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Microeconomics Week 3

by: Cindy Notetaker

Microeconomics Week 3 Econ-UA

Marketplace > New York University > Econ-UA > Microeconomics Week 3
Cindy Notetaker

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These notes cover elasticity and the inner workings of it as well as introduce Chapter 6.
Introduction to Microeconomics
Professor Bhiladwalla
Class Notes
Microeconomics, Economics
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This 9 page Class Notes was uploaded by Cindy Notetaker on Friday September 23, 2016. The Class Notes belongs to Econ-UA at New York University taught by Professor Bhiladwalla in Fall 2016. Since its upload, it has received 19 views.


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Date Created: 09/23/16
Recap: If government imposes tax on the seller, the guy that write out the check bears the statutory burden economic burden: the fact that some people have to move around with less money in their pocket because the government collected taxes; when you measure the economic burden, it measures the impact of the tax on the redistribution of resources in terms of price HINT FOR EXAM: will ask to move a curve and circle a choice on burden, the last question "the burden of the tax is the fallen quantity," true or false? FALSE --the reduction of quantity measure misallocation of resources in producing the good ex) 60 cent tax on either the SELLER of the CONSUMER (buyer) in order to compute burden on the... seller: 20 cents buyer: 40 cents you first locate the new equilibrium, and locate the distance "tax wedge" Subsidies: the opposite of taxes; the government puts money into your pocket payments to buyers/seller on each unit purchased/sold --the benefit of the subsidy is the same to the seller and the buyer a subsidy lowers the price of a good/service to consumers --it encourages them to buy more at each free market price example of subsidies in the US: --college education: the government can tell the college: for every student that enrolls we will pay you x amount of dollars - -healthcare: everyone must purchase health insurance (not foreigners); those people who can't afford it will be given a subsidy in order to attain health insurance example expanded: college education the impact of the subsidy on price P=25,000 tuition Q=4 million students after subsidy, more people will be willing to buy an education because students are getting paid to go to school @the new equilibrium: student benefits 4,000, college benefits 6,000 Now what if the government pays THE COLLEGE rather than you... After subsidy to college, more demand for students, students benefit 4,000 and college benefits 6,000 Chapter 5 Elasticity elasticity: measure of the responsiveness of one variable to a change in another variable; it responds to "force" and therefore we get different types of elasticities --force (price) changes and length (quantity demanded) responds --the percent change in one variable in response to percent change in another variable Examples: price elasticity income elasticity of demand price elasticity of supply cross price elasticity Price elasticity of demand: it measures the sensitivity of quantity demanded to the price of the good itself --the percent change in quantity demanded --caused by a 1% change in the good's own price --equation: %change in QD/% change in P --is ALWAYS negative -moves in opposite directions -HOWEVER, we disregard the (-) because we are comparing other goods; taking the absolute value of elasticity Ex1) ED for flash drives = -3, and for external drives =-4 --the demand for external drives is more elastic I-4I>I-3I Ex2) if P of video games falls by 2%, QD of video games rise by 6% 6%/2%=3.0 "the price elasticity of demand is 3.0" --each 1% drop in prices causes quantity demanded to rise by 3% NOTE: **the greater the elasticity value, the more sensitive quantity demanded is to price** --3.0>2.0>0.7 CONDENSED FORMULA: Calculating Price Elasticity of Demand: we imagine that only price is changing and other factors remain constant --therefore, elasticity is a movement ALONG the demand curve Using the Midpoint Formula for Elasticity: Ex)1 --when we move from point A to point B, the price (P) falls by $0.50 and this would be a 33% drop in price per avocado --HOWEVER, going in the reverse direction, from $1.00 to $1.50, that's a 50% increase **in order to make it the same in either direction, we use a special convention to get percentage changes; we divide the change in a variable by its starting variable** Breaking it down: You first find the percentage change is price (P) You then find the percentage change in quantity demanded (QD) Finally: we drop the minus signs to calculate the price elasticity of demand NOTE: keep in mind, elasticity can change as we move along a demand curve Elasticity of Demand is Categorized as Follows: a) inelastic demand --between zero and 1 --IEdI<I-1I ex) like an expo marker to force; doesn't change --IEdI=I-0.8I --not sensitive to change in P --curve is steeper b) Elastic demand --IEdI>I-1I --sensitive to change --the curve is flatter Ex) a rubber band **then show graphs as shown chapter reading that correspond to theses types** **they sort of reflect each other** C) Unit Elastic demand --if I graph that curve, rectangular hyperbola --IEdI=I-1I D) perfectly inelastic demand --Ed=0 --> vertical demand curve --no matter