welcome to econ 372: comparative economic systems by: dr. jacqueline khorassani
DESCRIPTION
Marietta College, Spring 2011. Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani. Week Three Lecture Slides Source: Chapter 1 & 2 (pp 15-). Notes. Exam 1: Wednesday, February 9 Team 1 paper is on Japan, Sweden and France and is due on Monday, February 28 - PowerPoint PPT PresentationTRANSCRIPT
![Page 1: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/1.jpg)
1
Welcome to ECON 372:
Comparative Economic Systems
By: Dr. Jacqueline Khorassani
Week Three Lecture SlidesSource: Chapter 1 & 2
(pp 15-)
Marietta College, Spring 2011
![Page 2: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/2.jpg)
Notes1. Exam 1: Wednesday, February 92. Team 1 paper is on Japan, Sweden
and France and is due on Monday, February 28
3. No class on Monday, January 244. On Wednesday, January 26, expect
an in class assignment on last Friday’s class + the first 15 slides on Week 3 (this week) lecture slides. 2
![Page 3: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/3.jpg)
The 9 criteria for evaluating economies
3
![Page 4: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/4.jpg)
4
5. The degree of dynamic efficiency Is efficiency sustainable over
time? Are there policies in place to
increase efficiency in the future? Involves collection of efficiency
related time-series data
![Page 5: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/5.jpg)
5
The 6th criterion Macroeconomic stability
– Stability in the following variables over time (10 years in your paper)
Output Employment Prices Exchange rate volatility (value of
currency) What else?
![Page 6: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/6.jpg)
The 7th criterion Economic security of individual
– Income Per capita Distribution Poverty rate
– Employment Unemployment rate/underemployment
– Health care % of population with health insurance Infant mortality Life expectancy
– Others? 6
![Page 7: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/7.jpg)
8th criterion The degree of income or wealth
equality? – What is the difference between
income and wealth? Which one is flow? Which one is stock?
7
![Page 8: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/8.jpg)
8
One measure of income distributionLorenz Curves
% of national income
% of population
45o
Perfect income equality
100
100
Nation’s curve
50
20
![Page 9: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/9.jpg)
9
Measure of income distribution Gini coefficient= area between
the Lorenz curve and the 45 degree line/total area under the 45 degree line– If =0 complete _______– If =1 complete _______
Equality Inequality
![Page 10: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/10.jpg)
10
Quintile Another measure of income inequality What is it?
– Here is how it is constructed 1. Obtain income data for every household in
a given year. 2. Arrange the data in a list ranging from the
household with the lowest income to the household with the highest
3. Divide the list into equal fifths (or "quintiles").
4. Divide the income share going to the top quintile by the income share going to the bottom quintile.
The higher the quintile ratio, the _______ the inequality.
Higher
![Page 11: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/11.jpg)
11
The 9th criterion Degree of economic freedom EFI = Economic Freedom Index
Takes a value between 1 (free) to 5 depending on 10 sub indexes having to do with– Corruption, trade barriers, tax rates,
efficiency of law enforcement, regulatory burden on business, restrictions on banks, labor market regulations, informal market activities.
![Page 12: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/12.jpg)
12
Another way to measure the 9th criterion
Brazil Latin America & Caribbean Countries
OECD Countries
Steps to launch a business 17 11.4 6.5
Rigidity of employment index (0 to 100)
56 40.3 35.8
Hiring cost (% of salary) 26.8 15. 9 20.7
Taxes as percentage of gross profits of a mid size company
71.7 52.8 45.4
Steps to comply with licensing and permit requirements for on going operation
19 16.3 14.1
Source: World Bank, 2005
![Page 13: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/13.jpg)
13
HDI: Human Development Index Takes a value between 0 (bad) to
1 depending on– Per capita income– Life expectancy– Adult literacy– Education enrollment
Which of the 9 criteria are reflected in this index?
![Page 14: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/14.jpg)
14
Let’s look at Tables 1.1 and 1.2, Pages 18 and 19.Who is doing better than us (USA) in different area?–Why?
![Page 15: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/15.jpg)
Chapter 2 Objectives?
– Focuses on Market Capitalism How it can achieve efficiency When it fails to achieve efficiency
15
![Page 16: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/16.jpg)
Theorem: A complete, competitive, full information general equilibrium is efficient.
