Profit Losses and Entrepreneurs

Side note: sometimes making a profit can be a "good" thing for the world.

Consider: lots of rules, regulations

ex: Mayor Menino banned Walmart from entering Boston; 

Also banned minute care from CVS to ppl w/out health care insurance. =/

example example example:

Who is "Victor Schrengoss"?? 

-> made the riding mower, common material in bikes, revolutionized the coffin industry, the truck industry

He's a classic entrepreneur! But we don't know him.

    Ghandi: permanently starved 100s of millions of Indians; he was against trading, reliance on others; forced villages to be self-sufficient and it led to their demise

   Why don't we know Norman Borlaug, the "father of the Green Revolution"

Common Sentiments: Immoral to make $ off the sick, how dare we exploit them

-->what does it mean to make too much money off someone's misfortune

Consider: clothing stores make $ off our nakedness

schools make $ off our ignorance, locksmiths make $ off our fear

17-20% of GDP goes to health care?

insurance very expensive--> if eliminated health insurance, would it change anything?

ex: 1999, cost Rizzo $1200 for hospital visit; saved his life 

-people who didn't even know him put in a lot of time/labor

-yes, they did make $ off of him, even if had different political/relig views, still assisted

-->can't just believe in work, need to get paid  

- $ plays incentive to make cures; would you rather they didn't? when you want something,you pay more

- why not compensate those who saved your life

What is an entrepreneur & what should they be cognitive of?

-To start a business, understand your costs

Factors of Production

1) Labor:

explicit: wages      implicit: forgone wages

2) Land

explicit: rent       implicit: rent

Opportunity costs, use land to run college, give up value to rent to other people (farm? casino?)

3) Capital

explicit: rent     implicit: forgone rent

Oppor. costs: rent equipment (explicit), own equipment (implicit)

-As an entrepreneur, consider the sum of implicit and explicit costs

Profitability: rental rate + appreciation rate - interest costs

What are some benefits of buying?

Isn't it better to keep your money?

Potential benefits of buying:

Forgone rent:    annual rental payment / price of good

Lease: 1 yr --> $12,000 / yr

Buy: $32,000

==> 12,000 / 32,000 = 37.5% is amount saved by buying

What is Not Shown?

-Maintenance; clean, fix, replace, broken costs

-Approx 4% of price --> pay for maintenance 

ex: Given $100 mill for new building, but should raise $200 mill to cover maint. costs

-reason our tuition always goes up, 

Own asset: something of value

-expectation of what you could sell it for next year

ex: Suppose sell car next year at $24,000

(Annual Rent / Price of good) / (Change of asset price / Price)

-->(2,000 / 32,000) + (-8,000 / 32,000)

 37.5% - 25% - 10%

    r = 10% , interest rate

cost of buying, 37.5 - 25 - 10 = 2.5%

Absolutely should buy the car, 2.5% is how much rich each year from having owned the car rather than renting it

Even if pay cash, still pay interest

-->opportunity costs forgone

Tax This, Tax That, Buyer Foot the Bill

Recall: New equilib emerges, price increases
-->why didn't go up to $4?
-Reduction in quantity
-Tax puts wedge btwn buyer value & seller cost
-Tax itself is just a transfer
Problem: distortionary, prevents other gain in society

Liability on sellers, but buyers pay 75 cents more

Current tax code is a mess, 51 pages to complete entire thing
Problem: people spend time & effort; Rizzo est. that he spend 15+ doing his taxes...ew
HUGE # of people to help with/process taxes (more than UPS, FedEx, Walmart & IBS combined!!)

Costs: could tax everyone, how spend tax revenue?
-build pointless bridges? bail out failed businesses?

Reasonable tax: divides $ appropriately
Problem: Fed uses taxes as excuse to spend more

New Sales Tax, Target the buyers!
Key Question:     What side of the market is affected?