how small we make the percentage change in price, the percentage change in quantity will always be infinitely larger -elasticity value of infinity TR(total revenue)=P*Q Change in TR=change in P + change in Q When the change in Q(positive component)> the change in P(negative component) --elasticity is GREATER THAN 1 --TR and price move in opposite directions NOTE: For linear demand curves --as price falls, demand elasticity decreases (as we move downward and rightward) --for non-linear curves, moving down curve can cause elasticity to rise, fall or remain constant Elasticity and Total Revenue --when price rises, total combined revenue of all the firms that sell in the market will depend on the price elasticity of demand for the good TR=P*Q ex) suppose that demand is inelastic (<1), then a 1% rise in price will cause QD to fall by LESS than 1% --so: the greater amount the seller get on each unit outweighs the impact of the drop in quantity and total revenue will RISE NOTE: if demand were elastic (>1), then it would be the opposite **an increase in price raises total revenue when demand is elastic and shrinks total revenue when demand is inelastic** Determinants/Factors of Elasticity 1. Availability of Substitutes --the greater the availability of substitutes, the higher the elasticity of demand --the availability of close substitutes often depends on how narrowly or broadly we define the market we are analyzing Ex) if price of sneakers increases, there are still other types of shoes even though not as comfortable --there would be a big quantity response; its elastic if the price of ALL sneakers increase, then will have lower elasticity 2. Necessities vs. Luxuries --Necessities will ALWAYS have lower elasticity than LUXURIES -necessities: food, housing, etc -luxuries: entertainment or vacation travel 3. Importance of Buyers' Budgets --when a good is expensive, an increase in price (P) will greatly impact how much you can spend on things and how much you consider alternatives ex) Paris vs Salt --if the price for a vacation to Paris increased by 20%, many people would start to consider other alternative because it take a big chunk of money --if the price of ordinary table salt increase by double or even triple the amount, it would have no significant impact on buying others goods and is therefore inelastic 4. Time Horizon --short run elasticities: elasticity measured just a short time after the price change -usually a year or less --long run elasticities: measures the quantity response after more time has elapsed -typically a couple years or more Ed short run<Ed long run. =>can find more substitutes **in markets where it takes a long time for buyers to fully adjust to a price change (like with oil or electricity), demand will be more elastic in the long run than in the short run Price Elasticity of Supply --the percentage change in quantity supplied caused by a 1% change in price --the bigger the value for the price elasticity, the more sensitive quantity supplied (QS) is --price and quantity supplied move in the same direction, so it is a POSITIVE number Factors that determine factors of supply 1. Alternatives in Production NOT consumption --supply will be more elastic when suppliers can switch to producing alternate goods more easily --this partially depends on the nature of the good it sells 2. The narrower the market definition, the more elastic the supply --the supply elasticity in NYS > the supply elasticity of the USA= 3. The time horizon --the longer we wait for a price (P) change, the greater the supply response to a price change Other Elasticities income elasticity of demand (Eid) --sensitivity of quantity to a change in income holding goods own price and other influences on demand contrast --we measure it alone demand curve, but when demand changes, there's a shift --the sign of the elasticity value matters -when income rises: positive and causes quantity to increase -when a rise in income lowers demand for a good: that particular good is an inferior good cross price elasticity --sensitivity of Q of good demanded to a change in the price of another good --when P of another good changes, the demand curve will shift NOTE: all types of elasticity measures share one thing in common-they tell us the percentage change in one variable caused by a 1% change in the other CHAPTER 6 when you're talking about the consumer, besides the fact of $ in pocket and price of good, there's also your psychological preferences and tastes --this is where abstract stuff comes in All consumers want to maximize their level of satisfaction given constraints: prices of goods and their budgets The Budget Constraint (BC) --an individual's BC identifies what he/she CAN AFFORD given income/budget and prices of goods he/she faces -your tasted will determine how much you would LIKE to buy ex) BC of of one individual named Max --he like movies and concerts --$100 a month for entertainment Price of movie:10 Price of concert: 20 Possible combinations Max can afford/BC Equation of the Budget Constraint 10*M+20*C=100 OR Pm*M+Pc*C=I **he can afford anything on or inside the budget line: feasibility** Slope of the Budget Line = in order to get one unit, he does give up a movie because opportunity cost -Pc/Pm=I-2I --for every concert, two movie --he gives up the same amount when along the line because the slope is constant


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