at least 3)
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-large number of firms and consumers
-products are perfect substitutes for each other
-easy to enter/exit market
-there is no non-price competition or advertising
-there is no control over price (price takers)
-the demand for products is highly elastic
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exclusion principle
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ability to exclude others from good or service (unless they pay)
*like costco
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Monopoly price setting
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-monopolies are "price choosers" (decide what price will make them the most $)
-MR is NOT constant (demand curve)
-profit is maximized with MR-MC
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"Free-rider Problem"
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consumers can take advantage of public goods w/out contributing sufficiently to their creation
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marginal revenue
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the proceeds from selling one additional unit of a product
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factors that shift the demand curve for labor
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1. demand for the product produced
2. productivity of labor
3. price of substitutes the factors of production (technology)
4. price of complementary factors of production (health insurance)
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LR in competitive market with economic loss
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-economic losses deter market entry & promote market exit
-exiting firms shift supply LT (increase in mkt price)
-firms cont. to exit mkt until all economic losses disappear (firm into long run)
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factors that shift the supply curve for labor
(think pharmacy tech)
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1. wages that oculd be earned in other occupations (wage price)
2. cost of acquiring the skills (certification price)
3. non-monetary aspects of the occupation (interest)
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LR in competitive market with economic profit
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-economic profit attract firms & promotes market entry
-entering firms drive the supply curve to the right (decrease in market price)
-new firms cont. entering market until all economic profits disappear (moving firm into long run)
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sunk costs (evaluate):
all costs incurred in the past are irrelevant to future decisions because they cannot be changed. only consider what can be changed.
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all costs relevant to a choice lie in the future because they are the result of the actions you take. since you can't change the past actions, you cannot change the costs associated with those actions.
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natural monoploy
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a market where costs are much lower for one firm to serve the customer than 2 or more
(ie power companies)
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review question:
Farmer McDonald gives banjo lessons for $20 an hour. One day, he spends 10 hours planing $100 worth of seeds on his farm.
a) what opportunity cost has be incurred?
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McDonald incurs an opportunity cost of $200 since he could have been giving banjo lessons
(10 hours X $20= $200)
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long run (LR)
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is the timefram in which the quantites of all resources are ariable
*all costs are variable in the long run
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fixed cost
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the cost of fixed factors of production that is independent of the quantity produced
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explicit costs
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a cost that can be quantified into an exact dollar amount; payments made to others
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