Download - Flagship Course Module 1 Overview
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Flagship Course
Module 1 Overview
The Basics of Market
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Three Fundamental Questions
• What goods and services should be produced
and how?
• How much of each type of good and service
should be produced?
• How should these goods and services be
distributed among members in society?
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Three Fundamental Questions
• What goods and services should be produced
and how?
• How much of each type of good and service
should be produced?
• How should these goods and services be
distributed among members in society?
MARKET
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Market
Under certain conditionsUnder certain conditions markets can lead to
a:
• Technically
• Cost-effectively and
• Allocatively
Efficient allocation of resources.
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PricesPrices Ensure That:
• On the production sideOn the production side resources are
used in their most productive way
• On the consumption sideOn the consumption side goods go to
those who value them most
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Efficiency-equity Relationship
Individual ability and willingness to pay
Market-based resource allocation
Income and wealth distribution EquityEquity
EfficiencyEfficiency
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Conditions for a Well-functioning Market1- Production Side
• Many producers
• Free entry and exit of producers
• Low fixed cost
• No production externality
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Conditions for a Well-functioning Market2- Consumption Side
• Informational symmetry
• No consumption externality
• No dominant consumer
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Externality
• Production externalityProduction externality
Social cost = Private cost + E
• Consumption externalityConsumption externality
Social benefit = Private benefit ± E
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Determinants of Supply
• Price
• Production cost
production continues to increase to the point
where marginal costmarginal cost equals marginal revenuemarginal revenue
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Determinants of Demand
• Price
• Tastes, preferences and needs
• Income
• Price of complementary/substitute goods
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Demand Schedule
Quantity
Price
P1
P2
Q2Q1Q’2 Q’1
Price elasticityof demand
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Demand Schedule
Quantity
Price
P1
P2
Q2Q1
Vertical height ofdemand schedule
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Supply Schedule
Quantity
Price
P1
P2
Q2Q1
Price elasticityof supply
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Supply Schedule
Quantity
Price
P1
P2
Q2 Q1
Vertical height ofsupply schedule
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Interaction of Demand and Supply Schedule
Quantity
Price
PE
P0
Q0s QE
Q0d
S D
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Externality
• Production externalityProduction externality
Social cost = Private cost + E
• Consumption externalityConsumption externality
Social benefit = Private benefit ± E
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Efficiency of the MarketMSC = Marginal Social CostMPC = Marginal Private CostP = PriceMPB = Marginal Private BenefitMSB = Marginal Social Benefit
MSC = MPC = P = MPB = MSBMSC = MPC = P = MPB = MSB
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Efficiency of the Market
• Consumers’ surplus:
Consumers’ value – Price
• Producers’ surplus:
Price – Actual production cost
Efficiency = Maximizing SurplusEfficiency = Maximizing Surplus
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Surplus
a
b
c
Surplus = (a + c) + (b – c) = a + b
S = MSC
D = MSBQ
P
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Surplus
a
b
cd
e
Surplus = (a + c - e) + (b – c - d) = (a + b) – (d + e)
S = MSC
D = MSBQ
P
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Efficiency of the Market
a
b
Surplus = a + b
S = MSC
D = MSBQE
PE
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Market FailureMSC = MPC = P = MPB = MSBMSC = MPC = P = MPB = MSB
Examples:• Water contamination by pesticides
MSC > MPCMSC > MPC
• Inability of consumers to judge the true value of a good (automobile)P > MPBP > MPB
• MonopolyMPC < PMPC < P
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Government Role in Market Failure
FailureFailure Government RoleGovernment Role
Water contamination by pesticides
Taxation
Inability of consumers to judge the true value of a good
• Public education• Regulatory approach
Monopoly Anti-trust regulations
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Major Features of Health Care
• Uncertainty and risk
• Informational asymmetries
– Supplier-induced demand
• Derived demand
• Externality
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