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Date Created: 11/04/14
Econ 200A O9302014 1113111111193014 Ask about 50 on clickers REMEMBER CLICKER Chap 2 chap 3 Tradeoffs models demand PPFs Curve showing the maximum attainable combinations of two products Ex schedule of tesla Slope of the ppf illustrates the trade off opportunity cost Opp cost giving up the highest possible alternative Tradeoff vs opportunity cost Trade off Something to do with the technology SUV positive production Opportunity cost is the negative sedan production in order to make SUVs Basically the same concept Opportunity costs are often increasing resources are not all the same Can start with guy who s good at SUV so not much to give up but then have to switch sedan resources which makes bigger cost This ppf assumes we are using our resources in the best possible way This is increasing marginal opportunity cost the marginal unit keeps getting more and more costly as you keep switching And this is marginal because you are working on the margin What can we do with a PPF Economic growth outward shift appears after growth resources in some way illustrate technological change it can make one product easier to produce causes one side to shift outward technological change is a fall in opp costs an inwardly bowed opportunity cost would mean that you are improperly allocating the worst resources for the job at first that39s why it never happens because it makes no sense Market economy Households provide factors of production Labor Capital natural resources entrepreneurial ability Firms supply goods and services to product markets Households purchase goods Circular flow diagram Makes assumptions on the only ways one can use money make money spend money Very limited model Missing financial sector Firms can produce investment goods for other firms Government is not incorporated HOW DO MARKETS WORK If we are going to create a model What determines prices what tells firms how much is produced how is decided who gets the products Ex smartphones Demand for smartphones How many smartphones do consumers want to buy First thing that matters is the price Other factors Desire Supply of smartphones How did apple decide to supply these smartphones Price of smartphones profit Other factors Prices of other goods Price of labor Price of inputs What determines the price Perfectly competitive market Many buyers and sellers All forms selling identical products No barriers to new firms entering the market Realistic Not every product is identical but for our purposes cola and pepsi are the same thing Big barriers to entry in cell phone business Demand Demand schedules A table showing the relationship between the price of a product and the quantity of the product demanded at that price Demand curve The graphical representation of the demand schedule Change in the consumers behavior that comes from the change in price In order fir this to work we have to assume that nothing changes during the survey ceteris paribus ALL VARIABLES CONSTANT EXCEPT FOR PRICE Law of demand When price of product falls the quantity demanded of the product will increase and when the price of product rises the quantity demanded decreases Implication demand curve slopes downward when the price falls two things happen in the brain of consumer the price becomes lower relative to other goods so consumers substitute substitution effects consumer has greater purchasing power and elects for purchase more goods overall income effect satisfaction if you define the quality of a good then more is always better therefor we can say that consumers will always want more What can you do with a demand curve What would change the curve other than the price Ex Cigarettes Find out they re bad for you some people will no longer buy them Demand curve shifts to the left Increase and decrease of demand When demand changes based off of something other than the price What factors influence demand Income of consumers Prices of related goods Coke vs pepsi Or complements PBampJ Tastes People can change their minds Population demographics properties of the market Expected future prices Market Demand Demand of all the consumers of a given good or service 82 Lecture 3 a good you buy more of as you become richer normal good Clothing Restaurant meals vaca ons a good for which demand decreases as income rises and increases as income falls inferior good second hand clothing ramen noodles the same good could be normal or inferior depending on what your financial situation is inferior or superior Not always obvious Change in the price of related goods Substitutes Bigmacwhopper Pepsicola Jeanskhakis If price for one goes up the demand of that product decreases and the demand of the other good increases Compliments Items used together Big mac and fries Peanut butter and jelly Bikini tops and bottoms When the price of a combo goes up its like the whole price goes up For our definition of shifting market demand due to increase in price to the compliment we ONLY LOOK AT PRICE as effecting a compliment Change in demand vs change in quantity demanded Change in quantity demanded is a movement along the demand curve dependent on the change of PRICE Change in demand due to something OTHER