Economics Summary - Sommersemester ausführliche Zusammenfassung des Modules auf Englisch PDF

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Sommersemester ausführliche Zusammenfassung des Modules auf Englisch...

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Economics

Frenk Locmelis

Economics 4th Semester

1

Table of content

1

Table of content ______________________________________________________________2

2

Government interventions (Quotas, Price ceilings, floors) ____________________________6

3

4

2.1

Quota_________________________________________________________________________ 6

2.2

Price ceiling ____________________________________________________________________ 7

2.3

Price floor _____________________________________________________________________ 8

2.4

Tariffs _______________________________________________________________________10

2.5

Subsidy ______________________________________________________________________10

2.6

Tax imposed on the supply curve__________________________________________________11

2.7

World supply curve _____________________________________________________________ 12

2.8

Who pays the tax? – Tax incidence ________________________________________________13

Supply and Demand Curve – Producer and Consumer surplus ________________________14 3.1

Producer surplus _______________________________________________________________14

3.2

Consumer surplus ______________________________________________________________15

3.3

Total surplus __________________________________________________________________15

3.4

Supply and demand Shifters – Factors, which influence the shift ________________________15

3.5

Changes in the market equilibrium ________________________________________________18

Elasticity ___________________________________________________________________20 4.1

Elasticity of demand ____________________________________________________________20

4.2

Cross elasticity of demand _______________________________________________________20

4.3

Law of demand ________________________________________________________________21

4.4

Elastic and inelastic demand _____________________________________________________21

4.5

Factors for elastic demand _______________________________________________________21

4.6

Calculating the price elasticity of demand (Midpoint method) __________________________23

4.7

Total revenue calculation and maximation __________________________________________23

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Frenk Locmelis

Economics 4th Semester

5

Normal and inferior goods ____________________________________________________24

6

Profit maximization, Marginal revenue __________________________________________25 6.1

Perfect competition in the short-run _______________________________________________25

6.2

Profit maximization ____________________________________________________________26

6.3

Profit maximization with cost curves_______________________________________________26

7

Four market structures _______________________________________________________28

8

Economies of scale ___________________________________________________________28

9

Diminishing marginal returns __________________________________________________29

10 Short Run Vs. Long Run _______________________________________________________30 11 Cost curves (AVC, AFC, ATC) ___________________________________________________31 11.1

Some remarks _________________________________________________________________32

12 Economic and accounting profit ________________________________________________34 13 Public goods ________________________________________________________________34 13.1

Characteristics of public goods____________________________________________________34

13.2

Private goods _________________________________________________________________35

13.3

Club goods____________________________________________________________________35

13.4

Common-Pool resources ________________________________________________________35

13.5

Public goods __________________________________________________________________35

13.6

Non-rivalrous and non-excludable goods ___________________________________________36

13.7

Rivalrous, but non-excludable goods _______________________________________________36

14 Positive externalities _________________________________________________________37 15 Negative externalities ________________________________________________________38 16 The network effects __________________________________________________________39 17 Notes from the book _________________________________________________________40 17.1

First principles _________________________________________________________________40 3

Frenk Locmelis

Economics 4th Semester

17.2

Production possibility frontier ____________________________________________________41

17.3

Demand and supply curves ______________________________________________________41

17.4

Surplus_______________________________________________________________________43

17.5

Price ceilings and quotas ________________________________________________________44

17.6

Elasticity _____________________________________________________________________46

17.7

INPUTS and COSTS _____________________________________________________________50

17.8

Perfect competition and supply curve ______________________________________________53

17.9

Externalities __________________________________________________________________55

17.9.1

Network externality _________________________________________________________________ 58

17.10

Public, common, private goods etc. ______________________________________________59

17.11

GDP _______________________________________________________________________62

17.12

Unemployment and inflation ___________________________________________________64

17.13

Long-Run economic growth ____________________________________________________65

17.14

Fiscal policy _________________________________________________________________66

17.15

Monetary policy _____________________________________________________________69

17.16

Inflatin, Disinflation and Deflation_______________________________________________70

18 Additional research __________________________________________________________72 18.1

Price and Cross-Price elasticitiy of demand _________________________________________77

18.2

Deadweight loss and elasticity ____________________________________________________78

18.3

Behind supply curve ____________________________________________________________78

18.4

Externalities __________________________________________________________________81

18.5

Network effects _______________________________________________________________82

18.6

Macroeconomics - overview _____________________________________________________82

18.7

GDP and Macroeconomics _______________________________________________________83

18.8

Fiscal policy ___________________________________________________________________84

18.9

Monetary policy _______________________________________________________________85 4

Frenk Locmelis

18.10

Economics 4th Semester

Globalization ________________________________________________________________87

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2

Economics 4th Semester

Government interventions (Quotas, Price ceilings, floors)

Quota (import quota) is trade restriction that sets a physical limit on quantity of good imported into a country in given period of time

2.1

Quota

The quota gets imposed at maximal quantity of 70. Supply of more than 70 units are not possible anymore. Therefore the supply curve moves vertically and finds the supply by price of CHF 9.

