The production possibility cure illustrates all feasible combinations of goods and services under the limited resources.In a closed economy, the combinations of goods and service that its citizen can possibly consume equals to the society’s production ability. Which means the country is self-sufficient. When the country trades in the world, the consumption possibility normally is greater than its production possibility. The consumption possibilities are maximized at the tangent with the bow shaped PPC, since the slopes at that point are the same, which means the opportunity cost for domestic and international production are equal. If the PPC is a straight line, the maximum output will be achieved with production specialization on the low OC good. When a good or sevice’s price is higher than the world price, the economy tend to become a net importer of the item. In the opposite, the economy will be the exporter for the product has the lower price than the world. The country will profit by exporting the goods they have comparative advantage and use the revenue to import the goods they do not have the comparative advantage. It is a mutually benefic al gain form trade. However, if there are winners, then there will be losers. The consumers of exported goods and local suppliers of imported goods will be harmed in this transaction. Thereby the tariff and quota are implied by the government. The tariff is the tax over imported goods, and it works like an increase on the world price. Tariff will incur a dead-weight loss on economic surplus. Another instrument is the quota, and quota limited the quantity of imported goods. Quota shifts the original demand curve to the right by the quota quantity, so the market equilibrium price is risen above world price. The market effects on both instruments are the same, but tariff generate tax revenue, and quota gain revenue by biding the import license. Trade barriers are created for protecting and reimbursing the groups were hurt by the trade and like other policies, it produces dead-wight loss and reduces the total economic surplus. In present days, the outsourcing service to low-wage countries is becoming more and more popular. It has the same operating principle as importation of goods from low-wage countries.
Chapter 10 Monopoly and other forms of imperfect competition
The imperfectly competitive market is where the firms have at least some control over their own price or market power. There are three forms of imperfect competition: The pure monopoly, oligopoly and monopolistic competition. The firms with the market power are the price-setter, so it is possible for them to raise their price over marginal revenue. We have already known as the demand curve for the perfectly competitive firms are the horizontal line, hence they can sell as much as they want at that exact price. However, in the imperfectly competitive firms, the demand curve is downward sloping. When a production doubles its inputs on production and its output increase as the exact same proportion, there is a constant return on scale for this firm. If the output changes by more than that proportion, the production has an increasing return on scale, it is also called economics of scale. The average cost of production as the number of units increases, therefore, there will be a natural monopoly. For many monopolist firms, to produce a new product usually associated with a lage start-up cost. For the firm which experiences an economics of scale, increasing the production level will trend the fixed cost to spread out over the quantity produced. So the more goods produced, the less essentially the fix cost among the total cost. And the average total cost will get closer to the marginal cost. Not like the perfectly competitive firms, the price-steer will set their price higher than the marginal revenue for the additional unit produced. This is because they need to sell all products at the same price, hence the price is not only for the additional unit but also the unit current selling as well. As a consequence, the monopolist will maximize their profit at marginal revenue equals to marginal cost. The invisible hand theory will not work efficiently under monopoly, because the market power of the monopolist acts as a barrier to prevent the new competitors to enter the market. The monopolist always produces lower than the socially optimal quantity where the marginal cost equals to the social marginal benefit(demand). Thereby, there will be a dead-weight loss. If a supplier in the monopoly market can perform perfectly price discrimination over its customer, then the economic surplus is maximized, but it is not possible in the real world. As a result, the hurdle method was invented in order to reduce the inefficiency. The firms are using coupon and other rebates for the buyers who over come some obstacle.
