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Lesson #9 - Basics and Microeconomoics Quiz

By
Mike Vergin
on April 13, 2012 8:00 AM |

Later in the hour, you'll take the quiz on the basics of economics and microeconomics. We'll spend the first part of the hour reviewing and clarifying things that have you concerned, curious and/or confused.

Here's the Basics and Microeconomics review sheet.


Homework for next session - Monday, April 16th

Chapter #5 of Naked Economics, "Economics of Information," should be read before the start of class on Monday.

Your Blog Entry #3 should be posted before class time begins on Tuesday, April 17th.

Continue reading Lesson #9 - Basics and Microeconomoics Quiz.

Lesson #8 - Business and Competition

By
Mike Vergin
on April 12, 2012 8:00 AM |

We'll conclude our overview of business today with a look at how business compete in the market. Remember that we'll do the quiz tomorrow. Here's the Basics and Microeconomics Review terms list.


Competition - Market Structures: We will begin our look at various competition models with a quick activity. You'll take a look at a reading/ chart of the various market structures. We'll expand upon that beginning with some additional information and examples.

These characteristics help determine the market structure for a given good:

  • number of firms in the industry
  • the presence (or absence) of product differentiation
  • ability (or lack of ability) of any or all firms to influence the market price 

Perfect competition: This is a theoretical market structure, but it is very closely approximated in an industry like agriculture. Here are the characteristics of perfect (or "pure") competition:
  • There are numerous sellers in the market, all selling identical products. This means there are no quality differences, no brand names, no need for advertising, etc.
  • There is free entry into and exit from the market. Anyone who desires to produce and sell goods in a given market can do so.
  • No individual seller or buyer can influence market price. It is instead determined by market supply and demand. Firms in perfect competition are "price takers."
  • All sellers and buyers are informed about markets and prices. Cost advantages will not remain secret for long...

In perfect competition, economic profits tend to be low because of the ease with which firms can enter the industry. Short term profits will attract more firms.


Monopolistic Competition: This is a market structure in which relatively many firms supply similar but differentiated products, with each firm having a limited degree of control over price.

  • Product differentiation is the major characteristic. This is the practice of establishing real or imagined characteristics that identify a firm's product as unique.
  • Profits tend to be minimized as a lot of money is spent on packaging, advertising, etc. It is also relatively easy for firms to enter the market.


Oligopoly: This is a market structure in which relatively few firms produce identical or similar products.

  • The actions of any one firm in terms of price and output will be noticeable by others.
  • There is interdependence among firms in setting their pricing policies.
  • Firms may be reluctant to engage in price competition because of the possible reaction of competitors. Product differentiation is more often used. Firms may also rely on collusion or practice "price leadership."

Cartels are organizations of independent firms that agree to operate as a shared monopoly by limiting production and charging the monopoly price.

 

Monopoly: This is the market structure in which only one producer or seller exists for a product that has no close substitutes. The only true monopolies that exist in our country today are probably some government-regulated public utilities.

  • The seller holds a large degree of control over price. The monopolist is a "price maker."
  • The key to obtaining and maintaining a monopoly lies in erecting barriers to the entry of other firms into the industry.
  • Sources of monopoly:
    • Economies of scale
    • There are some "natural monopolies" like bus companies and public utilities.
    • Control of raw materials can lead to a monopoly. (For example, ALCOA controlled almost all the world's bauxite.)
    • Patents- These give the exclusive rights to use, keep, or sell an invention for a period of years.
    • Competitive tactics- These would include pirating, pressuring, and predatory pricing

Anti-trust legislation: As you probably learned in history, the federal government has passed a series of laws designed to maintain competition and prevent restraint of trade.

  • Sherman Antitrust Act of 1890 - outlawed restraint of trade and attempts to monopolize
  • Clayton Act of 1914 - outlawed certain business activities including price discrimination, tying contracts, exclusive dealings, interlocking directorates
  • Federal Trade Commission Act of 1914 - created an organization to police unfair business practices


Questions to Discuss:

  • Why would a firm enter a market based on perfect competition? What are the system's advantages for the consumer?
  • How much monopoly is too much? (In what ways are monopolies beneficial?)
  • Should the government work harder to regulate potential monopolies?
  • If you were trying to gain a monopoly, how would you work to limit competition?
  • Are oligopolies necessarily bad for an economy? Why or why not?
  • How is product differentiation achieved? What methods do you believe are most effective?
  • Which market structure do you believe is best for consumers?

Homework for tomorrow - Friday, April 13th

You should be through Chapter 4 in Naked Economics. There is a single question on the "main themes" and/or ideas of each of the first four chapters on the quiz. (They don't assume you know all the examples or anything like that.)

The Basics and Microeconomics Review terms list should help you in your review for tomorrow's quiz. Remember that you are allowed a single-sided sheet of paper with any notes that you would like. 25 multiple choice questions and some straight-forward supply and demand graphs.

Lesson #7 - The World of Business

By
Mike Vergin
on April 11, 2012 8:00 AM |
On Friday, you'll take our quiz on the basics of economics and microeconomics.


You were asked to have Chapters 2 and 3 from Naked Economics ("Incentives Matter" and "Government and the Economy") read for today. I'm interested in hearing what you thought about that. If you need some reminders, here are twelve things (and there are a lot more) we could talk about:

  • SUVs
  • dog poop
  • crying babies
  • cigarettes
  • taxing externalities
  • good and bad government
  • copyright law
  • pharmaceutical companies
  • Indians: South Asian justice and American real estate
  • public goods
  • free riders
  • redistributing wealth


If you are interested in trying out the "Prisoner's Dilemma" game, here is a good simulation.

