Key Terms:
Imports
Exports
Specialization
Voluntary trade
Exchange rate
Comparative advantage
Balance of trade
Balance of Payments
Lesson Objectives
Although the transactions are more complex, the essential characteristics of international trade are identical to those of domestic trade.
Trade agreements, the rights and regulations that govern trade, are made by nations, but nations don't trade; individuals do.
Voluntary trade will not occur unless both parties anticipate that they will benefit from the exchange.
As in domestic trade, voluntary international trade encourages specialization and interdependence.
Increased international trade means greater production overall, greater specialization in production at lower cost, and higher average welfare for the citizens of both trading nations.
Trade protection policies have consequences (both costs and benefits) throughout the economy: for consumers, for workers in protected industries, and for workers in other industries.
The "trade costs jobs" argument is shortsighted, tending to focus on how trade impacts import-competing industries and to ignore the impact on export-producing industries.
NAFTA and GATT are examples of international agreements to reduce barriers to trade among nations.
Currency exchange rates result from supply-demand decisions.
Currency exchange rates reflect the expected relative purchasing power of national currencies; that is, they are determined by the supply of and demand for the currencies at home and by foreigners.
The subjective term "weak dollar" is sometimes used to indicate a perceived low demand for U.S. dollars relative to the demand for other currencies.
The subjective term "strong dollar" is sometimes used to indicate a perceived high demand for U.S. dollars relative to the demand for other currencies.
The "balance of trade" usually refers to the difference between a nation's merchandise exports and its merchandise imports; as such it is only one component of a nation's "balance of payments."
A trade deficit exists when the value of merchandise and services imported exceeds the value of merchandise and services exported.
A trade surplus exists when the value of merchandise and services exported exceeds the value of merchandise and services imported.
A deficit or surplus in merchandise and services will be exactly balanced by a surplus or deficit in financial assets.
When all exchanges (merchandise, services, and capital) are taken into account, financial flows always balance.
1. Suppose that, in exasperation over never-ending trade negotiations, the United States unilaterally removes ALL barriers to trade with Japan; (all tariffs, all duties, all quotas, all reciprocal agreements), and declares all our markets open to Japanese products, regardless of whether or not the Japanese follow suit.
Analyze the market for a specific product, predicting both short and long-term effects and the consequences for both an individual U.S. businessman and for the economy as a whole.
Do the same for a Japanese businessman and the Japanese economy.
Remember the chain of cause-and-effect as far as you can.
Definitions
Balance of payments - A record of all the financial transactions between a country and the rest of the world in a given year. It includes, in addition to the balance of trade, all other foreign exchange, such as the selling or purchase of bonds, stock, land, buildings, and businesses.
Balance of trade - A deficit or surplus in a country's merchandise trade with other nations; a comparison of the value of total exports to the value of imports.
Comparative advantage - The advantage in production of a good or service held by the producer whose relative opportunity cost of producing that good is lower than his trading partner's.
Exchange rate - The price of one country's currency in terms of another.
Exports - Goods, services, and resources produced in one country and sold to individuals and firms in another country.
Imports - Purchases by individuals and firms in one country of goods, services, and resources produced in another.
Voluntary trade - Exchange in which both parties choose to participate because they anticipate benefits.
Thursday, October 2, 2008
Monday, September 15, 2008
Actions of Government
Key Terms:
* Incentives
* Public choice theory
* Rational ignorance
* National Debt
* Taxes
* Government spending
* Budget deficit
* Gross Domestic Product (GDP)
Lesson Objectives
Economic reasoning helps us to answer the question of what things we should want and expect government to do: Government should do those things which it can do better than people can do without government. One criterion for determining what government should do is to consider whether the situation involves the free rider temptation. - The free-rider problem refers to situations in which non-payers cannot be excluded from benefits. Examples include national defense, street paving, fire protection, etc. - Coercion (by government) can overcome the problem by ensuring that all beneficiaries bear part of the cost. Like decision-makers in the market, public servants respond to incentives. Incentives in the political process may be different than those of the market. Elected public officials face different incentives than career government employees. The history of the federal budget deficit is a striking example of the disproportionate influence of special interest groups, who typically want increases in spending and/or reductions in taxes. Historically, balanced budgets were characteristic of American government until the Great Depression. In the years following the Depression, deficit spending has been the more common practice.
Farmers make up only 3% of the American population. Use public choice theory to explain why Congress consistently votes to continue farm price supports and subsidy programs that provide benefits to relatively few Americans and impose costs on many?
Definitions
Budget deficit - The condition that exists when, in any given year, the federal government's expenditures exceed the total of taxes, fees, gifts and other payments. The deficit is bond-financed and adds to the national debt.
Gross Domestic Product (GDP) - The final value of all goods and services produced within the domestic boundaries of the United States in a year.
Incentives - Rewards or punishments for behavior.
National debt - The cumulative total of past deficits and surpluses, financed by the issuance of interest-bearing securities. the debt is owed to the holders of such government securities.
Public choice theory - The application of economic analysis to the political arena made possible by the realization that elected officials, like private citizens, are motivated by self-interest. Officials whose self-interest lies in re-election are especially sensitive to the desire of special interest groups because of their ability to influence election outcomes through financial contributions and voter participation.
Taxes - Compulsory payments by individuals and businesses to government.
