Any one can help me with that?

Allocative efficiency occurs when the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the cost of the resources used up in production. The condition required for allocative efficiency is that price = marginal cost.

--> why not average cost?<--

Thank you

rest of the homework

Champagne

AD (a) The demand can decrease as there are more and more substitutes of champagne on the market

AD (b) The mechanization of some part of production and possible expansion of area which could be recognized as producing champagne.

Bicycles

AD (a) The growth of demand for cars, caused by the economic growth in last years in China, effected in change in traffic, as there are much more cars than there were before.

AD (b) I would expect that the income elasticity for bikes is negative, because the bikes tend to be an inferior good – as the income grows, the demand for bikes contracts.

AD (c) I would think it is positive, as the growth in income causes increase in demand for cars.

Smoothies and cola

AD (a) The demand for coca-cola was influenced by the fact that the consumers were not aware of the negative externality that the drink causes, so when there was campaign was supposed to encourage healthier eating, the demand contracted. As this campaign was promoting healthier food, and smoothies were advertised as a healthy food by its supplier, the demand for smoothies naturally expanded. This growth in demand is caused also by asymmetric information – the average consumer does not know what is the real effect of consuming smoothies

AD (b) The campaign effected growth in demand for smoothies, end contraction in demand for fizzy drinks like coca-cola

AD (c) I would them rather as substitute good as, they have very similar features, and contraction in demand for one causes growth in demand for other.

market failure

I have looked at Survivor's answers

Here are answers for the multiple choices questions!

320.( B) 321. (A) 322.(B) 323.(A) 324.(C) 325. (D) 326. (C) 327. (A) 328. (B) 329. (A)

330. (A) 331. (A) 332.(B) 333. (A) 334. (D) 335. (B) 336.(A) 337.(B) 338. (C) 339.(D)

340.(C) 341. (C) 342. (D) 343.(A) 344. (A) 345. (A) 346.(D) 347. (D)

I think the answers are

325is wrong because the it is the answer A because merit goods are not alwys non-rivalry and non excludable
328 is wrong because when social cost exceed the private cost it is a NEGATIVE externality not positive. So the answer is C

330 should be B because the Banning to park cars in the city centre is the only attempt to command and control

331 the answer is b, because the rule is described in the excercise

332, Is C, as the depreciation of value of cars does not concerns the society but owners of the cars. The society is has to pay for the higher prices for food.

333. I think that the definition of excludible is that it is not available for everyone because of its price, the rivalry good is one that is not for everyon because some alse can take it earlier. So i think the answear is C.

338. The government intervention in the market to improve may fail when the the cost of administration (financed by the taxes) exceed the benefit from its action

340. I think that the answer is D because reducing retirement age is not creating positive externality but extra founds in training are more likely to do so

346. I think it is answer B

You are considering a pricing strategy for a bus company. The economy is heading into a recession and the company is running at loss. Your local rail service provider has announced an increase in rail fares. How (if at all) you use the following information concerning the elasticity of bus travel with respect to varius variables to inform your decision on price.

I would raise the bus fares even though the Price elasticity of demand is elastic. Because, as the cross price elasticity of demand with respect to rail fares is also big, the raise in the rail fares will make the demand less elastic and I can earn money by increasing the prices.

A strange thing about price

If price goes up the demand goes down, but if demand goes down price goes down, but if price goes down demand goes up and if demand goes up then price goes up....

This appears wery strange, but can be explained as follows. Rise in prices causes a decrease in demand as there are less goods sold, but when there is decrease in the demand people buy less it may be caused by change in supply, but...

Help me

The As

Production possibility frontier (PPF)

àIt’s a boundary that shows how to use all the resources in the most efficient way
àWhen we maximise the output from the resources we got we reach an allocative efficiency
àWhen we reallocate our resources it involves an opportunity cost – when we want to increase the output of one good, we have diminish the output of another good
àIf the opportunity cost for producing two products is constant, then we draw the PPF as a straight line.

Productivity

àIt is measure that tells us how big is an output per worker, when the productivity is high it leads to:

- Lower average cost
- Improved competitvenes and trade performance (you can sell more, as you produce in a cheaper way)
- Higher profits
- Higher wages
- Economic growth

àThe productivity gap – it is the fact that the average GDP per hour for worker in England is smaller than that in France or Germany. The reasons of it might be: the lower labour quality, low rates of spending on development and research, lower capital investments than in other countries, over regulated industry,

àTrade off – The calculation involved in deciding on whether to give up one good for some other good

The supply:

àDefinition: supply is the amount of a product that a producer is willing and able to supply onto the market at a given price in a given time period.

