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Economics, Cost benefit approach, Better to review 4th lecture. Especially…

- - - - Describe the bundlesconsumer able to buy
      - Choose the best possible bundle
  - - - Bundles within the triangle are affordable but not optimal
      - Bundles outside the triangle are unaffordable
      - Changes in prices of the goods result in change of slope
      - Changes in income/budget result in translation of the line
    - - Composite good (Marshallian money) - amount of money left after the purchase
  - - - Possibilities
        
        B is preferred to A
        
        A is preferred to B
        
        A and B are equal
      - Preference properties
        
        Completeness - we can certain;y decide for every pair of bundles
        
        Transitivity: A>B, B>C => A>C
        
        More is better
    - - Bundles above the curve are more preferable
      - Bundles below the curve are less preferable
      - Indifference curve through every bundle
      - Curves never cross
      - Implication
        
        The rate at which the consumer is willing to exchange one good for another
        
        |Gradient of the curve| - Marginal Rate of Substitution (MRS)
        
        MRS diminishes as we move to the right
- - - - Firms are price takers (market price is given)
      - Factors of production are freely mobile in the long run)
      - Firms and producers have perfect information
      - Firms sell standardized product (perfect substitues for other firm's products)
    - - AVC is lower than price of profit
      - MR marginal revenue dTotal-revenue/dQ
      - MR = P = MC
      - MR = MC is a universal condition for profit maximalisation
    - - Incentive to trade at equilibrium price
    - - Reaches minimum value of LAC
      - As long as cost is higher- new firms will enter the market
      - Most efficient way to produce goods
  - - - Exclusive control over some important input (Natural resources) temporary
      - Economies of scale
        
        LAC is decreasing
        
        NAtural monopoly
        
        Most efficient way to produce is to cencentrate the production at one firm
      - Patents
        
        Have their costs and benefits
      - Government franchises and licenses
    - - demand curve for the monopoly is simply the market demand curve (downward –sloped)
      - That implies that the TR curve is not a line
      - To sell another unit of output the monopoly has to lower the price
        
        LESS OUTPUT IS PRODUCED BUT THE PRICE IS HIGHER
      - Marginal revenue is always less than the price
  - - - Multiple firms. Product is simmilar but not perfect substitutes
      - Free entry and exit of firms
    - - Price is highher than MR and MC
      - Not efficient
      - The product is valued higher tahn the vallueof resources required to produce
      - No economic profit in the long run
    - - Substitutes vary in distance from one specific product
      - Variety can only exists when consumers are willing to pay extra for it
      - Demand for variety increaeses with income
  - - - Sellers take another's actions into account in deciding on price and output
    - - Best for consumer
      - Worst for producers
    - - OH NO! the prisoner's dillema - me and my friends HATE the prisoner's dillema
- - - - Deals with grand total of economic activity
        
        Inflation - increase in the general price level of goods and services in the economy - reduction in the purchasing power of money
        
        Inflation rate
        
        meausurement
        
        CPI - consumer price index
        
        a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically
        
        Market basket
        
        2 more items...
        
        GDP deflector
        
        Shows how much change in gdp relies on changes in price level
        
        Does that by comparing current prices with base year
        
        = (Nominal GDP : Real GDP) * 100%
        
        Consequences
        
        Demand - pull (demand exceeds productin capacity)
        
        Cost push - increasse in price
        
        Built in - wages also have to rise
        
        Pros-cons
        
        Advantages
        
        Higher resale value
        
        Encourage spending => rise in GDP
        
        Disadvantages
        
        Having to pay more
        
        Higher prices for the economy
        
        Prices rise non-uniformly
        
        Redistribution of wealth between borrowers and lenders
        
        Increase in uncertainty
        
        Unemployment
        
        Person actively seeking a job but is unable to find
        
        Key measure of health of an economy
        
        Unemployment rate
        
        Types
        
        Seasonal
        
        Frictional - period in between different jobs (change of job/search after uni)
        
        Structural - mismatch between workers and jobs (tech advancements as the reason)
        
        Cyclical - variation in number of unemployed over the course of economic cycle (expansion/recession)
        
        Economic growth
        
        GDP - gross domestic product - total market value of the goods and services produced by a country’s economy during a specified period of time. (geographical rather than proprietary)
        
        Nominal GDP - GDP given in current prices, without adjustment for inflation.
        
        Changes when Economy is producing more or less
        
        Changes when prices change
        
        Inflation causes Nominal GDP to grow
        
        Real GDP - adjusted for prices
        
        Measurement (estimate)
        
        Sum of all expenditures
        
        Sum of
        
        4 more items...
        
