Microeconomics Test 2

Front 1

There is no such thing as perfect information

Back 1

either through time [t0 → tn], between individuals, or across some population

Front 2

perfect competition’

Back 2

is such an ideal case

Front 3

less than perfect information

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outcomes are less than optimal

Front 4

more uncertainty and greater risk

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less than optimal outcomes

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suboptimal outcomes (resources going to use that are less preferred)

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waste in a world of scarcity

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The ability of agents
to make good economic decisions

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maximization of consumer need and want satisfaction or profit maximization

Front 7

with perfect information optimal economic solutions would be possible

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Individuals have a responsibility for their own acquisition of knowledge or information … it is not the responsibility of others to provide it to you ‘free-of-charge.’

Front 8

Adverse selection

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a market situation in which one party to a transaction (or, exchange) is in a
position to take advantage of an information or knowledge disparity

Front 9

there is no such things as a perfect distribution of information of knowledge

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despite the Panglossian+ assumptions of the perfectly competitive market made by economists afflicted by a case of severe ‘over optimism.’ For example – the tendency for those who have high risk occupations or engage in high risk activities to obtain life insurance (if they farsighted).

Front 10

Moral hazard

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a market phenomenon which exists whenever two parties come into agreement
(form a contract, either implicit or explicit). Each party to the contract at some point may find it in their interest to gain from acting contrary to the principles laid-out under the agreement. It represents a betrayal of trust and is a special case of information asymmetries (less than perfect information). The risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.

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Asymmetric information

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A situation in which one party in a transaction has more or superior
information compared to another. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well. Potentially, this could be a harmful situation because one party can take advantage of the other party’s lack of knowledge.

Front 12

Ludwig von Mises

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All production if for consumption

Front 13

Joseph Schumpeter

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We must always start from the satisfaction of wants, since they are
the end of all production

Front 14

The consumer

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is the focus of all economic production

Front 15

Consumers’ satisfaction supplies the social meaning for all [capitalist]
economic activity

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Joseph Schumpeter

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read Voltaire’s satire, Candide, ou l’Optimime(1759),
Candide’s mentor

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was Dr. Pangloss!

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Dr. Pangloss!

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This name comes from the Greek – pan – all or entire;
and gloss – tongue and means - ‘all mouth’

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individual demand

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(di)

Front 19

total level of demand

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(∑di =Dij ) in some ‘market,’ consumer choices are revealed

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factors of production

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land, labor, capital and entrepreneurship

Front 21

In the market consumers are confronted by

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the ‘output’ or products arising from the prior actions
undertaken by the ‘producers’ (‘the firm’) … an ‘functional’ organizational entity that has brought the various factors of production

Front 22

transformation into final goods and services. These ‘producers’ seek to

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maximize their net returns for their efforts (Profits), usually by minimizing all of their costs (both explicit and implicit). In so doing, the prices charge to consumers will also are reduced to a minimum level sustainable through time, assuring the firm’s ultimate survival

Front 23

George Stigler’s

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assertion that the over-riding
goal of the firm is ‘survival,’ and firm’s failing to make profits are unlikely to survive

Front 24

Joseph Campbell

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circumstances provide the government to become the ‘hero with a thousand faces’ (Joseph Campbell) with its bailout of failed companies – all to ‘save jobs’ – in the name of ‘Too Big to Fail.

Front 25

Competitive prices

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are the outcome of a complete adjustment of the sellers [or, producers] to the demand of the consumers. Under the competitive price the whole supply available is sold, and the specific factors of production are employed to the extent permitted by the prices of the nonspecific complementary factors. No part of a supply available is permanently withheld from the market, and the marginal unit of specific factors of production employed does not yield any net proceed. The whole economic process is conducted for the benefit of the
consumer

Front 26

Mises

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There is no conflict between the interests of the buyers and those of the sellers, between the interests of the producers and those of the consumers. The owners of the various commodities are not in a position to divert consumption and production from the lines enjoyed by the state of supply of goods and services of all orders and the state of technological knowledge

Front 27

oligopoly (duopoly),

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the French economist, Antoine Augustin Cournot (1801-1877) in his Recherches sur les principles mathématques de la theorie des richesses (1838)

Front 28

monopolistically competitive markets

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Edward Hastings Chamberlain, 1933, The Theory of Monopolistic Competition

