Specialize & Trade : Comparative

Advantage Benefits
Scarcity & Choices 1. Input or Output problem? _____Output because
Ppc P Gasoline outputs vary__
2.Absolute advantage for each?
Microeconomics Cue Card EM
Economic Analysis MCS2
3.Comparative advantage for each? EM for Heat,
1. Point A - Before change Heat- .B .G P2 ST for Gasoline
B
2. Δ (Delta) = Change
ing ↑ .A MCS1 4.Terms of trade? 1.1 G <1 HO <1.3 G ⇒
3. Point B - After change
Oil .F P1 A Both Benefit
OOO -Output varies Opportunity cost
goes Over
Scarcity & Choice MBS Q IOU - Input varies Opportunity cost goes

Heating
← Q2 Q1 Under
The Economic Problem Prompt: Refinery EM produces 33 gal. gasoline or

Oil
Gasoline Gasoline is the
* Resources (also called 30 gal. heating oil per barrel of crude oil. Refinery
Two Choices are Trade-Off’s opportunity cost
Factors of Production or ST30produces 32 gal. gasoline or 24 gal. heating oil
Economic Analysis of heating oil.
Inputs) are scarce. per barrel of crude oil. Should they specialize &
1. A-allocative efficiency (P1Point
=MCSF )
1 = inefficient
Resources trade?
2. ∆ - cold
A Change in winter use of resources 24
Incomes
3. B –shortbut
Anything run Price Point G =
give up gasoline Heating OilGasolineElasticity Coefficients based on
land (natural) rent
causes toaget
change
heating unattainable in SR
in oil ⇒ new Oil 1 HO= 33/30
EM30 percent of change
= 1.1G33 1G= (%Δ)
labor wages
Demand. Shift the
allocative All points
efficiency (P2= MCS2 ) on Ppc 30/33=.9HO Price Elasticity of Demand
capital
A Change interest
in Price causes a curve. curve - full- ST24 1 HO = Formulas
Gasoline 32
32
entrepreneurship
change in Quantity Demanded. Gasoline
Δ Determinant⇒ΔD employment & 33332/24
3 =*1.3G32
Ed = %∆ 1GQDx=÷ 24/32=.75HO
%∆ Px
profits
Move along curve. P production
Typical Determinants Elastic (No neg. #)
ΔP⇒ΔQD
Demand and Demand Elasticity or Ceteris Paribus Demand’s slope:
* Ed = __∆ QDx ÷ P
P 1. A at P1, Conditions are ∆ Q>∆ P⇒flatter ∆ x
D3 Perfect elastic- original QD original Px
Q1 ∆ Buyer x

