AP经济学复习整理（3）

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　　Chapter 7 Government and Public Sector: Market Failure, Rents, Externalities, Public Goods, Efficiency

　　●Problem to address

　　If the market fails, say, not everyone is satisfied with the outcome of a market system, or there are externalities, the market will not be the vehicle of efficiency. The government may then intervene to promote a desirable social outcome.

　　●Externalities

　　In an externality, either the buyer or the seller doesn’t capture all of the benefits or costs of a transaction; some of the benefits or costs accrue to the public as social costs or benefits.

　　Positive externality would be the granting of a subsidy to private producers in order to continue production for this positive externality.

　　In a negative externality, the government might impose a tax to improve economic efficiency. The greater the tax is, the greater incentive for the firm to control the negative externality.

　　Also a negative externality, the price is relatively low, which encourages more negative externality.

　　In a positive externality, the price is relative high. Thus a subsidy is needed to increase supply.

　　●Social costs, private costs and externalities

　　Social costs are costs incurred by the public, which encompasses the private costs.

　　MSC(Marginal Social Costs) > MPC(Marginal Private Costs)

　　●Private and Public Goods

　　A private good is a good that has exclusion and distributive characteristics. One who is unwilling or unable to purchase a good is denied its benefits. Private goods are divisible into discrete units.

　　●Public Goods

　　Public goods lack the exclusion and distributive characteristics. A pure public good would be available for all regardless of any inability or unwillingness to pay. One more citizen who is qualified for a public good comes at zero marginal cost.

　　●Quasi-public Good

　　There are many public goods that have some private goods characteristics that make them quasi-public goods. E.g.: Congestible Public Goods and Price-excludable Public Goods.

　　Congestible Public Goods occur when a public good become so widely consumed that one more citizen to consume the good may result in the less benefits of those who have enjoyed the benefits. This is a negative externality.

　　●Measures of Efficiency

　　Paretoefficiency is the general measure of efficiency.

　　·Technological Efficiency

　　Technological efficiency is the identification of those inputs that have the greatest impact on outputs per dollar of input expenditure. (Output / input)

　　·Allocative Efficiency

　　The efficiency to channel its resources to their most productive and desired uses.

　　·Pareto Efficiency

　　The efficiency in which there is an improvement for society as long as some people are gaining without others losing ground or benefits.

　　●Bases for Public Goods or Government Interference with Market Outcomes

　　·Market Failure

　　Market failure means that the buyer and seller are not able or willing to agree on the terms of the transaction. In the broad social sense, a desired social outcome doesn’t occur.

　　Market failure also refers to failure of the market mechanism t achieve optimal or efficient outcomes. An efficient social outcome would be when marginal social benefits (MSB) equals marginal social costs (MSC).

　　·Externality

　　Externality is another form of market failure – the costs not captured but either buyers or sellers. Most of the costs are external to the producer (the produce won’t incur the costs.)

　　For the normal market, the equilibrium price is where private marginal benefits (MBp) equal marginal social costs(MSC).

　　The values of the externality are internalized in the price mechanisms as a subsidy. MSB equal MBp plus the positive externality.

　　In a positive externality, the price is too high and the output is too low. The government interference is justified so that this efficient level of output will be obtained.

　　With a negative externality, the market equilibrium price is too low and the equilibrium quantity is too high. The use of tax to correct for this situation reflects this negative externality. The tax equals the value of the negative externality and thus corrects or internalizes this externality.

　　·Other Bases for Government Interference

　　1. Information transparency. The government will mandate information to be provided publicly.

　　2. Meritorious nature – transcend any economic criteria in the determination of public goods. E.g. health care.

　　3. Efficient allocation of resources. If the ration of Public Good Benefit/ Public Good Costs is greater than 1 and this ratio is greater than Private Good Benefit/ Private Good Cost, then the good should be produced by public means.

　　4. Income redistribution – transfer payment.

　　5. Competitive market – correct or penalize firms that provide deceptive sales.

　　6. Stabilization programs – stabilize prices or business cycle. E.g.: fiscal and monetary policy.

　　Chapter 8 Costs, Production, Supply

　　●Production

　　The firms combine its resources into a product or a service, in which some tasks assume risks – whether the combination is the best. The production function is X=F(a, b, c…n) where X is output, F is function and a, b, c…n are factors of production.

