Market economy and pubic policy

Today
How to start your own business --- example and explanation by theories
Homework from last week
Examples to understand the “utility”
Normal goods and inferior goods
Income effect and substitution effect

Mike Itagaki’s success
Harvard Entrepreneurs Club guide to starting your own business, Poonam Sharma with chapters contibuted by Ngina Ducket….[et al], Harvard University, 1999.
Organic chemistry tutorial software
Founder, Kimberlyte, Inc. www.kimberlyte.com
Harvard College “98 (Chemistry)
Founded company between first and second year at Harvard.
Studied organic chemistry.
Took a semester off at the second year.
Design (and start a business with) a piece of software that contains all information used in the first-year.
With it, students can avoid detailed note.

In 1994, he programmed, and put it up on a web site. (Macintosh version) sold two copies.
In spring 1995, incorporated Kimberlyte in Hawaii, programmed more sophisticated version, “ChemDraw”. But came back to Harvard.
Internet oriented company = low costs = just running a web site and spending his time.
Internet – run his company from many places.
In summer 1995, graded up programming language to C++, and worked full time to program a Windows version. Sold hundreds copies.

Got much larger market share, because Windows machines have a much larger market share of the computer market.
University of Ohio recommended it to a class, ordered $7000 worth of product.
But, in 1996, he still wanted the whole market, so improved the Macintosh version. Much better job, because much more experienced.
In summer 1997, a new direction of company = web browser to find targeted e-mail addresses. (Jawa programmig language). Listed 10,000 e-mail addresses. == Marketing tool.
In February 1998, awarded Harvard Student Agencies Entreprineurial Contest

How to start your business
as a student
Think like as an entrepreneur.
various types of leadership, various idea types
Marketing your product --- methods
What customers really want? --- research
Financing your plan
Find venture capitalists: investment and return
Writing the business plan --- for financing
Industry --- the competitors
Protecting yourself
Options of your legal structure

How a company set the price in competitive market?

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

Q, P, TR, TC, TVC, TP, MC, MR

Marginal cost to supply curve

Cost curves and structure of industry

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

Emission trade ?

Environmental Investment by
Oil Industry
Include environmental performance in business plan.
Eliminate accidents.
Achieve company’s goal…Higher market share.

Environmental and share price in oil industry

Strategy of Environmental Investment

Investment risk

Homework 3
Translate to Ukrainian language
Governmental intervention
Price ceiling
Black market
Rationing, Non price rationing
Shortage
Surplus

Questions
The government agrees to purchase as many pounds of apples as growers will sell to it at a price of $0.80.
How much will the government purchase,
how much will consumers purchase, and
how much will be produced?

The supply and demand for apples
Demand
Supply
What is the market equilibrium price and quantity?

Governmental purchase
apple case

Governmental purchase = 140 000 – 110 000 = 30 000
Consumer purchase = 110 000
Produced apples = 140 000

Homework 1
Suppose the government policy of purchasing apples remains in effect, but consumer demand increases by 10 percent (consumers will purchases 10 percent more at each price than they did before).
What will be the effects on
total apple output,
purchases by consumers,
purchases by government, and
the price of apples?

After the Demand shifts
The consumer demand becomes D-D’.
The demand curve confronting the producers becomes D’-A’-D1.
Total output and price don’t change.
But, the consumers’ purchases rise to 121 000.
and the government’s purchases fall to 19 000 (140 000 – 121 000).

Homework 2
Find the demand curves for each of 3 variables.

Cobb-Douglas 3 dimensional case

Effect of food stamp program
vs. cash grant

Excise subsidy vs. Lump-sum subsidy

Fixed-quantity subsidy: Education

Tax and Rebate Program

Investment in education and borrowing

Income effect,
Substitution effect on price reduction

Income effect and substitution effect in a price reduction

Inferior goods

Examples
US Department of Labor, Bureau of Labor Statistics, Average annual expenditures
for Commodity and Service Groups Classified by Nine Family Characteristics…

Homework 1
Consider two market baskets. A ($100 worth of other goods and 10 units of X), and B ($150 worth of other goods and 10 unit of X).
If good X is a normal good, will the consumer’s MRS be greater when basket A or basket B is consumed?
What if good X is an inferior good?
Show in a diagram

Hint
if good X is a normal good