ECO 2023 Week 2 - Days 1 & 2 Lecture Notes
ECO 2023 Week 2 - Days 1 & 2 Lecture Notes Eco 2023
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This 9 page Class Notes was uploaded by Erika Huber on Friday September 2, 2016. The Class Notes belongs to Eco 2023 at University of Florida taught by Mark Rush in Fall 2016. Since its upload, it has received 256 views. For similar materials see Principles of Economics: Microeconomics in Economics at University of Florida.
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Date Created: 09/02/16
8/29/16 & 8/31/16 Microeconomics ECO 2023 Week 2 – Day 1 & Day 2 Lecture Notes Chapter 1-3 A Few Key Points to Recap – Chapter 1 & 2 Production Possibilities Frontier (PPF) o Most desirable production point o All points on the PPF are production efficient, but not all points are equally desirable. o Allocative efficient point: point that is most desirable from a social perspective. o Most desirable point– This depends on each individual society. But we will look more into this in Chapter 5. o Actual production– We will look into the point that we actually produce at in Chapter 3. o We will look at– What can we do to make the point that we actually produce at the most desirable one? What government policies do we need to implement? o The PPF is more conceptual than practical; economists don’t actually calculate a PPF or use PPFs to calculate other things. We are limited by the amount of resources and how advanced our technology is. The PPF can shift inward or outward. The PPF would shift inward in cases of a bad economy. o EX: In Syria, they have fewer resources because of the war. The PPF sheds light on the 2 of the 3 Big Economic Questions… o What should be produced? : The PPF shows you what 2 resources you are producing. o How will it be produced? : You always want to produce efficiently; produce on the PPF and not below; we want to produce goods as efficiently as possible. o For whom will the products be produced? : PPF does not shed light on this. Supply & Demand – Chapter 3 Stupid parrot joke: you can make any parrot into a world-class economist, you just remove all of its feathers and tell it to respond to every question with “It all depends on supply and demand.” o ****Although the above^^^ is a stupid joke, it just goes to show that A LOT of economics revolves around supply and Demand. So pay attention!!! We will take it one step at a time: 1. What effects suppliers 2. What effects demanders 3. Put it ALL together! Markets: What are they and who is in them? A market is any scheme that allows buyers and sellers to get together to *Realize this now* transact their business. There are too many buyers, that no one “Supply & Demand go hand in hand” … except buyer can affect the price, it takes all the that they’re like the opposite …. They ‘ditto’ buyers to impact the price. each other a lot but in opposite ways There are too many sellers, that no one seller can affect the price, it takes all the sellers to impact the price. You’ll start to see patterns between the two! Competitive market: lots and lots of buyers and seller ^^^^ o EX: agriculture o Most markets are competitive. What influences demanders? Law of demand: Price of the good and a demand curve Demand curve shows us at all different prices, the quantity of the product that people are going to buy. A rise in the price of a good leads to a decrease in the quantity demanded. A fall in the price of a good leads to an increase in the quantity demanded. Movement along the demand curve = the law of demand= change in theQuantity Demanded WARNING Shift of demand curve = change Demand THERE IS A DIFFERENCE BETWEEN THE TWO!!! An increase in demand corresponds to a rightward shift of the demand curve A decrease in demand corresponds to a leftward shift of the demand curve The only thing that changes quantity demanded is price Any other factor shifts the demand Demand Curve Graph – Demand of shoes As the price decreases, people want to Price buy more shoes….that makes sense $80 right………… $70 I mean, I think most people enjoy buying things at a cheaper price if they can, right? $60 $50 Okay good, let’s move on now, shall we? $40 $30 $20 $10 Quantity 0 5 10 15 20 25 30 Shifters of Demand Curve: 1. Income: a. Normal good: income increases, demand increase (Shift to right) – income decreases, demand decreases, shift to left b. Inferior good: income increases, demand decreases, shift left – income decreases, demand increases, shift right i. Ex: boxed mac and cheese, used clothing o Goods can change from being a normal good to an inferior good and being an inferior good to a normal good. o Most goods are normal goods. o You have to get data to know exactly if something is an inferior good or a normal good. o Income affects demand shifts for most goods! 2. Price of a related good: a. Substitutes: one good or another good. A rise in the price of a substitute increase the demand (shifts the demand curve rightward); a fall in the price of a substitute decreases the demand (shifts the demand curve leftward). i. EX: coke vs. Pepsi b. Compliments: one good and another good. A fall in the price of a compliment increases the demand (shifts the demand curve rightward); a rise in the price of a compliment decreases the demand (shifts the demand curve leftward). i. EX: Hot dogs and hot dog buns ii. You the consumer are buying them separately and you the consumer are putting them together - The price of a related good affects demand shifts for most products! 