The consumer surplus gets shrunk, producer surplus gets bigger and it gets generated deadweight. GENERAL REMARK: In order to be effective, the quota should be placed before the equilibrium, otherwise there will be no effect on quota, if the quota is put after the market equilibrium there will be no effect on the market.

Quotas are restricting the country to import the goods to satisfy demand. So for example: So we have 1000 of Supply of the world and 400 as a domestic supply. The between we would have the excess of demand, which is imported, thus 600. Now the government imposes quota of 200. As a result, the domestic supply price will rise until the quota price has been reached, which is 200 (imports allowed 200). Simply said the domestic supply has now space to rise up the prices so high, until the import limit is reached. 6

Frenk Locmelis

2.2

Economics 4th Semester

Price ceiling

A price ceiling is a government-imposed price control, or limit, on how high a price is charged for a product, commodity, or service. Governments use price ceilings to protect consumers from conditions that could make commodities prohibitively expensive. The goal is to make the product more affordable for consumers

Consumer surplus is always on the top of the price axis. The surplus gets calculated in terms of quantity * price divided by 2. Take a look on the example:

In the same way you calculate the producer surplus. Total benefit = consumer surplus + producer surplus.

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Frenk Locmelis

Economics 4th Semester

Government places the price ceiling, which cause the shortage of quantity of 3 units (7-4 = 3). Quantity of supply = 4, quantity demanded = 7.

As a result of it we have greater consumer surplus and smaller producer surplus. To calculate the deadweight loss you need to calculate first how much was the total benefit before the price ceiling, which is 54 (6*12)/2 + (6*6)/2. Also the total benefit after the price ceiling, which is 48. So that means we have deadweight loss of 6. The price ceiling “gap” can be also called excess of demand. That means in the market, there is too much demand, the supplier cannot cover all of the demand. As a result Qs and Qd is the gap, which cannot be satisfied by the local market.

2.3

Price floor

A price floor is the lowest legal price a commodity can be sold at. Price floors are used by the government to prevent prices from being too low. (Example: Minimal wages) There is always possibility that the government buys the surplus (government pays to the employees the wage difference or government pays the firms the difference of the wage, which the firm pays too much)

Price floors generate surpluses, lost gains from trade, wasteful increases in quality, a misallocation of resources 8

Frenk Locmelis

Economics 4th Semester

ere is better example of the minimal wage situation: It is quite good showed, that more labor is ready to work for the high price, in opposite the business is ready less to hire workers for higher labor costs.

In this picture we see more clearly, that the distance of Q(of Supply) and Q(Demand) is used to call unemployment, since the supply of labor is ready to work for the price floor, but the business is not ready to buy this labor that much for this price. More clearly it gets as soon we take a look on distance Q(d) and Q(equilibrium) – These are people, who had job, but had lost it due the price floor. The surplus of unemployment can be called “Excess of the supply”

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Frenk Locmelis

Economics 4th Semester

Excess of supply basically means, that the supply has much stock in the warehouse and cannot sell everything to the perfect optimum.

2.4

Tariffs Let us imagine we have Supply of the world and supply of the market (in the country). As you see in the image the supply of the world is able to supply the market by P2 the quantity of Q2, when the market supply is able to deliver only the Q3 for the price of P2. The rest of the quantity will be imported (excess of demand, thus import from world of supply)

Now let us assume, that the government wants to promote the domestic supply, that’s why they imposed a tariff on the world of supply (red curve). As a result we will see that the world supply won’t be ready anymore to deliver that much goods at the same price, which will cause the consumers to switch more on the domestic suppliers.

2.5

Subsidy Imagine the government wants to promote the usage of some product and therefore they promise to pay subsidy for the firms, if they agree producing certain quantity of goods additionally

Here we can see the market Equilibrium changes and the government achieving it’s goal. Since now the consumers are paying less per unit and also the firms are selling more products. (The 1. Image, violet square shows us, how much the government is paying for the firms) 10

Frenk Locmelis

2.6

Economics 4th Semester

Tax imposed on the supply curve Well firstly we need to find out the values after the tax. That means we are not interested into the values of S1, but more in S(tax). T + W is the deadweight loss.