Costs and Revenues: We did the introductory vocabulary yesterday. Let's work with several examples today. You should feel comfortable with these terms.

  • fixed costs
  • variable costs
  • total costs  
  • average cost 
  • marginal cost 
  • law of diminishing returns
  • revenue
  • total revenue
  • marginal revenue
  • profits
  • normal rate of return
  • economic profits


SEE IT HERE: There are some useful overheads illustrating these ideas: Costs: Fixed, Variable, and Sunk. Let's look here for a minute.

Then, you can put your newly found business skills to work analyzing "Andrea's Software Business" from a handout I'll get to you.

Homework for tomorrow - Wednesday, April 13th

Please have Chapter #4 of Naked Economics read for class tomorrow. (That will be the last chapter you'll be expected to have read before the quiz on Friday.)

You can take a look at a Basics and Microeconomics Review terms list. The quiz will consist of 25 multiple choice questions and some "problems." They will include the drawing and shifting of supply and demand curves, as well as several questions about a very straight-forward business situation on costs and revenues. You may bring in a single sheet (regular size, one side only) of notes that you think might be useful if you would like. You are also welcome to use a calculator if you would like.

Lesson #6 - The Market and Business

By
Mike Vergin
on April 10, 2012 8:00 AM |

If anyone has any "review" problems on supply and demand they'd like to share, we can start with those...

Next up, I'm curious as to what you thought of the essay, I, Pencil by Leonard Reed.

When Markets Fail:  I used to use the book Economics Explained by Robert Heilbronner and Lester Thurow when we did the "full" Economics class. They had a good section about how/why markets don't always operate according to the principles of Adam Smith and his "invisible hand." I wanted to share their findings with you.
 
Here are some examples of "failures" in the market:

  • "Marketers" may lack information. Their decisions may reflect luck, accident or ignorance. (Consider the role of advertising here as well.)

  • Pure public goods, such as defense, national security or lighthouses, cannot be effectively allocated. (The 'free rider' problem is an example of this.)

  • Externalities, such as pollution, are the effects that goods and services have on third parties.

  • The public wants some goods and services, such as health care or education, to be distributed more effectively than the market would.

Types of Business: We'll start this section by asking you to think of businesses that you consider to be both "successes" or "failures." Be prepared to tell us why you think the business does or does not "work" in your opinion.

Next, we'll look at the various classifications of businesses that we find in the economy. This matrix will help you fill in the necessary information.


What determines a firm's profits? Wheelan reminded us that firms aim to maximize profits. Before we can try this out, we need to master some basic vocabulary.

To figure this out, we need to look at both costs and revenues.

costs: There are two types of costs - fixed and variable.

fixed costs:  These are the production costs that do not change with changes in the quantity of output. The largest of the fixed costs are usually those associated with depreciation. (Depreciation is the costs of buildings, machinery, tools and equipment that are allocated to output over a given production period.)

variable costs: These are the costs that change with changes in the quantity of output. They would include the labor, raw materials and other costs that change with the quantity of goods produced. If you like to do math, you can get two more terms.

Total costs are simply the sum of fixed costs and variable costs for a given level of output.

Average cost would be the total cost divided by the number of units produced.

Marginal cost is the addition to total cost from increasing output by one unit.

SEE IT HERE: This is a useful webpage illustrating these ideas:  Costs:  Fixed, Variable, and Sunk.  Let's look here for a minute.

Next, we look at revenue.

revenue:  This is simply the money that a firm receives from the sale of its products and services.

total revenues:  This is the price of the product times the number of units sold.

(Average revenue is simply the total revenues divided by the number sold. Of course, that is also the price.)

Marginal revenue is the addition to total revenue from increasing output by one unit.

So, now we have what we need to get to the "bottom line" - profits.

Profits are determined by subtracting total costs from total revenue.

Want to know if your business is doing well? It would help to know the normal rate of return. That's the rate of earnings on investment that is normal for a given degree of risk. Earnings in excess of that would be termed economic profits.

Next time, we'll look at how competition (or a lack of competition) affects business decisions.

For now, consider these questions:

  • When should a business produce? At what point should a business increase production? Decrease production?
  • How much profit does a business need to remain viable? How certain does profit need to be for a business to remain viable.

Homework for tomorrow - Wednesday, April 11th

Blog Entry #2 is due to be posted before class time tomorrow.

Please be through Chapter #4 of Naked Economics before class tomorrow. (We'll probably get up through Chapter #5 and Blog Entry #3 this week.)



Lesson #5 - Wrapping Up Supply and Demand

By
Mike Vergin
on April 9, 2012 8:00 AM |

NOTE:  The commenting function on the blog should now be working. Please try to take care of that Blog Entry #1 ASAP.

We'll start the week out with another quick TED video from Dan Ariely. This one tells a bit more of his own story. He looks at ethics in this talk on "our buggy moral code."

My plan is to end the week on Friday with a quiz on the basics of economics and microeconomics. You'll get a review sheet in a day or two.

First off, we'll practice some more with demand and supply.

  • Thankfully, I've got a few of the prompts from last time left over to give each of you a quick review... What fun!

  • Online Simulation on Supply and Demand: The University of Omaha has done a neat on-line "tutorial" as well as their Exploring Supply and Demand quiz. Now would be a good time to work through the six question "quiz" at the end, as well as any other questions that you might have.

  • Solid job with the prompts on Thursday. I'm going to give you a slightly more challenging set of examples here called, "Going Bananas." 

  • Review Problems: It's your turn. You and a partner have five minutes to come up with one or more situations for your classmates to work through. The more terms and concepts you can incorporate, the better. Remember to be informative, entertaining, and appropriate...

