Welcome back to my blog! In the Previous blog, we talked about Externality, which including both positive externality and negative externality, and merit good, which defined as the good that has positive externalities associated with it. In this blog, we will firstly talk about demerit god.

Demerit goods can be defined as the good that has negative externalities associated with, and it will be over-consumed if left to market forces. For instance: Tobacco products, and high-fat, high- sugar food. These products will damage our physical health and very addictive, but these damage( or cost) will never be counted in the selling price. demerit goods are provided by the market but are likely to be under-priced and over-produced. As we can see from the first picture, if people consider the external cost, the supply curve should be S1 but not S.

There are serval ways to adjust these market failure. The first one should be laws and regulation. For example, if the government publish some regulations to control the supply of some demerit  goods, the supply will decrease to the correct level. Moreover, taxes can also be used to correct negative externalities. As you can see from the second picture, the supply cure will shift to left, which go back to the right place. Subsidy can be used to correct positive externalities. As you can see from the third picture, the increase in subsidy will cause the increase supply, thus the supply curve will shift to right. With the increase in quantity and the decrease in price, the supply and demand for merit goods will go back to the correct place.

After the introduction of externality, we will discuss the “price discrimination”.

Price discrimination is a selling strategy that charges customers different prices for the same product or service based on what the seller thinks they can get the customer to agree to. (investopedia) There are three necessary conditions for charge a price discrimination.

Firstly, the product must have a downward-sloping demand curve, which represents this company have a strong market power.

Secondly, the company is able to readily identify buyers with predictably different demand curve. This means that the company know clearly the elasticity of their product and how they shift with different changes.

Thirdly, the company is able to prevent resale (aka arbitrage).

There’re several types of price discrimination. The first type is buying in bulk—the more you buy, the lower price you will get. The second type is named two-part tariff. For example, if you get a membership card for a supermarket, you will get lower price for its product. Another one is coupons. People who get promo code can buy the product in a lower price.

Through price discrimination, the company will absolutely maximize their revenue, because that contains the revenue from people who are willing to pay a higher price and revenue from people who can only pay a lower price. That successfully   instead the situation of a single price with a limited amount of people.

In my last blog, we introduce he concept named “ externality” which define as the the cost or benefit that affects the third party other than producers or consumers. Like I said in the last blog, we need to find out what are the private & social benefit, and the private & social cost in order to get deeper understanding of externality.

Using some equations will be easier to understand this concept.

Generally speaking, social benefit is equal to private benefit plus external benefit( SB=PB+EB), and social cost is equal to private cost plus external cost(SC=PC+EC). If the social costs greater than the social benefit, we call it uneconomic use of resources. if the social cost is less than the social benefit, we call it the economic use of resources.

Externality can be divided into positive externality, which produces external benefits for other people and organizations that  were not involved in the decision or action that created it, and negative externality, which Imposes external costs on other people and organizations that did not agree to the action that caused it. Examples for positive externalities are including education, since the increase in the level of civic education level is helpful to increase the Citizen’s happiness index. Medication can also count as a positive externality, since it will save people from the torture of illness, especially for some Infectious disease, products like vaccine are bring huge external benefit to our society. People who inject the vaccine are not only help themselves, but also reduce the possibility of virus infection to other people.

Examples for negative externality are including vehicle pollution, noise pollution from neighbor, or air pollution from smoker. These negative effects are not to brought intendedly by people in our society, but what they have done indeed cause these negative effect and make damage to other people’s well-being. That’s the reason for economists call them negative externality.

After the discussion of externality, we will talk about merit good and demerit good, and the relationship between them and externality.

Merit good is defined as the good that has positive externalities associated with it, usually provided by a government because they can benefit everyone in society. For instance, the subsidized bike schemes, pubic library and community space, free school meal and nutrition advice, museum and gallery are all count as the merit goods. Merit goods are provided by the market but are likely to be over-priced and under-produced. Because the market only consider the private benefit and costs, and cause information failure, which happened when individuals or firms have a lack of information about economic decisions.  As you can see from this graph,

if people produce more merit good, the distance between the private benefit and social benefit is shown as the external benefit. This can be explained by the equation I perversely present— social benefit is equal to private benefit plus external benefit.

