PRINCIPLES OF

MICROECONOMIC
TEAM
MEMBERS
MUSKAN KHURANA – 21021321104
NAINA AGRAWAL – 21021321105
NAINSHEE SADRANI – 21021321106
NEHA GUPTA – 21021321108
NIKHIL KAUSHIK – 21021321109
NIMISHA PUROHIT – 21021321110

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“ MONOPOLY
VERSUS
GENERIC
DRUGS
MUSKAN KHURANA 3
According to our analysis, prices are determined differently in
monopolized markets and competitive markets. A natural place to test this theory
is the market for pharmaceutical drugs because this market takes on both market
structures. When a firm discovers a new drug, patent laws give the firm a
monopoly on the sale of that drug. But eventually, the firm’s patent runs out, and
any company can make and sell the drug. At that time, the market switches from
being monopolistic to being competitive.
During the life of the patent, the monopoly firm maximizes profit by producing the
quantity at which marginal revenue equals marginal cost and charging a price well
above marginal cost. But when the patent runs out, the profit from making the drug
should encourage new firms to enter the market. As the market becomes more
competitive, the price should fall to equal marginal cost.
Experience is, in fact, consistent with our theory. When the patent on a drug
expires, other companies quickly enter and begin selling so-called generic
products that are chemically identical to the former monopolist’s brand-name
product. And just as our analysis predicts, the price of the competitively produced
generic
drug is well below the price that the monopolist was charging.

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The expiration of a patent, however, does not cause the
monopolist to lose all its market power. Some consumers
remain loyal to the brand-name drug, perhaps out of fear that
QUESTIONS
the new generic drugs are not actually the same as the drug
they have been using for years. As a result, the former 1.What is the difference between generic
monopolist can continue to charge a price above the price
charged by its new competitors. For example, one of the most drugs and monopoly drugs?
widely used antidepressants is the drug fluoxetine, which is 2.What are drug monopolies?
taken by millions of Americans. Because the patent on this
drug expired in 2001, a consumer today has the choice between 3.What is the problem with monopolies?
the original drug, sold under the brand name Prozac, and a 4.What are the Examples of monopoly
generic version of the same medicine. Prozac sells for about
three times the price of generic fluoxetine. This price
drugs & generic drugs?
differential can persist because some consumers are not
convinced that the two pills are perfect substitutes.

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 Who pays
the luxury
NAINA AGRAWAL 6
 Who pays the luxury tax?
In 1990,Congress adopted a new luxury tax on items such as
yachts, private airplanes , jewellery and expensive cars. The
goal of the tax was to raise revenue from those who could
most easily afford to pay.. Because only the rich could afford

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to buy such extravagances, taxing luxuries seemed a logical
way of taxing the rich. Yet , when the forces of supply and
demand took over, the outcome was quite different from what
congress intended. Consider, for example ,the market for
yachts. The demand for yachts is quite elastic. A millionaire
can easily not buy a yacht, she can use the money to buy a
bigger house, take a European vacation, or leave a larger
bequest to her heirs. By contrast, the supply of yachts is
relatively inelastic, at least in the short run. Yacht factories
are not easily converted to alternative uses, and workers who
NAINA AGRAWAL
build yachts are not eager to change careers in response to
Our analysis makes a clear prediction in this case. With elastic demand
and inelastic supply, the burden of a tax falls largely on the suppliers.
That is ,a tax on yachts places a burden largely on the firms and
workers who build yachts because they end up getting a lower price
for their product .The workers, however are not wealthy. Thus, the
burden of a luxury tax falls more on the middle class than on the rich.
The mistaken assumptions about the incidence of the luxury tax
quickly became apparent after the tax went into effect. Suppliers of
luxuries made their congressional representatives well aware of the
economic hardship they experienced , and congress repealed most of
the luxury tax in 1993.