Chapter 11 Thinking strategically
Firms and individuals must consider other parties’ possible reaction altered by their decision. There are three elements in establishment of the thinking strategy that need to be evaluated: The players, other player’s strategy and the payoffs. A player will have a dominant strategy if the strategy creates higher payoff despite other players’ choices. The Nash equilibrium can be reached when each player’s strategy is their best option corresponding to other people’s strategies. It can be achieve where both groups have dominant strategies or one player has dominated strategy. Nevertheless, the result for each player has a dominant strategy is not positive. It may yield fewer payoffs than if each decided to take a dominated strategy. This scenario is nominated as the prisoner’s dilemma. The cartel agreement between suppliers can easily be violated due to the prisoner’s dilemma. A solution to the may repeated problem is the tit-for-tat strategy. Which the player cooperates at the first move, and copy their partner’s last move(corporate/violate). In addition to the thinking strategy study, we use the decision tree to comprehend the best possible payoffs when the choice are made within time orders. The outcome will be drastically affected by the ability of players to make a credible threat/promise. There will be a commitment problem prevent people to achieve their goals, when people cannot make these credible threat/promise In this case, the commitment devices can be used to increase the incentives， therefore, the empty threats or promises can be made credible. The concerns about ethical values need to be also accounted on the assessment over commitment problems.
Chapter 12 Externalities and property rights
The externalties are the cost/ benefit allocated over other people than the one who pursues the activity. Because the positive externalties will lead the social optimal value larger than the individual optimum, and the negative externalties will make the social optimal value less than individual optimum. The collective action may be proceeded by the government if the solutions for externalties are not efficient. The government’s intervention can be tax for externalities cost or subsidy for positive externalities. All of them will push the MC/ demand curve towards the social optimum curve. The best level of negative externalities is where marginal cost equals to the marginal benefit, since the further effort beyond that point is not worthy. The Coase theory states that if at nil negotiation cost, a efficient solution can be always arrived to the externalties problems. In addition, the adjustment is normally done by the party with the lowest cost. However, the negotiation can be costly in real life, so the laws of remedies may be used, and the burden can be placed on those who have the lowest cost. The chapter also introduced the tragedy of common resources(goods). The common good has two features: unexcludable and rival. Which means the one person’s use of the commons imposes an external cost to other users by reducing the property value, in addition, it is hard or costly to exclude non payers to use the property. As a consequence, the use of property will ascend until the marginal benefit reach zero. The private ownership can be used to solve this problem, since the highest bidder will have an incentive to consider the opportunity cost of using the property. The positional externality is when an increase in on person’s performance reduced the expected reward of another in situation in which reward is based on relatively performance. The positional arm-race control agreement may be implied in the industries.
Chapter 13 The economics information
Before a customer makes the purchase, he/she is assumed to be fully informed. If not, the customer will start gathering information, and the optimal amount of information is reached when the marginal cost of information is equal to the marginal benefit. In present days, many retail store face the free-rider problem on informations, whereas customers obtain the information on the product and abandon them to make a purchase online with a cheaper price. To perform a rational search, the price of the good is related to the cost of search. The product tends to be more expensive when the information is hard or too costly to acquire. There are always uncertainties on search, because the benefit is unknown but the marginal cost will occur. After we calculate the expected value of search(aggregate of possible outcomes multiplied by their probabilities), we can tell it is whether a fair gamble(EV=0) or better than fair gamble(EV>0) to proceed another search. People are classified into a risk-neutral person who accepts any gamble that is fair or better, and the risk-averse person that will reject any gamble. The decision we made is based on which type of personnel we are. However, if the buyer and seller have asymmetric information about the condition of the good, the lemon model can be used. This is the hypothesis assume all the goods on sale in the market are poor quality ‘lemons’, and the buyer’s decision should correspond to that. For example, if the customer believes a good is at good quality, then the red/blue book value for the same quality product on the market will be a fair price. Since the lemon model predicts there are no-good quality products on the market, the price is underestimated. People tend to interpret ambiguous in ways that promote their own interest, so the consumer may use the costly- to- fake principle to identify the credibility. The information can be genuine when the signal is too costly or hard to fake. In daily lives, people make judgements about the quality of other people, goods and services based on the groups to which they belong. This is called the statistical discrimination However, the industry exercise statistical discrimination may face moral hazard and adverse selection if they abort it. Somehow, the insurance managed to reduce these problems by lower rates, increase the incentive to behave positively and reduce the number of claims.
