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Econ 1110, Week 6 Notes

by: Cora Geunes

Econ 1110, Week 6 Notes ECON 1110

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Cora Geunes

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These notes cover lectures 10/11 on the theory of consumer choice as well as lecture 12 on the costs of taxation.
Introductory Microeconomics
Class Notes
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This 2 page Class Notes was uploaded by Cora Geunes on Thursday September 29, 2016. The Class Notes belongs to ECON 1110 at Cornell University taught by Sanders in Fall 2016. Since its upload, it has received 4 views.


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Date Created: 09/29/16
LECTURE 10/11  Total utility – happiness from given amount of units  Marginal utility – extra happiness from one extra unit  Law of diminishing marginal utility – the more of any 1 good consumed in a given period, less satisfaction (utility) generated by consuming each additional (marginal) unit of the same good  Indifference curve o Each point on an indifference curve yields same utility o 1. Downward sloping o 2. Higher curve, higher utility o 3. Indifference curves can’t cross o 4. Indifference curves are convex  Marginal rate of substitution – rate at which a consumer is willing to trade 1 good for another o Falls as you move down along an indifference curve  Optimizing choice of consumption bundle – highest indifference curve w/in consumption bundle  MRS=price(x-axis)/price(y-axis) o Price of x-axis in terms of y-axis  Income effect o Decline in price of any product, ceteris paribus, will make household better off o Household buys goods after price decline then it will have extra income – can be spent on product x whose price has declined  Substitution effect o Decline in price of prod x makes it cheaper, more attractive rel. to substitutes o If household shifts its purchasing pattern away from substitutes for x, it can spend more on prod. x whose price has declined  Economics makes the assumption that rational people try to maximize utility (the satisfaction a product gives the person)  Indifference curves – downward sloping  Higher indifference curve – more happiness  Any point on the highest indifference curve will be preferred to any other point on a lower indifference curve  Indifference curves never touch/cross  Indifference curves are convex (because of diminishing marginal utility)  Marginal rate of substitution – rate at which consumer is willing to trade one good for another LECTURE 12  As consumer surplus decreases, producer surplus decreases  o if we exchanged equilibrium quantity at equilibrium price  o C+E = deadweight loss o market distortion: whenever we force something on a market (tax, binding price ceiling/floor/quota) and prevents equilibrium  DWL & Elasticity of supply o when supply is inelastic, it’s harder for firms to leave the market when the tax reduces Ps o effect is that tax reduces q by sm amount, deadweight loss is small  DWL & Elasticity of demand o when supply is inelastic, it’s harder for consumers to leave the market when the tax increases Pb  doubling tax causes DWL to more than double  when tax is small, increasing it causes tax rev. to rise  when tax is large, increasing it causes tax rev. to fall  Laffer curve o x axis - tax size o y axis – tax revenue o (looks like an upside down u)


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