⊹ QUESTIONS:
⊹ Why was the luxury tax on yachts such an incredible failure?
⊹ What is luxury tax? What is taxed under the luxury tax?
⊹ What elasticity has to do with the tax burden?
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 The
increasing
value of
NAINSHEE 9
 CASE STUDY : THE
INCREASING VALUE OF
SKILLS
The rich get richer, and the poor get poorer.” Like many adages, this one
is not always true, but it has been in recent years. Many studies have
documented that the earnings gap between workers with high skills and
workers with low skills has increased over the past several decades.
Table 1 presents data on the average earnings of college graduates and of
high school graduates without any additional education. These data
show the increase in the financial reward from education. In 1975, a man
on average earned 42 percent more with a college degree than without
one; by 2011, this figure had risen to 75 percent. For a woman, the
reward for attending college rose from a 35 percent increase in earnings
in 1975 to an 81 percent increase in 2011. The incentive to stay in school
is as great today as it has ever been.
Why has the gap in earnings between skilled and unskilled workers
widened in recent years? No one knows for sure, but economists have
proposed two hypotheses to explain this trend. Both hypotheses suggest 10
The first hypothesis is that international trade has
altered the relative demand for skilled and
unskilled labor. In recent years, the amount of
trade with other countries has increased
substantially. As a percentage of total U.S.
production of goods and services, imports have
risen from 5 percent in 1970 to 18 percent in
2011, and exports have risen from 6 percent in
1970 to 14 percent in 2011. Because unskilled
labor is plentiful and cheap in many foreign
countries, the United States tends to import goods
produced with unskilled labor and export goods
produced with skilled labor. Thus, when
international trade expands, the domestic demand 11
Computers raise the demand for skilled workers who can use the new
machines and reduce the demand for the unskilled workers whose jobs
are replaced by the computers. For example, many companies now rely
more on computer databases, and less on filing cabinets, to keep
business records. This change raises the demand for computer
programmers and reduces the demand for filing clerks. Thus, as more
firms use computers, the demand for skilled labor rises and the demand
for
unskilled labor falls.
Economists have found it difficult to gauge the validity of these two
QUESTIONS
hypotheses. It is possible that both are true: Increasing international
trade and technological change may share responsibility for the
1.What are the
increasing income benefits
inequality we haveofobserved
Learning new
in recent decades.
skills?
2.Which skill would be in most demand
in future?
3.What is the importance of developing 12
 THE
MINIMUM
WAGE
NEHA GUPTA 13
CASE STUDY OF “THE
MINIMUM WAGE”
An important example of a price floor is the minimum wage.
Minimum-wage laws dictate the lowest price for labor that any
employer may pay. The U.S. Congress first instituted a minimum
wage with the Fair Labor Standards Act of 1938 to ensure workers
a minimally adequate standard of living. In 2012, the minimum
wage according to federal law was $7.25 per hour. (Some states
mandate minimum wages above the federal level.) Most European
nations have minimum-wage laws as well, sometimes
significantly higher than in the United States. For example,
average income in France is 27 percent lower thanit is in the
United States, but the French minimum wage is 9.40 euros per
hour, which is about $12 per hour.