Demerits good is defined as the good that has negative externalities associated with it, It is always over-consumed if left to market forces. We will cover more details about that in the next blog!

In our last blog, we covered about the definition of price elasticity of demand and price elasticity of supply,  relationship between revenue and different elasticity coefficient, and factors that affect the price elasticity of demand.

In this blog, we will firstly discuss the factors that will change the price elasticity of supply.

The first factor— time. As the time increase people normally will become less incentive to do their current job, especially for the job which have high repeatability and boring. Thus, the price elasticity of supply might be elastic at short run, but become inelastic in long run.

The second factor— the availability of resource. If this product require an extremely high cost to produce, which means a low availability of resource,  the price elasticity of supply will be inelastic. The quantity supply will change little bit with a large change in product’s price. If the cost of production is low, which means high availability of resources, the price elasticity of supply will be elastic. The quantity supply will change a lot with a small change in product’s price.

The third factor—difficulty of storage. If the product is easy to store, then it will be defined as elastic, because it can easily response the customers’ demand. However, If the product is not easy to store, then its will be defined as inelastic, suppler cannot response to consumers’ change in demand due to the lack of storage.

Like we covered in last blog, the price elasticity of supply coefficient can be calculated by the percentage change in quantity supply divided by the percentage change in price. If the price elasticity of supply coefficient equal to zero, that means the percentage change in price lead to no change in supply, and it will be defined as perfectly inelastic.

If the price elasticity of supply coefficient equal to infinity, that means the change in price will cause infinite change in supply, which will be defined as perfectly elastic.

If the price elasticity of supply coefficient greater than one, that means the percentage change in quantity supply is greater than the percentage change in price, which will be defined as elastic

If the price elasticity of supply coefficient is less than one, that means the percentage change in quantity supply is less than the percentage change in price, which will be defined as inelastic.

If the price elasticity of supply coefficient equal to one, that means the percentage change in quantity supply is equal to the percentage change in price, which will be defined as unitary elastic.

After the introduction of price elasticity of demand and price elasticity of supply, we will move to the next part— Externality.

Externality is defunded as the cost or benefit that affects the third party other than producers or consumers. Before the discussion of externality, we may need to focus on the private & social benefit, and the private & social cost

People always only see private benefits and costs while making decisions, so why dose the social cost and benefit matters? We will find that out in the next blog.

In the last blog, we talked about the price mechanism, which is the market mechanism that guides decisions taken by different producers and consumers about how scarce resources should be allocated between competing uses. Today, we will discuss the price elasticity of demand and price elasticity of supply.

Firstly, I will introduce the definition of of price elasticity of demand. The responsiveness of quantity demanded to changes in the price of a good service is known as the price elasticity of demand. Moreover, it can be calculated by the percentage change in quantity demanded divided by the percentage change in price.

If the price elasticity of demand coefficient is greater than one, it will be defined as elastic, and the increases in price will cause a decrease in total revenue. If the price elasticity of demand coefficient is less than one, it will be defined as inelastic, and the increases in price will cause a increases in total revenue. if the price elasticity of demand coefficient is equal to zero, it will be defined as perfectly inelastic, which means that any change in price will not change the quantity sold. if the price elasticity of demand coefficient is equal to infinity, it will be defined as perfectly elastic, any increase in the price will cause the demand to drop to zero.

What factors will affect the price elasticity of demand?

The first one should be the number of substitutes. the more substitutes that a product have, the more elastic that the product will be. The reason behind that is consumers will have more choices to select the best product. If the price if a product is higher than its substitutes, consumers will definitely choose to buy its substitute. For example, if the price for coke increases, then you will buy Pepsi or Sprit instead.

Secondly, the price elasticity of demand will affect by time period. For example, the you were a child, you may spend all your pocket money on order to buy a game machine, but as you grow up, a game machine will not attract your interest as you were a child, thus you will not willing to spend all your money to buy a same game machine.

