EC201 Week 2 Notes
EC201 Week 2 Notes Econ 201
Popular in Introduction to Microeconomics
Popular in Microeconomics
verified elite notetaker
verified elite notetaker
verified elite notetaker
verified elite notetaker
verified elite notetaker
verified elite notetaker
This 13 page Class Notes was uploaded by Annie Notetaker on Thursday October 6, 2016. The Class Notes belongs to Econ 201 at University of Oregon taught by Erica Birk in Fall 2016. Since its upload, it has received 7 views. For similar materials see Introduction to Microeconomics in Microeconomics at University of Oregon.
Reviews for EC201 Week 2 Notes
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: 10/06/16
EC 201- Erica Birk: Week 2, Chapter 3 Mon 10/3/16 Gains from Trade Fundamental of Microeconomics: Supply and Demand Curve 1. Consider two individuals: James and John- Produce beer and wine Output Per Day: Bottles of Beer Bottles of Wine James 10 5 John 6 2 James has the Absolute Advantage in beer and wine making. James can make more bottles of wine and bottles of beer than John, given the same input Are there gains from trade? Opportunity Costs: 1 Bottle of Beer 1 Bottle of Wine James ½ Bottle of Wine 2 Bottles of Beer John 1/3 Bottle of Wine 3 Bottles of Beer John has the Comparative Advantage in beer-making John only loses 1/3 of a bottle of wine to make 1 bottle of beer, whereas James loses ½ bottle. James has the Comparative Advantage in wine-making James only loses 2 bottles of beer to make 1 bottle of wine, whereas John loses 3 bottles. 2. Rosie and Amani- Produce cookies and pie Output Per Day: Cookies Pies Rosie 400 4 Amani 600 X What are the values of X for which we would have gains from trade? • In order for there to be gains from trade, someone has to have the comparative advantage in something Two scenarios: 1. Rosie has a comparative advantage in pies and Amani has a comparative advantage in cookie a. If Rosie has the comparative advantage in pie-making, it must be true that 100 cookies < 600/X cookies: X<6 2. Rosie has a comparative advantage in cookies and Amani has a comparative advantage in pie a. If Rosie has the comparative advantage in cookie-making, it must be true that 1/100 pie < X/600 pies: X>6 If X<6 or X>6, there are gains from trade. If X=6, there are no gains from trade Opportunity Costs: 1 Cookie 1 Pie Rosie 1/100 Pie 100 Cookies Amani X/600 Pies 600/X Cookies CHAPTER 3 Supply and Demand We are examining specific markets, rather than the entire economy Market Economies: Economies where resources are allocated among households and firms with little-to-no government intervention (i.e. capitalism) Government intervention is not necessarily bad Planned Economies: Economies where decisions regarding production are set by a central authority (i.e. socialism) Markets 2 • The exchange of goods/services in a market economy happens through prices that established in markets • A market is a collection of buyers/sellers of a particular product/service Competitive Market: A market with many buyers/sellers such that each only has a small impact on the market price and output The key components of a competitive market are: • Homogenous Goods: No product differentiation, everything is the same • Many Participants: Infinite buyers/sellers- no one person has enough impact to effect price and no one person leaving the market will change the demand schedule • No Barriers to Entry: Sellers can enter the market immediately without any barriers, specifically when a price rises • Perfect Information: Everyone has full information about the price Markets of agricultural goods are a good example: • Most farmers do not have an advantage over one another and cannot demand higher prices • It is highly likely that no one person can dictate the price they pay for produce, since a mass amount of people buy produce Imperfect Markets: Markets in which either the buyer or the seller has influence on the market price. Includes monopsonies, monopolies, and oligopolies • Monopoly: When a single company supplies the entire market for a particular good/service If a product is very different from that of its competitors, then the manufacturer can charge a higher pri ce • Monopsony: Has few buyers • Oligopoly: Few sellers or big players 3 Quantity Demanded vs. Demand Demand: The relationship between prices and the quantity demanded Demand Curve: A graphical representation of demand Quantity Demanded: The amount of a good/service purchased at the current price *Law of Demand: Ceteris paribus, quantity demanded falls when prices rise, and rises when prices fall If the price changes: It does not change our demand, it changes the quantity demanded Demand Schedule: A table that shows the relationship between the price of a good and the quantity demanded Demand Schedule for Mackerel Nigiri: Price per piece Pieces of Nigiri demanded $7 0 $6 1 $5 2 $4 4 $3 6 $2 9 $1 12 $0 15 Market Demand: The sum of all individual quantities demanded by each buyer in a market at each price Ex.: I’m willing to buy one piece of sushi for $6, and no one else is willing to pay that much, how much can be sold to the total market? 