Intro to Economics Lecture Video Note Sets 3-4
Intro to Economics Lecture Video Note Sets 3-4 1200
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This 7 page Class Notes was uploaded by Chris Fall on Friday February 12, 2016. The Class Notes belongs to 1200 at Rensselaer Polytechnic Institute taught by Sarah M. Parrales in Spring 2016. Since its upload, it has received 94 views. For similar materials see INTRODUCTORY ECONOMICS in Economcs at Rensselaer Polytechnic Institute.
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Date Created: 02/12/16
Chris Fall 2/8/16 Intro to Economics Video Lecture Note Set 3 Section 4.1 1. Assumptions to Make for this Lecture 1.1.For this Section, assume a perfectly competitive market, which is a market that has: 1.1.1. Many buyers and sellers 1.1.2. All firms are selling identical products 1.1.3. There are no barriers to new firms entering the market 2. Demand 2.1.The Law of Demand 2.1.1. This is the rule that, assuming everything else stays the same, that there is an inverse relationship between the price of a product and the quantity of that product demanded 22.214.171.124. When the price of a product falls, the quantity demanded of the product will rise 126.96.36.199. Conversely, when the price rises, the quantity demanded of that product will decrease 2.2.What Explains the Law of Demand? 2.2.1. Substitution Effect: the change in the demand of a good that results from a change in price, either making the good more or less demanded based on the price of a good that is a substitute 2.2.2. Income Effect: the change in the demand of a good based on a change in price and its’ effect on the purchasing power of consumers 3. Important Terminology 3.1.A movement up or down a demand curve shows a change in quantity demanded 3.2.However, a shift in a demand curve depicts a change in demand Section 4.2 1. Consumer Income 1.1.Income is held constant when drawing a stationary/linear demand curve. If income changes the demand curve must shift, a.k.a. a change in demand 1.2.An increase of demand means that at every price level, people are more willing to buy the product than before, whereas a decrease in demand is just the opposite, they are willing to buy less than before 1.3.Normal good: a good for which demand increases when income increases, and vice versa 1.4.Inferior good: a good for which demand increases when income decreases, and vice versa 2. Prices of Related Goods 2.1.Substitutes: goods and services that can be used for the same purpose as other goods and services 2.1.1. In this case, if the substitute good decreases in price, often times the quantity demanded for that good will increase, causing the demand for the original good to decrease 2.2.Compliments: goods and services that are often used together 2.2.1. In this case, if one good’s demand decreases, its’ complimentary good will also have a decrease in demand 3. Consumer Taste 3.1.This has many subjective factors that can affect the consumer’s decision to purchase a particular good or service 3.2.Examples of ways to change a consumer’s taste are effective advertising and fashion, diet, and automobile trends 4. Population/Demographics 4.1.As population increases, the number of buyers increases, so naturally demand for a good would increase 4.2.As demographics(things like age, race, education level, etc.) change, the demand of a good can change as well 5. Expected Future Prices 5.1.The expectation that consumers have about what the price of a good will be in the future can influence the demand of a good in the present 5.2.If consumers think that the price of a good is soon to go up, the demand of that good in the present can increase as consumers rush for what they think as a good deal, whereas if consumers feel the price will go down for a good in the future, many people will wait for that good to get cheaper, causing the current demand to decrease Section 4.3 1. Law of Supply 1.1.This is the rule that, assuming everything else is held constant and doesn’t change, there is a positive relationship between the good’s price and its’ supply 1.1.1. When the price of a good increases, the supply of the good will also increase 1.1.2. When the price of a good decreases, the supply of the good will also decrease 1.2.A movement along the supply curve due to a change in price is described as a change of quantity supplied, whereas if a factor other than price causes a change in supply, the curve shifts, and it is called a change in supply 2. Prices