Economics Lecture Twelve

Economics Lectures - [1 - 2 - 3 - 4 - 5 - 6 - 7 - 8 - 9 - 10 - 11 - 12 - 13 - 14]

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.

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.

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.

To show you how recent the theories of economics are, the term "rent seeking" behavior was introduced only 40 years ago. It describes actions by firms to increase their prices and obtain economic rent above the free market, competitive price. Such behavior is not good for the public, because it causes a deadweight loss (lost consumer surplus).

With that challenging introduction, let's have our review.