1 piece Pieces Demanded Person A Person B Person C Market Total 2 pieces 4 pieces 6 pieces 12 pieces 4 If 50 people demand 2 pieces of sushi at $3/piece, how much will be sold on the market? 100 pieces Know the difference between changes in quantity demanded (movements along the demand curve) and changes in demand (shifting of the demand curve) Quantity demanded is the amount wanted at a given price. The only way to change quantity demanded is to change the price Changes in demand are not caused by changes in prices of the good. It is only changed by how much consumers want it Causes of shifts in the demand curve: 1. Changes in income: With a higher income, you have more money to spend on goods/services, assuming prices do not change. Normal Good: A good that people buy more of as their income increases Inferior Good: A good that people buy less of as their income increases Ex.: Your income has increased. What would you expect to happen to your demand curve for ramen? a. Shifts to the left (decrease in demand) b. Shifts to the right (increase in demand) c. Does not change at all, this describes a change in quantity demanded 2. Changes in the price of related goods: Your demand for some goods depends on the availability of other goods Compliments: Two goods that are used together. When the price of a complementary good rises, the demand for a related good goes down Substitutes: Two goods that are used in place of each other. When the price of a substitute good rises, the quantity demand falls and the demand for the related good goes up Ex.: An accident results in Coca Cola losing most of its supply, its price will increase drastically. What do you expect to happen to the demand for Pepsi? 5 a. Shifts to the left b. Shifts to the right c. Does not change at all, this describes a change in quantity demanded 3. Changes in preferences: As something (clothing) goes out of style, people demand less of it because it is no longer desirable 4. Expectations regarding future prices: If we think the price of something will rise in the future, we demand more of it today, while it is still low Price isn’t just the cost in dollars. Includes time, legality 5. The number of buyers: If there are more people to buy a good, market demand will be higher (to the right) of a market demand with fewer buyers 6 EC 201- Erica Birk: Week 2, Chapter 3 Wed 10/5/16 The Law of Demand: As the price of an item rises, the quantity demanded of the item generally falls What changes quantity demanded? • Price of that specific good (ONLY thing that changes it!!!) What changes demand? • Changes in income • Preferences • Prices of related goods • Compliments and substitutes • Expectations about future prices, laws, etc. Mathematical representation of demand : d Q (p) = a-bp Where: • a > 0 • b > 0 Since b > 0, price and quantity are inversely related Suppose that Q (p) = 10-2p Quantity demanded falls two units for every dollar increase in price d • At p = 2, the quantity demanded in the market is Q (2) = 10-2(2) = 6 units d • At p = 3, the quantity demanded in the market is Q (3) = 10-2(3) = 4 units Suppose that Q (p) = 200-15p • At p = 10, the quantity demanded in the market is Q (10) = 200-15(10) = 50 units 7 d • At p = 12, the quantity demanded in the market is Q (12) = 200-15(12) = 20 units Quantity Supplied: The amount of a good/service that producers are willing and able to sell at the current price Supply: The relationship between prices and quantity supplied Supply Curve: A graphical representation of supply Law of Supply: Ceteris paribus, the quantity supplied of a good rises when the price of the good rises, and falls with the price of the good falls Suppliers want to sell when the price is high, and don’t want to when the price is low Supply Schedule: A table that shows the relationship between the price of a good and the quantity supplied Sushi supplied by a sushi restaurant Price per Piece Pieces of Sushi Supplied $7 15 $6 12 $5 9 $4 6 $3 4 $2 2 $1 1 $0 0 As the price of the sushi goes up, the restaurant makes more More Product = More Profit In EC201, we look at linear supply curves. In our case, the curve itself is more important than each point Market Supply: The sum of the quantities supplied by each seller in the market at each price • If 10 firms make 1 piece of 1 good, then there are 10 goods available on the market 8 Mathematical representation of supply : s Q (p) = c + dp Where: • c > 0 • d > 0 Since d > 0, price and quantity are positively related Suppose that Q (p) = 2 + 2p Quantity supplied rises two units for every dollar increase in price • At p = 6, the quantity supplied in the market is Q (6) = 2 + 2(6) = 14 units • At p = 7, the quantity supplied in the market is Q (7) = 2 + 2(7) = 16 units s Suppose that Q (p) = 50 + 10p Quantity supplied rises 10 units for every dollar increase in price s • At p = 10, the quantity supplied in the market is Q (10) = 50 + 10(10) = 150 units s • At p = 15, the quantity supplied in the market is Q (15) = 50 + 10(15) = 200 units A change in price cannot shift the supply curve (cause a change in