With the remaining time, I want to introduce you to one of my "academic crushes." I may have shown some of you a Hans Rosling video in World 10, but I'm not sure. This one is less than a month old. Here's five minutes of Professor Rosling educating Fareed Zakaria on world economies.

Something "old" - Please read this classic article for next time. It's a little corny, but really interesting.

I, Pencil is the name of a 1958 essay by Leonard Reed. Please skim this online essay before class tomorrow. Think about what it is saying about the division of labor and the "invisible hand" of the market.



Homework for next session - Tuesday, April 10th

Read I, Pencil from above.

You were asked to have Chapter #2 read for today. Please read Chapter #3 of Naked Economic before tomorrow's class time. Your Blog Entry #2 will be due by Wednesday's class time. (It will get posted later today.)

Lesson #4 - Fun with Supply and Demand

By
Mike Vergin
on April 5, 2012 8:00 AM |
We'll end this first week by looking at demand and supply in microeconomics. We'll also add some terms related to elasticity for a good or service.

At the top, I'm interested in hearing some comments related to your first reading in Naked Economics. Feel free to comment upon either anything you read or the substance of your blog entry. In fact, we'll have you meet in groups of five and prepare five topics/examples/points to bring back to the big group.


More on Demand and Supply:

elasticity: responsiveness of demand or supply for a good given changes in price (Formulas are reprinted from biz.ed, a British website)

price elasticity of demand: measures the responsiveness of demand to a given change in price and is found using the equation:

(PED) = Percentage change in quantity demanded/Percentage change in price
  • If a one percent change in price leads to a greater than one percent change in quantity demanded, that would be elastic.
  • If a one percent change in price leads to a less than one percent change in quantity
    demanded, that would be inelastic.
  • A good or service is "unit elastic" if a one percent change in the price leads to a one percent change in the quantity demanded/ supplied.

income elasticity of demand (YED): measures the responsiveness of demand to a given change in income

YED = Percentage change in quantity demanded/Percentage change in income
  • If YED is positive then the good is "normal." Consumers use an increase in income to buy more of the good.
  • If YED is negative, then the good is "inferior." People use an increase in income to buy less of this good and more of a superior substitute.

cross elasticity of demand (XED): measures the responsiveness of demand for one good (z) to a given change in the price of a second good (w)

XED = Percentage change in quantity demanded of good z/Percentage change in the price of good w
  • If XED is positive then the two goods are substitutes.
  • If XED is negative then the two goods are complements.

Obviously, you can run all the same calculations for the supply perspective by simply substituting terms. For example...

price elasticity of supply: measures the responsiveness of supply to a given change in price.

PES = Percentage change in quantity supplied/Percentage change in price
You get the idea...


"Fun" with supply and demand...  I've got a series of hypothetical situations for you we'll give you a chance to try some of them out today.


Homework for next session - Monday, April 9th

If you haven't yet posted your first required blog entry, take care of that ASAP.

Please read Chapter 2, "Incentives Matter," in Naked Economics for Monday's class.

Lesson #3 - Introduction to Microeconomics: Supply and Demand

By
Mike Vergin
on April 4, 2012 8:00 AM |
We will start the day out with a Dan Ariely clip. He is most famous for his book on behavioral economics, Predictably Irrational. Here is his website if you are interested.

We should also hit those Top Ten Economic Questions that I have referred to each day.


Demand and Supply: These are the two basic concepts of microeconomics. We'll take a look at them today. Get out a piece of paper. You'll be doing some drawing... (Plus, I have a useful handout.) By the way, certeris paribus is Latin for something like "other things being equal".

Demand: the relationship between the quantities of a good or service that consumers desire to purchase at any particular time and the various prices that can exist for the good or service

quantity demanded: the amount of a good or service that consumers would purchase at a particular price

demand curve: a graphic representation of the relationship between price and quantity demanded

law of demand: a rise in prices causes a fall in the quantity demanded, whereas a decline in price causes an increase in the quantity demanded. This affects people in two ways... 

    • income effect: the effect of a change in the price on the amount purchased that results from a change in purchasing power of a consumer's income due to the price change

    • substitution effect: the effect of a change in the price on the amount purchased that results from the consumer substituting a relatively less expensive alternative
What determines demand?
  • income
  • population
  • consumer tastes and preferences
  • substitutes and complements
  • perception of future prices

Supply: the relationship between the quantities of a good or service that sellers wish to market at any particular time and the various prices that can exist for the good or service

quantity supplied: the amount of a good or service that sellers would provide at a particular price

supply curve: a graphic representation of the relationship between price and quantity supplied

law of supply: the quantity supplied of a good or service varies directly with its price; the lower the price, the smaller the quantity supplied, and the higher the price the larger the quantity supplied

What determines supply?
  • costs of production
  • (short run)- a period of time so short that the amount of some inputs cannot be varied
    (long run)- a period of time long enough that the amount of all inputs can be varied     capacity and technology
  • prices of substitutes and complements
  • perception of future prices

equilibrium price: the price at which the market "clears"; the price at which the quantity of a good or service offered by suppliers is exactly equal to the quantity that is demanded by purchasers in a particular period of time


Homework for tomorrow - Thursday, April 5th

If you haven't yet, please read the Foreward, Introduction and  Chapter 1 ("The Power of Markets") from Naked Economics for tomorrow's class. 

Your first required blog entry is due no later than the START of class time on Thursday, April 5th.  (There's a separate entry for that.)

