Changes

:In 2008, "the average salary for a federal government employee was $79,197. The average salary for a private employee in the United States was $49,935. ...  Orange County Sheriff Sandra Hutchens earns almost half a million dollars a year between her current salary as sheriff and her pension from the Los Angeles County Sheriff's Department.  And Ms. Hutchens is not alone. Orange County CEO, Tom Mauk also earns close to $500,000 a year with his current salary from the County and his pension from working for La Habra."

:In 2008, "the average salary for a federal government employee was $79,197. The average salary for a private employee in the United States was $49,935. ...  Orange County Sheriff Sandra Hutchens earns almost half a million dollars a year between her current salary as sheriff and her pension from the Los Angeles County Sheriff's Department.  And Ms. Hutchens is not alone. Orange County CEO, Tom Mauk also earns close to $500,000 a year with his current salary from the County and his pension from working for La Habra."

Superintendents of public school districts in New Jersey are paid hundreds of thousands of dollars each year in salaries and pensions.  In electing a new governor of New Jersey who advocates lower taxes, voters may have been wondering what they are getting in return for paying such high taxes.

Superintendents of public school districts in New Jersey are paid hundreds of thousands of dollars each year in salaries and pensions.  Some people in New Jersey voted against Jon Corzine for governor, and elected Chris Christie instead, because they felt it was time to stop the growth in spending by the New Jersey government.

===Honors Example===

===Honors Example===

Consider an example of a government regulator telling a monopoly at which price to sell his goods.  This rarely happens, but public utilities (gas and electric companies) are an example where government must approve any rate increases.

Consider an example of a government regulator telling a monopoly at which price to sell his goods.  This rarely happens, but public utilities (gas and electric companies) are an example where any rate increases must be first reviewed and approved by government before they can go into effect.

Monopolies sell where marginal revenue equals marginal cost, or MR=MC.  But that is at a higher price than if there were perfect competition.  In perfect competition, the goods sell where P=MC, or where the marginal price curve intersects the demand curve.  That is at higher quantity of output than where the marginal cost curve intersects the marginal revenue curve.  Always remember:  the best price point for the public is the price when there is perfect competition, and there is more output at that equilibrium price in the free market.  More output means more benefits to the public, and more consumer surplus.

Monopolies sell where marginal revenue equals marginal cost, or MR=MC.  But that is at a higher price than if there were perfect competition.  In perfect competition, the goods sell where P=MC, or where the marginal price curve intersects the demand curve.  That is at higher quantity of output than where the marginal cost curve intersects the marginal revenue curve.  Always remember:  the best price point for the public is the price when there is perfect competition, and there is more output at that equilibrium price in the free market.  More output means more benefits to the public, and more consumer surplus.

== Review: Price Elasticity of Demand ==

== Review: Price Elasticity of Demand ==

Last class one student asked this question:  what are some example price elasticities of demand?  Recall the cutoff of 1:  price elasticity less than 1 is inelastic, and more than 1 is elastic.  Here are specific examples (price elasticity is always negative due to the Law of Demand, but its absolute (positive) value is used for convenience):

Price elasticity less than 1 is inelastic, and more than 1 is elastic.  Here are specific examples (price elasticity is always negative due to the Law of Demand, but its absolute (positive) value is used for convenience):

*rice in Japan: 0.2 (inelastic because it is a basic food there)

*rice in Japan: 0.2 (inelastic because it is a basic food there)

== Review: Returns to Scale ==

== Review: Returns to Scale ==

Next let's review “returns to scale.”  Imagine using a scale of one foot in measuring the dimensions of a room.  Then change to a scale of inches.  All dimensions increase by a factor of 12, because there are 12 inches to a foot.  That is what “scale” means: it affects everything.  In economics, changing the scale means changing all inputs by the same proportion.  Increasing the scale means increasing all inputs.  The “returns to scale” are then what happens to the output of a company when all inputs are increased.  Is "bigger" better for the business?

Next let's review “returns to scale.”  Imagine using a scale of one foot in measuring the dimensions of a room.  Then change to a scale of inches.  All dimensions increase by a factor of 12, because there are 12 inches to a foot.  That is what “scale” means: it affects everything.  In economics, changing the scale means changing all inputs by the same proportion.  Increasing the scale means increasing all inputs.  The “returns to scale” are then what happens to the output of a company when all inputs are increased.  Is "bigger" more efficient for the business?

The phrase that something is "scalable" means its proportions increase in a similar way in all respects, like "similar triangles" in geometry.  Some things are "scalable", while others are not.  A software database program that works the same for 100 entries as it does for 1 million entries is "scalable"; a program that needs to be reworked and reprogrammed as the database grows larger is not scalable.  One of the terrific features of "wiki" software used by Conservapedia is that it is scalable: almost no adjustments were needed as the number of its entries increase from 1 to 1000 to over 30,000 now, or even to a million entries in the future.

