Popular in Principles of Economics: Microeconomics
HIST 1010 - 001
verified elite notetaker
Popular in Department
This 13 page Class Notes was uploaded by Brie Burnett on Tuesday August 16, 2016. The Class Notes belongs to Econ 2020 at Auburn University taught by Banerjee in Fall 2016. Since its upload, it has received 180 views.
Reviews for Econ 2020
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 08/16/16
August 18 , 2016 Chapter 1: What is Economics? Social science that studies the choices we make as we cope with scarcity and the incentives that influence and reconcile our choices Scarcity: available resources are insufficient to satisfy wants. Implies that we have to make choices Incentives: Rewards (benefits, encourage action) vs. penalties (costs, discourage action) Benefits > costs = do it Benefits < costs = don’t do it Assume people are rational Social Science: create theories and models that we’d like to test Ceteris paribus= other things equal 4 Economic Resources 1. Land/natural resources 2. Labor (human capital) [capital is physical: building, machines, not money] 3. Capital (not financial capital) Physical capital Buildings, equipment, and machinery 4. Entrepreneurship Microeconomics Macroeconomics Individual consumers, households, How countries interact, trade & firms, & government influence how it benefits 3 basic questions: Financial well being of country I. What is produced How the whole country produces, II. How it is produced not one single decision III. For whom it is produced Labor=wages Capital=interest Land=rent Entrepreneur=profit The economic way of thinking Positive analysis= facts (inc. facts, decreases population need income) Normative analysis= judgment Economic cost= opportunity cost & value of best alternative Explicit costs= monetary costs Implicit costs=forgone alternative “Free good”= even free goods have an economic cost, not actually free Cost of free good= value of your time Tuition, forgone wages, books, parking permit= economic cost Housing, food= sunk cost (can’t recover/get back the cost) Marginal benefit: benefit of one additional unit of a good or activity Assumption: marginal benefit declines Marginal cost: Cost of one additional unit of a good or activity. Ex) college education Assumption: marginal cost rises MC & MB graph: Q* where MC=MB is best you can do 8/23/16 Chapter 2: The Economic Problem Ex) Brain surgeon owns an Escalade. Escalade needs a tune up. Brain surgeon can fix up in 1 hour. Ex) Mechanic needs 2 hours to fix up the car. Brain surgeon makes $1000/hour. Mechanic charges $100/hour Absolute advantage (faster) Comparative advantage (lower cost) Production of a good can be Cost of production is lowest. achieved in less time Brain surgeon has absolute More can be produced in the same advantage but mechanic has amount of time comparative advantage (since produces at least costly rate) Ex) Cleaning Business Two people own a cleaning business # Of bathrooms cleaned per # Of beds made per hour hour Scott 4 12 Caroline 3 10 It is apparent that Scott and produce 4 or 12 and Caroline can produce either 3 or 10. Absolute advantage: Scott (He can produce more of both goods) Impossible to have comparative advantage in both goods. Caroline vs Scott 3 1/3 beds > 3 beds Scott has comparative advantage in cleaning bathrooms Caroline has comparative advantage in making beds. Scott Caroline 4 Bath= 12 beds 3 Bath= 10 beds 1 Bath= 12 beds/4 bath 1 Bath= 10 beds/ 3 bath 1 Bath= 3 Beds 1 Bath= 3.33 Beds Marginal cost of 1 Bath= 3 beds Has Comparative advantage for beds since Marginal cost= Opportunity cost Scott has comparative advantage for baths. Has comparative advantage Lower # = has comparative advantage Production Possibility Frontier (PPF): has negative slope Graph of maximum output that can be produced by an individual or an economy Slope= change in y/ change in x= PPF Ratio/rate is always fixed & constant Slope= always negative (Resources are scarce: have to give up something to produce something= tradeoffs) Magnitude of the slope = MC of the good represented on the ‘x’ axis Slope of PPF gets steeper as we produce more of the good on the ‘x’ axis (since MC increases with quantity) Flatter slope (smaller #, more horizontal) has comparative advantage in good “x” Combine Scott and Caroline’s production to make an economywide PPF If Scott and Caroline both clean bathrooms: 4+3=7 max (7,0) If Scott and Caroline both make beds: 12+10=22 max (0,22) PPF and Marginal Cost A B C D E Cars 0 10 20 30 40 Donuts 600 560 500 400 0 What is the MC of car production between C & D? 10 card cost 100 donuts 1 car costs 10 donuts Efficiency Production efficiency: Producing at lowest cost Allocative efficiency: Using resources where they have the highest value Shifts in PPF: Move graph outward Technological change Capital accumulation Population growth Change in productivity of labor 8/25/16 Chapter 3: Demand and Supply Demand: Maximum