Lesson #14 - Basics of Economics / Microeconomics Quiz

By
Mike Vergin
on November 17, 2008 8:00 AM |
Later in the hour, you'll take the quiz on the basics of economics and microeconomics. There's a review sheet posted over on the "pages" section of the blog. We'll spend the first part of the hour reviewing and clarifying things that have you confused.


Naked Economics - Chapter #4 - "Government and the Economy, II"

We didn't talk much about this Friday, so I'll repost it here. While our focus will be on review, we'll take a few comments here if people have things to say.

  • Department of Motor Vehicles
  • US Postal Service 
  • Margarita Space Pak
  • Soviet Union - command economies
  • regulation
  • dead weight loss
  • taxes

When everyone taking the quiz today has asked their questions, we'll get you the quiz. 

I'm happy to spend the remaining time helping anyone else with review and/or getting caught up from their absences.


Homework for next session - Tuesday, November 17th

Your Blog Entry #4 should be posted before class time begins on Tuesday, November 18th.

Chapter #5 of Naked Economics, "Economics of Information," should be read before the start of class on Wednesday.

If at all possible, I'd love to have all of the quizzes made up before Thanksgiving break begins. Let's make that the goal.

Lesson #13 - Wrapping up Microeconomics

By
Mike Vergin
on November 14, 2008 8:00 AM |
On Monday, November 17th, you'll take the quiz on microeconomics. There's a review sheet posted over on the "pages" section of the blog.


Naked Economics - Chapter #4 - "Government and the Economy, II"

Once again, I think there's a lot to talk about in this chapter. Here are some suggestions:

  • Department of Motor Vehicles
  • US Postal Service 
  • Margarita Space Pak
  • Soviet Union - command economies
  • regulation
  • dead weight loss
  • taxes


Competition - Market Structures: Let's finish up that look at the various market structures. We'll expand with some additional information and examples.

Remember that these characteristics help determine the market structure for a given good:

  • number of firms in the industry
  • the presence (or absence) of product differentiation
  • ability (or lack of ability) of any or all firms to influence the market price

Questions to Discuss:

  • Why would a firm enter a market based on perfect competition? What are the system's advantages for the consumer?
  • How much monopoly is too much? (In what ways are monopolies beneficial?)
  • Should the government work harder to regulate potential monopolies?
  • If you were trying to gain a monopoly, how would you work to limit competition?
  • Are oligopolies necessarily bad for an economy? Why or why not?
  • How is product differentiation achieved? What methods do you believe are most effective?
  • Which market structure do you believe is best for consumers?


Sample Business Plans: There's no great insight here, but I thought this was kind of interesting. "Moot Corp. Competition," also known as the "Super Bowl of Business Plan Competition," invites business students to submit "plans" for a fictional business. In addition to giving you a chance to see what a plan might look like, some of these are just plain interesting ideas.

Do this: Choose one of the plans listed at the link above. Read through it to get an idea about the good/service and the plan for selling it. We'll have you share your quick impressions about these with the rest of us.


I'm happy to spend the remaining time helping anyone with review and/or getting caught from absences.


Homework for next session - Monday, November 17th

We'll have you take the Microeconomics quiz on Monday after we do some reviewing. There will be multiple choice questions and some basic graphs/problems. Remember that there is a review page posted on the blog.

Your Blog Entry #4 should be posted before class time begins on Tuesday, November 18th.

Chapter #5 of Naked Economics, "Economics of Information," should be read before the start of class on Wednesday.

Lesson #12 - Competition and Market Structure

By
Mike Vergin
on November 13, 2008 8:00 AM |

We'll look at different market structures and the ways in which businesses compete today. 

On Monday, November 17th, you'll take our quiz on microeconomics. We'll also be sure to get a terms list posted for you before tomorrow's class.


Blah, blah, blog - "Why the Cheap Haircuts?" - This is one specific entry from the Freakonomics blog hosted by The New York Times website. I'm a big fan of this website, whether or not I'm teaching an economics class at the time. You might enjoy browsing around here a bit. 

Here are some more economics blogs. I'll kind of rank them in terms of increasing understanding of economics needed to fully appreciate the content. (Some get pretty technical for those of us without PhDs in economics...)


Competition - Market Structures: Let's talk about the reading/ chart of the various market structures. We'll expand upon that beginning with some additional information and examples.

These characteristics help determine the market structure for a given good:

  • number of firms in the industry
  • the presence (or absence) of product differentiation
  • ability (or lack of ability) of any or all firms to influence the market price

 

Perfect competition: This is a theoretical market structure, but it is very closely approximated in an industry like agriculture. Here are the characteristics of perfect (or "pure") competition:

  • There are numerous sellers in the market, all selling identical products. This means there are no quality differences, no brand names, no need for advertising, etc.
  • There is free entry into and exit from the market. Anyone who desires to produce and sell goods in a given market can do so.
  • No individual seller or buyer can influence market price. It is instead determined by market supply and demand. Firms in perfect competition are "price takers."
  • All sellers and buyers are informed about markets and prices. Cost advantages will not remain secret for long...

In perfect competition, economic profits tend to be low because of the ease with which firms can enter the industry. Short term profits will attract more firms.

 

Monopolistic Competition: This is a market structure in which relatively many firms supply similar but differentiated products, with each firm having a limited degree of control over price.

  • Product differentiation is the major characteristic. This is the practice of establishing real or imagined characteristics that identify a firm's product as unique.
  • Profits tend to be minimized as a lot of money is spent on packaging, advertising, etc. It is also relatively easy for firms to enter the market.


Oligopoly: This is a market structure in which relatively few firms produce identical or similar products.