* Incentives
* Public choice theory
* Rational ignorance
* National Debt
* Taxes
* Government spending
* Budget deficit
* Gross Domestic Product (GDP)
Lesson Objectives
Economic reasoning helps us to answer the question of what things we should want and expect government to do: Government should do those things which it can do better than people can do without government. One criterion for determining what government should do is to consider whether the situation involves the free rider temptation. - The free-rider problem refers to situations in which non-payers cannot be excluded from benefits. Examples include national defense, street paving, fire protection, etc. - Coercion (by government) can overcome the problem by ensuring that all beneficiaries bear part of the cost. Like decision-makers in the market, public servants respond to incentives. Incentives in the political process may be different than those of the market. Elected public officials face different incentives than career government employees. The history of the federal budget deficit is a striking example of the disproportionate influence of special interest groups, who typically want increases in spending and/or reductions in taxes. Historically, balanced budgets were characteristic of American government until the Great Depression. In the years following the Depression, deficit spending has been the more common practice.
Farmers make up only 3% of the American population. Use public choice theory to explain why Congress consistently votes to continue farm price supports and subsidy programs that provide benefits to relatively few Americans and impose costs on many?
Definitions
Budget deficit - The condition that exists when, in any given year, the federal government's expenditures exceed the total of taxes, fees, gifts and other payments. The deficit is bond-financed and adds to the national debt.
Gross Domestic Product (GDP) - The final value of all goods and services produced within the domestic boundaries of the United States in a year.
Incentives - Rewards or punishments for behavior.
National debt - The cumulative total of past deficits and surpluses, financed by the issuance of interest-bearing securities. the debt is owed to the holders of such government securities.
Public choice theory - The application of economic analysis to the political arena made possible by the realization that elected officials, like private citizens, are motivated by self-interest. Officials whose self-interest lies in re-election are especially sensitive to the desire of special interest groups because of their ability to influence election outcomes through financial contributions and voter participation.
Taxes - Compulsory payments by individuals and businesses to government.
Monday, September 8, 2008
Inflation and Money
Key Terms:
* Inflation
* Money
* Consumer Price Index
* Money supply
* Interest rate
* Federal Reserve System
* Discount rate
* Monetary Policy
* Open market operations
* Reserve requirement
Lesson Objectives
Inflation is a general increase in the level of prices throughout the economy.
The most widely recognized measure of inflation is the Consumer Price Index.
The incentive to save diminishes as inflation erodes the value of savings accounts and fixed incomes.The incentive to spend and to accumulate debt increases as consumers act in anticipation of rising prices and wages.Inflation creates additional uncertainty. Predicting the future is more risky and mistakes are more costly.
Long-term and/or expected inflation may cause individuals and firms to alter their behaviors in response to anticipated changes.
* Interest rates rise to cover the expected inflation rate.
* Investors search for "inflation proof" investments.
* Unions demand cost-of-living clauses in contracts.
Inflation rarely occurs except as a consequence of rapid increases in a society's stock of money.
The Federal Reserve System, an agency independent of but established by the federal government, controls the stock of money in the United States through monetary policy.
The Fed enacts monetary policy by changing the discount rate, by changing the reserve requirement, and/or through open market operations.
The Fed often faces political pressures from government, private interests, and the media to follow policies that cause the money stock to grow too rapidly for price stability.
Calculate the potential impact of inflation using this scenario.
Suppose that your parents saved $50/month for your college education, beginning in the month you were born. A wise investment counselor has managed to earn about $5,000 with that money over the last 16 years. It currently costs about $5,000/year to attend your local state university. Inflation is heating up and is expected to run 5%/year. Will you have enough money to go to college?
Definitions
Consumer Price Index (CPI) - The most commonly used measure of inflation, calculated by comparing the price of a designated "market basket" of goods and services in the current year to its price in a base year. The CPI is compiled by the U.S. Bureau of Labor Statistics.
Discount rate - the interest rate charged to member banks on funds borrowed from the Federal Reserve.
Federal Reserve System - The "Fed" was created by Congress as an independent agency in 1913. It serves as the nation's central banking organization; its functions include processing checks, serving as the government's banker, and controlling the rate of growth of the money supply.
Incentives - Rewards or punishments for behavior.
Inflation - An increase in the overall level of prices over an extended period of time.
Interest rate - The price paid for borrowing or saving money.
Money - The accepted common medium of exchange for goods and services in the marketplace that functions as the unit of account, a means of deferred payment, and a store of value.
Money supply - The narrowest definition of the money supply includes all paper bills and coins in circulation, currency, travelers checks, and checkable deposits (Ml). A broader definition, M2, includes Ml plus such near moneys as time and savings deposits, money market mutual fund balances and Eurodollars.
Open market operations - The buying and selling of government securities by the Federal Reserve System.
Reserve requirement-- The requirement by the Federal Reserve that banks hold a minimum percentage of deposits on reserve, unavailable for lending.
* Inflation
* Money
* Consumer Price Index
* Money supply
* Interest rate
* Federal Reserve System
* Discount rate
* Monetary Policy
* Open market operations
* Reserve requirement
Lesson Objectives
Inflation is a general increase in the level of prices throughout the economy.
The most widely recognized measure of inflation is the Consumer Price Index.
The incentive to save diminishes as inflation erodes the value of savings accounts and fixed incomes.The incentive to spend and to accumulate debt increases as consumers act in anticipation of rising prices and wages.Inflation creates additional uncertainty. Predicting the future is more risky and mistakes are more costly.
Long-term and/or expected inflation may cause individuals and firms to alter their behaviors in response to anticipated changes.
* Interest rates rise to cover the expected inflation rate.
