Review of Basic Concepts (Microeconomics)
Review of Basic Concepts (Microeconomics) Ch.1 Scope of Economic Econom ic Analysis
1.
There is is no such such a thing thing as a free lunch, i.e. most most of the goods goods we study are scarce scarce goods.
2.
A free good good is good good that has has a zero zero MUV, MUV, though it has a positive positive TUV TUV..
3.
Scarcity Scarcity and and shortage shortage are are two diff different erent things; things; only only shortage shortage can be elimi eliminated nated by price and/or non-price competition.
4.
Cost Cost is is the the high highest est valued valued option option forgone forgone..
5.
Cost exists exists only when there there are are choices. choices. Without Without choices, choices, there there will will not be any valued option to forgo, and hence there is no cost.
6.
Scarcity Scarcity (in (in a society) society) implie impliess competiti competition on and discrimi discrimination nation.. Scarcity Scarcity also also implies implies some discriminatory criteria to determine winners and losers in competition are necessary.
7.
The existence existence of price and/or and/or non-pri non-price ce competitio competition n imply (implies) (implies) scarcity scarcity..
8.
Price mechanism mechanism helps helps to transmit transmit information information,, determine determine income income distri distribution bution and provide incentives. It serves as an invisible hand to direct the use of resources and determine income distribution.
9.
Competition Competition exists exists in in any economy, economy, no matter it it is a capitalis capitalistt or socialist socialist economy economy..
10. The usefulness usefulness of a theory lies lies on (a) its predictive/e predictive/explanat xplanatory ory power and (b) whether testable implications can be yielded. All useful theory must be testable (i.e. the theory must contain at least 2 observable/measurable variables and it must not contain indefinite predictions/outcomes). It does not matter whether the assumptions of the theory are realistic or not. 11. A tautological statement consistent consistent with all phenomena is not a theory since it is not testable. An ad hoc theory is not useful as well because of its low generalization power. 12. Equilibrium Equilibrium is achieved achieved if we can obtain testable testable implication implication(s), (s), though though equilibrium equilibrium itself is a concept and is not observable. Equilibrium cannot be used to explain human behaviour.. However, we can use it to derive implications refutable by fact. 13. The 4 basic constraints constraints in economic economic analysis, analysis, according according to Steven Cheung, Cheung, are: (a) scarcity of resources /goods, (b) diminishing diminishing productivity, productivity, (c) property rights, and (d) transaction costs. Ch. 2 Consumer Cons umer Demand: The MUV Approach
1.
Price is is the maximum maximum amount a consumer consumer is willi willing ng to pay at the margin margin (i.e. price price is is 1
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MUV). It is also the AUV when a consumer is confronting an all-or-nothing choice. 2.
A change change in demand/supply demand/supply of a good good may affect affect TUV, TUV, TEV, TEV, MUV and P, P, as well as the total revenue of the supplier who supplies the good's substitutes (or complements)
3.
A lump-sum lump-sum payment payment will will not affect affect the the marginal marginal choice choice of a consumer/pr consumer/producer oducer,, however, a per-unit payment will do.
4.
Consume Consumerr equilib equilibriu rium m means: means: To To an indivi individua dual, l, his MUV MUV = P
5.
Market Market equilib equilibriu rium m means means:: MUVa MUVa = MUVb MUVb = … = MUVn MUVn = P
6.
The market market demand demand curve curve of a private private good good which which is exclusive exclusive in consumption, consumption, is obtained by horizontal summation of individuals' MUV curves.
7.
Base on Alchian's Alchian's generali generalization zations, s, a per unit tax tax (or a perper-unit unit transpor transportatio tation n cost) cost) added to a higher-quality (a higher-priced) good will reduce its relative price, and lead to a greater amount to be purchased. However, the imposition of a percentage tax (cost) does not affect the relative price of the higher-quality good (or lowerquality good).
8.
Consumer's Consumer's surplus, surplus, which which is consumer's consumer's gain in in purchase purchase is the differ difference ence between between TUV and TEV.
9.
The concept concept of consumer consumer's 's surplus surplus throws light on why different different pricing pricing arrangements (e.g. membership fee, all-or-nothing pricing, tie-in contracts, etc.) are adopted. Since sellers want to capture cap ture consumer's surplus.
