Today's topic: Elasticity. Consumer and producer surplus.
I'm really happy with today's lesson - I explained everything I wanted to explain, nobody interrupted the lesson and we've passed all the difficult situations with surpluses when demand or supply are perfectly elastic. We have also learned how to say whether a good is normal or a giffen or just inferior or shob etc.. I feel like my preparation for this was worth it. Thank you guys for coming.
No photos, I have to say.
Wendy will do some homework ^^.
Today's topic: basics.
We are going to look through the following subtopics and questions:
- What is Economics?
- Scarcity and choice
- Goods and services
- Factors of production
- Production possibility curve
- Demand and supply curves. Price equillibrium.
- Main economic targets
- Monetary, fiscal and supply-side policies.
there also will be homework for some students.
I'll meet you at 12 am in the Cherwell building. :)
327. a (not sure)
330. b (???)
(Elvi has just came in and brought me some pizza, nice!)
i think i've failed
a) What is the information failure in the electronic cigarette market?
first of all I need to define the information failure. The information failure is a type of market failure when consumer and\or producer has inaccurate or wrong information about different things such as demand on a product\quality\externalities\etc.
In this case the information failure is presented by lack of knowledge about external benefits and costs of this good - people are told that electronic cigarettes are harmless, but this information isn't proved and even some specialists think that the information, which the customers are given, is totally opposite to the reality. One producing company even says that electronic cigarettes are good for health according to the World Health Organisation, but a man from the WHO told that the product is completely untested.
b) Does this represent asymmetric information in the market?
Asymmetric information, another type of market failure, occurs when a part of consumers or traders have more accurate information than the others. I think we can say that it's also an asymmetric information about this product, because consumers do not know anything about negative externalities of the product, but producers (or creators) definately know more.
c) What is the outcome in the free market of this informatio failure?
People are not aware of negative externalities of this good, they think it will help them to smoke in public places, because it isn't said in the law tha electronic cigarettes mustn't be smoked in public places. So the demand on the product is really high even though the price is high. The government can intervere, but for now it does nothing. The World Health Organisation wants to check this product on harmfullness.
d) What actions could government take to reduce/eliminate the market failure?
Prohobit any type of cigarettes in public places.
Make a full research on all the new things like this product in market to avoid negative externalities which will definately cause market failure.
a) How does binge drinking represent a market failure?
First of all, alcohol drink are demerit goods which have a negative impact on people's health. also we can call drinking a negative externality in consumption, because when people are drunk they do a lot of stupid things and also can vormit somewhere in a public place or commit an act of vandalism. As we know, both demerit good and negative externality are types of market failure.
b) What are the new proposals?
- put a ban on free drinks for women.
- pubs' staff should be trained according to new regulations
- special sensible alcohol message on each table where alcohol is sold
c) To what extent do you believe any one, or the combined proposals, are likely to be successful?
I can't see the point in putting a ban of free drinks for women.. yes, maybe demand for drinks will decrease a little bit, but I think that demand for drinks is inelastic, so the change in demand won't be so big. also lots of women are more addictive to alcohol than men, so if free drinks are banned, they will still buy alcohol.
Training staff is a good idea - they will be able to help drunk people or just not sell drink to people, who are already too drunk, using special phycological skills. traind staff will also be able to solve some problems in public places like fighting etc.
I don't think that messages on the table will help - people will just ignore them like the messages on packs of cigarettes.
a) Explain why the people falling sick is an example of a negative externality
People who fell sick are the third party - they haven't participated in the process of production or consumption. The only thing that connects these people with the company, which has caused these illnesses, is location. The factory was near the villages and polluted water and air in that area, people were affected. So there is a negative externality in this case.
b) Suggest 2 courses of action the government could take to try and reduce the possibility of such an incident happening again
- maybe some special comissions to check the filtration systems of the factories should work more effectively. if there had been such comission in this case, they would have noticed the problems and do something and people would not have been affected.
- I think taxation won't really solve the problem - factories will just pay more but not reduce pollution that they cause.
- the government should not let factories to be built so close to villages and places were people live.
First of all, I would like to sum up everything from this article.
In the beginning we learn that smokers' costs have increased by 1bn pound in a year, from 1.7bn to 2.7bn pounds. It is possible that in the future this number will reach the point of 3bn pounds.
Every year British smokers pay 9bn pounds only for TAX on tobacco products. it this is only tax, imagine how much money are flowing through the tobacco market! just unbelievable! well, it is quite obvious, but still.. well yeah, when you're addicted you don't care about your health and money. no, I can't stop thinking about it.. if a pack of Malboro gold costs 5.79.. let's consider that 1 pound is a tax.. aaah, so much money!
The government tries hard to prevent people from buying cigarettes. It has different ways to influence on the tobacco market, but smokers and tobacco companies don't want this changes to be realised.
- the government wants to ban advertising of tobacco products. well, we know that advertising market is full of money, so advertisers are not so happy as well - imagine hom much tobacco giant companies pay them! and I'm not sure that it will work - Iceland and Canada did that, but this action didn't reduce the number of smokers.