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To examine the effects of a minimum wage, we
must consider the market for labor. Panel (a) of
Figure 5 shows the labor market, which, like all
markets, is subject to the forces of supply and
demand. Workers determine the supply of labor,
and firms determine the demand. If the government
doesn’t intervene, the wage normally adjusts to
balance labor supply and labor demand. The Figure
shows the labor market with a minimum wage. If
the minimum wage is above the equilibrium level,
as it is here, the quantity of labor supplied exceeds
the quantity demanded. The result is
unemployment. Thus, the minimum wage raises the
incomes of those workers who have jobs, but it
lowers the incomes of workers who cannot find
jobs. To fully understand the minimum wage, keep
in mind that the economy contains not a single
labor market but many labor markets for different
types of workers .
The impact of the minimum wage depends on the skill and experience of the worker. Highly skilled
and experienced workers are not affected because their equilibrium wages are well above the
minimum. For these workers, the minimum wage is not binding. The minimum wage has its greatest
impact on the market for teenage labor. The equilibrium wages of teenagers are low because teenagers
are among the least skilled and least experienced members of the labor force. In addition, teenagers
are often willing to accept a lower wage in exchange for on-the-job training. (Some teenagers are
willing to work as “interns” for no pay at all. Because internships pay nothing, however, the minimum
wage does not apply to them. If it did, these jobs might not exist.) As a result, the minimum wage is
binding more often for teenagers than for other members of the labor force . Many economists have
studied how minimum-wage laws affect the teenage
labor market. These researchers compare the changes in the minimum wage
over time with the changes in teenage employment. Although there is some debate about how much
the minimum wage affects employment, the typical study
finds that a 10 percent increase in the minimum wage depresses teenage employment between 1 and 3
percent. In interpreting this estimate, note that a 10 percent increase in the minimum wage does not
raise the average wage of teenagers
by 10 percent. A change in the law does not directly affect those teenagers who
are already paid well above the minimum, and enforcement of minimum-wage
laws is not perfect. Thus, the estimated drop in employment of 1 to 3 percent is
significant. 16
In addition to altering the quantity of labor demanded, the minimum wage alters the quantity supplied.
Because the minimum wage raises the wage that teenagers can earn, it increases the number of
teenagers who choose to look for jobs. Studies have found that a higher minimum wage influences
which teenagers are employed. When the minimum wage rises, some teenagers who are still attending
high school choose to drop out and take jobs. These new dropouts displace other teenagers who had
already dropped out of school and who now become unemployed. The minimum wage is a frequent
topic of debate. Economists are about evenly divided on the issue. In a 2006 survey of Ph.D.
economists, 47 percent favored eliminating the minimum wage, while 14 percent would maintain it at
its current level and 38 percent would increase it . Advocates of the minimum wage view the policy as
one way to raise the income of the working poor. They correctly point out that workers who earn the
minimum wage can afford only a meager standard of living. In 2012, for instance,
when the minimum wage was $7.25 per hour, two adults working 40 hours a week
for every week of the year at minimum-wage jobs had a total annual income of
only $30,160, which was less than two-thirds of the median family income in the
United States. Many advocates of the minimum wage admit that it has some adverse effects, including
unemployment, but they believe that these effects are small and that, all things considered, a higher
minimum wage makes the poor better off. Opponents of the minimum wage contend that it is not the
best way to combat poverty. They note that a high minimum wage causes unemployment, encourages
teenagers to drop out of school, and prevents some unskilled workers from getting the on-the-job
training they need. 17
Moreover, opponents of the minimum wage point out that it is a poorly targeted policy. Not
all minimum-wage workers are heads of households trying to help their families escape
poverty. In fact, fewer than a third of minimum-wage earners are in families with incomes
below the poverty line. Many are teenagers from middle-class homes working at part-time
jobs for extra spending money.

QUESTIONS
Q1 Does young workers be paid the minimum wage?
Q2 How often does the federal minimum wage increase?
Q3 what happens if state law requires payment of a higher
minimum wage than federal law?