10. The law of demand (the (the negative negative relation relation between between price and quantity quantity demanded) demanded) is an assertion because we cannot canno t derive it from any economic theories (e.g. the indifference curve approach). Besides, as quantity demanded is never observable, the law cannot be tested directly. It can be tested only in conjunction with other propositions. 11. If a Giffen Giffen good (a good of which people people would buy more more when its price price rise) rise) exists, exists, the law of demand is rejected. 12. The price (average (average exchange exchange value) of a good good is determined determined by the good's good's relative relative supply and MUV, MUV, rather than the TUV. TUV. However, Adam Smith had confused the concepts of 'total' and 'marginal' in the water-diamond paradox. Ch.3 Exchange and Supply
1.
The theorem theorem of of exchange exchange states states that that if the margin marginal al use use values values of a good are are not the same among individuals, then exchange excha nge will occur, provided property rights are welldefined and transaction costs negligible.
2.
Without Without the law law of demand, there will be no theorem theorem of exchange. exchange. It It is because the 2
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equilibrium condition, MVa MVa = MVb = …= P, P, as is predicted by the theorem of exchange, would not be achieved. 3.
The condition conditionss for trade (exchange) (exchange) include: include: (a) well-d well-define efined d property property rights, rights, (b) traders have different MUVs on the same good before b efore exchange, and (c) transaction costs involved must be less than the potential gains from exchange.
4.
With With zero zero transactio transaction n costs, costs, the theorem theorem of exchange exchange predicts predicts that that the the market market equilibrium occurs when all persons' MUVs are equalized and is equal to the market price. The Pareto condition is satisfied.
5.
With With positive positive transac transaction tion costs, costs, people's people's MUVs may not be equalized, equalized, but but the Pareto Pareto condition is still achieved
6.
The presence presence of a perper-unit unit transac transaction tion cost cost will will reduce the volume volume of trade. trade. However However,, a lump-sum transaction cost does not have such an effect.
7.
Economic Economic inefficie inefficiency ncy exists exists when when some constraint constraintss are missed missed,, however, however, if if all the the constraints are fully specified, economic efficiency can always be achieved.
Ch. 4 Consumer Demand: The Indifference Curve Approach
1.
Util Utilit ity y does does not not mea mean n sati satisf sfac acti tion on..
2.
Utility Utility is an arbitrary arbitrary assignment assignment of of number number for the the purpose purpose of ranking ranking options options so as to explain human behaviour behav iour..
3.
Utility Utility cannot cannot be used to to measure measure welfare welfare of of an individ individual ual or of the the society society..
4.
Increasing Increasing margi marginal nal rate rate of substit substitution ution implie impliess corner corner solution solution (i.e. (i.e. special specializati ization on in consumption). Diminishing MRS can be consistent with both interior and corner solutions.
5.
The differen difference ce between between MUV and MRS MRS lies in in the utility utility content of the latter latter..
6.
If good good X is measured measured on the the horizontal horizontal axis and good Y on the vertical vertical axis, axis, a vertical price consumption curve (PCC) for X means mean s X is an inferior good. However, a horizontal PCC for X implies X is a normal good.
Ch. 5 Elasticities of Demand and supply
1.
Two straight straight-line -line demand demand curves curves having having same same y-intercep y-intercepts ts will will have same elastic elasticity ity at every positive price.
2.
A rectangular rectangular-hyp -hyperbolaerbola-shaped shaped demand demand curve curve has unit elasti elasticity city at every price. price.
3.
A unit(ary) unit(ary) elastic elastic demand demand implies implies no change change in seller seller's 's revenue revenue (or (or consumer consumer's 's expenditure) no matter how the price of a good changes.
4.
A rise in in the price price of a good good will will lead to to a greater greater demand demand for its its substitu substitutes, tes, but but a lower demand for its complements. As a result, those sellers selling substitutes of the 3
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good will record a rise in sale revenue whereas those selling complementary goods will record a drop in sale revenue. 5.
It is not possib possible le to have have all all luxuries luxuries or all inferior inferior goods goods in in the economy economy..
6.