Thirdly, the proportion of income you spent on this commodity. Take a GUCCI bag and potato for example. If both of these product decrease their price for fifty percent, which one would you likely to buy? The answer should apparently be the GUCCI bag, because the proportion of income you spent on a GUCCI bag will much more greater than potatoes.

After the introduction of the price plasticity of demand, we will discuss the price plasticity of supply. Just like the price plasticity of demand, the price plasticity of supply measures the responsiveness of quantity supplied to change in price. Moreover, it can be calculated through the the percentage change in quantity supply  divided by the percentage change in price.

what does different price plasticity of supply coefficient means? What factors will affect the price plasticity of supply? We will find these out in the next blog!

Welcome to my blog! In the last two blogs we talked about demand and supply, and the factors which will affect them. In this blog, we will firstly talk about price mechanism.

Price mechanism is a market mechanism that guides decisions taken by different producers and consumers about how scarce resources should be allocated between competing uses. What lead by price mechanism is the equilibrium price, It is the price at which the amount supplied equals or satisfies the amount demanded. We can simply find that from the graph, which shows by the intersect point of the demand and supply curve.

Government always try to interfere the market in order to get a better allocation of resources. the most common thing they would do is to impose tax on goods and services. Like we mentioned before, tax will influence the demand and supply. The increase in direct tax, which is a tax levied on the incomes or wealth of individuals or firms, will cause the decrease in demand. the increase in indirect tax, which is a tax levied on goods and services, will cause the decrease in supply. In the second situation, the indirect tax is not only burden by producer. As you can see from the graph, the upper part is burdened by consumer, and the other part is burdened by producer. Dead weight loss is showed by this little triangle. At this time, what burdened by producer seems outweigh by what burdened by consumer, that because the price elasticity of supply is lower than the price elasticity of demand. The more elastic of the demand, the lower tax that consumer will need to burden. The more elastic of the supply, the lower tax that producer will need to burden. vice versa

Government will also set price celling and price floor to control the market price celling is usually below the equilibrium price, which will defiantly lead to the decrease in market price. Government use prices celling to reduce the market price. Price floor is usually upper the equilibrium price, which will lead to the increase in market price. Government use that to increase the market price. When experiencing the market celling, it is always facing the situation of shortage, which is the quantity of demand is exceed the quantity of supply. When it turn to the price floor, it is always facing the situation of surplus, which is the quantity of supply exceed the quantity of demand.

Another thing government may do is to imposing quota or subsidy. Quota is a type of trade restriction that sets a physical limit on the quantity of a good that can be produced or purchased in a given period of time. If there is a quota below the current quantity supply, the equilibrium price will increase. Subsidy is a form of financial aid or support extended to an economic sector generally with the aim of promoting economic and social policy. Subsidy will also be burdened by both consumers and producers, and lead to dead weight loss.

Welcome to my blog! Last time we talked about three factors affect the  demand. Today, we will cover another three factors, and discuss something about supply.

Change in the price and availability of other goods and services.

For this point, the concepts of complementary goods and substitutes are need to be mentioned. Complementary good is a good whose appeal increases with the popularity of its complement, like car and gasoline; bread and milk. Substitutes good is a good that can be used in place of another, like taxi and bus; bread and cake; chicken and beaf. Thus, when the price of car increase, the demand for its complement, gasoline, will reduce; when the price of taxi increase, the demand for its substitute, bus, will increase.

Change in population. While population increase, the demand will increase, as the curve shift outward. vice versa.

Some other factors will also affect the demand, like in summer, the demand for ice-cream will increase, but in winter, the demand for ice-cream will decrease.

After talking about demand, we will discuss supply.

What is supply? It defined as the quantity that suppliers as willing and able to provide at a given price. The graph for demand curve normally have an upward trend, which means that as the price of this good or service increases, the quantity supply will increase. When people analysis supply, it’s also crucial to distinguish quantity supply and supply. The main difference between them is quantity supply will only change with the price change, but the supply will never change with change only in price, moreover, the change in quantity demand will show on the graph as a point change on the curve, but change in demand will show as the shift of the entire curve.

