Notes/Midterm Study 11888
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This 27 page Bundle was uploaded by Kathryn Gustafson on Sunday October 25, 2015. The Bundle belongs to 11888 at University of Oregon taught by Bekah Selby in Summer 2015. Since its upload, it has received 41 views. For similar materials see Intro to Microeconomics in Economcs at University of Oregon.
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Date Created: 10/25/15
Monday September 28 2015 Economics 201 Intro to Economics Economics the study of how people coordinate in order to allocate scarce resources in order to satisfy their unlimited desires scarcity the condition of being limited in quantity gives society s unlimited wants and needs cookies in a cookie jar resource a good or service that is available to consume a cookie unlimited desires the idea that under no limitations society would be happiest consuming an infinite amount of a resource eat cookies forever Microeconomics the study of how individuals in the economy make decisions and coordinate consumer decisions firm production government intervention Macroeconomics the study of how overall economy functions unemployment inflation economic growth Foundations of Economics Incentives what makes you make a decision the factors that motivate you to actor exert effort are positive incentives the factors the dissuade you from acting are negative incentivesdisincentives direct incentives someone posts a sign saying free cookies please take indirect incentives the price of cookies at the store are increasing so the free cookie is more appealing Monday September 28 2015 indirect incentives can often be thought of unintended consequences of other things in the market Tardeoffs the scarcity of resources including time makes it so that if you make a decision you will be forgoing another there is no such thing as a free lunch there is a cost for everything literal this cookie costs 1 reference if I eat this cookie then I will have less room in my stomach for coffee Opportunity Cost the value of the next best thing always exists college v work debt v income work with degree v without direct cost tuition amp fees amp books benefit amount made w degree v wout degree income BA Benefit time 40k Direct Costs Monday September 28 2015 Marginal Thinking as economists we are often considering the decision making process of agents consumers business government in the economy When consumers are making decisions they consider how happy they would be with the next additional unit of good when firms are making decisions they consider the benefit and cost or producing the next unit of the good as economists we call these benefits and costs of the next good marginal values and marginal costs marginal thinking in loves making decisions based on these marginals Trade the voluntary exchange of goods and services between two or more individuals in a market example Poussey and Sophia are inmates P makes good hootch Sophia is a great hairstylist P regularly wants a haircut but is bad at cutting hair Sophia regularly wants hootch but is bad at making hootch market prison P has comparative advantage of producing hootch Sofia has comparative advantage of producing haircuts Market a setting which brings buyers and sellers together to exchange goods and services Comparative Advantage the situation where an agent can produce a particular good at a lower opportunity cost than a competition Monday September 28 2015 Intro to Microeconomics economists use the scientific method and are scientists and usually concern themselves with positive analysis Positive Statements describes what is and can be tested and validated this is a cookie Normative Statements describes what should be and is an opinion that cannot be tested or validated people shouldn39t eat cookies economists formulate models of the economy in order to better understand how it func ons these models make assumptions that simplify the economy so that we can understand how it works Ceteris Paribus latin for other things being equal changing one thing but not the others one changing variable all others constant Endogenous Factors factors that are explained within the model quantity demanded is found from knowing a price demand is endogenous Exogenous Factors factors that are determined outside the model these are assumed to be known the amount of daylight is exogenous assumptions make models more tractable but if we want to use that model for any real word analysis the assumptions need to be appropriate First Model two things are produced beer and wine Monday September 28 2015 using space land and other resources a person can either make only beer only wine or divide the resources to make a combination there is a constant tradeoff between beer and wine we will always have to give up the same amount of beer to produce one more bottle of wine to produce 20 bottles of beer we have to give up 10 bottles of wine so to get two bottles of beer we have to give up one bottle of wine this tradeoff is constant