Eco 2013, week 3 notes
Eco 2013, week 3 notes Eco2013
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This 10 page Class Notes was uploaded by Lauren Carstens on Friday February 5, 2016. The Class Notes belongs to Eco2013 at Florida State University taught by Joan Corey in Spring 2016. Since its upload, it has received 14 views. For similar materials see Principles of Macroeconomics in Economcs at Florida State University.
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Date Created: 02/05/16
Macroeconomics Chapter 3: Supply, Demand and the Market Process The Demand Curve Law of Demand: there is an inverse (negative) relationship between the price of a good and the quantity that buyers are willing to purchase o When price goes up, people buy less o When price goes down, people buy more o Results in a downward sloping curve o Ex: Deriving the demand curve: As Joab offers coffee for less money, many more people are willing to buy it Consumer Surplus Consumer Surplus: The difference between the maximum amount of money consumers would be willing to pay and the amount that they actually pay o Consumer surplus is the area below the demand curve but above the price o Calculated with the area of a triangle equation (1/2 base x height) o No such thing as negative consumer surplus (The transaction just doesn’t happen if the price is above what you’re willing to pay o Consumer surplus goes down when price goes up o Ex: Person 1 will pay $500 and person B will pay $400. The actual price is $350. Their combined consumer surplus is ($500- $350=$150) + ($400-$350 = $50) = $200 Demand vs. Quantity Demand** Change in quantity demanded: A movement along the curve o Caused by: a change in the price of that good o Buying a different quantity because the price changes o Going from point A to point B or from point B to point A are both a change in quantity demanded o Increase in quantity demanded: movement down the curve (to the right) o Decrease in quantity demanded: movement up the curve (to the left) Change in Demand: a shift of the curve o Caused by: a change in anything that affects demand other than the price of the good Anything that changes how much you want something and how much you are willing to pay for it changes demand o Increase in demand: curve shifts right o Decrease in demand: curve shifts left To figure out which one changed, ask yourself why are you buying more? Is it because the price went down (quantity demand) or because your desire went up (demand)? Shifters of Demand What changes our demand (shifts the curve left or right) besides price? o Change in Consumer Income Normal Goods (goods you tend to like) If you have more money, you will buy more When Income increases, your demand for normal goods (D normalincreases Ex: Foods such as steak or shrimp Inferior Goods (goods you don’t necessarily like, but you buy because you’re poor) When your income increases, your demand for inferior goods (D ) decreases inferior Ex: Ramen noodles, bologna o Change in Number of Consumers When the number of consumers increases, demand increases Ex: When the football team is doing well, the school makes more money because more people come Local business don’t like summer because no ones here: The more people that there are around here, the more goods are bought (demand is higher) o Change in the Price of a Related Good This isn’t a shifter of quantity demand because it’s not the price of the actual good Substitutes: When the price of a substitute good increases, the demand of the actual good increases Ex: When the price of beef goes up, you will buy less beef so your demand for chicken goes up However, quantity demand of BEEF goes down Compliments: If the price of a compliment goes up, the demand of a good goes down Ex: Peanut Butter and Jelly o If the price of peanut butter increases, you will buy less peanut butter and then also buy less jelly Cereal and milk, coffee and cream, etc… o Change in Expectations Expected change in price If the future price is expected to increase, current demand increases Ex: Gas is cheap now, but if we were told it was going to go way up next week, everyone would go buy a lot of gas now Ex: If a sale was announced for next week, we wouldn’t buy it now (Demand decreases because the price is expected to going to decrease) Expected change in income If you expect your future income to increase, your current demand will increase (you know you’ll have the money to pay it off) If you expect your future income to go down, your current demand will go down (you’ll start saving immediately to avoid further debt later) o Change in Consumer Tastes and Preferences (How popular something is) When consumer taste increases, demand increases Ex: Bill Cosby’s comedy tickets o When the Cosby show first got popular, the demand for his comedy show tickets went way up. o After his sexual assault accusations, the demand for his tickets went way down (This has cost him about $4 billion in foregone revenue) Law of Supply/ The Supply Curve The law of supply: There is a direct relationship between the price of a good or service and the amount that suppliers are willing to produce o If the price goes up, the sellers are willing to sell more o Results in the supply curve being upward sloping (positive slope) o Ex: Deriving the supply curve (how many people would be willing to get naked in front of the class—more people will for more money) o Note: As price increases, quantity supplied increases Producer Surplus Producer surplus: The difference between the minimum price suppliers are willing to accept and the price they actually receive Ex: The lowest price you’re willing to sell your car for is $5000. If you sell it for $6000, your producer surplus is $1000 o At the very lowest, producer surplus will be zero (if the actual price is lower than the price someone is willing to sell for, the transaction will not happen) o Producer surplus is the area above the supply curve but below price Calculated with area of a triangle (1/2B) x (H) As price increases, producer surplus increases and vise versa Supply vs. Quantity Supplied A change in quantity supplied: a movement along the curve o Caused by a change in the price of that good An increase in quantity