International Trade Views Mercantilist gold is wealth trade is a zero sum game and trade is war Adam Smith skills and resources are more important than gold trade can be mutually beneficial believes in absolute advantage focusing on where you enjoy the lowest cost and then trade Ricardo based off of Smith focus on opportunity cost believes in comparative advantage focus where you have the lowest opportunity cost and then trade Market Failures PEEM 1 Public Goods non exclusion consumption someone is a free rider Ex snowy road example buying food at a restaurant and splitting check a Remedies collect taxes private membership 2 Equity markets are blind to fairness Ex minimum wage for workers in the United States a Remedies rationing price ceilings and floors 3 Externalities transactions effect third parties ex selling someone cigars factories producing harmful gasses a Remedies regulate marketable permits 4 Market Power ex overpriced goods like text books a Remedies Budget Constraint Income PX X PY Y 3 factors income wealth price Income Effect and Substitution Effect a Price Change a Income Effect price goes down so you re better off and have more money in your pocket b Substitution Effect price goes down so you can purchase more of the same good b Wage Change a Income Effect wages go up so you re better off and have more money in your body b Substitution Effect prices go down so you can purchase more of the same good Market Structures EXAMPLE Market Size Perfect Competition Fast food Many firms Monopolistic Competition Coffee places Many firms Oligopoly Monopoly airlines Few firms Apple iPhones Single firm Product Differentiation None Barriers to Entry None Long Run Economic Profit none Market power None Some None none none Some Unique product Significant barriers Affective barriers Reasonably likely Likely some Complete market power Social Costs of Monopoly Monopolies are not socially optimal because they charge a higher price because they limit production calculate social cost by looking at consumer surplus difference of what they are paying and what they are willing to pay Monopolies don t maximize profit due to their large deadweight loss By increasing profits they put costs on society Price Discrimination charging different prices to different customers even though production cost is exactly the same How market power having a unique product Why maximize profit prevent arbitrage customers selling to eachother Why does it matter increases monopolist profit increases total surplus reduces inefficiency Ex best seller books airplane tickets financial aid Oligopoly Models 1 Collusion Model price fixing a Cartels joint price and quantity decisions illegal in US b Tacit collusions implicitly agreeing on prices without paperwork c also illegal In order for it to succeed they need inelastic demand other firms must play by the rules and entry must be difficult 2 Price Leadership Model 3 Cournot Model a One firm dominates and calls the shots all of the other firms follow b Leader chooses prices to minimize the participation of smaller firms a Assume a duopoly b Firms react to each other because both have market power c Not as bad for society as monopoly d inbetween outcome less efficient less deadwight loss than monopoly but more efficient more deadweight loss than perfect competition Advertising Case for advertising informs customers promotes competition supports innovations signals quality Case against advertising manipulates tastes wastes scarce resources creates barriers to entry fosters inefficiency Gini Coefficients a quantitative measure of income inequality if gini is zero than there s perfect equality if gini is one there s perfect inequality Determine A A B Example Population Population Income Income Deirdre Katie Doug Elisa 25 50 75 100 5 million 5 million 15 million 25 million 10 20 50 100 Gini Trends from 1970 for USA 1970 394 1980 463 Rising by less than 1 over thirty years becoming more unequal every year 2000 462 1990 428 Sources of Rising Inequality 1 Skill Biased Technological Change a Most popular explanation there s a decline in demand for the unskilled worker b Example technology in factories replacing factory workers 2 Globalization a Factor prices are likely to equalize as we open public area economic playing field gets more competitive b Example immigration immigrants to the united states are sometimes unskilled and cannot legitimately work so they get paid less 3 Shift to Services a Services are 75 of employment associated with deindustrialization b Example service jobs in general pay less than corporate jobs party hostess makes a lot less than GM of chuck e cheese a Collective bargaining to decrease wage differentials for no reason 4 Declining Unionization unions declining 5 Corporate reconstructing a Greater reliance on part time employment companies finding ways to pay employees less b Example outsourcing part time labor temps 6 Public Policy Changes a Example minimum wage has dropped 75 from 1970 2005 changes in tax code holes in safety net 7 Financialization a Privileging Wall Street banks large firms over Main Street small businesses b Example People who work in big firms are making money fast while small business owners are losing their business creating a gap Prisoners Dilemma There are 3 options 1 Work together monopoly 2 Compete against eachother oligopoly 3 Jail separates them and they have to act on their dominant strategy perfect competition Ex1 arms race theyre overall better off when they cooperate and Fredavoid the arms race but they act on their dominant strategy and mass produce weapons Ex2 Jack and Fred committed a large crime that the police have no evidence for and a small crime that the police have full evidence for FRED CONFESS DON T CONFESS JACK CONFESS DON T CONFESS 8 YEARS 20 YEARS 8 YEARS 1 YEAR 1 YEAR 3 YEARS 20 YEARS 3 YEARS They are likely to follow their dominant strategy best strategy reguardless of what their friend does They will both confess