Econ 200 Week 2 Lecture Notes
Econ 200 Week 2 Lecture Notes
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Date Created: 04/12/14
Economics 200A Week 2 Lecture Notes Lecture 3 Tuesday April 8 Exampe gt Price ofjeans is 30 Quantity Marginal Value Total Value Total Expenditure Consumer Surplus 1 50 50 30 20 2 40 90 60 30 3 30 120 90 30 4 20 140 120 20 5 10 150 150 O 6 O 150 180 30 Note The numbers in this table are discrete numbers This basically means they are jumping from 1 to 2 to 3 versus 1 to 11 to 12 to 13 etc Discrete 2 3 Continuous 11 12 Note Don t need to know this but it helps for general understanding In the above example we can see our consumer surplus maximizes at two points Q2 and Q3 As consumers we want the best value so we want to find where Consumer Surplus maximizes or where the maximum value is To do this we 1 2 Set dCS derivative Consumer Surplus equal to O P ltsrvT3 Find the derivative of the Consumer Surplus Equation CS TV TE WE lUOKf 0 is MAX 62 Q Q suck Hamp39F c Economics 200A Week 2 Lecture Notes 2 Demand gt explains regularity of behavior among people who buy goodsservices Demand Curve shows quantities of a good that consumers are willing and able to buy at different prices all else constant Note This graph is the quantity demanded NOT demand V t is downward i loping because of Law of Demand keeping all else constant as the price per unit of a good rises the quantity demanded falls and vice versa General Statement of the Law of Demand as opportunity cost of a goodactivityservice rises there is less of the good purchasedless of the activity undertaken However as the price of a good falls consumer buys more according to PMV Example Y X Ag Hm PH Ce Fu SaS TF2 r 7N6 UP Sam u IgtUS gl39Ijea Somg o1 39Ilt B0 E Price T Car umJ1 an 1 Q1 Ql Q Anatomy of a Demand Curve Note Think about what a bribe is You give up part of your consumer surplus to get a lower price on the good Economics 200A Week 2 Lecture Notes 3 Charity donations have decreased since the 1950 s Have people become less charitable Lets look at the facts Time Tax Rate Opportunity Cost to Donate 1 to Charity 1950 s 70 30 Cents 1980 s to Present 35 65 Cents The opportunity cost of giving 1 to charity has increased because the tax rates decreased therefore according to the law of demand as the opportunity cost increases the incidenceamount of giving to charity decreased Market Demand Fgfsm A Dgman l FCISW1 E HM DCM Ulamp 2 F 3 Y 3 JUST F5 d eM 1Iamp Lccause A I39Sl39397L lAJa39ll39n o la when l Z 2 AK S 01emanJi 0Lo oeoO I quot l quot ll It I 1 E 39 1 1 5 Q Z Q I L 3 Q I a 3 457 Lecture 4 Thursday April 10 Water Diamond Paradox gt Diamonds are more expensive than water Does it mean we value diamonds which we don t need to live more than water which is essential to life Hint It is the difference between marginal value and total value TQ lMV TTV Demand curves for waterdiamonds Economics 200A Week 2 Lecture Notes 4 Analysis 0 Diamonds have a much higher price than water However X X P l PEP G p V W MV depends on the amount of goods available Tamount TMV o MV of water is small because there is a HUGE supply of water However water s total value is much higher than that of diamonds because it is essential to life a Diamond s TV is less than that of water a Dquot mond s Price TMV for the consumers meaning there exists some consumer surplus Applications of the water diamond paradox Example 1 Between plumbers diamonds and nurses water which one earns a higher salary Plumbers Does this mean we value our kitchen sinks more than our health No because the wages only measure the marginal value There is a big total value for health Each hospital has lots of nurses versus not many plumbers Example 2 Would you expect university professors to earn the same salary across all fields Computer science diamonds vs Philosophy water professors The salary only measures what we are willing to pay to have an additional unit of their services their marginal value CS Teachers have a larger field of interest and there is demand for them at school and in the industry This means for them to forgo working in the industry they need to be paid equally at the university Example 3 It is 8pm the night before a test Your boyfriend calls and asks you to come over for a few hours You say no and he gets upset and asks if your test is more important than him The answer is it is but only at the margin In this example a Boyfriend water TTV a Test diamond TMV because of the time constraint Tomorrow after the test the test s MV will be zero Yncomt MV Economics 200A Week 2 Lecture Notes 5 Consumption Smoothing The law of diminishing marginal value can explain why people engage in borrowing and lending T SrrooHwnc1 H go 0 Cong uMf7quot390I loch H0 c e IL II S Li Fe 0 M e Why do people do this Explain with an example You get paid in pizza every two days Do you consume two pizzas today or keep one for tomorrow Answer you eat one today a nd save one for tomorrow because of consumption smoothing Y 39 39 Ax quot W 2 A A Q M M Q Isa MQJ lute Mg it 1 N31 ob re People dislike feast famine which can be explained by their differing marginal values 0 Consuming second pizza on payday has a lower marginal value than 0 Keeping pizza and eating the next day increased marginal value Depicted in these graphs ml w OTC Preserrl Conslmgtv39on 7 Z 8 Fraser ongrn19 M C0nSUmr o 0 Pa C 1 P Economics 200A Week 2 Lecture Notes Clicker Question Answers 1 Marginal Value of present consumption is the willingness to give up future consumption to consume today 2 Consumption l TMV Example of consumption smoothing N P Possibility 1 Earn 20k the first year and 40k the next year spending erratically O Possibility 2 Spend 30k each year consumption smoothing Poss3gtv39393939 1 Yr 1 14 Spends Cad Jr E A E I ZA lKCTVFrzjeaS C FoSgt 2 l1 2 ZGK 36K IOK Con um o390nlt Yr 1 A E Y Z A8 ZA 23 Tvrez jeVS Hrensk Pres Consvmffian Law of Demand Inflation Prices usually go up a 0Z What does this do to demand X Price 2012 Price 2013 Salad 2 lb 4 lb Pizza 12 18 He has enough money to afford the same amount How much will he buy WHY T 2012 is 6 122 and in 2013 it is 45 184 Economics 200A Week 2 Lecture Notes People react to changes in relative prices If ALL is kept constant then increased price results in decreased quantity bought
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