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{{Economics_Lectures}}

{{Economics_Lectures}}

'''Next week:  Midterm exam, about 30 multiple choice questions.  Closed book.  Answer every question, because there is no penalty for wrong answers (the CLEP exam has no penalty for wrong answers either).'''

'''Next week:  Midterm exam, about 15 multiple choice questions.  Closed book.  Answer every question, because there is no penalty for wrong answers (the CLEP exam has no penalty for wrong answers either).'''

The word "economy" is derived from the Greek word for "household", which is the most basic and perhaps the most efficient unit of an economy.  Think of how there is division of labor among family members; diminishing marginal utility for activities; supply and demand for food in the refrigerator; both "long run" and "short run" decisions; economies of scale in buying dinner; and very few transaction costs within a family.  The family or household unit may be the most efficient structure possible.

The word "economy" is derived from the Greek word for "household", which is the most basic and perhaps the most efficient unit of an economy.  Think of how there is division of labor among family members; diminishing marginal utility for activities; supply and demand for food in the refrigerator; both "long run" and "short run" decisions; economies of scale in buying dinner; and very few transaction costs within a family.  The family or household unit may be the most efficient structure possible.

===Medium===

===Medium===

*'''consumer surplus''' (savings by consumers who would pay more than the market price for a good)

*'''consumer surplus''' (savings by consumers who would pay more than the market price for a good)

*'''indifference curve'''

*'''indifference curve'''

*'''elastic demand'''

*'''elastic demand'''

*'''inelastic demand'''

*'''inelastic demand'''

*'''price elasticity of demand''' (percent change in quantity demanded divided by percent change in price, dropping the negative sign)

*'''price elasticity of demand''' (percent change in quantity demanded divided by percent change in price, dropping the negative sign)

*'''price controls (ceilings and floors)'''

*'''price controls (price ceilings and price floors)'''

*'''marginal cost''' (MC = change in total cost (TC) due to producing one more unit of output Q)

*'''marginal cost''' (MC = change in total cost (TC) due to producing one more unit of output Q)

*'''total fixed costs''' (TFC) do not change as more is produced, thus MC = change in TVC due to one more output Q)

*'''total fixed costs''' (TFC) do not change as more is produced.  Because TC=TFC+TVC, and TFC does not change as more Q is produced, the marginal cost (MC) must be equal to the change in TVC due to producing one more output Q

*'''marginal revenue''' (MR)

*'''marginal revenue''' (MR)

*alternative definition of the '''“long run”''': enough time to adjust all inputs in order to produce a given Q at the lowest possible cost

*a clever definition for the '''“long run”''': enough time to adjust all inputs in order to produce a given Q at the lowest possible cost

*'''variable inputs''' (inputs that are increased to produce more Q in the short run)

*'''variable inputs''' (inputs that are increased to produce more Q in the short run)

*'''fixed inputs''' (inputs that cannot be increased in the short run to produce more Q)

*'''fixed inputs''' (inputs that cannot be increased in the short run to produce more Q)

*'''returns to scale''' (increasing, decreasing or constant?  Look at whether a firm's long run average total costs -- AVC=TC/Q -- increases when the firm's size increases)  Note that "economies of scale" is the same as "increasing returns to scale"; "diseconomies of scale" is the same as "decreasing returns to scale."

*'''returns to scale''' (increasing, decreasing or constant?  Look at whether a firm's long run average total costs -- ATC=TC/Q -- increases when the firm's size increases)  Note that "economies of scale" is the same as "increasing returns to scale"; "diseconomies of scale" is the same as "decreasing returns to scale."

*'''income effect'''

*'''income effect'''

*'''substitution effect'''

*'''substitution effect'''

===Equations of Medium Difficulty===

===Equations of Medium Difficulty===

:At Q = 0, TC = TFC

:At Q = 0, TC = TFC

::When quantity produced is 0, the total costs are total fixed costs.

::When quantity produced is 0, the total costs are the total fixed costs.

:At all Q > 0, AVC = TVC / Q

:At all Q > 0, AVC = TVC / Q

::Whenever quantity produced is greater than 0, average variable cost equals total variable cost divided by quantity.

::Whenever quantity produced is greater than 0, average variable cost equals total variable cost divided by quantity.

