1. IMBA Managerial Economics Jack Wu

2. Econ Efficiency: Conditions for all users, same marginal benefit for all suppliers, same marginal cost marginal benefit = marginal cost

3. Equal Marginal Benefit if not equal provide more to user with higher marginal benefit take away from user with lower marginal benefit

4. Equal Marginal Cost if not equal supplier with lower marginal cost should produce more supplier with higher marginal cost should produce less

5. Marginal Benefit/Cost if marginal benefit > marginal cost, produce more of the item if marginal benefit > marginal cost, produce less of the item

6. Adam Smith ’ s Invisible Hand: Price Competitive market achieves three sufficient condition for economic efficiency: buyers and sellers in a market system act independently and selfishly, yet the overall outcome is efficient i) users buy until marginal benefit equals price; ii) producers supply until marginal cost equals prices; iii) users and producers face same price.

7. Example of Invisible Hand Major policy issue: how to allocate licenses for 3G wireless telecommunications; pioneer: in early 1990s, US Federal Communications Commission showed that spectrum licenses were worth billions; created pressure on other governments to allocate by auction and not favoritism. Auction ensures that item goes to user with highest marginal benefit.

8. De-centralization create internal market if there is a competitive market for an item, set transfer price equal to market price consuming units should be allowed to outsource

9. UCLA Anderson School, 1989 Half an invisible hand is worse than none priced photocopying paper free bond paper

10. Price Ceiling Upper limit that sellers can charge and buyers can pay rent control regulated price for electricity

11. 0 1100 290300310 supply demand b equilibrium excess demand Quantity (Thousand units a month) Price ($ per month) Rent Control: Equilibrium 1000 900

12. 0 1100 290300310 supply demand b Quantity (Thousand units a month) Price ($ per month) Rent Control: Surpluses 1000 900 d g e buyer surplus gain = cfeg buyer surplus loss = dgb seller surplus loss = cfeg + geb c f

13. Rent Control: Losses deadweight losses -- sellers willing to provide item at price that buyers willing to pay, but provision doesn ’ t occur price elasticities of demand and supply _demand more inelastic --> larger loss _ supply more elastic --> larger loss

14. Price Floor Lower limit that sellers can charge and buyers can pay minimum wage agricultural price supports

15. 0 4.20 81011 supply demand a b c equilibrium excess supply Quantity (Billion worker-hours a week) Wage ($ per hour) Minimum Wage: Equilibrium 4.00

16. 0 4.20 81011 supply demand a b c Quantity (Billion worker-hours a week) Wage ($ per hour) Minimum Wage: Surpluses 4.00 f d e g seller surplus gain = fdge seller surplus loss = ghb buyer surplus loss = fdge + egb h

17. Minimum Wage: Losses deadweight losses -- sellers willing to provide item at price that buyers willing to pay, but provision doesn ’ t occur price elasticities of demand and supply _supply more inelastic --> larger loss _demand more elastic --> larger loss

18. Tax: Commodity Tax “ the only two sure things in life are death and taxes ” buyer ’ s price - tax = seller ’ s price payment vis- à -vis incidence US: airlines pay tax Asia: passengers pay

19. 0 800 900 e Quantity (Thousand tickets a year) Price ($ per ticket) supply demand $10 Tax: Equilibrium b h 804 794 920

20. 0 800 900 e Quantity (Thousand tickets a year) Price ($ per ticket) supply demand $10 Tax: Surpluses b h 804 794 920 f d j buyer surplus loss = fdge + egb seller surplus loss = djhg + ghb revenue gain = fdge + djhg g

21. Incidence incidence and deadweight loss depend on price elasticities of demand and supply ideal tax (no deadweight loss): inelastic demand/supply who pays the tax not relevant

22. Discussion Question 1 Consider a company that manages a network of hospitals across several counties in one state. Household incomes and the cost of living are higher in urban than rural areas. The company, however, has set the same prices for pharmaceuticals and services in all of its hospitals. It has also paid the same salaries for doctors, nurses, and other professional staff throughout the state.

23. Discussion Question 1:continued Management has noticed that there are long waiting lists for treatment at its urban hospitals. Can you explain this problem? The company has had great difficulty in recruiting professional staff for its urban hospitals. Can you explain this problem? What advice would you give to management?

24. Discussion Question 2 E-commerce is predicted to reduce the cost of intermediary services such as those of travel agencies, real-estate brokers, and investment advisors. Consider the market for air travel. Suppose that, with conventional travel agencies, the market equilibrium price is $300 per ticket, including a $15 intermediation cost. The quantity bought is 2 million tickets a year. With e-commerce, however, the intermediation cost falls to $2 per ticket.

25. Discussion Question 2:continued Using suitable demand and supply curves, illustrate the original equilibrium with conventional travel agencies. Represent the intermediation cost by shifting the supply curve. Illustrate the new equilibrium with e-commerce. What factors determine the extent to which consumers will benefit from e-commerce? Explain your answer with demand and supply curves.

26. Discussion Question 3 Typical real-estate broker: "In California, the seller always pays the broker's commission, so, buyers get brokerage services free." MBA: "If the custom were for the buyer to pay the commission, then would sellers get brokerage services free?" Real-estate broker, clearly losing patience: "That is a purely hypothetical scenario, but if that situation were to arise, yes, I guess you're right."

27. Discussion Question 3:continued Assume that each seller pays a brokers' commission of $18,000. Then, the supply of houses includes the cost of brokerage. Illustrate the market equilibrium with a price of $310,000 per house and sale of 200,000 houses a year. Now suppose that buyers rather than sellers pay the $18,000 commission. Using your figure, illustrate the following: (i) shift the supply curve down by $18,000 since sellers do not pay the commission, and (ii) shift the demand curve down by $18,000 since buyers now pay the commission.