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Principles of Macroeconomics: Day 5, 6 - 8

by: Brittnee Notetaker

Principles of Macroeconomics: Day 5, 6 - 8 ECN 150

Marketplace > La Salle University > Economcs > ECN 150 > Principles of Macroeconomics Day 5 6 8
Brittnee Notetaker
La Salle

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About this Document

These notes cover a week of notes plus one day from the previous week, including page numbers from the textbook.
Francis Thomas Mallon
Macroeconomics, Economics
75 ?




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This 7 page Bundle was uploaded by Brittnee Notetaker on Sunday February 7, 2016. The Bundle belongs to ECN 150 at La Salle University taught by Francis Thomas Mallon in Fall 2015. Since its upload, it has received 48 views. For similar materials see Macroeconomics in Economcs at La Salle University.


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Date Created: 02/07/16
Day 6 - February 1st PAGES 60 - 66 Supply & Demand Continued… - Price and cost are NOT the same thing - Price: what you have to expend (charge) to purchase the good in the market place - Cost: what is needed to be incurred to make the product available in the market place for sale - Example: Dry erase markers • At Staples, the dry erase marker has a price of $1.00 Cost = everything it took to make the dry erase marker itself + labor + rent on building + • utilities + taxes (relates to supplier & seller) - “XYZ Company” buys the product for $0.40 - They sell it to Staples for $0.60 (this is considered the cost for Staples) - Staples sells it for $1.00 (which is now the price) • Each supplier will have their own cost per unit depending on the efficiency of their operation - Example: 2 Contrasting Companies This company has a Purchasing Agent that is very scrupulous and knows that 1. you need lids but there’s 3 different companies who make them • one sells the lids for $0.01 • another sells the lids for $0.05 • third one sells the lids for $0.07 • An effective purchasing agent is need that knows the best options to keep the cost per unit down 2. This company’s Purchasing Agent doesn't care what they pay, but they take the perks instead (exclusive tickets, etc.) - The less efficient the higher the cost per unit and the more efficient the less the cost per unit - In order to make effective use: 2 Simplifying Assumptions that drive our reasoning • 1. As long as the market price exceeds the suppliers cost per unit, the supplier will elect to produce and sell the product • 2. The greater the positive differential (how big the difference is between the cost per unit and the market price) between the price and cost per unit, the greater will be the quantity of the product the supplier will elect to produce and offer for sale A B C D Price Total Quantity Cost per unit $7.00 $9.00 $3.00 $37.50 Number they produce based off price exceeding cost (on basis of 2 Simplifying assumptio↓) 4 2 9 0 $10.00 15 2 0 8 0 $8.00 10 0 0 5 0 $6.00 5 Supply Curve 10 9 7 e 6 i P 4 3 1 0 0 2 3 5 6 8 10 11 13 14 16 Quantity - The relationship is NOT inverse - As price and quantity increase the resulting curve is always up-sloping because the relationship is always direct with Supply • UP Demand curve, quantity goes DOWN UP Supply curve, quantity goes UP • • DOWN Demand curve, quantity goes UP DOWN Supply curve, quantity goes UP • - Change in Quantity Supply: change in the market price of the good under consideration which causes a MOVEMENT along an existing Supply curve • Shift of entirety of curve impacts suppliers cost per unit (outside variable) - in the sweater making example, lets say there is a surcharge in wool; this would result in a lower price to entice suppliers cost per unit - An outside variable that can effect cost per unit of production of a good will impact the supply of that good Day 7 - February 3rd
 PAGES 66 - 68 - Change in Supply: When there is a change in an outside variable capable of influencing in the supply of the good, it causes a shift in the entirety of the curve • downward to the right = an increase in supply upward to the left = a decrease in supply • Supply & Demand Working Together - looking at the same variables (market price and the quantity of sweaters) - Equilibrium: at equilibrium, the quantity willingly demanded equals the quantity willingly supplied OR the price where the quantity willingly demanded = the quantity willingly supplied • Does NOT equal optimal • DOES equal efficient • the point of equilibrium is arrived at by the natural workings of the market place • when quantity willingly supplied exceeds quantity willingly demanded, there’s a surplus and that occurs when the price is above equilibrium - When surplus exists, there is going to be a downward pressure on market price leading to a sale until equilibrium is established again • When the market price is set