* Investors search for "inflation proof" investments.
* Unions demand cost-of-living clauses in contracts.
Inflation rarely occurs except as a consequence of rapid increases in a society's stock of money.
The Federal Reserve System, an agency independent of but established by the federal government, controls the stock of money in the United States through monetary policy.
The Fed enacts monetary policy by changing the discount rate, by changing the reserve requirement, and/or through open market operations.
The Fed often faces political pressures from government, private interests, and the media to follow policies that cause the money stock to grow too rapidly for price stability.
Calculate the potential impact of inflation using this scenario.
Suppose that your parents saved $50/month for your college education, beginning in the month you were born. A wise investment counselor has managed to earn about $5,000 with that money over the last 16 years. It currently costs about $5,000/year to attend your local state university. Inflation is heating up and is expected to run 5%/year. Will you have enough money to go to college?
Definitions
Consumer Price Index (CPI) - The most commonly used measure of inflation, calculated by comparing the price of a designated "market basket" of goods and services in the current year to its price in a base year. The CPI is compiled by the U.S. Bureau of Labor Statistics.
Discount rate - the interest rate charged to member banks on funds borrowed from the Federal Reserve.
Federal Reserve System - The "Fed" was created by Congress as an independent agency in 1913. It serves as the nation's central banking organization; its functions include processing checks, serving as the government's banker, and controlling the rate of growth of the money supply.
Incentives - Rewards or punishments for behavior.
Inflation - An increase in the overall level of prices over an extended period of time.
Interest rate - The price paid for borrowing or saving money.
Money - The accepted common medium of exchange for goods and services in the marketplace that functions as the unit of account, a means of deferred payment, and a store of value.
Money supply - The narrowest definition of the money supply includes all paper bills and coins in circulation, currency, travelers checks, and checkable deposits (Ml). A broader definition, M2, includes Ml plus such near moneys as time and savings deposits, money market mutual fund balances and Eurodollars.
Open market operations - The buying and selling of government securities by the Federal Reserve System.
Reserve requirement-- The requirement by the Federal Reserve that banks hold a minimum percentage of deposits on reserve, unavailable for lending.
Monday, September 1, 2008
Labor Markets
Key Terms
* Employment
* Marginal costs
* Income
* Unemployment
* Marginal benefits
* Labor supply
Lesson Objectives
In competitive labor markets, wages and benefits are determined by the supply and demand for labor. Employers' decisions reflect the opportunity cost of hiring one worker over another or of using labor rather than other resources like capital.
The demand for any particular worker is determined by employers estimates of his/her productivity. Economic fluctuations may create conditions in which some workers are unable to secure employment.
The U.S. government defines the unemployment rate as the percent of the labor force not working. By government definition, the "labor force" consists of those non-institutionalized individuals 16 years or older, who are working or actively seeking work.The U.S. government defines the employment rate as the percent of the non-institutionalized population over the age of 16 that is currently employed. The employment rate and the unemployment rate can be rising at the same time.
Government policies may impact the labor market by changing the incentives facing employers and/or workers.Trade policies, minimum wage, and other legislation affect employment both in the U.S. and abroad.
Recent legislation and laws currently being discussed include mandated employee benefits - benefits that the law requires employers to provide for their employees, regardless of how much the benefits are valued by employees. Some examples of currently mandated federal or state benefits are up to 12 weeks a year of unpaid, job-protected leave, with medical. Benefits for childbirth, adoption, or illness of the employee or family member. Protection against application of a mandatory retirement age and a minimum legal wage. An application to part-time employees of all benefits provided to full-time employees. "Reasonable accommodations" to a job or workplace to enable a person with a disability to perform a job.
1. Predict the effects of mandated employee benefits.
2. Is this ever in the interests of employers to provide any benefits?
3. Is it always in the interests of employees to have fringe benefits?
4. What groups would you expect to be better off as a result of mandated benefits and what groups would you expect to be worse off?
Definitions
Income - Rent, salaries, wages, interest, and profit; payment received by the owners of resources when those resources are used to make goods and services.
Labor supply - The numbers of individuals willing to work for various wages at a given point in time.
Marginal benefit - The increase in total benefit that results from producing, purchasing, or consuming an additional unit.
Marginal cost - The increase in total cost that results from producing an additional unit.
Unemployment - Term describing the condition of those non-institutionalized individuals, over the age of 16, who are actively seeking jobs and unable to find them.
* Employment
* Marginal costs
* Income
* Unemployment
* Marginal benefits
* Labor supply
Lesson Objectives
In competitive labor markets, wages and benefits are determined by the supply and demand for labor. Employers' decisions reflect the opportunity cost of hiring one worker over another or of using labor rather than other resources like capital.
The demand for any particular worker is determined by employers estimates of his/her productivity. Economic fluctuations may create conditions in which some workers are unable to secure employment.
The U.S. government defines the unemployment rate as the percent of the labor force not working. By government definition, the "labor force" consists of those non-institutionalized individuals 16 years or older, who are working or actively seeking work.The U.S. government defines the employment rate as the percent of the non-institutionalized population over the age of 16 that is currently employed. The employment rate and the unemployment rate can be rising at the same time.
Government policies may impact the labor market by changing the incentives facing employers and/or workers.Trade policies, minimum wage, and other legislation affect employment both in the U.S. and abroad.
