9/17/14 (After 1st Exam)Ch. 5Equilibrium – gives you the efficient quantity and the efficient priceDemand curve – value or BENEFIT people see in this goodSupply curve – costs associated with this goodMarket Failure – situation where the market…left to its own devices fails to produce the efficient level of output (pg. 140)Justifies government intervention in the marketCorrect/Best/OptimalGovernment intervention in the economy-price floors or price ceilings-can reduce economic efficiencyGovernment intervention may actually increase economic efficiency and enhance the well-being of society (pg. 138)Public Goods – provided by local governmentstate highway, street light (pg. 151)Public goods characterized by:Non-rival consumptionMost goods if, I “consume” it no one else can “consume” itThat’s RIVALPublic goods, one person “consuming” it doesn’t prevent another person from “consuming” the same goodThat’s NON-RivalNon-exclusionMost goods, if you pay for it you get it, and if you don’t pay for it you don’t get itThat’s EXCLUSIONPublic goods, in many cases you cant keep someone from “getting” the good just because they didn’t pay for itThat’s NON-ExclusionExcludable: New shirt; ticket to a concert(The class I’m sitting in right now – not the information)Free-Rider Problem & Mosquito SprayingBecause of the free-rider problem, there would be no demand..And therefore no supplySo the market would “fail” with this goodSo we take the decision out of the hands of the marketWhat is/is not public good?National defense v. Fire ProtectionNon-rival consumption?Non-excludable?Health Care?Four Categories of Goods (pg.154)TL – Private Goods:Starbucks’ LattesLevis JeansTR – Common Resources:Fish in the oceanBL – Quasi-Public GoodsCable TVBR – Public Goods:National DefenseMosquito SprayingIs the internet a public GOOD?Externalities (pg. 138)Unintended consequenceCost of benefits caused by a transaction that aren’t part of the transactionA benefit or a cost that affects someone who is not directly involved in the production or consumption of a good/serviceNeighbor buys/plants apple treeCosts $300Branches hang over your propertyEveryday apples fall on in your yardPositive ExternalityNeighbor buys/plants apple treeCosts $300Branches hang over your propertyEvery morning sap falls all over your carNegative externalityPrivate v. External Cost & BenefitPositive ExternalitiesYou’re trying to sell your houseYou go on vacation and come back a week later (remodeled house)Negative ExternalitiesPollutionThe “transaction” is the thing causing the pollutionThe “spillover effect” is the polluted air or waterPrivate costs:Cost of productionExternal Costs:Costs of polluted waterSocial Costs = Private costs + External costs (pg. 139)Social costs are the full resource costs of an activity including the externalitySupply curve represents private costs to producersExternal cost: shift up of SP, demand doesn’t change, new equilibriumnegative externalityquantity in market is reducedDemand curve represents private benefits to consumersExternal cost: shift up of Demand, supply doesn’t change, new equilibriumPositive externalities9/22/14 Ch. 5 Cont’dMarket FailureSituation where the market... left to its own devices,, fails to produce efficient level of outputCorrect/best/optimalPg. 138-140 all graphsExternal Costs –External –Mr. PigouA.C. PigouEconomist who pioneered idea of using taxes/subsidies to address externalitiesReuters—Senators Boxer and Sanders introduce climate change legislation in congress..aimed to reducing greenhouse emissions by 80% by 2050Ch. 6Price elasticity – how demand responds to priceA change in the price will cause change in quantity demandedElasticity = responsivenessWhen price changed, does quantity demanded respond by changing a little or a lot?The bigger your “response”, the more “elastic” demand isResponse:Buy more or buy lessBuy or don’t buy—periodIf the price changes and you buy the same amount you were going to buy anyways, you didn’t respond to that price changeYour demand is not responsiveYour demand is not “elastic”If you buy a little more or a little less, you had some response in price changeSomewhat responsiveSomewhat elasticWhy do we care?Elasticity of demand determines whether you earn more revenues/..By selling more units at a lower per-unit price, orBy selling fewer units at a higher per-unit priceAlso determines size or marginWhat makes a good have a demand that’s elastic or inelastic?Number of substitutesLots of substitutes: demand is elastic (responsive)Few substitutes: demand is inelastic (not responsive)Luxury or necessityLuxury: demand is elastic (responsive)Necessity: demand is inelastic (not responsive)How broadly is the market defined?Broadly: demand is inelastic (generic)Narrow: demand is elastic (specific)Size of the good in the consumer’s budget (price relative to income)Large part of budget: demand is elasticSmall part of budget: demand is inelasticThe amount of time you (as a consumer) have to adjust to the new priceNatural gas to heat your house in the winterPut on a sweaterReinsulate walls in your houseReplace gas furnace with electric furnacei.e:GasolineInelastic then elasticMovie ticketsDownload, rent RedboxLot of substitutes/luxuryElasticIf demands elastic and you lower the price, your going to make moneyIf elastic and raise price, decrease moneyIf inelastic and lower the price, decrease moneyIf inelastic and raise price, increase your money(pg. 138)9/24/14(Not in book but on test)elasticity = responsivenesswhen the price changes in either direction…?What makes a good have a demand that is elastic or inelastic?Number of substitutesLuxury or necessityRecovery killer? Gas prices barrel toward $4 a gallonSeveral refineries closingNegative technology shock.. supply shifts left.. price increasesPrice of oil hits 52 week highPrice of input increases.. supply shifts left.. price increasesDemand is inelasticHow broadly the market is definedSize of good in the consumer’s budgetThe amount of time you have to adjust to the new priceNatural gas , to heat house in winterPut on a sweaterReinsulate your houseIf demand is elastic (pg.183)Elastic.. and you lower the price.. increasesPrice elasticity = % change in quantity demanded / % change in priceMidpoint formula1. Original price2. The new price3. The original quantity demanded4. The new quantity demandedYou sell