ECON 2010 Week 3 notes
ECON 2010 Week 3 notes ECON 2010
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This 12 page Class Notes was uploaded by jared.stein Notetaker on Sunday September 11, 2016. The Class Notes belongs to ECON 2010 at University of Colorado at Boulder taught by Dr. Charles A M de Bartolome in Fall 2016. Since its upload, it has received 3 views. For similar materials see Principles of Microeconomics in Microeconomics at University of Colorado at Boulder.
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Date Created: 09/11/16
9/07/16 Lecture 7: I. Determination of the Market Price A. Price is determined jointly by: 1. Eagerness of households to buy (demand side) 2. Eagerness of firms to sell (supply side) B. Focusing on eagerness of households to buy leads to formation of a demand curve. 1. Determined by price of product and total individual demand 2. Drawn ceteris paribus • see last lecture II. Movement along vs. Shift of Curve A. Drawing the Demand Curve 1.The Demand Curve is drawn ceteris paribus • One variable is changed and all else are held constant • Ex: Price is changed so quality, supply, etc are assumed to be constant 2. Table Graph = Demand Schedule = Demand Curve a. As p changes, curve shows how quantity demanded (x) changes; Ceteris paribus - hold everything else constant (in this case y) b. If p increases from 3 to 4, quantity demand changes from 3 to 1; as value on one axis is changing, move along the curve, move along the curve to find new value on other axis. 3. a. New schedule and new curve • As y changes, quantity demand changes • If y increases from 81 to 144 and p is unchanged, quantity demanded changes from 3 to 6 • ** New relationship between p and x • As something not on one of the axes changes. There is a new relationship between p and x. The curve shifts. • Represent pre-existing situations with solid line, “new” situation with dashed line. B. Shift of Demand Curve 1. a. Quantity demanded depends on: 1. Price: as p increases, value on one axis changes. Move along curve and quantity demanded 2. Tastes: Vacation: Something not on axis change, quantity demanded increases; demand curve shifts right. 3. Income: Income increases, value not on axis changes. Holding shoes price constant. 2. Individual spends some of extra income Individual buys less plastic shoes on more shoes Quantity demanded increases Quantity demanded decreases - Normal good - Inferior good 3. Goods a. Broad categories of goods (shoes, clothing, food..etc) tend to be normal b. Sub-categories of low quality are often inferior 4. Price of related goods a. In hamburger market: • Something on one of the axes has changed • Move along demand curve • Quantity demanded of hamburgers decreases b. In soup market • What is changing is not one of the taxes • What is changing is not one of the axes • D curve shifts c. People like to buy soup or hamburger • If people buy more soup, D curve shifts to right • substitutes 4. a. In sandwich market: • Something on one of the axes has changed, move along D (sandwhich) • Quantity demanded of sandwiches decreases b. In soup maret • What is changing is not one of the axes. D curve shifts c. People like to buy package of soup or sandwiches • Buying this bundle is more expensive so buy less sandwich and less soup • D curve shifts to the left • Complements “used with” 5. Ex: Gov’t wants to cut back on gasoline a. b. Either • Raise gas price to buyer (tax) • Move along demand curve c. Or • Reduce bus price • Give substitutes (demand curve shifts) III. Supply Side A. Move to supply side 1. 2. Price is determined by a. Eagerness of households to buy (demand side) b. Eagerness of firms to sell (supply side) B. How much do firms want to sell 1. It depends on: a. Price b. Technology c. Input prices d. Expectations 2. Focus on price - “ceteris paribus” a. Ask each soup firm: • “If price is __, how much do you want to sell?” b. Separating out demand and supply • How much do you want to sell • NOT how much you can sell (assumed that firm can sell) 3. Law of Supply a. Table presentation Graphical presentation = Supply schedule = supply curve b. Law of Supply: As price increases, it becomes profitable to produce more. Quantity supplied increases. 4. Market Supply Curve a. How much do all firms want to supply at given price. • Stack individual “curves” to get market “curve” IV. Movement Along v. Shift of Curve Example A. Gov’t wants firms to produce more solar heaters 1. Gov’t can either subsidize a. Firm can afford to pay more to produce more and sell at lower, same, or only higher price. b. Moves along curve OR 2. Gov’t labs work to improve technology a. Can produce more at same price b. Shifts curve (price stays same but number of heaters increases) 9/09/16 Lecture 8: I. Equilibrium A. What does equilibrium mean? 1. Equilibrium: “State of balance between opposing forces” - no net force pushing for change. 2. Equilibrium price by two forces a. • Eagerness of households to buy (Demand Curve) • Eagerness of firms to sell (Supply curve) b. Need to include both forces (supply AND demand) • Edgeworth (from lecture) I. Supply and Demand Curve (Literally the cornerstone of economics) A. Equilibrium when, Quantity demanded=quantity supplied B. Curves put together: • Equilibrium price = $1.00 per can • Equilibrium quantity = 40 cans per month C. Suppose market price increases: 1. P goes up to $1.50 a. For changes in price (move along supply curve) look at supply curve. b. As price goes up (S curve moving to the right) demand goes down (D curve to the left) • less people want to buy as many or more cans at higher price c. Leads to a surplus, firms have more than they need. Unbalanced • As inventory from unsold soup cans builds, firms need to get rid of them • Firms begin to undercut prices (lower prices or have a sale) • Price drops and demand rises to meet it again. 2. For the same graph: market price starts decreasing. a. People want more (move along demand curve) b. If each firm produces less (move along supply curve) c. Surplus shrinks and force lowering the price slackens d. Prices continue to fluctuate until intersection of supply and demand is met. • amount people want to buy = amount firms want to sell • No force moving price down D. Suppose market price increases 1. P goes down to $.50 a. For changes in price (move along supply curve) look at supply curve. b. As price goes down (S curve moving to the left) demand goes up (D curve moving to the left) • More people want to buy as many or more at lower price c. Leads to a shortage. Other kind of unbalancing • Households want more than firms have to sell. Households find it difficult to get soup in shortage • Forces firms to act: can either raise price or produce more • Can raise prices without losing sales 2. For same graph: Market price starts increasing a. Each person wants less (move along demand curve) b. Each firm produces more (move along supply curve c. Shortage shrinks d. Force raising prices slackens, move towards equilibrium again E. Example: News Magazine 100 (million) households and 20 firms 1. Predict: What is equilibrium price and quantity of magazines 2. How to a. Construct market demand curve b. Construct market supply curve c. Put curves together d. By Law of Supply and Demand • Equilibrium Price: $3 per magazine • Equilibrium Quantity: 400 million magazines per year 3. By Calculation a. Demand Curve: Q = -200p + 1000 Supply Curve: Q = 200p - 200 D S b. At Equilibrium Q =Q Or…. -200p + 100 = 200p - 200 p=3 F. Example: Miners and Cooks 1. Miners were paid $2.50 a day for (usually) 12 hour days. Miners were cheap, unskilled laborers. Cooks were paid better because “it was hard to find a good cook” 2. How price of labor (wage is determined) a. Use Law of Supply and Demand b. Wage = price of 1 hour of labor 3. a. Low skill → high quantity demanded → low wage So… high quantity supplied, low wages paid b. Higher skill → lower quantity demanded → higher wages So….low quantity demanded, high wages paid
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