at 2 beers 1 wine across all production Quantity of Beer 100 50 25 Quantity of Wine pointx is efficient point y is inefficient pointz is unattainable the blue line is called the PPF Production Possibilities Frontier a model representing the combination of resources that a society can produce if all resources are bing used the tradeoff is the opportunity cost one wine for two beers which is constant Law of Increasing Relative Cost the opportunity cost of producing good rises as you make more of it when you are producing mostly beer and little wine the amount of beer you would have to give up to make more wine is fairly small as you make more wine the opportunity cost of making more wine grows Monday September 28 2015 Quantity of Beer 50 4O 30 2O Quantity of Wine suppose this microeconomy suddenly gets improved technology to produce beer beer making improves wine does not Quantity of Beer 60 50 Quantity of Wine suppose this microeconomy suddenly gets more labor both improve Quantity of Beer m 60 50 0 50 60 Quantity of Wine Monday September 28 2015 Technology amp Growth Technology improving or worsening can change PPF in the same way as aforementioned this is a rotation outward of the PPF improving technology for producing pizza increased the max number of pizzas that can be produced When there is a population increase labor can increase this is a shift outward of the PPF AbsoluteComparative Advantage and Specialization suppose we have two producers of the same two goods each one differs on their abilities to produce the goods with the same resources absolute advantage the ability for one producer to make more than another producer with the same quantity of resources comparative advantage the ability to produce a pizza at a lower opportunity oat than a competitor Karen can produce more pizza than Nancy when they only produce pizza 120 v 100 suppose Nancy wanted to make one more pizza how much soda would she have to give up 50 soda100 pizza 05 soda2 pizza suppose Karen wanted to make one more pizza how much soda would she have to give up 100 soda120 pizza 083 soda12 pizza 1 pizza 1 soda Nancy Karen Nancy has a lower opportunity cost of producing pizza Nancy has the comparative advantage in producing pizza Karen has a lower opportunity cost of producing soda suppose the girls do not specialize and trade Monday September 28 2015 Karen has the comparative advantage in producing soda Nancy decides to produce 33 pizzas and 33 sodas to consume equal amounts Karen decides to produce 54 pizzas and 54 sodas to consume equal amounts suppose each girl specializes in producing what they have a comparative advantage in trade each girl is better off by specializing and trading production w consumption production w consumption gains from out trade wout trade trade w trade trade Nancy pizza 33 33 100 40 keeps 7 Nancy soda 33 33 0 40 from 7 Karen Karen pizza 54 54 O 60 from 6 Nancy Karen soda 54 54 100 60 keeps 6 120 0 Karen 0 Nancy 90 60 3O Monday September 28 2015 Demand market economy an economy where buyers and sellers can come together with little government interference market power the market s ability to influence output and market price competitive markets markets with out market power composed of a sufficiently large number of buyers and sellers homogenous goods have little to no differentations common in competitive markets monopoly a market with exactly one firm demand in a market people who desire a good supply in a market people who have or produce the good marginal value the additional value a person places on the next good consumed first tshirt willing to spend more than for the second and third and fourth total value the total valuation of all goods consumed amount of coffee lbs total value TV marginal value MV 1 20 2 15 3 1O 4 50 5 50 TV1 MV1 TV2 MV1 MV2 TV3 MV1 MV2 MV3 how much does the person value the first pound of coffee 20 how much does the person value the second pound of coffee 15 how much does the person value two pounds of coffee 35 Marginal Value rule you want the next pound of coffee only if the marginal value of consuming it is no lower than its price MV gt P Monday September 28 2015 price amount of coffee lbs total value TV marginal value MV 20 15 10 5 Price 1 2 3 Coffee lbs 20 35 45 50 how much coffee would a person want at 17 1 how much coffee would a person want art 8 3 20 15 1O 5 quantity demanded the amount of a good that people desire at a given price qd law of demand as the price for a good increases ceteris paribus quantity demanded falls amp visa versa demand schedule table that shows the quantity demanded for each price the sum of all individual quantities demanded by each buyer in the market at each price notated Q market demand the sum of all the individual quantities demanded by each buyer in the market at each price notated Q Q q1d q2d etc two individuals in a market for salmon Meredith and Derek at a price of 20Ib neither want fish qMdO amp qDdO market demand qMd Dd O O O at a price of 15lb Meredith wants 2 pounds and Derek wants 1 