Week 3 Notes
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This 4 page Class Notes was uploaded by Rachel Moore on Thursday February 4, 2016. The Class Notes belongs to ECON 2105 at University of Georgia taught by McWhite in Summer 2015. Since its upload, it has received 185 views. For similar materials see Macroeconomics in Economcs at University of Georgia.
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Date Created: 02/04/16
ECON 2105 February 1, 2016 – February 5, 2016 Chapter 3 (continued) Supply/Demand Example: Uber (Boston) Price 1. P 0& Q 0 2. Bruins & Red Sox Game P 1 P 0 Quantity Q 0 Q 1 Price 1. P 0& Q 0 2. Uber allows more “official drivers” P 0 P 1 Quantity Q0 Q 1 Price 1. P0 & Q 0 2. Snow Storm P 0 Quantity Q0 Elasticity Demand: If the price increases, then the quantity demanded will decrease. How sensitive an object is to a price change (price sensitivity) is elasticity. The more “elastic”, the greater the change in Q. ED = Elasticity |ED| > 1 ▯ Elastic 0 < |E | < 1 ▯ Inelastic D Price D A D B Quantity What impacts/determines elasticity? • Time • Budget share (More price sensitive to rent change than increase in price of pencils) • Necessities vs luxuries (More price sensitive to things you don’t need to live) • # of substitutes (If the price of 5 gum goes up, you are less price sensitive because of the other types of gum that are cheaper) Elasticity Example: Big Heroin Bust in New York City ▯ Increase in nonviolent crimes Price P1 P 0 1 Q0 Quantity Chapter 5 Key Points 1. Welfare economics is the branch of economics that studies how the allocation of resources affects economic well-being. 2. Consumer surplus is the difference between the willingness to pay for a good and the price that is paid to get it. • Willingness to pay is the maximum price a consumer will pay for a good, also known as the reservation price. • If student X decides that $200 is a fare price for a new textbook, then he is willing to pay $200. If the textbook costs $151, then he values the textbook $49 more than the purchase price. The consumer surplus is the $49. 3. Producer surplus is the difference between the willingness to sell a good and the price that the seller receives. • Willingness to sell is the minimum price a seller will accept to sell a good or service. • If student X charges a price of $15/hr for tutoring, then the $15/hr is his willingness to sell. If the market wage for tutoring is $25/hr, then student X has a $10 producer surplus every hour that he tutors at $25/hr. 4. Total surplus, also known as social welfare, is the sum of consumer surplus and producer surplus. It is also referred to as social welfare because it measures the welfare of the society. When the allocation of resources maximizes total surplux, the result is efficient. Consumers with low willingness to buy and producers with high willingness to sell do not participate in the market since they would be worse off. The equilibrium output at point E maximizes the total surplus and is also an efficient allocation of resources. Betty Willingness $7.00/gallon Total Surplus to Pay Market $4.00/gallon Price Consumer $3.00 Surplus Equilibrium Contented Cow Willingness $2.50/gallon to Sell Market $4.00/gallon Price Producer $1.50 Surplus Total Surplus $4.50 5. Equity refers to the fairness of the distribution of benefits within the society. • Equity vs Efficiency Example from Textbook: “Consider a pie. If our only concern is efficiency, we will simply want to make sure that none of the pie goes to waste. However, if we care about equity, we will also want to make sure that the pie is divided equally among those present and that no one gets a larger piece than any other.” 6. Excise taxes are taxes levied on a particular good or service. Incidence refers to the burden of taxation on the party who pays the tax through higher prices, regardless of whom the tax is actually levied on. 7. Deadweight loss is the decrease in economic activity caused by market ▯ distortions; calculated by using the formula for the area of a triangle (???? = (????×????)). ▯ • Deadweight loss occurs because taxes increase the purchase price, which causes consumers to buy less and producers to supply less. • Deadweight loss can be minimized by placing a tax on a good or service that has inelastic demand or supply.
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