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Joan Violet Robinson, 1933

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, The Economics of Imperfect Competition

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an imaginary state

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a state unattainable in the ‘real world,’ yet instructive:

Front 31

Perfectly Competitive

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-there are many buyers (consumers) and many sellers (producers);
-an infinite number of buyers (consumers) and sellers (producers) are
rational;

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Perfectly Competitive

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-all participants have access to perfect information;
-sellers (producers) seek to maximize profits;
-buyers (consumers) seek to maximize their levels of need/want satisfaction (utilities)

Front 33

Perfectly Competitive

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-firms seek to maximize their profits;
-all the products are homogeneous, i.e., identical and perfectly inter-
changeable;
-all participants are ‘price takers,’ lacking any market power;

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Perfectly Competitive

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-there are no barriers to the entry of new firms, nor are there barriers to their
exit from the market

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transactions are costless

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: Ronald Coase, 1960, The Problem of Social
Cost,” Journal of Law and Economics

Front 36

If markets are so efficient, why do ‘firms’
exist

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Ronald Coase

Front 37

The Nature of the Firm

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each participant is perfectly mobile

Front 38

Walter E. Williams

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Economic Myths

Front 39

Walter E. Williams , Economic Myths

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One of these ‘myths’ is that businesses or firms are constantly engaging in ‘cutthroat competition’ seeking to eliminate rival competitors and thereby establishing a monopoly

Front 40

Alan Greenspan’s 1961 article, “Antitrust,” in Ayn Rand’s

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Capitalism: The Unknown Ideal. There Greenspan observes that ‘competition is lauded,’ but ‘too much competition is condemned as cutthroat

Front 41

President Franklin D. Roosevelt’s closest adviser and architect of the New Deal,
Henry Hopkins, advised, “Tax and tax, spend and spend, elect and elect, because
people are too damn dumb to know the difference.

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Williams is commenting and quoting his colleague at George Mason University, Professor Bryan Caplan’s book, The Myth of the Rational Voter: Why Democrats Choose Bad Policies.

Front 42

Assumptions for Pure Monopoly

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. In a monopolistic market, there is a single seller or firm, not many – the firm is the industry – and it produces all of the output in that market is able to absorb at existing market prices, thereby enabling it to acquire and exert ‘market-‘ or ‘pricing-power

Front 43

The firm

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the ‘price-maker’ rather than a ‘price-taker’ as is the case in perfectly competitive markets.

Front 44

‘hierarchic’ (pyramidal) or ‘top-down’ model for mass production

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such industries as: automobiles, steel and appliances

Front 45

horizontal’ organizational models

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characterized by the development of the Toyota Production System (TPS).

Front 46

Ronald Coase’s article

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The Nature of the Firm,” and his ideas regarding the organization of production – through (i) markets; or (ii) within the firm. This ‘horizontal’ ‘process organizational’ approach involves ‘lean production’ (elimination of waste) and ‘production teams

Front 47

William Edwards Deming

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would exercise tremendous influence on future developments of the Japanese economy, working under General Douglas Mac Arthur (1947), aided in developing procedures for undertaking the 1951 Japanese Census of Population. While in Japan, Deming taught the principles of statistical quality control for the Japanese Union of Scientists and Engineers (JUSE).

Front 48

Taiichi Ohno and his primary management consultant Shigeo Shingo

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to create the TPS

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muda

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waste

Front 50

TPS-system, emphasized the

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elimination of waste (or ‘muda’) [the ‘Seven Wastes’]. Ohno’s TPS is characterized by ‘Total Quality Management’ (or TQM), a ‘Just-in-Time’ (or J-I-T) inventory system (much like the system adopted later by Wal-Mart), and ‘Lean Production’ or ‘Lean Manufacturing – so much for Motorola, and its much vaunted Six Sigma (6Σ) said to have been created in 1981 …. long after the work of Shewhart, Deming, Ohno and Shingo.

Front 51

Frederick Winslow Taylor (1856 – 1913). Taylorism

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time-and-motion studies,’ was designed to promote labor productivity and production efficiency.

Front 52

Additionally, Taylorism was furthered by the rise of Peter Ferdinand Drucker’s (1909 – 1993)

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Management by Objectives approach (MBO).