quantity a consumer is willing and able to purchase at various prices Law of demand: Inverse relationship between price and quantity demanded Assume linear relationship between price (P) & quantity demanded (Qd) ex) Demand for thin mints Qd (x) P (y) 6 0 5 2 4 4 3 6 2 8 1 10 0 12 Qd= 1/2 P + 6 P= 2 Qd +12 2= slope 12= yintercept [2Qd= P +12] [P= 2 Qd +12] shows inverse relationship between supply & demand As consumer consumes more, moves along demand curve, happiness from consuming particular good Demand=marginal benefit Y= mx +c [m= slope, c=yintercept] Interpret demand as marginal benefit P= 2 Qd +12 Qd= 3 P= $6 rd 3= 3 box of Thin mints is worth $6 $6= Marginal Benefit of 3 box Determinants of Demand Demand increase= shift right Demand decrease= shift left Change in quantity demanded= when price of good inc/dec, quantity demanded changes following laws of demand (Q1 Q2, along x axis) Changing demand=shift in demand curve (to left or right) Increasing demand is NOT same as increasing quantity demanded Demand curve= always negative sloped Changes in Demand [shifts: inc= shift right, dec= shift left] 1. Income Normal goods: goods where demand rises when income rises and falls when income falls Inferior goods: goods where demand rises when income falls and demand falls when income rises 2. Price Substitutes: Price increases so demand decreases and consumers demand a substitute Ex) Price of tea increases = Quantity 1 Tea decreases to Q 2 demanded of tea. Sugar demand would also decrease since its associated with tea. People would consume coffee since they substitute drink choice due difference in price. Demand of coffee would increase as demand for tea decreases. Compliments: Goods that are used together & consumed together Ex) Coffee and cream, cereal and milk Inc. price of coffee, increase price of cream 3. Expectations Price: Expect price to rise: increase current demand Expect price to fall: decrease current demand Income: Expected income rise = current demand increases Expected income decrease= current demand decreases 4. Tastes and preferences Ex) Market for eggs Ex) Fashion: if something is trendy, the demand for the item will increase 5. Number of Buyers More buyers= Demand increases Fewer buyers= Demand decreases Supply Supply: Maximum quantity a seller is willing and able to sell at various prices Supply increase= shift right (outward) Supply decrease= shift left (inward) Law of supply: Positive relationship between price and quantity supplied (inc. P inc Qs) Upward sloped *Supply= entire relationship between the price of the good and the quantity of it *Quantity supplied= point on the supply curve P Qs 0 0 2 0 3 2 4 4 5 6 6 8 Qs= 2P 4 P= ½ Qs +2 S= marginal cost Changes in Supply 1. Input prices Inc. wages paid to labor Dec. supply (shift left) Dec. wages paid to labor Inc. supply (shift right) 2. Price of Related Goods in Production Substitutes in production= using same resources to produce goods Ex) Corn & soybeans= same resource (land) Price of corn increases= opportunity cost of producing soybeans increases= supply of soybeans decreases Compliments in production: goods must be produced together Ex) Wool & lamb chops. Price of lamb increases= quantity of lamb seller is willing to give increases= supply of wool increases 3. Expectations about prices Expected price increases= supply decreases Expected price decreases= supply increases 4. Number of sellers/suppliers # Of sellers increases= supply increases # Of sellers decreases= supply decreases 5. Technology Better technology= lower marginal costs of production= increase in supply Ex) Assembly lines= Faster/greater supply Change in marginal cost of production Decrease costs Increase supply (more people will buy) 8/30/16 Demand and Supply Together D: Qd= 1/2P + 6 or P= 2 Qd+12 S: Qs= 2P4 or P= ½ Qs+2 Set D=S 1/2 P + 6= 2P4 2*(P + 12)= (4P8)*2 5P=20 P=4 To find Q*: Substitute price you found into one of the equations P= 2 Qd +12 P= ½ Qs + 2 4= 2 Qd + 12 4= 1/2 Qs + 2 8= 2 Qd 8= Qs +4 4= Qd 4= Qs Equilibrium (P*, Q*)= (4,4) Market Equilibrium= S & D cross on graph = MB=MC = Sellers & buyers aren’t willing to move Supply= MC (marginal cost) Demand= MB (marginal benefit) Surplus and shortage P> P* Surplus (Qs> Qd) P starts to fall until P= P* P< P* Shortage (Qs< Qd) P starts to rise until P= P* Changes in Equilibrium 1. Inc. Demand= Increases both price & quantity 2. Dec. Demand= Decrease both price & quantity 3. Inc. Supply= Decrease price, increase quantity 4. Dec. Supply= Increase price, decrease quantity [True if demand is held constant] * 5. D inc, S dec = P inc & Q inc OR P inc & Q dec 9/6/16 Chapter 4: Elasticity *The price elasticity of demand is a unitsfree measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same. Elasticity is the measure that we use to see by how much the equilibrium price falls and by how much the equilibrium quantity increases. Elasticity= “Responsiveness”, inverse to slope