ECON 2020 Lecture 2-4 Week 2
ECON 2020 Lecture 2-4 Week 2 Econ 2020
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This 12 page Class Notes was uploaded by Brianna Notetaker on Sunday August 28, 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 74 views.
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Date Created: 08/28/16
ECON 2020Exam 1 Lecture 2 8-22-16 Colors: Orange – DEFINITIONS Green – FORMULAS Highlighted – OTHERIMPORTANT INFORMATION PurposeofMicroeconomics: To use economicprinciplesto create models thatenableus toanalyzeandpredictbehavior. Economicprinciples– Statementsabouteconomicbehaviororthe economythatenablepredictionsofthe probableeffectsofcertain actions. Model– A simplifiedrepresentationofhowsomethingworks. Chapter3: TheMarket Model (Graph) Market – Anyinstitutionthatbringstogetherbuyersandsellersofa particulargoodor service. In productmarkets,householdsdemandgoodsandservices which are suppliedbyfirms inexchange for money. In resource markets,firms demandresources which are suppliedby householdsinexchangefor money. CircularFlow Product Markets $ Goods and services Households Firms Resource Resources $ Markets Demandschedule– A tablethatshowshowmuch ofa good or service consumerswill wantto buyat variousprices. Price $100 $80 $60 $40 $20 $0 Quantity 0 40 40 120 160 200 Law ofDemand– The price ofa goodand thequantitydemandedare inverselyrelated. DemandCurve – A linethatshowsthe maximumthatconsumersare willingto payfor anyquantity. Demand(D) – The relationshipbetweenP(Price) andQd (quantity demanded)forall possibleprices. Quantitydemanded(Qd)– The numberofunitsconsumersare willing to buyat a specificprice. Changein QuantityDemanded A change in theamountpurchasedcausedbya change inthe price;a movementalongthe curve. 2 Changein Demand A shiftof theentire curveto the leftor right. Factors That Shift theDemand Curve 1. INCOME Normalgoods – Goodsfor which incomeanddemandmovetogether. Inferiorgoods – Goodsfor which incomeanddemandmoveopposite. * The only way to determinethe classificationof the good is by the relationshipbetweenincome and demand. 3 ECON 2020Exam 1 Lecture 3 8-24-16 Factors That Shift theDemand Curve(Continued) 1. Income Ex.Whathappenstothe demandforSam’s Cola(an inferiorgood)when income rises? 2. Price ofRelatedGoods Substitutes–Goodsthattake theplace ofeach otherin consumption. The price ofonegood andthe demandfor theother movetogether. Complements–Goodsthatare usedtogether inconsumption. The price ofonegood andthe demandfor theother moveopposite. Ex.Whathappenstothe demand forpeanutbutterwhenthe price ofjelly(a complement)falls? 4 Peanut Butter OtherFactors 3. ExpectationsofFuturePrices – Expectedfutureprice changes and current demandmoretogether. 4. Numberof Buyers– Ex.As the“babyboomers”age, demandforsocial security,Viagra,etc.increases. 5. TastesandPreferences – Ex.Long t-shirts,monograms Supply Schedule Supplyschedule– A tablethatshows howmuch ofa good or service producerswilloffer for saleat variousprices. Price $100 $80 $60 $40 $20 $10 Quantity 360 280 200 120 40 0 Law ofSupply– The price ofa good andthe quantitysuppliedare directly(positively)related. Supply Curve SupplyCurve – A linethatshows the minimumthatproducersare willingto accept as paymentfor anyquantity. 5 Supply Curve Supply– The relationshipbetweenPandQs (quantitysupplied)forall possibleprices. Quantitysupplied–Thenumberof unitsproducersarewillingto offer for sale ata specificprice. Changein QuantitySupplied A change in theamountofferedfor salecausedby a change inthe price;a movement alongthe curve. 6 Changein Supply A shiftof theentirecurve to theleft or right. Factors That Shift theSupplyCurve 1. Input/ResourcePrices Inputprice andsupplymoveopposite. Ex.How wouldanincrease inthe price ofleather(an input)affect the supplyofshoes? 7 ECON 2020Exam 1 Lecture 4 8-26-16 OtherFactors 2. Technology-the productionprocessofchangingeconomicresources into goodsand services;when technologyimproves,supplyincreases. 3. Taxes- taxationandsupplymoveopposite 4. Expectationsoffutureprices- expectedfuture price changesand current supplymove opposite;goodmustbe durable/storable 5. Numberofsellers -usuallythenumberofsellersin a market changes as profitschange;firms will enterwhen profitis high andexitwhen it is low. *A lotof marketanalysisquestionsonthistest.Knowrelationshipson theselists. Market Model EQUILIBRIUM PRICE (Pe) Equilibriumprice-price at which the market clears (Qs = Qd) Equilibrium-no tendencyfor change 8 Surplus Surplus-at prices aboutPe, Qs >Qd Surplus= Qs – Qd units Surplusesputdownwardpressureonprices untilthesurplusis eliminated Shortage Shortage- At prices belowPe, Qd >Qs Shortage = Qd – Qs units 9 Shortagesputupwardpressureon prices untiltheshortageis eliminated Solving for Peand Qe Qs = 2+ 2P Qd = 20 – 4P Findthe equilibriumpriceandquantity. Solution:Qs = Qd 2 + 2P = 20 – 4P 6P = 18 Pe= $3 *PlugPe backintobothequations. Qe= 2+ 2(3) = 20 – 4(3) Qe= 8units Price Rationing Price rationing–the allocationofgoodsamongconsumers using prices. Economistsbelievethatpricerationingisthe most efficientmethodof allocatinggoodsandservices. Everyconsumer willingto payat leastthe equilibriumpricewillget to havethegood. Price Rationing 10 Withprice rationing,theconsumerswillingto paythemost willbe the recipientsofthegood. Withotherrationingmethods,theallocationisrandom. Market Analysis *Whenyou see a market analysisquestiononyourtest,youwill see severalof them.THERE WILL BE NO GRAPH.IT WILL BE A WORD PROBLEM. Whathappenstothe marketfor SUVs when the price ofgas (a compliment)falls? 11 1. Demandincreases 2. Shortageat the oldprice 3. Pe rises 4. Qe rises 12
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