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Econ 102 Week 6 Notes

by: Michelle Pope

Econ 102 Week 6 Notes Econ 102

Michelle Pope
GPA 3.5

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These notes cover part 2 of Comparative Statics and part 1 of Price Controls
Microeconomic Principles
Dr. Issac DiIanni
Class Notes
Econ, 102, week, 6, comparative, statics, price, Controls
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This 7 page Class Notes was uploaded by Michelle Pope on Sunday October 2, 2016. The Class Notes belongs to Econ 102 at University of Illinois at Urbana-Champaign taught by Dr. Issac DiIanni in Fall 2016. Since its upload, it has received 21 views. For similar materials see Microeconomic Principles in Microeconomics at University of Illinois at Urbana-Champaign.

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Date Created: 10/02/16
(9/28, 10/3, 10/5) Price Controls Wednesday, September 28, 2016 11:33 AM 1. The Price System as a Thermometer a. Reflecting underlying reality b. Direction of Causation: the causal relationship between one event and another i. A happens then B happens ii. Does A cause B or does B cause A? iii. May have significant consequences if understand causation incorrectly and reacts to it incorrectly iv. EX: Temperature- > Thermometer Reading Thermometer Reading- > Temperature 2. The Economic Theory of Price Controls a. Price Control Law: a law that mandates what price buyers and sellers must trade at i. Has no effect because the price is already at mark-eclearing price b. Effect Price Control: a price control law that keeps the price above or below the market-clearing price i. Effects people's behavior c. Maximum Price Controls i. Maximum Price Control Law (Price Ceiling): law that prohibits people from trading at a price above legal maximum 1) Keeps price away from equilibrium 2) Can be effective if price is below market-clearing price or equilibrium a. Minimum Price Controls i. Minimum Price Law (Price Floor): law that prohibits people form trading at a price below a legal minimum 1) Keeps price away from equilibrium 2) Can be effective if price is above market-clearing price or equilibrium %ΔP Since the price went down from $2 to $1, the %ΔP is -50% It decreased by 1/2 which is 0.50 or 50% It is negative because the price went down f. Income Elasticity of Demand i. EQx M =%ΔQ /XΔM ii. Percent change in quantity divided by the percent change in income iii. If income increases and: 1) If negative number, product is an inferior good 2) If positive number, product is a normal good. g. Cross-Price Elasticity of Demand D D i. EQx Py=%ΔQ /XΔP Y ii. Crossing from one good to another iii. Substitutes and complements iv. If negative number, products are complements v. If positive number, products are substitutes 7. Consumer and Product Surplus a. Demand curve: set ofm aximum buying prices b. Supply curve: set of minimum selling prices c. EX: good 1 Max buying price: $200; Min. selling price: $100 Actual price: %125 Buyer gains $75; seller gains $25 Total gain: $75 + $25 = $100 d. Consumer Surplus: measure of the gain that the buyer experiences from an exchange e. Producer Surplus: measure of the gain that the seller experiences from an exchange f. Total Gain from Trade: sum of consumer surplus and producer surplus i. Determined by the maximum buying price and minimum selling price ii. P*=equilibrium price iii. Q*=equilibrium quantity 8. Equilibrium: a. Equilibrium: situation in which no individual, taking the behavior of all others as given, wants to change their own behavior (Nash equilibrium) i. No one is changing b. Shortage: when the quantity supplied is lower than the quantity demanded c. Surplus: when the quantity demanded is lower than the quantity supplied d. Equilibrium price and market clearing price are two different concepts but refer to the same point on the graph e. The difference between scarcity and shortage: i. Scarcity: amount of goods is not enough to satisfy all human desires 1) Cannot solve scarcity ii. Shortage: quantity supplied is lower than the quantity demanded 1) Can produce more supply for that particular good 2) At equilibrium, the shortage is gone iii. Dead Weight Loss 1) Dead Weight Loss: Gains from trade that are not being made 2) Total Gains from trade triangle is not being made 3) Lowest of the numbers is the limiting factor 4) Surplus: demand would be the limiting number 5) Shortage: supply would be the limiting number a. i. Economic Efficiency: situation in which all possible gains from trade are being made 1) Dead Weight Loss is economic inefficiency 2) Opportunities are being wasted 3) P* is the economic efficiency point ii. When at equilibrium, can identify the consumer and producer surplus iii. When the price is lower, the producer loses some gains and the consumers gain depend on the price you buy at iv. When the price is higher, the producers gains depend on which price you sell and the consumers loses some gains 10. Entrepreneur a. Entrepreneur: person who takes advantage of profit opportunity in the market i. Someone reacting to shifts in supply and demand ii. They move prices iii. Responding to incentives in the price system b. Dead Weight Loss is a potential profit opportunity i. EX: normal good P*=$1 and Q* is 50 New price is $2 and Q is 100 If seller still sells at $1, becomes a shortage Next day, seller sells at $1.50, still a shortage but not as bad Next day, seller sells $2, no shortage, at equilibrium price 11. The Role of the Price System a. The Price System is an Information System i. Improvement in technology ii. Oil is substitute for nuclear power iii. Oil price fall iv. Oil is used to make gas v. Increase in supply in gas vi. Trucking prices go down (supply goes up) vii. Retail goods supply goes up viii. Better in a market economy ix. Prices, demand, and supply changes much more in market economies 12. The Price System is an Incentive System a. EX: Market for gas when Hurricane Katrina hit Oil refineries got destroyed Less gas available People did drive less (because price went up not because they needed to conserve gas) a. Individual prices give people incentives to change behavior b. Revolves around each of us c. How price system creates social order d. Related to spontaneous order e. Prices do have to be free to adjust


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