ECON 200 Week 1 Notes
ECON 200 Week 1 Notes ECON 200
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This 7 page Class Notes was uploaded by Rachel Pollard on Friday January 8, 2016. The Class Notes belongs to ECON 200 at University of Washington taught by Haideh Salehi-Esfahani in Winter2015. Since its upload, it has received 367 views.
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Date Created: 01/08/16
Intro Tuesday, January 5, 2016 10:29 AM MyEconLab • Drop-in help for MyEconLab on Tuesday January 12 3-5 Savery 311 • MyEconLab weekly exercises • Always due on Mondays at 1pm • The first homework is not graded, it’s a practice Clickers • Channel 30 Quizzes and First and Second Exams • Not multiple choice • Graded on quality of answer given • Drop the lowest scoring quiz • Quizzes held in quiz section • First quiz is January 15 • Quizzes have two or three non multiple choice questions. • Each exams have five non multiple choice ques tions • The first and second exams are held in lecture • Second exam is not comprehensive, it only has some of the material from before the first exam CLUE • Sessions held on Wednesdays at 6:30 Introduction to Microeconomics • Study of the market system - dependence on the market • Study of the market and its institutions Overview of principles of microeconomics • Given your constraints, how do you (as consumers) make decisions? o Consumer theory • How do suppliers make decisions in their best self -interest and produce the goods and service that we want without us actually talking to them? How do they make employment decisions? o They are looking for profit o Factors of production: labor, land, production or machinery • How does the market system coordinate the actions of millions of diverse individuals and what qualifications exist to make it work? o System of support for the market is important, its foundations lie in a system of rights and rule of law • How does the government fi t in to this picture? What are the justifications for, and, the effects of government policies? Interactions in an economy are: A. Positive sum game (all parties involved may gain) a. Voluntary exchange or voluntary market process Economics is a science. It em ploys a set of thinking tools (concepts) that help explain our economic and social phenomena and also predict the effects of changes in (relevant) constraints on the social and economic outcomes. • Use of economic theory as the foundation Is the following statement a theory? "An increase in wheat subsidy will either increase or decrease wheat output or keep the output constant?" NO • It's not a theory because a theory makes a specific claim. • A theory makes a claim that can be refuted. In line with economic theory, which of the following statements is true? A theory… contains refutable proposition(s). The fundamental axiom in economics (concerning resources) is: • A scarcity (of resources) • The wants of humans exceeds the resources of humans • Time and money are scarcity sources • For the economy, the scarcity sources are labor, capital (available machinery and things in a manufacturing site), and land (everything that is in land such as oil) • This means that you will have to make choices between alternati ve things • The economy at a whole; make decisions on what to produce • Choice --> tradeoffs • Every resource has an alternative use • Scarcity --> choice (making decision among alternative uses of their scarcity source) Opportunity Cost (of decisions) • The value of the next best alternative foregone (it's what you give up) • It's what you give up that defines the opportunity cost • Ex. You purchase a concert ticket for $40. Someone offers you $60 on the evening of the vent but you refuse. What did the concert ticket cost? o The opportunity cost is $60. o Because… the $40 doesn't mean anything. You could have taken the $60 and given up the concert. The cost of going to the concert was $60. • Ex. You have a baby-sitting job on Saturday night $10 an hour; you will baby -sit for 4 hours. On Friday before, your friend asks you to come over to watch a series of wrestling matches on TV on Saturday for the same 4 Hours. You value the enjoyment of watching the match at $50. o The opportunity cost is $50 • Ex. You have a baby-sitting job on Saturday night earning $10 an hour for four hours. You value the enjoyment of attending the performance by the local artist at $70. The cost of entrance fee and drinks is $30. What is your opportunity cost of doing the baby -sitting? o The opportunity cost is $40 The theory of consumer behavior identifies two sets of influences on our decisions to purchase various quantities of goods: 1. Constraints or opportunities o Examples: income, prices of goods and services, age, location, season, la ws and regulations, etc. 2. Tastes (also called Preferences) o Examples: Tastes are the likes and dislikes of different goods and services. • Taste is not measurable. • How can we find regularities of behavior and theorize about consumers' choice, and "explain" phenomena and "predict" changes when we can not even measure tastes? o We can assume that tastes are fixed • As constraints change what is the response by consumers? o They change their behavior in order to mitigate the adverse consequences of the constraints. • If you observe Americans driving small cars in the late 1970s and large cars in the late 1990s, you would argue: o None of the above o The constraint, the force, that made us behave the way we did: the price of gasoline was high in the 1970s. The constraint chan ged. Session 2 Thursday, January 7, 2016 10:23 AM Recap of Session 1 • Theory of consumer behavior o Constraints, or opportunities o Tastes (Preferences) • How can we find regularities of behavior and theorize about consumers' choice, and "explain" phenomena and "predict" changes when we can not even measure tastes? o Tastes are fixed and we look at changes in constraints • Clicker Question: Crime rates fell in the 1990s (as compared to 1970s (because) o There were tougher laws instituted against crimes in the 1990s • This is a constraint that changed, the preference did not change. Postulates of consumer behavior • Postulate 1: People have preferences. o Example: • Bundle 1: 3 slices of pizza and 1 salad per day • Bundle 2: 2 slices of pizza and 2 salads per day • Answers, indifferent between them or prefer 1 to 2 or 2 to 1. These are the options for preferences. You prefer something over something else, or you're