The tax incidences incidences (burden (burden)) shared shared by buyers buyers and sellers sellers depend on their their respectiv respectivee elasticity of demand and elasticity of supply. supply. The lower the demand elasticity and the greater the supply elasticity, elasticity, the greater will be the consumer's burden.
7.
Under uniform uniform pricing pricing with with zero zero marginal marginal cost, a wealth-maxi wealth-maximizin mizing g seller seller will will charge a price at the level where the demand is unit elastic.
8.
The higher higher the inform information ation cost cost to find substi substitutes tutes,, the lower lower the elasticity elasticity of a price price change.
Ch.6 Cost
1.
Cost Cost is the the highes highestt valued valued opti option on forg forgone one when when makin making g a choice. choice.
2.
Cost Cost changes changes if and and when when the highes highest-v t-valu alued ed altern alternati ative ve changes changes..
3.
No choi choice ce,, no no cos cost.
4.
Cost Cost can be a flow flow or or a sto stock ck con concep cept. t.
5.
A change change in cost cost affec affects ts reso resourc urcee alloc allocati ation. on.
6.
Sunk (his (histor torica ical) l) cost cost is not not a cost cost of curre current nt decis decision ion..
7.
Money Mo ney pric pricee is is only only a part part of cos cost. t.
8.
Full price (money price + non-pecun non-pecuniary iary price) can represent represent cost.
9.
The law of diminis diminishing hing margin marginal al returns returns states states that in in the short short run, run, when when more of any variable factor is added to given amounts of fixed factors, the marginal product resulting from each additional ad ditional unit of the variable factor will diminishing eventually ev entually,, other things being constant.
10. Diminishin Diminishing g returns occurs occurs when the marginal marginal product begins begins to fall. 11. If diminish diminishing ing margin marginal al returns returns holds (a) both 'superior' (most fertile) and 'inferior' 'inferior' (less fertile) land will be cultivated; (b) the fixed factor can receive a rent (c) MC curve will be upward upward sloping. 12. If diminish diminishing ing returns returns does not not hold hold (a) only the 'most 'most superior' land will be cultivated; (b) the return to to land(owners) is zero; (c) MC will not not be rising. rising. 13. The relationship between MC and MP, MP, AVC AVC and AP, AP, and AC and AP are as follows: (a)
MC = W / MP
(b) AVC = W / AP 4
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(c)
AC = AFC + W / AP
14. If the average average variable variable costs are constant constant,, a firm's short short run supply supply curve is is a horizontal line. 15. Haste (a (a higher producti production on rate) makes makes a higher higher cost. cost. 16. The average cost of productio production n will decrease decrease when (a) the volume of output increase increasess and/or (b) the production rate of output decreases. 17. Rent is cost, cost, but cost cost is not not necessarily necessarily rent. 18. Cost is not necessar necessarily ily rent in in that a change in rent will will not change change supply or alter alter behaviour in a certain dimension. 19. Profit Profit is an unexpected (unanticip (unanticipated) ated) increase increase in wealth or income. income. Profit arises arises only if it is unanticipated, thus the concept is useless in explaining human behaviour. Ch.7 Price Taking
1.
The existence existence of numerous numerous sellers sellers is is not a necessary necessary condition condition for for price-ta price-taking. king.
2.
A price-taking price-taking seller seller faces faces a horizont horizontal al demand demand curve; curve; the the revenue revenue from from selling selling an extra unit of output is constant (i.e. P = MR).
3.
If diminishi diminishing ng marginal marginal returns returns holds, holds, the portion portion of MC MC above AVC is the supply supply curve of a price taker.
4.
For a constantconstant-cost cost price price taking taking industry industry,, the long long run supply supply curve curve is horizontal. horizontal.
5.
The long run equilibr equilibrium ium is characterized characterized by P = MC = AC and there there is no entry/exit entry/exit of firms.
6.
Since all all the firms firms are are producing producing at at the same same MC (and (and AC in the the long run) run) that that equals equals P (also the MUV), the Pareto condition (economic efficiency) must be achieved in a price taking market.
7.
P = AC implies implies the the return return in the the industry industry is is equal to the return return from the the best alternative, i.e. no better alternative elsewhere.