of Input 2.1.The prices of goods that go into producing other goods influences and changes how profitable production of those other goods is 2.2.If the price of an input rises, total cost of production increases, and production becomes less profitable 2.3.This results in a decrease in supply, depicted by shifting the supply curve to the left 2.4.However, if the price of an input falls, total production becomes more profitable, causing an increase in supply, shifting the supply curve to the right 3. Technological Changes 3.1.As technology advances, the cost of production decreases, shifting the supply curve to the right 4. Prices of Substitutes in Production 4.1.Firms often produce several different goods/items; these items are called substitutes in production 4.2.If the price of a substitute in production changes, then the profitability of making that product increases, causing an increase of supply of that substitute, and therefore a shift right of the supply curve for that product 5. Number of firms in the Market 5.1.When new firms enter the market, supply of the product they sell increases(shift right) 5.2.When a firm shuts down, supply of the product they sold decreases(shift left) 6. Expected Future Prices 6.1.Firms respond to changes in expectations they have about the future price of the product 6.2.If a firm expects their product to be more expensive in the future, they have incentive to produce less in the present, and produce more in the future Section 4.4 1. Supply and Demand 1.1.In free markets, prices determine the actions of sellers and buyers so that shortages and surpluses will never exist and prosperity is maximized 1.2.Adam Smith, an economist, argued that because humans are rational, their independent decisions in response to price will make themselves and society better off 1.2.1. This requires prices to be flexible 1.2.2. Flexible prices are found in free markets 1.3.The Market Mechanism: the process by which people in a market respond to flexible prices, and therefore optimal market outcomes are achieved 1.4.However, there is no such thing as a “100% free” market in today’s economy, but some come close Section 4.5 1. The Market Mechanism 1.1.Once again, the Market Mechanism is the process by which people in a market respond to flexible prices, and therefore optimal market outcomes are achieved 1.2.Market Equilibrium: the point where demand and supply curves intersect, where quantity demanded equals quantity supplied 1.2.1. In a free market, the market mechanism pushes the market towards equilibrium 1.2.2. Adam Smith described this action metaphorically as “an invisible hand” guiding the market towards the equilibrium 1.2.3. In reality, however, the equilibrium is achieved when rational people properly respond to incentives 1.3.To understand the market mechanism, we must consider a market not in equilibrium 2. Disequilibrium: When Actual Price is greater than the Equilibrium Price 2.1.Quantity supplied is greater than quantity demanded, causing a surplus 2.2.Firms face an incentive to lower their prices in order to generate revenue 2.3.Downward pressure will be placed on the price as long as the surplus sticks around 2.4.The price will only stop falling when the equilibrium is reached 3. Disequilibrium: When Actual Price is less than the Equilibrium Price 3.1.Quantity supplied is less than quantity demanded, causing a shortage 3.2.Firms are incentivized to increase price because they know they can find buyers who would be willing to pay more 3.3.Upward pressure on the price will exist as long as the shortage is still there 3.4.The price will stop rising when equilibrium is reached 4. The Law of Demand and Supply 4.1.This law states that the price of a good or service will adjust to a value where quantity supplied will equal quantity demanded Chris Fall 2/10/16 Intro to Economics Lecture Video Note Set 4 Section 5.1 1. Demand and Supply 1.1.Once again, focus is put on price 1.2.The next question to ask is: HOW MUCH will quantity demanded and supplied change in response to a change in a price 2. Elasticity 2.1.A measure of how responsive quantity demanded and supplied are to a change in one of their determinants 2.2.Price Elasticity of Demand(PED): measures how responsive quantity demanded is to a change in price 2.3.PED = percentage change in quantity demanded / percentage change in price 2.4.You must take the absolute value of this quotient, as otherwise PED would always be negative 2.5.For computing