What Basic Decisions are made in every economy? how are these decisions made in the American economy?
- 1. Allocate Resources
- 2. Determine the composition of output
- 3. Distribute products
- 4. Provide for Growth
- In America price plays major role by converying consumer preference, Govenrment plays important role
What factors shape demand? What factors shape supply?
- Consumer Tastes
- Consumer Income
- Prices of substitutes and Compliments
- Transaction Costs
- Increase in price
- Particular period of time
- Level of input prices
- Taxes and government regulation
Explain the difference between a change in demand and a change in quantity demanded.
Change in demand = shift in the entire curve
Change in quantity demanded = shift along the demand curve because of price change
Draw a graph that shows the supply and demand for a service. Label the axis, supply curve, demand curve, equilibrium price and quantity.
Show the effects of establishing a limit on quantity. What is the loss of social welfare? How much loss is born by consumers? How much by Suppliers?
Draw a graph that shows a consumer's indifference map and budget constraint. At which point will the consumer want to be at?
Price elasticity of demand
- measure relationship between a change in price and a change in quantity demanded.
- elastic if % change in price results in more than % change in quantity demanded
- inelastic if % change in price results in less than % change in quantity demanded
Cross price elasticity
measures the percent change in a substitute good or compliment divided by the percent change in the price of the good
Price elasticity of Supply
measrures the relationship between the change in price and the change in quantity supplied
measures the percent change in the demand for a given change in income
A good for which increase in price of one good leads to a decrease in demand for the other good
goods for which an increase in the price of one good leads to an increase in the demand for the other good
goods for which a decrease in the price of one good leads to an increase in the demand for the other good
amount producers recieve in excess of the amount necessary to induce them to produce the good
value the consumers get froma good but do not have to pay for
the maximum legal that can be charged in the market
minimum legal price that can be charged in the market
What is the principal agent problem? How can it be resolved? What is the "perfect" agent?
- Principal hires another to perform service on ther behalf and delagte some decision making ability.
- Fix is to make incentives congruent
- Perfect agent makes decisions the principal would make if fully informed
environment within which firms in aparticular market operate
Industry concentration- % of business done by X number of firms
Nature of demand- price elasticity of demand curve
Entry conditions- advantages over new entrants, government rules and regs
Product differentiation- degree to which consumers view one firms output as a substitute for the other firms output
Firm integration and diversification- extent to which firms offer one product or many, and the extent to which firms provide their own semiprocessed inputs
decisions firms make and the method used to implement these decisions
Pricing policy- collude, choose to sell small output at high price
Design of product- differentiate packaging
Advertising- advertizing changes elasticity of demand
Research budgets- invest in various amounts of new products
whether outcome enhances welfare and other social goals
Price and output at the level that would occur with competitive markets
does conduct reduce the number of jobs or wage rate in the industry?
small number of providers, seller large enough to influence the market
non-price competition, product differentiation and brand loyalty
single firm serves the market without close substitutes for its products or services
single payer, just one buyer
one buyer and one seller
- many buyers and sellers
- each firm produces a differentiated product
- firms can freely enter and exit the industry
Draw a figure that shows profit maximization under perfect competition.
Label the profit maximizing price and quantity
Draw a figure that shows profit maximization under a monopoly?
Label the profit maximizing price and quantity
What are the five conditions necessary for competitive markets? provide a health care example where each does not occur.
- 1. Small size, large number of producers and buyers. Buyer or seller cannot influence price.
- not occur when hospital is a monopoly in ageographic area
- 2. Homogeneous product, each product is identical to the product of all others, no differntiation, buyers indifferent
- not occur in prescription drugs
- 3. Free mobility of resources, can respond to finacial signals by moving in and out of markets easily
- not occur in licensure laws as barriers to mobility
- 4. Perfect knowledge-consumers, resource owners, producers must have perferct knowledge of information about price, costs, wage, sales, and quality
- not occur when consumers can't judge quality of health care services
- 5. No externalities-someone not directly involved in the economic action bears a cost or recievs a benifit from the action
- not occur when increase in vaccinations benifts the community
- Production process had indivisablilities, results in increasing returns to scale and monopolies
- ex. potential cost saving techniques may not be researched if the cost of research is born by a single entity
Public good externalities
- One person's consumption of a good does not reduce another person's consumption
- ex. public health measures, sanitation
- an owner does not incur all the benifits or costs associated with their property
- ex. factory makes smog that causes lung cancer
What are the three conditions necessary for monoploistic competition?
many buyers and sellerseach firm produces a differentiated productfirms can freely enter and exit the industry
What are the necessary conditions for a monopsonist to be able to force a discount from a provider?
Hospital would be worse off with lower volumes than with discounted charges
Insurer must be able to make a credible threat to move patients
hospital must be unable to replace patients
Draw a graph that shows the dead weight loss monopoly