tastes/preferences D D horizontal * midpoint (arc) formula: E =

P2 .B 2. Δ 2 1
P BMW
d

∆ Number of buyers / ∆Q ÷ ∆P
↑ Price of population Less ↔ More P2 B
P1 A Q P1
∆ Income A
Σ Q/2 Σ P/2
cup of coffee ∆ Price of related Cups of Elasticity & Total Revenue
D ⇒↓ goodsthe demand curveCoffee
Why slopes D Test
quantity (substitutes & causesEconomic
downward—What the inverse Analysis Q2 Q1 Elastic >1 if P↓⇒TR↑
Q2 Q1
Law of Diminishing Q
Marginal relationship
compliments) between price1.andD1 quantity (opposites)
Q
demanded more of aConsumers
Utility—The good a demanded?
∆ Expectations Move along the2. Δcurve.
Population ↑ Inelastic Unit elastic =1 if ΔP⇒no ΔTR
* luxury
consumer Coffee has,. .the lower
Cups ofalready 3. B: 1. The Law of Diminishing Marginal
⇒ people drink P Demand’s slope: Inelastic <1 if P↓⇒TR↓
* close substitute
Utility ∆
P ↑, Q↓
* want to
the extra (marginal) utility more coffee in * Q<∆
largeP⇒steeper
% income (same direction)
(satisfaction) providedmaximize
by each 2. Income Effect—a lower price has P1
Houston. Perfectly inelastic- P
* longer time
extra unit. their total the effect of increasing3.money
D3↑ (QD↑ at P2 vertical P1 Ed>1
utility
a util = a unit of satisfaction P D
income⇒buy more of other things
every P) TR=P x Q
TU * want the Electricity
D P2 Ed=1
TUmost for P2
3. Substitution Effect—a lower price B
their money
Q 1 Q2 Q Ed<1
* MUX = P1
Q cause people to switch to the purchase A
D
MUY
MU Shoes Q
PX PY of the “better deal”. Q2 Q1
TR
* Σ MU = 4. Common sense—buy more if price is Q TR
Q TU lower * necessity Q1 Q2 QD
Snicker Bars MU * no close
Cross Elasticity Exy =%ΔQDx
substitute
* small % income ÷ %ΔPy
Sally Dickson, Austin, TX skdickson@yahoo.com
* shorter time Income Elasticity EY=%ΔQDx
÷ %ΔY (Y=income)
 Elasticity of supply
A Change in No TR test
Anything but --Slope of Curve
Price causes a P S2 S1
change in Supply. The key determinant of
P price P supply is
A Change in Price causes a Shift the curve.
S3 S * Longelasticity
Run of
change in Quantity Supplied. Δ the
All amount of time a sellerS
* Immediately P2 has to change the P1,2 amount
Move along curve. Determinant⇒ΔS resources
SupplyΔP⇒ΔQS
& Supply Elasticity Inelastic supply P1 of the good they can
Typical can change
Eco Analysis Determinants or produce
Elastic (or supply). Q1 Q2
P S 1. A at P1, Ceteris Paribus Vertical or steep Price
supplyElasticityQ
QS1 conditions Q Coefficient of Supply
Horizontal,
∆ resource (factor) Less ↔ based on % of change,
flat
P2 B 2. Δ ↑ More Q Q not slope
prices 1&2
Price of
∆ technology or
Cups of * Short Run E S
= %ΔQSx / %ΔPx
P1 A Coffee More elastic due to P
technique Surplus /
cup of coffee Economic Analysis S
∆ taxes/subsidies Shortage⇒Disequilibrium
⇒ 1. S1
∆ price of other Price firm´s S intense use of P2 Consumer & Producer
↑Quantity 2. Δ Starbucks Surplus
goods ⇒ $20 fixed resources
Excess Quantity
Q1 Q2 Q opens more ** Consumers’ surplus is the
production P1
supplied substitution storesSupplied
⇒# sellers↑ difference between that paid
3. S3↑ (QS↑ at (upslopiing) QS>QD =
Cups of Coffee 3. B: ∆ Price (Pe) and what one would have
Supply / Demand Equilibrium – Product Markets (Industry) Surplus Q1
Eco expectations
iPod’s Eco every P)
$15 paid based on utility (Phi )
P2↑, QS2↑ Q2 QEquilibrium
iPod’s Analysis P ∆ Number of sellers Analysis
1. A--P1, Price=Market
S1 1. A—P1, P (Area “e,Phi ,Pe”)
P Price QS=QD
Q1 S Q1 $10 Excess Quantity P S
S 2
Excise Taxes and Tax hi CS
2. Δ P 2.
Incidence Δ— (Who really pays
Demanded P
P2 B greater 1 A
thefaster,
tax depends on D QD>QS =
e
e
P1 popularity P P
A 2 B smaller of supplyShortage
elasticity and of lo PS

