Weeks 1 and 2 Notes
Weeks 1 and 2 Notes PAM 2000
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This 0 page Class Notes was uploaded by Eunice on Saturday February 6, 2016. The Class Notes belongs to PAM 2000 at Cornell University taught by McDermott, E in Fall 2015. Since its upload, it has received 76 views. For similar materials see Intermediate Microeconomics in Political Science at Cornell University.
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Date Created: 02/06/16
PAM 2000 Intermediate Microeconomics Eric McDermott Spring 2016 January 282016 0 De ne economics study of how people allocate scarce resources 0 Resources ex land health money 0 quotfatherquot of economics Adam Smith quotThe Invisible Handquot if everyone is sel sh and act in their best interest you get the most ef cient allocation However ef cient allocation does not mean desirable allocation ex social welfare functions 0 The Invisible Hand doesn39t consider individuals or rms that don39t have enough in uence compared to market power 0 Game theory provides the strategy study and behavior models to determine the effects of each agent39s actions 0 In any study controlled environments are necessary Develop theory create a behavioral model of agents test model using data to con rm to disaf rm Analysis ex randomized controlled experiment 0 Best analysis in social science 0 Imperfect randomization that requires veri cation evaluate all relevant characters ex gender age income height etc May be dif cult to identify andor quantify characteristics Costly Natural experiment 0 Caution correlation vs causation o Abundant in uences and external factors 0 Ex Oregon Medicaid Experiment Oregon could not provide Medicaid for everyone Lottery randomized Similar ex Vietnam War draft lottery by birthday 0 If not randomized must control for other factors 0 Economics often makes assumptions in order to simplify complications in models 0 Ex perfection information similar preferences or technology trends universalities rational behavior etc Behavioral economics and development economics have some controlled experiments 0 often by nature of economics general equilibrium kicks in and affects the experiment 0 experiments require partial equilibrium the effects don39t have a large impact or impacts on other markets February 2 2016 tradeoffs 0 choices between two things at a time 0 budget constraint BC ex coffee and lunch in a month 50 budget 0 resource dollars price dollars per unit pcc p M pc price of one coffee unit pl price of one lunch unit c quantity of coffee units quantity of lunch units M amount of income the consumer has to spend OOOOO Budget Constraint 0 0 Assume that you would use all of your income because then you get maximum utility assuming you like coffee lunch 0 SM M On budget constraint graph 0 Not spending all of income 0 Spending none of income 0 Spending all of income 0 Not possible 0 Sleep vs study 0 pslsl pstst 24 hours maybe no one studies more than 10hrs a day change 24hrs to 10 o 5 5t 24 5 units of sleep 5t units of study 0 other variables affect your ability to study health hunger location distraction Tax example being sick would be a tax on your studying 20 tax on study 16hr tax you study 20 less ef ciently when sick you can only study for 8hrs graphical interpretation 0 Change the slope Purpose of economic models 0 Analyze and understand economic phenomena Develop theories to test and discover proper explanations don39t rely on common wisdom Policy questions require forecasted information or need the determination of the value of bene ts that are dif cult to quantify Cost bene t analysis 0 Bene ts are often harder to specify than costs 0 When measuring bene ts look at only additional new revenue 0 Levels example of building a stadium Firm positive candy sponsors new seats City negative maybe taking consumers from nearby cities State neutral the city with the stadium may get an increase in revenue but nearby cities will decrease so the net is unaffected Setting a value for a product or service Market price The utils a consumer gets Willingness demand curve vs ability to pay Model based on how much people would pay to avoid change General equilibrium effects price changes in other markets that would need to be explicitly included within a model Economic assumptions 0 Generally don39t assume a difference in preferences unless there are de nitive examples of it 0 Make an assumption to base a model off of it nd support for it if none is found then re ne or change the model 0 Ex lntergenerationa Income Solon do