deliberations begin for the economics prize according to michael kremer, what has discouraged aids...
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Deliberations Begin for the Economics Prize
According to Michael Kremer, what has discouraged AIDS research?The lower prices drug manufacturers charge for AIDS drugs in Africa make them less profitable to produce. Therefore, the drug manufacturers are not interested in developing new AIDS drugs.Is Kremer’s premise consistent with economic theory?
Q
P
Supply1
Market for AIDS DrugsDemand
Q
P
Supply1
Market for AIDS DrugsDemand
P1 .
Q
P
Supply1
Market for AIDS DrugsDemand
PC .shortage
$0
$10
$20
$30
$40
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$60
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$100
0 10 20 30 40 50
Quanity
Co
st
Average Variable
Marginal
Average
Drug Producer’s Cost Structure
$0
$10
$20
$30
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$60
$70
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$100
0 10 20 30 40 50
Quanity
Co
st
Average Variable
Marginal
Drug Producer’s Cost Structure
P=AC
Profit=0
Average
$0
$10
$20
$30
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0 10 20 30 40 50
Quanity
Co
st
Average Variable
Marginal
Drug Producer’s Cost Structure
With price concessions
Average
$0
$10
$20
$30
$40
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0 10 20 30 40 50
Quanity
Co
st
Average Variable
Marginal
Drug Producer’s Cost Structure
Loss
P<AC
Profit<0
Average
$0
$10
$20
$30
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0 10 20 30 40 50
Quanity
Co
st
Average Variable
Marginal
Drug Producer’s Cost Structure
Average
R&D increases short-run fixed costs.
Loss
Q
P
Supply1
Market for AIDS DrugsDemand
PC .
Supply2
Advances in technology for producing AIDS drugs would shift out the supply curve.
Deliberations Begin for the Economics Prize
What does ?? Suggest as a solution to the drug problem?Increase the cost of selling drugs.
Would it work?
Q
P
Supply1
Market for Addictive DrugsDemand
P1 .
.Q1
Demand is perfectly inelastic.
P1 .
P
Supply1
.Q1
P2 .
Market for Addictive DrugsDemand
Supply2
Increasing the cost of providing drugs makes the supply curve steeper, increasing price with no change in quantity consumed.
Market for Addictive Drugs
How will drug addicts get the money to maintain their habit when the price of drugs increases?
Stealing
Prostitution
Dealing Drugs
Deliberations Begin for the Economics Prize
Does economic theory predict that retailers should sell products for lower prices on the internet than in their stores?
In Store
$0
$2
$4
$6
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$10
$12
0 10 20 30 40 50
Quanity
Cost
On-line
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50
Quanity
Cos
tAverage Variable
Marginal
Marginal
Average
Retailer’s Cost Structure
Average
Average Variable
The cost structure for selling in-store is higher than the cost structure for selling on-line.
On-line
$0
$2
$4
$6
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$12
0 10 20 30 40 50
Quanity
Cos
t
In Store
$0
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0 10 20 30 40 50
Quanity
Cost
Average Variable
Marginal
Marginal
Average
Retailer’s Cost Structure
The MC curve above the minimum of the AVC curve is the supply curve.
Average
Average Variable
Market Equilibrium
Each of the 1,000 producers have this supply curve.
In-store
$0
$2
$4
$6
$8
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$12
0 10 20 30 40 50
Quantity
Pric
e
Market Equilibrium
In-store
$0
$2
$4
$6
$8
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0 10 20 30 40 50
Quantity
Pric
e
The market supply curve will be the sum of the 1,000 supply curves.
Market
$0
$2
$4
$6
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$12
0 10 20 30 40 50
Quantity (1,000's)
Pric
e
Market Equilibrium
In-store
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50
Quantity
Pric
eMarket
$0
$2
$4
$6
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0 10 20 30 40 50
Quantity (1,000's)
Pric
e
The market price is determined by the intersection of the market supply and demand curves.
Market Equilibrium
In-store
$0
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0 10 20 30 40 50
Quantity
Pric
eMarket
$0
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Quantity (1,000's)
Pric
e
25,000 units will be purchased at $8 in store.
Market Equilibrium
In-store
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50
Quantity
Pric
eMarket
$0
$2
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0 10 20 30 40 50
Quantity (1,000's)
Pric
e
The demand curves for each retailer are horizontal at the market price.
Market Equilibrium
In-store
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50
Quantity
Pric
eMarket
$0
$2
$4
$6
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0 10 20 30 40 50
Quantity (1,000's)
Pric
e
Each retailer will sell 25 units.
In Store
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50
Quanity
Cost Average Variable
Marginal
Average
Retailer’s Cost Structure
For the 25,000 units sold in store, Price = Per Unit cost = $8 and Profit = $0.
Market Equilibrium
In-store
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50
Quantity
Pric
e
If the 1,000 retailers also sell on-line, the on-line supply curves will be added to the market supply curve.
Market
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50 60 70
Quantity (1,000's)
Pric
e
On-line
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50
Quantity
Pric
e
Market Equilibrium
In-store
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50
Quantity
Pric
e
The market prices drops to $7.
