Profits 12/12

-> Profits = Total Revenues - Total Costs (Explicit and Implicit)

-> Contracts reduce uncertainty, helping facilitate transaction

-> "Interest" - Price paid to consume today though you haven't earned it yet, and cost for loaner to not have that money over loan period

-> Even if accounting flow brings in positive monetary profits, economic profits may be negative due to implicit and opportunity costs

-> No such thing as guaranteed profits

-> Competition drives prices down and increases worker profits; preventing it does the opposite

-> Losses insulate against waste and curb risk-taking, preventing resource misallocation

The Entrepreneur 12/9

-> Entrepreneurs need 3 things:
1. Land
2. Labor
3. Capital

-> In determining profits, entrepreneurs can't ignore opportunity costs of using the land, labor, and capital they have for their business rather than for other means

-> The formation of entrepreneurial businesses is key to the economy and should not be overlooked in determining policy. 

Legal and Economic Incidence 12/7

1. Cost of taxes includes the deadweight loss and the cost of collecting, in terms of time and money: also includes cost of time spent preparing taxes and cost of hiring others to do it, again in terms of time and money

2. Whichever side of the market is more inelastic will always take the brunt of the tax, despite who the tax is aimed at -> RELATIVE ELASTICITY is the key to analyzing tax revenues and determining who takes the burden of taxation

3. Legal incidence and economic incidence are orthogonal

4. "Incidence" - Who really pays

Supply-Demand Changes 12/5

1. Illegality of drugs encourages:

• Less moral people to enter the market
• Stronger drugs
• Need for enforcement, which takes time and money

2. Taxes are neither a cost nor a benefit, since they only shift money around; however they prevent potential transactions, called the dead weight loss. This is where they hurt the economy.

3. Placing a tax on sellers is essentially taxing buyers; can't just isolate one side of the market for taxation without affecting other side

Class Notes 12/2

1. Price controls create need for security which creates opportunity costs of what enforcers could be doing. Security is a cost.
2. Housing vouchers would be much better than price ceiling
3. Increase in price decreases quantity demanded, not demand
4. Minimum wage does not help the poor, but admittedly it doesn't hurt too much either; a better system would use an Earned Income Tax Credit (EITC)

Price Controls 11/30

Outcomes of Price Ceilings
1. Reduced availability of good; harder to get! -> Shortages
2. Lower quality goods
3. Development of Black markets
4. Misallocations
5. Other neighborhoods face higher demand and higher prices
6. Lack of fairness
7. Discrimination since there is a lower cost of being discriminatory
8. Costs of enforcement

Market Equilibrium 11/28

1. Prices economize and give information to solve economic problems, without comprehensive knowledge on either side of the market -> personality traits, lifestyles, etc... Despite this, prices force consumers to take into account how much other people value goods

2. Markets have trial and error advantage over politics and central planning

3. Planned economies suffer from a knowledge problem and leave room for side deals and other hidden transactions, despite attempts to prevent this.

Class Notes 11/23

1. Change in prices DOES NOT change demand, it only changes quantity demanded
2. Prices demanders who cannot afford the good and suppliers who cannot produce it cheaply enough are forced out of the market
3. Changing this equilibrium arbitrarily leaves money on the table, incentivizing black market deals and other corrupt transactions

Equilibrium and The Price System 11/21

1. Money reduces exchange/transaction costs and helps facilitate trade by encompassing the value of goods
2. Surplus - At that price, quantity supplied is higher than quantity demanded
3. Shortage - At that price, quantity demanded is higher than quantity supplied
4. Double-Coincidence of Wants - Have to find someone with good you want who is willing to trade for what you have

Rationing Continued 11/18

Two Major Things to Consider

1. How will rationing determine competition?
• Constructive?
• Destructive?
2. Long-term consequences of rationing?
• How does rationing alter incentives?

• "Need" system incentivizes need, not production
• People can cheat "need" system by hiding income, assets, etc...
• Will moral people claim "need"?
• Price system allows for Consumer Choice
• Other systems claim to be better for poor but are often worse
• Needs no policing, since consumers determine distribution and price organically
• Other policing systems often fail and are cheated because there are no true incentives, only negative threats
• If a shortage is threatening, people's consumption will increase to prepare
• worsens shortage by immediately decreasing supply
• EXPECTATIONS
• Price system raises price in a shortage, decreasing consumption and forcing efficiency
• Forces Cost-Benefit analysis
• Consumers have to find out best way to use good
• Automatically makes consumer consider value of water to others, conveying needs honestly and organically
• Allows mobilization of goods to areas that need it
• Saying "You Must" does not work nearly as effectively
• Markets allow for long-term planning, an advantage no other system has