1. Complete?– There is a market for anything that is
useful– Does this hold in the US?
2. Competitive?– No barriers to entry and exit across
all markets– Homogeneous products – Does this hold in the US? 16
![Page 17: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/17.jpg)
Theorem: A complete, competitive, full information general equilibrium is efficient.
3. Full information? Suppliers and demanders in all
markets have every piece of info they need to have in order to make the best decision
Does this hold in the US? 4. General equilibrium?
In all markets, quantity demanded = quantity supplied
Does this hold in the US? 17
![Page 18: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/18.jpg)
What does efficiency mean? In consumption
–Can’t make someone better off without making someone else worse off. This is called ________ optimality.
In production– Operating on PPF
18
![Page 19: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/19.jpg)
What is PPF?
A curve that shows various combinations of 2 goods a nation can produce efficiently with a given amount of resources and technology
Goals?– To show trade offs, choices, efficiency in
production, increasing cost
19
![Page 20: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/20.jpg)
Production Possibilities Frontier
Assumptions1. Only two goods are produced 2. Fixed amount of resources that are fully
employed3. Given technology4. Producers and resource owners have full
information.5. Maximized output given what is available
▪ Can not produce more of something without giving up some of the other things.
20
![Page 21: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/21.jpg)
Production Possibilities Frontier (PPF)
21
Roses
Guns
100
10 20 30 400
9580
60
AB
C
D
E
* I
* U
PPF
![Page 22: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/22.jpg)
Production Possibilities Frontier (PPF)
Why is PPF downward sloping?– Can’t produce more guns without
giving up some roses Why is PPF bowed out?
– Why does the cost of producing 10 additional guns go up as we produce more guns?
– Increasing cost– All resources are NOT equally productive in
both lines of production22
![Page 23: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/23.jpg)
Let’s start with PPF
23
Good x
Good Y
A *
B *C *
*M
PPF
What is point A?What is point M?How can we move from A to B?
Increase efficiencyEmploy unemployed resources
How can PPF shift outward?
![Page 24: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/24.jpg)
What was efficiency in consumption? Can’t make someone better off
without making someone else worse off (Pareto Optimality)
Social indifference curve– Shows the combination of two
goods that make the society equally happy, given that all members of the society have the same taste.
24
![Page 25: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/25.jpg)
Social Indifference Curve Assumptions
1.Only two goods are consumed.
2.Fixed taste. 3.All members of the society
have the same taste.4.More is better.
25
![Page 26: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/26.jpg)
Social Indifferent Curve
26
Roses
Guns10 20 300
95A
Indifference Curve
50
40
B
C
Why is it downward sloping?If increase both happiness goes upWhy is it bowed in?Why are we willing to give up fewer roses for 10 additional guns as we consume more guns?
Diminishing utility
![Page 27: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/27.jpg)
Social Indifferent Curve
Roses
Guns10 20 300
95A
Indifference Curve
50
40
B
C
D *
*F
Do we like D better than B?Yes, on a higher indifference curveDo we like F better than B?No, on a lower indifference curve
![Page 28: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/28.jpg)
Social Indifference Map
Can a society’s indifference curves cross each other?
28
Roses
Guns
I1I2
• If indifferent between A and C• If indifferent between A and B• Then must be indifferent between B
and C (not true, because B and C are on different indifferent curves)
• Given no change in taste indifference curves can not intersectA*
B*C*
![Page 29: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/29.jpg)
29
Social Indifference Map
Indifference curves of a society are parallel to each other.
Roses
GunsI1I2
I3
I3 is better than I2 why?
![Page 30: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/30.jpg)
30
PPF and indifference map Is B better than M? Is C better than M?
Roses
Guns10 20 30 400
9580
BC
M
The highest indifference curve we can reach given what is available = efficiency in production and consumption. Why?1. Efficiency in production =
maximizing out put , given resources and technology
2. Efficiency in consumption= Can’t have more of both goods=can’t make someone better off without making someone else worse off
![Page 31: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/31.jpg)
31
How does this model relate to distribution of income? Consumption efficiency has
nothing to do with distribution of income– If one person gets it all, it is still
efficient as long as to make some one else better off you have to make this person worse off by taking something away from him.
