Transcript The Economic Way of Thinking 10e ©Prentice Hall 2003 Cost and

The Economic Way of Thinking
10th Edition
by Paul Heyne, Peter Boettke,
and David Prychitko
“Supply and Demand: Issues and
Applications”
PowerPoint Slides prepared by
Assistant Professor
Paul Harris
Camden County College
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The Economic Way of Thinking 10e
©Prentice Hall 2003
Chapter Outline
I. Introduction
II. Looking for an Apartment in the
City? Read the obituary!
III. Strong Booze, Stronger Drugs:
Criminal Incentives
IV. Skim Milk, Whole Milk, and
Gangster Milkmen
V. Who Pays the tax?
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The Economic Way of Thinking 10e
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Chapter Outline
VI. High Priced Sports, Low Priced Poetry:
Who’s to blame?
VII. Do Cost Determine Prices?
VIII. The Dropouts Release Their First CD
IX. “There’s Gold in Them There Hills!”
So What?
X. Even Butchers Don’t have the Guts
XI. Why Does it Cost So Much to Change
Bedpans?
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Chapter Outline
XII. More Please, Since its Free
XIII. Cost and Ownership
XIV. Appendix: Framing Economic Questions
Correctly
XV. Beware of Wrong Questions or Misleading
Specifications of the Problem
XV1.Beware of Data That appears to Speak For
Itself
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The Economic Way of Thinking 10e
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Chapter Outline
XV111. Beware of Academic Scribblers
and Would-Be Economists
XIX.The Graphic Case of Growing and
Permanent Shortages
XX. Once over Lightly
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Introduction
• The economic way of thinking is at work
regardless of economist’s actions.
– Economist have simply uncovered the
principles behind economic behavior with
respect to people’s choices, and the
consequences of their choices.
– Economist help us understand how individuals
are able to coordinate their production,
consumption, and exchange decisions through
cooperative and competitive activities in the
marketplace.
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Introduction
The forces of Supply and Demand
clarify markets, not economist.
Economist debunk popular myths,
and misconceptions, about market
Processes.
In this chapter we consider other
examples of misconceptions about
the market system.
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Looking For an Apartment in
the City? Read the Obituary!
• Question……
– Why is it so difficult to find an Apartment in
New York City?
• Answer…
– Because the free market process has not been
allowed to work. New York City
Commissioners have imposed rent controls,
which have led to persistent housing
shortages.
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Looking For an Apartment in
the City? Read the Obituary!
Monthly
Rent
Supply
$600
De
$500
D Rent Controls
$400
$300
Shortage
D
$200
$100
100
200
300 400 500 600 700 800 900 1000 1100
Quantity of Apartment Units
The Economic Way of Thinking 10e
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Looking For an Apartment in
the City? Read the Obituary!
Monthly
Rent
Supply
$600
De
$500
D Rent Controls
$400
$300
Shortage
$200
D
The Below Equilibrium
price causes the
shortage !
$100
100
200
300 400 500 600 700 800 900 1000 1100
Quantity of Apartment Units
The Economic Way of Thinking 10e
©Prentice Hall 2003
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Strong Booze, Stronger Drugs:
Criminal Incentives
Question………
Why didn’t the prohibition of the 1920’s abolish the
supply and demand process for Alcohol?
Answer……
People coordinated their activities through
underground market processes.
Prohibition affected the elasticity of supply for
alcoholic drinks.
Supply became much more inelastic, while demand
remained stable, causing prices to surge.
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Strong Booze, Stronger Drugs:
Criminal Incentives
People pursue
comparative
advantage.
Underground
production and
distribution provides
criminals with a
comparative
advantage.
The Economic Way of Thinking 10e
The prohibition can
be compared to the
war on drugs.
Current laws do not
demolish the
demand or supply
for illicit drugs.
Like other forms of
prohibition these
laws have an
unintended
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consequence.
©Prentice Hall 2003
Skim Milk, Whole Milk and
Gangster Milkmen
• Question………
– What if the
production,
distribution
and
consumption of
milk were
prohibited?
• Answer…………..
– These activities
would be driven
underground.
– Supply would
become inelastic.
– Prices would rise.
– Criminals would
become milkmen.
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Who Pays the Tax?
• Question……..
– What effect
would a higher
tax have on
cigarettes?
The twin goals of
deterring
smoking and raising tax
revenue are not
fully compatible..
• Cigarettes…
– Currently demand is
inelastic.
– Higher prices bring
about greater
responses.
– Further tax
increases may
reduce tax revenue.
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Who Pays the Tax?
Sposttax
.32
Price per Pound
.28
Spretax
.24
The imposition of a
nickel tax raises the price
from 20 to 24 cents-buyer pays 4 cents/seller
pays 1 cent.
.20
.16
.12
.08
D
.04
0
1
2
3
4
5
6
7
Quantity of Soybean Oil per Time Period
(billions of pounds)
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Who Pays the Tax?