Rationing 11/16

• Need for rationing arises when you have too few goods for too many people
• Examples of rationing mechanisms
• Need
• Queues
• Lottery system
• Equal shares
• "Kickin' Ass!"
• Merit -> "beauty", "smarts"?
• etc...
• How much other people are willing to pay impacts price
• Not taking higher offer is a real opportunity cost for the business, which raises prices
• Lower supply = Higher Prices; scarcity increases
• Businesses respond rationally to demand and expected willingness of consumers to pay
• If one tries the "need" metric, which is hard to define in itself, Rizzo claims that neither the neediest nor the people who want the good the most will receive it
• This is why you need prices
• Lottery system may be "fair", but it does not guarantee that the neediest or those who value the good the most and can use it best will get the good
• Inefficient in outcome
• May be rigged
• Equal shares mechanism dilutes value to the point of worthlessness
• Some goods can't divide well
• "Kickin' Ass!" is destructive competition and does not allow for planning
• We compete because of scarcity, not "capitalism"
• Capitalism doesn't create competition, it deals with it; competition is inevitable

Theory of Supply 11/14

TODAY IS MY BIRTHDAY!

Theory of Supply

• What changes supply?
• Own Price ("Quantity Supplied")
• Something else ("Supply shifts")
• Supply Elasticities
• = % change in quantity supplied / % change in price
• < 1 = "inelastic"
• > 1 = "elastic"
• Supply cost is the opportunity cost of not using the materials for a different good
• Leads to differences in prices
• Low Wages may be caused by a lack of other potential or real employers
• Lack of competition among employers
• Lack of demand for workers
• Lack of choice among employees to find other work
• Supply and demand are very similar in their trends and analysis
• "Law" of Supply, NOT "Law of Supply" -> first is indefinite, second is definite; supply is not truly a law
• As the price a consumer is willing to pay increases, supply increases
• If a future price increase is expected, short-term supply will decrease since suppliers will pull back in expectation of greater future profits
• The opposite occurs if price in the future is expected to drop
• Each point on a supply curve represents the marginal opportunity cost of making the product
• Other things to learn from a supply curve
• Total Revenues = Price sold x Quantity (P x Q)
• Consumer surplus / producer surplus
• If there is a supply curve in any factor market, attached goods will have a supply curve, even when they are otherwise "perfectly inelastic", though this is impossible
• Change in input (factor) price will change supply
• When input prices fall, supply increases
• When input prices rise, supply decreases
• Technology can shift supply curves out (increase supply)
• Substitutes can shift supply curves in (decrease supply)
• Expectations matter a great deal in shifting supply curves

Elasticity and Total Revenues 11/11/11

• Higher prices do not necessarily lead to higher total revenue
• "Perfectly inelastic" - No change in Quantity Demanded regardless of price (impossible)
• No alternatives?
• No opportunity costs?
• "Income Elasticity of Demand" - % change in Quantity Demanded / % Change in income
• > 0 means the good is normal (as income increases, the quantity demanded of the good goes up)
• < 0 means the good is inferior (as income increases, the quantity demanded of the good goes down)
• How does income affect consumption?
• Quantity of goods
• Type of goods
• Cost - Something that consumes resources
• Must be an action
• To whom?

Elasticity 11/9/11

• Elasticity - % change in quantity demanded / % change in whatever you are interested in
• > 1 means demand at that point is "elastic" (quantity demanded is sensitive to price changes)
• = 1 means demand at the point is "unit elastic"
• < 1 means demand at that point is "inelastic" (quantity demanded is insensitive to price changes)
• What impacts Elasticity?
• Time
• Budgets
• Substitutes
• Elasticity of 2: Change in quantity demanded is double the change in prices
• Changes in the market may take time to occur and become apparent
• Elasticity is not constant along a demand curve

Market Demand 11/7/11

• The more aggregated we get, the flatter the demand curve gets
• If prices go up with wages at a similar rate, the change in demand will be minimal
• What changes consumption?
• Income
• Substitutes and relative convenience
• Expectations
• Tastes, individual preferences
• # of individuals in the market
• INCOME NOT PRICES IN ANALYZING ECONOMIC GROWTH
• What affects demand
• Income
• "Normal" - When income goes up, quantity demanded goes up
• "Inferior" - When incomes goes up, quantity demanded goes down
• Normal and inferior goods are subjective and relative

What is Demand? 11/2

1. Demand is NOT an all or nothing concept, it is a Marginal Concept


2. Demand - The relationship between the amount of something you wish to obtain and the sacrifices required to get it

3. "Quantity Demanded" - Amount of a good that buyers are willing and able to purchase at a particular price


Willing - Subjective Preferences
Able - Concept of whether you have enough income to purchase the things you want

4. "Law of Demand" - Given other factors held constant ("ceteris paribus"), the quantity demanded of a good falls when the price ("cost") rises; essentially, that cost and demand are inversely related

5. "Law of Demand" describes human nature and applies to any trade-off we must face; not just a theoretical economic concept

6. Be wary of "helium balloon" paradoxes which seem to violate the "Law of Demand"; instead, ask "How can this be reconciled with what we know about the 'Law of Demand'?"