Recent legislation and laws currently being discussed include mandated employee benefits - benefits that the law requires employers to provide for their employees, regardless of how much the benefits are valued by employees. Some examples of currently mandated federal or state benefits are up to 12 weeks a year of unpaid, job-protected leave, with medical. Benefits for childbirth, adoption, or illness of the employee or family member. Protection against application of a mandatory retirement age and a minimum legal wage. An application to part-time employees of all benefits provided to full-time employees. "Reasonable accommodations" to a job or workplace to enable a person with a disability to perform a job.
1. Predict the effects of mandated employee benefits.
2. Is this ever in the interests of employers to provide any benefits?
3. Is it always in the interests of employees to have fringe benefits?
4. What groups would you expect to be better off as a result of mandated benefits and what groups would you expect to be worse off?
Definitions
Income - Rent, salaries, wages, interest, and profit; payment received by the owners of resources when those resources are used to make goods and services.
Labor supply - The numbers of individuals willing to work for various wages at a given point in time.
Marginal benefit - The increase in total benefit that results from producing, purchasing, or consuming an additional unit.
Marginal cost - The increase in total cost that results from producing an additional unit.
Unemployment - Term describing the condition of those non-institutionalized individuals, over the age of 16, who are actively seeking jobs and unable to find them.
Monday, August 25, 2008
Externalities and Property Rights
Key Terms:
Externality
Property rights
Transaction costs
Cost/benefit analysis
Tragedy of the commons
Lesson Objectives
Externalities, also know as spillovers or neighborhood effects, are any costs or benefits of production and exchange that are not taken into account by those who create the costs or benefits. Examples of positive externalities include the benefits to passersby of a beautiful garden on a busy street, or the safer neighborhood for others that results from some residents hiring private security patrols. Examples of negative externalities include an unmowed lawn in a suburban neighborhood, or automobile exhaust, or second-hand cigarette smoke. Cooperation becomes more difficult and markets operate less efficiently when externalities exist, because individuals have no incentive to take into account the consequences of their actions for other people.
The "Tragedy of the commons" refers to the lack of incentive to husband resources (like fish in a public lake) that are owned by everyone, and thus by no one (until they are caught). Defining property rights more satisfactorily enables market processes to encourage productive cooperation instead of waste and conflict, as is demonstrated by the case of the African elephant or the use of pollution tax credits to reduce sulfur-dioxide emissions.
Compare situations where a tragedy of the commons exists to situations in which property rights are clearly defined and well-secured.
1. Consider the typical high school cafeteria. Why are most of the tables dirty and surrounded by trash, while the senior section is relatively clean?
2. Why is there graffiti on the walls of the school bathrooms, but not on the walls of your bathroom at home?
3. Why do you suppose that there are many people moving freely around the park, there is little visible trash, and the bathrooms are clean at Disney World, while at Yellowstone National Park, roads are congested and trash barrels often overflow?
Definitions
Cost/benefit analysis - A comparison of the costs and benefits of a choice in an effort to select alternatives that maximize the difference between benefits and costs.
Externalities - The cost and/or benefits that are not internalized by the processes of production and exchange, and which therefore spill over onto third parties. Externalities may be positive or negative. (Also known as spillovers or neighborhood effects.)
Property rights - The conditions of ownership, including the rights and restrictions regarding use, ownership, and sale.
Tragedy of the commons - Describes the phenomenon of overuse of resources held in common (i.e. by the "public" or by government) that occurs because the failure to adequately define property rights means that no one has an incentive to conserve or maintain the resource and all have an incentive to use the resource before others do.
Transaction costs - The resources (like time and energy) that are used in making an exchange. An example of a transaction cost is time spent shopping or the time and energy necessary to negotiate a contract.
Externality
Property rights
Transaction costs
Cost/benefit analysis
Tragedy of the commons
Lesson Objectives
Externalities, also know as spillovers or neighborhood effects, are any costs or benefits of production and exchange that are not taken into account by those who create the costs or benefits. Examples of positive externalities include the benefits to passersby of a beautiful garden on a busy street, or the safer neighborhood for others that results from some residents hiring private security patrols. Examples of negative externalities include an unmowed lawn in a suburban neighborhood, or automobile exhaust, or second-hand cigarette smoke. Cooperation becomes more difficult and markets operate less efficiently when externalities exist, because individuals have no incentive to take into account the consequences of their actions for other people.
The "Tragedy of the commons" refers to the lack of incentive to husband resources (like fish in a public lake) that are owned by everyone, and thus by no one (until they are caught). Defining property rights more satisfactorily enables market processes to encourage productive cooperation instead of waste and conflict, as is demonstrated by the case of the African elephant or the use of pollution tax credits to reduce sulfur-dioxide emissions.
Compare situations where a tragedy of the commons exists to situations in which property rights are clearly defined and well-secured.
1. Consider the typical high school cafeteria. Why are most of the tables dirty and surrounded by trash, while the senior section is relatively clean?
2. Why is there graffiti on the walls of the school bathrooms, but not on the walls of your bathroom at home?
3. Why do you suppose that there are many people moving freely around the park, there is little visible trash, and the bathrooms are clean at Disney World, while at Yellowstone National Park, roads are congested and trash barrels often overflow?
Definitions
Cost/benefit analysis - A comparison of the costs and benefits of a choice in an effort to select alternatives that maximize the difference between benefits and costs.
Externalities - The cost and/or benefits that are not internalized by the processes of production and exchange, and which therefore spill over onto third parties. Externalities may be positive or negative. (Also known as spillovers or neighborhood effects.)
Property rights - The conditions of ownership, including the rights and restrictions regarding use, ownership, and sale.
