review of lecture3.docx

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Economics for Management Studies
Xinli Wang

Review of Lec 3  Conditions for a Well-Functioning Market Theoretically, competition should ensure resources are allocated efficiently (assuming property rights, well-functioning legal systems, etc.), with goods going to those who value them the most as measured by their willingness to pay. Due to market imperfections this outcome is rarely, if ever realized. Conditions necessary for efficient market allocation: 1) An absence of Market Power (on both the demand and supply sides) 2) Adequate Information (sufficient for both purchasers and producers to make good decisions) 3) Absence of Externalities  The Mechanics of the Market Individual Behavior and the Demand for Goods and Services Income and Substitution Effect: The movement along the original indifference curve from A to B is the substitution effect. The movement from B to C (moving up to the new budget line) is the income effect. The income effect always starts where the substitution effect leaves off. Demand and Supply Together:  Markets with Imperfect Competition  Monopolistic Competition  Oligopolistic Competition  Markets and Market Failure  The Welfare Effects of Externalities  The Welfare Effects of Market Power The Welfare Effects of Informational Problems  Methods of Economic Evaluation An economic evaluation is the systematic, comparative analysis of two (or more) courses of action in terms of both their costs and their consequences. Three Methods of Economic Evaluation: 1. Cost-Effectiveness Analysis: Measures consequences in the natural units in which they occur; does not assign a social value to the consequences as part of the evaluation. Assesses efficiency in terms of costs per unit effect achieved. Incremental Cost-Effectiveness Ratio (ICER): ----For a comparison of two programs A and B ICER = (CostA – CostB)/(EffectA – EffectB) Tells us the additional cost incurred per additional unit of effect achieved when we use alternative A compared to alternative B 2. Cost-Utility Analysis: Uses the same structure as Cost-Effectiveness Analysis, but outcomes are valued in terms o
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