Economics Lecture Ten - Revision history

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 But look more closely.  The next time you’re traveling in a car, take a look at the exhaust pipe on the car in front of you.  Pollution comes out of it.  That harms other people who did not sell or buy the gas.  People who do not drive, or children, are slightly affected by that pollution.  In some poor neighborhoods, it’s customary (and illegal) for car owners to modify their cars so that their engines have higher miles-per-gallon, but produce more pollution.  You can smell the difference when you are stuck behind one of those cars.  Airport taxicabs are notorious for putting out more pollution than the average car.  Airplanes themselves put out substantial pollution at airports as they idle.  In New Jersey, there is now a law against idling one's engine for longer than a few minutes.  At truck stops, truckers are encouraged not to idle their engines for long periods of time, but many do anyway.
-So the buyers and sellers of gas do not pay the full cost.  The public is bearing the small cost of the pollution.  This is an called a “negative externality” because it imposes costs on people who did not buy the good.  A negative externality has a negative effect on others.
+So the buyers and sellers of gas do not pay the full cost.  The public is bearing the small cost of the pollution.  This is called a “negative externality” because it imposes costs on people who did not buy the good.  A negative externality has a negative effect on others.
 Car pollution is often unnoticeable.  But sometimes pollution can be severe and dangerous.  If a company can dump toxic waste into a river for free, then that is going to be cheaper for it than disposing of the waste in proper manner.  The company will make more profits by dumping its waste at less cost to it.  But those who like to swim or fish in the river will suffer the harm.  Either they will have to curtail their activity, interfering with their utility, or they could become sick from it.  Environmental harm is the most obvious type of "negative externality."  Another example of a negative externality is excessive noise at heavy metal rock concerts, which may disturb neighbors who never bought or sold a ticket.
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 == Public good ==
-A “public good” is something, like music in public, that provides a benefit to one person without reducing the benefit to others.  (Let's assume it's ''good'' music!)  One listener does not lose benefit by the presence of other listeners.  Unless earphones are used, it is impossible to exclude others nearby from freely hearing it.  Food, in contrast, is not a public good, because one person can eat an entire meal without allowing others to eat it also!
+A “public good” is something, like music in public, which provides a benefit to one person without reducing the benefit to others.  (Let's assume it's ''good'' music!)  One listener does not lose benefit by the presence of other listeners.  Unless earphones are used, it is impossible to exclude others nearby from freely hearing it.  Food, in contrast, is not a public good, because one person can eat an entire meal without allowing others to eat it also!
 Let's try to define a "public good" in a more rigorous manner.  '''''A "public good" is a good which has indivisible benefits such that others cannot be excluded from the benefit even though they do not pay for it.'''''  Here are some examples:
@@ Line 122: / Line 122: @@
 ===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 any rate increases must be first reviewed and approved by government before they can go into effect.
+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 first be 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.
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 Yet the difficulties in surviving are what make a tree strong.  Each day it grows in two directions: downward further into the soil towards more nutrients, and upwards into the sky towards more sunlight.  Its growth is not easy in either direction.  The more it has to reach for nourishment, the bigger and stronger it becomes.  Trees that are given their nutrients, as in a laboratory, do not grow as large and powerful as trees that must struggle to survive in the wild.
-It is in striving against obstacles that the tree becomes so powerful.  Economics predicts that those who suffer from adversity will often become more successful or productive than those who have it easy, just as is true for trees.  The adversity is what makes one stronger, more motivated and more efficient.  Many of the most successful businessmen in history had very difficult childhoods, and some (like Tom Monahan, founder of Dominos Pizza) even grew up in orphanages.  Poverty was the common background of most successful businessmen.  In contrast, people who have had it easy rarely invent or succeed with their own businesses.
+It is in striving against obstacles that the tree becomes so powerful.  Economics predicts that those who suffer from adversity will often become more successful or productive than those who have it easy, just as is true for trees.  The adversity is what makes one stronger, more motivated and more efficient.  Many of the most successful businessmen in history had very difficult childhoods, and some (like Tom Monahan, founder of Domino's Pizza) even grew up in orphanages.  Poverty was the common background of most successful businessmen.  In contrast, people who have had it easy rarely invent or succeed with their own businesses.
 The Bible contains a similar message: it is through suffering and difficulties that Christianity became so strong.  Many books in the Bible emphasize this, from Daniel to Mark.  Learn to use adversity like an exercise bicycle or weights in order to make you stronger and more successful economically.
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 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 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.
+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.