Ch.8 Price Searching
1.
A monopolist monopolist is is a price price searcher searcher who faces faces a downward downward sloping sloping demand curve. curve. The price searcher searches for a price that maximizes wealth (where MR = MC).
2.
It is wrong wrong to say say that a monopolist monopolist faces faces no competi competition. tion. A monopolist monopolist still still compete compete with others for resources, for customers, etc.)
3.
Simple monopoly monopoly pricing pricing means means a price searcher searcher sells sells the product product at at one unifor uniform m price.
4.
With With zero zero marginal marginal cost cost of product production, ion, a monopoli monopolist st will will set a price at the output output where MR=0 that corresponds to the mid-point of a demand curve. (The price 5
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elasticity of demand at that point is one.) 5.
With With positive positive margi marginal nal cost cost of productio production, n, a monopolis monopolistt will always always set a price price at the elastic range of the demand curve.
6.
With With zero zero transaction transaction cost and and the availabi availability lity of alternati alternative ve pricing pricing arrangemen arrangements, ts, a price searcher adopting uniform pricing is inefficient because at the wealth maximizing output, MUV > MC.
7.
Due to positi positive ve transacti transaction on costs costs involved involved in using using alternati alternative ve pricing pricing arrangem arrangements, ents, a price searcher adopting uniform pricing is said to be efficient if alternative pricing arrangements cannot bring a higher net gain.
8.
The expected expected (monopol (monopoly) y) rent rent from from an entry barrier barrier (a franchise) franchise) due to government government regulations determines the price of the franchise paid by a price searcher in obtaining the monopoly status.
9.
Once the the monopolist monopolist paid the the price price for the monopoly monopoly right, right, the price price paid paid is a sunk cost that would not affect the future decision of on the product price to be charged.
10. The monopoly monopoly rent (due (due to a franchise) franchise) is a cost to the price price searcher searcher if he has the option to transfer the franchise (monopoly right) or the business outright. 11. A price searcher searcher has no supply supply curve. curve. Ch.9 Price Discrimination and Pricing Tactics
1.
Only a price price searcher searcher can use use different different kinds of pricing pricing strategies. strategies.
2.
The third-deg third-degree ree price price discrim discriminati ination on (also (also called called market market segmenta segmentation) tion) is the the practice of charging different prices to buyers of different markets for the same good (produced at the same cost).
3.
If the cost cost of handling/s handling/serving erving differ different ent customers customers diff differs, ers, diffe different rent prices prices charged charged on the same product may not constitute price discrimination (e.g. Young Young drivers are charged more for motor insurance than are old drivers).
4.
Perfect Perfect price price discrimina discrimination tion (also (also called called the the first first degree degree price price discriminat discrimination) ion) is is the practice of charging different prices to the same buyer on the different units of a good (produced at the same cost). Under this pricing arrangement, the seller will set different prices for each unit u nit of the product that equals the consumer’s MUV. MUV. As a result of this, the MUV of the consumer and the seller’s MR coincide.
5.
The condit condition ionss for practi practisin sing g price price discrim discrimina inatio tion n include: include: (a)
Monopol poly power
(b) (b)
Sepa Separrable able mar marke kets ts
(c) (c)
Diff Differ eren entt elas elasti tici citi ties es of of deman demand d
(d) (d)
Impe Imperf rfec ectt infor informa mati tion on 6
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6.
Pricing Pricing tactics tactics other other than the the price price discrimin discrimination ation include include the all-or all-or-nothi -nothing ng pricing, pricing, two-part tariff, tie-in contract, …etc. Due to the presence of transaction costs, different pricing arrangements are employed by price searchers to extract consumer’s surplus such that the gains from production and exchange are maximized.
Ch. 10 Derived Demand
1.
The demand demand curve curve for a facto factorr is downwa downward rd slopi sloping ng becaus becausee of the law law of diminishing marginal productivity. productivity.
2.
The law of of diminishi diminishing ng marginal marginal product productivity ivity states states that in in the short-r short-run un when more more units of a variable factor is added to a given amount of o f fixed factors, the product resulting from each additional ad ditional unit of the variable factor will diminish eventually even tually,, other things being constant.