D1 D2 (Δ D demand.)
chips (Δ D
QD Qe QS Quota – limit on the
preferenc technolog
P S Amount Q Q
Government Price Government Price Q1 Q2 Q ⇒S↑ 2 Music CD’s quantity ofe imports
Q Q es)
Q ⇒ D ↑ y) of
Floor Ceiling S1
Economic Analysis Price (Area
1 2
3. B-- 3. B--P↓, B surplus
P P P 1. Before change - $15/CD, quantity at “e,Plo ,P
S1e”)
S=MCS
Efficiency Loss = Dead P2↑,Q2Weight
↑S=MC Loss Govt. taxes orQ↑2 Cons.Tax tax ↑ Tariff=import tax=customs ** Producers’ surplus is the
S P1 D AQe duty
regulations or monopoly power reduce consumer and/or producer 2. Change: Seller difference
S2 in the price charged
surpluses below society’s allocative efficiency. Cosmetics Price raises price to $20 S US (P ) and the price a seller could
Pf on new hit CD
f d Pseller Prod. Tax Textiles e PUSnotrade
Floor - Apartments 3. After change – Surplus
PUSnotrade because QS > sell for based Son costs (Plo ).
QDD at the higher price 3
Pe e Pe Analysis Q 2 Q1 PW+Tariff PUS+quota
e
Wheat Pc c
Q PWorld DT TD D IP IPD
PWorld
g Ceiling 1. A-- No tax at equilibrium D
D=MBS D=MBS P 1 , Q1 D
Q Q 2. Δ --Govt. taxes Q1 Q2 Q3 Q4 Q5 US Steel Q 1 Q2 Q3 Q4 Q5
QD Qe QS QD Qe QS Shorta cosmetics↑⇒per unit Q Q
Eco Analysis Amoun Eco Analysis ge costs↑⇒S↓ (excise–business 1. Before--Pw+Tariff. , produces
t of 1. Before – US pays PUS+quota ,
1. Before--PeQe 1. Before–PeQamoun tax)
surplus e
t Q2 , has efficiency loss areas produces Q2 , has efficiency
2. Change – Govt. 2. Change – Govt. 3. B – P2, Q2 : Consumer
sets price floor to help “D”, gets tariff revenues areas loss areas “D”, import
sets apt. price ceiling tax=(P2-P1)Q2; Producer
farmers at Pf. “T”,and imports Q2 to Q4. producer gets extra profits
to help poor. tax=(P1-Pseller )Q2; Efficiency 2. Change—WTO treaty “IP”, and the US imports Q2
3. After—OS>QD⇒ 3. After – QD>QS⇒
Loss area “D” requires US to remove tariffs to Q4.
Surplus of wheat & Apartment shortage &
efficiency loss area efficiency loss area 3. After – P↓(US pays PWorld ), 2. Change – WTO outlaws
“efg” “cde” Q↓ (domestically producing to quotas
Sally Dickson, Austin, TX skdickson@yahoo.com Q1); M↑ (US imports Q1 – Q5) 3. After – P↓ (US pays
PWorld ), QUS ↓ (domestically
producing to Q ),
 5 1

Long Run ATC – All resources variable,

none fixed
Marginal Costs: MC is the cost ATC
Law of Diminishing Returns
Short Run Production Costs— of producing one more unit of Economies Constant
—As extra units of a variable
TC=FC+VC TC/Q=ATC output. Diseconomies
resource/input (labor) are added MC of Scale Returns of Scale
to fixed resources (capital,land), ATC=AFC+AVC VC/Q=AV crosses
1) If TP↑, C Costs LR ATC
output (product, quantity) will ATC and to Scale
decline at MP↑ TC FC/Q=AFC AVC at
MC
TP 2)some If TP↑Less their
Cost } FC
VC Fixed
point. lowest
costs ATC
TP
Diminishin TC VC points.
can’t AVC q1 q2
g, FC change in
No Output
MP↓ to Cost Q the short relations Economies of Scale due to labor &
0 ATC run. Q
1 2 3 3) If TP↓, hip managerial
Industry and specialization,
Firm in an efficient
AVC MC at lowest point when Expanding
capital⇒per Industry
unit costs↓
MP Q Short Run AFC { Loss Long Runbetween
MPNegative. Minimization Variable Shut Down Product (MP) is at its
Marginal
Equilibrium MC and P
Constant Returns top Scale⇒per unit
Decision P<AVC
highest point. These curves are
1 2 Profit 3 MR=MC, P>AVC costs
AFC can
p MC
MR=MC=min. AFC costs same S1 MC
Fixed AVC
change in mirror images.
Maximization Rule p MC ATC=P DiseconomiesATCof Scale due to
inputs- the short
Labor MPMR=MC Q p MC P1 A
inefficiencies fromSlarge,
p1 impersonal
Short run run. ATC 2 A
Perfect Competition p – P=MC
The Firm ATC ATC bureaucracy⇒per
MR=d unit costs↑
only
ATC Profits
ATC e AVC
Characteri MC ATC m
AVC P2 p2
stic p Loss f p B B
e p MR=d
s MR=d MR=d
MR=d p
**Very large Economicprofit
D
ATC f MR=d
number of Q1 Q2 Q q2 q
firms 1
Firm q q Analysis Industry
**Standardi Firm
Price q
Firm q q Firm
zed Profit Maximizing q
Discrimination—
Firm q q Regulatedfor
*p=MR=d=AR 1. A--Industry at P1, Q1 equilibrium ⇒
products Rule *p=MR=d=AR
The practice of for
q *p=MR=d=AR for firm Monopoly
the firm
**Price MR=MC the firma product at
selling firm price taker at p1, MR=MC at q1
*p=MR=d=AR for *q where MR=MC *Typically
*q whereNatural
MR=MC ,
takers P/C *q
morewhere
thanMR=MC one price
firm *loss area (ATC ,e,f,p)-- Monopolies with
*shut down because earns economic profits (p1, m,A,ATC )
**Easy MC *firm in
not justified long by
runcost
*q where MR=MC price below ATC & Economies
fixed costsof Scale
(ATC- 2.Monopoly becomes see
Δ—Other producers Competitive
profits and
entry into Why Demand equilibrium where
differences.
*economic profits above AVC *Fair-Return
AVC=AFC) Price:
are the P Pm > MC ⇒ of
and easy and MR aren’t Pm P=MC
Due toat min. ATC
*monopoly enter the market ⇒number
area (p,e,f,ATC ) *Fixed costs are Pf=ATC ⇒ monopolist
least loss possible P =MC
the same: e
power, firms ↑⇒industry supply↑ to S2
ATC covered (space breaks even
c
Monopoly – THEORY MR<POF b/cFIRM
to sell Profits *Ed segregates 3. B--P↓,Q↑ (industry) ⇒ firm price
Q↑, Monopolist ATC between ATC & AVC). *Socially Optimal
market, p
taker MC atATC
at p2 = MC =MR Eli Lily
q2 (allocative
P↓ on all
f
Price: Pr=MC m A
Characteristi *buyers can’t resell produces
efficiency), no economic profits p2=
cs units⇒TR↑ in MR=MC ⇒subsidies to product. B
p
min. Prozac
ATC (productive efficiency)
**One elastic D monopolist ⇒ Examples: airlines,
c