Market
$0
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$6
$8
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$12
0 10 20 30 40 50 60 70
Quantity (1,000's)
Pric
e
On-line
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50
Quantity
Pric
e
Market Equilibrium
In-store
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50
Quantity
Pric
e
The retailers’ demand curves fall to $7.
Market
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50 60 70
Quantity (1,000's)
Pric
e
On-line
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50
Quantity
Pric
e
Market Equilibrium
In-store
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50
Quantity
Pric
e
Each retailer will sell 23 units in store and 38 units on-line.
Market
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50 60 70
Quantity (1,000's)
Pric
e
On-line
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50
Quantity
Pric
e
In Store
$0
$2
$4
$6
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$12
0 10 20 30 40 50
Quanity
Cost
Average Variable
Marginal
Average
Retailer’s Cost Structure
For the 23,000 units sold in store,Price = $7, Per Unit cost = $8.25 and Profit = -$1.25.
Loss = $28.75
In the long run, retailers would shut down their in-store operations.
On-line
$0
$2
$4
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0 10 20 30 40 50
Quanity
Cos
t
Average
Marginal
Average Variable
Retailer’s Cost Structure
For the 38,000 units sold on line,Price = $7, Per Unit cost = $6 and Profit = $1
Profit = $38
Retailer’s Net Profit
Profit = $38 Loss = $28.75-
Net Profit = $9.25
Market
$0
$2
$4
$6
$8
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$12
0 10 20 30 40 50 60 70
Quantity
Pric
e
In-store Demand
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50 60 70 80 90
Quantity
Pric
e
On-line Demand
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50 60 70 80 90
QuantityPr
ice
Market demand for a product is divided between in-store and on-line.
In Store
$0
$2
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$8
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$12
0 10 20 30 40 50
Quanity
Cost
On-line
$0
$2
$4
$6
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$10
$12
0 10 20 30 40 50
Quanity
Cos
t
Average Variable
Marginal
Marginal
Average
Retailer’s Cost Structure
Average
Average Variable
AC = P
AC = P
Since the cost structure differs between in-store and on-line sales, the zero profit price varies.
..
Demand
Demand
Market
$0
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0 10 20 30 40 50 60 70
Quantity
Pric
e
In-store Demand
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50 60 70 80 90
Quantity
Pric
e
On-line Demand
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50 60 70 80 90
QuantityPr
ice
Some people will switch from in-store when to on-line because of the lower price.
Demand Demand
Demand
In Store
$0
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$12
0 10 20 30 40 50
Quanity
Cost
On-line
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50
Quanity
Cos
t
Average Variable
Marginal Marginal
Average
Retailer’s Cost Structure
AverageAverage Variable
The cost structure for selling in-store is higher than the cost structure for selling on-line.
Demand
Demand
In Store
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50
Quanity
Cost
On-line
$0
$2
$4
$6
$8
$10
$12
0 10 20 30 40 50
Quanity
Cos
t
Average Variable
Marginal Marginal
Average
Retailer’s Cost Structure
Average
Average Variable
The cost structure for selling in-store is higher than the cost structure for selling on-line.
In the New Economics, the Economy Has Little to Do with It
What were the major findings in Steven Levitt’s paper on legalization of abortion and the decrease in crime rates?A negative correlation between legalization of abortion and crime rate.
A negative correlation between number of abortions and crime rate.
In the New Economics, the Economy Has Little to Do with It
How does Levitt’s interpret the findings?The legalization of abortion in the early 1970’s played a key role in lowering crime by reducing the number of unwanted youths.Abortion explained nearly half of the decline in crime rates in the 1990’s.Many women getting abortions tended to raise children who committed crimes as teens.Abortion might have reduced the number of unwanted teens who came of age in the 1980’s and 1990’s.
In the New Economics, the Economy Has Little to Do with It
What are the strengths of the study?They compared changes in crime rates across states that legalized abortion at different times.
Hypothetical Example: 1980-1985
StateAbortion
Legalized (Y/N)Decrease in Crime Rate
1 Y 202 Y 223 N 154 N 185 Y 25
In the New Economics, the Economy Has Little to Do with It
Crime decreased more in states with legalized abortion.
Hypothetical Example
StateAbortion
Legalized (Y/N)Decrease in Crime Rate
1 Y 202 Y 223 N 154 N 185 Y 25
In the New Economics, the Economy Has Little to Do with It
What are the strengths of the study?They compared in abortion rates to decreases in crime rates.
Hypothetical Example: 1990
StateAbortion
RateDecrease in Crime Rate
1 10 202 11 223 5 154 8 185 12 25
In the New Economics, the Economy Has Little to Do with It
Crime decreased more in states with higher rates of abortion.
Hypothetical Example
StateAbortion
RateDecrease in Crime Rate
1 10 202 11 223 5 154 8 185 12 25
In the New Economics, the Economy Has Little to Do with It
What are the shortcomings of the study?
Does not adequately estimate the impact of the recession of the handgun and crack epidemic of the late 1980’s and early 1990’s.
A decrease in the use of crack in the late 1990’s would also decrease the crime rate.
In the New Economics, the Economy Has Little to Do with It
What are the social implications of the study?Affluent older women did not benefit most from legalized abortion.Crime may be curtailed by limiting the number of births among a few select groups.
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