3.
The demand demand (curve) (curve) for for a factor factor input of a price-t price-taker aker is is the portion portion of its MRP MRP (VMP) below its ARP.
4.
In equilibr equilibrium, ium, the MP MP of of a factor would be equalize equalized d across across firms. firms.
5.
When additio additional nal units units of labour are employe employed, d, the MP MP of of labour labour falls falls whereas whereas the MP of land rises.
6.
In some some property property right right arrangemen arrangements, ts, the the marginal marginal producti productivity vity theory theory does does not apply (e.g. A professor professor in HKU earns twice the salary of a lecturer does not imply the professor is twice as productive).
Ch.11 Determination of Wage
1.
With With private private property property rights, rights, the more more producti productive ve your labour (and the greater greater the demand for your service relative to its supply), the higher will be your wage rate.
2.
An individual individual labour supply curve can can be backwar backward d bending bending because because the substituti substitution on effect between work and leisure is smaller than the inco me effect when the wage increases.
3.
If leisure leisure is an inferior inferior good, good, the the labour labour supply supply curve curve will will not be backward backward bending. bending.
4.
The market market supply curve of labour labour is not not likely likely to be backward-bendi backward-bending. ng.
5.
With an unchan unchanged ged labour labour dema demand nd but a great greater er labour labour suppl supply y, (a) both MP and AP will will fall, fall, (b) the total product product of labour labour will rise rise (c) the total wage receipts may rise rise or fall fall (depends on elasticity elasticity of demand)
Ch.12 Determination of Rent
1.
Economic Economic rent is a payment payment that does not not affect affect the availabi availability lity of a good good nor 7
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resource allocation. 2.
Economi Economicc rent rent can be be earned earned by any econo economi micc resour resource. ce.
3.
Economic Economic rent is is a cost of running running a busines businesss if there there is the option option to sell sell the the business business outright.
4.
If the law law of diminis diminishing hing margina marginall returns returns does does not hold, hold, the price of of land will will be zero and only 'superior' land will be cultivated.
5.
A change in in cost affects affects resour resource ce allocation allocation but a change in in rent does not. not.
6.
Economic Economic rent exists exists only in some some particula particularr dimension dimensions. s. Given Given there there are numerous numerous alternatives available, rent is cost.
Ch. 13 Capital, Wealth and Interest
1.
Interest (a) is the price price for the earlier earlier availabilit availability y of goods (b) is the whole whole of income (c) is the potential flow of consumption consumption which can made without trenching on wealth (d) is a premium of future future over present present consumption consumption (e) exists exists even even without without money (f) exists exists in in a one-man one-man econom economy y (g) is a series series of events
2. Capital refers refers to any asset that is capable of generating income/service. 3. When interest rate rises, rises, (a) the price of a durable asset (relative to a non-durable asset) falls. falls. (b) trees will be cut earlier earlier (c) the present present value value of a bond falls falls 4. Wealth is the discounted present values of all incomes generated by a stock of economic good. 7.
Wealth is ambiguous ambiguous if there there is no market market or market interest interest rate. rate.
8.
Investment Investment is the the balance balance of consumption consumption over time. time. We We sacrifice sacrifice present present consumption for future consumption. Therefore, investment is said to take place when: (a) people produce more durable goods and fewer perishable goods (b) students play less and study more (c) people covert fresh milk (fish, food, …) to to cheese (salted fish, canned food, …) (d) people go to bed early early (e) people take take vitamin pills pills (f) buy shares shares 8
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7.
Profit Profit is is an unexpe unexpecte cted d (a windf windfall all)) gain gain in wealt wealth h / income income
8.
Profit Profit arises arises when the actual actual rate rate of return return is higher than the the expected expected rate of of return return
9. Wealth cannot be determined (a) if the market market interest interest rate rate does not not exist (b) if there there is no loanable loanable fund fund market (c) in a one one man man econom economy y 10. Wrong concept: Wealth maximization is preferred to income maximization. Income maximization is preferred to wealth maximization. 11. Amongst the maximization of wealth, income, rent, utility and profit, profit maximization is the worst choice in terms of economic eco nomic explanation. 12. The pre-requisit pre-requisitee of consumption consumption maximization maximization is wealth maximization maximization.. 13. In a given period period of time, consumpti consumption on may exceed income income given there there are opportunities to borrow or lend. 14. Even if both income income and interest rate rate fluctuates fluctuates over time, consumpti consumption on may still be constant over time. Ch. 14 Property Rights and Transaction Transaction Costs
1.