	Buyers	Sellers
Initial P	$3.00	$3.00
Final P	$2.75	$2.75
Tax Paid	$1.00	----
Burden (Real Cost)	$0.75	$0.25

New Equilib: Qt= 275 mill
P buyers=$3.75  P sellers=$2.75
-Regardless who we ask to send a check same across! Whether sellers or buyers, the numbers are the same
-Policy makers have no control over "who eats it"
-Underlying economics forces buyers to pay most of the tax, even when target the sellers  (like last class)

ex: Payroll Tax
split 50/50, "share the burden" between the firm and the worker
-labor demand elasticity incredibly high
-higher worker costs, fire some of the work force
-worker always pays for the taxes in the end; lower tax, continue working; raise tax, lose job

Rizzo paid $37,800 in taxes...well I think I may stay in college for the next 20 years and avoid that nonsense

What determines who pays?

Buyers pay 75 cents, Sellers pay 25 cents

-Notice supply curve relatively flat  -->buyers pay big burden

Imagine: Flat Demand, sharp supply, ==>burden on the firms

Good Tax Policy: Not distortionary!
Supply/demand not elastic
-Efficient when tax property, cannot reduce demand when already live on plot of land
ex: Supply curve of oil inelastic
Consider: when make the firms pay, shareholders and customers really end up paying

Subsidy
-Any increase in demand/supply not soley...something
-Function of relative elasticity

ex: subsidize per gallon of ethanol produced
-prevent ..i was falling asleep
-force certain proportion

Consider graph in class:

At $300, S & D crossed at 1013; 

With subsidy, (new equilib)  cost $290 and supply 1113; at that quantity could have priced at $343

   ==>  43 / 53 = 80% customers...205?

What true in tax world same as subsidy! But here both buyer and seller better off

Some Have What It Takes To Make Their Own Success

I found this article both enlightening and encouraging. It shows that with the right attitude, determination and a bit of luck, someone could be a successful entrepreneur. If every person relied on stable businesses for jobs and benefits, it would certainly help the individual but the economy would become stagnant. Big business know to be wary of eager entrepreneurs because
  1) New start ups can replace other businesses in the coveted spot
     -they have incentives to harbor demand
  2) Big businesses' fear of failure leads them to use smaller businesses for services and to remain competitive.

The piece convinced of the importance of entrepreneurs because they respond better than other to market signals and have the power to abolish old, unsuccessful ideas and implement better practices. It is vital for an entrepreneur to be flexible and the ability to adjust to demands or unpredictable occurrences. My favorite part of the reading was that it is "easier to ask for forgiveness than for permission". To make it, one cannot be afraid of failure, authority or uncertainty. I think it is hard for economists and investors to give entrepreneurs the credit they deserve because many people look for the short term, monetary gains rather than the larger impact or long term benefits.

Tsk Tsk Taxes

Recall: Problems with current drug prohibition
-$$ to enforce
-keeps police from doing other, more productive things
-->large bureaucracies are resistant to change; U.S. prison system the largest in the world
-->U.S. spends $33 bill, arrest 1.5 mill people annually to enforce the drug prohibition
-Lots of effort, yet drug use continues

If drug prices had risen? Real price to end user has actually fallen in past decades
-Drug interactions have strong correlation w/ violent crime rate and drug law enforcement
-elim drug prohibition, would reduce the drug homicide rate
ex: 40,000 deaths in Mexican drug war
  -people kill each other to get demand
  -cross border violence

ex: California's 3 strike law: 3 chances to be caught with marijuana then get 15-20 years in prison
-Completely reduces marginal cost of beating up/killing someone who know to 0
-cost isn't higher b/c end up in prison if knowledge of substance and you get out
-->lowered marginal cost of committing the next worst crime, already going to jail

Why drug law came into being when they did?
-recession, depression, prohibition happens when economy bad?

ex: Before 1930, no outright call for the replacement of the 18th Amendment.
How did it gain momentum?
Great Depression, ruined the federal tax income
Prior to 1913, 1/3 of gov't revenue came from liquor tax
-1920, income tax brought in more $ so Congress could allow temperance movement
--> $$ important!!!
-1930, income tax plummeted, awful recession
-Used liquor sales in 1934 to raise revenues

