Economic Principles 6/7/8/9/10

Economic principle #6

Trade generally makes people better off

Economic Principle #7

Good economics often conflict with smart politics

Economic Principle #8

Markets are generally the best way to organize economic activity

Economic Principle #9

Markets obey the law of supply and demand

Economic Principle #10

Markets sometimes fail, so governments do things that markets can't do

Specialization and trade

-trade=buying/selling of a product/service

-specialize= doing just one task

-Benefit: ppl better off (richer, happier, more utility)

producing things by hand

-costs: scarcity (your time, energy, resources, and skill are limited)

-Benefits: If ppl specialize they get better at making things and become more efficient

Comparative Advantage

and individual or groups ability to produce something at lower opportunity cost compared to a competitor

absolute advantage

an individual's ability to produce more of something compared to a competitor

Win-win

each trading partner gains utility

zero-sum

one trading partner gains utility and one looses utility

trade deficit

situation in which a country imports more than it exports

trade surplus

when a country exports more than it imports

Chimerica

-China + American economically tied

-China lends U.S. $ so we buy their products

Free trade

=trade without barriers (No tariffs, no subsides, no quotas, no licenses, no anti-dumping laws)

benefits:

-helps buyer +seller get maximum $$ from deal

- leads to integration between nations

Costs:

-American workers and companies don't like that americans can buy products from other countries

-some Americans loose jobs

-does not make pppl better off (i.e. slave trade)

-politicans block free trade

tariff

=taxes on imported goods

subsidies

= payments in order to produce something expensive

quotas

=limits on the # of something that comes from another country

licenses

=official permission to do/sell something

anti-dumping laws

=laws that prevent dumping --> selling a product for loss in another country in order to gain new customers

Why do politicians use trade barriers?

-PROTECTIONISM

-appeal to loudest shouting voters

-protect intrest of doners

-show they are pro-American ("local" business)

-Protect American jobs

-shelter new industries just starting out

-protect the environment

issues with barriers

-Increase price of goods/services for the consumer

-leads to short-term shortages if countries choose not to export

-damages relationship between countries (everyone suffers in long run)

-Decreases level of competition for domestic producers

-slippery slope --> other industries might demand protection

Most-Favored Nation Status (MFN)

-country "X" (the exporter) faces the lowest level or tariffs from country "y" (the importer)

-if one country believes that another country is violating deals, they can sue in the WTO

price floor (minimum wage)

=lowest price can go

-costs: (reduce # of jobs, incentivizes high school drop outs, doesn't help when looking for a new job, federal minimum wage does not keep up with inflation)

-Benefits: (if you have a secure job this helps you)

-soltuion: earned income tax credit

earned income tax credit

-provides tax reductions to low moderate income families

-if you earn less and/or have more children , you can pay less in taxes

Rent control (price ceiling)

=max amount ppl can spend on rent

benefits: (tenants get cheaper rent, incentivizes tenant stability)

Costs: (landlords can't charge as much, does not improve growth in infastructure

NAFTA

North American Free Trade Agreement; allows open trade with US, Mexico, and Canada.

-drove integration between all three economies

Political support of NAFTA in U.S.

-expands economy

-expands more jobs to mexicans so they have more disposable income

-believes it would discourage illigeal immigration

Political opposition of NAFTA in u.s.

-take away power from the states

-u.s. gets unecsisary fines

-americans will loos jobs to immigrants

-want to separate U.S. and Mexican economies

How did NAFTA effect the U.s?

-increased GDP

-trade between all three countries tripled

-About 200,000 export related hobs created anually

-companies moving to Mexico lower cost causing widening trade deficit

-Causing loss of 600,000 U.S. jobs over 2 decades

-U.S. auto sector los 350,000 jobs since 1994 (1/3 of industry) + mexico auto sector gained jobs

-Falling price often improved quality of goods

-steepest declines in jobs due to trade w/ china

-illigeal crossings increased

How did NAFTA effect Mexico?

-hundred of new automanufacturing jobs +mining jobs

-workers in other industries lost jobs due to increaed competition

-more cheaper goods w/ more variety

-increased trade, foriegn investment, and increased economic growth

-still poverty in south mexico

-many small mexican farmers in southern mexico couldn't keep up w. corn production b/c cheaper in u.s.

-consumer and companies gained acess to cheaper goods

-china becomes major competitor for mexican manufacturing

how did NAFTA effect Canada

-FDI grew

-strong gains in cross border investments

-boost in agriculture (argicultural trade tripled for U.S + totla agricultural exports tripled)

-leading importer for U.S. products

-manufacturing exports increased

-producing gap between U.S. and Canada increased

-More dependent on trade with U.S. (75% of exports) --> income vunerabillity

This dependence can be used by U.S as leverage

market

-a group of buyers and sellers of particular products or services

-a place where buyer + sellers maximize their utility by trading i.e. buying/selling goods

Ways to organize trade

-gender, tradition, centrally planned economies, autarky, invisible hand

gender

-men typically hunt, fish, + fight while women typically gather, cook and care for children

-Problems with that: (sexist, does not account for abillity of intrest, does not assess comparitive advantage

tradtion

-problem: does not account for your intrests, used to justify systems of oppression

centrally planned economies

-i.e. communist countries (Russia + Communist China)

-problems:( (ppl were told what to do --> no incentive or innovation, was inefficient --> resulted in oppression and starvation, lack of consumer goods)

autarky

- country that is economically self sufficient, does no seek trade or outside help (i.e Nazi germany)

-Problems: (does not exist in modern world, our time and reasources are limited)

invisible Hand (Adam Smith)