  • The actions of any one firm in terms of price and output will be noticeable by others.
  • There is interdependence among firms in setting their pricing policies.
  • Firms may be reluctant to engage in price competition because of the possible reaction of competitors. Product differentiation is more often used. Firms may also rely on collusion or practice "price leadership."

Cartels are organizations of independent firms that agree to operate as a shared monopoly by limiting production and charging the monopoly price.

 

Monopoly: This is the market structure in which only one producer or seller exists for a product that has no close substitutes. The only true monopolies that exist in our country today are probably some government-regulated public utilities.

  • The seller holds a large degree of control over price. The monopolist is a "price maker."
  • The key to obtaining and maintaining a monopoly lies in erecting barriers to the entry of other firms into the industry.
  • Sources of monopoly:
    • Economies of scale
    • There are some "natural monopolies" like bus companies and public utilities.
    • Control of raw materials can lead to a monopoly. (For example, ALCOA controlled almost all the world's bauxite.)
    • Patents- These give the exclusive rights to use, keep, or sell an invention for a period of years.
    • Competitive tactics- These would include pirating, pressuring, and predatory pricing.

Anti-trust legislation: As you probably learned in history, the federal government has passed a series of laws designed to maintain competition and prevent restraint of trade.

  • Sherman Antitrust Act of 1890 - outlawed restraint of trade and attempts to monopolize
  • Clayton Act of 1914 - outlawed certain business activities including price discrimination, tying contracts, exclusive dealings, interlocking directorates
  • Federal Trade Commission Act of 1914 - created an organization to police unfair business practices


Questions to Discuss:

  • Why would a firm enter a market based on perfect competition? What are the system's advantages for the consumer?
  • How much monopoly is too much? (In what ways are monopolies beneficial?)
  • Should the government work harder to regulate potential monopolies?
  • If you were trying to gain a monopoly, how would you work to limit competition?
  • Are oligopolies necessarily bad for an economy? Why or why not?
  • How is product differentiation achieved? What methods do you believe are most effective?
  • Which market structure do you believe is best for consumers?


Sample Business Plans: There's no great insight here, but I thought this was kind of interesting. "Moot Corp. Competition," also known as the "Super Bowl of Business Plan Competition," invites business students to submit "plans" for a fictional business. In addition to giving you a chance to see what a plan might look like, some of these are just plain interesting ideas.

Do this: Choose one of the plans listed at the link above. Read through it to get an idea about the good/service and the plan for selling it. We'll have you share your quick impressions about these with the rest of us.


Homework for tomorrow - Friday, November 14th

Please have Chapter #4 of Naked Economics read for Friday's class. Your Blog Entry #4 should be posted before class time begins on Tuesday, November 18th.

Lesson #11 - Business and Competition

By
Mike Vergin
on November 12, 2008 8:00 AM |

We'll look at different types of businesses and the markets in which they compete today. On Monday, November 17th, you'll take our quiz on microeconomics. I'll have more information about that yet this week, and we'll also be sure to get a terms list posted for you.

You were asked to have Chapter 3 from Naked Economics, "Government and the Economy," read for today. I'm interested in hearing what you thought about that. If you need some reminders, here are twelve things we could talk about:

  • SUVs
  • dog poop
  • crying babies
  • cigarettes
  • taxing externalities
  • good and bad government
  • copyright law
  • pharmaceutical companies
  • Indians: South Asian justice and American real estate
  • public goods
  • free riders
  • redistributing wealth


You were asked to put your newly found business skills to work analyzing "Andrea's Software Business" from a handout. Let's make sure that worked out for everyone.

Here is a useful web page illustrating these ideas: Costs: Fixed, Variable, and Sunk. Let's look here for a minute.


Types of Business: We'll finally look at the various classifications of businesses that you find in the economy. This matrix will help you fill in the necessary information, especially since I've now posted this three straight days...


Competition - Market Structures: You were asked to begin our look at various competition models with a quick activity. Let's talk about the reading/ chart of the various market structures. We'll expand upon that beginning with some additional information and examples.

These characteristics help determine the market structure for a given good:

  • number of firms in the industry
  • the presence (or absence) of product differentiation
  • ability (or lack of ability) of any or all firms to influence the market price

 

Perfect competition: This is a theoretical market structure, but it is very closely approximated in an industry like agriculture. Here are the characteristics of perfect (or "pure") competition:

  • There are numerous sellers in the market, all selling identical products. This means there are no quality differences, no brand names, no need for advertising, etc.
  • There is free entry into and exit from the market. Anyone who desires to produce and sell goods in a given market can do so.
  • No individual seller or buyer can influence market price. It is instead determined by market supply and demand. Firms in perfect competition are "price takers."
  • All sellers and buyers are informed about markets and prices. Cost advantages will not remain secret for long...

In perfect competition, economic profits tend to be low because of the ease with which firms can enter the industry. Short term profits will attract more firms.

 

Monopolistic Competition: This is a market structure in which relatively many firms supply similar but differentiated products, with each firm having a limited degree of control over price.

  • Product differentiation is the major characteristic. This is the practice of establishing real or imagined characteristics that identify a firm's product as unique.
  • Profits tend to be minimized as a lot of money is spent on packaging, advertising, etc. It is also relatively easy for firms to enter the market.


Oligopoly: This is a market structure in which relatively few firms produce identical or similar products.

  • The actions of any one firm in terms of price and output will be noticeable by others.
  • There is interdependence among firms in setting their pricing policies.
  • Firms may be reluctant to engage in price competition because of the possible reaction of competitors. Product differentiation is more often used. Firms may also rely on collusion or practice "price leadership."

