Unformatted text preview:

Chapter 1 I Economic Analysis of Law What are the defendants share of the market Will price controls on automobile insurance reduce its availability Who really bears the burden of the capital gains tax How much future income did the children lose because of their mother s death Economics provided a scientific theory to predict the effects of legal sanctions on behavior Prices How people will behave Efficiency is always relevant to policymaking because public officials never advocate wasting money III The Primacy of Efficiency over Distribution in Analyzing Private Law Private law the law of property contracts and torts possible way to purse distribution IV Why Lawyers Study Economics Why Should Economists Study Law Improving the effectiveness of law in poor countries is important to their economic development o Law needs economics to understand its behavioral consequences and economics needs law to understand the foundations of markets From economists lawyers can learn quantitative reasoning for making theories and doing empirical research From Lawyers economists can learn to persuade ordinary people Chapter 2 I The Structure of Microeconomic Theory Concentrates their decision making by observing individuals in small groups such as families clubs firms and governmental agencies o Microeconomics is the study of how scarce resources are allocated among competing ends The suit for the job interview or the new CD you want II Some Fundamental Concepts Maximization Equilibrium and Efficiency A rational consumer should choose the best alternative that the constraints allow o Recognize that consumers choose alternatives that are well suited to achieving their ends Choosing the best alternative that the constraints allow can be described mathematically as maximizing Utility function better alternatives can be associated with larger numbers Feasibility constraint the constraint in choice can usually be expressed mathematically Equilibrium is a pattern of interaction that persists unless disturbed by outside forces Economists usually assume that interactions tend toward equilibrium Types of efficiency o Productively efficient o Pareto efficient concerns the satisfaction of individual preferences Max profits MC MR We assume that firms maximize profits subject to the constraints imposed on them by consumer demand and the technology of production Profit TR TC A Short run at least one input is fixed capital B Long Run III The long run is distinguished by the fact that all factors of production become variable No longer any fixed costs o Established firms may expand their production capacity and new firms may enter the market IV Market Equilibrium Perfect competition an industry in which there are so many firms that no one of them can influence the market price by its individual decisions and in which there are so many consumers that the individual utility maximizing decisions of no one consumer can affect the market price Monopolistic Market can only arise where the market has barriers In general such barriers arise from two sources 1 Statutory and other legal restrictions on entry 2 Technological conditions of productions known as economies of scale a condition of production in which the greater the level of output the lower the average cost of production IV IX General Equilibrium and Welfare Economics Welfare economics explores how decisions of many individuals and firms interact to affect the well being of individuals as a group A General Equilibrium and Efficiency Theorems General equilibrium will be achieved only when competitive forces have led to the equality of marginal benefit and MC in the market for every single commodity and service Socially optimal two reasons for the conditions of gen equil 1 While all real world markets may not obey these conditions many will 2 The specification of the conditions that lead to the general equilibrium provides a benchmark for evaluating various markets and making recommendations for public policy B Market Failure There are 4 sources of market failure 1 Monopoly and Market power The public policies for correcting the shortcomings of monopoly are to replace monopoly with competition where possible or to regulate the price charges by the monopolist antitrust laws 2 Externalities Examples figure 2 15 External benefit pollination that a beekeepers provides to his neighbor who runs an orchard External cost air or water pollution can lead to market failure o The key to achieving the social optimum where there are externalities is to induce private profit maximizers to restrict their output to the socially optimal not privately optimal point 3 Public Goods A commodity with two very closely related characteristics a Nonrivalrous consumption is consumption of a public good by one person does not leave less for any other consumer b Nonexcludability is when the costs of excluding nonpaying beneficiaries who consume the good are so high that no private profit maximizing firm is willing to supply the good 4 Severe Informational Asymmetries an imbalance of information between parties to an exchange one so severe that exchange is impeded C Potential Pareto Improvements or Kaldor Hicks Efficiency An attempt to overcome the restriction of the Pareto criterion that only those changes are recommended in which at least one person is made better off and no one is made worse off Requires that gainers explicitly compensate losers in any change V X Decision Making Under Uncertainty Risk and Insurance A Expected Monetary Value An entrepreneur for example can compare two projects by comparing their expected values the sum of the probabilities of each possible outcome times the value of each of those outcomes B Maximization of Expected Utility Attitudes Toward Risk 1 Risk Adversion A Person who has diminishing marginal utility from money income is said to be risk adverse most people Ex An investor might want to have 80 for certain rather than undertake a project whose EMV 80 2 Risk Neutral a person who has constant marginal utility of income and is indifferent between an Chapter 3 certain prospect of income and an uncertain prospect of equal expected monetary value 3 Risk Seeking increasing marginal utility of income and therefore prefers an uncertain prospect of income to a certain prospect of equal expected monetary value C The Demand for Insurance One of the most important behavioral implications of risk aversion is that people will pay to avoid having to face uncertain


View Full Document

FSU ECP 3451 - Chapter 1

Download Chapter 1
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Chapter 1 and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Chapter 1 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?