Property Property rights rights (rules (rules of the game) are social social expectat expectations ions restra restraining ining human behaviour.
2.
There are are (transa (transaction) ction) costs to define define and enforce enforce any property property rights rights syst systems ems
3.
Private Private Property Property Rights Rights are are the pre-req pre-requisit uisitee of market market transact transactions ions (Coase (Coase Theorem Theorem))
4.
The attenuati attenuation on of privat privatee property property rights rights leads leads to non-price non-price competiti competition on and hence hence rent dissipation.
5.
The main main criterion criterion used used to allocate allocate resour resources ces under private private property property rights rights is price
6.
The owner owner of a private private propert property y has the the exclusive exclusive right right to to use the the property property,, to derive derive income from the property, property, to transfer the property, property, to choose the kinds of contract.
7.
A high higher er value value is atta attache ched d to a good good that that is tran transfe sferabl rable. e.
8.
A common property property is is a scarce scarce good good of which no delimitat delimitation ion on who can can use it it
9.
A common property property is is a scarce scarce good good subjecte subjected d to common common exploitat exploitation. ion. Under Under nonnon price competition it will lead to rent dissipation.
10. Under the postulate postulate of constrained constrained maximizat maximization, ion, the rent dissipat dissipated ed under a common property situation must be a constrained minimum. 11. A common common property property is is a scarce good good that has has no capital capital value. 12. A common common property property is usually subject subject to a higher utilizatio utilization n rate than a private property. 13. A common propert property y does not have a market price. 9
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14. Trans Transacti action on costs costs are all non-production costs that exist only in a society 15. Transacti Transaction on costs may or or may not be informati information on cost. 16. Transacti Transaction on costs can exist exist even if there there is no market market transaction. transaction. 17. Transacti Transaction on costs determine determine the choice of contracts contracts and the choice choice of economic systems (institutions). 18. When transactio transaction n costs are positive, positive, the Pareto Pareto condition can still still be achieved. achieved. 19. Transacti Transaction on costs costs help us to explain explain why (a) advertisements on goods are placed by sellers but advertisements advertisements on jobs are placed by employers (b) the airline companies accept more reservations for a flight than there are available seats on the airplane (c) reputable stores with big names often pay considerable lower lower rentals per square foot Ch. 15 Government Regulations and Dissipation of Rent
1.
Government Government control control attenuates attenuates privat privatee property property rights rights and hence leads leads to to a change change in human behaviour
2.
Government Government control control usually usually takes in in the forms forms like like price, price, quantity quantity,, and rate-ofrate-of-retur return n controls or through taxation
3.
Rent (price) (price) contro controll gives rise to non-exclus non-exclusive ive income income that attracts attracts competit competition ion in non-price manner, dissipation of rent will result.
4.
Under a rent control, control, the the turnover turnover rate rate of the control controlled led flat flat tends tends to fall.
5.
In tradition traditional al economics, economics, price control control will lead lead to a disequi disequilibri librium um state. state. However However,, according to Steven Cheung, Cheun g, equilibrium is always attained if the specified constraints (e.g. monetary and non-monetary costs) are rigid enough to yield implications refutable by facts.
6.
The creation creation of monopoly monopoly right (due to to government government control) control) attract attractss competiti competition on for monopoly rent.
7.
A per unit tax imposed imposed on a good will will lead to to a rise in relative relative market market share share of highquality good. However, the tax burden shared by b y consumers / producers is determined by the respective elasticities of demand and a nd supply.
8.
An ad valorem valorem tax imposed imposed on a good good will will lead lead to a quality quality change change of the good. good.
9.
A lump-sum lump-sum tax will will reduce reduce the amount amount of rent earned earned but will not affect affect the the wealthwealthmaximizing output level of a firm. Nevertheless, the n umber of firms in the market will fall in the long run.
