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This 33 page Bundle was uploaded by alexis johnston on Saturday December 6, 2014. The Bundle belongs to ECON 200 at University of Washington taught by Haideh Salehi-Esfahani in Spring2013. Since its upload, it has received 123 views. For similar materials see Microeconomics in Economcs at University of Washington.
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Date Created: 12/06/14
Econ 200 Microeconomics Lecture 1 Economics the science of human decision making in the economic arena 0 A set of tools to study how humans use the resources to produce the goods and services we want Markets the coordinating venue for human economic activity Scarcity the fundamental axiom in economics concerning resources Opportunitv Cost of a decision the net value of the next best alternative foregone Theory of Consumer Behavior there are 2 sets of in uences on our decisions to purchase various quantities of goods 0 Constraints or opportunities o Ex income price location age etc 0 Tastes or preferences o Ex preferring bananas over apples 0 Not measurable quanti able Overcome by considering tastes as given and look at the effects of changes in constraints 0 0 Lecture 7 Surplus of goods Supply available is higher than demand Transaction Costs characteristics or attributes that exist in some markets where mutually bene cial trade is dif cult to achieve 0 Include 0 0 0 0 Information cost about where the buyerseller is where the goods are Costs of establishing the salient featuresproperties of goods traded Cost of reaching an agreement over the price of the good or service to be traded haggling Costs of establishing and enforcing property rights over the goods or services traded Support Mechanisms reduce transaction costs 0 Ex renting an apartment insurance security deposits background checks rule of law legal system that oversees issues between renter and landlord etc Ex many consumer products warranties brand name guarantees return policies etc Student Questions 1 a Yes as long as the demand curve or the MV value is higher than the supply curve or MC value then trade will take place MCltMV b 5 million because this quantity represents the Pareto optimal or where gains from exchange are maximized Past this quantity trade will not take place c No the supply curve has surpassed the demand curve That is the seller wants more for a unit of a good then the buyer is willing to forego in other goods MCgtMV 2 You do not often observe haggling in a grocery store because the opportunity cost will almost always be higher than the minor gain consumers would see from haggling However when purchasing a car or a house the opportunity cost is likely to be much lower than the potential gains from haggling over typically what would be a substantial dollar value What you are foregoing by haggling for a house is relatively lower than that foregone in a grocery store Lecture 8 0 Negative value for n means an inferior good 0 Positive value for n means a normal good Cross Price Elasticity Consider two goods X and Y o If two goods are complements the cross price elasticity is negative 0 If two goods are substitutes the cross price elasticity is positive Shifts in the Supplv Curve Example 1 How does an increase in price of tomato sauce used in production of pizzas affect the supply curve for pizza 0 The marginal cost will increase and as a result the supply curve will move to the left Example 2 Suppose a new law banning the catching of tuna with regular shing nets is passed Now the shing of tuna requires special more expensive nets How does this law affect the market supply of tuna The supply curve will shift to the left because marginal cost rises Elasticity Elastic Perfectly elastic supply curve 0 Horizontal Elasticity measure for a perfectly elastic supply curve 0 In nity Inelastic Perfectly inelastic supply curve 0 Vertical Elasticity measure for a perfectly inelastic supply curve 0 Zero Lecture 9 Midterm 1 Review Therefore if individual39s income is volatile and they like to consume the same smooth consumption pattern each year they will 3939lend some of their income ie not consume it when it is high and will quotstorequot it to be received at a later period when their income is lower This will allow individuals to smooth out their consumption even if their incomes vary from year to year Chapter 3 Aspects of Demand Relative Price If prices of several goods change the Law of Demand pertains to the effects of a change in relative price of a good Price Elasticity of Demand Or For an inelastic demand if the price rises by 10 Q falls by less than 10 and hence the total revenues of the seller New PQ will rise For an elastic demand if the price rises by 10 Q falls by more than10 and hence the total revenues of the seller New PQ will fall Examples 10 Suppose there are a few grocery stores close to each other in a shopping district near your residence If a grocery store in this district desires to increase its revenues should it raise its price Elastic demand because there are an ample number of substitutes Therefore the grocery store should lower their prices to increase revenues Would you expect convenience stores to have higher or lower prices than regular grocery stores The convenient store prices will be higher 11 Is elasticity higher for a brand name or for the whole category of a good ie clothing versus Liz Claiborne clothing line The brand name will have a higher elasticity because there are more substitutes than for the entire category of clothing Adding a lump sum eg transport cost will render the high quality good relatively cheaper at destination versus the origin and vice versa Chapter 4 Mutual Gains from Voluntary Exchange Lecture 9 Midterm 1 Review Tax Revenue Quantity x Value of Tax unit Chapter 5 Supply and Demand Change in quantity demanded When the price of a good rises keeping all other forces constant the quantity