Deliberations Begin for the Economics Prize According to Michael Kremer, what has discouraged AIDS research?  The lower prices drug manufacturers charge for AIDS drugs in Africa make them less profitable to produce. Therefore, the drug manufacturers are not interested in developing new AIDS drugs. Is Kremer’s premise consistent with economic theory?

Q P Supply 1 Market for AIDS Drugs Demand

Q P Supply 1 Market for AIDS Drugs Demand P 1.

Q P Supply 1 Market for AIDS Drugs Demand PC.PC. shortage

Average Variable Marginal Average Drug Producer’s Cost Structure

Average Variable Marginal Drug Producer’s Cost Structure P=AC Profit=0 Average

Average Variable Marginal Drug Producer’s Cost Structure With price concessions Average

Average Variable Marginal Drug Producer’s Cost Structure Loss P<AC Profit<0 Average

Average Variable Marginal Drug Producer’s Cost Structure Average R&D increases short- run fixed costs. Loss

Q P Supply 1 Market for AIDS Drugs Demand PC.PC. Supply 2 Advances in technology for producing AIDS drugs would shift out the supply curve.

Deliberations Begin for the Economics Prize What does ?? Suggest as a solution to the drug problem?  Increase the cost of selling drugs. Would it work?

Q P Supply 1 Market for Addictive Drugs Demand P 1..Q1.Q1 Demand is perfectly inelastic.

P 1. P Supply 1.Q1.Q1 P 2. Market for Addictive Drugs Demand Supply 2 Increasing the cost of providing drugs makes the supply curve steeper, increasing price with no change in quantity consumed.

Market for Addictive Drugs How will drug addicts get the money to maintain their habit when the price of drugs increases? Stealing Prostitution Dealing Drugs

Deliberations Begin for the Economics Prize Does economic theory predict that retailers should sell products for lower prices on the internet than in their stores?

Average Variable Marginal Average Retailer’s Cost Structure Average Average Variable The cost structure for selling in-store is higher than the cost structure for selling on-line.

Average Variable Marginal Average Retailer’s Cost Structure The MC curve above the minimum of the AVC curve is the supply curve. Average Average Variable

Market Equilibrium Each of the 1,000 producers have this supply curve.

Market Equilibrium The market supply curve will be the sum of the 1,000 supply curves.

Market Equilibrium The market price is determined by the intersection of the market supply and demand curves.

Market Equilibrium 25,000 units will be purchased at $8 in store.

Market Equilibrium The demand curves for each retailer are horizontal at the market price.

Market Equilibrium Each retailer will sell 25 units.

Average Variable Marginal Average Retailer’s Cost Structure For the 25,000 units sold in store, Price = Per Unit cost = $8 and Profit = $0.

Market Equilibrium If the 1,000 retailers also sell on-line, the on-line supply curves will be added to the market supply curve.

Market Equilibrium The market prices drops to $7.

Market Equilibrium The retailers’ demand curves fall to $7.

Market Equilibrium Each retailer will sell 23 units in store and 38 units on-line.

Average Variable Marginal Average Retailer’s Cost Structure For the 23,000 units sold in store,Price = $7, Per Unit cost = $8.25 and Profit = -$1.25. Loss = $28.75 In the long run, retailers would shut down their in-store operations.

Average Marginal Average Variable Retailer’s Cost Structure For the 38,000 units sold on line,Price = $7, Per Unit cost = $6 and Profit = $1 Profit = $38

Retailer’s Net Profit Profit = $38 Loss = $ Net Profit = $9.25

Market demand for a product is divided between in-store and on-line.

Average Variable Marginal Average Retailer’s Cost Structure Average Average Variable AC = P Since the cost structure differs between in-store and on-line sales, the zero profit price varies... Demand

Some people will switch from in-store when to on-line because of the lower price. Demand

Average Variable Marginal Average Retailer’s Cost Structure Average Average Variable The cost structure for selling in-store is higher than the cost structure for selling on-line. Demand

Average Variable Marginal Average Retailer’s Cost Structure Average Average Variable The cost structure for selling in-store is higher than the cost structure for selling on-line.

In the New Economics, the Economy Has Little to Do with It What were the major findings in Steven Levitt’s paper on legalization of abortion and the decrease in crime rates?  A negative correlation between legalization of abortion and crime rate.  A negative correlation between number of abortions and crime rate.

In the New Economics, the Economy Has Little to Do with It How does Levitt’s interpret the findings?  The legalization of abortion in the early 1970’s played a key role in lowering crime by reducing the number of unwanted youths.  Abortion explained nearly half of the decline in crime rates in the 1990’s.  Many women getting abortions tended to raise children who committed crimes as teens.  Abortion might have reduced the number of unwanted teens who came of age in the 1980’s and 1990’s.

In the New Economics, the Economy Has Little to Do with It What are the strengths of the study?  They compared changes in crime rates across states that legalized abortion at different times. Hypothetical Example: State Abortion Legalized (Y/N) Decrease in Crime Rate 1Y 20 2Y 22 3N15 4 N18 5 Y25

In the New Economics, the Economy Has Little to Do with It  Crime decreased more in states with legalized abortion. Hypothetical Example State Abortion Legalized (Y/N) Decrease in Crime Rate 1Y 20 2Y 22 3N15 4 N18 5 Y25

In the New Economics, the Economy Has Little to Do with It What are the strengths of the study?  They compared in abortion rates to decreases in crime rates. Hypothetical Example: 1990 State Abortion Rate Decrease in Crime Rate

In the New Economics, the Economy Has Little to Do with It  Crime decreased more in states with higher rates of abortion. Hypothetical Example State Abortion Rate Decrease in Crime Rate

In the New Economics, the Economy Has Little to Do with It What are the shortcomings of the study?  Does not adequately estimate the impact of the recession of the handgun and crack epidemic of the late 1980’s and early 1990’s.  A decrease in the use of crack in the late 1990’s would also decrease the crime rate.

In the New Economics, the Economy Has Little to Do with It What are the social implications of the study?  Affluent older women did not benefit most from legalized abortion.  Crime may be curtailed by limiting the number of births among a few select groups.