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NYU / Engineering / ECON 2 / What is the meaning of equilibrium in economics?

What is the meaning of equilibrium in economics?

What is the meaning of equilibrium in economics?

Description

School: New York University
Department: Engineering
Course: Introduction to Microeconomics
Professor: Marc lieberman
Term: Spring 2016
Tags: Economics, midterm, Microeconomic, Study Guide, notes, Lecture Notes, marc, lieberman, marc lieberman, NYU, Microecon, guide, and study
Cost: 50
Name: Intro to Microecon 1st midterm study guide.pdf
Description: The study guide covers what's going to be on the next exam. (Chapters 1-5). Referenced the textbook, but mostly notes taken from lectures. Includes graphs and tables (handwritten).
Uploaded: 02/24/2016
10 Pages 24 Views 9 Unlocks
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Iwasaki 1


What is the meaning of equilibrium in economics?



Microeconomics Spring 2016

Midterm #1 Study guide

February 23, 2016

Chapter 1

“Economics is the study of choice under the conditions of scarcity”

Things that are considered as resources

1. Labor

2. Land (and all its natural resources: oil, iron, etc)

3. Capital

- Physical: tools that are not disposable and used for production

- Human: skills and knowledge

4. Entrepreneurship

Questions to ask: what is produced? How is it produced? Who gets it?

Methods of allocation

1. Command system (a.k.a. central planning) – orders are given

Ex) Soviet Union, China 30 years ago, and North Korea today


What is a price ceiling example?



2. Tradition – does whatever they’ve been doing before

Ex) African tribes

3. The market – everyone does whatever they want with what they have (this is the  modern way)

Opportunity cost – the cost of what one gives up in order to pursue something else *explicit cost is the actual dollars sacrificed, and implicit cost is the value of everything else  sacrificed such as time, pleasure, etc.

Example: Opportunity cost of going to college would be tuition, room & board, books,  supplies and the amount of money that one would’ve made if they’ve been working instead  of going to college (explicit costs) along with time that could’ve been spent doing something  they enjoyed more among other things (implicit costs). Don't forget about the age old question of What are the 3 laws of motion?

Chapter 2

Production possibility frontier 


What is meant by price floor?



A curve that shows the maximum  

amount of one good that can be  

produced for given amount of  

another good; technology and total  

resources are held constant.

???? Point A shows the amount of  

capital goods that can be produced  

(Y axis) and consumption goods  

(X axis) given a certain amount of  

resources.

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Basic principles:

- Law of increasing opportunity cost – the curve gets steeper at both ends because  the more of something you produce, the more opportunity cost of producing it. - It is impossible to operate outside of the curve

- The frontier moves outward with time beause of economic growth and  advancement in technology. It is also to move inwards (ex: when a disaster  destroys many capital goods needed to produce goods) We also discuss several other topics like What are the behavioral effects of smoking?

- If one is operating within the PPF, it means 1) the economy is in a recession or 2)  the market is not operating efficiently

Example of resource allocation: Don't forget about the age old question of What are the 5 determinants that impact health?

National security goods vs everything else

- After the cold war ended, the US became rich in consumer goods because it could  put its resources into producing consumer goods rather than national security  goods.

- Due to 9/11 US started putting a significant amount of its resources into national  security such as more FBI agents, staffs working at the FBI facility, etc. More  agents working against terrorism also means less agents working to fight other  crimes such as drugs & murder. If you want to learn more check out What is bounded rationality?

Chapter 3

Model – an abstract representation of reality

Assumptions 

- Simplifying – makes the model simpler but doesn’t change the conclusions. Ex)  when a map assumes that a world is 2D or that there are no trees

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- Critical – changes the conclusions. Ex) when a map assumes that all roads are  available for transportation; if that was true, the most convenient route would  change If you want to learn more check out What is microeconomics and macroeconomics?

Market: collection of buyers and sellers with the potential to trade

Market for gasoline in NYC

Demand (QD = number of gallons of gas buyers would like to buy each month given the  constraints they face)

QD = D(Pgas, PIncome, wealth)… wealth↑, (ceteris paribus) the demand↑

QD = D(Psubstitute)… price of substitute good (train tickets, plane tickets)↑,  demand↑

QD = D(Pcompliment)… price of compliment goods (tires, cars, etc)↑, demand↓ QD = D(Pgasexpected)… expected price↑, demand↑

Demand also depends on population and tastes We also discuss several other topics like What are nematocysts?

Supply (QS = number of gallons gas suppliers would like to sell each month given the  constraints they face)

QS = S(Pgas PInputs)… price of input↑, supply↓

QS = S(Palternate)… "alternate" is something that suppliers could easily supply in  exchange of the good. Ex: jet fuel is an alternate good for gasoline (same input,  different product). Price of alternate good↑, supply↓ because suppliers would want  to supply that alternate good instead of that good. Ex: selling gas in NJ is an  alternate good for selling gas in NY. Price of gas in NJ↑, supply of gas in NY↓. QS = S(# of firms)… # of firms↑, supply↓

QS = S(Pgasexpected)… expected price↑, supply↓

Supply also depends on technology, government policy (tax, regulation), etc.

