Discussion Q

In each of the following questions, what is the govts role? Does govt intervention improve the
outcome?
a. Public schools for K-12
Education is training the untrained. Once you are trained and working, that is a positive
externality.
b. Workplace safety regulations
Minimum wage, protect workers who lack the power compared to large conglomerates s
and business owners, whose main objective is to maximize profit.
OR, regulations might not be that efficient, because in a market point of view, business
might have incentive to pay more & lower spending on workplace. Workers might like
prefer that more.
c.

Public highways
Very rural areas dont get transportation. Places where they can get the most people to
board. Not a comprehensive network of transportation

d. Patent laws, which allow drug companies to charge high prices for life-saving drugs
Only a few people who are sick can get cured.

Circular flow diagram

PPF
The points inside the triangle possible, and points on the line are the most efficient production
agenda. Points outside are not reachable.
To reach the points outside of PPF you need 1. More resources(money, capital) or 2. Improve
technology (higher productivity)
Economic growth shifts PPF outward.
PPF & opportunity cost
-

Ex opportunity cost of producing 1 computer is 10 tons of wheat.

Opportunity cost of producing 1 ton of wheat -> 0.1 computer

Active learning
Which country is the opportunity cost of cloth lower
French has higher opportunity cost of cloth by 3 times.
So England is lower.

If opp. cost remains constant,

PPF is a straight line.

(In the previous example, opp. cost of a computer was always 10 tons of wheat.)

If opp. cost of a good rises as the economy produces more of the good, PPF is bowshaped.

In the case of a Bow-shape PPF

-

AT the top of the graph on the y axis, just taking one laborer producing beer -> can take
worker who is not really good at making beer

PPf slope gets steeper

At point A )top of graph)

But at the middle of the line, point B, most workers are producing bikes. The few left in beer
are the best brewers. Producing more bikes would require shifting some of the best brewers
away from beer production, causing a big drop in beer output.

Beer

Mountani bikes

PPF bowshaped when dif. Workers have dif skills, dif opportunity costs.

Summary of PPF
-

PPF shows all combinations of 2 goods that an economy can possibly prouduce, given its
resources and technology.

**Could be shifting inward if population decrease -> need immigration law to bring more
foreigners.

Chapter 4 Supply & demand

decreasing supply (no incentive to produce) is more dangerous than increase.
Like vs
Inflation vs deflation
*** Solve multiple questions for chapter 4 in supplement for this Thursday
Pg 87. #1~9
Price taker price set by market so you have no control over it just take it
Demand table table that shows relationship between price of a good and the quantity demanded.
Market demand vs. individual demand - market demand is just the summation of individual demand
(considering its a perfectly competitive market)

What would affect your demand? (other than price)

# of Buyers

Changes in income

Normal goods vs. Inferior good

Prices of Related Goods

Substitutes vs. complements

Tastes

Expectations

**change in price -> point moves along demand line

Change in demand -> change in demand curve.
Increase in buyers -> increase quantity demanded at each price, shifts D curve to right.
Demand for a normal good is positively related to income. If income increases, demand for a normal
good increases. Opposite is inferior good. Increase in income causes increase in QDat each price,
shifts D curve to the right.
Demand for an inferior good is negatively related to income. Inc in income shifts D of inferior goods to
left.

Prices of related goods

-

2 goods are substitutes if inc in price of one causes inc in demand for other.

Ex: coke and pepsi

Prices of related goods

-

2 goods are complements if inc in price of one cause a fall in demand for the other

Ex: computers and software

Hot dog buns and sausages, eggs and bacons

Tastes
-

Anything that cause a shift in tastes toward a good shifts D curve to right

Ex: Atkins diet became popular in 90s -> increase in demand for eggs, shifted egg demand
curve to the right.

Expectations
-

Ex: if people expect their incomes to rise, demand for meals at expensive restaurants may
increase now.

Supply
Lower input price -> increase in supply for that same price

Technological improve -> increase in supply

Increase in # of sellers ->
Expectations : Events in Middle east lead to higher oil price expected -> Dec. supply

Active learning 2
Supply curve for tax return preparation software.