pound qMd2 amp qDd1 1O 11 Monday September 28 2015 market demand qMd Dd 2 1 3 alculating Market Demand Pnca pot pound Price of salmon Derek39s demand Meredith39s demand Combined market per pound lper month pet month demand 2000 0 0 0 1750 0 1 1 1500 1 2 3 1250 1 3 4 1000 2 4 6 S 750 2 S 7 S 500 3 6 9 S 250 3 7 10 5 000 4 8 2 Prka Price lpor pound ipu pound 4510 0 5 0 10 Medan 2 Quantity Quantity Quantity pounds pot lpounds por pounds pot month month month Dorok Morodlth omblnod Markot Demand when price changes we move along the demand curve change in quantity demanded affected by income changes in tastes and preferences prices of related goods expectations of future price number of buyers income normal goods a type of good that buyers want more of as income increases inferior goods a type of good that buyers want less of as income increases ex top ramen what happens to demand for a normal good w an increase in income Price of Coffee Pounds of Coffee New Demand per pound Demanded per month 20 0 1 15 1 2 10 2 3 5 3 4 0 4 5 12 Monday September 28 2015 increase in demand goes to right decrease in demand goes to left tastespreferences for every price you would demand more of the good could be changed by new info on how goodbad things are for you if you like eggs and eggs are shown to be healthier demand would shift to the right if your medicine doesn39t work as well as it used to demand would shift to the left related goods demand for good changes when there are changes in other goods complementary goods goods that tend to be consumed together as the price of a complementary good increases we demand less of it ex price in egg goes up you want egg less demand shifts left as the price of a complement increases the demand for a good decreases substitute goods goods that tend to be consumed in replacement of the other coke v pepsi as the price of a substitute increases the Monday September 28 2015 demand for the good increases expectations of prices should I buy it now or wait until it is cheaper swimsuits are more expensive just before summer so I should buy one now for next summer when you expect prices to fall in the future your demand today decreases when you expect prices to rise in the future your demand today increases number of buyers 2 a McDonalds just opened in a remote town this increases the number of buyers of big macs market demand of big macs increases demand shifts right Burgers mil Suppw suppliers agents in the economy who already have these goods marginal cost the additional cost to 1 6 0 Region 1 a supplier to produce the next good 39 for each additional unit the person 12 values it more because they have fewer to consume themselves 08 04 o 1 2 3 13 Monday September 28 2015 05 0 Supply ex market for bananas 0375 price of bananas quantity supplied per lbs lbs per month 01 100 025 02 150 03 200 0125 04 250 05 300 O 100 150 200 250 300 market supply in competitive markets there are multiple suppliers the individual supplies can be added into a market supply quantity supplied of a good changes when its price changes ceteris paribus what leads to a shift in supply cost of inputs technology or production process taxessubsidies number of firms price expectations cost of inputs bad winter kills oranges orange juice is more expensive to produce now input price up supply down shifts left as input price increases the supply of a good decreases 14 change in technology Monday September 28 2015 invention of an electronic coffee grinder makes coffee easier and cheaper to produce increases supply of coffee shifts right taxes and subsidies government taxes a particular product flat tax changes supply curve from S1 MC to 82 2 MC t tax shifts left by t decreases supply government subsidizes a particular product flat subsidy changes supply curve from S1 MC to 82 2 MC s subsidy shifts right by s increases supply number of firms as the number of firms increases quantity supplied increases shifts right price expectations a producer of christmas trees could seek more trees at a higher price in december thaninjune if the price of a good is expected to increase in the future holding current prices constant quantity supplied today decreases if the price is expected to decrease in the future quantity supplied today increases Changes in the Market consumers want fewer goods as the price increases suppliers produce more goods when the price increases Full market the Salmon Market Price per pound 1500 1000 39 500 Surplus at a price of 1500 Shortage at a price of 500 2550 560 750 Quantity pounds per month surplus a condition where quantity supplied exceeds quantity demanded due to higher than equilibrium price qs qd shortage a condition where quantity supplied is less than quantity demanded due to lower than equilibrium price qdqS Monday September 28 2015 equilibrium center point occurs when quantity demanded is exactly equal to quantity supplied increase in demand no change in supply shift to the right 3 C11 C12 increase in supply no change in demand shift to the right 51 52 P 1 