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{{Economics_Lectures}}

{{Economics_Lectures}}

In this Lecture we will review the basic concept of "elasticity", learn about marginal cost and marginal revenue, and then study the powerful Coase theorem.  You’ll find these topics interesting and helpful.

Much of this lecture is devoted to review, and we also learn about the powerful Coase theorem.  The homework this week includes a quiz that covers the entire course so far.

By now you may have noticed that there is a style to economics:  simple concepts are studied very carefully.  Patience is valuable in solving economic problems.  Unlike history or science, it helps in economics to be extremely careful when '''''first considering''''' a problem.  Haste or sloppiness at the outset of trying to solve a problem can lead to unnecessary mistakes.   

By now you may have noticed that there is a style to economics:  simple concepts are studied very carefully.  Patience is essential to solving economic problems correctly.  Unlike history or science, it helps in economics to be extremely careful when '''''first considering''''' a problem.  Haste or sloppiness at the outset of trying to solve a problem can lead to unnecessary mistakes.   

In fact, we could define economics based on its unique style:  economics consists of making simple observations about complex situations in order to derive powerful results.  There may be many things that are unknown or uncertain about a situation, but economics looks at what can be determined and then derives as much as possible from what is known.  For example, one might ask an economist what he can say about public school classes.  Most people might respond, "I can't say anything about them without knowing more information."  But an economist thinks about what can be said despite the lack of knowledge of all the details.  The economist might say that we do know this:  public school classes censor prayer and avoid discussion of the Bible.  From that simple observation, an economist might draw a powerful conclusion:  students are completely missing out on the central source of wisdom and comfort.  Put another way, I do not know what students are doing in a typical public school classroom, but I do know that they are not learning anything related to the Bible.  And that observation is worth making, because the Bible has been the starting point and inspiration for most of the great achievements.

Economics consists of making simple observations about complex situations in order to derive powerful results.  There may be many things that are unknown or uncertain about a situation, but economics looks at what can be determined and then derives as much as possible from what is known.  For example, one might ask an economist what he can say about public school classes.  Most people might respond, "I can't say anything about them without knowing more information."  But an economist thinks about what can be said despite the lack of knowledge of all the details.  The economist might say that we do know this:  public school classes censor prayer and avoid discussion of the Bible.  From that simple observation, an economist might draw a powerful conclusion:  students are completely missing out on the central source of wisdom and comfort.

== Review: Elasticity ==

== Review: Elasticity ==

In Lecture Three we learned about "elasticity".  Let's define it again:  '''''elasticity is the responsiveness in demand for a particular good due to changes in a variable such price or income'''''.<ref>There is also an elasticity '''''of supply''''' of a particular good that we'll mention below.</ref>

In Lecture Three we learned about "elasticity".  Let's define it again:  '''''elasticity is the responsiveness in demand for a particular good due to changes in a variable such price or income'''''.<ref>There is also an elasticity '''''of supply''''' of a particular good that we'll mention below.</ref>

The concept of elasticity is worth learning well.  Many questions on an economics exam (such as the CLEP) ask about elasticity.  If you can know elasticity inside and out then you'll have a big advantage on an economics exam.

The concept of elasticity is worth learning well.  Many questions on an economics exam (such as the CLEP) ask about elasticity.

Most of the time elasticity means elasticity of '''''demand''''', as defined above.  We have already learned two types of elasticity of demand:

There are two types of elasticity of demand:

*price elasticity of demand

*price elasticity of demand

*income elasticity of demand

*income elasticity of demand

Keep these different types of elasticity separate: price elasticity is the change in demand due to a change in the price of the good, while income elasticity is the change in demand due to a change in the income of the buyer.  Your own teacher made the mistake of confusing these different concepts in the Question 4 of the homework for Lecture Three, as explained below.  Once he realized his error, he won't make that mistake again!

Keep these different types of elasticity separate: price elasticity is the change in demand due to a change in the price of the good, while income elasticity is the change in demand due to a change in the income of the buyer.   

=== Price Elasticity ===

=== Price Elasticity ===

5.  What does the Coase theorem say about the desirability, and the effect, of government regulations that increase transaction costs?

5.  What does the Coase theorem say about the desirability, and the effect, of government regulations that increase transaction costs?

6.  Take the online 10-question quiz about basic concepts covered in our course so far.  If you have a smart phone such as an iPhone or Android, this quiz should work on that too.  Report your score here (e.g., 8 out of 10).

6.  Take the online 10-question quiz covering the basic concepts learned in our entire course so far.  If you have a smart phone such as an iPhone or Android, this quiz should work on that too.  Your score is recorded electronically but also include the score as your answer to this question (e.g., 8 out of 10).

===Honors===

===Honors===