Lecture 1: Core principles of economics & Market Equilibrium Flashcards
HOW to balance efficiency with the rule of law in the regulation of markets in an international and European context? (110 cards)
1
Q
How is the study of economics legally relevant for lawyers?
give 4 reasons
A
- legal decisions have economic consequences whose costs and benefits must be weighed
- there are certain areas of law where lawyers will have to make economic arguments
- tdy legal rules are not only judged by their fairness and legality, but also their efficiency (an econ concept) - bc of increased resource scarcity AND liberalization
- judges stress role of efficiency in law - dont only look at what the law says + whether or not its efficient in practice
liberalization = privatization of public sectors = relevant
2
Q
What is an economic analysis of law?
define economic analysis
A
An economic analysis in law means using economic theories to understand how the law works
3
Q
What two key insights do we get by analyzing the law from an economic perspective?
A
- predict behaviour = we can predict how people respond to laws
- evaluate laws = we can evaluate if laws are efficient or socially beneficial
4
Q
why is efficiency relevant in law?
3 key world events
A
- privatization = selling preivously public sectors to private sectors (ex. state airline is sold to a private company)
- liberilzation = opening the market to allow private companies compete in what once was a public only field for more competition (ex. Allowing private companies to enter the telecom market that was previously monopolized by a state-owned company)
- globalization
5
Q
What is the main assumption that economic theories rely on?
A
economic theories assume that people are rational and respond to incentives
6
Q
How do legal sanctions act similarly to prices in economics?
A
= Legal sanctions (like fines) influence behavior by making people weigh the cost of breaking the law against the cost of compliance
explanation
- in economics => prices influence beahviour
- in law => legal sanctions (ex. fines) act like prices bc they influence behaviour
- ex. if u pollute a river u must pay 10k - u decide if it is more efficient to pollute a river and pay or not pollute and not pay
- the sanctions are what create the framework that help us; predict behaviour, evaluate efficiency of laws, and design better laws
7
Q
What is a traditional definition of law?
A
Traditionally, “a law is an obligation backed by a state sanction”
-a law is a rule that tells us what we must or must not do, enforced by a punishment
8
Q
How does the traditional definition of law comply with the economic perspective on law?
laws = rules + incentives
A
From an economic perspective on law, laws are not only rules but also incentives that influence peoples beheaviours + encourage them to act a certain way that is ‘desirable’ by increasing the cost of acting in an ‘undesirable way’
- law creates costs for certain behaviours via sanctions, thus the obligation is enforced bc it is ‘backed by a state’
9
Q
What is the cathedral of law metaphor?
“Economics is (just) one way of looking at the cathedral of law”
A
- we can look at a cathedral from many dif angles, we can analyze the law from many di flenses - moral, social, political, economic, philosophical, and ECONOMIC
10
Q
How did Calabresi and Melamed’s influential article contribute to the cathedral of law metaphor?
’ “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral’ 1972
A
- wrote an article that explored how dif legal rules (property rules vs liability rules) affected entitlements and efficiency - this connects to the cathedral metahpor bc it reflects their economic analysis shows one ‘painting’ of the cathedral, but does not disregard the idea that you can have many other paintings of the cathedral from dif angles
11
Q
What are the 3 core principles in an economic analysis of law?
A
- Efficiency
- Welfare
- Transactions
12
Q
What is efficiency?
what does the law have to do with efficiency?
A
- the centre of economics
**- making the best use of resources
**= by getting the most benefit with the least cost - so u esssentially balance the cost and benefits to maximize the net benefits - legal rules aim to maximize efficiency
- to do this we have to do a cost benefit analysis + figure out what the most effective way of achieving a goal is
13
Q
What is a net benefit?
give an example
A
- net benefits = benefits MINUS costs
- they show how much benefit there rly is
example; - a public program costs 1 mil, but saves 3 mil euros
- net benefit = 3-1
- net benefit = 2 million = which is efficient
- IF the net benefit would be NEGATIVE = not efficient
14
Q
What does maximizing a net benefit mean?
A
- increasing the benefit as much as possible + decreasing the cost as much as possible
- SO the gap between the two should be as large as possible
- (super high benefit, super low costs = big gap)
15
Q
What is cost effectiveness?
