Econ 2/25/26

Next classes will focus on a slide deck and handout.
Planning for a transition from Monday to Wednesday in the curriculum.
A concept review will be held on Wednesday to prepare for the midterm exam.
The midterm exam will cover introductory material in macroeconomics and is scheduled for next Wednesday.
- The exam is conducted online via Base Space.
- Students will have the weekend to complete the exam after it opens, specific timings to be announced during review session.
No physical class the following Friday due to the exam.
Mentioned ongoing weather conditions (snow) while moving into March.

Aim to connect previously discussed supply and demand concepts to macroeconomic principles.
Introduction of market failure as a key concept.
- Market Failure: Does not imply that markets have completely failed; rather highlights instances where free markets do not achieve efficient outcomes.
- Assumption of a laissez-faire free market moving forward as a US-based capitalist economy.
- While true capitalism assumes no government intervention, limited intervention can provide stability.

Consumer Surplus: The difference between what consumers are willing and able to pay versus what they actually pay.
- Example involving coffee to illustrate the concept:
- A consumer desperately needs the first cup of coffee to function; implies a high willingness to pay.
- Pricing at Starbucks does not vary based on individual need; consumers pay a market price.
- If Starbucks charged more based on urgency, it would exploit consumer need.
- Consumer surplus is recognized when a consumer pays less than they were willing to pay (e.g., willing to pay $4 but only pays $1).
- Business perspective: charging market price while eating the cost of the surplus reflects on the company's balance.

Examples of businesses using data tracking to drive consumer behavior:
- Starbucks and Dunkin' Donuts track buying habits and can offer promotions.
- The impact of big data allows targeted advertising to consumers based on previous purchases.

Discussion on how consumer rationality affects buying decisions:
- Consumers may pass on a fruit cup priced at $1 if they only value it at $0.50, reflecting rational consumer behavior.
- Lower pricing can incentivize consumption, even if actual value perceived is lower.
The importance of pricing strategies for businesses in attracting customer purchases while managing profit margins.

Government interventions like taxes and subsidies impact market behavior.
Welfare Effects: Can be perceived positively or negatively.
- The negative stigma around welfare affects public perception.
- Government funding for services from taxes can create a paradox where taxpayers dislike paying but benefit from the funded services.
Subsidies: Government financial support to assist sectors like agriculture, particularly in states where farming needs stabilization.
- Discussed challenges faced by farms and the need for subsidies to avoid market failure in agriculture.

Price controls such as minimum wages (price floors) and rent ceilings (price ceilings) as forms of market interventions.
Recognizing that these interventions do not necessarily indicate market failure but may be necessary for a functional market.

Externality: Economic side effects or impacts that affect third parties not directly involved in transactions.
- Example of Negative Externality: Pollution caused by manufacturing processes affecting the surrounding community and environment.
- Example of Positive Externality: Investment in property beautification increasing neighboring property values without additional cost to them.
Public Goods: Non-excludable and non-rivalrous goods, like national defense, cannot be restricted by payment and benefit all citizens.
- Important for understanding government roles in providing essential services that private sectors may neglect due to profit motives.
Moral Hazard: Tendency for behavior to change in relation to levels of risk or security afforded by insurance or protected conditions.
- Example: Safe vehicles giving drivers a false sense of security, leading to riskier driving behaviors.
- Discussion of behavior adjustments when individuals know they are insured and how this affects economic decisions.

Introduction of tax rate (t) and tax base (q):
- The goal is maximizing revenue ($t \cdot q$).
- Tax implications on large purchases (e.g., cars) versus everyday purchases (e.g., sodas) discussed.
Importance of understanding consumer perception regarding taxes in purchasing scenarios.
Mentioned how additional costs like taxes can affect purchasing decisions when significant amounts (like car taxes) are involved.

Interaction of consumer behavior with macroeconomic principles laid groundwork for exploring taxation in economy.
Next class will cover different types of taxes and their implications in detail.