There are also some factors which will affect supply.

Firstly, change in the cost of factors of production. As we discussed before, factors of production contain land, labour, capital, and enterprise. if rent increase, or wages increase, that indicate the cost of factors of production increase. if this cost increase, then supply will decrease, the supply curve will shift inward.

Secondly, the advancement in technology. the technological advance means that the manufactories will produce in a more efficient way. For example, they will use machine to produce instead of labour on the assembly line. Thus the supply will increase, and the supply curve will shift outward.

Thirdly, the business optimism and expectations in future. if the supplier expect that price of product will increase in future, then they will supply less now. If sellers expect a lower price in future, then they will currently supply more. Moreover, if the supplier expect that the prospects for another industries will be better, like IT industry, some of manufactories will transform to IT corporation in order to get more profit in future, thus the supply for manufactories will decrease.

Finally, the change in price of other goods and services. An increase in the price of a substitute good causes a decrease in supply and a leftward shift of the supply curve. With the higher price, sellers sell more of the substitute good and less of this good. Moreover, An increase in the price of a complement good causes an increase in supply and a rightward shift of the supply curve. With the higher price, sellers sell more of the complement good and thus more of this good, too.

Welcome back to my blog! Last time we talked about Pareto efficiency, which defined as it is impossible to make one party better off without making someone worse off. This time, we will begin with the introduce ‘game theory’, which is a concept that have somewhat similarity with Pareto efficiency.

Game theory is a theoretical framework for conceiving social situations among competing players. One of the famous concept is prisoner’s dilemma. What does that mean?

An example will be helpful to answer that question.

If A and B have done something bad, and been put into the prison. The policeman give them three choices. The first one:  If A confess B’s criminal evidence, A will get a reduce of penalty from nine years to two year, and B will stay in the prison for ten years. the second one: If B confess A’s criminal evidence, B will get a reduce of penalty from nine years to two years, and A will stay in the prison for ten years. The third one: If both A and B do not betray each other, both of them will get the penalty of five years. They have no idea about what others might choice, because they have been separated into different rooms during making the decision. If both of them confess others criminal evidence, they will both have ten years penalty. The graph below is helpful to explain this condition.

This is when prisoner’s dilemma happened. The most possible outcome is that both of them confessed their crime, because they want to get reduction of penalty. This concept will be more related to oligopoly, which is a type of market system that will be covered in later blog.

After the introduction of game theory, we will go through the fundamental concept for economic activities— demand and supply.

What id demand? It defined as an economic principle referring to a consumer’s desire to purchase goods and services and willingness to pay a price for a specific good or service. The graph for demand curve normally have a downward trend, which means that as the price of this good or service increases, the quantity demand will decrease. When people analysis demand, it crucial to distinguish quantity demand and demand.

The main difference between them is quantity demand will only change with the price change, but the demand will never change with change only in price, moreover, the change in quantity demand will show on the graph as a point change on the curve, but change in demand will show as the shift of the entire curve.

If change in quantity will only caused by the change in price, what will cause the change in demand?

Firstly, changes in consumer income. if consumer income increase, demand will increase, which show as an outward shift curve. vice versa

Secondly, change in consumer tastes&preferences, the decrease or increase in demand will depend on different situation.

Thirdly, change in expectation. If consumer expect future price to rise, they will buy the product now, thus the demand increases. Vice versa.

There still have three other factors which will change demand, we will find that out in next blog!

In the last blog, we covered few concepts including opportunity cost, possible productive curve, and factors of production. While in this blog, we will begin with discussing the relation between the factors of production and production possibility curve. Just a reminder: factors of production contains land, capital, enterprises, and labor.

Any change in these factors will cause an outward shift for the production possibility curve, which showed by this graph.   

The reason for this outward shift is that the increase in labor, for example, will help the manufactory produce more, due to more people are engage in the production process. as same as the increase in capital, more machine are used for production, which will definitely increase the output for both goods.