2 main forms
A
- only focused on reducing the costs, regardless of the benefit
- SO cost effectiveness only looks at lowering costs as much as possible
2 main forms;
- Transaction Costs = costs of making an economic exchange
- Production Costs = cost of creating a good / service
16
Q
What are four main types of transaction costs
explain w/ an example
A
example = buying a car
1. informing costs = researching cars
2. bargaining cost = negotiating with car dealership
3. monitoring
3. enforcement = making contract w car ppl, getting a lawyer
enforcment + monitoring sometimes seen as one
17
Q
What is the difference between efficiency and cost effectiveness - why is it important to acknowledge the difference?
give an example
A
- efficiency = looks at both costs AND benefits, its goal is to maximize the net benefit (increasing benefit, whislt decreasing cost)
- cost effectiveness = only looks at costs, its goal is to decrease the costs as much as possible
- JUST BC SOMETHING IS COST EFFECTIVE DOES NOT MEAN IT IS EFFICIENT
example;
- legislators vote to hire 10% less judges to save costs = cost efefctive
- a lack of judges reduc es the benefits of the legal system by 40%, so the net benefit is -30% (bc 10 - 40 = -30) = NOT efficient
18
Q
What is Pareto Efficiency?
(sometimes reffered to as allocative efficiency)
A
- it is a way to measure / judge efficiency
- according to pareto efficiency, an allocation of resources is efficient only when one person is made better off WITHOUT making someone else wores off
- aka it requires a win-win situation
SO
- if u can make a person better off without making someone else worse off, the situation is NOT YET pareto efficient, but it CAN be
- IF u cannot make a person better off without making someone else worse off, the situation is ALREADY pareto efficient (no room for improvement)
19
Q
There is an allocation of resources where Rachel gains, but Pheobe suffers a loss - according to Pareto efficiency criteria, is this efficient?
A
No this is inefficient because acc to Pareto efficiency nobody can suffer a lost, everyone must ‘win’
20
Q
graph;
Technology improves and producers of product Z are able to supply more of product Z at a lower cost. What happens to the supply curve?
- What happens to producer and consumer surplus?
- How is this related to Pareto efficiency?
A
The supply curve shifts to the right = increased quantity, and reduces price
- so consumper surplus INCREASES bc consumers pay LESS
- producer surpluss INCREASES bc producers create more of product Z at a lower price
-SO both parties are economically better off (save money) which means this is pareto efficient
x-axis = quantity, y-axis = price, supply curve goes up like this; /
21
Q
What is a monopoly in competition?
define perfect competition in your answer
A
A monopoly is the opposite of competition;
- where one single seller on a market controls the entire supply of a certain good or service - with no real competitor
- allows the seller to intentionally produce less suppplies, whilst increasing prices to increase their profits
- causes the price of their good to be ‘artifically high’ (since it isnt inreased according to natural competition
In a perfectly competitive market:
- There are many sellers offering the same product.
- No single firm can set the price — they must accept the market price.
- Consumers have many choices.
- Prices are lower, quality is higher, and efficiency is greater.
-
22
Q
Technology improves and producers of product Z are able to supply more of product Z at a lower cost. However, a monopoly forceloses the market, meaning product Z producers are the ONLY SELLERS
- what happens to producer and consumer suprlus?
- how is this related to pareto efficiency?
A
- producer surplus = increases (more profit)
- consumer surplus = decreases (we consumers have to pay MORE for LESS)
- this is NOT pareto efficient, since one party (producers) gain BUT at the expense of another party (consumers), regardless if the TOTAL SURPLUS increases
(even if it looks like the benefit outweigh costs, if even ONE person is ‘worse off’ something is no longer pareto efficient)
23
Q
What is the biggest limitation of the Pareto efficiency criteria?
