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General Economics - Coggle Diagram
General Economics
Externalities
Good side
- Positive Externalities: The beneficial spillover to a third party, or parties.
- Public Goods: The positive externalities are so extensive that private firms could not expect to receive any of the social benefits.
Investing in Technology
Will private companies be willing to invest in new technology?
- Investment usually requires a certain upfront cost with an uncertain future benefit.
Temporary edge over its competitors
New technology provides an ability to earn above-normal profit before competitors can catch up.
It's dis-courageous if competitors can easily catch-up
The competitors can just wait until another to develop a new technology and copy the idea.
Government Policy
- Guaranteeing intellectual property rights, such as patent
- Copyright laws
Patent
Provides incentive to the innovators, but they are not perfect
Government direct spending
Direct investment to the universities, colleges, non-profit research entities, etc.
- It, however, involves political decisions about which projects are worthy.
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Cooperative Research
Cooperation between government-funded universities, academics, and the private sector
Profit of Positive Externalities
- Private benefit: The profit of the firm receives
- Social benefit: Private benefit + all of the positive outcome of the new idea or product.
Subsidy
Market does not recognize the positive externality, therefore, it will go under produced and under consumed.
- The private firms set the price where MPB = MPC, and they do not realize the MSB, which creates subsidy
Public Goods
- Non-excludable: Whether he or she likes or not, anybody have access to it
Non-rival: One using it does not cause the other to be prevented from using it
Free-rider problem
People have an incentive to let others pay for the public good and then to "free ride" on the purchases of others.
Government Role
Assure that everyone will make a contribution and prevent free riders.
- Radio statin example: Any people have access to the radio signal, so radio station collects revenue by selling advertisement, indirect way to charge the listeners.
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Common Resources
Similar to Public Goods, but not the same
- It is Non-excludable, yet it is rivalous.
Overharvesting problem
Because everyone can access it, yet there are limited amount, the resources are overharvested.
Government intervention
- Require people to have a license to access the common resources
Bad side
- Negative Externaliteis: the third party, or parties, will suffer from the spillover
- Pollution: Causes various social costs, such as human health, property values, wildlife habitats, reduction of recreation possibilities, etc
Government Regulations
- Government intervene when market failure happens
Command-and-Control Regulation
Specify allowable quantities of pollution/Specify which pollution-control technologies companies must use
- It offers no incentive to improve the quality of the environment beyond the standard set
- Draws no distinctions between firms that would find it easy and inexpensive to meet the pollution standard
- It is subject to compromises in the political process (argue and lobby)
Pollution charge
The tax imposed on the quantity of pollution that a firm emits.
- The firm can use the chastest and easiest method to make an initial reduction in pollution, but the additional reduction in pollution becomes more expensive.
- The firm that has to pay a pollution tax will have an incentive to figure out the least expensive technologies for reducing pollution.
Works best when millions of users emit small amounts of pollution and have no strong interest in trading
Marketable Permits
Buying and seeing the marketable permits will determine exactly which firms reduce pollution and by how much.
- Shrinkable type: the amount of pollution allowed by a given permit decline with time.
Works best when a few dozen or a few hundred parties are highly interested in trading
Better-Defined Property Rights
Property Rights (Ronald Coase): The legal rights of ownership on which others are not allowed to infringe without paying compensation
- The property right determines who is responsible for the negative externalities.
International Issues
Such as Biodiversity and International Externalities cannot be solved by a country.
Market failure
Private market failes to achieve efficient output, because either firms do not account for all costs incurred in the production of output and/or consumers do not account ofr all benefits obtained.
Social optimal economic output
No matter what the preference is, all societies should wish to avoid productive inefficiency
- PPF can be used to determine the productive efficiency point where one axis is Economic Output and the other is Environmental Protection
Market Structure
Perfect Competition
- Identical products
- Many buyers and many sellers
- Seller/Buyers have full information to make rational decision
- Free entry/exit to the market
Price Taker
Sellers do not have the ability to change the price
- Perfectly Elastic Demand: Perfect horizontal demand curve. Price is equal for any quantity.
Output Decision
The price is fixed, so the seller only can decide amount of output.
- \(profit = TR - TC = P*Q - C*Q\)
- Firm will produce output that yields maximum profit
Profit Maximization Rule
The easiest measure is to choose the Q where \(MR = MC\)
- In Pefect Competition, \(P=MR=MC\)
Common Characteristics
Profit and Losses
- The firm is making a profit if Average Cost is less than the equilibrium price
- The firm is incurring a loss if Average Cost is more than the equilibrium price.
Shutdown Point
Variable costs can be reduced to 0 if the firm shutdown
- The firm must remain in business if If the equilibrium price is above the Average Variable Cost (AVC)
- The firm must shutdown if the equilibrium price is below the Average Variable Cost (AVC)
Barriers to entry
Factors that discourage or prevent potential competitors from entering a market.
- Legal, technological, or market forces
Short-Run vs Long-Run Outcomes
- Short-run: shutdown or not shutdown.