P allocative efficiency D
firm=industry elastic movies
**Unique range Qm MR P/C P varies; MR=D qm qc Q
product with Q **Qm where MR=MC Profits above
no close
unit elastic
Pm MR
ATCxQ
substitutes Pf ATC
m 1. A P1, Q1 – Monopoly with profits,
**Pm where Qm P/C
**Price maker inelastic
Pr efficiency loss
D intersects D MC
**Many 2. Δ The patent protecting Prozac
Q **Eco Profit = (P - MC
barriers, entry m runs out and other firms now produce
blocked MR ATC)Qm ATC
Profits the generic drug ⇒ competition ⇒ firm
**Little D
or Economic becomes price taker
Sally Dickson, Austin, PxQ=TR
advertising TX skdickson@yahoo.com MR
Profit=TR-TC ATC 3. B ↓pc, ↑qc
TR Q MR=D
**Efficiency loss ( e, f,
TR
Q
 Monopolistically Competitive firm reaches Long Game Theory Ex:--Two
Run Equilibrium Definitions— Cereal Firms
P P/C MC * Strategic General Mills
S1 p1 ATC Behavior-A firm Cereals
A
consider reactions Ad’s No
S2 Profits
of other firms to its Ad’s
ATC1______ _____
d1 actions. K
Monopolistic Competition
P1 – Theoryp of the Firm B Oligopoly * Concentration e l
A 2
P2 MR1 Ratio--% of market l Ad’s
Characteri B Characterisit o $70M
stic d2 Demand cs controlled by largest
firms g No $40M 1
s MR2 very **Few firms g Ad’s $70M
**Many elastic. **Standardize * Market
Industry Q1 Q2 Q Firm q2 q1 q oligopolistic if at $90M
firms d or * Dominant Strategy—best for
**Differentia 1. A Industry at equilibrium P1, Q1 Firm earning eco differentiated least 4 firms control
40% a player no $90M
matter what other
ted profits (p1>ATC) Imperfect **Interdepend does— Both $50M runs ad’s even
products ence limits *
2. Δ New firms enter industry, S↑ ⇒Competition or
firm’s d↓ b/c more Collusion=Cooperati though it is$40M an inferior
**Limited Pure Competition price control
close substitutes and aLabor smaller share Monopsonist
of total demand (1 ⇒ on position. $50M
control over Market firm D ) unless * Payoff Matrix—Payoff or
MR↓ L Workers (SL) Gain *Monopoly
Self-interest Power
⇒non-
price W Market W collusion profit to each party for each
3. B Industry ↓P ,↑Q ; Firm in Long *Run
Firm can set at
Equilibrium as**Many
a Union coop
**Few entry Firm 2 2
combination of choices
wages, but if one * Cartel—a
W formal
barriers ↓pW =ATC, ↓q2 S SL1 W2 B barriers to
2 more worker hired Organize all collusion
workers on price, * Outcome: Qoligopolists >
**Much non-
2 B L2
entry Economic Rent paid for
s2=MRC2 at higher wage, all quantity, share SL=MRC Qmonopolisof
use LandPo < PmEco Analysis
t;
W W current workers *WGame Theory—the
Resource (Factor, Input) 1 A Markets1 A How unions R S 1. A at R1,
receive pay raise, so study
U
of how people
Land
s1=MRC1 raise wages: WC R Austin Q0
SL ≠ MRC. behave in strategic 2 B
* Resource * Increase
A
Real 2. Δ
demand W MRC situations.
DL demand for R1 A Estate Population↑
derived of ⇒ DL↑
dL=MRP B
DLproducts
=MRP 3. B at R2↑,
product SL
* Increase InterestQpaid for
QQ0 use of
* W surplus 0