Tragedy of the commons - Describes the phenomenon of overuse of resources held in common (i.e. by the "public" or by government) that occurs because the failure to adequately define property rights means that no one has an incentive to conserve or maintain the resource and all have an incentive to use the resource before others do.
Transaction costs - The resources (like time and energy) that are used in making an exchange. An example of a transaction cost is time spent shopping or the time and energy necessary to negotiate a contract.
Sunday, August 17, 2008
Incentives, Profit and the Entrepreneur
Key Terms
* Profit
* Competition
* Property rights
* Incentives
* Entrepreneur
* Residual claimant
* Resource allocation
Lesson Objectives
Profit is an incentive; it motivates entrepreneurs to accept the risk of acquiring and organizing resources to seek market opportunities.
The expectation of profit encourages increases in production and attracts new suppliers; lack of profit signals businesses to reduce production or exit the market.
Competition, including entry of new businesses, reduces margins of profit and encourages an on-going search for improved products and lower-cost methods of production.
Governments encourage entrepreneurial activity when they secure clear property rights and protect freedom of exchange.
When there is no residual claimant, there is less incentive to reduce the costs of providing goods and services or to improve product quality and service.
1. Differentiate between accounting profit and economic profit.
2. Suppose that, many people are angry about the profiteering of drug companies, a bill has been introduced to have one company take over the production of all drugs.
Predict the result of such legislation:
a) What will happen to the price of drugs?
b) Who will pay?
c) How will we decide which drugs will be produced?
d) What will happen to the discovery of new, safe, and effective drugs?
e) How will decisions be made about which diseases drug research should target?
Definitions
Entrepreneur - One who is willing to risk loss in the attempt to make a profit from reorganizing market resources from low-valued to high valued uses. Entrepreneurs undertake the task of coordinating the employment of land, labor, and capital to produce goods and services.
Incentives - Rewards or punishments for behavior.
Profit - The difference between total revenue and total cost.
Property rights - The conditions of ownership, including the rights and restrictions regarding use, ownership, and sale.
Residual claimant - The owner of whatever is left (either profit or loss) when all the costs of production and sale have been accounted for. Entrepreneurs, by virtue of their willingness to risk failure, are the residual claimants to the profits of their enterprises.
Resource allocation - The method(s) used to determine ownership (property rights) to land, labor, and capital.
* Profit
* Competition
* Property rights
* Incentives
* Entrepreneur
* Residual claimant
* Resource allocation
Lesson Objectives
Profit is an incentive; it motivates entrepreneurs to accept the risk of acquiring and organizing resources to seek market opportunities.
The expectation of profit encourages increases in production and attracts new suppliers; lack of profit signals businesses to reduce production or exit the market.
Competition, including entry of new businesses, reduces margins of profit and encourages an on-going search for improved products and lower-cost methods of production.
Governments encourage entrepreneurial activity when they secure clear property rights and protect freedom of exchange.
When there is no residual claimant, there is less incentive to reduce the costs of providing goods and services or to improve product quality and service.
1. Differentiate between accounting profit and economic profit.
2. Suppose that, many people are angry about the profiteering of drug companies, a bill has been introduced to have one company take over the production of all drugs.
Predict the result of such legislation:
a) What will happen to the price of drugs?
b) Who will pay?
c) How will we decide which drugs will be produced?
d) What will happen to the discovery of new, safe, and effective drugs?
e) How will decisions be made about which diseases drug research should target?
Definitions
Entrepreneur - One who is willing to risk loss in the attempt to make a profit from reorganizing market resources from low-valued to high valued uses. Entrepreneurs undertake the task of coordinating the employment of land, labor, and capital to produce goods and services.
Incentives - Rewards or punishments for behavior.
Profit - The difference between total revenue and total cost.
Property rights - The conditions of ownership, including the rights and restrictions regarding use, ownership, and sale.
Residual claimant - The owner of whatever is left (either profit or loss) when all the costs of production and sale have been accounted for. Entrepreneurs, by virtue of their willingness to risk failure, are the residual claimants to the profits of their enterprises.
Resource allocation - The method(s) used to determine ownership (property rights) to land, labor, and capital.
Sunday, August 10, 2008
Markets in Action
Key Terms
* Demand
* Exchange
* Transaction costs
* Supply
* Marginal analysis
* Market clearing price
Lesson Objectives
The purpose of assignment 4 is to encourage you to practice applying the concepts you have been introduced to in the first three assignments, and to help you transfer your knowledge from simple examples, to more complex problems that have been reported in the news. On the questions below, your answers are less important than the reasoning with which you arrive at those answers. Does the event described affect supply? demand? both? neither? Does it cause supply or demand to increase? decrease? What effect will the change have on the price and the quantity exchanged in the market? Would you expect a large or a small change in price or in the quantity exchanged? Keep in mind that the answer will often depend on the length of time you are allowing for adjustments to occur. (You may find it useful to sketch a small supply and demand graph to guide their thinking.)
1. Using supply and demand analysis explain why the price of roses always seems to rise just before Valentines day.
1. How would a freeze that killed one-half of the rose crop effect the price? Why?
2. What would happen in the market for fine chocolates if one-half of the rose crop freezes? Why?
OR
2. A story on the front page of The Wall Street Journal on October 22, 1996, told about troubles in the Bob Evans Restaurants. The Bob Evans chain, which started as a truckers diner in the late 1940s, currently includes 380 restaurants with annual sales of more than $800 million. However, at the annual shareholders meeting on the family farm, disappointment and anger were the order of the day and the meeting focused on reported declines in the quality of food and service, and on the declining price of the company's stock. In searching for an explanation for the plight of the Bob Evans chain, the Journal noted that, rising hog prices combined with Americans' healthier eating habits have stalled sausage sales, which account for almost 25% of the company's revenue.