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 PEOPLE
RESPOND
NIMISHA PUROHIT 19
PEOPLE RESPOND TO INCENTIVES
BECAUSE PEOPLE MAKE DECISIONS COMPARING COST AND BENEFITS THEIR
BEHAVIOR MAY CHANGE WHEN THE COST OR BENEFITS CHANGE, THAT IS
PEOPLE RESPOND TO INCENTIVES WHEN THE PRICE OF APPLE RISES, FOR
INSTANTS PEOPLE DECIDE TO EAT MORE PEARS AND FEWER APPLES BECAUSE
THE COST OF BUYING AN APPLE IS HIGHER, AT THE SAME TIME APPLE
ORCHARDS DECIDE TO HIRE MORE WORKERS ARE SELLING AN APPLE IS ALSO
HIGHER. AS WE WILL SEE THE EFFECT OF PRICE ON THE BEHAVIOUR OF
BUYERS AND SELLERS IN A MARKET - IN THIS CASE THE MARKET FOR APPLES IS
CRUCIAL FOR UNDERSTANDING HOW THE ECONOMY WORKS. PUBLIC POLICY
MAKERS SHOULD NEVER FORGET ABOUT INCENTIVES FOR MORE POLICIES
CHANGE THE COSTS OR BENEFITS THAT PEOPLE FACE THEREFORE, ALTER
BEHAVIOR ATTACKS. THE GASOLINE FOR INSTANTS ENCOURAGES PEOPLE TO
DRIVE SMALLER, MORE FUEL EFFICIENT CARS. IT ALSO ENCOURAGES PEOPLE
TO TAKE PUBLIC TRANSPORTATION RATHER THAN DRIVE AND TO LIVE CLOSER
TO WHERE THEY WORK, IF THE TAXES WERE LARGE ENOUGH PEOPLE WOULD
START DRIVING ELECTRIC CARS.WHEN POLICYMAKER FAILED TO CONSIDER
HOW THEIR POLICIES AFFECT INCENTIVES, THEY CAN END UP WITH RESULT
THEY DID NOT INTEND. FOR EXAMPLE AND THE PUBLIC POLICY REGARDING
AUTO SAFETY. TODAY ALL CARS HAVE SEATBELTS BUT THAT WAS NOT TRUE 40
YEARS AGO IN THE LATE 1960S RALPH NADER'S BOOK “UNSAFE AT ANY
SPEED”GENERATED MUCH PUBLIC CONCERN ON AUTO SAFETY.
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NIMISHA PUROHIT
CONGRESS REQUESTED FOR LAWS REQUIRING CAR COMPANIES TO MAKE
VARIOUS SAFETY FEATURES, INCLUDING SEATBELT, STANDARD EQUIPMENT ON
ALL NEW CARS.HOW DOES A SEATBELT LAW AFFECT AUTO SAFETY ?THE
DIRECT EFFECT IS OBVIOUS. BUT SEATBELT IN ALL CARS, MORE PEOPLE WEAR
SEATBELTS AND THE PROBABILITY OF SURVIVING A MAJOR AUTO ACCIDENT
RISES IN THIS SENSE SEATBELTS SAVE LIVES.NOW CONSIDER HOW A SEATBELT
LAW I'LL JUST COST BENEFIT CALCULATION OF A RATIONAL DRIVER. SEAT BELT
MAKES ACCIDENT LESS COSTLY FOR A DRIVER BECAUSE THEY REDUCE THE
PROBABILITY OF INJURY OR DEATH. THUS, A SEATBELT LAW REDUCES THE
BENEFIT TO SLOW AND CAREFUL DRIVING PEOPLE RESPOND TO SEATBELTS AS
THEY WOULD DO AN IMPROVEMENT IN THE ROAD CONDITIONS-BY FASTER AND
LESS CAREFUL DRIVING .THE END RESULT OF A SEATBELT LAW THEREFORE IS
A LARGE NUMBER OF ACCIDENTS.

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AT FIRST THE DISCUSSION OF SEATBELTS AND INCENTIVES MIGHT SEEM
LIKE IDOL SPECULATION. YET, IN THE 1975 STUDY ECONOMIST SAM
PELTZMEN SHOWED THAT THE AUTO SAFETY LAW HAS IN FACT HAD MANY
OF THESE EFFECTS. ACCORDING TO PELTZMEN’S EVIDENCE, THESE LAWS
PRODUCE BOTH FEWER DEATHS PER ACCIDENTS AND MORE ACCIDENTS.
THE NET RESULT IS LITTLE CHANGE IN THE NUMBER OF DRIVERS DEATHS
AND AN INCREASE IN THE NUMBER OF PEDESTRIANS DEATHS. PELTZMAN
ANALYZES OF AUTO SAFETY IS AN EXAMPLE OF THE GENERAL PRINCIPLE
THAT PEOPLE RESPOND TO INCENTIVES. MANY INCENTIVES THAT
ECONOMIST STUDY ARE MORE STRAIGHTFORWARD THAN THOSE OF THE
AUTO SAFETY LAWS. NO ONE IS SURPRISED THAT PEOPLE DRIVE SMALLER
CARS IN EUROPE, WHERE GASOLINE TAXES ARE HIGH THAN IN THE USA,
WHERE GASOLINE TAXES ARE LOW. YET, AS THE SEATBELT EXAMPLE
SHOWS, POLICIES CAN HAVE EFFECTS THAT ARE NOT OBVIOUS IN ADVANCE
WHEN ANALYZING ANY POLICY, WE MUST CONSIDER NOT ONLY THE DIRECT
EFFECTS BUT ALSO THE INDIRECT EFFECTS THAT WORK THROUGH
INCENTIVES. IF THE POLICY CHANGES INCENTIVES, IT WILL CAUSE PEOPLE
TO ALTER THEIR BEHAVIOR

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QUESTIONS
1. What are marginal changes ?

2. how does the individuals and firms make

decisions?

3. why so rational individuals think at the margin?

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Thanks!

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