MPxP=MRPL Analysis Q2Q1 Q q2 q1 c A productivity ⇒ Capital

QD QC QS Q
=DL labor q Wm DL↑ r SLF = Savers,
Positive Externality—Social C 1. A Competitive
Lorenz Curve—Income
The Δ TR from 1. A Firm is wage taker at * Restrict lenders (House-
benefits to 3rd parties born by Equilibrium Inequality
each added W1, q1 MRP=DL membership holds, firms, govts.
private firms in labor % of Income
unit of
Negative ⇒ S ↓ DLF = Borrowers
2. Δ baby P boomers retire⇒ P market--W
L QC 100 e
resource
Externality—Private C,
* Organize all 80 (Businesses,
market SL↓,MC firm’s MRC↑ Labor Qm Qc 2. Δ Union Perfectequality →
*
costs born by P
workers ⇒ 60 Homeowners,
Wages=MRC
society/3 rd
party 3. B MarketSubto W ,Q ↓ Firm MC Q negotiates W↑ Govts.) ←LorenzCurve
sidy 2↑ 2 S
negotiate W↑ 3. After 40 A B
P MCS W2↑, q2↓ MCS Loanable Fund Market
Market Failure and Government Solutions Public QD <QS surplus 20
MCPB
P2 P1 A Subsidy L Anti-Trust
L⇒ Laws r=real interest % Causes of
Tax or
A G * Goals: promote of labor Complete
at↓IneW
qulity
Income
P2 B Regulation
P1 MBS P2 U 0 20 40 60 80

B
o competition and 100 Inequality:
P1 C A o efficiency % * Ability,
MBS MBP ds * Laws: Sherman—no of Families talent
Q2 Q1 Q MBS * Govt. monopoly & no Distance between 0e and *
provides restraints of trade Lorenz Curve shows Education/trai
Analysis Q Q2 Q
1 the (collusive price fixing degree of inequality. ning
Gasoline Q1 Q2 goods/ser & dividing markets), Gini ratio--numeric *
1. A—MBS=MCP,
Analysis Higher Education vice Clayton—no price measure of overall Discrimination
Efficiency loss 1. A—P1,Q1, under- 1. A— * Paid by discrimination not dispersion of income * Preferences-
(A,B,C )=society’s cost, tax based on costs, no Gini ratio = Area A÷ Areas types of work,
P1,Q1 Under-
resource revenues tying contracts, no A+B leisure
allocation of resources allocation * Difficult interlocking * Unequal
overallocation 0 = perfect equality; .249
of resources to exclude directorates, Federal wealth
2. Δ—Govt.
Sally taxes or
Dickson, Austin, TX skdickson@yahoo.com = Japan; .435 = USA; .
2. Δ—Govt. susidy to 2. Δ— non- Trade Commission * Market
regulates 519 = Mexico; 1 =
Govt. subsidy to and Wheeler Act— power
3. B—MBS=MCS, P2↑, payers ⇒ complete inequality
consumers⇒MB↑