7. Money prices in trade-off analysis and demand curves stand in for the goods given up due to opportunity costs

8. $0 does not equal infinite demand, due to other costs and varying preferences among the population

Theory of Supply and Demand 11/4

1. Transaction Costs - The cost of arranging and negotiating contracts and agreements, may include:

• time
• physical costs
• "ignorance" or a knowledge problem
• interference (social norms, religious values, cultural institutions)

2. Transaction costs are essentially limiting factors that inhibit trade

3. Great entrepreneurs know how to minimize transaction costs

4. Middleman - Anyone who gets buyer and seller together by removing transaction costs

5. There can be comparative advantages in reducing transaction costs

6. Small groups have less of a knowledge problem and can more easily overcome them, in addition to having more responsive feedback loops and less of an incentive problem.

7. Prices - Allow each of us to act on information, acquire knowledge about value, and make informed decisions about goods

8. High price signals value and scarcity (high demand and low supply); you can't have scarcity without demand

What is a market?

• Collection of (potential) buyers and sellers 
• Can be a physical market or a virtual market
• Any decentralized, unorganized interaction between potential buyers and sellers

Order - "Stuff's there"; equilibrium between demand and supply

Class Notes 10/31

1. There is no such thing as a positive or negative trade balance -> the balance is always 0.

2. Trade deficits often lead to an increase in economic growth and employment, or at least there is a correlation

3. Buying "local" leads to significantly higher costs in both money and time by preventing specialization

4. Economics does not change across geographical or political borders

5. Definition of "local" is often arbitrary

6. Why do we care about American poor, yet ignore world poor?

7. Often we only see who is hurt by outsourcing and job displacement, and ignore who it benefits

8. Concentrated damages and spread benefits are no excuse for preventing economic change

9. The concept of "Race to the Bottom" is laughable when you look at the data

10. FDI (Foreign Direct Investment) often flocks to more environmental, humanitarian, etc... countries

Class Notes 10/28

1. Productivity and employment are generally inversely related, though this is not an effective argument against productivity or technology that promotes productivity.

2. More ATMs does not equal fewer jobs. In fact, it may mean the opposite.

3. Complements vs. Substitutes - Most technology is complementary to labor rather than a labor substitution.

4. Wages in China are increasing at a very rapid rate, NOT DECREASING

5. What is important is the ratio of wages over the Marginal Product of Labor. By decreasing this ratio, technology may actually save jobs by making the workers of more advanced countries more efficient. It is not necessarily cheaper to export jobs to countries with lower wages.

6. We have larger deficits with Germany and Japan than with China. China may even run a trade deficit in the near-future.

7. Statistics are meaningless without context.

8. If trade deficits kill jobs, trade surpluses must create jobs, right? NO


9. Roundabout Production

10. Due to diversity of tastes and interests, it is hard to completely eradicate any industry by providing free goods. For instance, even if on Jan 1 every year Korea sent us enough free cars for every person in the nation, the car industry would still survive since not everyone would prefer the Korean car.

11. NAFTA is good. Since it has passed, jobs have continued to increase.

AND FINALLY:

"You can always profit by doing something." - Rizzo on a gourmet chip company which sells burnt chips profitably.

"I think I understand how the world works. I really do. You should write that down. OMG my Econ professor just mentioned belief!" - Professor Rizzo.

Class Notes 10/26

1. Poor quality jobs replaced by machines are offset by the creation of higher quality jobs. New jobs created by technology > Old jobs lost to technology, in both quantity and quality (and safety, for that matter)

2. Trade is often used as a scapegoat for the world's problems.

3. Trade does create a more volatile job market, but it does not destroy jobs. It simply changes the composition of the job market.

4. There is an abundance of jobs, and if you have a strong (and relevant) skill-set, people will find a way to utilize it.

5. Jobs are a cost, not a benefit

6. Exports - Imports = "Trade Balance" of Goods and Services

7. Even with the trade deficit, jobs have continued to increase consistently. On any employment graph, it is impossible to note when the trade deficit began, because there is no significant change in any trend.

8. The societal determination of which skills and skill sets are valuable is the cause of inequality and its fluctuations.