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| | There are three lectures remaining, including this one, and then there will be our final exam. As in our last Lecture (#11), we will review some important concepts while also learning some new ones. The review will help you prepare both for the final exam and, if you choose, the CLEP exam. | | There are three lectures remaining, including this one, and then there will be our final exam. As in our last Lecture (#11), we will review some important concepts while also learning some new ones. The review will help you prepare both for the final exam and, if you choose, the CLEP exam. |
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| − | But let's first address a superb question asked by a student in the last class. He wondered whether the "economic rent" (the extra amount charged by a company above its costs, perhaps because it is a monopoly) is the same as the "deadweight loss." The answer is "yes": "economic rent" is a type of deadweight loss. Any time the price of a good is raised above its price in a perfectly competitive market, there will be buyers who will not pay the higher price and thus will lose out on the consumer surplus between the higher price and lower, competitive price. That loss in consumer surplus is a deadweight loss. | + | But let's first address a superb question asked by a student in the last class. He wondered whether the "economic rent" (the extra amount charged by a company above its costs, perhaps because it is a monopoly) is the same as the "deadweight loss" to society. The answer is "yes": "economic rent" is a type of deadweight loss. Any time the price of a good is raised above its price in a perfectly competitive market, there will be buyers who will not pay the higher price and thus will lose out on the consumer surplus between the higher price and lower, competitive price. That loss in consumer surplus is a deadweight loss. |
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| | When the price is increased due to taxes, then both the buyers and the sellers lose out, and there is a deadweight loss that is even greater because it includes both a consumer surplus lost by the buyer and a producer surplus lost by the seller. So while higher prices due to monopolies are bad, higher prices due to taxes are even worse. You could review Lecture 7 and its graph to understand this further. | | When the price is increased due to taxes, then both the buyers and the sellers lose out, and there is a deadweight loss that is even greater because it includes both a consumer surplus lost by the buyer and a producer surplus lost by the seller. So while higher prices due to monopolies are bad, higher prices due to taxes are even worse. You could review Lecture 7 and its graph to understand this further. |
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| | Here are some other common graphical questions: | | Here are some other common graphical questions: |
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| − | *'''''optimal''''' market price: where the supply curve intersects the demand curve, or (for a monopolist that has no supply curve) where MC intersects demand curve (MC=P), as explained above | + | *'''''optimal''''' market price: where the supply curve intersects the demand curve. A monopolist has no supply curve and it sells at MC=MR, which has a price higher than the optimal price of MC=P. |
| | *consumer surplus (the benefit to the consumer where the demand curve is higher than price paid, because the consumers pay less than they were willing to pay, as when you would have paid $15 to see a movie but the charge was only $10: your consumer surplus is $5) | | *consumer surplus (the benefit to the consumer where the demand curve is higher than price paid, because the consumers pay less than they were willing to pay, as when you would have paid $15 to see a movie but the charge was only $10: your consumer surplus is $5) |
| | *deadweight loss: the lost consumer surplus explained above AND (in the case of a tax) the lost producer surplus (benefit to the seller who was willing to produce at a price less than what he sold it for) | | *deadweight loss: the lost consumer surplus explained above AND (in the case of a tax) the lost producer surplus (benefit to the seller who was willing to produce at a price less than what he sold it for) |
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| | == Production Possibilities == | | == Production Possibilities == |
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| − | Nearly 5% of CLEP exam is devoted to questions about "production possibilities." These are easy points to earn toward your total score. | + | Nearly 5% of CLEP exam is devoted to questions about "production possibilities." These are easy points for increasing your total score. |
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| | "Production possibilities, or "Possibilities of production," means all the different combinations of goods a nation can produce. The United States can produce X cars and Y trucks, for example. Or it could produce more than X cars and fewer than Y trucks. We could graph the number of cars on the Y-axis and the number of trucks on the X-axis, and draw a “production possibility” curve through all the possible combinations. It would be downward sloping: more trucks means fewer cars, and vice-versa. The opportunity cost of producing more cars is the loss in production of trucks. In the production possibility curve for cars and boats shown in Figure A (below), the opportunity cost of moving from point A to point B is 100 cars. | | "Production possibilities, or "Possibilities of production," means all the different combinations of goods a nation can produce. The United States can produce X cars and Y trucks, for example. Or it could produce more than X cars and fewer than Y trucks. We could graph the number of cars on the Y-axis and the number of trucks on the X-axis, and draw a “production possibility” curve through all the possible combinations. It would be downward sloping: more trucks means fewer cars, and vice-versa. The opportunity cost of producing more cars is the loss in production of trucks. In the production possibility curve for cars and boats shown in Figure A (below), the opportunity cost of moving from point A to point B is 100 cars. |
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| − | The shape of the production possibilities curve (or "frontier") is dictated by the high opportunity cost of trying to convert a nation's factories from making one type of good to making another type. Imagine having a car factory and a truck factory, and then trying to convert the entire truck factory such that it makes only cars. At a fixed level of expense, the truck factory is not going to be able to make as many cars as the trucks it was designed to make. So converting the nation from, for example, a level of 500 cars and 500 trucks to as many cars as possible will probably not be able to reach a level of 1000 cars and zero trucks. Instead, it will probably top off at a number less than 1000, and hence the tapering of the production possibilities curve near the two axes. | + | The shape of the production possibilities curve (often called the "production possibilities frontier") is dictated by the high opportunity cost of trying to convert a nation's factories from making one type of good to making another type. Imagine having a car factory and a truck factory, and then trying to convert the entire truck factory such that it makes only cars. At a fixed level of expense, the truck factory is not going to be able to make as many cars as the trucks it was designed to make. So converting the nation from, for example, a level of 500 cars and 500 trucks to as many cars as possible will probably not be able to reach a level of 1000 cars and zero trucks. Instead, it will probably top off at a number less than 1000, and hence the tapering of the production possibilities curve near the two axes. |
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| | If the overall number of workers or investment capital increased, then you could produce more of everything. The entire production possibilities graph (or “production possibilities frontier”) would shift upward and to the right. An improvement in technology would have the same effect. An increase in bureaucracy or administrative costs, however, would have the opposite effect, forcing a contraction in overall production. | | If the overall number of workers or investment capital increased, then you could produce more of everything. The entire production possibilities graph (or “production possibilities frontier”) would shift upward and to the right. An improvement in technology would have the same effect. An increase in bureaucracy or administrative costs, however, would have the opposite effect, forcing a contraction in overall production. |