Economic Incidence of Supply & Demand

Application: Taxation

Consider: Odd, tax not benefit or cost, it is merely a transaction; doesn't help or hurt

-taxes just transfer

-$ to gov't a benefit? only good if dollars spend well

Excise Tax: legal liability for a tax is on the seller

-the seller has to write the check to the gov't

-customers not liable

Example: tax on millions of packs of bubblegum

   

Initial Equilib: P* = $3

After Tax:

P buyers =$3.75

P sellers = $2.75

Qt = 2.75 mill, Taxes $2.75 mill

	Buyers	Sellers
Initial P	$3.00	$3.00
Final P	$3.75	$3.75
Tax Paid	---	$1.00 ->$2.75
Economic Burden	75 cents	?

-Tax is one suppliers, tax affects the supply curve, $1 per pack 

-->shift supply curve UP by amount of the tax

-new equilib of 9

Notice, tax increased by $1, BUT

1st Result: price doesn't incr. by the amount of the tax

  -price went up 75 cents

2nd Result: How much $ raised by the gov't?

Wanted $3 mill, but generated $2.75 mill

Why Does This Happen?

Drives a wedge btwn buyers & sellers

-prevented other good transactions

-tax gets in the way; use $1 to gain 70 cents

--> tax greater than the value of the transaction, transfer won't happen

Problems with taxes:

-less wealth, fewer jobs, less businesses

-value of forgone transaction that would have happened absent of the tax

-bad if tax inefficiently

Cost resources to collect taxes

-Pay for peopel who administer, monitor & process the tax

-spend 41 cent per $100 tax collected to have the IRS, 115,000 people producing nothing of value

-dead weight separate from fraud  

Fraud: cheat on taxes, spend resources trying to cheat than doing something beneficial

School Lunch

While Rizzo has convinced me that rent control causes more financial problems than housing help, I'm not completely sure I believe that price ceilings are worth completely abolishing. In lecture, I couldn't help but this of the cap on the price of school lunches. Maybe the people who want the nice penthouses or the tiny hole-in-the-wall apartments should get them because of ability to and value, but I believe education is a right of children in America, and they should not feel isolated or penalized by an expensive meal in the school cafeteria. I think the costs incurred by capping the price of school lunches are worth the other benefits gained from students. Cheap, unhealthy food can lead to high costs on health care (obesity is quickly becoming a major cost for Americans in the billions of dollars in medical visits). Also, food allows children to gain the nutrition and energy they need to focus in class; a hungry student may struggle and fall behind his peers in academic performance. It's like we learned in class, regulation should not be the goal, but sometimes it is necessary. When it comes to our kids, I think this is a practice worth keeping.

The Use of Knowledge in Society

Hayek's article articulates many considerations regarding who does the economic planning. With competition, there is decentralized planning done by separate persons. Hayek explains that knowledge is spread amongst several individuals; this is to the organization's benefit because each person possesses something unique (this reminds me of the Chuck Palaniuk quote "Nothing of me is original. I am the combined effort of everybody I've ever known" or rather that we are the sum of all of our experiences)

I agree with the idea that no one can possibly possess all the experiences, ideas or connections that I have accrued in my lifetime. There will come a time when I will have something to offer that no one else can give; perhaps it is a skill or a lesson from a previous mistake, but it will lead to some sort of benefit or advantage in the future.

I like Hayek's quote:
"To gain an advantage from better knowledge of facilities of communication or transport is sometimes regarded as almost dishonest, although it is quite as important that society make use of the best opportunities in this respect as using the latest scientific discoveries".

Success according to Hayek comes from the ability to adjust and reform in a strategic and effective manner. We should be open to all possibilities and insight from others. Decentralization is the solution to many economic problems because it solves the "knowledge problem" and also feedback, cooperation and even competition to bring out the best performance and product that can be provided.

