9/27 and 9/29 notes
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This 5 page Class Notes was uploaded by HD on Monday September 26, 2016. The Class Notes belongs to CDAE 061 at University of Vermont taught by Joshua Farley in Fall 2016. Since its upload, it has received 5 views.
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Date Created: 09/26/16
9/27/16 *iclicker* Demand for drugs (epipen) is: o Answer: price elastic = demand is the same regardless of price *iclicker* The price increase is evidence that the supply of these drugs is: o Answer: price inelastic Farm incomes in response to drought Price elasticity of demand o Measure of the extent to which quantity demanded and quantity supplied respond to variations in price, income and other factors Why does it matter? o Agriculture We don’t notice wheat price raise but the poor do o Natural resources o Healthcare Essential drugs/procedures o Community development Land values, rent, housing Drugs and crime Price elasticity of demand (continued…) o Def = measure of the responsiveness of the quantity demanded of a good to a change in the price of that good o % change in quantity demanded / % change in price *iclicker* Price falls by 2%, quantity demanded increases 6%, elasticity of demand is: o 3 and revenue increases Price elasticity of demand (continued…) o >1 = elastic o <1 = inelastic o = 1 = unit elastic o Elastic demand The total revenue and price move in opposite directions, revenue and quantity move in the same direction o Inelastic Total revenue and price move in the same direction, revenue and quantity move in opposite directions o What is the elasticity of demand for oil? Originally (1978) $46/barrel, 63 million barrels a day New (1980) $97/barrel, 62.9 mil barrels a day % change in Q / % change in P = 0.6/110 = 1/183: inelastic Elasticity of demand and volatility o Price inelastic demand Small changes in quantity supplied lead to large changes in price Fluctuations in supply lead to fluctuations in economy (instability) Instability makes it difficult to plan or invest, undermines quality of life Elasticity and total expenditure o Total expenditure = PxQ Market demand measures the quantity (Q) at each price (P) o Total expenditure = total revenue Inelastic demand and profits o Lower supply = greater profit o Elasticity of domestic manufacturing jobs that can be exported to Mexico OG = $10/hr, 10,000 jobs/year New = $10.5/hr, 8,000 jobs/year % change in quantity / % change in price =20/5 : elastic Determinants of Price Elasticity of Demand o The more essential the less elastic Agriculture is “pretty damn essential”, so is natural resources o Substitution possibilities If there’s no substitutions there’s inelastic demand Lots of subs for domestic jobs Few subs for oil o Budget share o Time Elasticity increases over time o Graphical interpretation of price elasticity of demand *look at slide #20* Steep line = inelastic demand Shallow line = elastic demand 9/29/16 Perfectly elastic demand curve o Example = gas (best example) One person raises the price, nobody will buy it because they’ll just go “across the street” to another gas station Perfectly inelastic o Example = epipen Anything that’s essential no matter the price Implication of inelastic demand for GNP o GNP essentially sums PxQ across all final goods and services in any economy Cross-price elasticity of demand o The % by which quantity demanded of the first good changes in response to a 1% change in the price of the second good o Substitution good When the cross price price elasticity of demand is positive Example = price of oil goes up, demand for ethanol goes up too o Complement good When cross price elasticity of demand is negative Example = price of oil goes up, demand for big cars goes down *iclicker* Income elasticity of demand is: o Answer: quantity demanded changes in response to a 1% change in income Income elasticity of demand o Normal goods Income elasticity is positive o Inferior goods Incomes elasticity is negative Example = ramen noodles, the slums Price elasticity of demand o The % change in quantity supplied that occurs in response to a 1% change in price o Price elasticity of supply = Q/Q // P/P o Example = oil (check slide) Highly inelastic supply curves o How elastic is the supply of agricultural output? Tree crops Annual crops Milk Beef o How elastic is the supply curve for natural resources? Renewable Non-renewable Price elasticity of supply o Determinants Flexibility of inputs Mobility of inputs Ability to produce substitute inputs Time ____________________________________________________________________________ The Nature of Natural Resources *iclicker* o Excludability = a legal principle that when enforced allows an owner to prevent others from using his or her asset o Rivalness = an inherent characteristic of certain resources whereby consumption or use by one person reduces the amount available for everyone else What are the scarce resources? o Energy o Labor o Land o Water o Raw materials Raw materials come from nature Laws of Thermodynamics o First law = can’t make something from nothing Imposes constraint on total size of economic system Only “something” available is the resources provided by nature o Second law = disorder and uselessness increases All production requires low entropy energy and creates high entropy waste Low entropy must be divided between maintenance of natural capital and human made (built) capital Finite stock of accumulated low entropy Fossil fuels Solar energy is ultimate limit on physical size of the economy Conclusion o The ultimate scare resource is low entropy matter/energy o Low entropy/useful resources provided by nature Abiotic Fossil fuels Minerals Water Land Solar power Biotic Ecosystem goods Ecosystem services Waste absorption capacity What are the characteristic of scarce resources relevant to allocation? o Stock Flow Resources (raw materials, ecosystem goods) Example = economic structure converted to economic products Production = material transformation Used up, not worn Use = depletion My use leaves less for you to use Rate or flow can be generally controlled We choose how fast we consume fossil fuels o Fund Service Resources (ecosystem functions, services, land, machines, labor) Structure generates function Ecosystem services Not transformed into what it produces My use may not leave less for you to use Human made fund service resources wear out, not used up Natural fund service resources spontaneously restored by solar power Rate of use can’t be controlled
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