Short Answer Topics Comprehensive Material View of International Trade Mercantilist Smith Ricardo Mercantilist Gold is wealth Belief Trade is zero sum game some win and some lose Adam Smith Challenged Mercantilist view in 1776 Wealth of Nations is NOT about gold Gold is ok but doesn t represent the countries wealth If you have money doesn t mean shit if you don t have any products Trade can be mutually beneficial Specialization Critiques to conclude if mutually beneficial Fair Trade Perfect labor mobility Extent to which workers are able and willing to move between different jobs occupations and geographical areas Specialize based on absolute advantage Absolute advantage Lowest cost per unit David Ricardo Built upon Smith s perspective Emphasized opportunity cost Specialize using Comparative advantage Comparative Advantage The ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another Lowest opportunity cost Must have different relative efficiencies Provides a more general rule than Smith Smith countries should be producing Ricardo If you specialize in one product trade with someone else to have the best of both products Autarky No Trade In the middle of the graph were the country doesn t trade and divides time evenly between the activities Market Failures categories remedies Invisible hand produces disappointing or embarrassing results for society Categories of Market Failure 1 Public Goods Solution Problem Non exclusive consumption Someone pays for something and the other one benefits Non market allocation mechanism Affects the market but not through buying or selling Collect taxes to fund them Public Education tax Private Membership Private school People in district pay tax for teachers not just an individual If individual paid for one teacher many children would benefit but only one parent paid Instead of paying taxes pay the school directly If cannot afford or don t pay tuition not allowed to enroll Only benefits those who pay 2 Equity fairness Markets are blind to fairness Remedies What you want to do with the product is irrelevant the only thing that matters is the money Non market allocation mechanism Rationing first come first serve preferences and income The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied Reduced supply causes a products price to increase the available supply is then rationed to those who are willing and able to pay for it Queuing Waiting in line as a means of distributing goods and services a non price rationing mechanism Ex Hurricane Sandy with the gas crisis A maximum price that sellers may charge for a good usually set by government Intended to keep quantity demanded greater than quantity supplied Cant take advantage of citizens when their product is necessary hotel prices during hurricane sandy keeps prices from becoming too high A minimum price below which exchange is not permitted Stops for overproduction so there are a limited amount of goods Price Ceilings Price Floors 3 Externalities Favored Customers Ration Coupons Reservation of scarce supplies for friends and favored customers Coupons that entitle families a certain number of a product Everyone would get the same amount regardless of income Transactions that impact the third party second hand smoke When social costs differ from private costs the discrepancy is invisible to the scientific producer These external costs matter but they don t get included in production decisions Cigarette companies not thinking about people being affected by second hand smoke but rather selling their product Remedies Command and control regulation Making it illegal to smoke in public Pigouvian Taxes Tax an inappropriate behavior it adds another cost of production and ultimately gets included in the production decisions Would have to increase price of cigarettes For producer Marketable Permits Buy permit for smoking Money used for permit goes toward foundations for lung cancer Demand goes down for cigarettes For consumer 4 Market Power The invisible hand works best when markets are competitive Monopolies control the price Remedies Set regulations 5 Economic Inequality Budget Constraint Graph equation Px X Py Y I Px X Py Y or Income Ex Pizza cost 3 Beer costs 1 50 your budget is 30 You can buy EITHER 10 pizzas OR 20 beers EXTREMELY SIMILAR TO PPF Income Effect vs Substitution Effect Price Change Real Income wealth price increase or decrease better off or worse off If you use extra income to buy X then substitution X normality substitution Wage rate change Wage rate increases leisure Real income Short Answer Topics New Material Market Structures defining characteristics compare contrast Perfect Competition Family farm Ex Olympic sized swimming pool using a teaspoon to get water out Monopolistic Competition fast food markets don t have a lot of power a lot of competition products are distinct Oligopoly airlines car companies has competition but only a few firms not unlimited amounts of gates at airports Monopoly Microsoft Only one firm can make windows Gives them tremendous power and discretionary power Ex Google term used to describe searching for something on the internet Monopolistic Oligopoly Monopoly Perfect Competition Many firms Market Size Few firms Many firms only single firm Significant Unique Product Effective Barriers Reasonably Likely Profit Maximization graphs perfect competition monopoly monopolistic competition Market Power None Product Differentiation Barriers to Entry Long Run Econ Profit Some Differentiated Products Significant Barriers None Differentiated Products No barriers No Prospects No Prospects Reasonably Identical Products No barriers Likely SEE TABLE ABOVE Monopoly Defining Characteristics Market Size Single Firm Market Power Significant Making decisions that impact what goes on in the market place Product Differentiation Unique Ex 2 3 years ago iPad was the only tablet that was on the market It WAS a monopoly Barriers to Entry Effective Long Run Economic Profits Likely Super Profits Significant market power and governed by profit maximization So MC MR Perfect Competition Horizontal demand line Firms are price takers accept what the economy gives them Price doesn t change Marginal revenue and price are the same thing in the graph Thinking about marginal revenue Monopoly Regular demand curve Firms are price maker Once you choose a quantity to produce the