Problems with Price Ceilings:

The main problem that price ceilings cause is SHORTAGE. Less people are willing to sell but more people are willing to buy. The price cannot bounce back to equilibrium.

It is not a landlord’s moral obligation to keep prices down so they are affordable. If this is the case, why isn’t it everyone’s moral obligation to provide housing? Why is it just the landlord’s

Price ceilings are intended to serve the poor/middle class who are unable to afford housing, but they

Actually more costly that price ceilings are enacted because they cause:

-Enforcement and policing (regulation is a cost)

-Bribery

-Inequity

-low-quality housing

-facilitators (apartment brokers)

-discrimination

The minimum wage reduced the demand firms have for workers. With higher wages, firms will respond ON SAME MARGIN to fix it.

Drugs and Illegal things

Rarity vs. Scarcity

What is the difference between rarity and scarcity? If something is rare, is it scarce?

Rizzo’s engagement ring: It is the only ring of its kind (with Rizzo’s initials and his wife’s initials). It is RARE but it is not scarce.

Water: Water is not rare but it is very scarce

Therefore, rarity and scarcity are different in that rarity is absolutely little in quantity whereas scarcity is when there is NOT ENOUGH of a good (even if it is abundant).

Surplus vs. Scarcity

If there is a surplus of something, can it be scarce?

If there is a surplus of a certain good, the quantity can be scarce because it means you are making a tradeoff. Remember the definition of scarcity since the 1^st week of class: things are scarce because you have must forgo one good to get another good. 

Making a good illegal makes the supply more inelastic. The marginal opportunity cost increases because enforcement costs increase.

ex: You will LOSE marginal benefits, like benefits. Benefits are not included in your wages so with higher wages, firms may take away your benefits.

What are better alternatives to minimum wage?

-Earned income credit 

What matters most is that people are not excluded from the market.

Why do unions support minimum wages?

The Economics of Price Controls

Rent= payment for  the use of capital, something that acrues to you without doing productive activities
(Idea, tax rent b/c not doing anything, don't tax work, we want people to work)

Market Equilibrium: P* = $1,000, Q*=12,000
Controlled Equilib: P (with price ceiling) = $800. Qd=14,000 Qs=10,000

If dictate lower prices, less suppply
-->landlords can only charge $800, the quantity supplied is lower
Consider the costs to deliver, some space becomes coops, offices buisness
-Quantity supplied falls by 2,000

Long run, supply of apartments elastic, able to adjust the number of rooms, wallls
Price lowered does NOT change demand
BUT the quantity demanded increases
-People decide to share apartment, live at home,

Ceiling: price doesn't change
-creates new equilibrium, controlled equilibrium
-->shortage of 4,000

"Price ceiling is binding" ->set price control below price that would have prevailed in the market
(Not binding means above market price)

Why equilib?
Buyers/sellers cannot do something better
-->sellers' plan satisfied, buyers plan not satisfied

Consider: less apartments than before price control!
w/out control, buyers can bid up the price

At price of $800, are apartments less scarce?
Depends why the price fell.
If legislated price, unclear

Consequences of Rent Control

1) Reduced availability & harder to get

-Some other cost will arise

Qd = Qs = 10,000, want to reach equilib. demanders find way to get

ex: wait in long lines to get gas, drive around to find shortest line

all things incr. the cost of obtaining beyond the sticker price

2) Lower Quality Apartment

-Leaky pipe kept leaking; if you don't like, plenty of other people ready to buy that apartment

-Cost $ to fix it, & cannot charge more for rent, cannot afford repairs

3) Other $ Will Be Paid, Black Markets

-Customers willing to pay more than $800, landlords may charge "finders fee"

ex: apartment brokers find apartments for you, illegal bribes/kickbacks

4) Misallocations

10,000/14,000 = 5/7

-People who value the thing the most may not get it

-Live w/ annoying roommate, can't move out b/c hard to find apartment 

Sublet: cheaper to keep large apartment, sublet rooms but gains do not reach the landlord