THAN PRICE that shifts entire demand curve which is a change in demand Change in expectations about future prices More expensive tomorrow Demand rises today Less expensive tomorrow demand decreases today Buying a house six months from now vs today Would your time be the opportunity cost The Law of Supply Difference in revenue holding everything else constant the higher the price the higher the supply the higher the revenue Changes in supply is a concern with FIRMS NOT CONSUMERS Anything other than prices that effects whether or not they want to be in the business is a shift in the supply curve Prices of inputs Costs of labor No such things as fully automated firm Pans An increase in cost decreases profit shifts supply inward Decrease in cost increases profit shifts supply outward Technological change Taste is to demand curve as technological change is to supply curve Management structures are technological change Computers are technological change Anything that has to do with how the firm does stuff Negative technological change Government restrictions on land use for agriculture might decrease the supply of wheat for ex Corruption also negative Natural disaster Prices for substitutes in production Change in the mix of what s produced Number of firms in market Expected future prices Expect price is higher in future will decrease supply today Expect price lower in future will increase supply today What goods can you do this Non perishabe goods Change in supply vs change in quantity supplied A change in the quantity supplied DUE TO PRICE slide on supply curve up or down A change in supply comes from change OTHER THAN PRICE shift of supply curve left or right Market Equilibrium When the desire and ability for firm to supply and desire and ability for consumer to demand are equal Nobody is changing their behavior with this situation It is a stable point In a point of surplus firms are unhappy because they don t want surplus at their firm by the end of it and they compete with other firms to appeal to consumers In a point of shortage consumers are unhappy because they do not have their phones firms are happy because they will find a buyer Consumers will compete by raising the price with each other that forces the price back UP Competition between buyers and sellers is what makes equilibrium Demand and supply both count Price is determined through the interaction between consumer and supplier 9714 finishing chapter 3 chap 6 Shapes of curves and analyzing them Products like gasoline People DO react to the law of demand Measuring responsiveness to price changes Slope of demand curve Percentages of change in total price and unit Yacht vs bag of chips Price elasticity of demand change in quantitychange in price Slope and elasticity are not the same thing When talked about it is talked about in terms of absolute value because we know its always going to be negative If the elasticity is 1 then demand is unit price elastic If the elasticity is less than one or close to zero this is price inelastic because there is little response to changes of price Percent change is based off of the initial and end price or quantity A BAB2 Steep demand curve is more inelastic flat demand curve is more elastic observations about elasticity slope and elasticity not the same thing if you had two lines coming through same point steeper slope means less elastic a vertical demand curve is perfectly inelastic at any price demand stays the same horizontal demand curve infinite demand at a certain price perfectly elastic behavior of consumers defines elasticity for a product availability of good substitutes passage of time sometimes more time allows people to adjust more so higher elasticity the farther time passes whether the good is a luxury or necessity luxury more elastic necessity less elastic definition of the market the more narrowly defined market the more elastic it can be because there are more substitutes pepsi soda beverages the share of a good in a consumer s budget if a good is a small portion of the consumer s budget the curve will be less elastic but if it is a larger part then one would be more sensitive to a price 10914 elasticity ctd surplus elasticity in respect to things other than price article response this price changesprice elastic one unit change in priceone unit change in demand means unit elastic why price elasticity helps knowing price elasticity of demand helps calculate total revenue as you change the price how does any of this help if we can only say what is and not what will be we assume the line continues on the same track cutting prices with different elasticities inelastic cut price not many additional sales total revenue decreased elastic cut price a lot more business relatively additional customers compensate for lower price and revenue increases the demand curve has different elasticities at different points in real life if inelastic can raise the price and make more money without losing anything When it is priceelastic revenue and price move opposite directions Lower the price get more revenue Look at demand curves as well as revenue curve With a linear demand curve can start elastic goes to unit elastic and then inelastic due to the fact that elasticity