The phrase that something is "scalable" means its proportions increase in a similar way in all respects, like "similar triangles" in geometry.  Some things are "scalable", while others are not.  A software database program that works the same for 100 entries as it does for 1 million entries is "scalable"; a program that needs to be reworked and reprogrammed as the database grows larger is not scalable.  One of the fabulous features of "wiki" software used by Conservapedia is that it is scalable: almost no adjustments were needed as the number of its entries increase from 1 to 1000 to over 30,000 now, or even to a million entries in the future.

“Increasing returns to scale” means that when you increase all the inputs, then your company’s output increases by an even greater proportion.  For example, if you double your inputs then perhaps your output triples.  That would be extremely profitable for your business.  Your costs only double, but your revenue triples.  Your profits skyrocket.  It is a formula for success.

“Increasing returns to scale” means that when you increase all the inputs, then your company’s output increases by an even greater proportion.  For example, if you double your inputs then perhaps your output triples.  That would be extremely profitable for your business.  Your costs only double, but your revenue triples.  Your profits skyrocket.  It is a formula for success.

Meanwhile, there is nothing special about constant returns to scale, which is to be expected.  But decreasing returns to scale is a disaster for a business that is growing.  So is diminishing returns to labor.   

Meanwhile, there is nothing special about constant returns to scale, which is to be expected.  But decreasing returns to scale is a disaster for a business that is growing.  So is diminishing returns to labor.   

''Simple rule'': If "bigger is better," and it is for Wal-Mart, then there are increasing returns to scale.”

''Simple rule'': If "bigger is more efficient," as it is for Wal-Mart, then there are "increasing returns to scale."

What are the returns to the scale for the world population?  It likely has increasing returns to scale.  Twice as many people means more than twice as much output.  Humans are creative, and twice as many humans would probably mean more than twice as many inventions like the light bulb, as people build on the work of others.

What are the returns to the scale for the world population?  It likely has increasing returns to scale.  Twice as many people means more than twice as much output.  Humans are creative, and twice as many humans would probably mean more than twice as many inventions like the light bulb and the iPhone, as people build on the work of others.

===Review: Law of Diminishing Returns===

==Review: Law of Diminishing Returns==

What is the Law of Diminishing Returns?  That is a rule that applies to ONLY ONE input.  It is when a company keeps its assembly line and factor size constant, for example, but keeps hiring more and more of one input, such as labor.  Eventually each added employee will have less and less to do.  The returns on the additional employees decline.  But if all inputs were increased at the same time, then the Law of Diminishing Returns does not apply.  Then it is a question about returns to scale.

What is the Law of Diminishing Returns?  That is a rule that applies to ONLY ONE input.  It is when a company keeps its assembly line and factor size constant, for example, but keeps hiring more and more of one input, such as labor.  Eventually each added employee will have less and less to do.  The returns on the additional employees decline.  But if all inputs were increased at the same time, then the Law of Diminishing Returns does not apply.  Then it is a question about returns to scale.

(a) Law of Demand

(a) Law of Demand

 

<br>(b) Law of Diminishing Returns

(b) Law of Diminishing Returns

<br>(c) Law of Diminishing Marginal Utility

 

<br>(d) Coase Theorem

(c) Law of Diminishing Marginal Utility

 

(d) Coase Theorem

Choices (a) and (d) can be eliminated immediately, but selecting between (b) and (c) is more difficult.  The key here is that “marginal utility” refers to consumer satisfaction, while “returns” refers to output of a company.  The question is geared towards consumer satisfaction, not output by a firm.  It refers to what someone wants, not what a company produces.  The correct answer is therefore (c).

Choices (a) and (d) can be eliminated immediately, but selecting between (b) and (c) is more difficult.  The key here is that “marginal utility” refers to consumer satisfaction, while “returns” refers to output of a company.  The question is geared towards consumer satisfaction, not output by a firm.  It refers to what someone wants, not what a company produces.  The correct answer is therefore (c).

==Assignment==

==Assignment==

Answer 6 out of 7 questions below:

After reading and studying the lecture, answer 6 out of 7 questions below:

1.  In your own words, try to give a better definition of "externalities" than provided by this Lecture.

1.  In your own words, try to give a better definition of "externalities" than provided by this Lecture.

2.  Explain why marginal revenue must be zero when total revenue is maximized.

2.  Explain what "derived demand" is, and provide an example.

3.  What is your favorite question on one of the quizzes that ''you answered incorrectly'', and why is it your favorite?

3.  What is your favorite question on one of the quizzes that ''you answered incorrectly'', and why is it your favorite?

===Honors===

===Honors===

Answer 2 out of the following 3 questions:

Answer 3 out of the following 4 questions:

8.  Mathematically prove (or disprove!) the price elasticity of demand when the equation for demand is P=30/Q.

8.  Explain why marginal revenue must be zero when total revenue is maximized.

9.  Provide, in your own words, the best definition of "public good" that you can.

9.  Provide, in your own words, the best definition of "public good" that you can.

10.  Identify a concept in economics that you found difficult to understand at first, but then explain how you were able to eventually understand it.

10.  Identify a concept in economics that you found difficult to understand at first, but then explain how you were able to eventually understand it.

== References ==

== References ==