Consumer and Producer Surplus Transactions and their Contents

The Game Plan ● Review ● Producer and Consumer Surplus + Price Controls ● Quiz

Announcements:

Problem Set due Friday

Problem Set 2 due the following Friday→ will be posted before this Friday

Chapter 1: First Principles Be sure to: Understand concepts and how the principles are illustrated in life → Understand Problem Set and In-class practice problems

P1: Choices are Necessary because Resources Are Scarce. Key Ideas: Scarcity & Resources

P2: True Cost = Opportunity Cost Key Ideas: Implict + Explicit Cost

P3: “How much” is a decision at the margin. Key Ideas: Marginal Analysis

P4: People usually respond to incentives. Key Ideas: Unintended Consequences and Goals vs. Mechanics

P5: There are gains from Trade & Specialization Key Ideas: Focusing on a narrow task increases production

Principles, continued.

P6: Markets move towards equilibrium Key Ideas: Command vs. Market Economy

P7: Resources should be used efficiently to achieve society’s goals. Key Ideas: Allocative & Productive Efficiency

Normative & Positive Economics P8: Markets generally lead to efficiency

Key Ideas: The Invisible Hand P9: When markets don’t achieve efficiency, government intervention can improve society’s welfare

Key Ideas: Market Failure

What economic principle is represented in these examples?

1. Johnny and Madison run a clothing factory. Johnny is a really great at producing shirts. Madison is great at making pants. They agree to have Johnny make all the shirts and Madison make all the pants.

a. Gains from Specialization

2. A doctor is told that rather than receiving the same salary, they’ll instead receive a smaller base salary plus a commission based upon the amount of tests and prescriptions they provide. The doctor responds by prescribing more drugs and running more tests.

a. People usually respond to incentives 3. Companies pollute beyond what is ideal for society because the cost of pollution to them is less than the

cost of pollution for society as a whole. The local government taxes carbon emissions in order to provide a better level of pollution.

a. When markets don’t achieve efficiency, government intervention can improve society’s welfare 4. You go for a run. Near the end of each mile, you decide whether or not you think that an additional mile is

going to improve your health/mood/day enough to be worth the additional effort and loss of time. a. How much is a decision at the margin

5. A marketplace opens up in Lima, Peru and a group of people set up shop selling the same touristy items. Though initially the prices vary throughout the market, eventually everyone is selling their products at the same price– and no one has any reason to adjust the price.

a. Markets move towards equilibrium

Practice Questions

1. What’s an explicit and implicit cost of going on vacation? a. Explicit → paying for the flight Implicit → how else you could have spent the time

2. Suppose we can’t produce any more of one good without producing less of a different good. Are we being allocatively efficient? a. Not necessarily. We are, however, being productively efficient.

3. Is “The US should have universal healthcare” a positive or a normative statement? a. Normative — it’s a prescription of how the economy ought to operate.