5) Other Markets

More expensive to live in the city, now more expensive to sprawl, AND incr. $ to transportation

6) Fairness

Who's able to pay

7) Discrimination 

Cost of discrim. reduced, don't allow market to work, don't face costs

-Age, size of people, sexual pref. race, don't allow market to work, don't face the cost 

-Without rent control and don't lease out, lose the $ of those people

-point of market clearing means no line to fill up

-BUT with rent control, don't lost $, plenty of people will find you

By being landlord, make room available to somebody, does some social if does discrim a bit

Consider: Buyers can be discriminating too

8) Monitoring/Enforcing Costs

-Costly to review boards, undercover agents

1. Reduce incentives; supply curve shifts in, flatter

2. Monitoring destructive

  -People/Resources not producing goods/services we want

  -example of broken window fallacy, wasteful practice

-->world without rape, fighting etc. there is no need for cops

-Right kind of regulation yes, but goal should not be regulation

3. Even if police do good job, (ignore waste) have to raise taxes to fund; taxes costly on consumers and to collect

Fire that Central Planner

Sellers should only worry about their own costs
Buyers: don't need to know reason behind price, just whether they value that good enough for that price

ex: suppose agreed fed gov't should have strong role in health care, 1 size fits all, same for all states
What if...wrong?
In market, have incentive to solve problems
In gov't, no plan B even though different states have diff. needs
Trial & error successful in markets but not in gov't--> should mimic experimentation

What's useful about market equilibrium?
Lines cross, all happy, can't do better
Those who value the most will get the product

Resources used are the cheapest to employ; Chicago school of econ says you'll walk past a $100? b/c markets efficient enough...silly

4 Problems For the Central Planner

(Imagine 5 Demanders, 5 Suppliers, Happy Point at 3 Guitars Produced)

1) Who Should Make Guitars? Don't Know Firm Costs

Should one producer make X amount or all? Maybe S4 make all guitars? (But oppor costs $25)

-Price to pay workers, rent, electricity

-Profit missed from doing something else

Only costs S2 $15 to produce, world would be poorer if allocated wrong

2) Suppose got the sellers right, S1 S2 S3 have lowest oppor. costs

Who decides who gets the guitars?

Prices force people to reveal themselves to show what they value the most

Imagine if the wrong people were forced to consume those guitars 

D4 gets $15 of pleasure from it, but D2 gets $25 of pleasure, world would be $10 richer

3) How know that 3 guitars is the right amount to produce in market?

Cent. Planner says to produce 1 or 2

Problem: too few guitars, still more deals to be made!

Markets are NOT about producing as much as possible

->Produce 5, demand low don't value the guitar, too much created

4)? Social Responsibility of business

Price = cost/values, what does society deem as important

How firms handle burden?

ex: MA premium incr. for policies; MA healthcare plan passed BUT did not measure the increased cost on suppliers

Consider: MA in better health, better education, & more people uninsured compared to the nation

-->entire country cannot match MA people, should have diff. plan

Problem: need for more doctors so costs went up

ex: 60 aired segment on huge amnt of Medicare fraud, health issues matched with list of ppl

1) health & human services

-big challenge pays out billions of claims a year

BUT medicare becomes bigger! 

2) Why took gov't so long to notice?

It was "well-intentioned", didn't think would attract fraud

Problem with Central Planner:

No incentive to produce; Markets provide financial incentives 

Accountability for aid

-->Some aid makes poor worse off or doesn't help at all

Knowledge problem-->Need feedback!

Lesson: Survive, must decentralize decision making

States should be humble in light of knowledge problem

ex: let states be unique in health care

"one size" does not necessarily fit all

-learn from mistakes & keep trying

-Need to be rightly oriented to issue

Rent Control: Price Ceilings

-Legislate rent control, can't raise price above some ceiling

-->landlords can't raise and sellers can't bid for a higher price; Should it apply to all?