Cartels are organizations of independent firms that agree to operate as a shared monopoly by limiting production and charging the monopoly price.

 

Monopoly: This is the market structure in which only one producer or seller exists for a product that has no close substitutes. The only true monopolies that exist in our country today are probably some government-regulated public utilities.

  • The seller holds a large degree of control over price. The monopolist is a "price maker."
  • The key to obtaining and maintaining a monopoly lies in erecting barriers to the entry of other firms into the industry.
  • Sources of monopoly:
    • Economies of scale
    • There are some "natural monopolies" like bus companies and public utilities.
    • Control of raw materials can lead to a monopoly. (For example, ALCOA controlled almost all the world's bauxite.)
    • Patents- These give the exclusive rights to use, keep, or sell an invention for a period of years.
    • Competitive tactics- These would include pirating, pressuring, and predatory pricing.

Anti-trust legislation: As you probably learned in history, the federal government has passed a series of laws designed to maintain competition and prevent restraint of trade.

  • Sherman Antitrust Act of 1890 - outlawed restraint of trade and attempts to monopolize
  • Clayton Act of 1914 - outlawed certain business activities including price discrimination, tying contracts, exclusive dealings, interlocking directorates
  • Federal Trade Commission Act of 1914 - created an organization to police unfair business practices


Questions to Discuss:

  • Why would a firm enter a market based on perfect competition? What are the system's advantages for the consumer?
  • How much monopoly is too much? (In what ways are monopolies beneficial?)
  • Should the government work harder to regulate potential monopolies?
  • If you were trying to gain a monopoly, how would you work to limit competition?
  • Are oligopolies necessarily bad for an economy? Why or why not?
  • How is product differentiation achieved? What methods do you believe are most effective?
  • Which market structure do you believe is best for consumers?


Homework for tomorrow - Thursday, November 13th

Your Blog Entry #3 - Naked Economics is due to be posted before the start of class time on Thursday. 

Please have Chapter #4 of Naked Economics read for Friday's class. 

Lesson #10 - The World of Business

By
Mike Vergin
on November 11, 2008 8:00 AM |

We'll continue delving into the world of business today. I've decided that we will wait until Monday, November 17th to take our quiz on microeconomics. I'll have more information about that as the week progresses, and we'll also be sure to get a terms list posted for you.


You were asked to think of a business that you believe is either a "success" story or a "failure". Be prepared to discuss the business and what you believe makes it work or not work.


Types of Business: We'll start by looking at the various classifications of businesses that you find in the economy. This matrix will help you fill in the necessary information.


Costs and Revenues: We did the introductory vocabulary yesterday. Let's work with several examples today. You should feel comfortable with these terms.

  • fixed costs
  • variable costs
  • total costs  
  • average cost 
  • marginal cost 
  • law of diminishing returns
  • revenue
  • total revenue
  • marginal revenue
  • profits
  • normal rate of return
  • economic profits


SEE IT HERE: This is a useful web page illustrating these ideas: Costs: Fixed, Variable, and Sunk. Let's look here for a minute.


You can put your newly found business skills to work analyzing "Andrea's Software Business" from a handout I'll get you.


Competition - Market Structures: We'll have you begin our look at various competition models with a quick activity. Use the reading provided to work on the chart of the various market structures.


Homework for tomorrow - Wednesday, November 12th

Please have Chapter #3 of Naked Economics read for class tomorrow. Your Blog Entry #3 - Naked Economics is due to be posted before the start of class time on Thursday. 

Please have both the "Four Market Structures" and "Andrea's Software Business" activities done for class tomorrow.

Lesson #9 - The Market and Business

By
Mike Vergin
on November 10, 2008 8:00 AM |
We'll look at the "market" a bit today (not "stock" or "grocery," but rather the "place" where supply and demand do their thing...)

You were asked to read these two essays for today, so we'll see what you thought.

I, Pencil is the 1958 essay by Leonard Reed on the division of labor and the "invisible hand" of the market.

The Attack on American Affluence by Robert Samuelson appeared in a recent Newsweek and serves as a thoughtful overview of the current economic crisis.


We need to look at two final examples of issues related to supply and demand. Let's look at the concepts of price ceilings and price floors.
When Markets Fail: Robert Heilbronner and Lester Thurow identify a number of reasons why markets don't always operate according to the principles of Adam Smith and his "invisible hand." Since we're not reading their book, Economics Explained, this year in class, we should talk about their arguments on this topic a bit. Here are some examples of "failures" in the market: * "Marketers" may lack information. Their decisions may reflect luck, accident, or ignorance. (Consider the role of advertising here as well.) * Pure public goods, such as defense, national security, or lighthouses, cannot be effectively allocated. (The "free rider" problem is a version of this...) * Externalities, such as pollution, are the effects that goods and services have on third parties. * The public wants some goods and services, such as health care, to be distributed more equally than the market would. Types of Business: We'll start by looking at the various classifications of businesses that you find in the economy. This matrix will help you fill in the necessary information. What determines a firm's profits? To figure this out, we need to look at both costs and revenues. costs: There are two types of costs - fixed and variable fixed costs: These are the production costs that do not change with changes in the quantity of output. The largest of the fixed costs are usually those associated with depreciation. (Depreciation is the costs of buildings, machinery, tools, and equipment that are allocated to output over a given production period.) variable costs: These are the costs that change with changes in the quantity of output. They would include the labor, raw materials, and other costs that change with the quantity of goods produced. If you like to do math, you can get two more terms. Total costs are simply the sum of fixed costs and variable costs for a particular level of output. Average cost would be total cost divided by the number of units produced. Marginal cost is the addition to total cost from increasing output by one unit. SEE IT HERE: This is a useful webpage illustrating these ideas: Costs: Fixed, Variable, and Sunk. Let's look here for a minute. revenue: This is simply the money that a firm receives from the sale of its products and services. total revenues: This is the price of the product times the number of units sold. Marginal revenue is the addition to total revenue from increasing output by one unit.
Profits are determined by subtracting total costs from total revenue. Want to know if your business is doing well? It would help to know the normal rate of return. That's the rate of earnings on investment that is normal for a given degree of risk. Earnings in excess of that would be termed economic profits. Next time, we'll look at competition (or lack of) and how it affects business decisions.
For now, think about these questions: When should a business produce? When should it decide to increase production? Decrease production? How much profit does a business need to remain viable? How certain does profit need to be for a business to be viable?

