INTRO MICROECON ECON 200
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This 14 page Class Notes was uploaded by Miss Adeline Weimann on Wednesday September 9, 2015. The Class Notes belongs to ECON 200 at University of Washington taught by Staff in Fall. Since its upload, it has received 8 views. For similar materials see /class/192485/econ-200-university-of-washington in Economcs at University of Washington.
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Date Created: 09/09/15
A Model Answer to a Question on Consumer Choice The good model answerexplanation is in blue font below The soso answer is in green font below You receive 4050 of the points for this type of answer The inadequate answer is in red font If you address the question inadequately you will receive possibly 020 of the grade For example if question is worth 10 points you would receive a maximum of 2 points if you address it inadequately Larissa purchases a variety of goods and services Among them Larissa buys entertainment services by attending concerts Larissa s marginal values and total values to be calculated for concerts per year are as follows a Fill in the column above for Total Values of various numbers of concerts per year b For the second concert explain the difference between the total and the marginal value Also explain why the marginal value of additional number of concerts decreases The MV is what Larissa is willing to give up of other goods and services to be able to enjoy an additional second concert The total value of two concerts is the total amount of other goods and services Larissa would be willing to give up in order to attend two concerts rather than attend no concerts at all The MV is what she is willing to pay for an extra unit of the good The total value is what she is paying for all the units The question states that Larissa buys a variety of goods and services The marginal value of additional items for any one good e g concert decreases because at some point she would prefer to have a unit of another good or service to going to yet one more concert Her willingness to give up of other goods in order to attend additional concerts goes down with increased number of concerts This is veri ed by the fact that Larissa likes a variety of good and services explained by the stateme nt in the question Larissa purchases a variety of goods and services The marginal value falls because she gets bored with this good as she consumes extra units of it c Now suppose the market price of a concert is 45 How many concerts will Larissa attend per year How did you choose your answer Larissa purchases concerts up to where MV Price of concert This is achieved at 4 concerts per year For the rst concert she is willing to give up 60 worth of other goods and services and she is only asked to give up 45 So she voluntarily purchases this rst concert For the second concert she is willing to give up 55 worth of other goods and services and she is only asked to give up 45 So she voluntarily purchases this rst concert on to the 4th concert She maximizes her CS with this choice She will attend 4 concerts Session 8Econ 200 Chapter 4Source of Mutual gains from exchange Putting the market supply and market demand together how in the absence of transactions costs the gains from trade are maximized for the parties involved P Supply 4 Q El The figure above shows the D and S together Let s say for thelSt unit MV for buyer is 22 and that of seller MC of seller is 6 Their mutual gains form this exchange is 16 There will be voluntary exchange of 1st unit For the 2nd unit say the MV for buyer is 20 the MC cost of seller 8 so this trade also takes place As long as MVs are different exchange will be mutually beneficial Exchange will take place until which point Where will it stop What will be the MVMC of each side and how much will be exchanged When the MV for buyer is 14 and for the seller MC is 14 further exchange stops There are no further gains from exchange At MV or Price of 14 all gains from trade are exhausted At P 14 we say our market is in a Pareto Optimal or an efficient condition Here the gains from exchange are maximized These gains are the CS and seller s rents together in the triangles to the left of 50 units sold Insights about the organized markets Why do we observe a single equilibrium price In a 2 person economy the price at which a good changes hands is not well specified it depends on the bargaining positions of the two people But in the modern economy with organized markets for most goods there is a single price To show this suppose there are two villages right next to each other where there is a market for apples in each Suppose the price that appears in one small market is a higher than the other Since these are right next to each other the word gets out that one market has a higher price Soon those who bought their apples in the lower price market turn around and sell them in the higher price market You can imagine what happens when this process takes place this is called arbitrage N o haggling Generally for the everyday goods and services we purchase there is no haggling Some or all of the mutual gains from trade may be dissipated due to use of time and other resources if we haggle Suppose every time you go to negotiate a price you take a consultant with you to make sure you are not cheated You have to pay this person That is the cost of negotiating What is the cost of haggling Why do people usually haggle over the price of cars and houses How are the equilibrium price and quantity in a market established If the price is too high consumers stay away and goods go unsold That is a signal for sellers How do sellers react What happens if the price is too low Price per Unit Market S PE Market D QE Quantity At PE the quantity demanded quantity supplied Consumers purchase goods until the MV falls to price They will not go further since after that their MV is less than what they have to give up of other goods to purchase another unit of this good At