1. Hypothesize about the equilibrium price, quantity supplied and quantity demanded this year at Bob Evans as opposed to last year.
Definitions
Demand - The relationship between prices and the corresponding quantities of a good or service buyers are willing to purchase at any given point in time.
Exchange - Trade or voluntary agreements between buyers and sellers.
Marginal analysis - A comparison of the costs and benefits of consuming or producing an additional unit.
Market clearing price - The price at which all that suppliers are willing to sell equals all that buyers are willing to purchase; the price at which quantity demanded equals quantity supplied; the price that "Clears" the market.
Supply - The relationship of prices to the quantities of a good or service sellers are willing to offer for sale, at any given point in time.
Transaction costs - The resources (like time and energy) that are used in making an exchange. An example of a transaction cost is time spent shopping or the time and energy necessary to negotiate a contract.
* Demand
* Exchange
* Transaction costs
* Supply
* Marginal analysis
* Market clearing price
Lesson Objectives
The purpose of assignment 4 is to encourage you to practice applying the concepts you have been introduced to in the first three assignments, and to help you transfer your knowledge from simple examples, to more complex problems that have been reported in the news. On the questions below, your answers are less important than the reasoning with which you arrive at those answers. Does the event described affect supply? demand? both? neither? Does it cause supply or demand to increase? decrease? What effect will the change have on the price and the quantity exchanged in the market? Would you expect a large or a small change in price or in the quantity exchanged? Keep in mind that the answer will often depend on the length of time you are allowing for adjustments to occur. (You may find it useful to sketch a small supply and demand graph to guide their thinking.)
1. Using supply and demand analysis explain why the price of roses always seems to rise just before Valentines day.
1. How would a freeze that killed one-half of the rose crop effect the price? Why?
2. What would happen in the market for fine chocolates if one-half of the rose crop freezes? Why?
OR
2. A story on the front page of The Wall Street Journal on October 22, 1996, told about troubles in the Bob Evans Restaurants. The Bob Evans chain, which started as a truckers diner in the late 1940s, currently includes 380 restaurants with annual sales of more than $800 million. However, at the annual shareholders meeting on the family farm, disappointment and anger were the order of the day and the meeting focused on reported declines in the quality of food and service, and on the declining price of the company's stock. In searching for an explanation for the plight of the Bob Evans chain, the Journal noted that, rising hog prices combined with Americans' healthier eating habits have stalled sausage sales, which account for almost 25% of the company's revenue.
1. Hypothesize about the equilibrium price, quantity supplied and quantity demanded this year at Bob Evans as opposed to last year.
Definitions
Demand - The relationship between prices and the corresponding quantities of a good or service buyers are willing to purchase at any given point in time.
Exchange - Trade or voluntary agreements between buyers and sellers.
Marginal analysis - A comparison of the costs and benefits of consuming or producing an additional unit.
Market clearing price - The price at which all that suppliers are willing to sell equals all that buyers are willing to purchase; the price at which quantity demanded equals quantity supplied; the price that "Clears" the market.
Supply - The relationship of prices to the quantities of a good or service sellers are willing to offer for sale, at any given point in time.
Transaction costs - The resources (like time and energy) that are used in making an exchange. An example of a transaction cost is time spent shopping or the time and energy necessary to negotiate a contract.
Sunday, August 3, 2008
Competition and Market Power
Key Terms
• Competitive markets
• Market Power
• Price discrimination
Lesson Objectives
1. Why do movie theaters charge different people different prices for tickets, but charge everyone the same price for popcorn?
2. Suppose that five major oil-producing nations of the world get together and, with the goal of increasing revenue and profit, agree to cooperate in such a way as to act as if they were a single supplier.
What actions could they take to achieve their goal?
Consider each action on the list individually. What is the likely impact on the price of oil? Why?
What is the likely result in terms of the revenues of oil producers?
Consider each action on the list individually. Are the benefits and costs of each action the same for all producers?
What is the incentive for individual producers to abide by any agreement?
What is the incentive for individual producers to cheat on any agreement?
What would be necessary in order to maintain (enforce) the agreements?
What do you predict will happen in the long run?
Lesson Overview
In competitive markets, price increases caused by changes in either supply or demand are the result of increases in marginal costs; prices and marginal costs are directly related.
o The higher prices which accompany increased demand indicate buyers' willingness to bear higher opportunity costs in order to purchase particular goods and services.
o The higher prices which accompany decreased supply indicate the higher opportunity costs producers must bear (because of higher prices for resources or the existence of other, more profitable, production alternatives) in order to provide particular goods and services.
The term "market power" refers to the influence that any particular buyer or seller can exercise over the price of a product. Market structures range from highly competitive, in which there are so many buyers or sellers that none can influence the market price, to the other extreme in which a single buyer or seller faces no competition and therefore wields great market power.
o In markets characterized by free entry, attempts by sellers of products or resources to raise prices in the absence of cost increases are generally unsuccessful.
o Similarly, in markets characterized by free entry, attempts by buyers of products or resources to lower prices in the absence of cost decreases are generally unsuccessful.
