Lecture 21, Friday, Oct. 30. Lecture. 1. Wed: Stay home and participate in Tragedy of the Commons experiment

Transcription

1 Lecture 21, Friday, Oct Wed: Stay home and participate in Tragedy of the Commons experiment Lec1(a) 9:05-9:30 Lec1(b) 9:30-9:55 Lec17(c) 10:10-10:35 Lec17(d) 10:35-11:00 Lecture 1. Robinson/Friday trade The complete picture 2. Public Goods 3. Cost curves (ATC, MC, etc.) 2. No office hours next week because I am out of town Tues- Thur

2 Comparative Advantage as a Basis Robinson PPF C o c u n u t slope s = 1/3 2 0 IC (autarky) slope = 1, world price IC (trade) C A PPF BC Fish Produce Consume Autarky A(12F,4C) A (12F,4C) Trade B(24F,0C) C(12F,12C) B for Trade (Complete Picture!) Friday PPF C18 o16 c14 u12 10 X n u 8 slope t 6 = 3 4 s 2 0 Y PPF slope = 1, world price IC (trade) Z IC (autarky) BC Fish Produce Consume Autarky X(4F,12C) X(4F,12C) Trade Y(0F,12C) Z(12F,12C)

3 Lots of great stuff on the previous page!!!! 1. production possibility frontier 2. choice under autarky (on budget constraint where MRS equals opportunity cost) 3. specializing in terms of comparative advantage 4. gains from trade 5. Supply=Demand (Robinson supplies 12 fish and Friday demands 12 fish) Public Goods One last visit to Econland The Widget, a private good. New words: Rivalrous in consumption I eat it, you can t. Excludable People can be prevented from consuming it. These are the two characteristics of a private good.

4 Nonrivalrous in consumption One person consuming the good doesn t take anything away from another s ability to consume it. Tornado siren. I hear it, you can still hear it. Watching a TV show Nonexcludable Can t prevent people from consuming the good. Tornado siren. Can t set it up so that only those paying for the service get to hear it. (Unless make it work through cell phones) TV programming? Once was not excludable (old fashioned over the air). But now can be excludable with pay-for-view, etc.

5 Public Good Nonrivalrous Nonexcludable Examples: Tornado Sirens, Street lamp National Defense Research (if no patent system) Music and Film (if no intellectual property production) Now newspaper reporting! Efficient Provision of Public Goods vs. Efficient Provision of Private Goods Private Good: rule: should make another unit of output and give it to a person if that person s marginal willingness to pay exceeds the marginal cost. D1: values a widget $9 S1: can produce at $1. Make the widget!

6 Different story with public goods. I never told you this, but Econland has no sun! (So dark all the time) Proposal: Build an artificial sun, will light all of Econland. Cost of project is $20. What is willingness to pay? : Name would Name pay D1 9 S1 0 D2 8 S2 0 D3 7 S3 0 D4 6 S4 0 D5 5 S5 0 D6 4 S6 0 D7 3 S7 0 D8 2 S8 0 D9 1 S9 0 D10 0 S10 0 would pay If this were a private good at a cost of $20 per unit, the efficient amount would be zero.

7 Public good: Add the willingness to pay of each together. If the artificial sun is build, all get to enjoy it. Social Marginal Benefit from building the artificial sun is: = $45. Greater than $20. So socially efficient to build the artificial sun. But because nonrivalrous and nonexcludable, will get market failure In the free market, there is a free rider problem. Worth it to do, but no one willing to put up the whole amount to do it themselves. Have a role for government. Gov t were to tax D1-D4 $5 each, there would be a Pareto improvement One last point: because of technological change things can become excludable that before were not excludable, and the other way.

8 Suppose can build an artificial sun where you need a certain kind of sunglasses to see the light. Entrepreneur build the artificial sun, sell sunglasses to people for $5 D1-D5 buy, get $25 in revenue. Pays for the $20 investment. The good is now excludable. Key point: will need intellectual property protection. If someone can sell bootleg sunglasses, then the entrepreneur unlikely to be able to make a go of it. So won t get the investment in the first place. Economic Logic of intellectual property protection like patents and copyrights

9 3. Costs Costs pretty simple so far in Econland S1: can make 0 or 1 widget. Cost to make 0 widget: $0 Cost to make 1 widget: $1 In real world, things are usually more complicated. Meet S11 Details of her widget operation. Fixed Cost of $4 to be in business These are costs that are the same regardless of quantity produced. Examples: Salary of the CEO Electric bill for lights rent on factory Or long-term rental contract on a truck

10 Variable Input: Labor Q L (hours) Variable Cost (wage=$2 an hour) Variable Cost (VC) = Q 2 (For S11) We will look at VC of the form VC = aq 2 + bq The cost structure for S11 exhibits Diminishing Marginal Returns To get first widget, need half hour of labor. To get second widget, need 1.5 hours of labor more. So return on additional units of labor added is diminishing. This is what happens when pick the low hanging fruit first. Here a = 1 and b = 0.

11 One big table Q FC Fixed Cost VC Variable Cost TC Total Cost AFC AVC ATC MC Marginal Cost TC = FC + VC AFC = Average Fixed Cost = FC/Q AVC = Average Variable Cost = VC/Q Marginal Cost: change in cost from increasing output one unit. MC between 0 and 1 is 1 = 5-4 MC between 1 and 2 is 3 = 8 5 MC between 2 and 3 is 5 = 13 8 What is MC at 1? (use midpoint). So MC at 1 is 2 (between 1 and 3) MC at 2 is 4 (between 3 and 5)

12 General Formula is easiest way to go. TC = aq 2 + bq + c MC = 2aQ +b Here TC = Q So: a = 1, b=0, and c = 4 MC = 2Q Another example: TC = 10Q 2 + 3Q +50 MC = 20Q +3 This general form has many cases. Different firms will have different values for a, b, c.

13 Gather up S11 s Cost Table (Example of U-Shaped ATC) Q AFC AVC ATC MC