*'''price discrimination'''

*'''price discrimination'''

*'''minimum wage'''

*'''producer surplus'''

*'''supply elasticity'''

*'''supply elasticity'''

*'''division of labor'''

*'''division of labor'''

*'''condition for reducing production''' (MC>MR)

*'''condition for reducing production''' (MC>MR)

*'''condition for shutting down''' (P<AVC in short run or P<ATC in long run)

*'''condition for shutting down''' (P<AVC in short run or P<ATC in long run)

*'''Giffen good'''

*'''Giffen good'''

===Equations of Honors Difficulty===

===Equations of Honors Difficulty===

*a '''transaction cost''' is not the overall cost of the transaction.  It is not the overall price paid for something, but is the portion of the overall cost that is due to "friction", or the time and expense of obtaining what you really want from the transaction.  Examples include tips, taxes, commissions, salesmen, broker fees, gas to drive there, etc.

*a '''transaction cost''' is not the overall cost of the transaction.  It is not the overall price paid for something, but is the portion of the overall cost that is due to "friction", or the time and expense of obtaining what you really want from the transaction.  Examples include tips, taxes, commissions, salesmen, broker fees, gas to drive there, etc.

*a '''variable cost''' is not any cost that varies over time.  It is a type of production cost for a firm that '''varies with output'''.  It is a cost that grows bigger as the number of units made increases, such as more electricity for staying open later, more paper and ink costs for making more copies of lectures, higher gas costs for taking more taxicab rides, etc.

*a '''variable cost''' is not any cost that varies over time.  It is a type of production cost for a firm that '''varies with output'''.  It is a cost that grows bigger as the number of units made increases, such as more electricity for staying open later, more paper and ink costs for making more copies of lectures, higher gas costs for taking more taxicab rides, etc.

*'''Returns to scale''' are in the "long run" and have nothing to do with "marginal" effects. There are not "diminishing" returns to scale like "diminishing marginal utility" which suggests a rapidly declining rate.  Instead, there are "decreasing" returns to scale.  If someone says "diminishing returns" then he is talking about the short run.  "Returns to scale" have to do with the long run, when you can double the size of your factory or build a new stadium.

*'''Returns to scale''' is the answer to this question:  if you own a firm, and you double the amount of your inputs (such as the size of your factory and the number of employees), does the output of your firm increase precisely double also, or increase by less than 2 times, or more than 2 times? Example: doubling the size of a car can carry more than twice as many people.  That means it has increasing economies of scale.  But the phrase "too many cooks spoil the broth" means there are decreasing economies of scale in a kitchen.

*In calculating '''overall utility''', keep in mind in which order someone chooses to maximize his marginal utility.  Exam questions might ask how someone specifically spent his third hour of time based on assumptions about how the utility for different activities diminish over time.

*In calculating '''overall utility''', keep in mind in which order someone chooses to maximize his marginal utility.  Exam questions might ask how someone specifically spent his third hour of time based on assumptions about how the utility for different activities diminish over time.

*the concept of '''marginal product''' is specific to an input, as in "marginal product of labor," which is the additional overall output (product) produced due to an additional unit of that input (labor).

*the concept of '''marginal product''' is specific to an input, as in "marginal product of labor," which is the additional overall output (product) produced due to an additional unit of that input (labor).

*speaking of inputs, we might as well include this concept:  '''factors of production.'''  These include the four basic resources for a firm or company:  land, labor, capital and entrepreneurship.  Exam questions typically ask most about the input of labor for a firm or company.

*speaking of inputs, we might as well include this concept:  '''factors of production.'''  These include the four basic resources for a firm or company:  '''land, labor, capital and entrepreneurship'''.  Exam questions typically ask most about the input of labor for a firm or company.

*last week's homework assignment had a question that asked about "wealth or '''consumer surplus'''."  Consumer surplus is a form of wealth, a savings made possible by the free market.  The buyer is wealthier by the amount of his consumer surplus in a transaction, because consumer surplus is the excess of what he would have paid above what he did pay for something.  It is his net benefit from the transaction.

*'''consumer surplus''' is the extra amount a consumer would have paid for something, but did not have to because the free market brought the price down lower than what the consumer was willing to pay.  The buyer is wealthier by the amount of his consumer surplus in a transaction, because consumer surplus is the excess of what he would have paid above what he did pay for something.  It is his net benefit from the transaction.