- one more suggestion is more nice and I think it has the point - make shops hide tobacco products. what do you see first when you enter a shop? yeah, right - a shelf filled with different cigarettes right behind a salesman, near the cashmachine. one of the principals of good selling - if a consumer sees a good, he will probably buy it. if a consumer doesn't see a good, there is a possibility that he won't remember about it or just won't want to buy it. so I think that may help
- and this is really strange suggestion from the government - plain packaging. that means that packs of cigarettes won't have any brands or words on them. the government think that this will help with teenagers' smoking problem - it's not a secret that most teenagers start to smoke just because they want to show off by smoking some 'cool' cigarettes. particular brand of cigarettes attracts customers more and makes them spend more.
all this ways to improve the current situation have at least one disadvantage - it will be hard to understand where legal market ends and the black market starts.
ok, now I'm going to explain you why smoking is a market failure. well, let's start with cigarettes and tobacco which are demerit goods and have a negative effect on the consumer. this negative effect can not be counted and that's why it isn't included in the price of these goods. in this case market fails when it's imposible to measure external costs. smoking is a negative externality which has a negative effect on the third party. the third party hasn't participated in the proccess of production or consumption but still is affected. market fails because of inability to influence on this negative externality except for complete banning smoking.
a) What is the economic argument for banning smoking in public places?
as I already wrote, smoking is a negative externality which affects the third party, the non-smoker part of the public. harming health of other people by demerit good and\or negative externality is a market failure.b) To what extent do you think a £50 fine for being caught will reduce the market failure?
well, I don't think that 50 pounds can compensate all the external costs in this case, but it is a good example if reducing market failure - to the price of cigarettes you add a 50 pound fine which is more close to the social cost than just price of cigarettes. if this practic of fining people for smoking will be developed, in future the market failure could be avoided.
it's a perfect example of negative externality. and it's real - I felt it myself - my ex-host family lives nerarby the railway:
Residents' anger over train fumes
this night me and Aidana ordered a pizza. we believe it will help in our studies and save us from hunger :)
The main topics on yesterday's session were land and labour.
We started with a small revision of what we did on the previous meeting: 7 levels of Social Structure. This time we learned that the family level is based on a system of gifts. Usually members of a family don't offer each other deals like "I'll pay you 40 pounds and you'll cook a great dinner for me" or "I'll do this only if I get some benefit from it". No, we can say that in a family our actions are similar to a particular gift - mum is going to cook breakfast without any minimum wage and children are going to clean up their rooms without any exchange for that like a new skateboard.
It used to be true that communities also had a system of gifts instead of traiding. Communities used to be like a big family, where everybody's aim was not a gaining something from a deal. But it was a long time ago. Let's take Oxford city nowadays as an example of community. Imagine, you enter a shop and ask "Can I have I bottle of Red Bull please?". The salesman will ask you for money to exchange them on Red Bull - he won't give it to you without money, obviously.
Then we were talking about a few aspects of market economy and after that we started, in my opinion, a very interesting topic - connections between Supply, Demand, Land and Labour. I think this can be called one of the basic things in economics - this is where a price is set. But I'll talk about prices a little bit later.
Coming back to Land, Labour, Supply and Demand.
First, land supply doesn't respond to demand. Well, it's obvious, but still sometimes people forget about it. If demand on land increases that doesn't mean that there will be more land because it's limited. This is called fixed or limited supply. I'm talking about Land in general, but if we take a particular territory, let's say some land near London city, the situation will be different. There can be more supply of this land but only if supply of some other land will be less. So, if there is a forest near London, there can be built some suburbs, but there will be no forest anymore. So opportunity cost in this case is a forest, which will be cut off just to be replaced with some houses.
Second, there is a competition in labour market between people who want to get a job. Once again, I'm talking about general things - usual jobs. There are lots of lawyers, for example. They all want to get a job. But because there are lots of qualificated lawyers, employers can set up really low wage - there will be some people who will agree to work for this wage. Others, who deny this low wage, just won't get a job, so next time they will have to agree to work for a small amount of money.
And now... prices!
What we can say about price? Price is an equillibrium point, where supply and demand curves intersect. This price is set not just because producers supply people with exact number of particular good which is going to be bought.
There is a so called 'bottom price' for the producer - it equals production cost of a good. If price is lower this point, than the business in useless - you'll spend more on production than you'll get for this good. If producer sells a good at a bottom price, he will just get the money that he spent on production back.
There is also a 'top price' - it's the highest price that could be reached without decreasing demand, a consumer still buys a good, but if the price is set up higher, a consumer will not buy this good.
The optimum price is called "exchange price" where both consumer and producer are happy with what they get after exchange.
A rule of exchange:
Each party must want to get something more than it wants to give.
Both consumer and producer have two values:
- a value of what they have
- a value of what they want to recieve.
So there are four values in exchange of two people.
One thing is very important - price itself is not a value, price is just an amount of money.
Now I'm going to tell you about circle of land. Think about any good that we have. It's all produced by using land. There is no good which was produced without using land. Not neceserally that land was used directly.
