Econ Discussions 9 - 10 Material

Econ Minute: Third Parties

facilitate transactions between buyers & sellers & get paid for it.

* more effective if they can provide lots of buyers to sellers & vice versa
* price of the third party firm is NOT the price of the good, it is the price they charge to USE their service.
* all costs are given to sellers

Econ Minute: Third Parties Examples

AirBnB, Auction Houses, Credit Card Companies

trust

a large grouping of business interests with significant market power

sherman antitrust act

firms cannot conspire to restrict output & raise prices

antitrust

regulation of the concentration of economic power, mostly in regard to monopolies & anticompetitive practices.

* good for consumers.
* keep markets competitive & prices lower.

oligopolies

a market with a small number of firms who realize they are dependent on one another in their pricing & output policies.

* legal

cartels

illegal

price signaling

prices can move to cartel levels without direct communication

parallelism

when firms notice other firms slowly raising prices & do the same

barriers to entry

* new entrants are the BIGGEST THREAT to monopolies… worse than antitrust laws!
* entry reduces market power
* substitution is possible, so demand curve is elastic (horizontal)
* raising your prices could mean consumers substitute to new firms, meaning TR could fall when P rises

BTE

a “moat” for firms & investors

how do monopolies keep new entrants out?

1. cartels or mergers between rivals
2. tariffs or quotas
3. be the better entrepreneur
4. control over indispensable inputs
5. economies of scale
6. strategic conduct
7. network effects
8. massive advertising

factors that influence beer demand

income, population, price of related products, price of beer itself (changes Qd)

what decreases beer demand?

* carbs & health concerns
* cocktails & wine are more sophisticated
* taste profile: bitter for a sweet tooth generation
* DUI stringency has increased

what increases demand?

* male & female acceptability
* inexpensive buzz
* social activity
* brand image

factors that influence supply of beer

* new entrants: consumer tastes are leaning towards specialty beers, but the industry is dominated by 2 large breweries.
* superior entrepreneurship: marked expertly to both blue color & white collar workers
* economies of scale: smaller firms can’t compete with larger firms’ prices. If MES is at a pretty high quantity, smaller firms will be driven out.
* massive advertising: ad budget of big beer companies has grown tremendously

sin taxes

taxes on good the government deems bad

* these goods usually have inelastic demand & the government takes advantage of that

externalities

* one of the critiques to the market system
* a cost or benefit to a third party when a good is consumed or produced

why are externalities described as a spillover?

a cost or benefit for a third party that isn’t added into the total value of a good.

negative externalities

when the MSC (marginal social cost) is greater than the MPC (marginal private cost) and MSB (marginal social benefit)

positive externalities

when the MSB (marginal social benefit) is greater than the MPB (marginal private benefit) & MSC (marginal social cost)

solutions to externalities

* pigouvian tax
* cap & trade

piguovian tax

taxing our way to MSC = MSB

* ex. government taxes firms for pollution; firm which it is cheaper to add abatement equipment will do so while the firm for which is costly to remove pollution will pay the tax & pollute

cap & trade

auctioning rights to get to MSC = MSB

* ex. government auctions off right to pollute a certain amount

Econ Minute: Third Party Payer Markets (Healthcare)

* you
* your doctor
* your insurance company (sometimes the government)
* incentives are the most important to consider
* you don’t pay the healthcare bill directly, so you want the most expensive option
* insurance company wants you to get cheapest option
* doctor wants you to get treatment you need refilled often

Econ Minute: Commitment Devices

* people don’t often do what they say or follow through with their goals
* incentives change behavior
* commitment devices force you to pull through
* often there is a referee involved (person or thing enforcing the commitment)

Econ Minute: Happiness

* happiness determined by:
* genetics
* circumstances
* decisions (ECON)
* happiest people
* have lots of friends & family
* are religious
* are women
* are employed or have earned income

easterlin paradox

people in more developed countries are happier than people in less developed countries. but as people become even wealthier, their level of happiness doesn’t necessarily go up (sometimes it goes down).

why do economists believe in incremental change & marginal adjustments?

because the point where MSC = MSB is likely somewhere in between no change & radical change

how to implement marginal change?