　　●Distinction Between Short Run and Long Run

　　In the short run, supply cannot fully adjust to changes in demand. The law of diminishing marginal productivity is a short run phenomenon.

　　In the long run, supply dose fully adjust to changes in demand. There is enough time for the supplier to buy new equipment so that the efficiency won’t drop.

　　●Relationship of Production to Costs

　　Average Physical Product(APP) is defined as the total product or output divided by the number of units of variable input.

　　APP= total output/ variable input

　　MPP= change in output/ change in input

　　When MPP(Marginal Physical Product) is at its peak, APP(Average Physical Product) intersects MPP.

　　●Cost

　　The relationship of MPP to APP is the converse of the relationship of MC to AVC.

　　MPP curve intersects the APP at the maximum point on APP but MC curve intersects the AVC curve at the minimum point on AVC.

　　·A Word of Caution

　　Simply because MPP is declining and MC is rising doesn’t necessarily mean that the firm should discontinue production. We need to compare MR(Marginal Revenue) with MC. If MR > MC, then continue production.

　　Some other extended notions:

　　1. Fixed Costs

　　Total fixed costs(TFC) are those costs that in total do not vary with changes in output. Average fixed costs(AFC) are total fixed costs divided by output (TFC/Q). AFC are going to decline as outputs increases.

　　2. Variable Costs

　　Total variable costs(TVC) are costs that in total vary as output changes. Average variable costs(AVC) equal TVC/Q.

　　3. Total Costs

　　Total Costs(TC)= TFC+TVC. ATC=AFC+AVC

　　MC intersects both the AVC curve and ATC curve at their respective minimum points.

　　●Cost: The Long Run and Economies of Scale

　　In the short run, according to the law of diminishing marginal productivity, not all of the inputs have sufficient time to adjust to the changes in demand.

　　If the demand increase seems long term and sufficient to justify increased plant capacity, and the related utilization of that capacity, the firm would move to the next-larger plant size when the ATC curve of one size intersected the ATC curve of the next-larger size.

　　The savings due to the scale economy can result from two economies: external, large size, and internal, specialization.

　　●Value of a Large-size Firm

　　The larger the firm can be more efficient than the small firm simply on the basis of being able to hire more expertise.

　　For underutilization or excess capacity, the economies of scale will be soon exhausted and then a long range of diseconomies of scale (the longer, upward sloping portion of the ATC curve).

　　For a rather small firm, the economies of scale will be exhausted in a longer period. Still, diseconomies will happen.

　　●Economic Costs

　　Economic cost is what must be paid, at minimum, to maintain or attract production of the goods and services that we are demanding.

　　Economic costs include the implicit cost of what could have been earned elsewhere with the same resources employed in the current business and explicit cost, the basic cost of running a business – to review economic feasibility.

　　Chapter 9 Product Markets: Types, Characteristics, Pricing Strategies

　　●A chart to clarify several definitions

　　CharacteristicsPerfect CompetitionMonopolistic CompetitionOligopolyMonopoly

　　1. Number of sellersManyFewer sellers than perfect competition, more than oligopoly/ monopoly.few sellers who have some control of market share; interdependenceOne seller for whom there are no close substitutes.

　　2. Availability of substitutesOne product type available from all sellersImperfect substitutions.Fewer substitutes available = market pricing powerNo close substitutes available.

　　3. Degree of elasticityPerfectly elasticImperfect elasticity. Depends on the degree of innovation.Varies. Greater elasticity at high price. Lower elasticity at lower price.Generally inelastic but still elastic at high price.

　　4. Similarity of productsHomogeneous products from all sellersHeterogeneous.Some markets – homogeneous for specialty products. Other markets heterogeneous products.Heterogeneous since there are no close substitutes.

　　5. Pricing policyNo pricing policy. Price at market price, price-takers.Mostly non-price competition; some independent pricing.Much interdependence in pricing. Some evidence in pricing. Some evidence of monopoly pricing.Monopoly pricing power. High value to ratio: (P-MC)/P

　　6. Barrier to entry/ exitNo barriers to enter or exit.Weak barriers to entry/ exit.Formidable barriers to entry/exit.Complete barriers to entry by definition.

7. Efficiency/ rent-seekingEfficient. Each seller prices at cost. No re