The persistence of large differences between price and production cost usually indicates that entry is restricted.
o This may be the result of limited availability of specialized resources or of government restriction to entry.
o Government intervention in response to a special interest group often results in reduced competition and the creation of market power for that group.
o Because the costs imposed on consumers by the government response to any particular lobbying effort are diffuse and individually small, consumers generally do not organize to oppose the influence of the special interest groups. The benefits to the special interest groups are large enough to give them an incentive to organize and lobby.
Price discrimination, charging different people different prices for the same good, is possible because individuals place different subjective values on goods.
o Price discrimination is most likely to occur when the seller can identify groups of buyers who place different relative values on a good or service and when resale of the item among customers is either impossible or highly unlikely.
o Pricing of airline and theater tickets are good examples of price discrimination.
Definitions
Competitive markets - Markets characterized by relative ease of entry and exit and by large numbers of sellers who provide products which consumers regard as substitutes for one another.
Market power - The degree to which a business firm is able to earn larger than normal profits, market power is inversely related to both the degree of competition in the market and the ease of entry and exit.
Price discrimination - The practice of charging different groups of consumers different prices for the same good or service.
• Competitive markets
• Market Power
• Price discrimination
Lesson Objectives
1. Why do movie theaters charge different people different prices for tickets, but charge everyone the same price for popcorn?
2. Suppose that five major oil-producing nations of the world get together and, with the goal of increasing revenue and profit, agree to cooperate in such a way as to act as if they were a single supplier.
What actions could they take to achieve their goal?
Consider each action on the list individually. What is the likely impact on the price of oil? Why?
What is the likely result in terms of the revenues of oil producers?
Consider each action on the list individually. Are the benefits and costs of each action the same for all producers?
What is the incentive for individual producers to abide by any agreement?
What is the incentive for individual producers to cheat on any agreement?
What would be necessary in order to maintain (enforce) the agreements?
What do you predict will happen in the long run?
Lesson Overview
In competitive markets, price increases caused by changes in either supply or demand are the result of increases in marginal costs; prices and marginal costs are directly related.
o The higher prices which accompany increased demand indicate buyers' willingness to bear higher opportunity costs in order to purchase particular goods and services.
o The higher prices which accompany decreased supply indicate the higher opportunity costs producers must bear (because of higher prices for resources or the existence of other, more profitable, production alternatives) in order to provide particular goods and services.
The term "market power" refers to the influence that any particular buyer or seller can exercise over the price of a product. Market structures range from highly competitive, in which there are so many buyers or sellers that none can influence the market price, to the other extreme in which a single buyer or seller faces no competition and therefore wields great market power.
o In markets characterized by free entry, attempts by sellers of products or resources to raise prices in the absence of cost increases are generally unsuccessful.
o Similarly, in markets characterized by free entry, attempts by buyers of products or resources to lower prices in the absence of cost decreases are generally unsuccessful.
The persistence of large differences between price and production cost usually indicates that entry is restricted.
o This may be the result of limited availability of specialized resources or of government restriction to entry.
o Government intervention in response to a special interest group often results in reduced competition and the creation of market power for that group.
o Because the costs imposed on consumers by the government response to any particular lobbying effort are diffuse and individually small, consumers generally do not organize to oppose the influence of the special interest groups. The benefits to the special interest groups are large enough to give them an incentive to organize and lobby.
Price discrimination, charging different people different prices for the same good, is possible because individuals place different subjective values on goods.
o Price discrimination is most likely to occur when the seller can identify groups of buyers who place different relative values on a good or service and when resale of the item among customers is either impossible or highly unlikely.
o Pricing of airline and theater tickets are good examples of price discrimination.
Definitions
Competitive markets - Markets characterized by relative ease of entry and exit and by large numbers of sellers who provide products which consumers regard as substitutes for one another.
Market power - The degree to which a business firm is able to earn larger than normal profits, market power is inversely related to both the degree of competition in the market and the ease of entry and exit.
Price discrimination - The practice of charging different groups of consumers different prices for the same good or service.
Thursday, July 31, 2008
Markets
Key Terms
• Exchange
• Money prices
• Transaction costs
• Specialization
• Property rights
• Market-clearing price
• Interdependence
• Monetary costs
• Non-monetary costs
Lesson Objectives
1. Review the nature of voluntary exchange, drawing on the experiences in "Why People Trade."
o No one forced people to trade; why did they? (anticipation of benefit)
o Who benefited from each exchange? (mutual benefit)
o Why were some people able to trade more than others?
o What was the opportunity cost of the trade you made?
2. Define market - and discuss why they are our preferred method of rationing. (Relate to "Why People Trade" - was that a market? how so?)
o How do people behave in markets?
o Markets work as positive sum games when:
there are clearly defined "rules of the game;"
property rights are clearly established and are protected; and
there is freedom to exchange.
o How would our market have been different if we had used money?
3. Define incentives as both rewards and penalties for behavior.
o There are monetary and non-monetary incentives.
4. The role of prices in markets.
o Prices provide information.
o Prices act as a rationing mechanism.
o Prices are incentives - for buyers and sellers.
5. Prices play a crucial coordinating role in commercial societies; they provide incentives for buyers and sellers to act in ways that lessen the impact of scarcity.
o Reminder of law of demand from first lesson. How do buyers react to changing prices?
o Reminder of law of supply from first lesson. How do sellers react to changing prices?
Definitions
Exchange - Trade; voluntary agreements between buyers and sellers.
Market clearing price - The price at which all that suppliers are willing to sell equals all that buyers are willing to purchase; the price at which quantity demanded equals quantity supplied.
