The Principles of Economics
It must intervene if there is a market failure: the market fails to allocate resources efficiently or there is too much market power; when a single actor has too much influence in an economy (such as a monopoly). However, too little inflation or even deflation (the fall in prices) can also be very harmful to an economy. Therefore, inflation must be at a stable and calculated level.
Thinking Like an Economist
The Economist as a Scientist
The line between the two extremes shows all possible combinations of units of wine and cheese that it can produce. The line represents the tradeoffs an economy must make: it must give up some of one good in order to produce another.
The Economist as a Policy Advisor
Why Economists Disagree
Interdependence and the Gains from Trade
A Parable for the Modern Economy
Comparative Advantage: the Driving Force for Specialisation
Applications of Comparative Advantage
The Market Forces of Supply and Demand
- Markets and Competition
- Demand
- Supply
- Supply and Demand Together
Likewise, the price along the demand curve will equilibrate and we will have a new equilibrium. There are no effects that would cause the demand curve to shift, so the price moves along the demand curve to a new equilibrium.
Elasticity and its Application
Elasticity of Demand
Perfectly inelastic, elasticity = 0: when any price changes generate no change in quantity demanded; 2. But if the demand is elastic, many consumers will be lost and the price increase will not compensate for it, therefore the total revenue will be less.
Elasticity of Supply
Supply, Demand and Government Policies
Controls on Prices
Taxes
Consumers, Producers and the Efficiency of Markets
Consumer Surplus
Of course, in cases such as harmful products, such as drugs or cigarettes, policymakers will not care about consumer surplus because it is not beneficial for them to consume the good completely, let alone be encouraged to consume it by making it easy and to make available cheaply.
Producer Surplus
Market Efficiency
According to the utilitarian, government should maximize the happiness and well-being of everyone in society. The other three are: unanimity – if everyone prefers A to B, then A must beat B; independence of irrelevant alternatives – the decision between A and B should not depend on the relative preference of C; and not a dictatorship – everyone can make a free choice.
Application: the Costs of Taxation
The Deadweight Loss of Taxation
However, it is also true that there will be a public benefit or tax revenue for the government. Once the tax is introduced, the price on the supply and demand graph will move to the left and there will be a wedge between the curves, the size of that wedge being the size of the tax.
The Determinants of Deadweight Loss
If the world price is higher than the domestic price, it is likely that the country will be an exporter, which will be beneficial to producers but harmful to consumers as their prices will increase. When an economy opens up to trade and the world price is found to be higher than the domestic equilibrium price, it means that the country has a comparative price.
Public Policies Towards Externalities
Often the tax revenue received by the government is less than the market deadweight loss, and the difference is the total deadweight loss that the government should reduce. A monopoly is the only firm in the market, so its demand curve is a downward-sloping market demand curve.
Private Solutions to Externalities
Public Goods and Common Resources
Public Goods
If the good is not excludable but subject to rivalry, it is a common resource, like fish in the sea, because I cannot prevent anyone from catching them, but the more someone fishes, the less there is left for me to catch. And finally, if the good is neither excludable nor subject to rivalry, it is a public good like national defense, for if the whole country is protected, everyone in that country is protected.
Common Resources
That's why companies often don't spend enough on basic research and that's why the government tries to fund this kind of research at various universities and state research institutes. Each captain of each ship can see the light and by seeing it does not diminish its quality to other captains, so if the ships are the main beneficiaries, lighthouses are public goods and that is why governments today mainly operate them.
The Design of the Tax System
The Financial Overview of the US Government
The US federal government collects its tax revenue mainly through income and payroll taxes, while states do so through sales and property taxes. Most of the tax revenue comes from individual income taxes, the US has relatively low taxes on income, and yet it is in the middle, so there are countries with even lower burdens.
Taxes and Efficiency
Taxes and Equity
For example, a young person earning a certain amount of money and another young person earning the same amount may have different needs because they have health problems or need to care for their elderly parents or families.
The Costs of Production
- What Are Costs?
- Production and Costs
- The Various Measures of Costs
- Costs in the Short Run and in the Long Run
The production function describes the relationship between the number of workers and output, while the total cost curve describes the relationship between output and total costs. The firm's total costs are its fixed costs plus variable costs multiplied by the quantity of goods.
Firms in Competitive Markets
What is a Competitive Market?
Average revenue equals the price of a good because revenue is the quantity of price plus time, and average revenue is that divided by quantity. Marginal revenue is an important concept; it is the increase in revenue divided by the increase in quantity.