        Sum of values of all goods and services
        
        Sum of all incomes
        
        Employee wages (pre tax) + benfits
        
        Rental income of persons
        
        Net interest - interest paid and earned by households and gov
        
        Corporate profit - firms' profit pre tax
        
        Proprietor's incomes (self employment
        
        Shortcomings
        
        Underground econmy (barter etc)
        
        Do-it-yourself activities (housekeeping, childcare etc)
        
        Increase in quality of products (GDP only measures monetary value)
        
        Pollution, decline in quality of life
        
        Value of leisure time is not accounted for
        
        Long run
        
        historical trend - rising
        
        Causes
        
        2 more items...
        
        Growth is determined by the growth of potential product
        
        Potential GDP - maximum output of the economy using its existing economic resources
        
        Short run
        
        Prices are fixed, so external shocks are absorbed through product and unemployment changes
        
        Fluctuation of real GDP around potential GDP => business cycle
        
        Expansion
        
        2 more items...
        
        Contraction (recession)
        
        3 more items...
        
        International trade
      - Macroeconomic equilibrium (must find a way to aggregate all prices and quantities)
        
        Aggregate demand AD -different quantities goods and services that would be demanded in the total economy at different price levels, other things being equal.
        
        Aggregte supply AS - different quantities goods and services that would be supplied in the total economy at different price levels, other things being equal
      - Indicators of performance
    - - How to make a choice whether to do X
        
        B(X) > C(X), then do X
        
        B(X) < C(X), then do not do X
        
        Opportunity cost - once you choose one alternative, you sacrifice all other options - has to be added to C(X)
        
        Sunk cost - previous expenditures are not relevant to future decisions - so should be ignored (ex: continued development of Concorde even when the plane proved to be nonviable)
- - - - 0 > e > -1 Inelastic demand
      - e = -1 unit elastic demand
      - e < -1 elastic demand
    - - Perfectly elastic D - horizontal line
      - Perfectly inelastic D - vertical line
      - (Does that mean that price elasticity describes the slope/gradient of demand curve??)
    - - for |e|>1 lowering the price will increase profit
      - for |e|<1 increasing the price will increase profit
  - - - Positive for normal goods
        
        0 - 1: necessities
        
        1: luxuries
      - Negative for inferior goods
- - - - Describes how inputs are transformed into outputs (dependant on current state of tech.)
      - Tells how output vary if some inputs are changed
      - Input
        
        Variable - quantity may be freely varied
        
        Fixed - can't be changed within given time frame
      - Time frame
        
        Long run - shortest period of time required to change every input - all inputs are variable
        
        Considered case: Q=f(K, L) capital and labour
        
        Similar to rational consumer choice
        
        Multiple combinations of K and L can achieve same output
        
        ISOQUANT (hyperbolae shaped curve) - set of all input combinations that yield a given level of output - level curve f = Q
        
        Points above the curve produce more
        
        Marginal Rate of Technical Substitution (MRTS)
        
        dK/dL = MP-L/MP-K
        
        Rate at which one input can be exchanged for another without altering output
        
        Diminished with movement to the right
        
        Short run - at least one input is fixed
        
        Total product curves
        
        Simple case: only one variable input
        
        quantity growth starts to diminish with increase in input
        
        After a critical point quantity starts to decrease with all other inputs fixed
        
        Initial growth of quantity with increase in input
        
        Law of diminishing returns
        
        Outputs will eventually diminish
        
        Hasn't happened due to technological development
        
        Marginal product - change in total product due to unit change in the variable input
        
        Average product = Q/L
        
        when Av P is max - intersects Marg P
    - - Increasing returns to scale - input change causes more than proportional change in output - less firms in the industry
      - Constant returns to scale - proportional change
      - Decreasing returns to scale - less than proportional - large number of firms in the industry
  - - - Fixed - doesnt vary with changes in output (in short run)
      - variable - depend on product output
      - Total cost = fixed cost + variable cost = rK+wL
        
        r - rent price
        
        K machine-hours
        
        w - labour price
        
        L person hours
      - Divide by quantity we get avarage values
      - Marginal cost - change in total cost from a unit change of output produced
        
        MC = dTC/dQ = dVC/dQ
        
        MC = w/MP
        
        AP = w/AP
    - - Isocost line
        
        Set of points with fixed expenditure
        
        C = rK+wL
        
        K and L are axes\
      - Maximum outpout lies on the tangency between the isocost and the highest possible isoquant
      - Graphs are the same as short run costs, bun no fixed cost
        
