How the remaining class sections will go:

1. Lesson on Market Failure and the Role of the Government

2. Return to Public Goods & the Distribution of Income

3. Unit 5 Exam Returned and Reviewed (grades up to date)

4. Practice AP Exam5. Practice AP Exam

6. Review for AP Exam

7. AP Exam (5/16)

Syllabus Fact-Check• Basic Economic Concepts (8–14%)• Supply and demand (15–20%)• Market equilibrium• Determinants of supply and demand• Price and quantity controls• Elasticity (Price, income, and cross-price elasticities of demand and Price elasticity of supply)• Consumer surplus, producer surplus, and allocative efficiency (9c)• Tax incidence and deadweight loss (chapter 6)• • B. Theory of consumer choice (5–10%)• Total utility and marginal utility• Utility maximization: equalizing marginal utility per dollar• Individual and market demand curves• Income and substitution effects• Q• C. Production and costs (10–15%)• Production functions: short and long run• Marginal product and diminishing returns• Short-run costs• Long-run costs and economies of scale• Cost minimizing input combination and productive efficiency• • D. Firm behavior and market structure (25–35%)• Profit: Accounting versus economic profits, Normal profit, and Profit maximization: MR=MC rule• Perfect competition: Profit maximization, Short-run supply and shutdown decision, Behavior of firms and markets in the short run and in the long run, and Efficiency and perfect competition• Monopoly: Sources of market power, Profit maximization, Inefficiency of monopoly, Price discrimination, and Natural Monopoly• Oligopoly: Interdependence, collusion, and cartels, Game theory and strategic behavior, Dominant strategy, and Nash equilibrium• Monopolistic competition: Product differentiation and role of advertising, Profit maximization, Short-run and long-run equilibrium, and Excess capacity and inefficiency• • III. Factor Markets (10–18%)• A. Derived factor demand• B. Marginal revenue product• C. Hiring decisions in the markets for labor and capital• D. Market distribution of income• • IV. Market Failure and the Role of Government (12–18%)• A. Externalities: Marginal social benefit and marginal social cost, Positive externalities, Negative externalities, and Remedies• B. Public goods: Public versus private goods and Provision of public goods• C. Public policy to promote competition: Antitrust policy and Regulation• D. Income distribution: Equity and Sources and measures of income inequality

Children, begin gathering your past tests

Final will be 25% old test questions, 25% modified old test questions, 25% will be

modified final review questions, and 25% will be one bad mother

Market Failure and the Role of the Government

• Market Failure can result from imperfect competition, externalities, public goods, and imperfect information

• Market failure results in the opposite of a market being in equilibrium, namely higher prices and a lower quantity… or low prices and too much without it being bought

• The solution for this would be obviously for the government to strive towards structuring a market more towards perfect competition…?

• 1776: Pure competition and liberal democracy

Infinite buyers and sellers Zero entry and exit barriers

Perfect factor mobility in the long run Perfect information

Zero transaction costs (such as liscences) Profit maximization at where MC=MR

Homogenous products Non-increasing returns to scale

Property rights

More detailed, but we have covered all of this…

This is perfect competition… imperfect competition is the opposite

Monopoly, oligopoly, and monopolistic competition are examples of imperfect competition

Externalities• These are effects felt

beyond those involved in demanding and supplying… Not reflected in the price

• Think of them as “spillover effects”

• Pollution is the best example

• Negative Externalities are from a failure for someone to account for the harms of their actions

• Positive Externalities a failure to account for the unintended benefits

OUR SECOND TO LAST GRAPH TYPE

The variables:•MB= Marginal Benefit of the individual buyer… Always declining (the Law of Diminishing Marginal Utility)•MSC or MSB=Marginal Social Cost or Benefit is when you examine the total effect of an externality in a market… cost is negative externality and benefit is positive externality•MEC or MEB= Marginal External Cost or Benefit is the additional externality gained from one more•MPC= Marginal Private Cost, what the buyer pays for each additional unit of product

OUR SECOND TO LAST GRAPH TYPE

The variables:•MB= Marginal Benefit of the individual buyer… Always declining (the Law of Diminishing Marginal Utility)•MSC or MSB=Marginal Social Cost or Benefit is when you examine the total effect of an externality in a market… cost is negative externality and benefit is positive externality•MEC or MEB= Marginal External Cost or Benefit is the additional externality gained from one more•MPC= Marginal Private Cost, what the buyer pays for each additional unit of product

Negative Externality Model Graph

Positive Externality Model Graph

What can you do to address externalities?

A Pigovian tax is a tax applied to a market activity that generates negative externalities. In such a case, the market outcome is not efficient and may lead to over-consumption of the product. A Pigovian tax equal to the negative externality is thought to correct the market outcome back to efficiency.

Negative Externality Model Graph

Remember, pollution is the cost of progress

Negative effects of public goods and imperfect information

• Public goods (non-excludable and non-rival) can create moral hazard- a tendency to be more willing to take a risk, knowing that the potential costs or burdens of taking such risk will be borne, in whole or in part, by others…

• Imperfect Information means that some people in the market know something about economic realities which the rest of the market does not… Where the black gold is

• No prisoner dilemma applies• Insider Trading - radingof a

corporation's stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the company.

Your homework

• Find and read an article opinion on moral hazard or insider trading in the 2008 Financial Crisis… Come to class ready to discuss what you discovered

Distribution of Income

• How do you think the bottom 20% compares to the top 20% in terms of income brackets?

• This top-heaviness of income has led to much social tension and questions about the essence of America

• Only 42% of Americans think income inequality has increased in the past ten years

• Lowest in Maine, highest in Texas

OUR LAST GRAPH1111!11!!• The vertical axis represents

the cumulative percentage of income, the horizontal axis measures the cumulative percentage of families beginning with the poorest and to the richest

• The perfect equality line means the bottom 10% would get 10% and so on… The line of inequality (known as the Lorenz Curve) is how it really is

• Gini coefficient is found by:

Shaded areatotal triangle area

If one person made all the income, what would the Gini coefficient be?

1

• Homework… Create two problems for each of the three themes we are studying

TAX SYSTEMS, THREE KIND

• Proportional taxes maintain equal tax incidence regardless… Everyone pays 30%

• Regressive taxes take more money from those at the lower brackets… The top 10% pays 1% and the bottom 10% pays 30%

• Progressive taxes take more money from those at the upper brackets… The top 10% pays 30% and the bottom 10% pays 1%