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Intro to Microeconomics day 1 notes

by: Sarah Gordon

Intro to Microeconomics day 1 notes Econ 201

Marketplace > Indiana University > Economics > Econ 201 > Intro to Microeconomics day 1 notes
Sarah Gordon
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microeconomics week 1 and 2 notes and examples
Intro to Microeconomics
Hewei Shen
Class Notes
Econ, Economics, Microeconomics, Economics Microeconomics ECON 200 UW, supply, supply and demand, Econ; Economics; Mircroeconomics; Principles of Economics; Demand; Supply; opportunity cost
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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. 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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