Week 3 Macroeconomics 1020 Notes Ceteris Parabus- "other thingsIf you want to learn more check out geogebra sqrt
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equal" • Little things can make a big difference • Some other considerations determine decisions as well 1. Demand Shift in Demand • Not a change in quantity demanded, but it's a shift of the entire curve, meaning something else is causing a change- a whole different DEMAND CURVE • A demand curve is a relationship between price and their quantity demanded • The only thing we can change is the price • Demand is always changing • An increase in demand is a RIGHTWARD shift of the demand curve • A change in price results in a movement along the curve, but a change in everything else is a shift in the entire demand curve Determinants of Demand • Income: not obvious which way demand will shift o Normal Good: as income goes up, the demand goes up, and at any given price the quantity demanded will be high • Goods for which demand increases when income increases, and falls when income decreases • Example: Healthcare o Inferior Good: a good whose quantity demanded decreases when consumer income rises • Ex: Spam • Prices of related goods o Complement: if price of jelly goes up, you'll consume less peanut butter • Price of complement goes up, the demand for the good goes down • Same relationship (if demand for one goes up, demand for the other does too) o Substitute: tea and coffee, if price of tea falls, demand for coffee would go down because people would be buying tea instead • Inverse relationship 2. Supply Shift in Supply • An increase in supply is a RIGHTWARD shift of the supply curve • Technology: if we have better technology we can produce more at that price • Input Prices: if our inputs become costlier, the supply curve will go down. • Price of Related Outputs: we have complements and substitutes o Oil and natural gas are complements of supply. Hydrocarbons collect together. We produce oil and natural gas, so if the price of oil goes up you'll produce more oil and natural gas • Number of producersEquilibrium: At a high price, the quantity demanded is too small, and quantity supplied is too big, so market will be restricted by the lower number because there can only be a certain number of transactions • When price is too high, there's pressure on price to fall • When price is too low, there's pressure on it to rise • When there's more buyers than sellers, the price tends to go up • When there's more sellers than buyers, price goes down Example 1: What Effect does the Affordable Care Act have on market price and quantity of healthcare • We move along the supply curve and expected it to influence demand, but we didn't have any corresponding increase in supply (we didn’t start training doctors and nurses) • We have a movement along supply which increased demand of healthcare • What about Ceteris Parabus? Weren't other things changing too, not just healthcare that would raise the price? o Demographics: demand increased because people are getting older and demanding more healthcare o Income Effects: economy grew during this time, people got richer, the wealthier people are the more they're likely to get healthcare Question: What effect does an increase in Supply have on price and quantity? • Price falls, quantity increases Example 2: Explain the Real Estate Boom and Bust • Low interest rates, expansion of credit: D ???? D' (big increase in demand) • Adverse shock to demand, people expected houses demand to rise • As average household income grows, people are going to buy more housing, so demand shifts to the right • As price is increasing, people begin to wonder, "real estate is a great thing to buy, you can't lose if you buy real estate" o Land is in-elastically supplied, it can only rise o "Betting" price will be higher tomorrow and they can resell the house by flipping it o Doing this results in a FURTHER increase in demand o Had to extend credit to risky borrowers, "mortgage backed securities" o What happens when that next buyer doesn't appear? • Dip in housing prices, and all of a sudden everything collapses, financial bubble • When the demand collapses, the prices come down very rapidly Question: Which of the following would not increase the demand for a normal good? • Increase in the number of sellers, because that's a supply shifter Arbitrage: simultaneous purchase and sale of an asset to profit from a difference in the price Question: Consider the market for craft-beer. What would happen to equilibrium price and quantity of craft beer if marijuana were fully legalized.• Alcohol and marijuana are substitutes. The demand for beer would decline, causing equilibrium price and quantity to fall Reservation Prices • Demand: a measure of the maximum willingness to pay (WTP) • Supply: a measure of minimum willingness to accept (WTA) • WTP-WTA is a good measure of surplus Question: How can we measure the surplus value created by a market? • Willingness to Pay- Willingness to Accept • (WTP- WTA) o Consumer Surplus: area below the demand curve but above price o Producer Surplus: below price, above supply curve o Producer Surplus + Consumer= Total Surplus • Maximizes surplus at the black triangle *Production comes from those most willing to produce at the LOWEST COST