is based off of PERCENTAGES of price change and unit change Cross price elasticity of demand Percentage change in quant demanded of one good change in price of ANOTHER good Look in terms of Substitutes Positive when demand for one increases demand for the other increases Ex Samsung vs apple tablets Complements Negative relationship Ex Tablet computers and apps If pos change in price of apps negative demand for computers Unrelated Zero Peanut butter price doesn39t effect tablet sales Cross price elasticity tells you if they are complements or substitutes Income Elasticity of Demand change in quantity demandedchange in income types of goods normal and a necessity positive but less than one ex bread normal and luxury good positive greater than one ex caviar inferior negative richer I get the larger decrease in demand ex Ramen elasticity ex Alcohol farming Price elasticity of Supply Price elasticity of suppy change in quant supchange in price Calculate percentages with midpoint the same way All about what is going on inside firm Technology of firm How easily existing firms can expand Ability for firms to enter Time period is important Ex Oil Why are oil prices so unstable When you have inelastic supply and inelastic demand the quantity doesn39t change much so price will If both these curves are vertical you can get a big change in price without a big change in demand ELASTlClTY is always quantity demanded of a good divided by a different denominatoreconomic factor Chap 4 What can we do with these curves Ex should gov control apartment rent Application of a ceiling Consumer and producer surplus Consumer surplus diff between the highest willing price of consumer and the actual price of the good paid Wine willing to pay 60 got it for 20 my surplus is 40 Everybody has different surplus because everybody has diff opinions of worth of goods Producer surplus diff between price firm is willing to accept and what it was actually sold Tied to idea of Marginal Cost additional cost to firm to produce one more unit of a good or service What do consumer and producer surplus measure Net benefit to consumers from participating in market And net benefit for firms to participate Efficiency Market is efficient if all trades happen when marginal benefit exceeds marginal cost and no other trades take place Market is efficient if maximizes sum of consumer and producer surplus total net benefit to consumers and forms economic surplus Economic efficiency market outcome which marginal benefit to consumers of last unit produced equal to its marginal cost of production and the sum of consumer and producer surplus is at maximum Efficiency of competitive equilibrium Left side of intersection J at least goods are selling Right side of intersection L the people who really want some already have some so your extra units are not being consumed Both not the best because even on the left side the firm could be making more profit and the consumers could have a larger consumer surplus 1014 surplus and efficiency 102114 chapt 9 ctd Welfare analysis of trade Chaot 4 When markets don39t work well CHAPTER 4 NOT ON MIDTERM On midterm 123469 scantron simple calculator ruler practice test is not 100 the same topics comparative advantage isn t there a point where absolute advantage is so great that it doesn39t matter if one has comparative advantage They shouldn39t trade Or does this depend on the terms of trade A is willing to pay up to local comparative advantage for one good Trade benefits society by directing our resources to the best place possible Don39t forget bowed outward PPF Couldn39t u argue that even nationally domestic trade can still hurt What is an example of this Seatte tech What allows the world price to be a part of the US economy in the first place People are offered to buy from another country they are given the option to buy from another country that is how it is introduced When domestic price moves to world price consumers win Economic surplus due to trade graph is not realistic because it assumes that the world can meet this country s demand forever and for whatever amount A better model would include this by sloping the world price These areas in domestic graph imports are equal to the surplus of the importers Tariff means money going into pocket of firms and of government Area C is still being consumed however the product is being produced inefficiently whereas D is the revenue lost bc price is higher Quota In real time the price and production will rise until US production plus quota meets demand Middle area is not being taxed so it39s the foreign producer surplus Foreign producers who get to sell in US get to sell at higher price than world price For consumers it39s the same as tariff for gov its worse than tariff for foreign producers its better than tariff If there is VER that makes sense for an importer because at least importer is getting a chunk of revenue We see these trade restrictions still because while the gains are spread out amongst many consumers the costs are concentrated among a few 102314 end of chap 4 when trade occurs the benefit is spread amongst millinons of people Whereas the cost is only spread amongst 56 suppliers More acute effects on suppliers remember that