Transcript UT Microeconomics of Domestic Security

Using All the Theory:
The Microeconomics
of Domestic Security
© 2003 South-Western/Thomson Learning
The Opportunity Cost of
Domestic Security
Increasing production of goods and
services that provide security comes
at an opportunity cost:
producing less of other goods and
services.
The Opportunity Cost of
Domestic Security
All Other
Goods and
Services
Q2
Q4
A
B
Q1
Q3
Security Goods and Services
The Opportunity Cost of
Domestic Security
All Other
Goods and
Services
B
B'
A
Security Goods and Services
The Opportunity Cost of
Domestic Security
The opportunity cost of increased
production for security is a sacrifice in
the growth of our standard of living.
•At worst, our living standard could fall
•At best, it will rise more slowly than it
otherwise would.
Changes in Product Markets
after 9/11/01
•Changes in Demand
•Changes in Supply
Changes in Demand after 9/11
Demand would shift to goods that
provide security:
• luggage screening machines
• metal detectors
• handguns
• new technologies
• bomb-sniffing dogs, etc.
Demand for Security Dogs
(a) Market
Price per
Dog
S1
Price per
Dog
S2
B
P2
MC
B
P2
P3
P1
(b) Typical Firm
C
A
D2
P3
P1
C
A
d2
ATC 2
ATC 1
d3
d1
D1
Q1
Q2
Q3
Number of
Trained Dogs per Month
q1 q3
q2
Number of
Trained Dogs per Month
Increased Demand after 9/11
• In the short run, the rise in price for
security-related products increases
supply to some extent.
• In the long run, the higher price and
associated profits increase
productive capacity, leading to even
greater increases in supply.
Decreased Demand after 9/11
• In the short run, the drop in price due to
decreased demand of some products
(such as travel-related goods/services)
decreases supply to some extent.
• In the long run, if the decrease in
demand persists, the lower price and
associated losses will decrease productive
capacity, leading to even greater
decreases in supply.
Changes in Supply after 9/11
There are markets where the initial
impact of the attacks is a change in
supply.
Increased security requires the use of
additional inputs and higher costs to
produce any given level of output.
Changes in Supply
(a) Market
Price per
Gallon
S2
(b) Typical Gas Station
Price per
Gallon
S1
B
P2
P2
MC2
MC1
ATC2
B
d2
ATC1
P1
A
P1
A
d1
D
Q2
Q1
Gallons
per Month
q2 q1
Gallons
per Month
Changes in Supply
After 9/11, it will take more resources to
produce many goods and services, such
as those involving high-risk
transportation.
Prices of these goods will rise and
production will fall as consumers are
forced to take account of the higher
opportunity cost of production.
Changes in Supply
Price per
Passenger
S3
S2
S1
D
P3
P1
P2
A
C
B
P'
D1
D2
Q3 Q2
Q1
Number of
Passengers per Week
Changes in Labor Markets
Reallocating resources:
•land
•capital
•labor
Changes in Labor Markets
Demand for security-related jobs
increases:
•security guards
•intelligence agents
•aircraft engineers
•biochemists, etc.
Strategic Language Speakers
In the short run, increased demand
for strategic language speakers
causes their average wage to rise,
with only a relatively small increase in
employment.
Strategic Language Speakers
In the long run, the higher wage will
shift the labor supply curve
rightward, bringing the wage down
somewhat while increasing quantity
further.
Strategic Language Speakers
Wage
fig 7, animated
L
L
W2
S
1
S
2
B
W3
W1
C
A
L
D
L
Q1
Q2
D
2
1
Q3
Number of Qualified
Strategic Language
Financial and Capital Markets
Producers of security-related goods
could increase profits by expanding
plant and equipment.
Potential suppliers of funds found
stocks/bonds of these firms more
attractive than before.
Financial and Capital Markets
Result: an increased flow of loanable
funds to firms and industries
producing security goods, resulting
in an increase in the sector’s
productive capacity.
Defense Industry and the Stock
Market
(a) Mexico
Price (per
Pound)
(b) U.S.
S Price (per
Pound)
D
D
G
24¢
20¢
14¢
A
initial
exports
C
B
E
20¢
H
initial
imports
F
D
S
150
170
250
220
Tomatoes
(Millions of Pounds per Month)
200
215
300
265
Tomatoes
(Millions of Pounds per Month)
Public Goods and Government
Involvement
Issue of dividing domestic security
among public and private goods.
Airline safety shares a characteristic
of a public good, but is not a pure
public good - it is rivalrous and
somewhat excludable.
International Trade and
Domestic Security
Some trade barriers may be reduce by
the events of 9/11.
But these effects are likely to be
dominated by the increased cost of
delivering goods across international
boundaries due to heightened border
security.
International Trade and
Domestic Security
(a)
Price per
Share
$31.50
$24.85
(b)
Price per
Share
S1
$33.25
$31.50
B
A
S1
S2
C
B
DSept. 17
Dlate Oct.
DSept. 17
D Sept. 10
330
million
Number of
Shares
330
360
million million
Number of
Shares
International Trade and
Domestic Security
Increasing costs of transporting
internationally traded goods and
changing the pattern of production
domestically, increased security at our
borders will increase resource
requirements for many goods/services,
and contribute to slower growth in living
standards.