-government shoudl leave people alone to buy freely + markets will be guided to positive outcome

some problems with the market

-pollution +over production

-allow large corporations to squeeze out small businesses

-does not account for economic depression

-ppl can be irrational

war on drugs

actions taken by U.S. state and federal governments that are intended to curb the illegal drug trade and reduce drug use

supply side conflict of drugs

You face more severe punisments for dealing drugs than having possesion of them

-this causes the price of illigeal drugs to go up

-drug dealers get increased revenue in which they use that $ to get better technology or corrupt law enforcement to smuggle drugs

elasticity level of drugs

-drugs are inelastic because despite price changes, ppl still buy them

Costs of prohibition of drugs

-drugs become more strong or potent because they msut be sold in smaller packages

-drugs sold on black market might have worse quality and you cannot sue for bad quality drugs

-leads to more overdoses

-many steal drugs

-settle drug disputes through violence instead of court

-homocide rates higher

-drug war finaced by tax $ (soicety pays for incarcertions through tax dollars, and we loose on whater goods or services the ppl jailed do not do)

-innocent ppl mistakenly raided or killed

Supply

= the amount of product/service that a company/firm will provide/make available at price X. It's not what the company will make. It's what's available for purchace at price x.

Cost

= what is costs a company to make products/services

price

= what the consumer pays for product/service

(acts as signals to companies)

the law of supply

as prices rise, companies will supply more. As prices fall, companies will supply less. IE supply= a company's response to consumer demand.

demand

= the amount of product/service that a consumer is willing and able to buy at price x. Demand = the # of ppl x what they are willing & able to spend (Demand is not a desire)

law of demand

= as prices rise, quantity demanded falls. As prices fall, quantity demanded rises.

market equilibrium

-when supply equals demand

-causes for equilibrium: prices are visible signs, ppl respond to incentives, rational ppl make choices at the margin)

shortage

when the supply is less than the demand

surplus

when the supply is greater than the demand

marketing appeal of tiktok

-algorithm shows ppl who look like you using specific products

-titok= entertainment/ content app so no social presuure, also serves content on things your interested in

- # of paid influencers on tiktok grow easily so all brands trying to get onto the app

-psychologically, ppl feel better if they "find" something on tiktok so they buy it

-sales funnel collapsed and it made into a disc

Rise of Labubu

- blind box element (you don't know what labubu you are getting and if you want one specific one you must keep buying them) --> increase in demand

-celebrities (i.e. k-pop groups) did viral unboxings --> increase in demand

-Pop mart kept supply low (sparked frenzy so investors were more hooked)

-success depended on scarcity (consequences --> fights broke out at stores, robbers stole products, scalpers and bots bought up online inventory)

Fall of labubu

-scalpers dumped their investors and it pushed price down even further as no more hunt for labubu --> resale prices collapsed

-there were lafufus in the market that decreased the value of the brand

impact of labubus and whats going on now

-when it reached U.S. + Western countries pop mart made a lot o $$ --> labubu a luxury brand

-made labubu movies

-sales going up now because of labubu being sold in western countries.

-refuted sterotype that Chinese products are bad quality

complementary goods

=goods that are typically consumed together. (changes in price or availability would directly affect both of them)

i.e. penut butter + Jelly

competitive goods

=goods that you generally choose ONE to consume not the other. (Changes in prices or availability would inversely effect both of them)

i.e. Coffe +tea, or Dunkin + Starbucks

Wealth Effect

= a behavioral economic theory that ppl spend more as the value of their assest rises. Consumers feel more financially secure + confident about their wealth when their home or investment profiles increase. They are made to feel richer, even if their income + fixed costs are the same as before

opportunity cost

whatever must be given up to obtain some item

elasticity

= the degree to which demand or supply changes in reaction to a change in price

inelastic

=there is little to no reaction to change in price

-i.e. a demand for a necessity, few to no substitutes, richer pppl tend to have demand that is more inelastic

elastic

=when there is a big reaction in change in the price

-i.e. a demand for a luxury, many substitutes, related goods, poore ppl tend to have a demand that is more elastic

importance of elasticity

-companies/seller must consider it when determining price points + pricing strategy

-individuals/buyer must consider it when buying + budgeting

-economists + gov'ts use it to determine how much taxes will distort behavior (i.e. cigarette tax)

-the gov't sometimes make laws b/c of (in)elasticity

things Gov't is better at providing than market

-shared collective goods and service: security (police +military), justice (through courts), education (through public schools), Road+ bridges, Welfare

market failure

= when a market does not make society better off (richer/happier...more utility)

-Three ways: negative externalities, free rider problem, tragedy of the commons

Negative Externalities

= a side effect or consequence of an industrial or commercial activity that effects other parties without this being reflected in the cost of goods/services

i.e. when you buy a car you and the dealership benefit, but your gas emissions hurt the lungs of your neighbor with asthma (externality= pollution)

free rider problem

= ppl who use non-privately owned goods + services without paying for it/them

i.e. if you see fireworks your a free rider as you didn't pay for them and nobody stopped you from watching them

tragedy of the commons

=goods/services that no one person owns, but are open to everyone. Unfortunately, they are often oversued or depleted over time

i.e. air in the atmosphere is shared, but gas companies responsible for CO2 emissions

Paris Agreement

establishment of protocols dealing with greenhouse gas emissions by the United Nations

-each country agreed to set pollution limits

-if you exceed pollution limit you can pay a fine or use a pollution credit or buy one from someone else

Cap and trade scheme/pollution (carbon) credits

-limit or cap on amount of pollution and You trade pollution credits

other ways gov't nudges ppl to make the right choices

-supervision/monitors ( legal contracts, inspections, law that ensure companies don't cheat)

-Sin taxes (taxes on products like alcohol, fatty foods, gambling which effect the user)

-pigovian taxes ( taxes on products like oil/gas + plastic bags which effect society more broadly