Non-monetary costs - See transaction costs.
Property rights - The conditions of ownership, including the rights and restrictions regarding use, ownership, and sale.
Specialization - Occurs when individuals, businesses, regions or nations concentrate on producing only those goods and services that they can best (most efficiently) produce, given their existing resources.
Transaction costs - The resources (like time and energy) that are used in making an exchange. Examples of transaction costs are time spent shopping or the time and energy necessary to negotiate a contract.
• Exchange
• Money prices
• Transaction costs
• Specialization
• Property rights
• Market-clearing price
• Interdependence
• Monetary costs
• Non-monetary costs
Lesson Objectives
1. Review the nature of voluntary exchange, drawing on the experiences in "Why People Trade."
o No one forced people to trade; why did they? (anticipation of benefit)
o Who benefited from each exchange? (mutual benefit)
o Why were some people able to trade more than others?
o What was the opportunity cost of the trade you made?
2. Define market - and discuss why they are our preferred method of rationing. (Relate to "Why People Trade" - was that a market? how so?)
o How do people behave in markets?
o Markets work as positive sum games when:
there are clearly defined "rules of the game;"
property rights are clearly established and are protected; and
there is freedom to exchange.
o How would our market have been different if we had used money?
3. Define incentives as both rewards and penalties for behavior.
o There are monetary and non-monetary incentives.
4. The role of prices in markets.
o Prices provide information.
o Prices act as a rationing mechanism.
o Prices are incentives - for buyers and sellers.
5. Prices play a crucial coordinating role in commercial societies; they provide incentives for buyers and sellers to act in ways that lessen the impact of scarcity.
o Reminder of law of demand from first lesson. How do buyers react to changing prices?
o Reminder of law of supply from first lesson. How do sellers react to changing prices?
Definitions
Exchange - Trade; voluntary agreements between buyers and sellers.
Market clearing price - The price at which all that suppliers are willing to sell equals all that buyers are willing to purchase; the price at which quantity demanded equals quantity supplied.
Non-monetary costs - See transaction costs.
Property rights - The conditions of ownership, including the rights and restrictions regarding use, ownership, and sale.
Specialization - Occurs when individuals, businesses, regions or nations concentrate on producing only those goods and services that they can best (most efficiently) produce, given their existing resources.
Transaction costs - The resources (like time and energy) that are used in making an exchange. Examples of transaction costs are time spent shopping or the time and energy necessary to negotiate a contract.
Scarcity and Choice
Key Terms
• Demand
• Supply
• Scarcity
• Trade-offs
• Opportunity Cost
• Marginal Costs/Benefits
Lesson Objectives
1. Define scarcity and give an example.
2. Establish causation: Scarcity necessitates choice; therefore trade-offs cannot be avoided.
o List and describe several methods of rationing.
3. Define opportunity cost.
o Differentiate between trade-off and opportunity cost: the cost is the "next-best" alternative.
4. Develop examples to illustrate the characteristics of cost.
o All costs lie in the future; the anticipation of future consequences shapes peoples' decisions.
o Emphasize that "consequence" and "opportunity cost" are different.
5. To the decision-maker, the relevant value of something is its marginal value.
o Define marginal as additional, or "a little more or a little less," or "the next unit."
Definitions
Demand - The relationship between prices and the corresponding quantities of goods or service buyers are willing to purchase at any given point in time.
Marginal benefit - The increase in total benefit that results from producing, purchasing, or consuming an additional unit.
Marginal cost - The increase in total cost that results from producing an additional unit.
Opportunity cost - The most highly valued sacrificed alternative; the value of the "next-best" choice.
Scarcity - Scarcity means that people cannot obtain as much of something as they want, without making a sacrifice or bearing a cost. Scarcity defines a relationship - between the amount of something we want and the amount that is available.
Supply - The relationship of prices to the quantities of a good or service sellers are willing to offer for sale, at any given point in time.
Trade-off - A choice between alternatives that reveals the opportunity cost of selecting one alternative over the other
• Demand
• Supply
• Scarcity
• Trade-offs
• Opportunity Cost
• Marginal Costs/Benefits
Lesson Objectives
1. Define scarcity and give an example.
2. Establish causation: Scarcity necessitates choice; therefore trade-offs cannot be avoided.
o List and describe several methods of rationing.
3. Define opportunity cost.
o Differentiate between trade-off and opportunity cost: the cost is the "next-best" alternative.
4. Develop examples to illustrate the characteristics of cost.
o All costs lie in the future; the anticipation of future consequences shapes peoples' decisions.
o Emphasize that "consequence" and "opportunity cost" are different.
5. To the decision-maker, the relevant value of something is its marginal value.
o Define marginal as additional, or "a little more or a little less," or "the next unit."
Definitions
Demand - The relationship between prices and the corresponding quantities of goods or service buyers are willing to purchase at any given point in time.
Marginal benefit - The increase in total benefit that results from producing, purchasing, or consuming an additional unit.
Marginal cost - The increase in total cost that results from producing an additional unit.
Opportunity cost - The most highly valued sacrificed alternative; the value of the "next-best" choice.
Scarcity - Scarcity means that people cannot obtain as much of something as they want, without making a sacrifice or bearing a cost. Scarcity defines a relationship - between the amount of something we want and the amount that is available.
Supply - The relationship of prices to the quantities of a good or service sellers are willing to offer for sale, at any given point in time.
Trade-off - A choice between alternatives that reveals the opportunity cost of selecting one alternative over the other
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