I P 39 p I z I I z z I 39 I l 39 1 39 I 1 I I I I l r I I 39 I I I D 1 I 1 l l I l q qi Q5 decrease in demand no change in supply shift to the left both down Monday September 28 2015 decrease in supply but no change in demand shift to the left bidding war prices up demand down 5 sq increase in demand increases prices decrease in supply increases prices increase in supply decreases prices decrease in demand decreases prices increase in demand increases equilibrium quantity increase in supply increases equilibrium quantity decrease in demand decreases equilibrium quantity decrease in supply decreases equilibrium quantity supply drives prices up demand drives prices down decrease in supply increase in demand they offset unambiguous increase in price ambiguous change in demand equilibrium would move up to P2 middle point ql q5 Monday September 28 2015 demand effect dominating quotq if the demand shifts more than supply they offset q each shifts the same amount supply effect dominating vq if the supply shifts more than demand decrease in supply decrease in demand they offset unambiguous decrease in quantity ambiguous change in price a study says that going to starbucks more will make you live longer and government places a small tax on paper cup demand will increase big supply will decrease small 18 Monday September 28 2015 Elasticity marginal cost drives supply marginal value drives demand as prices increase quantity demanded decreases ceteris paribus as prices increase quantity supplied increases ceteris paribus market equilibrium occurs when quantity supplied quantity demanded increases in demand income price expectations etc drive prices and quantity up increases in supply price of inputs technology etc drive prices down and quantity UP when price income and prices of other goods change equilibrium quantity changes for some goods we may not be sensitive to changes if you have diabetes and need insulin you will continue to buy insulin if the price goes up or down price elasticity of demand a measure of responsiveness of quantity demanded to a change in price the percent change in quantity due to a one percent change in price ED oodeltaq039 odeltaP percent change in quantitypercent change in price always negative EX price goes up 10 percent and this induces a 20 percent decrease in quantity demanded ED oodeltaq039 odeltaP 20 o10 o 2 elastic demand demand is sensitive to price changes Price elasticity of demand is greater than 1 in magnitude IEDI gt 1 EX ED 2 IEDI 2 gt 1 so this demand is elastic inelastic demand demand is not very sensitive to price changes Price elasticity of demand is less than 1 in magnitude IEDI lt 1 EX ED 12 IEDI 12 lt 1 so this demand is inelastic unit elastic demand quantity demanded changes by the same percentage as price Price of elasticity is equal to one IEDI 1 19 Monday September 28 2015 how to estimate the percent change in quantity and price from point A to point B P given these two points Aq1 P1 and Bq2 P2 we can P estimate the change from A to B as 1 odeltaq P2 ifA32 B41 39431 1 amp 122 O5 elasticity formula 1 O5 2 so moving from A to B if A32 B41 344 O25 amp 2 11 1 elasticity formula O251 O25 estimating elasticity w midpoint AP Pi a q OL39OC o IIOAP f 3435 O29 Sh q QL QJ Aq Er 2 115 066 so elasticity is O29O66 O44 inelastic 20 Monday September 28 2015 suppose price is high and quantity demanded is low Will people be very responsive to a small change in price at this point Whywhy not Pi when price is low C 1 change doesn39t change A 18 demand Small decrease In price brings price to pt D 17 using midpoint formula v The ercent chan e in rice is i p g p 3 D Pq P 2 quott 1 e 3 040 40 quot quotgtCI P1 P22 25 2 3 1718 gt The percent change in quantity is 72 i q 18 T 17 o 71 q22 175 0 O6 6 gt So the price elasticity of demand is 6 E 1 U 40 0 5 inelastic when price is high A 1 change does change demand Small decrease in price brings price to pt B using midpoint formula gt The percent change in price is Po 7 P 17 i 18 1 006 6 P1 P22 17 182 gt The percent change in quantity is Q2 71 3 2 04 40 q1 q22 3 2 2 o gt So the price elasticity of demand is 40 E 1 6 6 33 Pa Atb elastic Elastic elastic IEDI gt1 U t El t39 unit elastrcrty IEDI 1 m as 39c I t39 Inelastic IEDI lt 1 ne as 39Ccap 21 Monday September 28 2015 demand for cigarettes because cigarettes are addictive change of price of cigarettes does not change demand inelastic demand for coke because there is a substitute change of price of coke does change demand of coke bc pepsi is cheaper elastic change in price from P1 to P2 same percent price change different change in demand red curve q1 gt q2 blue curve q1 gt q3 othe flatter the curve the more elastic the curve the steeper the curve the more inelastic curve cigarettes would be red determinants of price elasticity 22 number of available substitutes if it can be easily replaced with another good elastic share of budget spent on good when spending a small amount of your budget 10 change in cost is small inelastic when spending a large