Market economy and pubic policy

Today
Homework from last week
CPI supplement
Micro and Macro
D and S
Soviet Union vs. Free Market
How S is made?
Elasticity
Utility, indifference curve, and wellness
How utilities explain social problems?
Guide to more serious researches…for some of you
Marginal Rate of Substitution --- Homework
Governmental intervention to market

Consumer Price Index
--- shopping “basket”

Consumer Price Index
Year 1: I = PB1 B1+PZ1 Z1 =Σ P1 Q1
Year 2: I’ = PB2 B1+PZ2 Z1 =Σ P2 Q1
Price Index P*
P* = I’/I = Σ P2 Q1/Σ P1 Q1

Various markets
(industries, businesses)
Energy (oil, gas, coal, hydro, nuclear, solar, wind, biomass, ….)
Utilities (heating, electricity, water, sewage, ...)
Public services (post, bus, taxi, train, …)
Education
Productions (car, electronics, food, IT, …)
Finances (bank, credit, stocks, ….)
Housing, lands, ….
Export/import trades
Emission trade (quotas, tradable permit, …..)
And so on…

List of terminologies

How is price made?
Why it is changed?
In competitive market

Question**
Some economists get angry by the comment bellow:
Education is expensive, but nothing is more valuable.
Ukraine needs more energy.
Social Security should cover our basic needs in retirement.

Vertical Demand

How does it look like if Soviet Union’s economist draw a picture, using our economics?

Vertical supply

Question
What is that Soviet Union’s system similar to the item in our market economy?
Find the answer from the list shown at the beginning of this lecture today.

How a company set price in a market, with no competitor?

How a company set the price in competitive market?

Marginal cost to supply curve

Price Elasticity of Demand
η = (ΔQ/Q)/(ΔP/P)

Elasticity of Demand on a linear Demand curve

Examples of Demand Elasticity

Corner solution
Equilibrium lies at one of the intercepts of the budget line, in this case,
at point M, where only other goods are purchased.

Question***
Car seat-belt
Before seatbelt was not required by law, it was available as an option.
The drivers knew that seatbelts reduced the injuries from accidents.
But, the drivers did not buy them.
Are the drivers irrational?

How utility explains price?

Some examples to show how indifference curves explain various economical/social problems

Effect of food stamp program on consumption

Excise subsidy vs. Lump-sum subsidy

Fixed-quantity subsidy: Education

Tax and Rebate Program

Investment in education and borrowing

References
[1] Browning E.K., Browning J.M., Microeconomic Theory and Application, Third Edition, Scott, Foresman and Company (Glenview, Illinois), 1989. –637p.
[2] Goldberger A. S., A Course in Econometrics, Harvard University Press, Cambridge, Massachusetts, (1991) –405p.
[3] Matsuki Y., Bidyuk P., Theory, algorithm and condition for aggregating economic benefit and health damages of coal fuel combustion, System Research & Information Technologies, 3’ 2013, Institute for Applied System Analysis, Kyiv, Ukraine (2013) pp. 19-29
[4] Matsuki, Y. Bidyuk, P., Kozyrev V., Empirical investigation of the theory of production function with the data of the alloy production in Ukraine, System Research & Information Technologies, 2’ 2014, Institute for Applied System Analysis, Kyiv, Ukraine (2014) pp. 29-39.

For Empirical study
to check theory by data
Utility Function

Production function

R-squared

Marginal rate of substitution (MRS)
MRS: Other goods/Steak

Homework
Monica spends her entire monthly income of $600 on cosmetics and accessories.
The price of cosmetic is $30, and the price of accessory is $10.
If she consumes 12 cosmetics and 24 accessories, her MRS is 1A/1C. Is she in equilibrium at this point on her budget line?
Show the result in a picture.

Hint

Homework 2
Translate to Ukrainian language
Price Elasticity of Demand
(Demand Elasticity)
Price Elasticity of Supply
(Supply Elasticity)
Marginal rate of substitution

Intervention by government (1)
Tax

Price Ceiling

Government purchase