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 == Public good ==
-A “public good” is something, like music in public, that provides a benefit to one person without reducing the benefit to others.  (Let's assume it's ''good'' music!)  One listener does not lose benefit by the presence of other listeners.  It is impossible to exclude others nearby from freely hearing it.  Food, in contrast, is not a public good, because one person can eat an entire meal without allowing others to eat it also!
+A “public good” is something, like music in public, that provides a benefit to one person without reducing the benefit to others.  (Let's assume it's ''good'' music!)  One listener does not lose benefit by the presence of other listeners.  Unless earphones are used, it is impossible to exclude others nearby from freely hearing it.  Food, in contrast, is not a public good, because one person can eat an entire meal without allowing others to eat it also!
-Let's try to define a "public good" in a more rigorous manner.  '''''A "public good" is a good which has indivisible benefits such that others cannot be excluded from the benefit for not paying.'''''  Here are some examples:
+Let's try to define a "public good" in a more rigorous manner.  '''''A "public good" is a good which has indivisible benefits such that others cannot be excluded from the benefit even though they do not pay for it.'''''  Here are some examples:
 *fire protection
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 Public transportation is not a public good because it is easy to keep people off who do not pay.  But the cost of riding is usually much lower than the true cost, and taxpayers subsidize most of the cost of public transportation.
-Garbage collection in most cities is a public good because voters want all of the garbage collected, whether someone wants to pay for it or not.  But in rural areas, including much of New Jersey, people do pay private for garbage collection.  The small town governments do not pay for it.
+Garbage collection in most cities is a public good because voters want all of the garbage collected, whether someone wants to pay for it or not.  But in rural areas, including much of New Jersey, people do pay privately for garbage collection.  The small town governments do not pay for it.
-''Question'': Are websites on the internet public goods?  Is Conservapedia a public good?  Imagine that!
+''Question'': Are websites on the internet, like ''Conservapedia'', public goods?
 == Private good ==

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 <references/>
 [[Category:Economics lectures]]
 {{DEFAULTSORT: Economics Lecture 10}}

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 :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===
-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.
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 == 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)
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 == 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.
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 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.
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 (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
 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).
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 ==Assignment==
-Answer 6 out of 7 questions below:
+After reading and studying the lecture, answer 6 out of 7 questions below:
 .  In your own words, try to give a better definition of "externalities" than provided by this Lecture.
-.  Explain why marginal revenue must be zero when total revenue is maximized.
+.  Explain what "derived demand" is, and provide an example.
 .  What is your favorite question on one of the quizzes that ''you answered incorrectly'', and why is it your favorite?
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 ===Honors===
-Answer 2 out of the following 3 questions:
+Answer 3 out of the following 4 questions:
-.  Mathematically prove (or disprove!) the price elasticity of demand when the equation for demand is P=30/Q.
+.  Explain why marginal revenue must be zero when total revenue is maximized.
 .  Provide, in your own words, the best definition of "public good" that you can.
 .  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 ==

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 .  Explain why marginal revenue must be zero when total revenue is maximized.
-.  What is your favorite question on the midterm exam that ''you answered incorrectly'', and why is it your favorite?
+.  What is your favorite question on one of the quizzes that ''you answered incorrectly'', and why is it your favorite?
 .  Give an example of a positive externality, and an example of a negative externality.  The example does not have to be limited to a business.
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 ===Honors===
-Answer 3 out of the following 4 questions:
+Answer 2 out of the following 3 questions:
-.  Mathematically prove (or disprove!) the answer to the question on the midterm exam about P=30/Q.
+.  Mathematically prove (or disprove!) the price elasticity of demand when the equation for demand is P=30/Q.
 .  Provide, in your own words, the best definition of "public good" that you can.
-.  Find a question on the midterm that describes a situation that would be unusual in the real world, and explain why the scenario of the question is unrealistic.
+.  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 ==

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 {{Economics_Lectures}}
-At this point we have covered most of what is taught in "Microeconomics", and most of what is on the CLEP exam for college credit.  We have only five lectures left, and then a final exam.
+At this point we have covered most of what is taught in "Microeconomics", and most of what is on the CLEP exam for college credit.  There are still some important topics that we need to cover in the remainder of this course, such as:
 *externalities
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 *capital and banking
-About 10% of the CLEP Microeconomics exam questions are on government policy, a much higher percentage than one would expect for a course about individual market-based decisions.  Also, nearly 5% of the exam asks about "production possibilities," which is not a particularly important concept in Microeconomics.  But we'll cover all these topics so that you will be prepared if you want to take the CLEP and earn college credit.
+About 10% of the CLEP Microeconomics exam questions are on government policy, a higher percentage than one would expect for a course about individual market-based decisions.  Also, nearly 5% of the exam asks about "production possibilities," which is not a particularly important concept in Microeconomics.  But we'll cover all these topics so that you will be prepared if you want to take the CLEP and earn college credit.
 ==Externalities==
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 There is a Latin phrase: "nitor in adversum."  It means "strive in opposition."  It's a good motto.
 ==Assignment==