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Equilibrium…point of rest

- Endogenous variable-- variable determined inside the model; variable determined  by the model (price of gas, quantity of gas bought/sold)

- Exogenous variable-- variable given to us outside of our model (all the other  variables like income, price of alternative/substitute, etc)

Chapter 4

Government intervention 

Why would the government want to intervene?

• Market isn't working well (later)

• Price is not fair (too high/too low)

• Quantity is not quite right

Ex: if the government doesn't intervene in the education market, too little people would  be willing to receive education

Different sort of intervention: fighting the market / influencing the market Fighting the market isn't recommended due to severe side-effects

When the price isn't fair:

Price floor…minimum price for the product.

Mainly used in farm products…why?

2 problems for farmers:

1. Unstable weather -- because of an unusually steep demand curve, without price floors,  farmers would actually be making more money with bad weather. However weather is  uncontrollable which means total revenue is unstable.

2. Technological advances -- overtime, there will be technological advances which will  shift supply curve to the right, lowering prices; total revenue will go down overtime.  Small farm's income will go down, while big farm's income will go up due to financial  ability to obtain these new technologies.

… Because of such difficulties, farms products needs forceful government intervention. Price floors usually backfires.

If price is forced above the equilibrium, there will be an excessive surplus. In order to sell the  surplus, farmers might start selling crops for lower (illegal) prices.

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In order to sustain floor

1. Government buys the surplus; stores them until they rot

2. Artificially increase demand ex: got milk? Advertisement, food stamps (issued by  agricultural department), ethanol mandate (mandates that percentage of gasoline be  made from US corn)

3. Artificially decrease supply (until 2012) -- paid off farmers not to grow crops.  However, these payments were usually given to large corporations, while small farms  barely received any.

Too many loopholes: family may divide ownership of farm amongst their family  members to collect subsidies multiple times. Rich investors in Manhattan can buyout  farms in order to receive subsidy not to grow crops.

4. Crop insurance

Price ceiling…maximum price for the product.

Theater tickets in Manhattan

Short run: no theater construction or destruction.

Scalpers -- people who buy tickets and sell them at whatever cost people will be  willing to buy it

Long run: theaters will go out of business, causing supply curve to shift leftward,  ending up with a significant decrease in supply of tickets.

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When the quantity isn’t right 

Tax – when the government wants people to buy less of it by increasing price (ex: cigarettes  and other unhealthy things)

Tax incidence – the burden of tax falls on both buyers and sellers (at different amount)

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Subsidies – when the government wants people to buy more of it, they provide subsidies to  lower the cost (ex: education, medical care). The incidence falls on both buyers and sellers  for this case as well.

Iwasaki 8

Chapter 5

Law of demand: P↑ = Q↓, P↓ = Q↑

Price sensitive – price affects quantity substantially

$1 rise in chocolate bars caused 100 decrease in quantity→price insensitive $1 rise in airplanes caused 100 decrease in quantity→price sensitive

???? need a universal measurement that applies to all goods

Price "elasticity" of demand (ED)

Elasticity = sensitivity

ED = %∆#$ 

%∆%

Price per gallon

# gallons  

demanded/weeks

$3.00

10,000

$3.30

8,000

$3.60

6,000

To calculate %∆ for elasticity, we use "midpoint rule".

%∆�' = ∆�' 

�1 + �2

2

%∆� = ∆�

�1 + �2

2

�' = 22.2

9.5 = 2.34

…larger the number, the more price sensitive

Categories of elasticity

• Elastic: �' > 1

• Inelastic: �' < 1

• Unit elastic: �' = 1

• Perfectly elastic (a small change in price causes infinite change in quantity): �' → ∞ Ex) a $10 bill would not be sold for anything more than $10

• Perfectly or completely inelastic: �' = 0

Determinants of elasticity

Basic principle: greater ability or willingness to substitute other goods→demand is more  elastic

1. Nature of product; luxuries are more elastic than necessities

Ex) electricity: 0.19, medical care: 0.3, movies: 3.69, foreign travel: 1.77

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2. Narrowness of market definition; if the market is defined narrowly, it becomes more  elastic

Ex) elasticity for "fruit" would be more elastic than "food"

3. Time horizon; the longer we wait after price change, the more elastic is demand Ex) gasoline in short run: 0.26, in long run: 0.58

4. Importance in buyer's budgets; the larger the percentage of our budget spent on a good,  the more elastic is demand

Ex) a spike in rent would cause people to look for another apartment or search for a  roommate, while people would still buy the same tabasco despite a spike in price Elasticity and total revenue (total expenditure)

Applications:

Mass transit:

P↑ = QD↓ = TR↑

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If the price is inelastic→ price goes up by 10%, quantity demanded goes down less than  10%, total revenue will go up.

Illegal drugs

60-70% of economists say that all drugs should be legal

Illegal drugs are inelastic to price = the higher the price, the higher the revenue Because drugs are illegal:

Drug war rises the price (which rises the total expenditure)

Addicts commit crime to pay for addiction

Turf wars and police corruption happen because so much money is at stake Unnecessary deaths due to impure substances

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