S + U is the Tax revenue.

Producer surplus is the V. Since the producer doesn’t get the whole region after the tax intervention.

To sum up – Taxes on some products may lead to the inefficiency.

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Frenk Locmelis

Economics 4th Semester

1. Tax per unit is USD 3.00, since we calucate USD 14 – USD 11. 2. Total tax revenue is USD 3 * 10 = USD 30 3. Total amount of tax paid by consumers is USD 14 – 12 = USD 20 4. Total amount of tax paid by producers is USD 12 -11 = USD 10 5. Total expenditure is 14 * 10 = USD 140 6. Total revenue of the firms is 11 * 10 = USD 110 From the graph we can state, that the consumers and producers doesn’t share equally the imposed tax. As you see the producers will have less tax paid to the government. Why? Because the demand curve is inelastic

2.7

World supply curve Let us imagine, we have world supply curve by Q of 120 and domestic supply curve by Q of 50. Here are the results to the questions for the diagram

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Frenk Locmelis

2.8

Economics 4th Semester

Who pays the tax? – Tax incidence

If the demand curve is perfectly inelastic, then the consumers will pay the whole tax. The opposite happens if the demand curve is perfectly elastic, then the whole imposed taxes will go for producers.

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Frenk Locmelis

3 3.1

Economics 4th Semester

Supply and Demand Curve – Producer and Consumer surplus Producer surplus Supply curve starts with price of 1 to produce 1000 of Quantity. That means to even start the production, the market need to be able to pay the opportunity cost of 1 to firm.

As soon the producer and consumer are on the market equilibrium area, they have no incentive to go higher with the price / pay more for the product. The market equilibrium is the limit for the producer and the limit for the consumer, which are ready to invest in. Individual producer surplus = Selling book for USD 30, even when you were willing to sell for USD 5.

Producer surplus is a difference how much of a good the producer is willing to supply versus how much he receives in the trade. Imagine company producers drumkits for CHF 300.- (only production costs), but sells for CHF 700.00. Therefore we have CHF 400.00 of producer surplus

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Frenk Locmelis

3.2

Economics 4th Semester

Consumer surplus There would have been people, who would pay CHF 1’000 for one surfboard, but got it for CHF 800.

Is below the price (demand curve).

3.3

Total surplus Total surplus, where is the value of CS and PS. Also we can state, who is the winner and who is the loser in the market. In case government did some restrictions, then we also can state, which value we as a society have lost, because of this restriction

3.4

Supply and demand Shifters – Factors, which influence the shift •

Technological innovations

•

Input prices

•

Taxes and Subsidies

•

Expectations

•

Entry or Exit of Producers

•

Change in Opportunity Costs 15

Frenk Locmelis

Economics 4th Semester

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Frenk Locmelis

Economics 4th Semester

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Frenk Locmelis

Economics 4th Semester

Here some exercises – Analyze the hamburgers: 1. New grilling technology cuts production time in half (Supply shifts to right) 2. Price of chicken sandwiches (a substitute) increases (Demand rises for the hamburgers) 3.

Price of hamburgers decreases (the price increase or decrease is never causing the curve shifts! But here will be shortage generated. See it in this way price decreases, the demand rises, the supply goes down, it causes the shortage). In the picture you can see the new P1 and the excess of demand generated (excess of demand = shortage)

4. Price of ground beef triples (Supply shifts to the left, price will go up, quantity will go down), since it is the key resource for the hamburgers, there will be shift. It is the input cost for the production 5. Human fingers found in multiple burger restaurants (Demand decreases)

3.5

Changes in the market equilibrium If the new disease resistant apple is invented, the supply curve will shift to the right and the price of the good will fall down. It generates a new market equilibrium

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Frenk Locmelis

Economics 4th Semester

Price goes up and the Quantity goes up

For apple industry it’s not good, since the demand for apples will decrease as a result of the ad campaign for pear cider.

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Frenk Locmelis

4 4.1

Economics 4th Semester

Elasticity Elasticity of demand Calculation of the elasticity. So to calculate the elasticity in between of the points we need the firstly the change between the points and the point from which we start. Also important to know, that the curve has not to be constant everywhere. Slope from E / F can be different (elasticity) If the price drops by 1%, the increase of demand is lower than 1% (lower increase in Q). As a result revenue drops. If the price drops by 1%, the increase of demand is higher than 1% (higher increase in Q). As a result the revenue rises.

4.2

Cros...