Homework for tomorrow - Tuesday, November 11th

Please have Chapter #3 of Naked Economics read before class on Monday.

Think of a business that you believe is either a "success" story or a "failure". Be prepared to discuss the business and what you believe makes it work or not work.

Lesson #8 - More Fun with Supply and Demand

By
Mike Vergin
on November 6, 2008 12:15 AM |

We spent quite a bit of time yesterday with the election and its aftermath. That's fine, as we'll still have time to wrap up supply and demand today. Our focus will shift to the world of business next week.


You were asked to have Chapter 2, "Incentives Matter," in Naked Economics read for yesterday, but we didn't get there. We'll see what you found interesting and/or enlightening in here.

Your Blog Entry #2 was to be posted by class time today, but I extended the deadline to 6 PM on Sunday since we didn't talk about the chapter yesterday at all.


Online Simulation on Supply and Demand: The University of Omaha has done a neat on-line "tutorial" as well as their Exploring Supply and Demand quiz. Now would be a good time to chat about either of those if you have any questions.


Solid job with the prompts yesterday. I'm going to give you a slightly more challenging set of examples here called, "Going Bananas." 


Review Problems: It's your turn. You and a partner have five minutes to come up with one or more situations for your classmates to work through. The more terms and concepts you can incorporate, the better. Remember to be informative, entertaining, and appropriate...


Something "old" and something "new" - Please read these two for Monday.

I, Pencil is the name of a 1958 essay by Leonard Reed. Please read this online essay before class on Monday. Think about what it is saying about the division of labor and the "invisible hand" of the market.

"The Attack on American Affluence" by Robert Samuelson appeared in the most recent issue of Newsweek. It's a thoughtful overview of the current economic crisis.


Homework for next session - Monday, November 10th

Your Naked Economics - Blog Entry #2 should be posted before 6 PM on Sunday.

Read I, Pencil from above. Read "The Attack on American Affluence" as well. Be prepared to discuss and ask questions about both.

I'll ask you to have Chapter #3 of Naked Economics read before Wednesday's class time

Lesson #7 - Fun with Supply and Demand

By
Mike Vergin
on November 5, 2008 8:00 AM |

You were asked to have Chapter 2, "Incentives Matter," in Naked Economics read for today. We'll see what you found interesting and/or enlightening in here.

Please post your Blog Entry #2 before class time tomorrow.


WSJ Political Markets: I've made several references to these "futures" markets. Here's one we can take a look at. While we're at it, here was an article from the Wall Street Journal highlighting interesting markets to watch on election day. For those of you who like the advantage of hindsight, check out: Best Bet for Next President: Prediction Markets from last year.

For those of you who thought I was making it up the other day: Amid furor, Pentagon kills terrorism futures market - CNN.com, July 30, 2003.


Online Simulation on Supply and Demand: The University of Omaha has done a neat on-line "tutorial" on using supply and demand. We'll spend some time trying to work through that. I'd suggest doing it with a partner. Our goal will be to get through the 6 questions on the "quiz" at the end together. I know some of you took the quiz already yesterday, but we'll make sure we are all on the same page.

Exploring Supply and Demand: Here's the quiz. Work through the problems and see how you do. Notice that the curves will actually move to help you better understand.


Supply and Demand "Prompts" and "Going Bananas" - I've got another couple of review activities here for us to try together. We'll take "volunteers" at the board...


Review Problems: It's your turn. You and a partner have five minutes to come up with one or more situations for your classmates to work through. The more terms and concepts you can incorporate, the better. Remember to be informative, entertaining, and appropriate...


Homework for tomorrow - Thursday, November 6th

Your Naked Economics - Blog Entry #2 should be posted before class time tomorrow.

Lesson #6 - More on Supply and Demand

By
Mike Vergin
on November 4, 2008 8:00 AM |
We'll do a couple more things with supply and demand tomorrow. We'll also get interrupted briefly when the kindergarten classes come down to vote about 8:45. That will give you a few minutes to play with the online simulation below.

REMINDERS: You're asked to have Chapter 2 in Naked Economics read for tomorrow's class. (It's "Incentives Matter.) I've posted Blog Entry #2, and that is due before the start of class on Thursday.


Let's briefly talk about the Paul Krugman article you were asked to read for today.

