ECON 200 Week 6 Notes
ECON 200 Week 6 Notes ECON 200
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This 10 page Class Notes was uploaded by Rachel Pollard on Friday February 12, 2016. The Class Notes belongs to ECON 200 at University of Washington taught by Haideh Salehi-Esfahani in Winter2015. Since its upload, it has received 12 views.
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Date Created: 02/12/16
Session 10 Monday, February 8, 2016 1:43 PM A study of forces other than the price of the good that would influence good and supply. • Keeping all other forces constant, if the price of the good rises, the quantity demanded will fall and vice versa. • On a given demand schedule, quantity changes as a result of change in price. We can call this the effect of price on quantity (or the "price effect") • Do we show the price effect primarily via slope of the demand curve or its location? It is the effect of a change in price so the slope not the location • But price is not the only force that affects how much consumers will purchase of a good. o Other factors: o Level of income • If income rises, likely to purchase more quantity of a good you like given its price o Prices of other related goods and services o Age of consumers o Location o Season o Government policy • How do we keep the two dimensional graph of demand (price and quantity) and use the same graph to show the effect of other forces on quantity demanded? • We show these effects by changing the location • When the price o f a good rises (keeping all other forces constant) the quantity demanded falls (and vice versa). This is called a "change in the quantity demanded" of a good. • When a force other than the price of the good changes, the whole demand behavior shifts (its location changes!). This is called a "change in the demand" for the good. • Examples of this o Effect of income changes on the demand for a good: Think of a good that you may purchase more of as your income rise (when you get a job) o Shift right on a graph o Normal good o When your richer, you want more of it • Now, think of a good that you may purchase less of as your incomes rise (when you get a job) o Top Ramen o Shift to the left on a graph o Inferior good: in the sense that less quantity is purchased when you are r icher • The effects of changes in the price of other (related) goods: • Consumption of some goods are related (goods can be substitutes or complements) • Interrelated markets Example 1: • If the price of gasoline increases, what happens to the demand for gas gu zzling cars? • When people want to use less gasoline, their demand for gas guzzling cars will go down. • The effect of the price of gas on the quantity of cars purchased, any price of cars, you will actually buy less. • Gasoline and cars are complements, they go together. • When the price of the good rises, the quantity demanded of the other related good falls. Example 2 • The effect of a change in the price of a related good: • If the market price of chicken falls, what is the effect on the demand for turkey? • People will buy more quantities of chicken • As people buy more chicken, they will buy less turkey. • The price of chicken, effects the turkey • People are buying more chicken and substituting it for turkey. Example 3: • The effect of a change In the price of a related good/service: City of London has introduced a congestion charge of 8 pounds per day for private cars that drive into Central London during rush hours. • The demand for transportation services in a private car goes down. • People who are not driving their own c ars, are demanding more public transportation. This increases the demand for public transportation. • The demand curve of public transport shifts to the right. • What is the effect of the congestion charge for private cars on the demand for public transport? • To shift the demand curve for public transport to the right, which is an increase in demand. • Income elasticity of demand: η = % change in Quantity demand / % change in income • What does a negative value for η mean? Inferior good • What does a positive valu e forη mean? Normal good Cross Price Elasticity • This is cross price: the change of price of good on the quantity of the other good demanded • E xy% change in Qy / % change in Px • Cross means between two goods • If two goods are complements, is the cross price elasticity positive or negative? o Px goes up, that will imply Qx goes down. o Since the two goods are complements, they go together. If less x is consumed, then less y is consumed. o Qy goes down, o NEGATIVE • If two goods are substitutes, is the cross price elasticity positive or negative? o Px goes up, Qx goes down o People will switch to good y o Qy goes up, o POSITIVE • Income Elasticities for selected goods or services: Automobiles 2.46 (normal good) Furniture 1.48 (normal good) Restaurant meals 1.4 (normal good) Electricity .20 (normal good) Pork products -.20 (Inferior good) Public transportation -.3 (inferior good) • Cross Price Elasticities for Selected Pairs of Products Good or Service Good or service with price change Elasticity Butter Margarine .81 Natural Gas Fuel oil .44 Entertainment Food -.72 Cereals Fresh fish -.87 • For Margarine, if the price goes up by 1 percent, the quantity of butter consumed goes up by .81%. Cross price elasticity, implying these two are substitutes • Food and entertainment, complement good • Fresh fish and cereals are complement goods Shifts in the Supply Curve Example 1 Suppose below we have a graph of supply of cars • How do improvements in com puter software- used in both design and assembly of cars - how would this improvement, as an event, change the supply curve? • What would the supply curve, with technological advancement, look like? • Any type of improvement tends to reduce the marginal costs o f production. o Improvements make it easier to design and assemble cars. • The supply curve shifts to the right. • But, the supply does not fall! This is an increase in supply. It is the marginal cost that falls. • At each given price, more quantities are produced and are given for sale. Example 2 Suppose below we have a graph of the market supply of wheat. • How does unfavorable wheat - the lack of water for irrigation - affect the market supply of wheat? • It would be more costly to produce wheat in this situation. • So the marginal cost tends to rise with unfavorable weather. • This leads to a shift to the left of the supply curve. • This is now a decrease in supply. Idea of Relative Elasticity • Steeper curve: relatively inelastic • Less steep curve: relatively elastic • Revisiting the concept of relative elasticity of demand and supply o The relatively inelastic demand is a relatively steep demand curve. o What is the shape of a perfectly inelastic demand curve? Vertical o What is the elasticity measure for a perfectly inelastic demand curve? 0 o Would a perfectly inelastic demand for a good illustrate a "short run" or a "long run" demand for that good? o The relatively elastic demand is a relatively shallow demand curve. o The shape of the perfectly elastic demand curve is horizontal. o The elasticity measure for a perfectly elastic demand curve is infinity. • Price takers • Supply o The relatively inelastic supply is a relatively steep supply curve. o The shape of a perfectly inelastic supply curve is vertical o The elasticity measure for a perfectly inelastic supply curve is 0. o A perfectly inelastic supply for a good illustrates a "short run" supply of that good. o Relatively elastic supply is a relatively shallow supply curve o The shape of a perfectly elastic suppl y curve is horizontal o The elasticity measure for a perfectly elastic supply curve is infinity. Market for Steel • Suppose the government imposes a tax of $100 per month on owners/sellers of rental units.
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