give an example
A
It is difficult / almost impossible to achieve in practice so people view it as ‘too ideal’
example;
- There is a car transaction where the buyer values a car at 12,, and the seller at 10k = according to pareto they should agree on 11k BUT in reality sellers are greedy and want that extra 2k
24
Q
What is the Kaldor Hicks Efficiency Criteria
A
- ## according to this, something can be efficient EVEN WHEN someone is left worse off, as long as the winners can compensate the losers - creating a potential win-win situation (even if that never actually happens)
25
The Dutch Government is constructing a new highway. IT will raise overall property value, reduce transportation costs, but some citizens will be displaced. Is constructing the highway efficient?
| look at pareto efficiency vs Kaldron Hicks efficiency
**Pareto Efficiency =**
- no bc despite the benefits, the displaced people will be worse off
**Kaldron Hicks efficiency =**
- yes bc the total benefit outweights the total costs
26
Explain Polinsky's metaphor of efficiency in practice; 'maximizing the size of the pie'
| does this align with kaldor + hicks OR pareto
- polinskys views align with kaldor and hicks
- 'maximizing the size of the pie' means making decisiosn taht create the most value for soceity, even if not everyone gets an equal slice
27
How does efficiency relate to law?
- we want laws to be efficient
- understanding efficiency helps us make decisions, for example, should we switch from Law B which is less efficient, to law A which is more efficient for society as a whole, even if the switch will harm some people?
Kaldor Hicks would say yes, as long as the winners could in theory compensate the losers
pareto would say no
28
How have Richard Posner, David Friedman and Cooter&Ulen answerd the question; should the law *aim* to be efficient?
**Richard Posner = ex ante argument**
- yes bc we prefer laws that maximize total wealth / efficiency bc we dont know what position in society we will have
- this assumes ppl value predictability, productivity and mutual benefit
**David Friedman = practical argument**
- in practice people care abt efficiency, and prefer outcomes that maximize gains whilst minimizing waste
- most legal systems are already designed to generate efficient outcomes
**Cooter&Ulen = looks at goals of the law**
- efficiency should be a central goal of law, BUT NOT THE ONLY GOAL
- other concepts such as FAIRNESS + RESOURCE ALLOCATION for example should be considered
29
What are the limitations of efficiency
| aka limitations of efficiency being the main goal of law
1. efficiency is NOT equity
- efficiency = focuses on total welfare
- equity = focuses on distribution of resources acc to ppls needs
2. efficinecy is NOT fairness
- efficiency = focuses on an outcome, not on HOW the outcome is achieved
- if the outcome is GOOD but the process of achieving it is BAD, efficiency does not care
- ex. assinging seats via an auction is efficient bc those who value it most pay for it, but it is unfair bc poor students cant afford it
3. efficiency is NOT maximizing happiness / utility
- efficiency uses **willingness to pay (WTP)** to measure value
- BUT WTP depends on ones ability to pay, not our real needs
30
What was Posners example of why efficiency is not the same as utility due to the WTP value?
rich fam = may be willing to pay 100k for sons cosmetic surgery
poor fam = needs 20k to pay for medicine to cure son of disease
= under efficiency, which is based on WTP, the rich fam case matters more bc they r willing to pay more, despite the fact that the happiness gain would be greater from the poor fam since it would save their sons life
| WTP = willingness to pay
31
# The Nature of Economics
How is the lady of injustice viewed acc to law vs economics?
| focus on sword + scales
**law =**
- sword of justice
- scales help her weigh dif arguments + interests in order to achieve fairness
**econ =**
- sword of efficiency
- scales help her weigh costs and benefits of different alternatives to decide which alternative maximizes the net benefits best
32
# second key principle
What is welfare economics in law?
| define welfare
- according to welfare economics, people should be as happy and satisfied as possible
- SO welfare economics is a tool used to **analytically** determine whether or not laws increase peoples welfare
- THERFORE welfare is defined as utility, determined by satisfaction of desires
33
# welfare economics
Satisfaction can be (a) monetary or (b) non-monetary - explain;
monetary = wealth, compensation
non-monetary =peace, quiet, clean enviornment
34
# welfare economics
satisfaction can be subjective or objective - explain;
a) satisfaction is **subjective** bc something that satisfies + makes u happy, might make uthers unhappy or dissatisfied
b) satisfaction is **objective** in the sense that when you do something that makes you happy but HARMS others, that conduct should be limited + regulation should occur
35
Should welfare econmists judge our preferences / actions (based on what makes us happy)?
welfare economists should NOT judge our preferences - UNLESS our preferences cause HARM to other people, in which case they CAN judge us + limit that conduct
36
what is the aim of welfare economics?
to find a balance in satisfying everyones needs as much as possible without causing harm to anyone
37
# welfare economics
What is scarcity, why is it relevant in welfare economics?