Front 53

Oligopolies

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-Firms occasionally cooperate, setting market regions, market share and market
prices, this is referred as collusion;

Front 54

homogeneous product

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no product

Front 55

differentiation

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steel, aluminum and flour – and a market where there are a few firms producing

Front 56

there are a few firms producing differentiated goods

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, e.g., automobiles, refrigerators and electronic equipment;

Front 57

national socialism’

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While national socialism opposes Communism and other left-wing sentiments, the ideology favours certain aspects of leftist ideologies such a progressive taxation, minimum wage,
affordable housing, public healthcare and education. On the other hand, national socialism incorporates certain right-wing aspects into its agenda, such as capital punishment, pro-life
stance on abortion, anti-immigration and revitalization of traditional gender roles to name a few. The aspects of the ideology are dynamic and largely based in theory

Front 58

Nazism

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The Nazis argued that capitalism damages nations due to international finance, the economic dominance of big business, and Jewish influences within it. Adolf Hitler, both in public and in private, held strong disdain for capitalism; he accused modern capitalism of holding nations ransom in the interests of a parasitic cosmopolitan rentier class. He opposed free-market capitalism's profit-seeking impulses and desired an economy where community interests would
be upheld. He distrusted capitalism for being unreliable, due to it having an egotistic nature,
and he preferred a state-directed economy. Hitler told one party leader in 1934, "The economic system of our day," referring to capitalism, "is the creation of the Jews." In a discussion with Italian Fascist dictator Benito Mussolini, Hitler said that "Capitalism had run its course".

Front 59

Precisely, where does the threat by the government to individual liberty and personal ‘freedom’ come from today

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Krugman, Volker and Paul

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John Marshall (1755 – 1836), one of the most important Chief Justices of the U.S. Supreme Court (1801 – 1835)

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The power to tax is the power to destroy

Front 61

Market Structures

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Market structure is a term employed in neo-Classical economics to describe various degrees of competitiveness or lack thereof that exists in the marketplace. To a large extent the differences are based on the participants (buyers and sellers) to influence the ‘market-price.

Front 62

market structures are described as

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the degree to which firms in a given market, local, regional, national, or, even international – say for, tomatoes, steel, groceries or haircuts – are able to influence the ‘market’ prices.

Front 63

Ludwig von Mises

Back 63

Competitive prices are the outcome of a complete adjustment of the sellers [or, producers] to the demand of the consumers. Under the competitive price the whole supply available is sold, and the specific factors of production are employed to the extent permitted by the prices of the nonspecific complementary factors. No part of a supply available is permanently withheld from the market, and the marginal unit of specific factors of production employed does
not yield any net proceed. The whole economic process is conducted for the benefit of the consumer

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Key Elements of Economics’ proposed by Gwartney and Stroup

Back 64

Voluntary Exchange Promotes Economic Progress

Front 65

Key Elements of Economics’ proposed by Gwartney and Stroup

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People Earn Income by Helping Others

Front 66

Key Elements of Economics’ proposed by Gwartney and Stroup

Back 66

Profits Direct Businesses toward Activities that Increase Wealth

Front 67

Key Elements of Economics’ proposed by Gwartney and Stroup

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Incentives Matter

Front 68

Key Elements of Economics’ proposed by Gwartney and Stroup

Back 68

The is No Such Thing as a Free Lunch

Front 69

law of diminishing returns

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as output increases at an increasing rate for increments of variable factor, variable costs will increase at a decreasing rate

Front 70

The total short run cost (TC)

Back 70

is the sum of Total Fixed Cost (TFC) and Total Variable Cost (TVC):TC = TFC + TVC

Front 71

Competitive Markets

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: Competition Promotes the Efficient Use of Resources and Provides a Continuous Stimulus for
Innovative Improvements

Front 72

We must always start from the satisfaction of wants, since they are
the end of all production

Back 72

Joseph Schumpeter

Front 73

All production if for consumption

Back 73

Ludwig von Mises

Front 74

Consumers’ satisfaction supplies the social meaning for all [capitalist]
economic activity

Back 74

Joseph Schumpeter

Front 75

In the ( ) consumers are confronted by the ‘ ’ or products arising from the prior actions
undertaken by the ‘producers’ (‘ ) …

Back 75

market output the firm

Front 76

assertion that the over-riding
goal of the firm is ‘survival,’ and firm’s failing to make profits are unlikely to survive.