àThe supply rises when the price offered for the product rises. Because of:
o the profit motive
o Production of bigger amount of the product needs more money
o New entrants coming into the market, as the price rises

The demand

àThe demand is the price that consumer are able and are wiling to pay for certain amount of good. There are different types of demand:

The effective demand: The Willingness to pay for a certain good
The latent demand: The potential demand – i.e. this created by the advertisements
The derived demand: The demand that results from the demand for some other good, i.e. raising in demand for cars causes rise in demand for steel.





The demand elasticity

àPed measures the responsiveness of demand for a product following a change in its own price. The formula for calculating the co-efficient of elasticity of demand is (where Ed = the PED)


We can say that the demand is more or less elastic, if it’s:

Ped = O – than it is perfectly inelastic
Ped is between 0 and 1, than it is inelastic
Ped = 1 Than it is unit elastic. This means that 15% increase in price induces 15% increase in demand
Ped > 1 than it is the demand is elastic. That means i.e. that 15% change in price induces 30% in demand

àWhat determines price elasticity

o The number of close substitutes
o The cost of switching between the products
o The degree of necessity – if we really need this good, or if it is just luxury
o The % of consumer income that is allocated in some good
o The time period allowed following a price change
o How much we are used to consume some good
o If the time is off-peak price (than the demand is inelastic) or peak (than the demand is elastic
o The breadth of definition of a good or service – if a good is broadly defined, i.e. the demand for petrol or meat, demand is often inelastic. But specific brands of petrol or beef are likely to be more elastic following a price change.

Price elasticity of Supply

àThis is the relation between the change in quantity supplied and the price of the product

- If supply is elastic the producers can increase output without rise in cost or time delay
- If supply is inelastic the producers can not increase output in a short period of time

Pes > 1 – elastic
Pes < 1 – inelastic
Pes = 0 – perfectly inelastic
Pes = infinity – the supply is perfectly elastic

àFactors affecting the supply elasticity

- Spare production capacity – when there are plenty of resources the supply is elastic
- Stocks of finished products and components – when there is a lot of the product or components stored in a magazine
- The ease and cost of factor substitution – how it is easy to organise new factors of production
- Time period involved in the production process

The producer surplus

àIt is the wealth of the producer.


Market failure and government intervention

àMarket failure: When resources are used not in a perfect way that produces the best allocation for consumers (i.e. when people use to many plastic bags and the society has to pay for the utilization of them

àProductive efficiency: The fullest use of resources. When the maximum quantity of the products is being made

àInformation failure: When the lack of information causes inefficiency of the usage of the market resources.

Asymmetric information: When the amount of knowledge is not equal between the people making some transaction.

àExternality: (or a spill-over) an effect when those who are not directly involved in some decision making (the third parties) are affected by the actions of others

- Negative
- Positive

Costs and Benefits:

1. Private costs and benefits: directly accruing to people who make decisions or make some particular actions.
2. External costs and benefits: fall on the third party – people not involved
3. Social costs and benefits: The society gains on losses on some actions made by some other folks

àMerit good – Has some positive externality – society/third party gains while sbd. ss consuming. It creates positive externality
àDemerit good – society/third party losses while sbd. is consuming. It creates negative externality

Public goods

àNon rivalry – when someone is using it, others can use it as much as he did. (theoretically perfect example virtually it doesn’t work like that – not always)
àNon-excludability: everyone can contribute

Private goods:

àExcludability: Not everyone can consume it.
àRivalry: When consumed, are not available any more.
àRejectable: You can simply reject it, you can choose something else, some substitute good.

Quasi public good: I.e. highway you are charged for it so it has no all features of a public good.

àSemi-non-rivalry: I.e. beaches that are overcrowded.
àSemi-non-excludable: i.e. the highways that are charged

Government intervention in order to correct market failure – most common politics towards:

àPublic bad: something like waste. Opposite of public good

àNegative externalities – Charges, providing information (like on the cigarettes)
àPositive externalities – Advertising, giving subsidies,
àMerit goods – popularizing information about its good effect, tax revenues
àDemerit goods – provision of information/ban.
àPublic goods – providing them J

Taxation

àDirect taxes: Income tax, corporation tax (paid by companies); taken from the income of individuals and firms
àIndirect tax: Tax levied on goods and services (i.e. VAT)

Indirect tax: Takes into consideration externality costs produced by some good. Polluter pays principle.