PE all consumers who are buying any amount of this good have the same MV Since they will all value the good at the same margin no further trade among consumers will take place The mutual benefits are exhausted Markets Where lots of buyers and sellers transact at one price are called competitive markets What quali cations exist for the maximum gains from trade to be realized The concept oftransaction costs The above analysis assumes rights to buy and sell to exist and right of ownership is guaranteed If private property rights are absent then gains from trade will be diminished as individuals spend time and other resources to try and secure ownership rights for goods Also different information by seller and buyer creates some informational issues that make trade difficult Consumers may spend time and money to find out the quality or property of the good transacted inspecting a gem taking the used car to a mechanic a bank inspecting the house before sale all these costs are called transaction costs If the value of the good transacted is high it pays to appraise it Transactions costs are characteristics or attributes that exist in some markets Where mutually bene cial trade is dif cult to achieve Transaction costs include Information cost about where the buyerseller is Where the goods are Costs of establishing the salient featuresproperties of goods traded Cost of reaching an agreement over the price of the good to be traded haggling Costs of establishing and enforcing property rights over the goods traded Examples of transaction costs and mechanisms of lowering them The rental car example The market for tissues in Iran Use of money for exchange Representative rather than direct democracy Do distributors of goods middlemen reduce transaction costs A couple of problems to understand the effect of government tax and subsidy measures on demand and supply behavior Problem no 1 Consider individual B the seller of shirts in our example last time Consider the market price of a shirt at 8 per shirt How many shirts will B offer for sale Now suppose the government gives the seller a subsidy of 2 for each shirt person B sells How many shirts will B offer for sale What is the cost of subsidy to the government and taxpayers We need to write the rule for supply MC and consider the new rule where a subsidy of 2 per unit applies What is the new MC schedule If say previous to subsidy the good costs 4 after receiving 2 it only costs 2 and so on So she offers units for sale If she sells these units subsidy cost to the government is How do we draw the new supply inclusive of subsidy on the graph below Supply MC Schedule Problem n0 2 Consider demand for steaks for the following indiVidual A The market price for this good is 10 per unit How many units does this person buy What is the rule Now suppose the government provides a 1 subsidy to A for every unit he purchases Applying the rule for the purchases A makes and considering the subsidy he receives the rule is Now buy up to where MV P 1 or where MV 1 P At the market price of 10 how many steaks does he buy What is the cost of this subsidy to the government taxpayer The graphical representation How do we draw the new MV curve inclusive of the subsidy A Demand MW Schedule Chapter 5 Supply and demand Changes in Demand versus changes in the quantity demanded Keeping all other forces constant ie not changing E the price of a good rises the quantity demanded will fall and Vice versa On a given demand behavior quantity changes as a result of a change in price We can call this the effect of price on quantity But price is not the only force that affects how much consumers will purchase of a good What are the other factors that in uence quantity of a good people buy How do we keep the above two dimensional graph with price and quantity and use it to show the effect of other forces on quantity demanded Is the law of demand a statement about slope of the demand curve or the location of the demand curve What other factors besides price of the good in uence your demand for a good and how do you graphically illustrate the effects of these other factors Income Prices of other relevant goods Tastes change in tastes Demographic changes Effect of Income changes on demand for a good Think of a good that you may purchase more of as your incomes rise when you get a job On a graph of demand draw the demand for this good now and then draw the demand when you have a higher income How do we characterize this good Inferior normal Think of a good that you may purchase less of as your incomes rise when you get a job How do we characterize this good When the price of a good rises keeping all other forces constant the quantity demanded falls and Vice versa This is called change in quantity demanded of the good When a force other than the price of the good changes the Whole demand behavior shifts its location changes This is called a change in the demand for the good The effects of changes in prices of other related goods Consumption of some goods are related goods can be substitutes or complements For example if price of gasoline goes up what happens to the demand for gas guzzling cars Gasoline P Cars Are cars and gasoline complements or substitutes If fees for tennis court rents go up what is the effect on the demand for tennis rackets Example of the effect ofa change in the price ofa substitute good If the price of chicken falls what is the effect on the demand for turkey Chicken P Turkey Similarly if the price of concert tickets fall what is the effect on demand for movies Another example of effect of price change on the demand for substitute goodservice The City of London has introduced a congestion charge per day for private cars that drive into Central London during rush hours check out wwwcclondoncom Transportation by private cars P Public Transport Measuring the income elasticity of demand Income elasticity change in change in What does a negative value for imply
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