ECON 202 1nd Edition Lecture 19 Outline of Last Lecture I. Market Inefficienciesa. Externalitiesi. Negative Externalityii. Positive Externalityiii. Pigorian Taxes and SubsidiesOutline of Current Lecture II. Market Inefficienciesa. Public Goodsi. Market Demand CurveIII. Business Costs and Productiona. Explicit vs. Implicit Costsi. Accounting Profit vs. Economic Profitb. Short Run vs. Long RunCurrent LectureEfficiency of MarketsMarket InefficienciesMarket Failure – situation in which a market, left on its own, FAILS to allocate resources efficiently.1. Externalities – The Third Party Problem2. Public Goods – The Free Rider ProblemPublic Goods – non-excludable and non-rival in consumption- Markets will provide LESS THAN the efficient amount of a public good- Free Rider Problem – someone who consumes the good without paying for ito Mainly occurs because public goods are non-excludableMarket Demand Curve- Private Goods: horizontally add the demand curves of the buyers in a marketThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Public Goods: vertically add the demand curves of the buyer in a marketExample: Assume 2 buyers A and B is in a Public Good MarketOptimal Provision of a Public GoodS = Marginal Social CostD= Marginal Social Benefit; Actual Willingness to PayQ* = Efficient, socially optimal quantityD1 = Revealed Willingness to payPQDA$5$212PQDB$6$312PQDMarket$11$512SDPQ*QMarketD1QQMarket = amount people reveal they’re willing to payBusiness Costs and ProductionProfits and Losses- Profits = Revenue – CostsExplicit vs. Implicit Costs- Explicit Costs – out of pocket or monetary costs- Implicit Costs – non-monetary or opportunity costsAccounting Profit vs. Economic Profit- Accounting Profit = Total Revenue – Explicit Costs- Economic Profit = Total Revenue – Explicit Costs – Implicit CostsImplicit Costs- Include the opportunity cost of capital – the “average” or “normal” rate of return that money invested in a company could have earned if invested elsewhere- If a company is earning ZERO ECONOMIC PROFIT they are earning an “average” or “normal” rate of economic profitExample: Suppose you buy a McDonalds for $100,000 and you will manage it full time. Assume you can earn $50,000/year if you worked another job and invested your $100,000 elsewhere earning %6 as interest.Results after one year of Operating McDonalds: Total Revenue = $500,000Explicit Costs = $443,999Accounting Profit = $56,001Implicit Costs = $56,000Economic Profit = $1You should open the McDonalds because you will be $1 better off if you do.Short Run vs. Long Run- Short Run – at least 1 input is fixed- Long Run – all inputs are variableProduction Terms:- Total Production – total output (Q)- Average Production – total production ÷ number of units of input (for a specific input X)oAverage Production=total production¿ of X or A PX=QXExample: Suppose 10 workers make 50 computers; Average Production of each worker would equal 5 computers.If you hire an 11th worker output increases to 54 computers. The Average Production is:5411=4.91
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