Why is the moral responsibility of the landlords? Not only provide bed, but MUST provide cheaply

Exchange is Immoral

There is no perfect system or solution for an issue, like room assignments, that affect a large population of individuals with unique situations and needs. Reading the housing process of Duke university reminded me of our own college's policy; both have instituted a room lottery that favors groups. (Ours simply has become more exclusive with the points system). It appears that the administration has done its part to impose a system that is as "fair" as possible, but it seems the process may change in light of the monetary exchange between student groups to swap housing assignments.

I was surprised (and initially impressed) that the Duke administration allowed students to trade assignments amongst themselves. But I'm not sure I understand why that trade becomes a "disgraceful" problem when money is brought into the trade; as the author of the post pointed out, both groups benefited and obtained housing for less than they valued. And furthermore, no party was hurt in any way (the neighbors of the BSSG are probably grateful as well for the swap with the fraternity). 

I think college administrations forget that even though we are students, we are still technically adults and should be able to make mature decisions about where we choose to live. It is important to note that the Duke student groups had the right to turn down the money offers from other organizations; they did not have that right to refuse the assignment from the lottery. I also believe the administration would find LESS student complaints about neighbors if students have more flexibility of where they live and can share spaces with other groups that have similar living habits.

Don't Mess with the Price System

Other systems besides price fail because they do not provide incentives.
-->imagine if ration by height, nothing gained
Making things "law" is dangerous, forces someone to provide a service



ex: 64 yr breast cancer survivor, would have to wait 5 months to see doc about her back, but the visit is free
BUT she can pay to see a doctor sooner
-A cyst would be covered by nat'l health care, but she was denied because she could afford the sooner visit
-People complained that she used the price system to jump the line
Consider: some people do need medical care more desperately
-Eng doctor-->not incentivised to do more surgeries or to do the hard procedures

The beauty of the market system
1) don't have people determine if "needy" or not
2) Will not waste suppy
-NO vaccine police to solve; production/consumption solved by price system

ex: Water Ban
-Don't run water, take dog swimming, don't..
-shortages persist, persuasion doesn't work (sadly, proof is in the cheating on our test)
-little less becomes a lot less
-expect price to rise, buy more now and put more pressure
-people don't realize the full cost of water use

Prices Force:

1) Value Cost; plan to use water when deem worth it
-cheap, use more $$ give up least valued uses of water
-Doesn't require force from police
2) Consider value others place on water
-If price jumps to $10/gal, says someone out there reallly wants it
-->make decision not to buy the water

Price gives chance for people to gain from transaction
-Price water & it rises, incentivises producers to make more
-entrepreneurs find to ways to produce water
-w/out price, not enough water
Allocated wealth, right people produce/consume

Why kidney transplants 4?
-lack of specialization, kidneys buried
-people dying from kidney failure
Obj: legalize kid. sales
Would unethical methods increase because of chance to make $?
Imagine, ban sale of kidneys
-->profits HUGE on black markets, marginal value highter

People thing of healthcare as a sep. good
-Scarce, how distribute to society?
What should determine who gets health service?
-w/ burritos, no objection
--> those value, get them, why different in health care?
-No one argues we should all eat same, wear same, live same

Founders of Eng. health care system wanted ALL equal, rich and poor alike
BUT inequality greater today
1)Impossible to make healthcare indep. of income, occupation, education
2) Even if possible, is it always worth it?
3) Why do so many people talk about it?

Consider: some heart surgeons better than others
-->depending where you go, some get better care than others
Imagine if line for best surgeon is across the country
-not everyone can afford the plane ticket to get there, the hotel etc

"Free Education"
-Must be able to buy home in that area, get to work from that house
=>therefore, access to education is not equally distributed

Make choices by flipping a coin?
90 yr old lady vs 20 yr old student, who gets the new liver?
-yes, veil of ignorance;

Imagine world without money
Guitar maker, need materials to build and stuff to live
    -money changes the nature of the transaction
Guitar maker wants a toothbrush, have to go around and find someone who makes toothbrushes
Does that producer want to exchange for a guitar?
-->Bartering takes time, waste chances to make more guitars or toothbrushes

1)Double Coincidence of Wants
2) Divisible: in barter world, have to divide stuff
-ticket=$200, guitar $2,000, give 1/10 of a guitar?
--inconvenient, hard to divide,
imagine paying for car with guitars, costs 100s of guitars
-->$ allows us to exchange more easily

why use price=assign monetary value

What Were They Thinking?