3. Preferences a. An increase in the preference for a good increases the demand (shifts the demand curve rightward). b. A decrease in the preferences for a good decreases the demand (shifts the demand curve leftward). - Information changes preferences o EX: how unhealthy cigarette smoking it; how healthy certain foods are - Fads effect preferences o EX: beanie babies - Preferences affect demand shifts for most products! 4. Number of Demanders a. An increase in the number of demanders increases the demand (shifts the demand curve rightward) b. A decrease in the number of demanders decreases the demand (shifts the demand curve leftward) - Can change for demographic reasons o EX: older people use more pharmaceuticals - Can change because of seasons o EX: weather and certain events happening in different seasons 5. Credit Market Conditions: a. “Good” credit market conditions increase the demand (shifts the demand curve rightward) i. EX: Easy to get a loan b. “Bad” credit market conditions decrease the demand (shifts the demand curve leftward) i. EX: If you can’t get loans - More applicable to big ticket items 6. Expected Future Price a. Expected Future Price increases, demand increases, curve right. When the expected future price rises, the current demand increases (shifts the demand curve rightward). b. Expected Future Price decreases, demand decrease, curve left. When the expected future price falls, the current demand decreases (shifts the demand curve leftward). - There are many products for which this doesn’t matter Human capital: skills and talents people possess; increasing quality of labor Entrepreneurship: people running business; make business decisions PPF is bowed outward because resources are not equally productive in producing all different sorts of goods and services/all quantities Law of supply: Focus is on profit. PROFIT, PROFIT, PROFIT! Anything that increases profit, firms will produce more of it. o (Cause they want to make more money… duhhhh) If profitability decreases, firms produce less of the product. o (Cause not making a lot of money sucks) Profit = revenue – cost Law of supply: A rise in the price of a good leads to an increase in the quantity supplied; a fall in the price of a good leads to a decrease in the quantity supplied Movement along supply curve = change in quantity supplied Change in supply = shift of the supply curve Cost does not equal price! Price = what people pay to buy a product Again…THERE IS A DIFFERENCE! Cost = what the supplier has to pay to produce a product $90 $80 $70 $60 $50 $40 $30 $20 $10 0 5 10 15 20 25 30 And as the price increases, Suppliers want to produce more because then they can make more money….cause that’s their end goal. PROFIT PROFIT PROFIT! And well, who doesn’t love money? Shifters of Supply Curve: 1. Cost: a. Cost increases, supply decreases, leftward shift. A fall in costs increases the supply (shifts the supply curve rightward). b. A rise in costs decreases the supply (shifts the supply curve leftward). 2. Price of Related Goods a. Substitutes in Production: when a firm is going to produce one OR another good i. A fall in the price of a substitute in production increases the supply (shifts the supply curve rightward) ii. A rise in the price of a substitute in production decreases the supply (shifts the supply curve leftward) iii. EX: Toyota produces hybrids or SUVs in an assembly line. If price of producing hybrids increases, then the supply of SUVs decreases because Toyota wants to produce more hybrids since the price increased and they can profit more from suppling more hybrids rather than suppling SUVs. b. Compliments in Production: when a firm produces one good AND another good i. A rise in the price of a compliment in production increases the supply (shifts the supply curve rightward) ii. A fall in the price of a compliment in production decreases the supply (shifts the supply curve leftward) iii. EX: When you produce oil, you also have to produce gasoline, petroleum, diesel, & heating oil. If the price of gasoline increases, the company would supply more oil 3. Technology a. Tend to think of technology as advancing; rarely does technology take a step back b. A technological advance increases supply (shifts the supply curve rightward) 4. Number of Suppliers a. An increase in the number of suppliers increases the supply (shifts the supply curve rightward) b. A decreases in the number of suppliers decreases the supply (shifts the supply curve leftward) 5. State of Nature a. A good state increases the supply (shifts the supply curve rightward) b. A bad state decreases the supply (shifts the supply curve leftward) i. EX: hurricanes, earthquakes, tsunamis, flooding 6. Expected Future Price a. When the expected future price falls, the current supply increases (shifts the supply curve rightward) b. When the expected future price rises, the current supply decreases (shifts the supply curve leftward) c. Only for products that can be stored Review Factors that shift the demand curve: 1. Income 2. Price of related goods 3. Preferences 4. Number of demanders 5. Credit market conditions 6. Expected future price Factors that shift the supply curve: 1. Cost 2. Price of related goods (production) 3. Technology 4. Number of suppliers 5. State of nature 6. Expected future price More Review Below! Demand Price = Quantity Demanded Price = Quantity Demanded Supply Price = Quantity Supplied Price = Quantity Supplied