Introduction To Microeconomics
Introduction To Microeconomics
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Date Created: 04/17/14
Reading Notes April 15th and April 17th Chapter 2 Economic Behavior Economic Postulates have to be stated in terms of actions that can be observed Behaving economically in the science of economics doesn t align with the common connotations of bargain shopping or couponing Individual not Group Preferences Economic postulates are always all about the individual preferences rather than group preferences Therefore behavior postulates are all about individual behavior Postulates of Behavior 1 People have preferences People exercise tastes or preferences about things they choose 2 More is preferred to less Human wants are insatiable always want more 3 People are willing to substitute one good for another people are willing to make trade off s fundamental aspect of economic behavior 4 For all individuals and all goods the marginal value of goods decreases as more of that good is consumed holding other thins constant the amount of other goods we are willing to forgo in order to consume additional units of a good becomes continually less The Meaning of Value Fundamental observation of economics Postulate 3 provide s the only observable definition of the concept of value Marginal Versus Total Value Economics makes an important distinction between the amount a person would be willing to pay in order to consume all units presently consumed of some good rather than none at all Postulate 4 Marginal Valuezis how much a good is worth to someone in terms of other goods For example the more pizza slices someone eats the less hungry he becomes and the less valuable the next slice is to him Each slice of pizza would lose marginal value because the person eating them would desire the pizza less and less after becoming full Total Value is how much of a good or service someone is willing to give up in order to consume all units of a certain good rather than consuming none at all LACK OF DIVERSITY For example instead of just purchasing one or two units of lemonade one would offer a set amount of a good or service in order to purchase all the lemonade rather than have none 2 Q Law of Demand Follows from the postulate of diminishing marginal values other things remaining the same as the price of any good decreases more of that good is consumes as the price increases less is consumed Postulates of behavior are based of individual behavior but the demand curves of interest are the aggregate of all consumers in a market These market mean curves are simply the sum of each individual s demand curve Graphically market demand curves are the lateral sum of the individual curves Market demands are downward sloping for two distinct reasons First as the price of some good decreases the individuals already consuming the good increase their consumption In addition however new consumers enter the market and commerce consumption of the good adding their demand to the others already in the market On a diagram with price on the vertical axis and quantity on the horizontal axis the demand curve indicates the amount a consumer wishes to purchase at given prices The law of demand is the statement that demand curves are negatively sloped Diamond Water Paradox the paradox is resolved by understanding that the prices of these goods represent their marginal values not the total values of diamonds versus water Because the supply of diamonds is low and the supply of water is great marginal value of diamonds is higher than the marginal value of water but total value of water is higher than the total value of diamonds Consumption Over Time How one allocates income earned in different periods of time to consumption When income is earned in erratic patterns individuals attempt to smooth out their consumption through borrowing and lending Maximizing total value by smoothing out consumption represented by the area under the demand curve the amounts of future income an individual to consume the specified level of present consumption rather than none at all total value of steady consumption 2A B total value of variation consumption 2A B C since BgtC due to the demand curve slope income is more highly valued at steady consumption patterns Chapter 3 Relative Versus Absolute Prices Absolute price refers to the average price of goods consumed Relative price means the price of one good in relation to another For example if apples cost 25 and pears cost 5 the relative price of a pear is 2 apples If inflation causes the prices of apples and pears to become 5 and 1 respectively then although absolute prices have increased relative prices have remained the same In modern economics it has most often been the case that on average prices have increased An increase in general price level is called INFLATION a decrease in the average price of goods is called DEFLATION Economic theory predicts that only changes in relative prices causes behavior to change If literally all prices were to change in the same proportion no relative prices would have changed and therefore no choices would change Such a perfectly neutral inflation would have no effects being a change in absolute prices only However it is not likely to have this type of strictly proportional change in prices Consumer Price Index most widely used measure of the average price level in the economy It is calculated using the cost of a market basket of goods consumed by households reported every mont by the Bureau of Labor Statistics The Law of Demand and Inflation The Elasticity of demand is a dimensionless measure of the responsiveness of the quantity demanded to change in prices the slope of a demand curve is sensitive to the units of quantity and price Elasticity of demand is defined as the percent change in quantity demanded per percent change in price Elasticity is necessarily negative since price and quantity move in opposite directions along a demand curve Demand is called elastic if the percent change in quantity is absolutely greater than the percent change in price Demand is inelastic if the percent change in quantity is absolutely smaller than the percent change in price Unitary Elastic Demand when the percentage change in quantity demand equals the negative percentage change in price When demand is elastic as the price decreases and quantity therefore increases the total expenditure consumers make on the good increases since quantity increases in greater proportion than the price decrease similarly when demand is inelastic as the price decreases total expenditure decreases because the expansion in quantity purchased is proportionately less than the price decrease The Second Law of Demand the law of demand states that holding other things constant the quantity demanded of any good or activity varies inversely with price A second law is also commonly asserted with the passage of time the response to a change in price becomes absolutely greater An alternative way of stating this second law is that at any given price longrun demand curves are more elastic than shortrun demand curves If a fixed cost is added to the prices of two different qualities of some good the premium good the only originally higher priced becomes relatively cheaper As a result such charges increase the consumption of premium goods relatively to lower quan es Further Applications of the Law of Demand The law of demand applies to all behavior that can be characterized as choice subject to constraints this applies to choices concerning basic human activities such as sex and marriage fertility crime and discrimination by race and gender If any quantifiable cost associated with these activities increases the law of demand predicts a decrease in the extent to which that activity is pursued
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