Chapter14 Labour markets, poverty and income distribution
In a competitive market, the wage is determined by the value of marginal product by a labor. It is the dollar value of the additional outcome received by the firm by hiring an additional unit of labor. Therefore, when value of marginal product is at least great as the wage, the firm should continue to hire. The demand curve of labors is the aggregation of individual VMP curve. Different firms have different value of marginal product, there are two major factors influence the change: the human capital and labor union. The human capital is the education, intelligence, energy, habits, etc, that affects the value of a worker’s marginal product. Sometimes the demand has the impact on human capital, for example, an urgent demand for a specific occupation will raise the human capital of the labors who have the relative skills. The labor union leads the workers to act collectively with an employer for better wage and working condition. The union can set wage flooring, but it will cause a total economic surplus reduction. However, unionization also improves the productivity by improving communication and morale level. In addition to the VMP, there is another feature that affects the wage level, the working condition is important for many of us. And the jobs with poor working environment may need to compensate a wage different in order to attract workers. Although the competitive labor theory claims that the wage differential is only based to the workers’ value of marginal production, the discrimination in the labor market also takes a great part of effect. The employer may prefer one group of workers over another, which it will results he pays that specific group with more wages when all groups’ VMPs are the same. Hence the employer’s profit is reduced. The other form of discrimination is called the customer discrimination. It is the customer will pay more for a product belongs to a favored group, even it is irrelevant to the good’s quality. In modern world, the labor market is a winner-takes-all markets. The small difference in human capital will translate into large difference in pay. In a society, the rewards for hard work and risk-taking rise national income, but also creates inequality. To reduce the inequality, government develops well-fare payments and in-king transfers to the poor families. Even though the means-tested benefit programs are used, the incentive to work is decreased because the benefit declines corresponding to the wage people earn. A more radical system called negative income tax was proposed by some people, under this system, every person would receive a tax credit. Because working will not decrease the tax credit received, it is better than the means-tested benefit program. Still, people may not to work and live with self-suffiency and the cash tax credit plus the political cost is extremely high. Another tax benefit system is the earned income tax credit, under this policy, only the worker with low-income will receive credits on their federal income tax. The government may provide public employment for the poor. It covers the shortage of NIT and EITC, but may face the problem that outcomes created by the jobs can be worthless. As a result, government use combination of methods to create social well-fare at present days.
Chapter 15 Public goods and their financing
There are four types of goods: public goods are nonexcludable and non rival; collective goods are non rival but excludable; common goods are rival but non-excludable and private goods are both rival and excludable. Rival good is the goods whose consumption by one person diminish the availability for others. A good is difficult to exclude non payers form using it is called nun-excludable good. This chapter focuses on public goods. The government provide public goods only if the cost is lower than the benefit. The cost is the implicit and explicit cost to produce it, once it is produced, it is hard to change on the use of the good since it has no marginal cost. The benefit is the total reservation price for the people want the good. The fairest way to pay for the public good is to tax people in proportion to their willingness to pay. So the head tax and regressive tax are not applicable in this situation. The proportional income tax charge the same proportion of everybody’s income, if the tax amount is lower than the reservation price of people for the public goods, they will not against it. Furthermore, a progressive tax that charges higher tax as income rises can be used as well. The progressive increase economic surplus and head tax reduce economic surplus, because the income elasticity of demand for public goods is greater than 1. The public demand curve is the vertical aggregation of the individual demand curve. The optimal quantity is reached where marginal cost intercepts with the demand curve. Government is the normally the provider of public good, because it has the power on tax and may be the only feasible provider. There are issue caused by this due to the one-size-fits-all approach will not satisfy everyone, and many people averse mandatory taxation. Besides government, the public goods can be provided by other sources of funding. To illustrate: funding by donation, private contracting, sale of by-products and development of new means to exclude non-payers. It may reduce the economic surplus.
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