Ch 1, 2: Supply and Demand
Ch 1, 2: Supply and Demand ECO 420K
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This 5 page Class Notes was uploaded by Natalie Strawn on Tuesday June 7, 2016. The Class Notes belongs to ECO 420K at 1 MDSS-SGSLM-Langley AFB Advanced Education in General Dentistry 12 Months taught by John Thompson in Summer 2016. Since its upload, it has received 137 views. For similar materials see MICROECONOMIC THEORY in Economcs at 1 MDSS-SGSLM-Langley AFB Advanced Education in General Dentistry 12 Months.
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Date Created: 06/07/16
nd June 2 , 2016 Micro-theory Chapter 1 – Preliminaries Economics – the study of rational human action under scarcity -People are rational. They make cost/benefit decisions and face trade-offs. -Prices help people make those decisions. Prices signal relative scarcity. -Scarcity exists if, at a zero price, quantity demanded exceeds quantity supplied. -Scarcity makes rationing necessary. -Markets are usually a good way to ration scarce goods and services. -A market is a collection of buyers (demanders) and sellers (suppliers). -Markets vary in structure between perfectly competitive and monopolistic. -Market definition matters. * product space * geographic space Microeconomics – Individual actors (consumers, firms) and specific markets. Macroeconomics – Aggregate economic activity. Chapter 2 – Supply and Demand Supply – The relationship between price and quantity supplied. Supply depends on… 1) Price: Qs = f(P) Qs = 40 + 2P Qs = -110 + 5P – 1.6C 2) Cost of production (labor, capital, materials, etc.) 3) Expectations (of future price) 4) Seasonality (weather, holidays, etc.) -A supply curve is a marginal cost curve. Ex. The supply of lobsters. Illustrate: change in quantity supplied vs. change in supply (increase in supply -right shift. Decrease in supply -left shift) (change in quantity supply-movement along the curve.) See figure 2.1 in textbook. Demand – The relationship between price and quantity demanded. Demand depends on… 1) Price: Qd = f(P) Qd = 200 -3P Qd = 88 – 4P + 5.6M + 2.2 Po 2) Income (normal, inferior, income insensitive) 3) Prices of related goods (substitutes, complements) 4) Tastes and preferences 5) Expectations (of future price, income) 6) Seasonality A demand curve is a marginal benefit curve. Ex. The demand for lobsters. Illustrate: Change in quantity demanded vs. change in demand (see figure 2.2) Equilibrium occurs when quantity supplied and quantity demanded are equal and there is no shortage or surplus. Illustrate: Equilibrium, shortage, surplus -When supply or demand shift, we move to a new equilibrium. Illustrate: Shifting supply and demand (four possible: if only supply or demand change) -When both supply and demand shift, the effect on one variable will be obvious, and the effect on the other will be ambiguous. Ex. 1) 9/11 attacks reduce the demand and the supply of housing in NYC. -Supply down, price up, quantity down -demand down, price down, quantity down (either way if the price went up, down, or stayed the same, the quantity went down) Ex. 2) There is a higher demand for corn at the same time we’re having a drought. -price goes up, don’t know about quantity, demand up Ex. 3) The demand for immigrant labor is falling as illegal immigration is rising. -price down, demand down, don’t know quantity Ex. 4) Demand for lobster is rising as lobster fishing is becoming more efficient. -quantity rises, demand rises, price ambiguous If we know the specific supply and demand changes, we can calculate the new price and quantity… Ex. 1 : Qs = 40 +2P Qd = 200 – 3P P* = 32 Q* = 104 Ex. 2 : Qs’ = 60 + 2P Qd’ = 250 – 3P P’ = 38 Q’ = 136 Elasticity – A measure of how much one variable changes in relation to another. *The more responsive the more elastic -Suppose UT increases tuition by 50%. How would that affect seniors at UT?: Inelastic demand (steep curve) How would that affect high school seniors who want to come to UT? : Highly elastic demand (more flat curve) Illustrate: Relatively inelastic vs. relatively elastic demand An elasticity measures responsiveness. More responsive… more elastic. Qd = f(P,M,Po, T,E,S) Qs = f(P,C,E,S) Price elasticity of demand: Ep = %deltaQd / %deltaP Ep = (deltaQd / deltaP) (P/Qd) Cigarette demand: Qd = 300 – 10P Calculate elasticity between $6 and $8 (midpoint method) Ep = - 0.3, less than 1, inelastic Calculate elasticity at $10 (point method) Ep = (-10/1) (10/200) = -0.5 Price elasticity and total revenue Ex. 1) Price of cigarettes increases 10%, quantity falls by 2%. What happens to revenue? Ep = (%deltaQd)/(%deltaP) = (-2/10)= -0.2 Goes up by Price X Quantity = Total Revenue If (abs value) of Ep < 1, demand is inelastic. When demand is inelastic: ^P : ^ TR price down, total revenue down Ex. 2) Shell lowers their price 5% and sees a 20% increase in sales. What happens to revenue? Ep = 20%/-5% = -4.0 Goes up by 95% X 102% = 114% If (abs value) of Ep >1, demand is elastic. When demand is elastic: …(insert data) If abs value of Ep =1, demand is unit elastic Along a linear demand curve, we will see different elasticities at various points. Price elasticity of demand Ex.) Qd = 8 – 2P Calculate the elasticity at a price of $1, $2, $3. Linear demand curve will have inelastic region, elastic region, and unit elastic point. Point elasticity – point method Arc elasticity – midpoint method -Extreme examples: (a) perfectly elastic demand; horizontal demand curve (b) perfectly inelastic demand; vertical demand curve Determinants of price elasticity of demand 1) Availability of substitutes (cigarettes) 2) Size of the good in your budget (salt and housing) 3) Short-run versus long-run (gasoline) Income Elasticity: Ei = (%deltaQd)/(%deltaI) Ei = (deltaQd/deltaI)(I/Qd) Cigarette demand: Qd = 300 – 10P + 0.5I Calculate Ei at P = $8 and I = 40 (point method) Ei = (0.5/1)(40/240) = 0.083 *The greater the elasticity, the more sensitive consumers are to changes in income and vice versa* -If Ei > 0, we have a normal good. -If Ei < 0, we have an inferior good. Cross Price Elasticity: Ecp = (%deltaQd)/(%deltaPo) Ecp = (deltaQd/deltaPo)(Po/Qd) Cigarette demand: Qd = 300 -10P + 0.5I + 8Po Calculate Ecp @ P = $8, I = 40, Po = $10 (point method) Ecp = (8/1)(10/320) = 0.25 -If Ecp > 0, we have substitutes. -If Ecp < 0, we have complements. Price Elasticity of Supply: Es = (delta Qs/delta P)(P/Qs) Beef supply (long run): Qs = -100 + 50P Calculate Es at P = $6 (point method) Es = (50/1)(6/200) = 1.5 -beachfront property: higher demand, more quantity, price goes up (build islands) -notebook paper: higher demand, more quantity, same price
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