908Econ 104 Intro to Economics MICROECONOMICS Chapter 4 April 1 2014 Microecon an individual person an individual firm an individual industry how markets are structured Market Forces set the prices most of the time Other times government federal state local might step in and set the prices Other times government might not set the price but might step in and put limits on the price Price Ceiling a level a price can t go above This can lead to a shortage in the market if it below price equilibrium Price ceiling above the equilibrium price it does not cause a shortage nor does it distort the market LOOK IN WRITTEN NOTES Price Floor a level the price can t go below pg 110 Sounds better for those selling not consuming This can lead to a surplus in the market A price floor below the equilibrium price does not cause surplus nor does it distort the market LOOK IN WRITTEN NOTES Price floors like minimum wage only distort the market if ABOVE equilibrium price Price ceilings only distort market if BELOW equilibrium price Exam Q Examp Price Floor 32 surplus Price Ceiling 20 shortage Price Ceiling 30 Equilibrium price Price goes quantity goes down supply Price goes down quantity goes up demand Consumer Surplus Difference between price consumer has to pay and price consumer would be willing to pay Below demand and above price o 1 2bh area of triangle to figure out consumer surplus o LOOK IN WRITTEN NOTES Producer Surplus Difference between lowest price a firm would accept for its product and the price it actually receives pg 105 Calculated same way as consumer surplus 1 2bh Above Supply Below Price LOOK IN NOTES Tax pushes supply to the left Economic Surplus Consumer and Producer Surplus combined 108 109 Dead Weight Loss is the reduction in economic surplus that results when the market isn t efficient Demand curve represents VALUE of BENEFIT people consumers see in this good Supply curve represents COSTS to producers associated with this good Market Value a situation where the market left to its own devices fails to produce the efficient correct best optimal level of output 118 Market failure justifies government intervention in the market Externalities costs or benefits caused by a transaction that isn t part of the transaction or a benefit or a cost that affects someone who is not directly involved in the production or consumption of a good service Unintended consequences Externalities create a situation where government involvement in the market is justified Example If you work with 5 people in a small room and all of them get purchase a flu shot You benefit from this and not get sick This is an externalities You did not pay for their flu shots but you are not getting sick Private v External Costs and Benefits Cost Outside the transaction External Cost o 10 to wash your car every day after sap comes on it Benefit Outside the transaction External Benefit o 25 in free apples every fall b c neighbors tree is over your property Positive Externalities bad house nice house your house will sale now DEMAND Negative Externalities pollution SUPPLY Sets of Costs Private Costs External Costs costs of production costs of polluted air polluted water Private External Social Costs Social Costs are the full resource costs of an activity including the externality 116 Supply Curve represents Private Costs to Producers COST Demand Curve represents Private Benefits to consumers BENEFIT Incorporating an Externality Shifts one of the curves External costs we show them as an increase in costs shifts UP the supply curve External benefit shows them as additional increase for demand shifts UP demand curve When there are external COSTS including these has effect of increasing RAISING costs curves supply When there are external BENFITS including these has effect of increasing RAISING benefits curves demand Economist who pioneered idea of using taxes subsidies to address externalities o Taxing to decrease activity o Subsidy to try and increase activity Chapter 5 Most people don t purchase health care Most people purchase for insurance Then the insurance company pays for the health care Some people get health insurance through where they work 49 Some people get health insurance through the government 29 o Medicaid Lower Income o Medicare Elderly Some people buy health insurance through the market 5 Some people just go without health insurance 17 Mr Pigou In the US Going without Health Insurance v Going without Health Care Emergency Medical Treatment and Active Labor Act EMTALA treat ACUTE cases NOT required by law to treat CHRONIC cases emergency rooms required to o If you have lung cancer and are coughing up blood they must stop the bleeding but do not have to treat the lung cancer Single Payer System although the gov pays the doctor the doctor is not a gov employee Dr and hospital are private companies but being paid by the government This is a form like Medicaid or Medicare People pay taxes and do not pay a premium to an insurance company Socialized Medicine the Dr is a government employee and hospitals are gov intentness A persons taxes pay the doctor s salary UK is this Third Party Payer System Party consuming the product is not the party paying for the product This can create information problems 149 Principal agent problems United States is this Principal Agent Problem one party is acting on behalf of another party but there is asymmetric or incomplete information Example Professors acting on behalf of the school Example Is the doctor working on behalf of himself insurance company or patient United States People Pay for Insurance It s provided by PRIVATE company The insurance company pays the doctor for his service Doctor is private business In order to talk about Healthcare we have to talk about Information Problems 4 Information Problems listed below Asymmetric Adverse Risk Pooling Moral Hazard Asymmetric Information when one party to a transaction has less information than the other party Buying a used car seller has way more information than you do Babysitter babysitter has more information with what they do with kids than the hiring parents Adverse Selection 148 When one party to a transaction takes advantage of other party s lack of information Hidden information Results bad products or bad customers are more likely to be selected due to asymmetric info Example Look below Asymmetric Adverse Info in the Market for Insurance Homeowners Insurance o Homeowners know about potential fire hazards in the home