ECOMAN Review Session - ECO MAN Brief review of part 1...

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Unformatted text preview: ECO MAN Brief review of part 1 Session Lecture 12 Consumer theory Objective was for consumer to maximize satisfaction: this occurred when consumer chooses the point on the budget line that is tangent to highest possible indifference curve(MUX/PX = MUy/PX) We covered 2 main shocks: 1. Change in income: e.g. InCome goes up The budget line shifts out(parallel) and consumer chooses new point (tangent to highest IC), Outcome: buys more X (thus X is a normal good) buys more y (thus y is a normal good), in this situation the ICC would be positively sloped and the Income elasticity would be positive too. (see exhibit 1) OR buys less X (thus X is an inferior good). Note, when drawing this case, ensure the IC’s Do Not Intersect! ! !. The ICC would have a negative slope and Income elasticity would be negative for X. 2. Change in PX: e.g. PX falls The budget line this time pivots out, becomes flatterfrom this you can sketch out the demand curve for X. There were 3 assumptions relating to demand: tastes are held constant, disposable income is held constant, and price of y is held constant. Note I also discussed the “substitution and income effects” associated with a fall in PX last day too. Practice: What would happen to demand if a. change in tastes, change in incomes, change in prices of other goods, b. how would we derive the industry demand 3. Application of Income vs Gift in kind. Here we say the consumer would always prefer the cash vs Gift in kind, mainly because the gift was always possible to purchase the cash, so at best the gift was the same as case(ie same IC). However, more often than not, given the cash the consumer would choose/elect/maximize satisfaction by choosing a bundle/combo that is different from the gift. Practice Question: Suppose your parents gave you a choice: A. lower your allowance by $100 B. take away 3units of clothing, & 3 units of food valued at $100 Answer? Change in PX Lecture 13 Price elasticity of demand and Total Revenue: lets do it now Practice question: Farmers in a year experienced a drought, yet they discovered their total revenues actually increased. What can you conclude about elasticity of demand? Rent Controls VS Housing Vouchers Here we learned that rent controls( which is a price ceiling, set below the equilibrium price) has many many harmful effects. -shortage of rental units would be created, since QD exceeds QS -low income families would not be able to find affordable housing -capitalism is driven by innovating large scale oligopolists -invention/innovation is driven by large scale firms -innovation: a new product, new process, new market, new source of supply. . .these are seeked by large scale firms, not small price taking firms —competitive forces of capitalism is not driven by PC, it was adopted by large scale firms thru innovation, or copied innovation -large scale firms had to innovate to: increase profits & survive. If failed to copy the innovation would render firms obsolete(e. g. Microsoft with zune, copying apples innovation of IPOD, or discovery of UPC scanners for large scale grocers, or Dell computer with J IT inventory, and demand pull assembly, or U of T with its sophiscated high tech enrollment system vs high school scheduling system, can u think of others? Even laundry detergent, toothpaste, food companies,would all have to come out with improved products to stay ahead, KFC’smega meal, Tide with getting shirts “whiter than white”) ~non innovating firms would suffer from “creative destruction” ie they would go Bankrupt —large scale firms would have R&D (macdonalds is constantly testing their food menu, to come up with new food items, RIM would always be upgrading their device —innovation is risky business(e. g. when coke came out with “New Coke”, a disaster that had to be changed asap), innovation could fail, but successful innovation would lead to an improved resource allocation, higher labor productivity, and higher standard of living ~ link Schumpeter to Denison/solow concept as the cause of economic growth *future of capitalism would demand on innovating large scale firms Interesting quotes about Schumpter: It's not difficult to be for Adam Smith and Joseph Schumpeter at the same time,“ maintains House majority leader Dick Armey. "The market must clean itself out by taking resources away from the losers, so it creatively destroys the losing companies and reallocates resources to the winning companies. That's really what's going on." it's entrepreneurs who drive economies, generating growth and, through successes and failures, setting business cycles in motion Products based on ideas — music, software, pharmaceuticals - require an enormous investment to develop but very little to keep making. And they're often subject to network effects, which reward those that achieve critical mass. Together, these factors — high cost to create, minimal cost to produce, and a winner-take—all environment **don’t forget to read articles by Nelson and Thomas McCraw in your readings, Prof hare might ask u to comment on them for your test. ' -they would have to live in the uncontrolled sector, and thus this would cause demand to increase in the uncontrolled sector and rents there would be even higher! -the rents capped, there would be no incentive for private market to build more units, so the shortage remains a long term problem —with a shortage landlords would probably rent to “lower maintenance” tenants, ie those with higher income, vs single mother with 2 kids( this would then defeat the purpose of rent controls) ‘ —the shortage would create black markets, and people would be willing to bribe landlords for the unit, this also defeats the purpose of rent controls. -the state of rental apts would deteriorate as landlords would have little economic incentive to keep apt well maintained, **only benefit would be that those tenants lucky enough to find a unit would pay less, and have higher consumer surplus (see exhibit 4) Vouchers (low income families would receive voucher/subsidies from gov) >"much superior to rent controls —it helps low income families directly find affordable housing -with vouchers the demand for housing will increase as families have more money available for housing —this would increase rents, and private market would then have incentive to supply more units, over the long run, the extra new units produced would work to reduce the rents. -the market would be in equilibrium, with no shortages Lecture 14: We talked about: Offer to purchase, deficiency payments, production Quotas, (see exhibit 5) Now lets review Pure Competition VS Monopoly again **In economic theory: Pure competition is superior since it has zero profits(normal profits), thus no ID, and also P=MC thus no AD. But in Monopoly(or oligopoly) Price > MC thus there is an AD, and profits > 0 thus there is an ID. As Prof Hare states in Notes: Economists there judge that in the long run, Monopolists & oligopolists incur 2 distortions: ID and AD, thus Monopolies and Oligopolies are BAD economic agents. However firms in Pure competition do not generate either ID or AD, thus PC are superior economic agents. ************Joseph Schumpeter****************$******** -challenges the optimal allocation of resource criteria presented by PC —PC he says is “rare” & “inferior” ...
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This note was uploaded on 05/08/2010 for the course ECO ECO105 taught by Professor Hare during the Spring '08 term at University of Toronto- Toronto.

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ECOMAN Review Session - ECO MAN Brief review of part 1...

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