Weeks 2 notes
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This 7 page Class Notes was uploaded by Taryn manciu on Friday October 9, 2015. The Class Notes belongs to Econ201 at University of Oregon taught by Keaton Miller in Fall 2015. Since its upload, it has received 97 views.
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Date Created: 10/09/15
Week 2 Tuesday Elasticity Bring electronic device with mob lab Thursday When both shift happens at the same time the quantity affected in ambiguous Direction of effects Own price 1 then Qd 1 law of demand Substitute price 1 then Qd 1 curve shifting This class magnitude of the change We want a concept that measures the magnitude Want to measure amount that quantity changed when price changes What if I want to look at my consumption of bananas Units of the slope bananas per week dollar We cant compare to bananas to gas We define elasticity using percentage changes Price elasticity of demand Measures the responsiveness of the demand curve to changes in price symbol eAD equotD AQquotD Changed in quantity demands over changed in price Calculate elasticity using the midpoint method QZQl change in Q change in Q Average Q over the change 12 P2P1 A note on signs Look at price elasticity of demand This quantity is always negative Why By convention we make the price elasticity of demand positive if you end up with a negative eh just make it positive Perfectly inelasticity demand eD0 No matter how much people are willing to pay a limited quantity exist Ex Crater lake shoreline Picasso originals A P S People will buy as much of the good as you can sell them but only for a very specific time Define a good very narrowly in a broad market Corn grown in Gosper county Nebraska participates in the global corn market Can go to commodities market and sell as much as they can grown at going price Q b Most goods fall between these extreme cases When eD lt 1 we say demand is inelastic Total spending PQ increases as P increases When eD gt 1 we say demand is Elastic Total spending PQ decreases as P increases When eD 1 we say demand in Unit Elastic Total spending stays the same as P increases Real world example Time Period Per capita daily Average price per consumption of gallon in dollars motor gasoline June 2007 132 305 eD AQd AP June 2008 126 407 A 06 102 05 16 28 Average ofboth 129 356 years A 05 28 Demand of gasoline is Inelastic This calculation isn t as simple as it looks When estimation demand elasticity we need to hold fixed the other determinants of demand to isolate the impact of the change in price Also need to take supply into account why is what we calculated the elasticity of demand and not the elasticity of supply Econometrics the study of using data to answer questions like this We need to make an argument in terms of curve shifters WTS supply curve DID shift Ex Price of barrel of oil increases from 65 to 121 Oil is an input in making gas As increase in input prices shifts supply up and to the left Determinates of demand in gasoline Taste of consumers seasonality in demand drive more in summer than spring We hold this fixed by comparing June to June if we looked at June to December it wouldn t look the same as June to June Number of consumers population grows over time Fixed by looking at per capita numbers Income gas is a normal good so income can t change Income didn t change much between June 2007 and June 2008 in the beginning of the economic crisis Price of substitutes and complements didn t change much over this one year period Cant look at consumer price to index to test this claim The elasticity we estimated is shortrun elasticity June 2007 June 2008 Consumers have not had as much time to make response Over a long period of time if gas is significantly higher in price Consumers will buy different cars better mileage Might change where they live tired of 20minute commute to work Society might change laws gas is expensive make transit more affordable To estimate longrun elasticity need to compare cases where prices have been different for a long time What makes demand more elastic Long time horizon consumers have opportunity to change patterns of consumption away from expensive options Luxury not necessity HBO is a luxury good whereas ESPN is maybe a necessity Narrow definition of good closer substitutes exist For the purposes of driving to work a dodge intrepid works just as well as a Bugatti Vernon Week 2 Thursday Income Elasticity of Demand Income AQquotd AIncome For normal good equotincome gt O inferior good equotincome lt 0 Two kinds Necessity O lt equotincome lt 1 income inelastic Spending share falls as income rises Toilet paper milk bread Luxury 1 lt equotincome income elastic Spending shares rises as income rises Vacation homes Rolex watches Is healthcare a necessity or luxury good Yes at the country level Rich countries spend a higher share of income on healthcare Healthcare at the country level is an income elastic good One reason we spend a lot on health care is we are rich Models can help answer questions How many smart phones get made globally what s the price Who gets to buy and sell them P Q and Who What s the overall benefit created by smartphones Are we making the right amount Is the market efficient What impact do government polices have Which features do consumers care about and will producers focus on ECONLAND where people buy and sell Widgets D people eat widgets each D person has a reservation value for one widget D1 is indifferent between 20 and 0 widgets 11 and 1 widget D6 is indz erent between 14 and 0 widgets 10 and 1 widget S people don t eat widgets S people know how to make them gets hungry from widget work The cost to an S person to make one widget is the amount of dollars we have to give her so she is just willing to do it 3 indz erent between 20 and making 0 widget 23 and making 1 widget Marginal cost the cost of the next one in Marginal reservation price the value of the next one in could call this the marginal benefit Market Economy in ECONLAND At P3 who is willing to sell 81 82 S3 Qquots3 From the marginal cost curve we get the supply curve What are the gains from trade Producer surplus of seller price receivedcost Also called profit Consumer surplus of a particular buyer Reservation price price paid I budgeted 1000 for a new computer but only had to pay 800 This gives me 200 to spend on something else Consumer surplus area between demand curve and price line Producer surplus area between price line and supply curve in ECONLAND demand and supply curves look like steps in an economy with lots of people we wont notice the steps things will smooth out Market allocation PQ and Who Social Surplus The total surplus in the economy generated from the market cell phones Pareto Efficiency An allocation P Q and Who that can be produced makes sense and there is no way to make someone in the world better off without making someone worse off Ex 6pies 2 for students 2 for me 2 in the trash Not efficient Can take pies out of the trash and give them to me I m better off you re not worse off 5 pies for students 2 for me Not feasible we only have 6 pies not efficient One pie for me 5 pies for the rest of you Efficient cant make you better off without making me worse off Where does equity show up in the definition of efficiency it doesn t Consumers that value goods the most should consume them first assuming they are able to The producers that have the lowest cost should produce first assuming they are able to
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