effects of tariffs and quotas in terms of deadweight loss changes based off of price elasticity of supplydemand 1930 smoot hawley tariff increasing tariffs to gt50quoto during great depression wanted to protect local firms but reduces surplus as a whole which is necessary Wrong policy 1948 after world war II western countries seeking to revive international trade for GATT Tariff reduction and trade grew 1995 World Trade Organization not a gov but a forum where approval can be given or countries have disputes what is unfair Dumping selling a good at a lower price than its cost Meant to drive competitors out of business bc for while will lose money but then will make more money later because it is the only one left If you can sell internationally for lower price than sell domestically then dumping Special interest groups are typically the ones who are imposing quotas and tariffs Private costs of production Fuel Labor Equipment Social costs The private cost plus other costs Other costs external costs Po u on Marginal private costgt marginal private cost Difference between curves to the external costs of production The market will decide an equilibrium that is below the efficient equilibrium therefore the buyers and the sellers operate at a cost greater than MB to other people not included in their equation Deadweight loss coming from too much production Negative externality means P market is too low and Q market is too high Positive externalities underproduction relative to efficiency Positive externalities Too little production POSITIVE AND NEGATIVE EXTERNALITIES market failure a situation in which the market fails t produce at the most efficient level externalities come from incomplete property rights or from the difficulty of enforcing property rights in certain situations acid rain falls on farmer who can he take to court By assigning property rights you can bring external costs into private costs Good property rights avoid the market failure is zero pollution efficient Not really Have to consider costs on both sides If produce then have goods but some pollution If cant produce to avoid pollution have benefits bc less pollution but cost to lost revenue Only want to reduce when the cost of reduction is equal tot eh benefit of reduction Is it common practice to include time Does that factor into the price elasticity of demandsupply for MB of pol Reduc MC of pol reduc When moving to more pollution reduction B is cost to everybody A is benefit to everybody If the benefits of pollution reduction are felt diffusely achieving this outcome is difficult the TRANSACTION COSTS are too high Coase theorem Private parties could solve the externality problem through private bargaining provided Property rights arte assigned and enforceable transaction costs are low Also requires that the coase theorem also requires that parties have full information about the costs and benefits involved It doesn t matter who gets the property rights The efficiency will come Transaction costs the costs in time and other resources that parties absorb in the process of agreeing to and carrying out and exchange of goods or services example bee keeping and apple orchards private market is developing more efficient way to do this next time corrective taxes after midterm O9302014 hw chap 5 when the paper mill is held legally resp why is that not internalized through their supply curve after midterm taxing cigarettes and soda negative externality cigarettes taxed more heavily than four categories of goods Etel uoe le Prieete Eooole Himquot Iotarnoleez lg Macs Flurtning ehoes ue5 Pu3i Goocie Eoarnoleet ICel1eT lt To roed itluonlrittell O9302014 itlonneiteluoele Common Heeoureee EtIEll39IquotltlE5Z Tune in the ooeen Poolie esture lend Public Goocie Eoemplee Notional efense Court Et5tEl quot39I l our economic models work well with excludable and rival goods but not well for everything else lighthouse non rival non excudabe light is non riva adding more people who can see the light does not diminish the amount of light we can each see cant keep people from seeing the lighthouse markets don39t work well for lighthouses army in the US as more people enter the US our army doesn39t become less effective after midterm O9302014 differences between private goods in the market and other goods private goods horizontal summation at certain price two people want five each so at that price we give them ten at a higher price demand falls and market demand summation of all private demand falls public goods cant be excluded from it vertical summations at a certain quantity we add up the values that each person gets instead of adding up quantity we add up individual value this is example of security guard with money vs hours can please have tuna example or something of a physical nature Lighthouse Are burgers and hours of protection really the same thing Cost benefit analysis is the way quantity of public goods is determined Chap 10 Consumer decision making Why does the demand curve look this way How does the law of demand work Rationality the thought process that directs consumers to make themselves as well off as possible with limited resources Budget constraint Limited amount of income Measuring happiness Utility