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Micro Notes Week 5

by: aswanson488

Micro Notes Week 5 Econ 215

Coe College

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Notes from this week on the demand curve
Class Notes
elasticity, DemandCurve, marginal cost
25 ?




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This 2 page Class Notes was uploaded by aswanson488 on Tuesday September 27, 2016. The Class Notes belongs to Econ 215 at Coe College taught by Ryan in Fall 2016. Since its upload, it has received 11 views. For similar materials see Microeconomics in Principles of Microeconomics at Coe College.

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Date Created: 09/27/16
Notes for week of 9/26     Optimal decisions We arrive at a decision by optimizing net benefits. This is done through utility. Benefit is  measured in dollars, or price (P). Total Net Utility (TNU) = Total Utility (TU) ­ Total costs Two ways to calculate optimal decisions     Optimization in levels     Optimization in differences Optimization in levels Optimization in differences (marginal analysis)     Use marginal net utility to calculate differences Marginal net utility (MNU) = marginal utility ­ marginal cost Definitions:  Marginal benefit­ the additional benefit from consuming 1 more unit. This means what  you would gain by buying one more of x. Optimal consumption bundle­  Optimal purchase rule­ It always pays the consumer to buy more of any good when  marginal utility > P unless if marginal utility < P. When possible, the consumer should  buy a quantity of each good or service at which marginial utility is equal to price. Only at this quantity do consumers maximize TNU (total net utility), assuming their budget is  fixed. P needs to be lower to buyers and consumers optimal decisions.  9/28 When benefits > cost, net utility increases Definitions: Consumer surplus­ The difference between the value to the consumer of the quantity of  good x purchase and the amount the market requires the consumer to pay for that  quantity of x. In other words, the difference between what you’re willing to pay and what  the good actually costs. Elasticity­ measures the responsiveness of buyers to prices and income  Demand Curve properties Elasticity Price elasticity of demand     Tells how much demand decreases as P (price) increases Consumers will consume until P = marginal benefit When the demand curve is very elastic, we call this very responsive. A small amount of  change in P leads to a large change in quantity demanded When the demand curve is inelastic, we call this not responsive. A small or large  change in P leads to a small change in quantity demanded.  Determinants of elasticity 1.The existence of substitutes Many substitutes means the demand curve will be more elastic. Few substitutes means  less elasticity.  2. Share of the budget spent on the good A bigger share of the budget means more elasticity. If a candy bar went up in price from $1 to $1.50, you’d still buy it because it’s still a small amount of money. If a $20,000  goes down in price by $2,000, you’d buy it because it’s a large amount to spend on a  good and $2,000 is a large markdown. 3.  Necessity and luxury A good or service that is deemed necessary is inelastic. No matter what the price rises  to, consumers will still want to item because they need it. Luxury items are inelastic  because they are wants, not needs, and consumers will not demand them if the price  gets too high. 4. Time for adjustment In the immediate run, goods are inelastic. In the short run, goods are elastic. In the long  run, items are very elastic. 


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