demanded falls and vice versa This could also be called quotthe price effectquot Change in the demand When a force other than the price of the good changes the whole demand behavior shifts its location changes Income and Cross Price easticitv For substitute goods the cross elasticity is positive For complements the cross elasticity is negative Income elasticity If n lt 0 the good is inferior If n gt 0 the good is normal Shifts in the supply curve improvements in technology shift the supply curve to the right increase in S Forces that raise the marginal cost of production shift the supply curve to the left Lecture 10 Sellers hope tax is all paid by consumers Consumers hope tax is quoteatenquot by sellers Tax is in fact shared by both consumers and producers However due to the relatively inelastic supply and the relatively elastic demand curve sellers pay most of the tax Tax drives a wedge between the price paid by the consumer and price received by the seller Meaning the MVs are no longer the same on both sides This implies that a tax levied by the government results in lost gains from trade 0 One justification for the government intervention happens in markets for the type of goods and services where market transactions produce some quotnegative externaity Where demand is relatively inelastic even though the government collects the taxes from the sellers actually most of it is paid by the buyers Lecture 12 What is MC of an additional sh for Anna 1 Rabbit What is MC of an additional sh for Brad 12 Rabbit Who has comparative advantage in sh Brad Anna decides to catch 4 sh How many rabbits 6 Brad decides to catch 2 rabbits How many sh 4 If we add this up acting alone they have a total of 8 sh and 8 rabbits Now suppose Anna specializes in rabbits Therefore Anna produces 10 rabbits 2 rabbits And Brad specializes in sh Therefore Brad produces 8 sh Now the total production between them is 10 rabbits and 8 sh Now suppose we are at 18 sh and no rabbits Anna and Brad would now like to have 2 rabbits rather than none How many sh is produced 16 Who catches the 2 rabbits Do Anna and Brad each catch 1 Anna gives up fewer sh for each rabbit caught Now suppose Anna and Brad want to have 4 rabbits Who catches the 4 rabbits Who produces what here Anna 4 rabbits Brad 14 sh Now suppose that Anna and Brad want to have 12 rabbits How many sh are caught here Who produces what Brad 4 Fish 2 Rabbits 0 Must give up 1 sh for every rabbit caught would normally catch 6 sh Zgiven up 4 sh caught Anna 10 Rabbits Max number of rabbits she can catch What is the MC of rabbit production at A 1 sh What is the MC of rabbit production at B 2 sh The MC of rabbit production rises as we run out of suitable resources ie Anna gets tired for production of rabbits Lecture 14 De nitions InputsEconomic resources Factors of production 0 labor land capital human and physical management or entrepreneurship Marginal Product of an inputlabor Additional output that is created when an additional unit of labor is applied to a given amount of other inputs 0 In analyzing the production of a good we use the concept of Marginal Product ofaninput Total Product of labor The difference in output when some units of labor are used versus no labor used at all Marginal Value of an input ed labor to a rm It is the 3939value 39 of the Marginal Product of that input This is simply the price of the goodoutput multiplied by the additional output produced by the input labor Table 1 L of laborers Q quantity produced MPL Q2 Q1L2 L1 APL QL Diminishing Marginal Product of Labor as labor ie resource of equal quality is added to produce successive units of output ie an increasing number of laborers quotcogsquot the system and the increasing ow of output MPL is slowed Hair Salon Example How much does the 7 unit of beauty services cost 30 05 production 60 Does the quotmarginal costquot of production rise or fall as quotmarginal productivityquot of labor fall from 6 to the 7 worker 0 Falls due to diminishing marginal product of labor As the MC of production of this service rises here it is rising costs in the intensive margin there will be rent Rents with increasing cog at the intensive margin Just as rents occur due to our inability to replicate resources increasing costs at the extensive margin in chapter 6 rents can also occur due to increasing costs at the intensive margin That is rents occur as we add equally good and suitable labor to other xed inputs In this way rents go to the person who accepts responsibility for all the risks of the Lecture 15 VMPL Wage Therefore the rm will hire 3 workers 3 Now consider the oyster farm as common property Write down the condition for employment under common property How many workers will be employed there and what are the net gains rents Why are net gains dissipated when the institution of property rights change from private property to common property They would hire 4 workers because past this point the rents begin to fall and the additional worker added adds less than the rent they dissipate Lecture 18 4 15 3 375 12 3 5 17 2 34 15 2 6 18 1 3 18 O 7 18 O 257 21 3 Employment Rules Private Property Wage VMPL 0 Most efficient of workers Common Property Wage VAPL Too many workers Socialist Property D Maximum VAPL Too few workers Chapter 9 Property Rights and Coase Theorem Examples The case of externality when producing sheep and tulips Suppose a sheep herder and a tulip farmer are neighbors Each sheep destroys 60 worth of tulips in its lifetime The table of marginal private costs and marginal tulip damage No of sheep Marginal Private Marginal tulip Marginal Social Cost damage Cost 1 60 60 120 2 90 60 150 3 120 60 180 4 150 60 210 5 180 60 240 6 210 60 270 7 240 60 300 8 270 60 330 The price of a sheep is 180 WO Liability by Farmer Price Marginal Private Cost 0 5 sheep W Liability by Farmer D Price Marginal Social Cost 0 3 sheep
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