* taxes
* social incentives
* dead turtle on plastic bag
* monetary incentives
* people bring reusable bag, they get entered in lottery

income questions

1. what constitutes income?
2. can interpersonal income be compared?
3. if interpersonal income can be compared, what should be distribution of income?
4. if prevailing distribution of income is considered inappropriate, what should be done to remedy maldistribution?
5. what should be the economic consequences of redistributing income to attain greater income equality?

what makes up income?

* labor income (wages, paychecks)
* income from investments & savings (interest & dividends)
* income from entrepreneurial talent (profit)
* in-kind income (transfer payments from government, sharity, or business firms)
* MINUS taxes - taxes are subtracted from income & go to government

data collection issues with income

* my income is none of your business
* mainly because people are pursuing tax avoidance - almost everyone does this
* should we include & how do we measure in-kind income?
* in-kind income is income received as a good & service rather than money
* time period
* do we adjust for leisure
* are we talking about income (flow variable) or wealth (stock variable)?

income

flow variable, you need a time frame to measure

wealth

stock variable

how to measure wealth?

wealth = assets - liabilities

human capital

* included in wealth
* any future value you could have from doing something

income distribution

* US is a bit MORE UNEQUAL than other industrialized countries.
* MORE EQUAL than in less industrialized countries.
* for a lot of higher earners in the US, income comes from interest & dividends.

lorenz curve

* used to analyze distribution of income
* closer to 45 degree = more equally income is distributed
* can calculate income equality but computing area under a lorenz curve
* compare equality across nations
* shows percentages so it does not matter what the total income in a country is

cost analysis of inequality

* plight of low income recipients
* risk of social unrest

benefit analysis of inequality

* incentives to use resources wisely & make productive contributions to society
* economic growth - having some richer individuals means a greater tendency for people to invest
* investments shift our PPC right

labor demand

* the greater the demand for the goods or services you produce, the greater the demand for your labor

what is labor demand effected by?

* demand for goods & services produced by the labor (derived demand)
* price of other inputs
* labor’s productivity
* wage rate (not a shift factor, just a slope factor)

why does labor supply curve bend backwards?

when substitution effect is stronger, labor supply curve is upward sloping. when income effect is stronger, labor supply curve bends backwards.

substitution effect

when wages increase, you choose to work more because the opportunity cost of leisure is now higher

income effect

you choose to work less because leisure is a normal goods & a higher wage implies an increase in income & thus increased leisure.

what is labor supply curve affected by?

* the population
* cultural attitudes
* health
* marginal tax rates
* wage rate

why don’t all jobs pay the same?

* safer jobs > dangerous jobs
* jobs with nice work environments > jobs without
* not all labor is interchangeable
* people’s skills differ
* discrimination by race, gender, etc.

monopsony

a market with only one buyer (usually the government)

what is the MFC in monopsony?

marginal factor cost. the cost of hiring one additional worker. like MR, since we have to pay all our workers the same amount. restricts supply of labor they hire & artificially restrict price for wages.

tournament markets

prospect of making enormous rewards attracts workers into a tournament where first prize is the position as CEO, CFO, Partner, Superstar, etc.

* extremely high salaries are for the “winner” of the tournament

unions

monopolies on supply of labor

goal of unions

raise the wage above that which would be paid in a competitive market

where do unions work best?

in market where demand elasticity for labor is relatively inelastic.

does product have to be high or low for labor unions to be productive?

high

how do labor unions increase chances of success?

* shift demand curve for union labor right
* featherbedding: requiring excessive amounts of labor for simple task
* restrict rivals supply: lobbying for tariffs on nonunionized competitors.
* shift supply curve for union labor left
* long apprenticeship programs
* strikes & picketing

economic rent

any extra money someone earns that’s more than the cost of producing the good (similar to surplus)

rent seeking

trying to get that extra money (without providing extra good or service)