indifferent. • Postulate 2: More is preferred to less. o Consumption over a period of time of goods, that you would like access to. • Postulate 3: People are willing to substitute one good for another. o There are substitutes everywhere. • How relevant is the idea of "need" to consumer choices? o Need is not part of a choice. Everything that is a n eed, it is not a choice ex. Water/ • Concept of "value" o We cannot measure how much someone likes a good. But we can talk about how much they value a good. o What does it mean to say that you value a pair of jeans at $25? • It means, you are willing to give up $25 worth of other goods and services in order to get the pair of jeans. o Marginal Value: The MV of good x is the amount a consumer is willing to give up of other goods in order to consume an additional unit of good x. • Postulate 4:Marginal value of a good falls as the quantity consumed of the good increases. o Diminishing marginal value. o Example: • 1st glass of lemonade -----> $2 (willing to give up $2 of goods and services) • 2nd glass of lemonade ----> $0.50 • 3rd glass of lemonade -----> $0.00 § The marginal value falls o "Variety is the spice of life" • This can explain why the marginal value falls. • People like a variety of things. • You have a limited income but like a lot of goods. • For any single good, when you buy increasing units of the good, you are willing to give up less other goods. • Because income is scarce o Example: People who have their birthday right after or at Christmas feel cheated. Why? • Because of postulate 4; the marginal value of the gifts decreases. • It's the second round, the marginal value of the second celebration has declined. • Total value of good x is the amount a person would be willing to give up of other goods to have all of good x, rather than have none of the good at all. o Clicker question: The marginal value of consuming additional un it of a good, say T- shirt ______ because_____. • Decrease, consumers get bored after consuming certain units • Increases, as this is a good, not a bad • None of the above • They are less willing to give up money for this good over other goods because the marginal value has decreased. • As you are buying more tshirts, you want more of a variety. • Understanding and deriving a consumer's quantity choice at a given market price: Example 1: Sooki's margina l and total value of blue jeans (per year) Q MV($) Total Value ($) 1 50 50 2 40 90 3 30 120 4 20 140 5 10 150 6 0 150 • Supposed the price of a pair of jeans in the market is $30. How many pairs of jeans will Sooki voluntarily buy in a year? o For the first pair, Sooki is willing to give up $50 worth of other goods and services to have this pair of jeans. She i s asked (by the market!) to pay $30. Will she buy this first pair of jeans? • Yes! It's a voluntary act. • "Net gain" or "consumer surplus" from the purchase of the first pair of jeans: $20. o For the second pair, Sooki is willing to give up $40 worth of other goods and services to have this pair of jeans. She is asked (by the market) to pay $30. Will she buy this second pair of jeans? • Yes! It's a voluntary act. • Net Gain from second pair: $10 o What about the 3rd pair of je ans? • Yes! o What about the 4th pair? • No! Because she would be losing $10 of net gains. o She buys a total of 3 pairs of jeans General rule for the amount of a good a consumer buys at a given market price: • A consumer purchases a quantity per year, such that at that quantity, the marginal value is equal to the price. o Calculating the net gains of this consumer (Calculating the consumer surplus for a consumer!) • Unit by unit § 1st unit: $50-$30=$20 § 2nd unit: $40-$30=$10.00 § 3rd unit: $30-$30=($0.00) • Customer surplus = Total value - Total Expenditure § TV = $120 § TE = Price * Quantity • TE= $30 * 3 = $90.00 $90 § CS = $120-$90=$30 • Marginal Value o For the first pair, Sooki is willing to give up $50 worth of other goods and services fro this pair of jeans. o For the second pair, she is willing to give up $40 worth of other goods and services. o For the third pair, she is willing to give up $30 worth of other goods and services. • Total Value o For 2 units, she's willing to give up $90 worth of other goods and services per year. o The total value is the total of all the marginal values o For 3 units, she's willing to give up $120 worth of other goods and services per year. Looking at different market prices: Price Q Total Exp Total value Consumer surplus $50 1 50 50 0 40 2 80 90 10 30 3 90 120 30 20 4 80 140 60 10 5 50 150 100 • What is the effect of a lower price on Consumer Surplus for Sooki? If she could bribe the store owner to buy jeans at $20 a pair instead of $30, what i t the maximum amount she would be willing to pay the store owner for this privilege? o How much is a lower price blue jean worth to her? < --- Really what the question is asking o How much is she willing to pay up to? o What are her net gains? o CS2 - CS1= amount she is willling to pay • $60-$30=$30 o It is worth to her $30 Clicker Question: In the maximization behavior of consumer purchase of a good, we consider a consumer to: • Maximize her consumer surplus Example 2 Jack has the following schedule of MV for consumption of steak and pizza per month: Q 1 2 3 4 5 6 MV steak ($) 14 12 10 8 6 4 MV Pizza ($) 18 15 12 9 6 3 The market price of steak is $6 per unit of steak. The market price of pizza is also $6 per unit of pizza. • How many steaks and pizzas does this consumer purchase per month? o 5, o Purchasing such that the marginal value equals the price. • How much does he spend on each good? o Total Expenditure=price times quantity o $6x$5=$30 • Does Jack value his total purchases of pizza and steaks the same? o NO! o TV of steak = $14 +$12 + $10 + $8 + $6 = $50.00 o TV of Pizza = $18 + $15 + $12 + $9 + $6 = $60.00 • How much should Jack be paid (i.e., compensated) in order for him to agree to purchase pizza at $9 a piece instead of $6 a piece? o A calculation of consumer surplus o Interpret, what is it worth to him to buy pizza at 6 versus 9 o At P = $6 per unit, quantity = 5 • TV = $60 • TE = $30 • CS1 = $30 o At P = $9 per unit, quantity = 4 • TV = $54 • TE = $36 (9x4) • CS2 = $18 (54-36) o The difference between the two consumer surpluses is $12. The difference between CS1 and CS2 is $12. o The answer is $12. o He requires to be paid at least $12 to agree to buy pizza at $9 a slice.
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