Profit Maximisation and the Competitive Firm's Supply Curve
So companies will not produce anything in the short run if its total revenue is less than its variable costs, though not its total costs, because they still have to compensate for fixed costs of any On the other hand, in the long run, the firm should only shut down if its total revenue is less than its total cost, or its price is less than its average total cost.
The Supply Curve in a Competitive Market
Therefore, the firm's short-run supply curve is the part of the marginal cost curve that lies above the average variable cost curve. Total profit will be the firm's total revenue minus its total costs, or, to put it simply, price minus average total cost multiplied by quantity.
Monopoly
- Why Monopolies Arise
- How Monopolies Make Production and Pricing Decisions
- The Welfare Cost of Monopolies
- Price Discrimination
- Public Policy toward Monopolies
A monopoly can choose to differentiate between different groups of consumers and charge them different prices. And of course, if the market disadvantage with a monopoly isn't that great, the government can just let it go.
Monopolistic Competition
Between Monopoly and Perfect Competition
A market with many sellers, who sell slightly different products and are subject to free entry and exit, is called a monopolistically competitive market. We have learned in previous chapters about two extremes in competition: perfect competition and monopoly.
Competition with Differentiated Products
In reality, more often than not there is imperfect competition, which lies somewhere between the two extremes. One type is oligopoly, which occurs when there are only a few sellers offering a similar or identical product.
Advertising
Opponents say it manipulates people into thinking products are more different than they really are, hindering competition. A brand name manipulates consumers into thinking that some products are more different than they really are or gives them a stamp of quality and informs the consumer.
Oligopoly
Markets with Only a Few Sellers
An oligopoly will therefore be more efficient than a monopoly, but not as efficient as a perfectly competitive market. The more firms there are in an oligopoly, the more it resembles a competitive market and the closer the price is to marginal cost.
The Economics of Cooperation
An oligopoly is a market with only a few firms that is less efficient than perfect competition and can become as inefficient as a monopoly if cartels form. Two players will compete to steal market share from the other, but will not achieve a price equal to marginal cost, as both will produce their Nash equilibrium quantity, which is the best quantity to produce given what the other is producing.
Public Policy toward Oligopolies
However, it is often better to work together where possible and simply agree to make the best choice. The participants submitted computer programs with repeated game strategies for prisoner's dilemmas and these programs were tested against each other.
The Markets for the Factors of Production
- The Demand for Labor
- The Supply of Labor
- Equilibrium in the Labor Market
- The Other Factors of Production: Land and Capital
At equilibrium, wages equal the marginal product of labor and are proportionally affected by shifts in the supply and demand curves. For this reason, any event that changes the demand or supply of labor must change the wage and the marginal product of labor proportionately.
Earnings and Discrimination
Some Determinants of Equilibrium Wages
If this is true, then increasing the level of education of all workers will not change wages. One possible reason for this is that people who are more beautiful have an advantage that makes them more productive.
The Economics of Discrimination
Because of past discrimination, African-American men are still less likely to obtain a college education, and schools in predominantly African-American neighborhoods are of lower quality. Also, when we talk about women in the workforce, again due to past social norms, the average woman in the workforce today is younger than the average man, and women often hold different jobs than men.
Income Inequality and Poverty
The Measurement of Inequality
The Political philosophy of Redistributing Income
Policies to Reduce Poverty
Proponents of these types of programs say that this way the poor get what they need most and avoid the problem of drug and alcohol addiction in low-income communities. However, others say this is disrespectful and inefficient; because the government cannot know what each individual really needs most.
The Theory of Consumer Choice
- The Budget Constraint: What the Consumer Can Afford
- Preferences: What the Consumer Wants
- Optimization: What the Consumer Chooses
- Three Applications
The further the indifference curve is from the origin, the more the consumer prefers it, since it represents larger quantities of the two bundles of goods. When income increases, the quantities of the two bundles of goods consumed do not necessarily increase proportionally.
Frontiers of Microeconomics
Asymmetric Information
An uninformed party can also try to solve the problem of adverse selection by trying to obtain more information about the purchase.
Political Economy
This is called the median voter theorem, which states that voting preferences are the median of voters. It is optimal for any party to be as close as possible to the median voter in its policies.
Behavioural Economics
If there are 100 voters and you want to place them in a line from whoever wants the least money in the budget to whoever wants the most, a decision will be made and this will be the 50th or median voter's preference. . Since the median voter is the 50th, there are more people who want a budget of less than 150, so the party is not elected.