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 It is obvious what the "demand" for a good is:  it is the desire for the good by the public, in terms of how much the public is willing to pay for it.
-"Derived demand" is a firm's demand for a good.  The firm's demand is "derived from" the public demand for what the firm makes.  "Derived demand" is the demand for "something" by a ''firm'' based on how much that "something" contributes to the finished goods sold by the firm to the public.
+"Derived demand" is a firm's demand for something.  The firm's demand is "derived from" the public demand for what the firm makes.  "Derived demand" is the demand for "something" by a ''firm'' based on how much that "something" contributes to the finished goods sold by the firm to the public.
 Every firm has "factors of production" in making its goods (or services).  There are four basic "factors of production":
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 The owner of a firm looks at its factors of production and must determine the derived demand for each factor, which is known as the "derived factor demand."
-A successful owner of a firm must make decisions about how much of each factor of production he needs.  How much labor?  How much capital (money)?  How much land?  How much entrepreneurship?  To make those decisions in the best way possible, he needs to consider the "derived demand" for each factor:  how much does each factor contribute to the finished goods sold by the firm.  Put another way, what is the public's demand for the output produced by that factor?
+A successful owner of a firm must make decisions about how much of each factor of production he needs.  How much labor?  How much capital (money)?  How much land?  How much entrepreneurship?  To make those decisions in the best way possible, he needs to consider the "derived demand" for each factor:  how much does each factor contribute to the finished goods sold by the firm?  Put another way, what is the public's demand for the output produced by that factor?
-Let's take an example.  Suppose you own a company (a firm).  How many workers should you hire?  Well, to answer that question you need to know what the demand is for your firm's goods, and then determine how much a new worker contributes towards making those goods.  In other words, the number of workers hired depends on the public demand for the goods that the workers helped you produce.
+Let's take an example.  Suppose you own a company (a firm).  How many workers should you hire?  Well, to answer that question you need to know what the demand is for your firm's goods, and then determine how much a new worker contributes towards making those goods.  In other words, the number of workers hired depends on the public demand for the goods that the workers help you produce.
 Your demand for workers (labor) is a "derived demand" because it depends on the demand by the public for the goods your workers make.  The demand by a firm to buy things is "derived from" the public demand for the goods the firm will produce.

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 Illegal drugs create perhaps the largest negative externality.  The transaction is between the drug dealer and the drug addict, but when that drug addict runs out of money due to his habit then he is going to turn to crime.  Soon he will be robbing and even killing people to obtain money to feed his addiction.  The victims of this crime bear the negative externality.
-Libertarians promote a philosophy of "let everyone do what they want."  But that approach ignores the harm caused by negative externalities.  Letting someone get drunk will sometimes result in his driving drunk, and then killing an innocent person who had nothing to do with the purchase and sale of the alcohol.  Should alcohol companies pay for the negative externalities caused by their good?  Should abortion providers pay for the negative externalities caused by abortion?  Many would answer "yes" to both.
+Libertarians promote a philosophy of "let everyone do what they want."  But that approach ignores the harm caused by negative externalities.  Letting someone get drunk will sometimes result in his driving drunk, and then killing an innocent person who had nothing to do with the purchase and sale of the alcohol.  Should alcohol companies pay for the negative externalities caused by their good?  Many would say "yes".  Should abortionists and Planned Parenthood pay damages for the enormous and lifelong negative externalities caused by abortion?  Many would answer "yes" to that also.
 Let's consider what can be done about positive and negative externalities.  It is desirable to eliminate or minimize the negative externalities, so that sellers bear all the costs of their production and sales.  How can they be required to pay all of their costs, rather than pushing those costs onto the public?
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 “Public choice theory” recognizes that self-interested politicians can act contrary to public interest.  Politicians are known to maximize their own interests, such as their own relative salaries and pensions and control over others, in setting tax policy, rather than maximizing public interests.
-Remember the economist Ronald Coase?  He would say that the reason for externalities is transaction costs.  If it were practical to give everyone a right to be free from pollution, and then allow them to sell it without incurring transaction costs, then pollution would become a good that is bought and sold like any other good and it would no longer be a negative externality.  Most people would accept small payments from Exxon and other oil companies in exchange for accepting a little pollution to their lives, if transaction costs weren’t larger than the payments.  We would not need additional taxes on gasoline by an inefficient government.
+Remember the economist Ronald Coase?  He would say that the reason for externalities is transaction costs.  If it were practical to give everyone a right to be free from pollution, and then allow them to sell it without incurring transaction costs, then pollution would become a good that is bought and sold like any other good and it would no longer be a negative externality.  Most people would accept small payments from Exxon and other oil companies in exchange for allowing a little pollution in their lives, if transaction costs weren’t larger than the payments.  We would not need additional taxes on gasoline by an inefficient government.
 === Positive Externalities===
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 :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 who advocates lower taxes, voters may have been wondering what they are getting in return for paying such high taxes in New Jersey.
+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.
 ===Honors Example===

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 .  Mathematically prove (or disprove!) the answer to the question on the midterm exam about P=30/Q.
-.  Provide the best explanation of "public good" that you can.
+.  Provide, in your own words, the best definition of "public good" that you can.
-.  Find a question on the midterm that describes an unusual situation in the real world, and explain why the scenario of the question is unrealistic.
+.  Find a question on the midterm that describes a situation that would be unusual in the real world, and explain why the scenario of the question is unrealistic.
-.  Revisit the problem on the midterm about the price ceiling (with the graph), which asked how much the shortage would be.  Provide the correct answer and explain why.  (If you answered it correctly, then provide a similarly difficult substitute for this.)
+.  Revisit the problem on the midterm about the price ceiling (with the graph), which asked how much the shortage would be.  Provide the correct answer and explain why.  (If you answered it correctly, then provide a similarly difficult substitute question for this.)
 == References ==