Back 76

George Stigler’s

Front 77

. As
we have learned recently, such circumstances provide the government to become the ‘hero with a thousand faces’

Back 77

(Joseph Campbell) with its bailout of failed companies – all to ‘save jobs’ – in the name of ‘Too Big to Fail.’

Front 78

may be undertaken under a variety of organizational forms to satisfy human needs and wants –

Back 78

Production

Front 79

Gwartney and Stroup

Back 79

Voluntary Exchange Promotes Economic Progress

Front 80

Gwartney and Stroup

Back 80

People Earn Income by Helping Others

Front 81

Gwartney and Stroup

Back 81

Profits Direct Businesses toward Activities that Increase Wealth

Front 82

Gwartney and Stroup

Back 82

Incentives Matter

Front 83

Gwartney and Stroup

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The is No Such Thing as a Free Lunch

Front 84

technology

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is a means of doing something – it represents some means of ‘trans-forming’ scarce resources into some intermediate or final product. It is what gives rise to a particular production function

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technology is a means of doing something – it represents some means of ‘trans-forming’ scarce resources into some intermediate or final product. It is what gives rise to a particular production function

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Y = f (X)

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fixed factor

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is the physical capacity of the factory or plant or the number of acres under cultivation.

Front 87

The typical short run production relationship is described as

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Y = b0 + b1X + b2X2 – b3X3

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Total output or Total Product (TP) is

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the locus of ‘product-to-input’ relations – expressed in physical units;

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Total Cost (TC) is

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the corresponding locus of ‘product-to-input prices’ – expressed in some unit of account ($, ₤, €); each displaying their representative relationships as ‘product’ and ‘cost’ curves.

Front 90

If equal increments of one variable input is added, while keeping the amounts of all
other inputs fixed, total product may

Back 90

increase

Front 91

after some point, the additions to total (the marginal product) will

Back 91

decrease

Front 92

Profits are a measure of business or corporate

Back 92

success

Front 93

Gwartney and Stroup

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Competitive Markets: Competition Promotes the Efficient Use of Resources and Provides a Continuous Stimulus for
Innovative Improvements

Front 94

Profits Direct Businesses toward Activities that Increase Wealth

Back 94

Gwartney and Stroup

Front 95

Note: that wealth and profits

Back 95

are not the same

Front 96

wealth

Back 96

is the accumulation of returns through time (t0 → tn);

Front 97

profit

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are returns at a moment in time (t0). Businesses that fail to make profits are WASTING SCARCE RESOURCES [not providing consumers with what they need or want at prices that they are WILLING to pay]

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** Deemed to be the first of ‘too big to fail’ by Federal Reserve Bank and Federal
Deposit Insurance Corporation (FDIC) regulators’

Back 98

1984 Continental Illinois Banking & Finance National Bank &
Trust1

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Paul A. Volker

Back 99

The Chairman of the Federal Reserve at the time was Paul A. Volker (1979-1987), a Carter appointee

Front 100

Continental
Illinois National Bank

Back 100

largest ‘bank failure’ in U.S. history – until it
was surpassed by the failure of Washington Mutual in 2008. In early May,
1984 large depositors withdrew $ 10,000 million and there was a run on
Continental Illinois.

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Paul Volker

Back 101

former Chairman of the Federal Reserve (1979 – 1987) and currently the
chairman of the White House Economic Recovery Advisory Board has argued that
‘bailouts’ create moral hazard – signaling to firms that reckless risk-taking in the expectation that taxpayers will bear the costs of future failures

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Representative Ron Paul (R. TX)

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“I have always opposed government bailouts of private tizations. … We must remember that governments do
not produce anything. Their only resources come from producers in the economy through such means as inflation and taxation. In bailing out failing companies, they are creating money from productive members of the economy and giving it to failing ones… By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better, more productive use. An essential element of a healthy free market, is that both success and failure must be permitted to happen when they are earned. But instead with a bailout, the rewards are reversed – the proceeds from successful entities are given to failing ones. How this is supposed to be good for our economy is beyond me.... It won’t work. It can’t work... It is obvious to most Americans that we need to reject corporate cronyism, and allow the natural regulations and incentives of the free market to pick the winners and losers in our economy, not the whims of bureaucrats and politicians.