PED, always use the midpoint method 2.5.1. This involves taking two points on a demand curve(for example A and B) and performing the following calculation: (A-B)/((A-B)/2) 2.5.2. This must be done for both top and bottom of the PED calculation Section 5.2 1. Putting PED into Perspective 1.1.Take gasoline prices Scenario 1 Gasoline before Gasoline after Demand(per day) 1,000 Gallons 1,200 Gallons Price $4.00 $3.70 1.2.Doing the Calculations PED 1 Change in Quantity Demanded/ Change in Price = ((1,000/1,200)/1,000)/ ((4.00-3.70)/3.85)= (-.18)/.08= 2.25(have to take absolute value) 1.3.When PED is greater than 1, demand is elastic, meaning quantity demanded changes proportionally more to price Scenario 2 Gasoline before Gasoline after Demand(per day) 1,000 Gallons 1,050 Gallons Price $4.00 $3.70 1.4.Doing the Calculations PED 2 Change in Quantity Demanded/ Change in Price = ((1,000/1,050)/1,025)/ ((4.00-3.70)/3.85) = (-.05)/.08 = 0.63 1.5.When PED is less than 1, demand is considered inelastic, meaning quantity demanded changes proportionally less to price 2. Compared to Reality 2.1.In real life, gasoline is considered to be inelastic in terms of demand, so scenario 2 is more realistic 2.2.This is proper, as gasoline is a necessity for most 3. Elasticity Extremes 3.1.A vertical demand curve would have a PED equal to 0 and is considered to be perfectly inelastic 3.1.1. An example of a good in this category would be a very important legal prescription drug 3.2.A horizontal demand curve would have a PED equal to infinity and is considered to be perfectly elastic 3.2.1. Financial securities fit in this category 3.3.When PED is equal to one, demand is unit elastic, meaning quantity demanded changes proportionally to price Section 5.3 1. Determinants of PED 1.1.Availability of Close Substitutes 1.1.1. If these substitutes are available, demand tends to be more elastic 1.2.Necessity Vs. Luxury 1.2.1. Goods considered to be needed for life tend to have inelastic demands, whereas goods considered to be more luxuries have very elastic demands 1.3.How to Define the Market 1.3.1. A market that is more broad (ex. food) is more inelastic 1.3.2. A market that is more specialized (ex. banana) is more elastic 1.4.Time Horizon 1.4.1. Goods tend to be more elastic in demand over a long period of time and inelastic over a shorter period 1.5.The total Share of a Consumer’s Budget 1.5.1. If the price of a good is only a fraction of the average consumer’s budget, then the demand for that good will be more inelastic Section 5.4 1. Total Revenue 1.1.This is the price per unit of the good multiplied by the quantity of that good sold 1.2.This can also be calculated using the demand curve and quantity demanded 2. Using the Gasoline Example 2.1.In the previous case, Total Revenue of the initial state of the gasoline problem was $4.00 per gallon times 1,000 Gallons equals $4,000 2.2.Using the increase in demand situation from before as well where gasoline falls to $3.70, the total revenue is $3.70 per gallon times 1,050 Gallons equals $3,885 2.3.This is due to the inherent inelasticity of the gasoline market 2.4.For demand that is price inelastic, price and revenue move in the same direction 2.4.1. A decrease in price causes a decrease in total revenue and an increase in price causes an increase in total revenue 3. Using the Market of Books from Barnes and Noble 3.1.This is a very price elastic market 3.2.Assume the average book price sold is $4.00 and they sell 1,000 books at this price giving a total revenue of $4,000 3.3.Now assume the average book price is $3.70 and the number of books sold per day at this price is 1,200 books, making the total revenue $4,440 3.4.For demand that is price elastic, price and revenue move in opposite directions 3.4.1. A decrease in price causes an increase in revenue, and vice versa 3.5.In the special case of unit elasticity, a change in price won’t cause a change in revenue Section 5.5 1. PED and the Linear Demand Curve 1.1.Any sort of linear demand curve is often a snapshot in time, as price and demand are constantly changing, meaning the curve is actually curved 99.9% of the time 1.2.PED varies along a linear demand curve 1.2.1. In a downward-sloping line, at first PED shows an elastic market, causing an increase in total revenue, but as the line progresses, PED approaches and hits unit elasticity and then begins to gradually become more and more inelastic, losing total revenue
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