As we are considering the shifting reasons for production possibility curve, it is necessary to point out  these three different situation:

For point A, which is defined as inefficient, occurs while the manufacture disabled to allocate all the factors of production in the most efficient way, problems like slack staff, or ineffective communication may exist. For point B, which is defined as efficient, occurs while the manufacture allocate all the factors of production in the most efficient way, thus the manufacture will produce the amount of good A and good B in the maximum combination. For point C, which is defined as impossible, is exactly what we discussed above. Improvement in the factors of production will help this “impossible” to “possible”

Economists invented a lot of concepts to understand the word “efficiency” in an economic way.

For the first one: economic efficiency

economic efficiency is about making optimal use of scarce resources to satisfy needs and wants. it means optimum allocation of resources, where the marginal social benefit is equal to marginal social cost (the concept of Margin will be covered in later blogs). This means that in order to satisfy economic efficiency, people need to satisfy both allocative efficiency and productive efficiency. Allocative efficiency happened when average revenue( total revenue divided by total output). Productive efficiency is happened while the output is produced at long run minimum average cost( total cost divided by total output), which is also where average total cost equal to marginal cost.

Technical efficiency is occur when there is no possible to increases output without increasing input. Every lowest point on the average total cost curve represent the technical efficiency.

Static efficiency, which represent the allocative efficiency and productive efficiency in the short run( a short period), or at a given point in time.

Dynamic efficiency, which represents the productive efficiency of a firm in long run( a long period of time) or over time due to engaging in technology advance.

Here is another very interesting efficiency named Paretto efficiency. This means that it is impossible to make one party better off without making someone worse off. the resources are distributed in the most efficient way, and satisfy both allocative efficiency and productive efficiency.

What dose it related with the “game theory”? We will find out in the next blog.

Welcome to my first passion blog! This will be my place for popularizing some economics knowledge.

“What is the basic idea for economic?” This is the question that asked by my high school economic teacher in the first class. After three years long economics study, I find that this basic idea is actually the reason for the existence of this subject.

“Scarcity”, said by my high school teacher, “economics is the subject that exploring scarcity”.

In another word, scarcity means that “unlimited wants chasing the limited resources”. if nothing scarce in our world, then economics problems will also vanished.

Scarcity is also the reason for the existence of the terminology “opportunity cost”, which is another major concept in economics. The definition for opportunity cost is the forgone benefit that would have been derived by an option not chosen. This shows that people need to make choice while that are making decisions, they need to give up something in order to get something else, If everything in this world is infinite, then it is unnecessary for people to make choice.

The terminology —opportunity cost— will lead to the concept production possibility curve, which is showed by the following pictures. The production possibility curve is a curve that illustrates the variations in the amounts that can be produced of two products if both depend upon the same finite resource for their manufacture. From this picture, for instance, The firm can only produce seven units of good A, or eight units of good B at a given period with given resources. However, the entrepreneur can make choice, if he wants good A and good B in the same time. After the evaluation of this firm’s production capability, the entrepreneur find that he can produce two units of good A and five units of good B, or four units of good A and two units of good B. That is to say, if this entrepreneur wants two unit of good A and five unit of good B, he is confront with the situation that he need to give up seven units minus two units of good A, in order to get five units of good B. In this circumstances, the five units of good A that been forgone is the opportunity cost for this production process.

When discussing about production process, there will be a significant concept called “factor of production” which is well-known as FOP. The definition for this concept is that inputs needed for the creation of a good or service, including land, labor, entrepreneurship, and capital.

Firstly, As the name implies, land can be defined as the nature resources. For instance, the place used for cultivation, and the oil, mineral are all counted as land.

secondly, labor, this can be defined as the human resources. Examples are including the workers in manufactories, or waiters who serves guests.

Thirdly, capital, this can be defined as the machine used for production, like the tractor purchased for farming.

Fourthly, entrepreneurship, which is act as an allocator for these three factors upon, and also act as a risk taker.

What is the relation between these four factor and production possibility curve? We will find it out in the next blog.

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