So, the circle of any good looks like this:
LAND - Natural Resources (you must have knowledge about it and access to it) - Extraction - RAW MATERIALS - Processing - INTERMEDIATE GOODS - Manifacture - FINISHED GOODS -Distribution - GOODS IN USE - Depreciation - OBSOLESCENE - Dissolution - LAND.
Think about it - it happens to any good: starting with your laptop and ending with a can of Red Bull.
That seems to be all.
I have just finished doing my homework with Aidana.
It's pretty cold in the residence yard right now, but my 57-year-old roommate won't be happy if i start using my laptop right now in our room. There is still no wi-fi connection in Aidana's room, so outside it the only way to post my mind maps.
I don't want to sleep at all!
Beware - HUGE MIND MAPS! Mwahahaha!
While mind maps are on their way to full completion (Wednesday hasn't come yet, has it?), I've decided to read some articles about current crisis economics situation also known as 'the credit crunch'.
To my great luck, I've found very interesting and detailed article at economist.com.
It seems that 'the credit crunch' could have been predicted if somebody have looked at the situation carefully - these things, according to the article, were unseen so banks and companies could borrow huge sums of money without even thinking about any possible following problems.
This is a great example of the 'dark side' of monetary policy - not rational use of interest rates has led to worldwide crisis. Monetary policy is fully dependent on the banks. In this particular situation banks are not a tool of fixing economics problems, they are a problem themselves.
Uh, wait, I've forgotten one more thing - If i'm talking about monetary policy and interest rates, I should explain some details.
There are six main types of monetary policy - each is used for it's own target. Types of monetary policy are usually called monetary regimes:
- Inflation Targeting.
- Price Level Targeting.
- Monetary Aggregates
- Fixed Exchange Rate
- Gold Standard
- Mixed Policy
find out more on the Wikipedia.
Monetary policy uses different tools, but would they help with 'the credit crunch'? I'm not so sure.
- Monetary base. In the current situation monetary base won't help at all - banks are not controlling the money circulating in the economics anymore.
- Reserve requirements. I can't say anything about this one.. except I don't think that bank are going to reserve any requirements while they are busy with their own problems.
- Discount window lending. Yes-yes-yes, now it happens. The ECB (the European Central Bank), the Bank of England and the Bank of Japan, the Federal Reserve agreed to lend a further $620 billion on September 29th for fixing the crunchy situation in the US. President Bush wanted to give the same amount of money from the budget, but this idea was rejected by the Congress. Maybe it will slower the crisis and some analitics will find a solution before the big default boom.
- Interest rates. Uh, I think that's the thing that is out of any control now.
'The credit crunch' may cause the rise of unemployment rate, which will cause less spending, which means demand will decrease dramatically.
On the other hand, the companies will have less money too. The strongest companies will survive, of course, but it can lead to a monopoly. A monopoly means high prices, no competition and other scary stuff. Supply will decrease.
uhm.. so, mind maps will be soon :)
Today I woke up at 5 a.m to catch a bus from Kennington at 05:46 (the next one would be only at 06:38), then, in the city centre, approximately at 06:15 I got on a bus to Headington. At 06:30 I'm in the residence already just to write one very important post (which, of course, will not improve my grade, but anyway..)
What is this very important post about? That't the most interesting thing! It's about economics courses, on which I started going yesterday. Yes, I was there, unbelieveable.
The lecture (or maybe it's better to call this a discussion) was interesting, but still there were lots of disadvantages. Such as:
1. The main idea of the course is to view economics from very complicated point. What I mean by this? At the lecture we had a diagram which showed us a triangle. In the centre of this triangle there was a human world. Two angles, Humanity and Universe, were connected with Natural Laws. The third angle, which was called Conditions at the point of Interaction, was like a result of Labour (which is produced by the Humanity) and Land (which is produced by the Universe). When I was thinking about it at the lecture, I thought "Hey, why do economists need all that?". Well, you can say that economists should take all these in account. Yes, I agree. But they don't need to know the details. They must have only general picture of the Universe and Natural Laws, but everybody already knows them - it's called experience. Of course, if it's flooding, I would understand that there will be no rice this year etc. So I think it's not so necessary, but we've lost 2 lectures already on that. (my money, my time!! :((( )
2. Division by primary and secondary factors of production. Yes, I agree that structured factors are much better. But still, who is here to judge which factors should be primary and which factors should be secondary! As for me, I think, that capital should be primary factor of production and land is secondary. Why? Well, as I see it, nowadays we produce MUCH MORE by capital. Yes, we use Land as well, but we use Land not only for production.. At the lecture there was an example of building sandcastles. Nobody will benefit from that, it's not a production, it's a game! It's just for fun not for making money! But Land is used.
There also were very useful things. Such as:
1. We started discussing 7 levels of social structure (which is a part of Capital). By the way, it will be useful for everybody:
7 levels of Social Structure:
2. Now I know more on the Capital and Capitalism topic.
3. The people there are really nice and like sharing their thoughts and ideas.
I understood nearly 90% of what was said there yesterday. I also will go to the philosophy class on Monday.
That seems to be all.