Preparing for the Final!

Christian,
If you have time, and interest, check out the review sheets I left for you at the house with your books; however, if you don't have time to study everything, at least be sure to hit the highlights:


-- scarcity & opportunity cost
-- what factors cause the demand or supply curve to "shift" and the effect on equilibrium price and quantity
-- price ceilings and floors --- persistent shortages or surpluses
-- be able to calculate price elasticity of demand, state whether something is elastic, inelastic, or unit elastic, and determine the effect on total revenue
-- finding MU if given TU
-- determining the optimal purchase
-- Law of Diminishing Marginal Utility
-- short run vs. long run
-- accounting cost (profit) vs. economic cost (profit)
-- what is a production function?  what is a cost function?
-- understand how to determine TC, FC, VC, ATC, AFC, AVC, MC, implicit cost, explicit cost, economic cost, accounting cost, TR, etc.
-- Law of Diminishing (Marginal) Returns
-- economies/diseconomies of scale
-- characteristics of perfect competition (monopoly, oligopoly, etc.)
-- short run (and long run) equilibrium
-- fundamental rule of profit maximization (MR = MC pr P = MC for perfect competition)
-- concentration ratio
-- kinked demand curve
-- Anti-trust Laws
-- negative externalities (MSC > MPC)
-- two characteristics of public goods
-- calculating present value
-- Pareto efficiency, if you got this far


All the best, and love,
mom

Capital, interest, and corporate finance ...

Christian,

This topic should finish up the course --- WOW, last chapter! Just want to say that you did so well this semester as microeconomics is one of those courses that tends to "weed out" the non-serious students, and you worked hard, stayed on task, and got good grades. OK, great grades!

So awesome!

I'll come back to this topic in the next day or two, and until then ...

Love you, and keep studying,
mom

Market Failure --- Government Failure

An aside:

Economists and others can be fully aware of market failures and still be in favor of the market system anyway. Why? Because of government failures, such as lags in identification, decision-making, implementation, etc., not enough information or no incentive to correct the problem, the recognition of unintended consequences, etc., etc., etc.

Market Failure --- Public Goods

Remember the two essential characteristics of pure public goods:


1. non-excludability meaning that no one (not even "non-payers" or what's referred to as "free-riders") can be excluded from consuming the good or service


2. Non-depletability meaning that an additional consumer won't diminish the amount left over for someone else


To be considered a pure public good, both characteristics must hold!


To see the difference between "public" and "private" goods, first consider a private good such as the purchase of a movie ticket. Since non-payers will not be allowed in the theater, non-payers (i.e., free-riders) are excluded from consuming the good; therefore, the non-excludability characteristic does not hold.

Also with private goods, such as a new automobile or a stereo, when someone makes a purchase, there is one less car or stereo left over to sell to someone else; therefore, the non-depletablity characteristic does not hold.


Can you think of a good or service for which only one of the two above characteristics holds? Name any examples that you can think of.

------------------------------------------------

Now consider public tv and radio, both good examples of public goods. Can anyone be excluded from watching public tv or listening to public radio? Does the non-excludability characteristic hold?

If one more person turns on their radio or tv, is there less product available for others? Does the non-depletability characteristic hold?

Can you name some other examples of public goods? There are several.

Market Failure --- Externalities

Christian,

I know you're focused on this topic right now; however, I wrote some things about it earlier on 3/2/10. Positive externalities generally lead to a discussion of public goods, the next topic discussed here on 4/18/10.

Much love,
mom

marginal benefit = marginal cost

An aside:

By this point, it should be clear that all optimal decisions involve setting marginal cost equal to the marginal benefit. Why?
Consider the following .......

If marginal benefit > marginal cost, then it's better to increase production (or consumption)
If marginal benefit < marginal cost, then it's better to decrease production (or consumption)
So, only when marginal benefit = marginal cost, there is no further tendency to make changes ..... and thus the situation is considered to be in equilibrium whether it's the input market, output market, etc. Not convinced that MB = MC is the best outcome? Reread the chapter on perfect competition and remember that this result applies to optimal decisions (production, consumption, number of hours to work, etc.) assuming no externalities. If negative externalities exist, and the MSC > MPC, then the optimal outcome is met when MB = MSC.

[Note: MPC = marginal private cost, MSC = marginal social cost, and MSC > MPC if there are negative externalities]

Value of the Marginal Product

The demand for inputs is considered to be, and referred to as, a "derived demand" since the amount of inputs hired actually comes from demand for the product that the inputs produce. Labor (and, of course, all other inputs) has demand ONLY because of the demand that exists for the end result --- the product (or service) that labor & the other inputs produce. Obviously.

However, the essential point to understand in the input (or resource) market is a concept called the "value of the marginal product". While the idea of the VMP isn't too complicated, it requires a few new graphs, and an understanding of some earlier concepts such as Diminishing Marginal Returns, Marginal Physical Product, and how the price of the output produced is determined. To make the analysis easier, we'll assume some characteristics talked about in perfect competition too.

And, as expected, the concept of elasticity applies to the VMP as well, and its elasticity is affected by factors such as: time, how easily other inputs can be substituted, the price elasticity of the output* produced, and the share of total cost that the input represents.

(*and where the price elasticity of the output also depends on time, the number of substitutes available, the cost of the output relative to other things that could be purchased instead, whether the output is a necessity or a luxury, etc.)


Keep this in mind ---
VMP = MP times the price of the output = MRP

Much more to follow, including a discussion of MRP.