**scarcity** = the resources we have in society are limited *ex. natural resources, time, money, labor*
- BC our resources are limited, we cannot satisfy everyone - which is why acc to welfare economics we should **distribute resources** in a way that **maximizes general social welfare**
38
What is a transaction?
| what does it involve?
- A transaction is an exchange where you exchange one thing for another
- every transaction involves 3 types of transfers that occur at the same time
- every transaction (made up of the transfers) also has transaction costs
39
Every transaction involves three transfers occuring simultanously. What are they?
1. physical transfer = actual delivery of a good
2. economics transfer = payment / exchanging money
3. legal transfer = change in ownership
40
What are transaction costs?
| state 4 of them
- costs that occur every time a transaction occurs
1. information costs
2. bargaining costs
3. monitoring costs
4. enforcement costs
41
when a transaction happens - what 2 things occur?
1. three dif transfers hapening at once
2. transaction costs
42
what is the relevance of contracts in a transaction?
contracts define the terms of a transaction and provide a legal structure for enforcing it
- people onl
43
what do costs and benefit shave to do with transactions?
- people only proceeding with transactions if the benefits outweight the costs of the transaction
44
what are opportunity costs?
- marginal costs dont only focus on the money spent, but include **opportunities we miss out on** when we make a decision
- SO opportunity costs are the **value of the 'next best' alternative we have to give up** when we make a decision
- **should ALWAYS be evaluated** when we make a decision
45
what are sunk costs?
- costs that can no longer be recovered no matter what
- so we should ignore them
- we **should NOT evaluate** them and use them to make decisions because our future decisions should be influenced by FUTURE costs and benefits
46
should we take sunk costs into account when making decisions?
NO
- we should ignore sunk costs because our decisions should be influenced by future costs and benefits
47
what are marginal costs?
- marginal = extra / additional costs
- when analyzing costs and benefits we dont only look at the total of costs, we focus on the **marginal (additional) costs** of the **next action**
- so when deciding whether or not to follow through with the 'next action', we assess if the benefits outweigh the costs, in which case we do the conduct UNTIL the benefits no longer outweigh the costs and then we stop
- helps us decide if we should do more or less of something
48
in order for Markets to ensure an efficient allocation of resources that realizes maximum welfare for
society - what precondition must be met?
the market must be perfect in order for it to ensure an efficient allocation of resources that realizes maximum welfare for society
49
What are market failures?
failures that occur when the market fails to allocate resources efficiently
50
What are 4 prominent examples of market failures?
1) imperfect competition (monopoly + oligopoly)
2) externalities
3) public goods
4) information asymmetry
51
what is imperfect competition
52
what are public goods? Why are they considered forms of market failures?
- goods that are valued by consumers but not provided by the market
- They are non excludable = you cant exclude anyone from using them
- They are non-rivalrous = when one person uses it other people can use it as well (more people can use it simultaneously
- example; national defense, clean air
cons;
- public goods create a free rider effect. Since they are both non-excludable and non-rivalrous, people can benefit from them without paying, and rely on others to pay for them instead. BUT if we all rely on others to pay for them, nobody pays, and the good does not get produced bc it is not profitable = thus the good stops being made meaning the market fails to provide it
-
53
what does it mean when a resource is non-excludable?
Is a public good excludable or non-excludable?
non excludable = you canot stop people from using that resource
Public goods = goods valued by consumers but not provided by the market, they are non-excludable meaning anyone can use them. For example, national defense, clean air,
54
What does it mean when a good is non-rivalrous?
are public goods rivalrous or non-rivalrous?
non-rivalrous = multiple people can use a certain resource at the same time
a public good = a good valued by consumers but not provided by the market, they are non-rivalrous meaning many people can use them at the same time. Ones use of the good does not prevent another person from using the good as well. For example, national defense, clean air.