Subsidy

It is a direct payment by made by government to producer or to consumer to make the good easier to get and consume.

Producers subsidies:

àCapital directly paid to the producer to increase the supply of some product, and reduce the equilibrium price. Types of producers supply


- A guaranteed payment on the factor cost of a product – gov. has to buy fixed amount of product on fixed prices
- An impute subsidy – gov. subsidies some of the producing costs i.e. the wages of the employers
- Government grants to cover the losses of made by a business
- Financial assistance – guarantying loans, financial support, helping in ‘political’ way, organizing areas of cheap labour - part of regional politics
- The more inelastic the demand curve the greater the consumer's gain from a subsidy.
Pros of subsidies
Cons of subsidies
Control of inflation
Distortion of market
Encouragement of consuming merit goods
Arbitrary assistance – the decision made on who will receive a subsidy can be made arbitrary
Increase the revenues of the producers
The final cost of the subsidy may be on those who do not benefit from it
Reduce the costs of capital investment
Encouraging inefficiency
Subsidies to slow-down the process of long term decline in an industry
Risk of fraud

Tradable permits

Allowance to emit certain amount of pollution i.e. carbon dioxide. You can sell the and buy if you want to.

àThe European Union Emission Trading Scheme – ETS it sells permissions to pollute the atmosphere,

Specialization and trade

àSpecialization causes:

-Higher output
-Variety
-Bigger market
-Competition and lower prices

àDivision of labour: When the process of production is broken up into many separate tasks. Even though it sounds good it has its limitations.
- The greatest seem to be the diseconomy of scale, which is the situation when the labors efficiency is diminished because of the fact that the workers take less pride of they are doing, or are simply bored with their work
- Narrow training of the employers may cause problems for them with changing the job

àThe specialisation of the countries. Some countries have their specialities in exporting some goods.
- the level of endowments depends on how efficiently are resources of a country used – how much it can produce from a certain amount of a resource.
- The countries have different specialities, i.e. some might have the maximum output of the vacuum cleaners of 1000 and maximum output of washing machines 2000, it means that the opportunity cost of producing one vacuum cleaner is 2 washing machines, so it is better for the country to relocate the resources to production of the washing machines to maximise the output.

Electronic cigarettes – relief for smoker’s health or another corporation lie?

Probably many of you have come across a new invention called the electronic cigarettes. They look similar to the ‘normal’ ones, but work in a different way. They have nicotine in their filter and generate heat that creates a water vapor that allows smoker to ‘puff’ with no tobacco nor carbon-monoxide. That bypasses the law against smoking in pubs, and allegedly allows one to smoke without the health risk. The price for one is about 40 pounds. As noted earlier they are advertised as not perfectly healthy cigarettes (as it is a new product and no one knows if it actually works. They say that it is much too early to judge if the new product is completely safe. As they were not properly tested there is high probability that the cigarettes are a health risk, and might be even worse than regular cigarettes.

The information failure may occur if the electronic cigarettes turns out to be a health risk. The fact that producers lies to customers, provides him with false information and in effect makes the people believe that they do not have to worry about their health and can smoke as much as they want. As it most probably makes them smoke more, those people are going to generate costs for the NHS. The problem of the lack of information also concerns also the government as it does not know if it should ban the electronic cigarettes or not.

The asymmetric information here occurs when we consider the fact that some of the companies producing the electronic cigarettes write on their boxes that they recommended by the World Health Organisation, which is not true. As we do not know for sure if the cigarettes are harmful, it is hard to tell how big the asymmetry information is in this particular case.

The outcome of this information failure also depends on the actual impact of the electronic cigarettes on health. As they are probably far more negative than the producers claim, the outcome of this information failure on the free market is the aggrandisement of NHS expenses and the probable capital losses of tobacco companies.

What the government should do in my opinion is take a lesson and impose a law that won’t allow any companies to put on the market, products that have not been properly tested. It should also make the companies that sell electronic cigarettes, withdraw the product as long as it has not been properly examined by medical authorities and recognised as not dangerous for customers health.