below equilibrium, there’s a shortage that comes where the quantity willingly demanded exceeds quantity willingly supplied - this is what happens every holiday season - when this happens, price gets competed UP - it is only at equilibrium that there will be no more need for a price adjustment • there will be NO surplus nor shortage when equilibrium is reached Day 8 - February 5th PAGES 68 - 75 - Price can have a bearing if it’s the price of complimentary/substitute good, the change is in demand • change in price of gasoline to double the amount —> will decrease the demand for cars - Price of the good under consideration is never an outside variable - There are outside variables that are NOT capable of influence on the good under consideration Step-by-Step Analysis: Supply & Demand 1. Has an outside variable changed? 2. IF so, which curve is effected by this outside variable (supply or demand)? 3. Does the effected curve increase or decrease? 4. Given the shift of the effected curve, is there immediately a surplus or a shortage created? 5. Given the presence of a surplus or shortage, what will be the natural workings of the market place to restore equilibrium? - Surplus = price comes DOWN to restore equilibrium - Shortage = price goes UP to restore equilibrium Prrincciplles off Ecconnoomiiccs Noottess Day 5 - Supply & Demand continued Textbook pages: 50 - 60 - Price Quantity relationships: Kelly Green Sweaters Example o The amount of disposable income is going to have a bearing because it is an outside variable capable of influence o Disposable income is the amount of money the buyer has to spend § Disposable Income (DI) = $19 § Sweaters are $10, so the buyer can only willingly demand 1 quantity § They go on sale for $8, so the quantity willingly demanded is now 2 § They go on sale again for $6, so the quantity willingly demanded is now 3 § P (price) Q (quantity) a. 10 1 b. 8 2 c. 6 3 § When you plot these points, it produces the Demand Curve Demand Curve 12 10 a. 8 b. 6 c. 4 2 0 • 0 0.5 1 1.5 2 2.5 3 3.5 • The price change did NOT change the curve, but instead made a movement on the curve o Movements down curve = an increase in quantity demanded o Movements up the curve = a decrease in quantity demanded • Law of Downward Sloping Demand: for all “normal goods”, there is an inverse relationship between price and quantity and therefore the resulting curve of that relationship will always be down sloping o Inverse meaning price and quantity move in opposite directions, so as price goes up the quantity demanded goes down and as the price goes down the quantity demanded goes up o What’s not a “normal good”? § Certain products have a positive relationship where when the price goes up, the quantity demanded goes up too • Example: Rolex watch • This is because the rise in the price makes it even better for the buyer/consumer just because it’s specifically a Rolex § Why does this come to be? There’s 2 reasons to justify • Income effect: As the price of a desired item falls, the consumer can afford a greater quantity of that desired good with their fixed income, it is as if they’ve had an increase in their income, but actually there is just an increase in their purchasing power • Substitution effect: Purchasers predisposed to buying an alternative good may shift their buying preference in favor of the good with a declining price o When the price goes down of the alternative product, they’ll buy it instead o Example: purchaser goes in the store for a sweatshirt, but the sweater is less money § The buyer perceives a certain amount of satisfaction from the predisposed product, in this case the sweatshirt § So there is a change in the value per dollar VS the value in satisfaction Prrinccipless off Ecoonnommiicss Nootess Day 5 § Change in Quantity Demanded: A change in the price of the Textbook pages: 50 - 60 (continued) good under consideration while all other variables capable of influencing the demand for that good are held constant. Graphically, this is seen as a MOVEMENT from one point on the curve to another point on the same curve § What causes the curve to shift? • This occurs when there is a change in an outside variable = change in demand • Change in Demand: Occurs when there is a change in an outside variable capable of influencing the demand for the good under consideration. Graphically, this is seen as a shift of the entire curve • Example (on the basis of the Kelly Green Sweaters): o Let’s say you receive a birthday card from your Aunt Tilly with $7.00 inside, this would change your DI (disposable income) from $19.00 to $26.00, which is an outside variable P (price) Q (quantity) Q1 (quantit) a. 10 1 2 b. 8 2 3 c. 6 3 4 o Now the whole curve shifts and is moving along the existing curve § Upward & to the right = an increase in demand § Down & to the left = a decrease in demand


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