55
A public good is both non-rivalrous and non-excludable. How does this contribute to a market failure?
public good = good valued by consumers but not provided by the market
non-rivalrous = ones use does not prevent another person from using it as well - multiple people can benefit form using the good at the same time
non-excludable = nobody can be prevented from using this good
this contributes to market failure because since anyone can use it anytime, people dont pay for the good as they rely on others to pay for it instead, as a result nobody pays for it and the good stops being made since its not profitable - thus the market fails to provide a valuable good
56
what is an information asymmetry?
When one party has more information than the other regarding a product, which can cause them to abuse their power and create a deal that benefits them at the expense of the other party - they take advantage of the lack of knowledge the other party has
57
What are externalities?
When ones conduct impacts third parties without their consent.
Can be positive = a third party benefits without paying
can be negative = a third party suffers a cost without experiencing the benefit
for example; polluition caused by cars
The market does not account to how such damage can be prevented or repaired.
58
What is a regulatory failure (or government failure)?
When the government aims to resolve a market failure, but the impact of their attempted sollution has an even worse outcome.
= in other words, the regulation imposed fails and the market failure is not resolved, or better yet, even worse than before
59
what are five main types of **regulatory** failures?
1. asymmetric information
2. lobbying / rent seeking
3. short time horizon
4. budget maximization
5. corruption
60
1. information assymetry
2. lobbying / rent seeking
3. short time horizon
4. budget maximazation
4. corruption
what are the four aforementioned subjects examples of?
regulatory failures
61
Information asymmetry as a regulatory failure
occurs when the government creates rules for producers and consumers that are confusing or unclear = therefore they faile
hence => regulatory failure
62
what is lobbying as a regulatory failure?
lobby = when groups attempt to influence the govs decisions so they align with their interests - if the govs create laws that profit powerful companies = regulatory failure bc profit is not natural
lobbying groups influence laws + regulations = fail
63
what is rent seeking as a regulatory failure?
when a company tries to make money by using power and influence (political manipulation) as opposed to making money by creating something new and valuable
= they use their power to distort regulatory processes = hence regulatory failure
64
short time horizon as a regulatory failure
short time horizon refers to the idea that politicians operate on short electoral cycles, ussually of 4 years. SO they create regulations and laws that lead to short term benefits as opposed to long term benefits = regulatory failure
65
budget maximization as a regulatory failure
when govs try to minimize their budgets bc they want more power, not because it is necessary = regulatory failure
66
corruption as a regulatory failure
= when public officials trusted with regulation abuse their power for personal gain and dont maxmize welfare at large = failure
67
What is perfect competition?
1. when there are many consumers and suppliers on the market = this means everybody is a price taker and they accept the price as it is (dont decide it)
2. includes homogeneous goods = products similar / almost the same so consumer is influenced to buy one based on price
3. no transaction costs = buying and selling is easy and smooth, there are no barriers to trade
68
what is a price taker
when market participants, so producers and consumers, take the price as it is instead of determining it. The price is determined by perfect competition (many consumers and producers interacting and 'competing'
= no single buyer or seller can influence the price
69
what are homogeneous goods - how are they part of perfect competition?
- goods that are similar or almost identical to each other
- thus a consumer decides which companies good to buy based solely on the price - NOT the actual product (since its essentially the same each time)
70
perfect competition has no transaction costs - what does this mean?
what are 3 ways in which no transaction costs are ensured?
there are no barriers to trade, the excxhange of goods is fast and easy
1) property rights in the market are clearly defined = there is no legal uncertainty
2) the market is perfectly transparent = fair and equal access to goods and information
3) no barriers to entry / exit of the market = this means anyone can start selling
71
What is inefficient competition?
= when at least one condition of perfect competition is violated
72
What is perfect competition?
1) many consumers and producers on the market = they are price takers not makers
2) homogenous goods = goods so similar that consumers decide which to buy based on price
3) no transaction costs = easy to trade, no barriers to trade
i) free entry and exit of the market
ii) property rights clearly outlined = no legal uncertainty
iii) transparency
73
What is imperfect competition?
