Microeconomic Principles - Week 3
Microeconomic Principles - Week 3 ECN 212
Popular in Microeconomic Principles
Popular in Economcs
This 3 page Class Notes was uploaded by Gwen on Tuesday January 12, 2016. The Class Notes belongs to ECN 212 at Arizona State University taught by Dr. Nancy Roberts in Spring 2016. Since its upload, it has received 27 views. For similar materials see Microeconomic Principles in Economcs at Arizona State University.
Reviews for Microeconomic Principles - Week 3
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 01/12/16
Elasticity ❏ elasticity → responsiveness, sensitivity; depends on the good ❏ elastic more responsive ❏ inelastic less responsive Ex: If Kellogg’s corn flakes experienced a change in price, consumers would react much more than if heroin experienced a change in price. A perfectlyinelast graph would be a vertical line. Determinants 1. Number of substitutes ○ the greater the number, the greater the elasticity 2. luxury vs. necessity 3. % of budget the item consumes Ex:paperclips vs. a Jaguar 4. time 4 Measures of Elasticity 1. price elasticity of demand ● Price elasticity demand is always negative. ○ between 0 and 1 = inelastic ○ between 1 and (infinity) = elastic Ex: a 1% change in price will cause a 1.31% change in demand in the opposite direction 2. price elasticity of supply → limited by production processes Ex:Sevs. i ● Price elasticity supply is always positive. Ex: a 1% change in price will cause a 3.2% change in supply in the same direction. 3. income elasticity of demand 4. cross price elasticity Ex:every 1% increase in the price of Coke will cause a 1.67% increase in the demand for Pepsi. Elasticity is a relative concept. Formalizing Demand ● Law of Diminishing Marginal Utility: the more you consume something, the more MU diminishes (less utility/happiness) . Ex: If you give a homeless man a pair of flip flops, he’ll be really happy. If you give him another pair, he’ll be happy, but not quite as much. As the pairs of flip flops increase, the less happiness he’ll gain from each one. ● util → unit for measuring utility ○ utils are “ordinal” not “cardinal” → order matters more than the value ○ ‘diminishing’ is different than ‘negative’ Marginal Utility (MU) =△Total Utility (TU) ÷ △Quantity (Q) Ex: MU vs. TU of Reese’s Peanut Butter Cups ★ slope of TU decreases to 0 then becomes negative; MU diminishes to 0, then becomes negative Consumers determine what to buy based on their MU they’ll receive per dollar ( MU/P ). Consumer equilibrium: MU 1 P1= MU2÷ P2 Ex:If you have $13 to spend and soda is 50¢ and pizza is $1, in this scenario the best combination of pizza and soda would be 10 cans of soda and 8 pieces of pizza because the MU/$ is equal. Consumer Axioms 1. consumers rank their preferences (which is best/equal) 2. preferences are transitive (consistent) ○ if A > B and B > C, then A > C 3. More is preferred to less →NOT GREED (what you do with it varies) ❏ Marginal Rate of Substitution (MRS): rate at which an individual is willing to trade X for Y. ❏ an Indifference curve shows us willingness, notabili→ it needs a budget constraint. ★ Budget line → the market (only shows ability) ★ Indifference curve → the individual (only shows willingness) ❏ Slope of the budget line → the market’s tradeoff ratio between X & Y ❏ the consumer’s indifference curve is tangent to the budget line (they touch where the slope is the same) Px÷ Py= MUx÷ MUy → MU1÷ P1= MU2÷ P2→ consumer equilibrium!
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'