micro econ week 3 notes
micro econ week 3 notes Econ 2020
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This 4 page Class Notes was uploaded by kmb0095 on Friday January 29, 2016. The Class Notes belongs to Econ 2020 at Auburn University taught by William M. Finck in Spring 2016. Since its upload, it has received 24 views. For similar materials see Principles of Economics: Microeconomics in Business at Auburn University.
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Date Created: 01/29/16
Intro to econ (ch. 1-2) Definition Formula 1/25/16 o Factors that shift the supply curve Input/resource prices Input prices and supply move opposite Ex) how would an increase in the price of leather (input) affect the supply of shoes? o Supply curve would shift left, quantity decreases Technology – the production process of changing economic resources into goods and services; when technology improves, supply increases Taxes – taxation and supply move opposite Expectation of future prices – expected future price changes and current supply move opposite; goods must be durable/storable Consumers are always adjusting for the lowest possible price Producers are always adjusting to be able to sell at the highest possible price Number of sellers – usually the number of sellers in a market changes as profits change; firms will enter when profit is high and exit when its low More sellers = more supply Market Model o Equilibrium price – price at which the market clears (middle of the X on the graph where the lines cross: Qs=Qd) o Equilibrium – no tendency for change All markets tend to move towards the equilibrium o Surplus – Qs > Qd at prices above Pe (prices way too high) Surplus = Qs - Qd units Surpluses put downward pressure on prices until the surplus is eliminated (lower prices until people buy everything) o Shortages – Qd > Qs (prices way too low, not enough product) Shortage = Qd - Qs units Shortages put upward pressure on prices until the shortage is eliminated (raise prices) Ex) Solving for Pe and Qe o Qs = 2+2P o Qd = 20-4P Find the equilibrium price and quantity o Solution: Qs = Qd 2+2P = 20-4P 6P=18 Pe = $3 Price rationing – the allocation of goods among consumers using prices Intro to econ (ch. 1-2) Definition Formula o Economists believe that price rationing is the most efficient method of allocating goods & services o Every consumer willing to pay at least the equilibrium price will get to have the good o With price rationing, the consumers willing to pay the most will be the recipients of the good Lottery o With all other rationing methods, the allocation is random Market Analysis o The all involve the model, but you have to draw the graph o Ex) what happens to the market for SUVs when the price of gas (complement) falls? Demand increases Shortage at old price Pe rises Qe rises o Ex) what happens to the market for SUVs when the price of steel (input) falls? Supply increases (quantity supply far exceeds quantity demanded) Surplus at old price Pe falls Qe rises o Ex) steel is an input in SUVs. SUVs and gas are complements. What happens to the market for gas when the price of steel falls? Draw graph for supply of SUVs Supply of SUVs increases Price of SUVs falls (we know these two things bc on last ex) Apply decrease in price of steel Demand for gas increases Pe rises Qe rises o Ex) what happens to the market for gas when we expect higher future prices? Set up graph, figure out what factor is changing, is it affecting supply or demand? Both!! Buy gas today or tomorrow? Todayyyyyy Demand rises At the same time, supply decreases bc price rising (Pe rises) Intro to econ (ch. 1-2) Definition Formula So, Qe is indeterminate (fancy way of saying idk) Price controls – legal restrictions on prices o Types: Price ceiling – maximum legal price An effective price ceiling is set below the equilibrium price, but what the effect? Consequences: o Shortages o Inefficient allocation among consumers o Wasted resources On the part of the producers and consumers o Low quality Price floor – minimum legal price An effective price floor is set above the equilibrium price, but what is the effect? Consequences: o Surpluses o Inefficient allocation among producers o Wasted resources o Protection from imports 1/29/16 o Price controls have no effect on the market price if they are not set properly o A price ceiling set above Pe, or a price floor set below, will not change the behavior of producers and consumers; the market remains in equilibrium Review graph (picture) o What effect would a price ceiling of $27 have on this market? Shortage of 90 - 50 = 40 units (Qd - Qs) o What effect would a price floor of $27 have on this market? None, the market remains in equilibrium o Know if we need to work the math or not o “The house must be upside down to be effective” (picture) floors on top, ceiling on bottom (relative to equilibrium price) effective price ceiling = below equilibrium effective price floor = above equilibrium don’t do math if this is the case (ch.4) consumer and producer surplus o consumer surplus = consumer’s willingness to pay – amount paid Intro to econ (ch. 1-2) Definition Formula willingness to pay – maximum price at which a consumer will buy a good 1 quantity $7 (willingness) 2 $5 3 $4.50 4 $4 5 $3.50 6 $2.50 What is consumer surplus if the market price of the good is $3.50? Total willing = 7 + 5 + 4.50 + 4 + 3.50 = $24 Total paid = 3.50*5 = $17.50 Consumer surplus = 24 - 17.50 = $6.50 o Producer surplus = amount received + willingness to accept Willingness to accept – minimum price at which a producer will sell a good 1 $0.50 2 $1 3 $1.50 4 $2.50 5 $3.50 6 $4 7 $5 What is produce surplus if the market price of the good is $3.50? Total received = 3.50*5 = $17.50 Total willing = 5 + 1 + 1.5 + 2.5 + 3.5 = $9 Producer surplus = 17.50 - 9 = $8.50
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