Flatter/lower slope=more responsiveness= higher elasticity Steeper slope=less responsiveness= lower elasticity Price Elasticity of Demand (Ed)= % change in Qd / % change in P Ed= (Change in Qd/Change in P) * ((P1+P2)/(Q1+Q2)) Ed= (1/slope)*(Sum P/ Sum Qd) Measured by calculating responsiveness of consumers to a change in price Slope: Change in P/ Change in Qd Units of measurement vary so we need “unit free” measure use percentage changes: % change in Qd / change in %P Starting point use percentage changes 3 Ranges of Ed 1) Ed>1 % change in Qd / % change in P > 1 % change in Qd > % change in P “Elastic” demand P inc, Q dec P dec, Q inc Revenue: P*Q inc. 2) Ed<1 % change in Qd / % change in P < 1 % change in Qd < % change in P “Inelastic” demand P inc, Q dec Revenue increases P dec, Q inc Revenue decreases [Price and revenue follow the same direction] 3) Ed=1 % change in Qd / % change in P = 1 % change in Qd = % change in P “Unit elastic” demand 9/8/16 Ex) Qd= 0.5 P + 6 Qd: 54 (P= 2 Qd + 12) P: $2$4 Ed=(Change in Qd/Change in P) * ((P1+P2)/(Q1+Q2)) = ½ * 6/9 = 1/3 < 1 = Inelastic Ex) P: $8$10 Q: 21 Qd= 1/2(8)+8 = 2 Qd=1/2(10)+8 = 1 Ed= ½ * 18/3 = 3>1 = Elastic People care more about price changes if they spend more on that good to begin with Know how to calculate elasticity given a Qd= equation and given either Qd or P. Find each by plugging into equation and solving for elasticity and determining which of the 3 ranges of Ed it is Determinants of Ed 1. Proportion of budget spent on the good 2. Availability of substitutes Lots of substitutes: Demand more elastic Fewer substitutes: Demand less elastic Ex) Definition of the market: the more broadly the market is defined, the less elastic demand is 3. Time More time demand more elastic Less time demand less elastic Two Extremes 1. Perfectly inelastic demand: graph of demand line is vertical 2. Perfectly elastic demand: graph of demand line is horizontal Ed & Revenue [Most important part of this chapter] Revenue= P*Qd Higher PRevenue? Ed<1(Percent change in Qd/Percent change in P)<1 Percent change in Qd<Percent change in P Small Qd change relative to change in P CrossPrice Elasticity Price Elasticity of Demand For elasticity of demand, Ed= Percent change in Qd/Percent change in P CrossPrice Elasticity= Percent change in Qdx/Percent change in Py Unlike Elasticity of demand, it does not have absolute values outside of it Substitutes in consumption Complements in consumption Ex) X= Coke, Y= Pepsi Inc. P of Pepsi Inc. Qd of Coke (Percent change in Qdx/Percent change in Py)>0 Positive Substitute [Ed= +/+ >0 = Substitute] Negative Compliment [Ed= /+ or +/ <0= Compliment] Ex) P tent: $40 $42 (demand increases) Q sleeping bag: 10 9 (demand decreases) E tent, sleeping bag= ((910)/(4240))*((42+40)/(9+10))= (1/2)*(82/19)= 41/19 < 0 *Since it is less than 0, the two goods are compliment & is inelastic Ex) P tent: $40 $42 (demand increases) Q tent: 20 24 E= (4/2)*(82/44)= 41/11 > 0 *Since it is greater than 0, the two goods are substitutes & is elastic Income Elasticity Income Elasticity= (Percent change in Qd/% change in income) How consumers change their consumption with change in income Positive Normal good Negative Inferior good Price Elasticity of Supply Supply Elasticity: how suppliers adjust supply in regards to market price Es= (Change in Qs/Change in P)>0 Es>1 Elastic Es<1 Inelastic Es=1 unit elastic Determinants of Es 1. Availability of substitute inputs Fewer substitute inputs less elastic supply More substitute inputs more elastic supply 2. Time More time more elastic supply Less time less elastic supply Ex) Computers change so much, consumers buy new products and therefore, old products are sold for less and have less elastic supply. *Know one formula & know all definitions for test* -Price has to do with Compliments and Substitutes -Income has to do with Normal goods and Inferior goods Difference between quantity supplied of and supply of -The quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price. -The quantity supplied is one quantity at one price. -When the price of a good changes, a change in the quantity supplied occurs -Expectations about future prices influence supply * The more it costs to produce a good, the smaller is the quantity supplied of that good at each price (other things remaining the same). Ex) In 2013, the price of corn fell and in 2014 some corn farmers will switch from growing corn to growing soybeans. This illustrates the law of supply because the fall in the price of corn results in a decrease in the quantity of corn supplied. A corn farmer would grow soybean because soybean is a substitute in production for corn, and when the relative price of corn falls, farmers plant more soybeans. -Demand for a luxury is more elastic than demand for a necessity, because a luxurt has more substitutes. Ex) Food is a necessity and has few substitutes
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'