Download - Flagship Course Module 1 Overview
Flagship Course
Module 1 Overview
The Basics of Market
Three Fundamental Questions
• What goods and services should be produced
and how?
• How much of each type of good and service
should be produced?
• How should these goods and services be
distributed among members in society?
Three Fundamental Questions
• What goods and services should be produced
and how?
• How much of each type of good and service
should be produced?
• How should these goods and services be
distributed among members in society?
MARKET
Market
Under certain conditionsUnder certain conditions markets can lead to
a:
• Technically
• Cost-effectively and
• Allocatively
Efficient allocation of resources.
PricesPrices Ensure That:
• On the production sideOn the production side resources are
used in their most productive way
• On the consumption sideOn the consumption side goods go to
those who value them most
Efficiency-equity Relationship
Individual ability and willingness to pay
Market-based resource allocation
Income and wealth distribution EquityEquity
EfficiencyEfficiency
Conditions for a Well-functioning Market1- Production Side
• Many producers
• Free entry and exit of producers
• Low fixed cost
• No production externality
Conditions for a Well-functioning Market2- Consumption Side
• Informational symmetry
• No consumption externality
• No dominant consumer
Externality
• Production externalityProduction externality
Social cost = Private cost + E
• Consumption externalityConsumption externality
Social benefit = Private benefit ± E
Determinants of Supply
• Price
• Production cost
production continues to increase to the point
where marginal costmarginal cost equals marginal revenuemarginal revenue
Determinants of Demand
• Price
• Tastes, preferences and needs
• Income
• Price of complementary/substitute goods
Demand Schedule
Quantity
Price
P1
P2
Q2Q1Q’2 Q’1
Price elasticityof demand
Demand Schedule
Quantity
Price
P1
P2
Q2Q1
Vertical height ofdemand schedule
Supply Schedule
Quantity
Price
P1
P2
Q2Q1
Price elasticityof supply
Supply Schedule
Quantity
Price
P1
P2
Q2 Q1
Vertical height ofsupply schedule
Interaction of Demand and Supply Schedule
Quantity
Price
PE
P0
Q0s QE
Q0d
S D
Externality
• Production externalityProduction externality
Social cost = Private cost + E
• Consumption externalityConsumption externality
Social benefit = Private benefit ± E
Efficiency of the MarketMSC = Marginal Social CostMPC = Marginal Private CostP = PriceMPB = Marginal Private BenefitMSB = Marginal Social Benefit
MSC = MPC = P = MPB = MSBMSC = MPC = P = MPB = MSB
Efficiency of the Market
• Consumers’ surplus:
Consumers’ value – Price
• Producers’ surplus:
Price – Actual production cost
Efficiency = Maximizing SurplusEfficiency = Maximizing Surplus
Surplus
a
b
c
Surplus = (a + c) + (b – c) = a + b
S = MSC
D = MSBQ
P
Surplus
a
b
cd
e
Surplus = (a + c - e) + (b – c - d) = (a + b) – (d + e)
S = MSC
D = MSBQ
P
Efficiency of the Market
a
b
Surplus = a + b
S = MSC
D = MSBQE
PE
Market FailureMSC = MPC = P = MPB = MSBMSC = MPC = P = MPB = MSB
Examples:• Water contamination by pesticides
MSC > MPCMSC > MPC
• Inability of consumers to judge the true value of a good (automobile)P > MPBP > MPB
• MonopolyMPC < PMPC < P
Government Role in Market Failure
FailureFailure Government RoleGovernment Role
Water contamination by pesticides
Taxation
Inability of consumers to judge the true value of a good
• Public education• Regulatory approach
Monopoly Anti-trust regulations
Major Features of Health Care
• Uncertainty and risk
• Informational asymmetries
– Supplier-induced demand
• Derived demand
• Externality
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