supply). It can only change the quantity supplied The following can cause shifts in the supply curve: 1. The cost of inputs: Resources used in the production process. These include workers, equipment, raw materials, buildings, etc. • If the cost of input increases, it costs a firm more to produce a good. Therefore, they require a higher price before they are willin g to sell the good • If the cost of input falls, it becomes cheaper to make the good, so they are willing to sell at lower prices 9 • If the cost of labor is more expensive, firms tend to demand higher prices to supply a certain level of goods. This is a shif t to the left of the supply curve 2. Changes in technology or the production process : As technology improves, firms require less inputs to produce a good. Therefore, production is cheaper, and firms are more willing to accept a lower price for a given level of output 3. Taxes and subsidies: Similar to a change in the cost of inputs • If a firm must pay a tax for each good sold, selling that good has become more expensive, and they require a higher price for a given level of output • A subsidy (does the opposite of a tax) is the government paying a firm some amount of money to produce a good. By doing so, the government has lowered the firms’ cost of production, and firms sell goods at a lower price 4. The number of firms in the industry: The number of customers and firms impacting demand • If one firm sells 100 goods for $2 and another firms sells 200 of the same good for $2, the demand curve shifts to the right 5. Price expectations: Future expectations of the price of a good/service may influence a firms’ willingness to sell • If a firm expects the price to be higher in the future they may want to sell less now, so they can sell more at a higher price in the future. • If they expect a lower price in the future, they may want to sell more now, while the price is high How do supply and demand impact each other? Equilibrium: Occurs when at the market price, the quantity supplied equals the quantity demanded. This occurs at the point where the demand curve and supply curve intersect Equilibrium Price: The price at which the quantity supplied is equal to the quantity demanded. Also called the Market Clearing Price 10 Equilibrium Quantity: The amount at which quantity supplied is equal to quantity demanded Law of Supply and Demand: The market price of any good will adjust to bring the quantity supplied and quantity demanded into balance Very strict assumptions for equilibrium: No barriers to entry, everyone has the same information, homogenous products Market-clearing conditions that define equilibrium allocation • There can be no pressure on prices to change: Prices are set, unless something outside the model changes • There can be no pressure on quantities to change: Price ceilings, floors, minimum wages, and quotas can all affect this Where is this allocation? d s • The price, p, that equates Q (p) and Q (p) d s Suppose that Q (p) = 50-p and Q (p) = 20+2p • Characterize the equilibrium in this market. Find the equilibrium price and the equilibrium quantity Q (p) = Q (p) 50-p = 20+2p 50 = 20+3p 30 = 3p p = 10 (Equilibrium price is $10) Q (10) or Q (10) 50-p or 20+2p 50-10 = 40 or 20+2(10) = 40 Suppose that Q (p) = 100-4p and Q (p) = 28+5p 11 • Characterize the equilibrium in this market. Find the equilibrium price and the equilibrium quantity Q (p) = Q (p) 100-4p = 28+5p 72 = 9p p = 8 (Equilibrium price is $8) d s Q (8) or Q (8) 100-4p or 28+5p 100-4(8) = 68 or 28+5(8) = 68 Shortage: The case where quantity supplied is less than quantity demanded • The difference between quantity demanded and the quantity supplied is the size of the shortage • If prices are high and supply is low, there will be more demand than there is supply • Puts upward pressure on prices Surplus: The case where quantity supplied is greater than quantity demanded • The difference between quantity demanded and quantity supplied is the size of the surplus • Puts downward pressure on prices: Overproduction and low prices • Not enough demand to keep up with supply Demand Increases: If demand increases (shifts out, or to the right) and supply remains the same, what happens to equilibrium quantity an d equilibrium price? Demand might shift out if: • There’s a change in price in a compliment (lower) • There’s a change in preferences (up) Demand increases, prices increase 12 What happens if demand decreases (shifts left)? Demand might shift in if: • There’s a change in preferences (down) • If more firms produce the good (increase in supply), prices fall because of substitutes, competition, surplus in goods, etc. Demand decreases, prices decrease What if supply decreases (shifts left)? • Prices increase • People start using substitutes d s If Q (p) = 60-p and Q (p) = 2p, there is an equivalent system of equations • Inverse Demand: p(Q ) = 60 - Q d s s • Inverse Supply: p(Q ) = 0.5Q d s p(Q ) = p(Q ) • Q (p) = 60-p p = 60-Q d • Q = 2p s p = 1/2 Q d s 60 - Q = 0.5Q d s 1.5Q* = 60 (Q = Q ) Q = 40 p(Q*) = $20 13
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'