== Example 1: Economic Insights into Politics ==

== Example 1: Economic Insights into Politics ==

Economics affects election outcomes in two ways.  First, many people vote based on how they are personally doing economically.  Voters who recently lost their job are more inclined to be angry about the incumbents (the politicians currently in power).  Those voters may choose not to vote for the incumbent, either by not voting at all or by voting for the opponent.  Some economists feel that the outcome of every presidential election can be predicted by looking at key economic indicators (such as unemployment) on Election Day.

Economics affects election outcomes in two ways.  First, many people vote based on how they are personally doing economically.  Voters who recently lost their job are more inclined to be angry about the incumbents (the politicians currently in power).  Those voters may choose not to vote for the incumbent, either by not voting at all or by voting for the opponent.  Some economists feel that the outcome of every presidential election can be predicted by looking at key economic indicators (such as unemployment) on Election Day.

Second, the side that spends the most money in a political campaign usually wins.  In 2008, we can compare the campaign spending by Barack Obama and John McCain to the votes they actually received.  Obama spent $7.39 per vote that he received, while McCain spent only $5.78 per vote that he received.  That's a large difference of nearly 25%.

Second, the side that spends the most money in a political campaign usually wins.  In 2008, we can compare the campaign spending by Barack Obama and John McCain to the votes they actually received.  Dividing the total amount the campaign spent by the total amount of votes it received, Obama spent 25% more per vote than McCain did.

One reason Obama spent more was because he received far more in campaign contributions than McCain did.  But that was partly due to a strategic decision made by McCain in the summer of 2009: he decided to take federal campaign funds, which prohibited him from raising money from the public after around September 1st.  Between September 1st and Election Day (in early November), McCain was stuck with the roughly $75 million provided by law to candidates who choose to take federal financing rather than funds from public donors.  Obama made the opposite choice, and elected to receive contributions from the public and not take any federal financing.  Obama then raised over $300 million from internet donations during that same period, which is 4 times as much as McCain received.

One reason Obama spent more was because he received far more in campaign contributions than McCain did.  But that was partly due to a strategic decision made by McCain in the summer of 2008: he decided to take federal campaign funds, which prohibited him from raising money from the public after around September 1st.  Between September 1st and Election Day (in early November), McCain was stuck with the roughly $75 million provided by law to candidates who choose to take federal financing rather than funds from public donors.  Obama made the opposite choice, and elected to receive contributions from the public and not take any federal financing.  Obama then raised over $300 million from internet donations during that same period, which is 4 times as much as McCain received.

From this simple observation about the differences in funding, several conclusions can be drawn:

From this simple observation about the differences in funding, several conclusions can be drawn:

#McCain would have done better if he declined the federal funding and raised more money on the internet.  It's impossible to know how much better his results could have been.

#McCain would have done better if he declined the federal funding and raised more money on the internet.  It's impossible to know how much better his results could have been.

#Freedom is not free.  People who want their side to win have to support their side financially.

#Freedom is not free.  People who want their side to win have to support their side financially.

The political process in the United States is based on competition, just like the free market.  Typically the political winner, as in the free market, is the candidate who runs the most ''efficient'' campaign and who raises the most money for that campaign from supporters.  Efficiency and capital are the keys to both economic and political success.

The political process in the United States is based on competition, just like the free market.  Typically the political winner, as in the free market, is the candidate who runs the most ''efficient'' campaign and who raises the most money for that campaign from supporters.  Efficiency and capital are the keys to both economic and political success.

It's your decision how to use your "inputs" of capital (money: the $10,000) and labor (the volunteers).  How would you use concepts you've learned in this course to maximize the vote for your candidate?  (Note: it's unethical and illegal to pay cash directly to voters, or "buy" votes).

It's your decision how to use your "inputs" of capital (money: the $10,000) and labor (the volunteers).  How would you use concepts you've learned in this course to maximize the vote for your candidate?  (Note: it's unethical and illegal to pay cash directly to voters, or "buy" votes).

The concept of "marginal product" is useful here.  You need to allocate your inputs (capital and labor) in order to maximize your output (votes for your candidate).  If you put all your money and volunteers into mailings, then you won't influence people as much as if you could speak directly with them.  But mailings reaches more people more cheaply.  Perhaps you'd allocate your capital and labor on a little of each:  some on the phone, some door-to-door, some mailings, and some putting up signs.  That's what most campaigns do.  It's hard to know if your allocation of inputs to tasks is optimal to maximize output.