- Long-run: The market is in long-run equilibrium, where all firms earn zero economic profits. No firm has an incentive to enter/exit the market. If it's not, firms will enter/exit until the long-run equilibrium is established
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Monopoly
- No significant competition
- One firm has a very high market share
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Natural Monopoly
Barriers to entry are something other than legal prohibition
- Marginal cost of adding an additional customer is very low
- Products are difficult to transport
- Has control of a scarce physical resource
- Economies of scale are large relative to the quantity demanded
Legal Monopoly
The law prohibits (or severely limit) competition
- Promoting Innovation: The government grants exclusive rights to the inventors to promote innovations.
- Trade secrets: Even if a company does not have a patent on an invention, competing firms are not allowed to steal their secrets.
- Intellectual property: Ownership over an idea, concept, or image, not a physical piece of property
- De-regulation: Sometimes, regulations prevents innovation; governemtn can eliminate or reduce restrictions.
Patent
the exclusive legal right to make, use, or sell the invention, for a limited time.
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Copyright
prevent people from reproducing, displaying, or performing a copyrighted work without the author's permission.
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Predatory Pricing
Firm uses the threat of sharp price cuts to discourage competition
- Antitrust law prevents it, but it's difficult to prove.
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Pricing
The monopolist can charge any price for its product, nonetheless the demand for the firm's product
- Demand curve is downward slope
- There is a point where profits starts to decrease as Q (output) increases
Profit Maximization Rule
Same as perfectly competitive firm; choose the price where \(MR = MC\)
- However, the monopolist can charge a higher price than the price point \(MR = MC\) if the demand is above the Profit Maximization point
Production Possibilities Frontier
Constraint faced by society. Shows productively efficient combination of two products that economy can produce given the resources available at the moment.
- Can shifts outward as the economy grows.
Productive Efficiency
- All resources all used at the current scale of the economy
- As long as the choice is within the attainable boundary, it can be changed in the response to the need of society.
Allocative Efficiency
- Given that Productive Efficiency is reached, society wants to choose the alternative that satisfies them the most.
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Resources
- Land: natural resources, raw materials
- Labor: people physical & mental talents
- (Real) Capital: equipment, tools, machinery, factory storage, transportation
- Entrepreneurial Ability: take initiative and risks, makes strategic decisions
Investment
- Money that pays for the accumulation of capital
- Money itself is not productive since it does't produce anything
Economic Resources
Used to produce goods and services
- Natural Input
- Human Input
- Manufactured Input
Division of Labor (specialization)
The work required to produce a good or service is divided into tasks performed by different workers instead of all the tasks being performed by the same person.
- Workers and firms can focus on particular tasks that are well-suited
- Workers who specialize in certain tasks often learn to produce quality products more efficiently
- Businesses can take advantage of economies of scale: unit cost decreases as total outcome increases
- Adam Smith
Trade/Markets
The market allows workers to pay their earnings to buy goods and services at the price that both buyer and seller agreed upon.
- Specialization cannot exist without trade/markets
Globalization
Expanding cultural, political, and economic connections between people around the world.Allows division of labor at the country level.
- Improvements in shipping decreased shipping costs
- Innovations in computing and telecommunications
- International agreements and treaties
Utility
satisfaction, usefulness, or value one obtains from consuming goods and services
- Economists assume that the more of some good one consumes, the more utility one obtains
Diminishing Marginal Utility
The utility received from consuming the first unit of a good is typically more than the utility of the second unit of good or more.
Ex. the first burger gives maximum satisfaction, yet second or more will give less as he or she is full
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Confronting Objections
People, Firms, and Society Do Not Act Like This
In reality, the way in which people and societies operate doesn't look like a straight or smooth curve as our theories
- Still, the economics approach is a useful way to analyze and understand economic decisions, even if it cannot cover everything.
People, Firms, and Society Should Not Act Like This Way
The economic approach portrays people as self-interested, and this is immoral. Instead, people should be taught to care more about others.
- Economics seeks to describe economic behavior as it is (positive statement), not to describe how it should be (normative statement)
- Self-interested behavior can be labeled personal choice and freedom instead.
- Self-interested behavior can lead to positive social results
- People often set aside their own self-interest in various parts even though he or she focuses on their own self-interest in the economic parts.
Economic Theories/Models
Often used interchangeably.
- Theory: Simplified representation of how two or more variables interact with each other.
- Model: Used to test the theories.
Circular Flow Diagram
- Households: sell labor to business firms or other employees
- Firms: sell goods and services to the households
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Opportunity Cost
Within the boundary of attainable region, something has to be given up in order to acquire a new thing.
\(OC_{gain} = \frac{costGivenUp}{gain}\)
Comparative Advantage
Some firms or countries have an advantage in shifting their production from their current production to the other.
- A firm or a country has an opportunity cost of producing A has the comparative advantage of producing more A.
Scarcity
When a human wants for goods and services exceed the available supply.
- Humans virtually want goods and services indefinitely
Microeconomics/Macroeconomics
- Microeconomics focuses on the actions of individual agents within the economy: households, workers, and businesses
- Macroeconomics focuses on the economy as a whole: growth of production, number of unemployed people, inflation rate, government deficits, levels of imports/exports
Sunk Cost
The costs incurred in the past and cannot be recovered should not affect the current decision.
- The cost is already gone, so we should focus on the current and future benefits only.