The negative externality caused by the contamination of water in China

In September 2008, according to Chinese state agency, about 50 000 children had fallen ill because of drinking contaminated milk and four of them died. The cause of this terrible accident was the industrial chemical melamine in the milk which probably, came from water that was contaminated by industry waste of metal company. The scandal resulted in a recall of many Chinese milk products. The Chinese state agency claims that ill can be cured in about 15 days.
The negative externalities seem to be obvious. The sickness of the children must had engaged their parents in their houses, which had decreased the amount of labour and made the production more expensive. The other negative externality is the fact that the government has to pay for the medical treatment of the sick. The poisoning might also had some negative effects that will be reveal in the future, the problems with health might be permanent and might cause more externality costs. The torrential rain caused waste water, polluted nearby ponds and wells which might also create more externality costs.
What in my opinion the Chinese government should do is to organize free hospitalization for the poisoned people from the money that it gains from the companies whose irresponsibility caused the contamination of water. It should also invest some capital to the milk companies that used unintentionally the poisoned water, to save them from bankruptcy.
The government should also take a lesson from what happened and create more restrict laws that are going to regulate what should be done with dangerous industrial waste. If they already exist they should be executed in some better way.

JB

What is the economic argument for banning smoking in public places?

Many people argue that smoking should be banned because of its obvious negative influence on smoker’s health. On the other hand people who want to smoke argue that it is their own right to smoke if they want and that the state should not encroach on their private lives. In a liberal society that I am very happy to live in, that argument sounds perfectly rational, but when we consider the market failure, and the externality costs, we might see that smokers do not only cause problems to themselves but also to others. Second hand smoke is extremely dangerous.

Market failure is the theory within some allocation of capital in free market that the liberal economy is not paying off society. It is caused when capital is invested for the benefit of one private person or small group but with the loss of society as a whole. This loss can be called externality cost, but it is important to remember that externality cost has a positive effect – it can also mean that society gains because of some private capital allocation.

Now I am going to discuss some of the externality costs with regard to the negative effects. The costs that society needs to sustain because of the tobacco industry. The most important externality is the cost of the health care for the people that have to be hospitalized because of their addiction. The statistics say that in the UK 2.7 billion pounds per year has to be spent by the National Health Service as a direct result of the health problems of smokers.

We also have to add the other externality cost of the smoking industry –second hand smoke. People who are regularly exposed to cigarette smoke can also suffer the same problems which smokers do and may cause similar problems to the Health Service as if they were smokers. Although it is not as easy to measure the amount of expenses caused by second hand smoke.

If we are considering the costs generated by the tobacco industry we have to take into accounts the taxes paid by the tobacco companies, and the taxes paid by the smokers themselves which is £9bn each year. In my opinion this is enough to cover both, the physical externalities (second-hand smoke) and the financial ones (related to the costs of healthcare, sick leave, etc.), which brings me to the conclusion that the further encroachments of the government and actions against the tobacco industry and smoking are against the idea of a liberal state and should be stopped, and banning smoking in all public places is not a good idea, as there should be at least some area were smokers are allowed to smoke. People who do not want to breathe second-hand smoke can just avoid those places.

Credit Crunch

A Credit crunch is a situation when there is a sudden decrease in the availability of loans, caused by a serious increase in the bank’s interest rates – which are the main supplier of the loans. It is caused by a number of complicated reasons, like the bursting of the mortgage bubble, securitization, giving loans to unreliable people, or inaccurate credit ratings. I am going to discuss the reason which I consider to be the most important ones. I will also examine here the cures for the credit crunch and the impact that it has on the economy.

The most important reason for the credit crunch (also the current one in 2007/2008) is the fact that the banks were lending large amounts of money to clients who were not able to pay them back – the result of this is the financial losses of the lending institutions – the banks. In response to this situation, banks are increasing the interest rates and making it harder to get a loan. This causes a financial crisis –which we refer to as the credit crunch.

In America, banks used to buy other bank’s loans (which, as noted earlier, were loans given to unreliable people with little chance of paying back the money) as a cheaper form of borrowing. As the banks buy and sell from each other, those loans that many non-American lending institutions had bought, (those so called ‘sub prime’ credits, or securitization – selling the loans) – caused a situation where the banks would not lend money to other banks as they did not know how many of these ‘sub prime’ credits (mainly the mortgages given to people with bad ‘credit reputations’) those financial institutions have. When banks are not ready to lend money to each other, the liquidity (the movement of money) diminishes which causes a financial crisis.

This has a huge impact on the economy and causes panic on the financial market, increases food prices, causes bankruptcy in the major financial institutions (like the Lehman Brothers bank), and the dramatic outflow of cash from the stock.

The governments try to respond to those problems and decrease the losses caused by the crisis. The American government is lowering the federal funds to liquidate more capital. It is also regulating lending policies so that banks aren’t permitted to lend money to people with little chance of repaying it.

More importantly it also bails out the major financial institutions in financial trouble. It had to invest £700bn to purchase the risky credits from the banks and save them from bankruptcy.


Jan Beaupre