Any tax reduces buyers
and sellers ability to
engage in that activity,
and to enjoy the mutual
benefits of further
opportunities for
exchange.
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High Priced Sports, Low Priced
Poetry: Who’s to Blame?
Because the fans
are willing
to pay to see
us !
Why are our
salaries so
high?
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High Priced Sports, Low Priced
Poetry: Who’s to Blame?
Unfortunatel
y the demand
for poetry
reading is
low.
Why aren’t poets
paid as
much as professional
athletes?
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Do Costs Determine Prices?
Sellers like for the
public to believe that
price increases arise
from rising costs.
No sellers in history
have announced that
increases in demand
caused the the price
hike.
Costs depend not
only on supply, but
demand too.
The price of a
commodity depends
on its supply and
demand curves.
The position of the
supply curve
depends on its cost
of production
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The Dropouts Release Their
First CD
Remember! Sunk costs
are history. They
are irrelevant to
current economic
decisions..
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There’s Gold in Them There
Hills: So What?
Current market
price makes
it too costly to open
the mine. Let’s wait
for demand to increase.
Go for the
Gold!!!!
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Even Butchers Don’t Have the
Guts
When the demand for beef increases
the butcher’s sales increase.
The demand for final beef products
is elastic.
The supply of new cattle however is
inelastic .
Customer’s increased demand for
the final product cause the price to
increase.
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Why Does it Cost so Much to
Change Bedpans?
Question……
Why are
hospital cost
forever on the
increase?
Insurance
Lowers cost of
physicians’
services
Increases amount
purchased
Increases the cost
of medical
services
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Why Does it Cost so Much to
Change Bedpans?
Question
What will patients
do if their
payments are the
same regardless of
whether they
receive in- or
outpatient care?
Care inside the
hospital is usually
better inside the
hospital than outside
it.
Physicians can more
easily monitor a
patients progress
inside the hospital
than outside.
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Why Does it Cost so Much to
Change Bedpans?
 Employers
 Insurers
Have been
Pay hospitals fixed
pressuring
amount
insurers to control
Hospitals
costs
economize
 Insurers
 Demand affects cost,
Have been
rationing medical care
pressuring
services is unavoidable
doctors
since at a zero out of
pocket cost, demand
will far exceed supply.25
The Economic Way of Thinking 10e
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Why Does it Cost so Much to
Change Bedpans?
P
D w/out
insurance
S
D with
insurance
Q
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More Please Since It’s Free
Congested highways is another word for
shortages.
Shortages occur when prices are low.
Public transit systems are an answer, but they
loose money.
Private auto drivers don’t pay the full cost of
driving.
Motorist generate a lot of spillover cost by
driving.
As long as we give away scarce urban street space
for nothing we will have congested highways. 27
The Economic Way of Thinking 10e
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More Please Since It’s Free
 Solution to Traffic Congestion
 Charge users of public
transit a price high enough
to pay for improvements.
 Question……….
 What would happen?
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Cost and Ownership
Property Rights matter.
Question……..
Why will personnel tend to be
used in wasteful ways in the
military more often than in
civilian life?
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Cost and Ownership
 Answer……
Civilians are paid their opportunity cost.
Efficient use occurs more often when
resources (both human and inhuman) are
owned by someone
Resources tend to employed less efficiently
when the users do not themselves have to
pay the full opportunity cost.
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Cost and Ownership
How does the allocation of resources occur
when they are owned by the government?
With public resource ownership, planners
impose their own evaluations to the
alternatives.
With private resource ownership, competing
bids and offers generate prices that
approximate opportunity costs.
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Beware of Wrong Questions or
Misleading Specifications of the
Problem
You gave
me the
wrong
answer
No You asked the
wrong question
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Beware of Data That Speaks
Appears to Speak for Itself
With this
data the
answer is
apparent
!
Data
never
speaks
for itself!
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Beware of Academic Scribblers
and Would-Be Economist
The price increase will lead to
a decrease in the quantity
demanded. That will
eliminate the shortage.
Hey! The orange freeze is
going to lower supply, and
lead to higher prices, which
will lower demand.
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The Graphic Case of Growing and
Permanent Shortages
Output
Of Oil
Demand
Supply
False supply and
demand
curves for oil.
1950
2010
2050
35
Year
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Once Over Lightly
 Rent Controls create
unintended
shortages.
 Prohibition on
alcohol and drugs
drives the market
process
underground, and
provides criminal
with a comparative
advantage.
 A taxed activity
tends to reduce
further
opportunities for
people to participate
in that activity.
 Price is determined
both by supply, and
demand, not simply
cost.
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Once Over Lightly
 Supply and demand
and the market
process sets prices
that reflect the
relative scarcities of
goods and indicate
how they can be
used most
economically.
 When resources are
not privately owned
the rules of the game
governing their use
are unclear.
 Economic terms,
and concepts are
often used in
misleading ways.
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Next , Chapter 7 on
“Information,
Middlemen, and
Speculators”`
End of Chapter 6
The Economic Way of Thinking 10e
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