parents39 incomes affect the wealth of their children American Dream of anyone can make it is dead signi cant positive correlation between fathers incomes and sons39 0 Ex Guns Germs and Steel Diamond what caused the success of the occidental sphere climate and geographical orientation differences between NorthSouth continents a lot of variation vs EastWest continents little variation allowed Eurasia to develop faster than AfricaAmericas thanks to the former s successful trade of grain and domestic animals 0 Ex Mystery of Wealth why are there different types of government Common Law vs Civil Law Common easy to settle good land fewer diseases protection of settlements and property required Civil dif cult to settle people tend to use resources and move on low incentive to establish property rights 0 Ex Germs Social Networks and Growth Diseases lead to different types of government Depending on the existence of disease and their contagion governments may have different networks Affects spread of technology and information 0 Ex Socialist vs Capitalist growth Property rights and incentive for investment Preferences Differentiates social sciences from physical sciences Utility 0 Depending on the number of dimension 0 4 apples gt 3 oranges o 2 apples 3 oranges gt 2 oranges 3 apples February 3 2016 discussion 0 Given max inputresourcestimeincome M two choices X and Y prices thereof pX and py and quantities thereof qX and qy 0 Function M pqu pyqy o Xintercept Mpx o Yintercept Mpy o Slope pxpy If given a function where the maximum quantity of one choice is not possible the function becomes a step function not linear 0 Ex 35 11wines 3Beers 0 can39t have 1166 beers or 318 wines round down 0 But Professor prefers that you keep it at a fractional answer February 4 2016 Opportunity cost of choosing an option VALUE OF the next bestalternative 0 To understand the value of something you should look at more than monetary costs or bene ts 0 In order to determine the monetary value of an option not already monetized survey how much you could pay someone to not dodo something 0 Example Values 15 movie 0 stay at home 8 food Both food and movie costs 10 Best option Bene tcost Movie 101515 Stay at home 10keepO10 Food 8102 Economic v accounting pro ts 0 Accounting pro t revenue cost 0 Economic pro t revenue opportunity cost 0 Example A rm can 0 Invest 1M in a factory 100000 pro t from leasing factory out for 1yr Sell factory for 950000 after 1yr Opportunity cost invest money at 6 per year Accounting pro t 100k 950k 1000k 50k Economic pro t Opportunity cost 60000 0 Budget constraints 0 Singleinput budget constraint Indicates quantity of a single good a person can buy if that is the only option that exists One good examples are used as an introduction to BC 39 qc M pc qc quantity 0 M income 0 pc price 0 Twoinput budget constraint see notes from previous lecture and discussion 39 M qux l0yqy M 2 pqu pyqy is the function of all affordablepossible bundles the line and the area underneath would be shadedin 0 Known as the budget set 0 M pqu pyqyis the function of the budget boundaryconstraint 0 Known as the boundary of the budget set Changing the function e The slope is determined by the prices c When the income changes the slope remains the same the function shifts up or down 0 Disregard demand especially because in a two option economy there is substitution of inferiornormal goods Disregard preferences for now but feasibility is determinable there is no correlation between the two 0 A point on the graph of a BC is a combination of options called a bundle 0 Points inside the linear function between the axes and the line of the function are bundles that can be afforded 0 Points on the line are bundles that can be afforded and that uses the entire budget or income the line is the boundary this maximizes utility 0 Points outside above the linear function are bundles that cannot be afforded The assumption is that you cannot buy negative units of a product essentially selling them Tax 0 Example Options C and W Prices pC and pW Tax tW on W lncome M ch twpr pr M ch pr1 tw twpr tax paid 0 tax changes the slope o slope pcpw1 tw assuming C is on xaxis and W is on yaxis subsidiesdiscounts have the same affect but it39d be negative because they lower the price 0 Assumptions on consumer preferences two things Consumers prefer more to less 0 Consumers select bundles that are on the boundary of the BC Tastes are stable consistence unchanged 0 Consumption bundles are not chosen at random OOOOO
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