F I R M S A N D M A R K E T S I I MPA 612: Economy, Society, and Public Policy February 27, 2019 Fill out your reading report on Learning Suite
P L A N F O R T O D A Y Scale, location, networks, and time Stone cold sober chocolate milk ϵ lasticiti ϵ s of d ϵ mand
S C A L E , LO C AT I O N , N E T W O R K S , A N D T I M E
S I Z E A N D L O C A T I O N Economies of scale Cost to make stuff goes down as you make more stuff Economies of agglomeration Cost to make stuff goes down as you clump together Network effects Cost to make stuff goes down when everyone uses your stuff
E C O N O M I E S O F S C A L E If you double the inputs, you get more than double the outputs If you {{increase}} the inputs, you get more than {{that increase in}} the outputs
S C A L E , L O C A T I O N , N E T W O R K , O R N O T H I N G ? eBay and PayPal QWERTY and Dvorak keyboards Doubling a recipe Walmart’s distribution network Costco Henry Ford’s assembly line Rural Chinese moving to cities
A V E R A G E C O S T S A N D S C A L E
A V E R A G E C O S T S A N D S C A L E
T I M E A N D S C A L E SRAC LRAC
T I M E A N D S C A L E SRAC LRAC Economies Constant Diseconomies of scale returns to of scale scale
S TO N E C O L D S O B E R C H O C O L AT E M I L K
Excel time!
ϵ L A S T I C I T I ϵ S O F D ϵ M A N D
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ϵ = ∞ = Perfectly elastic Any change in price Identical goods moves quantity to 0 Two vending machines ϵ > 1 = Elastic Changes in price change Goods with substitutes the quantity a lot Diet Coke ϵ = 1 = Unit elastic Changes in price change the quantity the same ϵ < 1 = Inelastic Changes in price change Goods with few substitutes the quantity a little AIDS medicine ϵ = 0 = Perfectly inelastic Changes in price do Survival goods nothing to the quantity Water in the desert
! W A R N I N G ! Elasticities are not the same as the demand curve A linear demand curve has lots of elasticities!
Demand Elastic $60.00 Unit elastic $50.00 $40.00 Inelastic $30.00 $20.00 $10.00 $0.00 0 2 4 6 8 10 12 Revenue $160.00 $140.00 $120.00 $100.00 $80.00 $60.00 $40.00 $20.00 $0.00 0 2 4 6 8 10 12
Excel time!
W H Y D O E L A S T I C I T I E S M A T T E R I N P A ? Taxing things changes their prices Changing prices changes quantities Taxing elastic goods will make quantities go down a lot and decrease tax revenues Taxing inelastic goods will make quantities go down slightly and not hurt revenues
N E X T T I M E ( S ) Rent, surplus, and gains from trade Supply and demand Market power and natural monopolies
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