Well before I had step foot into an economics class, my friends and I were puzzled about a supply issue. Wendy's of course, offers delicious frostys and looking to save calories but still enjoy the cool dessert, my friends and I would get the kiddie size. Last summer, small frostys were offered at 99 cents, but the kiddie size was $1.50 (or something like that). Now, as much as I like conserving calories, I also like saving money, so I opted for the LESS expensive but the BIGGER size. This completely contracts the Law of Supply and common sense in my opinion. The only reason I could see why Wendy's would charge less for a larger size of the same drink would be if customers are more likely to buy more food when they buy more drink. For example, some people enjoy dipping their fries in the frosty (not me). Perhaps if they have a larger frosty, they would be willing to buy MORE french fries, or opt to get a burger too. In any case, I settle for paying less and eating half of my small (when I have the self control).

Supply Propoganda

 

During World War II there was serious rationing of goods nationwide; people donated scrap metal, created victory gardens and reduced the use of gas. At that time, demand for a variety of goods remained consistent while the amount of supply was greatly diminished due to the needs of the American army. These posters demonstrate another way to change people's consumption besides the price system. In this case, the public was inspired to demand less to be patriotic; it was their contribution to the war effort. By eating less meat or by using alternative materials for aluminum,there was enough for the army and people felt they were helping the nation. People respond better to positive persuasion rather than negativity or force. (But arguably, fear also is a significant inspiration) This campaign was successful because children, women and the elderly felt were a part of a bigger effort.

Another type of opportunity costs: what other customers are willing to pay
ex: hotel raised price of room during golf tournament
-gouged?! What if put out sign saying incr. b/c of tragic accident? Does the reason matter?
Price a business charges is what people are willing to pay, what they value at that price
-->Rizzo didn't like $$, shared bed instead of pay money for own room
-incentives for homeowners to step in and offer rooms for cheaper

Many ways to allocate scarce goods to people
ex: How get 5 fish to 12 people?
-all 12 can't have a fish
-price system = the rule to follow

ex: Pres Obama criticized insurance companies for rationing coverage
consider, # of people who need healthcare compared to amount of health care provided
BUT we ration everything else

Sample Rationing Criteria

1) Need

-vague, subjective, hard on a grand scale

-Who determines what is need? $? physical pain?

-How demonstrate more needy? (costly, uncertain)

2) Queue

-First come first serve; waiting inconvenient 

-Even if free, the line is cost

  --perhaps camp out, pay someone to wait for you

-CEO of company, poor working all hours, perhaps cannot afford to wait

3) Lottery

-Often considered "fair"

-Value/need goods but may/may not get it

4) Equal Shares

-Pure communism, divide equally and everyone gets some

-Low cost role

-Problem: not able to properly divide

  --If large number, barely receive anything and reduce the value

5) Might Makes Right

-Free for all! Biggest/strongest gets the fish by fighting for it

-Planning difficult, costly

6) Merit

-Ration scarce goods to people who "deserve" it

-est criteria (think college admission) social judgement

-says nothing about the value of achievment

   --Does intention matter over outcome? Problem: reward for duty rather than success

Evaluation of Rationing Mechanism

1) Where does competition come from?

-does not come from rationing 

-Derived from scarcity -->compete regardless of "rules"

2) What is the nature of competition?

-Destructive or Constructive

Destructive:

ex: Boys compete for Caroline, to get the date they need the biggest biceps

-->guys work out curls constantly;

Destructive, costly; they're not studying or doing what they enjoy

Competition: here, only focus on the self and produce nothing to sociey

ex: Rizzo does steroids to outcompete

-->BUT other guys do roids too and everyone gets bigger

-Still only one winner, nothing better produced

Constructive:

ex: Caroline wants the guys to bid for a date

-Boys compete by making $

-->teach econ, clean floors, bake goods

-->society is richer! Competition, something of value produced and the "losers" still have $

3) What are incentives for producers to make/deliver more?