Are most markets perfect or imperfect? Give some examples;
when at least 1 aspect of perfect competition is violated.
most markets are imperfect, for example bc of;
- natural gas = few suppliers
- jeans = are all a bit dif, ur not solely influenced by the price like for bananas
- notary profession = high barriers of entry
- building sector = in the NL they agreed NOT to compete and instead divided the market between the few building companies that existed, then they raised prices and made profit which did harm consumers
- the stock market = not always transparent, and transaction costs exist
74
# demand and supply
what is demand
- how much of a good / service consmers are willing and able to buy at dif prices
75
What are antitrust laws?
competition policies made by the gov to improve fairness and ineficiency and try perfect the market
for example;
- prohibit cartels / collusions (price agreements)
- prevent hamrful mergers (mergers that reduce competition or create a monopoly)
- stop predatory pricing (when a company randomly decreases prices driving out all competition and then drasticly increasing them
76
define demand, draw the demand curve
demand = how much of a product consumers are willing to purchase at a certain price
demand curve goes from left hand corner down
it indicates that the higher the price, the less consumers will buy, and the lower the price, the more consumers will buy.
SO there is a NEGATIVE relationship between price and quantity (bc slope goes DOWN)
77
what is the law of demand
as price goes up, quantity (amount consumers want to buy) goes down
as price goes down, quantity goes up
78
is the demand curve positive or negative?
aka is the relationship between price and quantity negative or positive?
negative bc the slope goes DOWN
79
What is the substitution effect
when looking at demand;
- when prices rise, people substitute the expensive product for something that is the same but cheaper
- a cheaper product will sell more than an expensive product
80
What is the locked in effect?
when people continue buying a product even when it is more expensive, it is an exception to the substitution effect
81
what is an exception to the substitution effect?
locked in effect = when ppl continue buying a product even after the price increases
substitution effect = when a price of a product increases so people substittue that product for something similar but cheaper
82
# demand
what is price elasticity?
price elasticity shows how much an increase in price of a product impacts the demand (quantity) that people buy
83
what does it mean when price is elastic?
what does it mean when price is inelastic?
What do the demand curves look like? draw them
elastic price = increase in price causes HUGE change in the quantity
- big reaction
- steep demand curve
inelastic price = increase in price causes very minor change in the quantity
- tends to occur in products which are considered to be necessities ex. milk
- small reaction
- more horizontal / flat demand curve
84
what is the typical price elasticity of demand?
ex. price of product demanded increases
in demand, when price increases quantity of demand decreases, therefore price elasticity is NEGATIVE (curve goes down)
85
AH riases the price of milk by 1%, sales drop by 0.2%. What is the price elasticity? is it elastic or inelastic? what does this mean?
price elasticity - 0.2%, this is below one which means it is a minor change in quantity, which means people continue buying milk
this means this is an inelastic price change
86
you raise price of ice cream by 1%, sales of ice cream drop by 3%. what is the price elasticity? is this price change elastic or inelastic? what does this mean?
price elasticity = -3%
This means the price change caused a major change in demand, meaning the price change is elastic. This means that people stopped buying ice cream due to its increase in price
IF BELOW 1 = INELASTIC
IF ABOVE 1 = ELASTIC
87
WHAT is supply in perfect competition
in perfect competition, there are many producers supplying products. SO producers are price takers, the price they produce at is determined by the overall market
- THERFORE a producer is a quantity adjuster - since they cant choose the price, but they CAN choose how MUCH to produce at a certain price to maximize profit.
88
can a producer choose how much to supply and the price to supply at in perfect competition?
