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Notes: Week of January 25, 2016

by: Brad Schiebel

Notes: Week of January 25, 2016 Econ 2105

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Brad Schiebel

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Supply and Demand, Comparative Advantage
Prin of macroeconomics
Dr. Kris McWhite
Class Notes
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This 4 page Class Notes was uploaded by Brad Schiebel on Wednesday February 10, 2016. The Class Notes belongs to Econ 2105 at University of Georgia taught by Dr. Kris McWhite in Summer 2015. Since its upload, it has received 138 views. For similar materials see Prin of macroeconomics in Economcs at University of Georgia.


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Date Created: 02/10/16
Notes: Week of January 25-29, 2016 02/09/2016 1/25/2016 ▯ ▯ Interdependence & Gains from Trade ▯ A little example: Bob and Ray  Bob and Ray have been stranded on an island. They need to find food to stay alive and have two options. They can catch fish or pick coconuts. Each can do a linear combination of catching fish (F) or picking coconuts (C) within a 24 hour period. They both can pick coconuts equally well, but Ray is a better fisherman. ▯ Ray Bob PPC limits: (12C & 0F) or (0C & 24F) PPC limits: (12C & 0F) or (0C & 12F) C = 12 – 0.5F C = 12 – F Or F = 12 - C F = 24 – 2C Bob: 12F = 12C > 12F/12 = 12C/12 > 1F = C Ray: 24F = 12C > 24F/12 = 12C/12 > 1C = 2F Ray has the comparative advantage in fishing, while Bob has the comparative advantage in picking coconuts. SUPPLY AND DEMAND Some BIG economic words beforehand: 1. Markets – bring trading partners together to create order out of chaos, or group of buyers and sellers of a particular good or service 2. Competitive markets – one in which there are so many buyers and sellers, but each person has very little impact on market price. 3. Law of Demand – changes in demand vs. changes in quantity demanded 4. Law of Supply – changes in supply vs. changes in quantity supplied 5. Complements – two goods that are used together 6. Substitutes – two goods that are used in place of each other 7. Normal Goods – a good that a consumer buys more of as their income increases 8. Inferior Goods – a good that a consumer buys less of as their income inceases and more of when they have less income 9. Changes in Input Costs – an increase in input costs will make product price increase, therefore decreasing quantity demanded, decrease in input costs will cause opposite, quantity supplied increases 10. Technology – will create more efficient system, producing more output, increasing quantity demanded, and eventually quantity supplied Microeconomics discussion of markets is explained using:  Supply  Demand  Market Equilibrium 1/27/2016 Change in Demand  Income o Normal good: income increases, demand increases o Inferior good: income increases, demand decreases o Where substitutes and complements are important Demand  Quantity demanded – amount of a good or service buyers are willing and able to purchase  Law of Demand – (seen above) as prices decrease (increase) the quantity demanded will rise (fall) o Inverse relationship o Ceterus paribus  We can demonstrate demand in: o Graphs o Charts o Equations o EX: UGA football tickets *Change in quantity demanded results from change in price; change in demand > change in anything else* Examples of Normal/Inferior Goods  Steak or bacon – normal o Demand curve shifts right if there is an increase in income  SUV – normal o Demand curve shifts right with income increase  Spam (meat) – inferior o Demand curve shifts left with income increase, shifts right with income decrease  Ramen noodles – inferior o Demand curve shifts left with income increase, shifts right with income decrease Substitutes vs. Complements  Substitutes: Price of Good X  = Demand for Good Y  Complements: Price of Good X = Demand for Good Y Examples of Substitutes  Coke vs. Pepsi o As Coke gets cheaper (at least in the South), the demand for Pepsi decreases and the demand curve shifts to the left  Jittery Joe’s vs. Starbucks o Jittery Joe’s lowers their prices, demand for Starbucks decreases  Galaxy/iPhone o Galaxy phone develops a glitch and price falls, therefore iPhone demand increases and the curve shifts to the right, resulting in a fall of demand of the Galaxy  Cigarettes/”the patch” o Government taxes cigarettes, therefore the demand for the patch increases and demand curve shifts to the right Examples of Complements  Peanut Butter/Jelly o Price for peanut butter increases, and the demand for jelly decreases, as does demand for PB  Greens Fees/Golf o Keeping up with the greens becomes more expensive, so prices for 18 holes go up, therefore decreasing demand for both  Milk/Oreos o The price of milk increases, and the demand for Oreos decreases, shifting both demand curves left 0 1/29/2016 Supply Change in Supply = changes in input cost, technology, # of firms producing certain good  Example o Trucks  Input costs: steel, air bags  If the price of steel or air bags goes up, there will be a decrease in supply, resulting in a shift left, and vice versa  Technology = helps to improve input and production methods Supply & Demand  How price is determined  Where the lines cross = equilibrium price  P > P = P 0 0 S  Q0> Q =0P S  Move up Supply curve, at Price 2 (P ) 2 o P :2Q >SQ = Durplus  Move down supply curve, at Price 3 (P ) 3 o P :3Q >DQ = Shortage Example: Market for Waffle Fries 1) Idaho stops growing potatoes 2) New “better” deep fryer invented 3) Curly Fries P 4) UGA students get $2000 Situation #1  Supply curve is going to shift left, up demand curve, therefore increasing the price, and decreasing quantity demanded Situation #2  Supply curve is going to shift right, down demand curve, therefore decreasing price, and increasing quantity demanded Situation #3  Demand curve for waffle fries will shift left, causing the equilibrium price to fall, and the quantity supplied to decrease Situation #4  Demand curve will shift to the right , causing the equilibrium price to rise, and the quantity supplied will increase


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