![Page 32: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/32.jpg)
32
How do market supply and demand in a competitive market related to efficiency?
![Page 33: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/33.jpg)
33
Let’s look at supply and demand in a completive market
If the maximum amount of output is sold efficient
P
Q50
D
S100
70
50
30 80
At P = 100, how much is sold?At P = 50, how much is sold?At p = 70, how much is sold?Which one is efficient?This result is achieved under competitive, full information general equilibrium.
![Page 34: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/34.jpg)
34
Definitions Marginal cost = increase in total
cost as a result of producing one more unit of a good = MC
Marginal revenue = increase in total revenue as a result of selling one more unit of a good = MR
![Page 35: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/35.jpg)
35
What is the profit maximization rule in a market economy?
1. As long as producing one more unit of a good adds more to your revenue than to your cost (as long as MR> MC) produce more
2. If producing one more unit of a good adds more to your cost than to your revenue (If MC>MR) produce less
3. Profits are maximized when you produce the quantity of output at which MC = MR
![Page 36: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/36.jpg)
36
In the short run, when you have at least one fixed input of production MC eventually increases as
you increase production Why?
![Page 37: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/37.jpg)
37
Example Output = shirts Inputs
▪ Labor (L)▪ Capital (K, sewing machine, which you only
have one) If you keep on hiring more workers and
don’t buy any more sewing machines, new workers can not produce as many shirts for you as the old workers but you pay them the same wages as your old workers you cost per additional shirt goes up. MC of additional shirt goes up
![Page 38: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/38.jpg)
38
How is the price and the quantity of output determined in a competitive market?
Market Firm 1
P P
D
S
P
MC
$10
220
=ΣMC
What is MR for this firm?$10
=MR
Quantity Quantity
![Page 39: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/39.jpg)
39
Monopoly
What is it?– Extreme case
One producer produces a unique good or service for which there are no close substitutes in the market
Has power to control the price.
![Page 40: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/40.jpg)
40
Now suppose a firm buys all of the little firms in a the market
Market Firm 1 = monopoly
P P
D
S
P
MC
$10
220
=ΣMC
MC
DDoes monopoly produce 20 units?
![Page 41: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/41.jpg)
41
Monopoly is facing the same demand but S = MC
Market
P
D
S =MC20
1
18
2
If monopoly wants to sell one unit, it can charge $20 What is MR of the first unit?$20If monopoly wants to sell 2 units, it can charge $18.What is MR of the 2nd unit$16Why?MR = ΔTR/ ΔQMR = 16/1
MR
![Page 42: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/42.jpg)
42
How should the monopoly maximize profits?
Market
P
D
S =MC
Find the quantity of output from intersection of MR and MCCharge the highest price it can charge for this much outputMonopoly produces less and charges more than a competitive marketConsumers are not consuming the maximum amount no efficiency in consumption
MR
10
15
![Page 43: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/43.jpg)
43
How likely is efficiency in production under monopoly?
Market
P
D
S =MC
Not LikelyWhy?Monopoly charges a higher price can afford to be less efficient and more wasteful than a competitive firm.Under monopoly, production is below capacity we don’t reach our PPF.
MR
10
15
10
20
Monopoly
Competitive
![Page 44: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/44.jpg)
Question How are natural monopolies
different from unnatural monopolies?
44
![Page 45: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/45.jpg)
45
What is economies of scale?
Average cost
Quantity of production
As the firm gets bigger AC dropsWe can have one firm producing 30 units orWe can have 3 firms each producing 10 unitsWhich one is potentially more efficient?One firmThis is a cause of natural monopolyExamples?What should government do? (Rachel)Allow monopoly to exist but watch it.
$30
$12
10 30
ACEconomies of scale
![Page 46: Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani](https://reader036.vdocument.in/reader036/viewer/2022062222/56816608550346895dd93c9c/html5/thumbnails/46.jpg)
46
What about unnatural monopolies?
Average cost
Q
There is a short range of economies of scaleWe can have one firm producing 30 units orWe can have 3 firms each producing 10 unitsWhich one is potentially more efficient?three firmsExamples?What should government do? (Rachel)Remove the barriers to entrySherman Act, Clayton Act, FTC Act in the US
PP31-32
$30$40
10
AC
30