10. A lump-sum lump-sum tax will will not affect affect a consumer's consumpt consumption ion level. 10
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11. A rate-of-return control leads to a higher capital/labour ratio ratio and thus a higher MP of labour. 12. An effective wage control leads to to a rise in marginal productivity of labour.. Ch. 16 Nature of the Firm
1.
A firm exists exists because there are are (transacti (transaction) on) costs costs of using using the the price price mechanism. mechanism.
2.
A communist communist state state is a super-fir super-firm m because because the use of resources resources is direct direct by central planning (authority), instead of directed by market signals (prices).
3.
A firm will will cease cease to exist exist when when the cost cost of managerial managerial coordinat coordination ion outweighs outweighs the cost of market coordination.
4.
With With zero zero costs costs of transac transaction, tion, the choice choice of instituti institutions ons (e.g. (e.g. firm, firm, market, market, middleman) is indeterminate.
5.
When When a fi firm exis existts, (a) input owners are not paid by directly measuring their their contributions, but by a proxy.) (b) input owners do not trade directly with consumers
6.
In some some situations situations the product product market market and the factor market are insepar inseparable: able: (e.g. A shoe-shine boy working for himself receives a payment of $X for shining a pair of shoe.)
7.
With With positiv positivee transacti transaction on costs, costs, there there will will be contractual contractual supersess supersession. ion. Some Some contracts will be adopted to reduce transaction costs so as to maximize the gains from exchange. For example, (a) a time-rate contract is adopted to employ a teacher (b) a basic salary plus commission to employ a salesman salesman (c) a taxi-driver pays a fixed rent to taxi companies and take the residual income
8.
Firm / market market are altern alternative ative contractual/ contractual/inst instituti itutional onal arrangements arrangements amongst consumers, input owners and entrepreneurs
Ch.17 Problem of Social Cost
1.
Accord According ing to Steven Steven Cheun Cheung, g, the Coase Coase Theo Theorem rem has has three three versio versions: ns: (a) The delineati delineation on of rights rights is the essentia essentiall prelude prelude to to market market transact transactions. ions. (b) If private private property property rights rights are are clearly clearly delineated delineated and and all costs costs of transacti transactions ons zero, zero, then resource use will be the same (identical) regardless of who owns the property rights. (c) If private private property property rights rights are clearly clearly delineated delineated and and if all costs of transacti transactions ons are zero, then the allocation of resources will be efficient, so there is no problem 11
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of externality. 2.
Impl Implic icat atio ions ns of of the the Coas Coasee theor theorem em:: a.
With the absence of private private property property rights, rights, market market transact transactions ions are are impossible. impossible.
b. The diverge divergence nce between between private private and social social costs costs will will disappear disappear if there there are welldefined property rights and negligible transaction costs. c.
Government Government interv intervention ention is a soluti solution on to the the social social cost cost problem problem only only when when the cost of government intervention is lower than the costs of market transaction
d. Under a private private property property rights rights system, system, resources resources allocation allocation will will always always be the the same. e.
If property property rights are enforceabl enforceablee at negligibl negligiblee transactio transaction n costs, costs, the optimal optimal level level of pollution may not be zero but b ut is subject to private contracting.
3.
The diverge divergence nce between between private private and social social costs costs does not not imply imply ineff inefficiency iciency or market failure. It is not market failure because the market is not allowed to function well since property rights are absent.
4.
If the the marginal marginal value of of an unpaid unpaid effec effectt is zero, there is no divergence divergence between between private and social costs.
Ch.18 Public Goods and Economic Efficiency
1.
A good good is a pub publi licc goo good d if if a.
it can can be be consum consumed ed concu concurre rrently ntly by many many indivi individua duals. ls.
b.
the mar margin ginal al cost cost of servi serving ng an addit addition ional al user user is zero zero..
2.
A public good can can be produced produced by by the government government as as well as by private private firms firms
3.
Economic Economic inefficie inefficiency ncy is inconsiste inconsistent nt with with the postul postulate ate of maximizatio maximization. n. Even if certain marginal values are not equal, the situation is still efficient if we consider that the cost of moving to their equality e quality is higher than the extra benefit entailed.
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