EC 1206: Cheat completed version 1.2Sheet MUx_MUy Optimization p= Profit maximize: product (suppliers) / utility, (consumers). Optimize marginal per dollar. ‘Accounting profit = economic profit minus economic costs, i.e., opp. costs incurred from not doing things. Specifically: cost of people's: ‘time, cost of money's time (interest/risk) Supply /Demand +P. Ot eatas supply up — price down/auantiy up s+ P- Qt S P+ D+ ~ Pe Qe D =P. Q S+D+ = P2Q+ §-0- ~ P7Q- SoD —PHq? D>S+P-a? Market is sum of individual curves. Individual curves from indifference / budget curves. Game Theory zara | 25/5 | [30700 | v5 | [200 | 2575 7s | 00 | [525 | 0 || ses | we Eq: 0/0 (cheat) Eq: 30/30 (coop) Eq: 8/8, 30/30 Firms can cooperate (tacitly or explicitly) to achieve the best outcome in cooperative equilibria Sometimes in non-cooperative games, one dominant strategy always finds the best outcome. These tend to @ Nash equilibrium Hn(coop) > n(mixed), there's coop equilibrium. HH n(cheat) > n(mixed), cheat equilibrium. CPFs/PPFs opportunity cost = dala Unemployment moves point inwards, not PPF. Feasible inside PPF, efficient on PPF If domestic S > D, expor diff. Tariffs / import quot If domestic 0 > §, import: Consumers lose A¥B¥G#D. Cis revenue for __ lmport Linear PPF Perfectly efficient resource reallocation. Bowed Out PPF \\ Ieficient. Opportunity cost P1}--. increases with production, PPF Expands 8}, \ Fechadvancement "KS population increase PPF Contracts Resource lass, 1 population decrease. A A, X adv. in ood A, ¥ adv. in good B Monopolies/oligopolies/menopolistic competition all cause failure. Non-ival or non-excludable goods always ineficient. Hiding asymmetric info ina transaction: Moral hazard hiding tox. Negative surplus can afterwards (skydiving after buying insurance), adverse exist on right of equilibrium. selection hiding before (insider trading). Markets are efficient when YMC: = IMB forall affected people. Externalities are differences between private (market forces) and societal (everyone else affected) costs or benefits ag Taxation Aim for equity and efficiency. icp cp neg | pos Bs Bp Bp Less elastic pays more tax, Revenue = direct burden and OWL = excess burden. The Laffer Intervention Government functions: ‘monopolizing the use of force and curve between rates and revenues shows, diminishing direct burden protecting property rights. Broader social (oals of reducing inequality, public Market Failure DWL > 0. When not allocatively efficient, requires intervention Inequality measured by Lorenz curve between people and income {area = Gini coefficient) if marginal rate # avg rate, tax changes inequality. Provision. protection (patemalism), end proGortional t= AR Social responsiblity with public provision, Reehesue Mts AR redistribution, regulation. Consieringiect _ Resress\ve MR Costs of production, compliance, and rent-seeking (sortin} Floors bind above equilibrium, ceilings bind. Gents antic pie ows a constant for everyone. Binding Pre/post progressive tax. Percent of income nS>a0 Percent of people sports + imports. Changes to ToT = CPF rotates. The law of one price says world price is constant except for shipping costs. Countries ‘engage in protectionism to promote diversification, protect interest groups (infant industries), improve ToT, or just make more money. No trade = autarky. have same effect tarrifs but OWL for quotas. A voluntary ‘export restriction (VER) is just another quota. Countervaling duties are tarifs specifically for going nou to foreign subsidies. Dumping is flooding of foreign ‘market at low price. ‘Advantages: comparative (lower opp. cost) or absolute (lower absolute cost) given some other resource, Specialization in producing goods with avs Creates gains from trade, economies of scale, and learning by doing. Comparative advantage can come from factor endowments (forests, oil.) climate, human capital, acquired skill (learning by doing) ec When trade opens between counties, CPF rotates away from origin around advantage point (sine the other good is imported from the second country) Pwet PwMarket Structures Perfect Competition Firms small wit markt, sell infinite produet at market price. This ales a horizontalvinfinitely elastic firm demand curve (while market remains downwards siopin). Products are homogenous, No big barriers to entry or exit. ic Produce where MC = MR =P In the long run, since firms can TATE fends to the equim pice LRS = min(LRATC), exit if P< LRS VO Market is allocatively and ‘roductiely efficient Monopolistic Competition Monopoies ona differentiated product. Act like monopoly in short run, PC in. fong un since trms can enterfent ntl Zero prot. P= LRATC tangent to demand Always produce under “efficient” ‘scale (i.e. excess capacity). Gey Dillereniaion (through adverts) decreases elasticity, increasing profi. Canna now efficiency ecause of differentiation Q Fficient” Oligopoly/Cartel Monopoly in short tem, perfect competition in longterm Balance between firm production and market quantity. Explicit collusion isilegal, usually termed cartels. Cartels ‘must prevent new entrants and restrict output. Implicit or tacit collusion is not. Usually 4 ‘easily exit and enter, supply always Leads to long run equilibrium with Monopoly set price where MR = MC, Come Ic) about naturally with utilities / manufacturing / economies of scale / one firm supplies entire industry or created by government /IP rights / trade groups. Not allocatively efficient always productively efficient. Governments try to fix by setting P = MC. but causes losses and firms exit the industry. Or set P = ATC but that isnot allocativey efficient and halts investment ‘Two-part