{ "cells": [ { "cell_type": "markdown", "metadata": {}, "source": [ "# Summary of topics and tying up loose ends\n", "## Prof. Rabanal [Econ 133]\n", "\n", "\n" ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "### Market structures\n", "We have studied different market structures. In all structures, we know that the optimal quantity that maximizes profits should satisfy the following condition ***MR = MC***.\n", "\n", "1. Monopoly -> one seller in the market. Generally, **P>MC** and the profits $\\pi>0$. \n", "2. Perfect competition -> here we have homogenous goods, and **P=MR=MC**. We know that profits are zero (imagine that you can avoid the FC). Otherwise, more firms will enter the market. The industry is very efficient and produces at the lowest cost. This is true at the minimum AC, when **P = MC = (min) AC**\n", "3. Sometimes, few firms can collude and decide to form a cartel. The cartel tries to mimic a monopolist outcome. We have shown that theoretically firms do better by setting lower prices, but one can create mechanism that enforces the cartel. \n", "4. We also encounter situations in which firms produce no homogenous products. That is, there is some sort of differentiation between products (different ideas or tastes for different products). In this case, $ P\\neq MR$ because the firms have some sort of market power. However, that power is limited by the threat of entry. We assume that other competitors can also enter and produce a similar variety. Other firms will not have incentive to enter when $P=AC$. The main difference compared to perfect competition is that industry is not producing at the most efficient cost or min AC. \n", "5. We skip other oligopoly cases (aka few firms). For example, few firms compete via setting quantities and we need to figure out what's the best production (a Cournot model). Also, we might have a leader in the market, and the residual demand (whatever is left for other firms) is key. Theses cases are better illustrated with the use of calculus, and therefore left for you Micro Theory class at Colby. I hope that the intution and techniques studied in this Principles class will be helpful to master these other topics. \n", "\n", "\n", "\n" ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "### Factor markets\n", "\n", "Factor is other name that economists use for input markets. For example, we have studied labor markets. \n", "That the price of labor (wages) is determined by the demand and supply. But what determines that demand and supply? \n", "\n", "- Supply is what the workers offer. According to some theory, people make rational decisions on how many hours to offer in the market, and how many hours do something else (e.g. playing lacrosse). That analysis determines the supply of hours. \n", "\n", "- Demand is driven by the companies. Basically the benefit of hiring a worker is that producing something. That process of production is affected by the tech available. Therefore the benefit for the firm is how that worker productivity is increasing its sales. You will see how nice expressions will simplify this argument. \n", "\n", "- Other inputs. Of course, a firm uses other inputs to produce. Economist like to summarize all the material inputs as capital. Capital also has a price that you will discuss extensively in your Principles of Macro class (of course, if you decide to take that class!). Many people confuse capital as money. Here we are talking about physical capital (e.g. buildings, sillicon, etc.) However, the interest you earn from your savings account should be somehow related to the price one obtains for using physical capital. \n", "\n", "- To sum up, the factors of production are labor and capital. Technology is somethin that affects how firms use labor and capital to produce. Economists usually assume that technology is just another input. That idea is key to some macroeconomists to understand the growth of nations, or to really understand how to make America great again. \n", "\n", "- An important extension of micro in factor markets is the monopsony case. In this case, assume that there is only one big firm in town. Assume that Colby is the only employer at Waterville. The question for you is how many workers do Colby hire? (HINT: assuming an upward-sloping labor supply, does Colby need to offer higher or lower wages to convince people to offer more labor?)\n", "\n" ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "### Information in markets \n", "\n", "- We have assumed that market participant know for certainty the types of products or consumers type. What happen when consumers do not know the different quality in markets? Let's play an experiment. What are your conclusions? \n", "\n", "- In health markets, it is quite important the information of market participants. Usually economists called this case **asymmetric information**, the health providers do not have complete information about people health. \n", "\n", "Please answer the following problem: \n", "\n", "- A newly formed insurance company, Mccabe Health Inc (MCC) is\n", " planning to sell policies in the local area. Of the 10,000 local\n", " households, 75% are low risk with average annual health costs of\n", " \\$2000. The other 25% are high risk with average annual health\n", " costs of \\$6000. MCC is a for-profit company with negligible overhead costs. \n", "\n", " a. What annual premium would allow MCC to break even if all households joined?\n", " \n", " b. At that premium, which households would find it worthwhile to\n", " join MCC? What would MCC annual profit be if just those households\n", " joined?\n", " \n", " c. What advice can you offer MCC to help them efficiently serve the local healthcare market?\n", "\n" ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "### Market interactions\n", "\n", "- We only focused on one market at the time or the aggregation of individual choices to get a market or industry demand/supply.\n", "\n", "- It is evident that our decisions not only affect or comprenhend a single market. Our income affect how much we consume of different goods. In the aggregate level, we can also analyze production, income and other relevant variables. This is the main purpose of the next Principles of Macro class taught by Prof. Siodla and Findlay. \n", "\n", "- For example, you will be able to better analyze this current issue. (it starts at 7')\n", "\n" ] }, { "cell_type": "code", "execution_count": 3, "metadata": {}, "outputs": [ { "data": { "text/html": [ "\n", " \n", " " ], "text/plain": [ "" ] }, "execution_count": 3, "metadata": {}, "output_type": "execute_result" } ], "source": [ "from IPython.display import Audio\n", "Audio(url=\"http://web.colby.edu/cell/files/2017/08/pm_20171117_pod_64.mp3\", autoplay=False)" ] }, { "cell_type": "code", "execution_count": 4, "metadata": {}, "outputs": [ { "data": { "text/html": [ "\n", "\n", "\n", "\n", "\n", "\n", "\n", "\n" ], "text/plain": [ "" ] }, "execution_count": 4, "metadata": {}, "output_type": "execute_result" } ], "source": [ "from IPython.core.display import HTML\n", "def css_styling():\n", " styles = open(\"custom.css\", \"r\").read()\n", " return HTML(styles)\n", "css_styling()" ] } ], "metadata": { "kernelspec": { "display_name": "Python 2", "language": "python", "name": "python2" }, "language_info": { "codemirror_mode": { "name": "ipython", "version": 2 }, "file_extension": ".py", "mimetype": "text/x-python", "name": "python", "nbconvert_exporter": "python", "pygments_lexer": "ipython2", "version": "2.7.10" } }, "nbformat": 4, "nbformat_minor": 2 }