amount of your budget 10 change is cost is small elastic necessities vs luxuries when the price of necessities water increases u need it inelastic when the price of luxuries ice cream increases u aint need it elastic short run vs long run short run price change u see them change the price on gas u get gas inelastic long run price change if gas prices are consistently higher u don39t drive as much elastic special cases Monday September 28 2015 perfectly inelastic when a good is completely unresponsive to price change vertical line on graph ED O perfectly elastic when a good is completely responsive to price change horizontal line on graph ED gt infinity Ex 2 Thomas loves to eat burritos at his favorite restaurant He will eat 5 per week when the price is 5 per burrito However when the price increases to 6 he only wants 3 per week Is his demand inelastic elastic or unit elastic 675 i AP 02 652 55 3 5 2 0m d 05 q 352 4 05 E v e2 5 D 02 Because ED gt I demand is elastic at this point income elasticity of demand holding prices constant increase in income increases demand of normal goods and decreases demand of inferior goods market equilibrium price and quantity will increase for normal goods and decrease for inferior goods calculated by qch 0 d E I oAq qq22 A M 1 I22 for normal goods an increase in income increases the quantity demanded so oodetal gt O and deltaqd gt O El gt 0 positive for inferior goods an increase in income decreases the quantity demanded so oodetal lt O and deltaqd lt O El gt 0 negative 23 Monday September 28 2015 luxury good a type of good which has an income elasticity greater than 1 Egt1 necessity good a type of good which has an income elasticity less than 1 OltElt1 Ex 1 Jason is a Pokemon fan He loves to collect more cards any time he gets more more money to spend on them Recently he received a 30 increase to his salary income He was buying 4 packs a month and now he is buying 6 What is his income elasticity of demand Does he view Pokemon cards as a necessity luxury or inferior good Ex 2 Travis recently received a 20000 bonus from his work for being generally awesome his usual income is 200000 per year With his new money he feels substantially richer and decides cut back on eating cube steak and switches to eating top sirloin steaks In fact he would usually buys 100 pounds of cube steak per year but now he only wants 50 What is his income elasticity of demand for cube steak Does he view it as a normal necessity or luxury or inferior good crossprice elasticity Al 30 6 a 4 2 M d 04409 7 6 42 5 04 Because E gt O the good is a normal good Because E gt 1 we also know that this is a luxury good 0 20000 20 000 0 llo 0 200000 l 2200002 210000 50 100 50 A quot 067 6670 7 50 1002 75 667 E z z 702 95 Because E lt1 0 we know he views cube steak as an inferior good change in price of a related good complements and substitutes affects the demand curve for a good increase in the price of a substitute leads to an increase in the demand for a good increase in the price of a complement leads to a decrease in the demand for a good percent change in quantity demandedpercent change in related good can be calculated by AqA Percent Change in Quantity of Good A C APB Percent Change Price of Related Good B 24 Monday September 28 2015 if E gt 0 an increase in the price of a related good odeltaPB gt 0 leads to an increase in the quantity demanded of a good odeltaqA gt O A amp B are substitutes if E lt 0 then an increase in the price of a related good odeltaPB gt 0 leads to a decrease in the quantity demanded of a good odeltaqA lt O A amp B are complements 39 ifEcO A amp B are unrelated goods substitutes E gt O complements E lt O unrelated E0 O price elasticity of supply 25 how responsive is quantity supplied to market ex food carts may choose to relocate if the market drops in their location ex oceanfront land cannot change their location or quantity if the market changed onqd Percent Change in Quantity AP Percent Change in Price if Es gt 1 supply is elastic if Es lt 1 supply is inelastic if E3 1 supply is unit elastic supply always positive except if perfectly inelastic in which case it is 0 Ex 1 Looking at market data we see that for every 20 increase in prices producers of coffee drinks Aqd 40 E 5 AP 20 Because E5 gt 1 supply is elastic have an increase in output of 40 What is the price elasticity of supply for the coffee drink market and is it elastic inelastic or unit elastic 2 Monday September 28 2015 Midterm Prep absolute vs comparative advantage 50 o PPF1 o PPF2 375 25 125 O O firm 1 opportunity cost of producing good 2 50good150good2 1good11good2 lower opportunity cost of producing good 2 firm 2 opportunity cost of producing good 2 50good120good2 25good11good2 higher opportunity cost of producing good 2 quantity demanded vs overall demand quantity demanded quantity at a particular point on a demand curve quantity at a particular point 26 27 overall demand the demand curve a function Monday September 28 2015
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