tarifs = fixed price + marginal price. p 7 Recall profit = Qx(P-ATC). ‘Any change in quantity produced creates price and output effects: {otal revenue goes up when sor ‘output > price Price Discrimination Monopolies/oligopolies optimize with perfect price discrimination by selling to everyone at demand so entire area between D and ATC is profit. Usually impossible (except for airlines etc.) so bucket customers with imperfect ‘more elastic demand gets lower price. Allowing movement ard priing 30 more rharginal tty = effort = discount Total pollution = size of economy (GDP) x energy use x pollution from energy. If small, estimate composition of percentages with addition, Direct contol usualy ineficient because firms have diff costs. Mostly useful for 100% removal of specific pollutant. Let market forces do the hard work instead. Add tangible cost to pollution: direct taxes (know P, unknown Q) on units or distribute permits (unknown P, know 0) for sale. Graph as P/Q of abatement (eduction). With fixed number of permits, firms trade until price of Pro} P| Pollution Sel Inelastic (q<1) permit = MC of abatement for all firms. Elasticity ,, (40/2) means responsive S Maxrevenue of demand (AP/P) to quantity, elastic (q > 1) to price. 2 occurs at MR = 0, n=0) Unit elastic gives maximum revenue / but that is the unit ‘expenditure, so moving closer to elastic point, so a that point (eg, inelastic + raised price demand is elastic or elastic + higher quantity raises PMR >O and revenue. Lines have parabolic elasticity inelastic Unit Inelastic Elastic ‘so one unit elastic "best” point. ifMR <0. Cross-Elasticity Income Elasticity Elastic» Inelastic 0 1 0 1 ‘Complements “supsitutes "! Thferior goods necessiles Tuxures Good ¥’s demand over good Y's price formal goods Complements are goods that are used together. Substitutes are goods t ‘Same sign as term in demand equation. Calculate the same but instead of price use income can replace each cher. Inferior goods are hose people bu es when ch Necessities are staples that everyone needs,Consumer Behaviour ‘Two effects when price goes down: substitution (always up) income (depends on elasticity) Normal Inferior Good Good Making a Supply/Demand Curve raging 3 cue ta oints with equal benef (atlty or ny prt tam np Line indifference or isoquant curves. Draw the PPF-style line for fixed cost of goods/inputs. Ths is ‘the budget or isocost line, Indifference (soquant) Map All goods can be Inferior demand cure can slope up. ‘The optimal isoquant Income effect changes (limited Giffen goods are super essentials. is tangent tothe quantity by switching the Syacton) irl Conspicuous consumption goods are budget line. As the isoquant line as real income (limited by use). super uxury goods. budget line changes, (purchasing power) goes up. ‘Non-Excludable Excludable different lsoo canta ‘Substitution effect is the 3 Publi hb ive diferent optimal thange ofthe the locos ne |e heath empty highway.) ex tll oads, museums, Semand and long-run sliding down isoquant when © | Pos externalities, typically | MCs =0.soP=0, ypicaly| Supply curves. felative costs change. 3 provided by government. | monopoly or government. ec Common = substitution x fishing, busy highway. Evsale does nat chance eee does not change | Positive externalities, no 2 preferences, : possibilities, so &| allocative eff. Tragedy of | Mast goods/markets slope of isocost ' area under isocost eet vere ansider negative is invariant ; invariant overexploiting until MB = 0. Saleen Short Run supplier's costs can Supply ‘Short run, some variable fae ma acre rable Werhmpcinecrnone, Te=trce ve ee caaraat eel ATC = AFC + AVC ‘Minimized when they Peacoat cost curve (ATC/AQ). Fis aways poy FC soifMC< Ave ho Se Sen oot shuts down (distinct from ent en Long Run long-term is unviable) Al posstieshrtun cost curves especie minimum points create a long-run average total cost Carve Muse were erin procs pr Soler recess URAC down MC down > retus to scale up Factor Markets Human/physical capital (stock) which produces cash flow. MRI IRxMP acts as demand, do normal S/D. Equilibrium differentials don’t change. Intrinsic (features) vs acquired (invest) vs compensating (non-monetary diffs) e.g. hazard pay or wage discrimination. Factor mobility is ease in reuse in new industry, erodes temporary differentials. Gains = transfer earn (extra), More elastic ~ tran F earings, be variable or fixed, so: J 099 cos)» economic rent This gives the supply/demand curve of one individual in the market. Dor't forget that the actual curve is @ sum of everyone in the market. Very Long Run Changing the LRAC’s shape is possible. Tech oe changes move the curve downwards, reducing costs for every possible production level LRAC Productive Efficiency Ezonomy yEficient Diseconomy ‘Afirm is productively eficient itis producing Jf scale’ {scale } of scale at minimal cost (P= SRATC = LRATC) (increasing ; (zero icecrasy fetums) — fretums) returns) ‘A market is productively efficient if all firms have the same MC and is producing on the PP Allocative Efficiency Economy/market is allocatively efficient if P = MC and no DWL, Measure failure by size of DWL: Perfect competition > Oligopoly > Monopoly Labour Monopsonies are monopolies but ‘upside-down, with one seller buyer. Minimum wages ~ unemployment. Unions collectively bargain for bet wens. Thi ests abou suru chs ee ee (useless hiring) and Qm Qo Qc i ee Kapital Markets posses AP atnamum Interest she pie of eal tn Do supply and demand with ee rmaxidiminishing productiiy So AP MP interest rate and investment instead of price and quantity Total production depends on tech of labour and capital: TP = f(K.L).