-problem of supply

-compete over prices, people care about income

Consider: seem poorer, college will reward defect, dishonesty

Theory of Supply

All relevant costs for a producer are opportunity costs
--> more burritos, give up chance to make pizza

Quantity Supplied vs. Supply

 

Price	Quantity Supplied
$0	0
$0.50	0
$1.00	1
1.50	2
$2.00	3
$2.50	4

-Think of price as related to opportunity costs of producing that particular burrito
-Each pt =marginal oppor. cost (recall points on demand curve also marked margin)

So long as make each burrito 49 cents, will make a profit if sold for 50 cents
-Some prices are too low, could never earn a profit (perhaps it costs 80 cents to make 1st burrito)
NOTE: supply curve slopes up

"It costs more to make more"

How do producers change as prices change?

Do the cheapest, least costly way first

Supply: relationship of how respond to prices; marginal opportunity costs

Total Costs of Production: marginal costs of each unit produced added together

-area below to the supply curve up to that point

What can we learn from the supply curve graph?

1) Marginal

2) Total Cost

   = MC1 + MC2  ($1.00 + $1.50 = $2.50)

3) Total Revenues = P x Q

   2 x 1.50 = $3.00

4) Producer Surplus = total rev. - total costs

   -How much money is made, "profits"

Why do supply curves slope up?

"Law of Supply" 

Don't forget, violated, not always true

ex: labor supply, some usage may reduce work down the line, "backward bend"

1) Diminishing Return of Production

-harder to make more; tougher to make 5 vs make 1

ex: farmer owns 160 acres, which spot(s) to plant?

typically choose the best; imagine go from 10 acres to 20 acres

-next acres not as good, need more water, more fertilizer, more attention

  Consider, some technology doesn't matter, 10th download harder than 2nd?

2) Additional Resources

Imagine all the land is good, STILL have to buy more seeds, more machines, maybe more workers
-bid away tractors from other sources causes the price of tractors to rise

Changes in Supply

Quantity Supplied vs. Supply

Quantity Supplied: Change in Price -Move along the supply curve <--- only changes in price

Supply: changes in other stuff

-Supply curve shifts, causes a change in supply

 

<--Anything other than price that changes supply

ex: any change in factor (input) prices burritos need: land, labor capital

Rent falls: cheaper to produce

-expectations matter MORE for producers than consumers

ex:titanium on property; imagine that future prices will drop, dig up now to sell

-expect price to rise in future, wait

-->decr. production, also causes to bring up

(expect) change in technology -->supply curve based on constant

consider: improvement in technology improves production

-->shifts out

ex: changes in other markets

Pizza prices skyrocket, making big $$$

-> stop making burritos, start making some pizza!

Elasticity: changes in price to produce more

Price elasticity of Supply: how much more I will produce when price goes up

Relatively Elastic vs. Relatively Inelastic

Elastic: > 1
Inelastic: < 1
ex: longer time producers have to make decisions, more elastic (more choices)

Marginal vs. Average Costs

A	B	C	D = C / A
Burrito	MC	TC	Avg Cost
0	0	0	0
1	$1.00	$1.00	$1.00
2	$1.50	$2.50	$1.25
3	$2.00	$4.50	$1.50

ex: sell 2 burritos, market price $1.50

Sell next burrito if people willing to pay $1.75

-avg costs of production, $1.50, make a profit?

NOOOO

when producers think of unit #3, sell for $2.00, $2.01

could have lost 25 cents of 3rd

Consider: sunk costs 3rd burrito only matters when the ??? of last burrito, doesn't matter others

Avg costs matter for the long term

-firm entry/exit

marginal: incr/decr production

price system = way we ration goods in society