Intro to Microeconomics day 1 notes
Intro to Microeconomics day 1 notes Econ 201
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This 4 page Class Notes was uploaded by Sarah Gordon on Friday September 23, 2016. The Class Notes belongs to Econ 201 at Indiana University taught by Hewei Shen in Fall 2016. Since its upload, it has received 5 views. For similar materials see Intro to Microeconomics in Economics at Indiana University.
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Date Created: 09/23/16
1. EXAMPLE for PPF: Suppose you have a limited amount of time to study for two exams, Economics and Accounting. a. What would the production possibilities curve for the exam grades look like> i. A straight line like the ppf for sedans and SUBs ii. A bowed outward curve like the PPF for tanks and automobiles 1. Curve because the extra amount of time you study, the marginal opportunity cost is higher and higher 2. The first hour spent studying econ is much more valuable than the last hour… increase by 30 points for extra minutes only gain 1 or 2 points (harder to learn all material) 2. EXAMPLE for Trading: PPF for picking apples and cherries a. You and your neighbor each have a limited time to pick cherries and/or apples. If you spend your time picking cherries/apples you can pick 20 pounds of cherries/apples. If your neighbor spends all of her time picking cherries, she can pick 60 lbs of cherries. If your neighbor spends all of her time picking apples she can pick 30 lbs of apples. b. What if you and your neighbor decided to specialize and trade? i. Could your neighbor benefit from trade? She is better at picking both… c. Assumption… without trade you pick and consume: 8 apple and 12 cherry, and your neighbor 9lbs of apple and 42 lbs of cherries d. Now, you specialize in picking apples and she specializes in cherries… now if you trade 10lbs of your apples for 15 pounds of you neighbors cherries, you will be able to consume i. Now you consume at a point that is at a point outside your PPF point so you and your neighbor are both better off specializing and trading 3. EXAMPLE of Comparative advantage: a. US has better advantage of automobiles or supercomputers, but China can produce more clothing and corn/rice, but trade so that we all can have the products and trade MARKET SYSTEM 1. Examples of markets: farmers markets, stock market, walmart. Ebay, kroger, red lobster, hotels, (services) 2. Like all economic models, the circular flow dieagram is a simplified version of reality: ni government, financial system, foreign buys and sellers of goods. 3. Why is market economy more successful than centrally planned economy? a. After all, individuals are acting only in their own rational selfinterst b. But markets with flexible prices allow the collective actions of households and firms to signal the relative worth og goods and services c. Adam smith argued for free markets in his 1776 treatise, an inquiry into the nature and causes of the wealth of nations d. “Invisible hand” allows individual responses to collectively end up satisfying the wants of consumers 4. EXAMPLE: a. How do you make an iPad? i. Silicon valley, hundreds of firms are involved, firms can trade freely on the market, ii. Guided by their ow self interest they all contribute to the final product 5. Examply of entrepreneur: a. Henry ford “if i had asked my customers what they wanted, they would have said a faster horse” b. Make a vital contribution to economic growth with a considerable personal risk and sacrifice 6. Protection of private property a. When criminals can take your wages or profits, households and firms will have little incentive to work hard. b. Property rights the rights individuals or foirms have to the exclusive use of their property including the right to buy or sell it are essential here c. Enforcement of contracts and property rights Chapter 3 Supply and Demand Section 3.1 1. Logic behind law of demand a. When the price of a product falls, two effects cause consumers to purchase more of it: i. The product has become cheaper r elative to other goods, so consumbers substitute toward it. This is the substitution effect. 1. Price decreases, it is relatively cheaper than other goods so you will buy more ii. The consumer now has greater purchasing power, and elects to purchase more goods overall. This is i ncome effect. 1. Prices decreases, has more purchasing power. When you have more money, it becomes “cheaper” to yourself. 2. Income of consumers, prices of related goods, tastes, demographic a. Change in price of related goods i. Substitutes: goods and services that can be used for the same purpose 1. Pepsi and cola, beef and pork, etc ii. Complements: Goods and services tat are used together 1. Hot dog buns and hot dogs, phone and phone case, peanut butter and jelly, ice cream and ice cream cones iii. 09/07/2016 Section 3.1 / ...continued 1. EXAMPLE for SUBSTITUTES a. Are tablets substitutes for ereaders? i. As tablets have become more popular the sales of ereaders have fallen ii. Because consumers by more tablets because it has more functions iii. So yes. Substitute 2. Change in expectations about future prices a. An expected increase in the price tomorrow ncreases demand today. b. An expected decrease in the price tomorrow decreases demand today. i. Examples: 1. if you found out the price of gasoline would go up tomorrow… 2. Firearms were restricted so the price would go up, so a lot of people bought firearms and ammunition more before it went up 3. Fruit...in season versus out of season c. Consumers buying other goods when the price of the good in question rises? i. Income effect ii. Substitution effect Section 3.2 1. Supply Schedule: a table that shows the relationship between the price of a product and the quantity of the product supplied. 2. Quantity Supplied: The amount of a good or service that a firm is willing and able to supply at a given price. 3. Supply Curve: A curve that shows the relationship between the price of a product and the quantity of the product supplied. 4. The Law of Supply: The rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied. 5. EXAMPLE of Price of Substitutes and number of firms a. An illinois farmer can plant corn or soybeans. IF the price of the soybeans rises, he will plant MORE corn. b. More firms in the market will result in __MORE__ product available at a given price (__more___supplies) meaning the supply curve will shift to the right c. Fewer firms? The supply curve will shift to the left. Section 3.3 1. Putting Demand and Supply Together a. The purpose of market is to bring buyers and sellers together. The interaction in the markets ultimately results in firms being led to produce the goods and services that the consumers want the most. 2. Market Equilibrium: a situation in which quantity demanded equals quantity supplied. 3. Competitive Market Equilibrium: A market equilibrium with many buyers and sellers a. Does buyer decide the price? Seller? Neither consumer nor producers can determine the price, only the interaction of the market can determine the price. 4. A Surplus in the Market for Smartphones (see notes) 5. Demand and Supply both count a. Price is determined by the i nteraction o b. Neither group can dictate price in a competitive market (i.e. one with many buyers and sellers). c. However c hanges in supply and/or demand traded 6. The Effect of Shifts in Supply on Equilibrium a. Suppose Amazon enters the smartphone market and more smartphones are supplied at any given price. b. What happens to equilibrium price? Equilibrium quantity? Price will decrease and quantity will increase 7.
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