ECON 2020 (Dr. Macy Finck) September 26-30
ECON 2020 (Dr. Macy Finck) September 26-30 Econ 2020
Popular in Principles of Economics: Microeconomics
Popular in Economics
This 7 page Class Notes was uploaded by Gabrielle Ingros on Sunday October 2, 2016. The Class Notes belongs to Econ 2020 at Auburn University taught by William M. Finck in Fall 2016. Since its upload, it has received 8 views. For similar materials see Principles of Economics: Microeconomics in Economics at Auburn University.
Reviews for ECON 2020 (Dr. Macy Finck) September 26-30
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 10/02/16
ECON 2020 Lecture 1: Consumer Behavior and Factors that Change the Budget Line • Question #1: Why do we buy stuff? o We buy stuff to maximize utility. • Utility – the satisfaction a consumer obtains from the consumption of a good or service • Utility Facts: o Utility is measured in utils. § We CANNOT compare the utils assigned to a good by multiple people (it is different for everyone depending on your opinion). § We CAN compare the utils assigned to multiple goods by one person (if one person assigns the number to each good). • Total Utility vs. Marginal Utility: o Total Utility – the total satisfaction a person derives from consuming some specific quantity; TU increases as Qd increases § TU = ΣMU o Marginal Utility – the additional utility a consumer derives from an additional unit of a good § MU = ΔTU • Example: Quantity 1 2 3 4 5 6 TU 15 28 39 48 55 60 MU 15 13 11 9 7 5 • Law of Diminishing Marginal Utility – as Qd rises the Marginal Utility falls o Note: as Marginal Utility falls, willingness to pay falls as well § Quantity and Total Utility move together § Quantity and Marginal Utility move opposite • Question #2: When do we stop buying stuff? o When we run out of money! • Budget Line/Constraint – line that shows the different consumption bundles a consumer can purchase with a specific money income • Consumption Bundle – the combination of goods and services consumed by an individual o Note: the price of a consumption bundle cannot exceed the consumer’s total income o Income = (Qx * Px) + (Qy * Py) • Budget lines will always be straight line. ECON 2020 • Budget Line/Constraint Graph: o Assume a consumer with $24 to spend is choosing between $4 hot dogs and $2 chicken fingers. o The consumer can purchase all bundles on or to the left of the budget line. o If the consumer is at a bundle in the budget line, the only way to consume more of one good is to give up some of the other. o Opportunity Cost of X = max Qy / max Qx = Px / Py § Opportunity Cost of Hot Dog = 2 Chicken Fingers § Opportunity Cost of Chicken Fingers = ½ Hot Dogs Lecture 2: Factors that Change the Budget Line • Factors that Change the Budget Line: o (1) Income – a change in income causes a shift of the budget line (an increase in income allows for more goods to be purchased – an increase in income means an increase in the end points & a decrease in income means a decrease in the end points) ECON 2020 o (2) Price of Y – a change in price causes a rotation of the budget line (if the price of hot dogs decreases, the number of hot dogs you can buy increases & if the price of hot dogs increases, the number of hot dogs you can buy decreases) o (3) Price of X – a change in price causes a rotation of the budget line (if the price of chicken fingers decreases, the number of chicken fingers you can buy increases & if the price of chicken fingers increases, the number of chicken fingers you can buy decreases) ECON 2020 • Question #3: What do we buy first? o We buy the good that gives us the most marginal utility per dollar. § Marginal Utility Per Dollar = Marginal Utility/Price • Example: o Marginal Utility (MU) of vacation = 50,000 utils o MU of cheeseburger = 20 utils o Price (P) of vacation = $5,000 o P of cheeseburger = $1 § MU v P v 50,000 / 5,000 = 10 § MU c P c 20 / 1 = 20 • Utility-Maximization Rule (a.k.a. Consumer Equilibrium) – for utility maximization, the consumer must get the same amount of utility from the last dollar spent on each good o In other words: Total Utility is maximized when: § All income is spent § MUx/ Px = MUy = Py • Utility-Maximizing (Optimal Consumption): o Optimal Consumption Bundle – the bundle that maximizes total utility § Find the optimal consumption bundle using the following information: o Consumer Income = $24 o Px = $3 o Py = $2 Qx TUx MUx MUx/Px Qy TUy MUy MUy/Py 1 39 39 13 1 30 30 15 2 75 36 12 2 58 28 14 3 108 33 11 3 84 26 13 4 135 27 9 4 108 24 12 5 159 24 8 5 128 20 10 6 180 21 7 6 146 18 9 7 198 18 6 7 162 16 8 o Use the INCOME formula on possible optimal bundles to determine if all money is spent: § 1X and 3Y: (1*3) + (3*2) = $9 § 2X and 4Y: (2*3) + (4*2) = $14 § 4X and 6Y: (4*3) + (6*2) = $24 o Optimal = 4 units of X and 6 units of Y o Total Utility of Bundle = 135 + 146 = 281 utils ECON 2020 • Graphing Optimal Consumption: o What happens if prices change? § Two options: • Rewrite the entire table • Use a graph • Indifference Curve – a line that shows the consumption bundles that yield the same amount of total utility • Properties of (Most) Indifference Curves: o Indifference Curves (IC) are downward sloping o ICs farther from the origin represent a greater level of Total Utility (TU) o ICs never cross o ICs are bowed inward Lecture 3: Indifference Curves Continued • Calculating the Slope of Indifference Curves: o Slope = ΔQy/ΔQx o Along an IC: § ΔTUx + ΔTUy = 0 o This can be rewritten as: § MUx * ΔQx + MUy * ΔQy = 0 or § MUx * ΔQx = -MUy * ΔQy o Dividing both sides by ΔQx and by -MUy: § ΔQy/ΔQx = -MUx/MUy • Marginal Rate of Substitution – the ratio of the marginal utility of one good to the marginal utility of another: MRS = MUx / MUy ECON 2020 o Bundle 1: big MUx / tiny MUy = big MRS o Bundle 2: tiny MUx / big MUy = tiny MRS • Principle of Diminishing Marginal Rate of Substitutions – the more of good X a person consumes in proportion to good Y, the less Y the consumer is willing to substitute for X; Marginal Rate of Substitution decreases as Qx increases o The MRS changes along an Indifference Curve because of diminishing marginal utility o At 1, the consumer would be willing to give up a lot of Y to get another X o At 2, Y is scarce, so the consumer will only give up very little to get another X • Graphing Optimal Consumption: o Let’s add a budget line to the IC graph ECON 2020 o Which is the optimal bundle? - #2 o At bundle 2, slope of the IC = slope of the BL • Relative Price – the ratio of the price of one good to the price of the other o RP = Px / Py • Note: slope of budget line = -Px / Py • Thus, we can find the optimal bundle by setting: o MRS = RP or MUx / MUy = Px / Py • Relative Price Rule – at the optimal consumption bundle, MRS = R Bundle Qx MUx Qy MUy MRS A 2 2500 60 100 25 B 3 2000 40 200 10 C 5 1000 24 500 2 D 6 750 20 750 1 o Each bundle is a different point along the same IC o A is way over to the left – little of good X and lots of good Y, so MUx is really big and MUy is low o As quantity falls, the MU increases § If Px = $50 and Py = $5, what is the optimal bundle? • Solution: MRS = RP • MRS = MUx / MUy • RP = Px / Py = 50 / 5 = 10 • Optimal Bundle = B
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'