ECON 2020 (Dr. Macy Finck) August 22-26
ECON 2020 (Dr. Macy Finck) August 22-26 Econ 2020
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This 8 page Class Notes was uploaded by Gabrielle Ingros on Friday August 26, 2016. The Class Notes belongs to Econ 2020 at Auburn University taught by William M. Finck in Fall 2016. Since its upload, it has received 18 views. For similar materials see Principles of Economics: Microeconomics in Economics at Auburn University.
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ECON 2020 Lecture 2: The Market Model Purpose of learning Economics: to use economic principles to create models that enable us to analyze and predict behavior o Economic Principles – statements about economic behavior or the economy that enable prediction of the probable effects of certain actions o Model – a simplified representation of how something works Market – any institution that brings together buyers and sellers of a particular good or service (a market doesn’t have to be a physical location: i.e. you can buy goods and services online without ever seeing the seller facetoface; supply and demand) o Product Markets – in product markets, households demand goods and services which are supplied by firms in exchange for money o Resource Markets – in resource markets, firms demand resources which are supplied by households in exchange for money Circular Flow Diagram: Demand Schedule – a table that shows how much of a good or service consumers will want to buy at various prices Price $100 $80 $60 $40 $20 $0 Quantity 0 40 80 100 180 200 Demand Schedule Example (shown above): If I am the only person in the world that has a ticket to the Auburn v. Clemson game for sale, and you need a ticket – how much will you be willing to pay? The point is – as the price point decreases, the number of people willing to pay for the ticket increases. o Law of Demand – the price of a good and the quantity demanded are inversely related (variables: price and quantity demanded) Demand Curve – a line that shows the maximum that consumers are willing to pay for any quantity ECON 2020 o Demand – the relationship between P and Qd for all possible prices o Quantity Demanded (Qd) – the number of units consumers are willing to buy at a specific price Change in Quantity Demanded (ΔQd) – a change in the amount purchases caused by a change in the price; a movement along the curve o The consumer’s income determines how much they are willing to pay for a product (however, we are not measuring income or other variables of the consumer in this particular graph) o Note: The quantity demand (Qd) decreases as you move up the curve and increases as you move down the curve Change in Demand (ΔDemand) – a shift of the entire curve to the left or right o This graph shifts as a result of outside factors (i.e. consumer change in income) o Note: A shift to the left means a decrease in demand and a shift to the right means an increase in demand Factors that shift the Demand Curve: o (1) Income: Normal Goods – goods for which income and demand move together Inferior Goods – goods for which income and demand move opposite ECON 2020 The only way to determine the classification of the good is by the relationship between income and demand Example: What happens to the demand for Sam’s Cola (an inferior good) when income rises? Explanation: Because the Cola is an inferior good compared to (say) Pepsi, when consumers are able to afford the “better” good, Pepsi (as a result of an income increase) the demand for the Cola (the inferior good) will decrease. Lecture 3: The Market Model (Continued) Factors that shift the Demand Curve (continued): o (2) Price of Related Goods: Substitutes – goods that take the place of each other in consumption (the price of one good and the demand for the other move together) Complements – goods that are used together in consumption (the price of one good and the demand for the other move opposite) Example: What happens to the demand for peanut butter when the price of jelly (a complement) falls? Explanation: Because Peanut Butter and Jelly “go together,” when the price of jelly goes down, the consumer will buy more; this means that the consumer will also need to buy more Peanut Butter (the complement good) and, thus, the demand for Peanut Butter will increase. ECON 2020 o (3) Expectations of Future Prices – expected future price changes and current demand move together (i.e. if you expect the price to go down tomorrow you will buy it tomorrow – consumers want the cheaper price) o (4) Number of Buyers – (seasonal changes in demand) ex: as the “baby boomers” age, demand increases for Social Security, Viagra, etc. o (5) Tastes and Preferences – (fads and trends) ex: bigass tshirts and monograms Supply Schedule – a table that shows how much of a good or service producers will offer for sale at various prices (profit is the difference between the money you bring in and the money you spend) Price $100 $80 $60 $40 $20 $10 Quantity 360 280 200 120 40 0 Supply Schedule Example (shown above): If you are trying to sell your Auburn v. Ticket – how much will you be willing to sell it for? How important is the ticket to you? The point is – you want the highest sum of money someone is willing to pay for the ticket. o Law of Supply – the price of a good and the quantity supplied are directly (positively) related Supply Curve – a line that shows the minimum that producers willing to accept as payment for any quantity o Supply – the relationship between P and Qs for all possible prices o Quantity Supplied (Qs) – the number of units producers are willing to offer for sale at a specific price Change in Quantity Supplied (ΔQs) – a change in the amount offered for sale caused by a change in the price; a movement along the curve ECON 2020 o Note: The quantity supply (Qs) decreases as you move down the curve and increases as you move up the curve Change in Supply (ΔS) – a shift of the entire curve to the left or right (changing the amount offered for sale at a certain point) o Note: A shift to the left means a decrease in supply and a shift to the right means an increase in supply Factors that Shift the Supply Curve: o (1) Input/Resource Prices: input prices and supply move opposite (if input prices go up, it’s bad) Example: How would an increase in the price of leather (an input) affect the supply of shoes? o Explanation: When the price of the leather (the input item) increases, the available supply of shoes decreases. Lecture 4: The Market Model (Continued) and Market Analysis Factors that Shift the Supply Curve (continued): o (2) Technology: the production process of changing economic resources into goods and services (when technology improves, supply increases) o (3) Taxes: taxation and supply move opposite o (4) Expectations of Future Prices: expected future price changes and current supply move opposite; good must be durable/storable (producer wants to sell goods at the highest price possible) ECON 2020 o (5) Number of Sellers: usually the number of sellers in a market changes as profits change (firms will enter the market when profit is high and exit when it is low) Market Model: o Equilibrium Price (Pe) – price at which the market clears (Qs [Quantity Supply] = Qd [Quantity Demand]) Equilibrium – no tendency for change (the market always moves to equilibrium on its own) o Surplus – at prices above Pe, (Qs >Qd); surpluses put downward pressure on prices until the surplus is eliminated Surplus = Qs – Qd units o Shortage – at prices below Pe, (Qd >Qs); shortages put upward pressure on prices until the shortage is eliminated Shortage = Qd – Qs units Solving for Pe and Qe: o Qs = 2 + 2P ECON 2020 o Qd = 20 – 4P Find the equilibrium price and quantity: o Solution: Qs = Qd (2 + 2P = 20 – 4P) (6P = 18) Pe = $3 & Qe = 8 units Plug answer back in to check if correct: o Qe = 2 + 2(3) = 20 – 4(3) Qe = 8 = 8 Pe = $3 o Price Rationing – the allocation of goods among consumers using prices Economists believe that price rationing is the most efficient method of allocating goods and services Every consumer willing to pay at least the equilibrium price will get to have the good With Price Rationing, the consumers willing to pay the most will be the recipients of the good (maroon line shows those willing to pay) With other rationing methods, the allocation is random (dotted line shows those willing to pay – selected at random) Market Analysis: o What happens to the market for SUVs when the price of gas (a complement) falls? ECON 2020 Price of Complement Falls so Demand Increases: when the price of the complement (gas) falls, the demand for SUVs increases (since people can afford more gas they are more willing to buy a gasguzzling vehicle) There is a Shortage at the Old Price so New Price Increases: when there is a shortage of goods you need to jack up the price so you don’t sell out The Qe Rises to Meet the New Equilibrium Point: you now meet in the middle to find the equilibrium point)