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Lecture

chapter 13 Economic Value of Failure ecn 340.docx
chapter 13 Economic Value of Failure ecn 340.docx
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School
Ryerson University
Department
Economics
Course
ECN 340
Professor
Thomas Barbiero
Semester
Fall

Description
ECN 340 Lecture notes chapter 13 Economic Value of Failure Failure arises because of: 1. Basic human condition of Scarcity! 2. Search for greater rewards 3. Because of the market system Failure of Scarcity  Choices have to be made, some of which will not work out  Some producers will not be able to get the necessary resources they need  Others, (firms) already in production will fail to retain the resources they do have  Choices and the necessity of allocation make failure unavoidable (a firm that has resources or can't have sufficient resources,)  Pervasiveness of scarcity ensures failure.  But failures cause 1. A release of resources that can be re-employed (possibly at lower prices) in more successful undertaking 2. A decrease of abundant good and services produced that can then be sold at a higher price (when supply falls) - As some business fail, others will start and grow Searching for Greater Rewards  Even efficient firms should fold if more efficient firms exist  No such thing as good ABOSLUTE performance  Relative performance matters  A beautiful female can fail to attract a particular male if an even more beautiful female competes Information Failures  Information is costly both in product and resources ( land, labour, and capital) market  Firms can't tell which products to sell, resource owners (including labour) can't always correctly guess what sectors will be lucrative(when you make a lot of money) in the future  You don't know what is to happen in the future  But information problems may not be correctible b/c of scarcity of information  Public policy may try to redistribute successes and failures through the tax system (I or subsidies)  Centralizing decision making process will not solve information problems  Central planning impose superhuman demand on limited capacity of planners to handle information Risk, uncertainty, and rational failures  Information deficiencies = problem of risk and uncertainty about future economics events  risk = probability distribution example, 7 out of 10 restaurants will fail  Uncertainty = lack of information makes it impossible to estimate probability of success  one can sometimes get a little more information at a cost but sometimes you can't have it at all  Risk and uncertainty will INSURE some firms, plants, and workers will fail  Plants that close simply find cost of counting outweighs the benefits  Preventing failures may be very costly in that the cost of keeping the firms going would be high  ( information problem!: they didnt know...)  The resources in the 'failing' firms could be used in successful firms 
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