The concept of "marginal product" is useful here.  You need to allocate your inputs (capital and labor) in order to maximize your output (votes for your candidate).  If you put all your money and volunteers into mailings, then you won't influence people as much as if you could speak directly with them.  But mailings reach more people more cheaply.  Perhaps you'd allocate your capital and labor on a little of each:  some on the phone, some door-to-door, some mailings, and some putting up signs.  That's what most campaigns do.  It's hard to know if your allocation of inputs to tasks is optimal to maximize output.

Now recall Question No. 12 from Homework Assignment Week 6 in this course: Your firm seeks to produce a certain level of output in the most efficient way (the lowest cost). It should use its resources in which of the following ways:

Now recall Question No. 11 from Homework Assignment Week 6 (Honors) in this course: Your firm seeks to produce a certain level of output in the most efficient way (the lowest cost). It should use its resources in which of the following ways:

:(a) use materials that generate the highest marginal product

:(a) use materials that generate the highest marginal product

What would entice someone to attend a dinner?  How can you make the event look as attractive as possible?  Could price discrimination be used to maximize the income?  One possibility is to replace the speaker, who is a major cost item, with inexpensive music and dancing, which may actually be more popular.

What would entice someone to attend a dinner?  How can you make the event look as attractive as possible?  Could price discrimination be used to maximize the income?  One possibility is to replace the speaker, who is a major cost item, with inexpensive music and dancing, which may actually be more popular.

'''''Perhaps you would like to show initiative and organize the next homeschool dinner! Perhaps a Christmas event?'''''

'''''Perhaps you would like to show initiative and organize the next homeschool dinner!'''''

== Sample problems and solutions==

== Sample problems and solutions==

'''''Answer''''':  The most basic rule for multiple choice tests is this:  be sure to understand the question.  See that "EXCEPT"?  Typically several miss that, and pick the wrong answer.  Be sure never to miss a question because you did not understand the question.

'''''Answer''''':  The most basic rule for multiple choice tests is this:  be sure to understand the question.  See that "EXCEPT"?  Typically several miss that, and pick the wrong answer.  Be sure never to miss a question because you did not understand the question.

Next, our test-taking tips encourage us to eliminate wrong answers before trying to select the correct answer.  Gold is not scarce under any meaning of the word.  Knock it out as an answer.

Next, our test-taking tips encourage us to eliminate wrong answers before trying to select the correct answer.  Gold is scarce under any meaning of the word.  Knock it out as an answer.

Pennies, paper clips and pencils are all inexpensive, but they do cost something.  A penny is not worth much, but it is worth something.  If you had a hundred of them, you could buy a chocolate bar.  But it doesn't matter how much salt water you might have at the ocean.  That's worthless because there is a free oversupply.  Nobody would pay anything for it, not even a penny.  Thus it is not economically scarce.  The correct answer is (d).

Pennies, paper clips and pencils are all inexpensive, but they do cost something.  A penny is not worth much, but it is worth something.  If you had a hundred of them, you could buy a chocolate bar.  But it doesn't matter how much salt water you might have at the ocean.  That's worthless because there is a free oversupply.  Nobody would pay anything for it, not even a penny.  Thus it is not economically scarce.  The correct answer is (d).

We're left with a choice between answers (c) and (d).  But (c) can't be right either.  The firm is better off the bigger it is, when it has increasing returns to scale or "economies of scale."

We're left with a choice between answers (c) and (d).  But (c) can't be right either.  The firm is better off the bigger it is, when it has increasing returns to scale or "economies of scale."

By process of elimination, the correct answer must be (d).  We can confirm it is right by thinking back to the Wal-Mart example:  as it increases its "scale", it increases the quantity of its goods, and that enables it to lower the average costs for each good and then lower the prices.  Its ATC decreases as it increases its size; it has "economies of scale" or "increasing returns to scale."

By process of elimination, the correct answer must be (d).  We can confirm it is right by thinking back to the Wal-Mart example:  as it increases its "scale", it increases its quantity of its goods, and that enables it to lower the average costs for each good and then lower its prices.  Its ATC decreases as it increases its size; it has "economies of scale" or "increasing returns to scale."

== Assignment ==

== Assignment ==

'''Study for the midterm exam next week.'''

'''Study for the midterm exam next week.'''

[[Category:Economics lectures]]

[[Category:Economics lectures]]

{{DEFAULTSORT: Economics Lecture 08}}

{{DEFAULTSORT: Economics Lecture 08}}