NO
- in perfect competition the producer can choose how MUCH to supply
- but because there are many producers ihn perfect competition, they are price takers thus they must become price adjusters and adjust to the price that as given by the overall market
they determine how MUCH to produce at the given price through calculating; profit = marginal revenue (pricexquantity) - marginal coost
89
total revenue
price x quantity
- total amount of money firms earn from selling a product
90
marginal revenue
extra money u get from selling ONE MORE UNIT of the product
so Marginal Revenue = Price
- SINCE in perfect competition you CANT CHANGE THE PRICE, the price is equal to marginal revenue
91
In perfect competition, the price of a product = marginal revenue. how come
marginal revenue = profit from making one extra product
- its the same as the price of the product bc in perfect competition you cannot decide the price yourself, the price is set by the market and will always be the same
(horizontal line on graph is the price = MR)
92
marginal revenue vs total revenue
marginal revenue = profit from making one extra product (pricexquantity)
total revenue = total profit made
93
fixed costs vs variable costs
fixed costs = costs that always stay the same no matter how much you produce, you always pay these costs even if you dont produce anything
variable costs = costs that vary based on how much of a product you produce
94
fixed costs
costs that always stay the same, regardless of how much you produce. so you will have these costs even if you do not produce anything (ex. rent)
95
variable costs
costs that change based on how much you produce - ex. the more you produce, the more expensive
- ex. costs for workers, electricity used etc.
96
define short term costs + examples (are variable and fixed costs short term costs?)
costs that can change in a short amount of time (a company can reduce these costs overnight)
- example = variable costs - CAN change overnight bc you can change **labour**
- example = fixed costs =CANNOT change overnight, too difficult
long term = anything can change
97
In the short term, what is the only thing (cost) that you can change?
LABOUR (part of variable costs)
98
graph average variable cost (AVC)
variable cost = based on how much you produce, so the more you produce, the more expensive,
average variable cost = Total variable cost x Quantity
- at first theAVC is low and efficient, ur producing a normal amount at normal price
- the more you produce, the more workers you need, the more expensive it will be to produce and the higher the variable costs will be - so they rapidly increase and become less efficient
- at a certain point, you reach a limit of how much you can produce - and you have too many workers in relation to the number of machines you have = this is inefficient bc variable cost is very high = this is called **diminishing returns**
99
graph average fixed cost curve
= total fixed cost / quantity
- at first, the fixed cost is high even if quantity is low because the fixed cost does not chagne based on how much you produce. As quantity increases, the fixed cost goes down - this is because you then cover the fixed costs and keep the profit so the more you produce the 'cheaper' the fixed costs are
- this is called **spreading the fixed cost**
100
graph average total cost
= average variable cost + average fixed cost
SO first goes down bc of AFC, then goes up bc of AVC
= total cost / quantity
101
graph marginal cost curve
marginal cost = profit made from an additional unit = suppply
- as quantity increases, price increases (Bc its more expensive to make the product)
102
what is profit
revenue (how much money you make) - cost
IF MR > MC = ur making more money then ur spending so you should continue producing more UNTIL MR = MC which maximizes your profit, IF MC > MR = ur losing money
103
MR = MC - what does this mean
this means that marginal revenue is equal to marginal cost, so the amount of money ur making is the same as the amount of money ur spending per additional product which is when profit is maximized
104
what if MC> MR
this means marginal cost is greater than marginal revenue, which is inefficient and means the cost is greater than the benefit and you should stop
105
what if MC < MR
this is good, it means ur marginal revenue is bigger than the marginal cost, but it is not equal yet which is optimal, so you should continue producing more
106
in perfect competition, how is the marginal curve the supply curve?
since there are many producers, they dont determine the price of the product they take it as it is, so they are price takers. This means the price is equal to the marginal revenue (price per additional product). Since profit is maximized where Marginal revenue = marginal cost, it means that Price also equals Marginal cost.
- SO the MC / P / MR curve indicates how much to produce at any given price = this makes it a supply curve BUT ONLY ABOVE A CERTAIN PRICE
BASICALLY;
- price = marginal revenue
- to maximize profit MR = MC at every price
- SO MC is the supply curve
107
what does horizontal summation mean for the supply and demand curve
demand;
- you add up how many ppl are willing to buy something at a certain price = creates the demand curve
supply;
- you add up how much a seller is willing to supply at a certain price = creates the supply curve
108
what is the market equiibrium, graph it
= optimal price determined by where the supply and demand curve meet, aka where consumers and producers agree on quantity and price
quantity demanded = quantity supplied
109
explain why or why not the market equilibrium is pareto efficient
market equilibrium is pareto efficient because supply = demand which means that everybody is happy and nobody can be made more better off without making someone else worse off - thus reources are maximized and there is no waste
110