enjoyment people receive from their goods Would the utility of a good look like a shift up in demand curve Or is it internalized within demand curve Law of diminishing marginal utility the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time after midterm 09302014 In the case when too much cannot hurt you marginal utility is always a positive number but smaller and smaller In the case where extra can hurt you it will be positive and then negative Ex Pizza first piece is great second good third nuce fourth okay fifth more food sixth Etc asymptotic happiness Utility measuring how much people like if giving people free pizza they would grab as much as the utility was positive middle man between utility and demand curve each item purchased gives amount of utility by dividing the utility by the price of each item you get the amount of utility per dollar spent when total utility is maximized the marginal utility equals zero definition of total utility confusing because if you can have utility that is decreasing but still positive then you will never have total utility When you are being as marginally efficient as possible there is no other way to get that maximum utility When marginal spending for each item no longer makes you better off when the marginal utility costs are equal for both goods MUPthe value of a dollar when you only have goods to trade Conditions of maximizing utility Satisfy the rule of equal marginal utility per dollar spent MUpizzaPpizzaMUcokePcoke Echaust your budget Amount spent on pizzaamount spent on coke total available budget Units of utility utils I prce of one item decrease after midterm 09302014 It effects law of eq marg util You can afford more than before this is like having a higher income OR THINK OF IT THIS WAY Pizza has become cheaper relative to coke In terms of MUP Income effect when the price of a good changes this changes your purchasing power so it is like your income changes Remember inferior normal and luxury goods here Substitution effect because you have more money you can substitute certain goods for other goods Refer to changes in MUP See book for more on substitution Deriving the demand curve for pizza At two dollars we derived that you would buy 3 slices at 150 you would buy 4 The downward sloping curve holds because Pizza became a better way ton increase total utility As well as if pizza is normal good when price fell we bought more Those two factors ADDED TOGETHER are why the law of demand holds Could the demand curve slope upwards For demand curve to be positive after midterm 09302014 Good must be inferior Make up large portion of consumer budget Large income effect Large substitute effect This is a Giffen good Ex Rice in china 114 theory of consumers ctd producer theory article ideas externalities substitution and income effects when price falls income increases quantity increases what when inferior good when price increases income decreases you buy more social influences count as externalities Ex Microsoft word compatibility Fairness counts as externality Nfl ticket pricing Behavioral economics Trying to explain behavior s that don39t fit expected behavior Taking into account monetary costs but ignoring nonmonetary opp costs after midterm 09302014 Monetary and nonmonetary costs Paying 3000 vs giving up the opportunity to gain 3000 People don39t often know that these are the SAME Endowment effect the tendency of people to be unwilling to sell a good they already have Having something and losing it is more painful that not having something and choosing not to buy it Failing to ignore sunk costs A cost that has already been paid and cannot be recovered Opportunity cost of getting that player should not be considered because you can never get that opportunity cost back Being unrealistic about their own future behavior inconsistent choices do these theories invalidate our theory No bc we must see unrealistic assumptions to minimize moving pieces Models are best judged by success of their predictions rather than the accuracy of their assumptions Supplier theory Basic activity of firm To use inputs Workers Machines Nat resources Tor produce outputs of goods and services Technology process a firm uses to turn inputs into outputs after midterm O9302014 Technological change change in ability of firm to produce given level of output with given quant of inputs Short run and long run in economics Long run no inputs are fixed Short run is period of time during which at least one of firms inputs is fixed Short run or long run depends on the technology of the firms Fixed costs vs variable costs Var costs cost to firm that changes as output changes Fixed costs costs that remain constant as output changed In the long run all costs are variable Total cost fixed cost variable cost TCFCVC Ex Publishing industry Inputs Workers Ink binding glue Factory Paper Electricity Intellectual property Etc In the end they come out as books VC Paper electricity ink workers FC Intellectual property factory rent printersmachines Machines fixed if small market variable if able to sell easily Explicit vs implicit costs Explicit involves spending money Implicit non monetary opportunity cost O9302014
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