Welcome to Day 12

1. Welcome to Day 12 Principles of Microeconomics

2. What do we want the economy to do?1) Produce a lot of stuff2)Produce the stuff we want the most3)Distribute various things to people who value those things highly

3. An economy that does these things is operating efficiently.EfficientThe allocation of resources when the net benefits of all economic activities are maximized.

4. An economy that is operating efficiently has both: 1) Efficient production2) Efficient allocation of goods.

5. Will a market economy do these things? How does a business make money?Producing a lot of what people want the most and selling it.

6. The better a business correctly estimates what its customers value, and makes a lot of those things, the higher its profit.And of course, we want the economy to be able to adjust to changing circumstances. Will a market economy do that?

7. Rainy Winter Increases Demand Q1 Q2

8. Can a command economy do this? The incentive problem and the information problem.

9. The Incentive ProblemWhat does an umbrella businessman get if he gets umbrellas quickly out to a rainy area?What does the 2nd undersecretary of umbrellas in Washington get if he gets umbrellas quickly out to a rainy area?

10. The Information ProblemHow does the 2nd Undersecretary of Umbrellas know we need more umbrellas in Bakersfield?How do private business owners of umbrella companies know?

11. Every time you go shopping, it is a transfer of information fest!!!

12. You are letting sellers know what you want.Sellers are letting you know what they can make at what cost.

13. The Invisible HandAdam Smith – 1776The Wealth of NationsBecause trades are voluntary, in helping yourself, when you are helping yourself, you help others also.

14. The way for the businessman to make money is to most effectively serve his customers. In doing what is best for him, he is being lead, as if by an “invisible hand” to help society.

15. So what can go wrong?Market Failure - The failure of private decisions in the marketplace to achieve an efficient allocation of scarce resources.

16. In other words, we are making too much or too little of something because of a failure to properly take account of its benefits and costs.What markets does the government heavily regulate in the U.S. economy?

17. Externalities – an action taken by a person or firm that imposes benefits or costs outside of any market exchange.

18. We’ve seen these pictures earlier this semester, but we didn’t have a name for what they were yet. Now we do.

19. Welcome to Day 13 Principles of Microeconomics

20. Quiz today? Magic 8 ball says ….

22. So what to do?We have seen one solution, which is government regulation of the industry. There is another, which is to charge, or tax, people for the harm they are doing to others. This will “internalize the externality.

23. Here is our factory causing $100,000 worth of harm to the people around the factory. It could cut the pollution in half by spending $25,000 on scrubbers. Will the owner do it?What if he had to pay $1 in taxes for each $1 harm done by his pollution?

24. Some people have proposed a “carbon tax” as part of the solution to global warming.

25. Welcome to Day 14 Principles of Microeconomics

26. Quiz today? Magic 8 ball says ….

28. Besides externalities, there is another type of marked failure is known as public goods.

29. Public Goods A good for which the cost of exclusion is prohibitive and for which the marginal cost of an additional user is zero.

30. For example, a streetlight placed on a block.

31. Examples of Public Goods1) Streetlights2) Roads3) National Defense4) Light Houses5) Free Television

32. The Free Rider ProblemFree Riders – People or firms that consume a public good without paying for it.

33. The government gets around the problem by not asking you to pay, but telling you to pay.

34. In theory, the government can handle this problem. In practice, we still have our old problems of:1) information.2) incentive.

35. Tragedy of the Commons - What happens when property rights are not assigned?

37. Once property rights are assigned, problem solved. This is why the cow population is thriving and whales are hunted almost to extinction.

38. The air is a commons. Unless the government enforces regulation or taxes.

39. Of course, we have talked about air pollution before, under externalities. The tragedy of the commons isn’t really a new thing, it is a subset of externalities. Who owns the air?

40. Chapter 7 The Analysis of Consumer Choice

41. 1. THE CONCEPT OF UTILITY Learning Objectives • Define what economists mean by utility. • Distinguish between the concepts of total utility and marginal utility. • State the law of diminishing marginal utility and illustrate it graphically. • State, explain, and illustrate algebraically the utility-maximizing condition.

42. 1.1 Total Utility • Total utility is the number of units of utility that a consumer gains from consuming a given quantity of a good, service, or activity during a particular time period.

43. Total Utility and Marginal Utility Curves

44. 1.2 Marginal Utility • Marginal utility is the amount by which total utility rises with consumption of an additional unit of a good, service, or activity, all other things unchanged. • The law of diminishing marginal utility is the tendency of marginal utility to decline beyond some level of consumption during a period.

45. Welcome to Day 15 Principles of Microeconomics

46. Quiz today? Magic 8 ball says ….

48. Write your name, class day and time, and Quiz #5 at the top of the paper.

49. The Invisible Hand can work because price allows for the effective use of 1) ____ and 2) ____ in a market economy. Hint: both answers start with the letter “i”.

50. We’ve seen that when the thing is free, the best thing to do is just take it until marginal utility hits zero. But what if you have to pay a price?