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Microeconomic Principles - Week 3

by: Gwen

Microeconomic Principles - Week 3 ECN 212

Marketplace > Arizona State University > Economcs > ECN 212 > Microeconomic Principles Week 3
GPA 3.4

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About this Document

These notes cover the third week of lectures.
Microeconomic Principles
Dr. Nancy Roberts
Class Notes
micro, Microeconomics, Economics, ASU
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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.


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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:​Se​vs. 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​= MU​2​÷ 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​÷ MU​y​ → MU​1​÷ P1​= MU​2​÷ P2​→ consumer equilibrium!   


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