Online Simulation on Supply and Demand: The University of Omaha has done a neat on-line "tutorial" on using supply and demand. We'll spend some time trying to work thorugh that. I'd suggest doing it with a partner. Our goal will be to get through the 6 questions on the "quiz" at the end. Here are some things to look at on each part of the tutorial. The tutorial has six "pages" to work through and a self-quiz at the end. Explorations in Economic Demand, Part I - The words in bold can be considered to be the "determinants" referred to in the discussion questions at the bottom. Consider how changes in each of those would affect his demand for blue jeans. Explorations in Economic Demand, Part II - Be sure you understand the role of these terms and concepts: demand curve, income effect, substitution effect, diminishing marginal utility Explorations in Economic Demand, Part III - Watch for the difference between shifts in the curves and movement along the curves. Explorations in Economic Supply, Part I - Do the same as we did with the demand page, but you are on the "other side" this time. Explorations in Economic Supply, Part II - Be sure you understand the role of these terms and concepts: supply curve, short run, long run, fixed costs, variable costs, law of diminishing marginal returns Explorations in Economic Supply, Part III - Watch for the difference between shifts in the curves and movement along the curves. Exploring Supply and Demand: Here's the quiz. Work through the problems and see how you do. Notice that the curves will actually move to help you better understand.


More on Demand and Supply: Link back to yesterday's definitions if you need a refresher. Today, we'll add a few more concepts, and then give you time to "practice" what you've learned with the on-line simulation below. elasticity: responsiveness of demand or supply for a good given changes in price (Formulas are reprinted from biz.ed, a British website) price elasticity of demand: measures the responsiveness of demand to a given change in price and is found using the equation: (PED) = Percentage change in quantity demanded/Percentage change in price Let's figure out how to tell if demand for a good or service is elastic or inelastic...
If a one percent change in price leads to a greater than one percent change in quantity demanded, that would be elastic. If a one percent change in price leads to a less than one percent change in quantity demanded, that would be inelastic.
A good or service is "unit elastic" if a one percent change in the price leads to a one percent change in the quantity demanded/ supplied.
income elasticity of demand (YED): measures the responsiveness of demand to a given change in income YED = Percentage change in quantity demanded/Percentage change in income
If YED is positive then the good is "normal." Consumers use an increase in income to buy more of the good.
If YED is negative, then the good is "inferior." People use an increase in income to buy less of this good and more of a superior substitute. cross elasticity of demand (XED): measures the responsiveness of demand for one good (z) to a given change in the price of a second good (w) XED = Percentage change in quantity demanded of good z/Percentage change in the price of good w If XED is positive then the two goods are substitutes. If XED is negative then the two goods are complements. Obviously, you can run all the same calculations for the supply perspective by simply substituting terms. For example... price elasticity of supply: measures the responsiveness of supply to a given change in price. PES = Percentage change in quantity supplied/Percentage change in price You get the idea...

Giffen goods: There is debate among economists as to whether or not these truly exist. A Giffen good is a commodity for which quantity demanded increases at higher prices and falls at lower prices. (They exclude what some call the "snob" effect of an item being trendy, etc.) Can you think of any possibilities? If you are interested, here's what Wikipedia has to say...
Homework for tomorrow - Wednesday, November 5th

Please have "Incentives Matter" read for tomorrow's class. That's Chapter 2 in Naked Economics.

Blog Entry #2 is due before the beginning of class time on Thursday.

Lesson #5 - Microeconomics: Demand and Supply

By
Mike Vergin
on November 3, 2008 8:00 AM |
Today, we'll (re)introduce the two basic concepts of microeconomics: supply and demand. Reminders: Your Blog Entry #1 - Naked Economics should be posted by now. Let me know if you are having any difficulty doing that. Your Blog Entry #2 - Naked Economics will be due before class time on Thursday, November 6th.

Site of the Day: Everyday Economics This is an on-line column that Steven Landsburg (one of my favorite economists) writes for Slate magazine. Please read one column of your choice NOW (OK, when I tell you to...), and we'll share those in 5 or 10 minutes.

I've also got an article from recent Nobel Prize-winning economist Paul Krugman that appeared in Sunday's StarTribune for us to take a quick look at. 


Demand and Supply: These are the two basic concepts of microeconomics. We'll take a look at them today. Get out a piece of paper. You'll be doing some drawing... (Plus, I have a useful handout.) By the way, certeris paribus is Latin for something like "other things being equal".

Demand: the relationship between the quantities of a good or service that consumers desire to purchase at any particular time and the various prices that can exist for the good or service

quantity demanded: the amount of a good or service that consumers would purchase at a particular price

demand curve: a graphic representation of the relationship between price and quantity demanded

law of demand: a rise in prices causes a fall in the quantity demanded, whereas a decline in price causes an increase in the quantity demanded. This affects people in two ways... 

    • income effect: the effect of a change in the price on the amount purchased that results from a change in purchasing power of a consumer's income due to the price change
    • substitution effect: the effect of a change in the price on the amount purchased that results from the consumer substituting a relatively less expensive alternative

What determines demand?
* income
* population
* consumer tastes and preferences
* substitutes and complements
* perception of future prices


Supply: the relationship between the quantities of a good or service that sellers wish to market at any particular time and the various prices that can exist for the good or service

quantity supplied: the amount of a good or service that sellers would provide at a particular price

supply curve: a graphic representation of the relationship between price and quantity supplied

law of supply: the quantity supplied of a good or service varies directly with its price; the lower the price, the smaller the quantity suppled, and the higher the price the larger the quantity supplied

What determines supply?
* costs of production
(short run)- a period of time so short that the amount of some inputs cannot be varied (long run)- a period of time long enough that the amount of all inputs can be varied 
* capacity and technology
* prices of substitutes and complements
* perception of future prices

equilibrium price: the price at which the market "clears"; the price at which the quantity of a good or service offered by suppliers is exactly equal to the quantity that is demanded by purchasers in a particular period of time


HOMEWORK for tomorrow - Tuesday, November 5th

You should have Chapter 2 in Naked Economics read by the start of class time on Wednesday. Your Blog Entry #2 is due before class time begins on Thursday.
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