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Line 113: − − ==Three basic principles of economics== − − We can now state the three most basic principles of economics with respect to price: − − *A rise in price tends to increase supply and decrease demand. Conversely a fall in price tends to decrease supply and increase demand. '''LOWER PRICE MEANS HIGHER DEMAND''' − − *When demand exceeds supply at a given price, the price tends to rise. Likewise, when supply exceeds demand, the price tends to decrease. − − *Price tends to move towards the amount at which the quantity in demand is equal to the quantity in supply: '''EQUILIBRIUM IS WHERE SUPPLY EQUALS DEMAND'''. − − Many of the problems in this course, and in any economics course, can be answered just by remembering and applying the above there principles about price. − − == Imbalance in Information == − − Imbalances in information are a reason for the delay in pricing to reach equilibrium. Buyers do not immediately realize when they can obtain the same good more cheaply another way. For many years people continued to pay high costs for renting telephones after it became legal to buy inexpensive ones. The effects of competition are not often felt overnight. A lower-priced competitor has to educate the public of the availability of its goods, and that takes time. − − There is also a more permanent imbalance in information between the buyer and seller of a good. The seller always knows more about his good than the buyer does. The seller does not want to disclose the disadvantages, weaknesses, defects, and outright dangers of his good. The buyer has to beware in paying money to the seller for a good: caveat emptor (Latin for “let the buyer beware”). − − Tobacco companies did not want to disclose that cigarettes cause cancer. [[Abortion]] providers do not want to disclose that [[abortion]]s can cause infertility (inability to have children) or severe premature birth and health problems in future children, breast cancer, and psychological problems. There would be far fewer abortions if full disclosure of their harm were made prior to performing the service, and if taxpayer money was not used to fund the service. − − Disclosure of harm is a problem for used car dealers who do not want to tell buyers that a car is a lemon (i.e., constantly needs fixing). Food manufacturers do not want to disclose all the fat and artificial ingredients in their products. − − Governmental regulations require some of these disclosures (but not for abortion in New Jersey, which is one reason why New Jersey has more abortions than other states that do require full disclosures). Mandatory disclosure about goods and services may be the best and only effective type of governmental regulation. Food packaging now must state what the ingredients are and how much fat is contained. The buyer doesn’t have to guess about this information. The buyer must still beware, but can do so with more information than before.
Economics Lecture Two (view source)
Revision as of 12:04, September 5, 2009
, 12:04, September 5, 2009move to next lecture
When there is perfect competition, then the ultimate equilibrium is when the marginal revenue to the seller (the extra dollar that he charges) equals his marginal cost in producing the good (the extra dollar he pays). At that point his marginal profit (the extra dollar that he can keep after paying his costs) has fallen to zero and he has no incentive to produce any more goods. In other words, the supplier keeps producing more and more goods until its marginal profit on each extra good falls to very close to zero. That profit decline may be because the goods are not selling as quickly or due to unsold goods. For example, the first SUV produced by Ford may sell at a high price, but its last SUV in a given year will have to be discounted heavily. Ford doesn’t want to make any more SUVs in a given year that it might have to take a loss on. It produces just enough so that marginal revenue falls to marginal cost, as best as can be predicted. Do not worry if you do not completely understand this last paragraph, as we'll discuss this in greater detail in a future lecture.
When there is perfect competition, then the ultimate equilibrium is when the marginal revenue to the seller (the extra dollar that he charges) equals his marginal cost in producing the good (the extra dollar he pays). At that point his marginal profit (the extra dollar that he can keep after paying his costs) has fallen to zero and he has no incentive to produce any more goods. In other words, the supplier keeps producing more and more goods until its marginal profit on each extra good falls to very close to zero. That profit decline may be because the goods are not selling as quickly or due to unsold goods. For example, the first SUV produced by Ford may sell at a high price, but its last SUV in a given year will have to be discounted heavily. Ford doesn’t want to make any more SUVs in a given year that it might have to take a loss on. It produces just enough so that marginal revenue falls to marginal cost, as best as can be predicted. Do not worry if you do not completely understand this last paragraph, as we'll discuss this in greater detail in a future lecture.
==Example: the National Debate over Health Care==
==Example: the National Debate over Health Care==