supplied Movement up the curve (to the right) A change in supply: a shift of the curve o Caused by a change in anything that affects supply other than the price of the good Increase in supply: curve shifts right Decrease in supply: curve shifts left o Ex: If the production costs go down, your willingness to make and sell more increases (increase in supply because you’re more willing to make more because it’s cheaper to make, not because the actual price went down) You will produce more at the same selling price Shifters of Supply 1. A change in resource price o Price of the resource increases supply decreases 2. A change in technology o The more technology we have supply increase 3. A change in nature and politics o Depends on what the change is? Bad weather or a natural disaster vs. good weather opposite reactions 4. A change in taxes o As taxes increase Supply decreases Elasticity Inelastic: Changes in quantity are not sensitive to changes in price o Inelastic curves are steeper o If the price changes, the quantity of demand does not change Elastic: Changes in quantity are sensitive to changes in price o Elastic curves are flatter o If the price changes, the quantity of demand changes much more drastically Ex: Pizza vs. Cigarettes o If the price is $5 for both, you might buy 5 slices of pizza and 5 packs of cigarettes o If the price increases to $10, the quantity demanded for pizza would go all the way down to 1 slice, but you might still buy 4 packs of cigarettes (because you’re addicted) Perfectly Inelastic: You will buy the same amount of the item no matter how much it costs o The line is perfectly vertical, up and down o Ex: Life saving medication Perfectly Elastic: If the price goes up at all, you will not buy any of the item o If the price goes down at all, you will buy an infinite amount o Perfectly flat line Market Equilibrium (Q* and P*) A state in which the conflicting forces of supply and demand are in balance Occurs where the demand curve intersects the supply curve o Where the Quantity that the seller is willing to produce is exactly equal to what the customer is willing to pay Market equilibrium is economically efficient o Efficient: No excess supply or excess demand o Anywhere before Q* will have surplus because the they want to sell more at the higher price o Anywhere after Q* will cost the seller more than the customer will get in benefits (These transactions will most likely not occur) Gives us the Quantity supplied and Quantity demanded for points that are not Q* o Excess supply: quantity supplied > quantity demanded At a higher price, the seller is more willing to produce more items, but buyers are less willing to buy No one is buying the item so the price will go down and get closer to the equilibrium quantity o Excess demand: Quantity demanded > Quantity supplied At a lower selling price, the seller is less willing to produce the item, but the buyer is much more willing to buy Everyone wants to buy the item so the price will go up and get closer to equilibrium Changes in Demand Demand Changes o Price: moves in same direction o Quantity: moves in the same direction Ex: Demand increases when o Price increases o Quantity increases Changes in Supply Supply changes: o Price: moves in opposite direction (Supply goes up when price goes down) o Quantity: Moves in the same direction (Quantity goes up when supply goes up) Ex: Supply increases when o Price decreases o Quantity increases Changes in Both Demand and Supply Rules for handling these problems: o 1. Take it one statement at a time. Does it affect demand or supply? Is demand/supply increasing or decreasing? How does it effect price or quantity? o 2. Repeat steps A-C for 2 ndstatement. o 3. Add effects together. Remember all the rules for changes in supply and changes in demand to determine each statement’s effect. Invisible Hand Principle The tendency for people, while pursuing their own interests, to promote the economic well-being of society o People promote the interests of society because they are primarily driven by their own self-interests o Ex: Waitresses don’t actually care about the customers, but they’re nice and try to create the best dining experience just to get better tips o Ex: So many people work to make pencils as cheaply as possible, but not for our benefit Review: 1. Know why the supply curve is upward sloping and the demand curve is downward sloping. 2. Find producer and consumer surplus. 3. What are the shifters of demand? 4. What are the shifters of supply? 5. Know the characteristics of market equilibrium. 6. Be able to do the single and double shifts of demand and supply curves. 7. Know the invisible hand principle. Macroeconomics Chapter 6: The Economics of Collective Decision Making Role for Government The government should… o 1. Protect individuals and their property rights (most people agree with this) o 2. Provide goods that cannot be easily provided by the market (Much more debate with this among economists) Just because the government gets involved, doesn’t mean things will get better Ex: When there is a market failure, the government should take over. However, this can usually lead to a government failure Size and Growth of the U.S. Government Size of government is indicated by government expenditures as a percentage of U.S. GDP (How much the government spends in relation to the U.S. spending) o 1930: 9.4% o 2015: 34.3% o Where is the government spending your money? Federal Spending Medicare and Health Social Security National Defense State and Local Spending Education Public Welfare and Health Administrative Expenses Transfer Payments: Transfers of income from some individuals to others (social security, unemployment benefits, welfare, etc.) o Not the government taking money and giving it to firemen or soldiers because that’s for doing a good thing o Ex: Taking money from younger people and giving it to older people o Ex: Taking money from people in higher economic status and giving it to people with a lower economic status They aren’t doing anything to get the money, they’re only getting it for being in that group o Transfer payments comprise nearly half of total government spending
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