        Depend on returns to scale
        
        see the lecture lol
- - - - Short run
        
        Value of marginal ptoduct of labor = product * marginal prduct of labor
        
        VMP of labor = w (market wage)
        
        Changes in w will affect amount of labor demanded
      - Long run
        
        all inputs are variabvle
        
        Decrease in w will cause even larger increase in hiring
    - - Assumptions
        
        One kind of labor
        
        Worker can choose how many hours to work
      - Alternative to work is unpaid leisure
      - Analogous to Rational consumer choice
      - Supply curve - backward - because income effect dominates substitution effect
        
        Increase in wage makes leisure more expensive – substitution eff.
        
        With higher pay worker wants to rest more - income effec
    - - Hire less work lower wages - however labor mobility ensures decent pay
    - - Winners - who retain their jobs
      - Losers who lose their jobs
      - In monopsony increases hiring
    - - Bargain collectively
      - Facilitate negotiations between workers and management
      - When wage is increased - less well paid ppl rather than more low paid ppl
      - Layed off union members move to nonunionised sectors, driving the wages down
      - Sometimes increase productibvity
    - - Customer
      - Coworker
      - Employer
      - Statisticsal discrimination - good and bad workers getequal pay
      - Winner takes all markets
  - - - Same as demand for labor. Rental rate r instead of w
      - r = interest rate + maintnance cost + technological obsolescence
      - Buy or rent
        
        Deciding on buying
        
        Machine will increase revenue by amount R for N years
        
        After N years sell for scrap value S
        
        Yearly maintnance M
        
        PV = R-M/(1+i)+(R-M)/(1+i)^N+S/(1+i)^N
        
        Should buy the machine only if price lower or equal to PV
        
        PV is inversely proportional to interest rate
    - - Sources are fungible (non-specialized)d
        
        Once real capital is bought - capital loses its flexibility
- - - - There will always be harm to someone
      - Two legal regimes
        
        When the disturber is liable
        
        When the disturber is not liable
      - When the parties affected by externalities can negotiate costlessly with one another, an efficient outcome results no matter how the law assigns responsibility for damages
        
        Net benefit is always the sam
        
        Only applies to costless negotiations
  - - - should a number of people enjoy unfettered access to a finite, valuable resource such as a pasture, they will tend to over-use it, and may end up destroying its value altogether.
      - If the finite resource waas owned by someone - users would be more considerate with its use.
- - - - Demand curve - quantities buyer are willing to purchase at certain prices - points where buyers are satisfied
        
        Downward slope - price falls => demand increases
        
        Substitution effect - with increase in price people switch to substitutes
        
        Substitutes (ex. price for coffe rises => demand for tea rises)
        
        Compliments (ex. bacon and eggs - price for eggs rises => demand for bacon falls)
        
        Income effect - increase in price reduces purchasing power of the consumer
        
        Normal goods - demand increases with rise in income - demand curve moves up
        
        Inferior goods - demand falls with higher income - demand curve moves down
        
        Tastes - differ and change over time
        
        Expectations
        
        Size of population
    - - Supply curve - quantities sellers are willing to sell at different prices - points where sellers are satisfied
        
        Upward slope - as price increases, the supply rises
        
        Price must cover the cost of producing the good or service. Increase in production is connected to increase in cost.
        
        Increase in price lures new sellers and vice versa
        
        Technology
        
        Advance in technologies lowers the cost of production => higher supply
        
        Only moves the curve to the right
        
        Factor prices
        
        Labor, capital, land etc
        
        Changes in costs of factors Can move the curve both ways
        
        Weather, expectations, number of suppliers
    - - Trading locus
        
        Price above equilibrium - trading according to demand curve - price decreases
        
        Price below equilibrium - trading according to supply curve - price goes up
      - Equilibrium prices
        
        D increase => P increase, Q increase
        
        D decrease => P decrease, Q decrease
        
        S increase => P decrease, Q increase
        
        S decrease => P increase, Q decrease
      - Intuition
        
        Demand curve
        
        Increase - moves up to the right
        
        Decrease - moves down to the left
        
        Supply curve
        
        Increase - moves down to the right
        
        Decrease - moves up to the left
    - - When not in equilibrium - it is possible to reallocate such that one party is better off without harming the other (Pareto efficiency)
      - The efficiency does not ensure the socially desirable outcome
      - Price regulations distort the function of price
    - - Rationing - prices direct existing supply of goods to the users who value it most
      - Allocative - price guides the resources towards production of profitable goods