03 02 2011 12 01 00 The PPF and Opportunity Cost The opportunity cost of an item is what must be given up to obtain that item Moving along a PPF involves shifting resources from the production of one good to the other The slope of the line equals the rise over the run the amount the line rises when you move to the right by one unit Economic growth shifts the PPF outward The Shape of the PPF The PPF could be a straight line or bow shaped Depends on what happens to opportunity cost as economy shifts resources from one industry to the other o If opportunity cost remains constant PPF is a straight line o If opportunity cost Why the PPF might be bow shaped o As the economy shifts resources from beer to mountain bikes o At point A most workers are producing beer even those that are better suited PPF becomes steeper to building mountain bikes So do not have to give up much beer to get more bikes o At point B most workers are producing bikes The few left in beer are the best brewers Producing more bikes would require shifting some of the best brewers away from beer production would cause a big drop in beer output Demand Demand curve shifters of buyers Income Demand comes from the behavior of buyers The quantity demanded of any good is the amount of the good that buyers are willing Law of demand the claim that the quantity demanded of a good falls when the price and able to purchase at alternative prices of the good rises other things equal Demand schedule a table that shows the relationship between the price of a good and the quantity demanded As price increases quantity demanded decreases negative slope o An increase in the number of buyers causes an increase in quantity demanded at each price which shifts the demand curve to the right o Income increases demand for a normal good is positively related to income An increase in income causes increase in quantity demanded at each price shifting the D curve to the right o Demand for an inferior good is negatively related to income An increase in income shifts D curves for inferior goods to the left Prices of related goods o change in price usually just moves up and down the curve when it is a price o two goods are substitutes if an increase in the price of one causes an increase of a related good it shifts the line in demand for the other example pizza and hamburgers An increase in the price of pizza increases demand for hamburgers Shifting hamburger demand curve to the right o two goods are complements if an increase in the price of one causes a fall in demand for the other example computers and software If price of computers rises people buy fewer computers and therefore less software Software demand curve shifts left example college tuition and textbooks bagels and cream cheese eggs and bacon Tastes o Expectations o Expectations affect consumers buying decisions o Examples If people expect their incomes to rise their demand for meals at expensive restaurants may increase now Summary variables that affect demand Price causes a movement along the D curve No of buyers shifts the D curve Income shifts the D curve Price of related goods shifts the D curve Tastes shifts the D curve Expectations shifts the D curve 03 02 2011 12 01 00 Market Failure Market mix is either above or below the optimal Either over producing or under producing compared to the optimal outcome Causes of Market Failure The four specific sources of market failure are Anyone can use it National Defense park o Public goods o Externalities o Market power o Inequity Joint Consumption and Non excludability A public good is a good or service o Whose consumption by one person does not effect consumption by others o Can not exclude others from consuming the good or service Underproduction of Public Goods If public goods were marketed like private goods everyone would wait for someone else to pay Free Ride The result might be a total lack of public services What are externalities Examples o Something that I am doing in the market as a buyer and you as a third party get to be influenced by it o Neighbor spends 3000 landscaping his yard I am very happy when I open my window and see it didn t pay for it but am still influenced by it o Neighbor s dog barking negative externality Externalities are the costs or benefits of a market activity borne by a third party o The difference between the social and private costs benefits of a market activity The market will underproduce goods that yield external benefits and overproduce those that generate external costs The market responds to consumer demand not externalities When a firm has market power it has the ability to alter the market price of a good or Restricted Supply service Antitrust Policy Government follows an antitrust policy when it intervenes to alter market structure or prevent abuse of market power Inequity The distribution of goods and services generated by the marketplace is not necessarily fair Taxes and Transfers Transfer payments are made to individuals for which no current goods or services are exchanged like Social Security welfare unemployment benefits Just one need to be present Chapter 10 Gross Domestic Product Expenditure and Income Two definitions o Total expenditure on domestically produced final goods and services o Total income earned by domestically located factors of production Expenditure equals income because every dollar spent by a buyer becomes income to the seller Income and Expenditure 03 02 2011 12 01 00 Gross domestic product GDP measures total income of everyone in the economy o GDP also measures total expenditure on the economy s output of g s For the economy as a whole Income equals expenditure because every dollar a buyer spends is a dollar of income for the seller Gross Domestic Product GDP Is the market value of all final goods services produced within a country in a given period of time o It is a market value or dollar value want to see how much is being produced in an economy Goods are valued at their market prices so All goods measured in the same units ex Dollars in the U S Things that don t have a market value are excluded ex Housework Advantage anything that hits the market has a value o Final goods intended for the end user o Intermediate goods used as components of ingredients in the production of other goods o GDP only includes final goods they already embody the value of the intermediate goods used in their production o GDP includes tangible goods like DVDs mountain bikes beer o o GDP
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