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Econ 200 10022014 Homework due every Monday at 11 59 Drop 3 lowest clicker days 3 Article Responses ECON study of choices under constraint Microeconomicss studies these choices at the individual household and firm level Topics lnlcude Consumer Behavior Firm Behavior Exchange Trade The Price System Resources Allocation Government Intervention People are Rational Economists generally assume people are rational Rational using all available information to achieve ones goals People respond to incentives Optimal decisions are made at the margin Tvpes of Economics Centrally planned economics Market Economics Mixed Economics Efficiency Market economics tend to be more efficient than centrally planned economics Market economics promote Productive efficiency Theories provide framework for understanding facts Production Possibilities Frontier a curve showing the maximum attainable combinations of two products that may be purchased with available resources and time Chapter 2 Section 3 Tradeoffs Models Demand The production possibilities frontier ppf a curve showing what is possible may show a certain possibilities of outputs that are possible with the specific firm combinations below the curve do not use all of the resources and is inefficient for the firm and points above the curve are not unattainable with the current resources the points on the curve are the most efficient possibilities using the resources at hand The slope of the PPF illustrates the tradeoffs Opoortunitv Cost the highest vaued alternative that must be given up to engage in an activity with only two goods the best alternative is easy to find in the real world though its harder it the slope of the PPF is constant then the opportunity cost is constant opportunity cost are often increasing first unit is the cheapest and the last unit is the most expensive Some resources are better suited to one task than another the first resources to switch are the one best suited to switching may lead to a more non inear PPF curve called increasing marginal opportunity costs PPF getting steeper cost increasing What can we do with this model we can illustrate economic growth a shift outward this will be illustrated with this model with more production possibilities in which both the X and Y possibilities are represented by larger values what was previously impossible becomes possible we can illustrate technological change less resources are used and it is represented by a fall in costs The PPF tells us what can be produced not what should be produced The basis for trade is comparative advantage not absolute advantage Households consist of individuals who provide factors of production labor capital natural resources and entrepreneurial ability Firms supply goods and services to product markets households buy these products from the firms Cirucular Flow Diadram Households Factor Markets Firms Product Markets Households Money goes the opposite direction A model of a Market to better understand factors market and goods market we want to know What determines the price for Smartphones Demand for smartphones How many smartphones do consumers want to buy affected by price of smartphones Affected by other factors including prices of ther goods Supply of smartphones How mant smartphones are producers willing to sell affected by price of the smartphones affected by other factors including prices of other goods we will analyze these in a perfectly competitive market a market with 1 many buyers and sellers 2 all firms selling identical products and 3 no barriers to new firms entering the market potentially an unlimited amount of buyers and sellers Demand Demand schedule a table that shows the relationship between the price of a product and the quantity Demand Curves represents how the consumers will react to a change in the price of the goods shows the relationship between the price of a product and the quantity of the product demanded Market Demand the demand by all the consumers of a good or product when drawing the demand curve we assume ceteris paribus the requirement that when analyzing the relationship between two variables suchs as price and quantity demanded remains thl Law of Demand the rule that holding everything else constant when the price of a product falls the quantity demanded og the product will increase and when the price of a product rises the quantity of the demand decreases when the price of a product falls two effects cause consumers to purchase more of it the product has become cheaper relative to other goods so consumers substitute toward it substitution effect the consumer now has greater purchasing power and elects to purchase more goods overall income effect a change in something other than price that affects demand causes the entire demand curve to shift a shift to the right is an increase in demand a shift to the left is a decrease in demand as the demand curve shifts the quantity of demanded will change even if the price doesn t change the quantity demanded changes at every possible price What Factors Influence Market Demand Income of consumers increase in income increases demand if product is normal decreases demand if product is inferior Prices of related goods increase in price of related good increases demand if products are substitutes decreases demand if products are compluments tastes Demand Continued Supply Equilibrium Clue tutoring Wed 630800 241 Mary Gates Hall As the demand curve shifts the quantity demanded will change even if the price doesn t change The quantity demanded changes at every possible price Anything that cause people to want more causes an increase in demand and the demand curve will shift out Factors that influence Market Demand income of consumers Increase in income increases demand if the product is normal decreases demand if the product is inferior prices of related goods Increase in the price of related good increases demand if products are substitutes decreases demand if products are complements tastes So people can change their minds Population and demographics Expected future prices Normal good A good for which the demand increases as income rises and decreases as income falls Ex clothing restaurant meals vacations Inferior good A good for which the demand decreases as income rises and increases as income falls Ex second hand clothing Ramen noodles Norma good shift demand curve outward because you will buy more lnferior goods shift the demand curve inward because you will buy less as income rises It depends sometimes if a good is normal or inferior Change in the price of related goods Goods and services that can be used for the same purpose ex big mac and whopper ford f15O and dodge ram jeans and khakis Complements Goods and services that are used together ex big mac and fries hot dogs and hot dog buns left shoes and right shoes Change in tastes or population lf consumer s tastes change they may buy more or less of the product Population and demographics lncreases in the number of people buying something will increase the amount demanded Change in demand vs Change in quantity demanded A change in the price of the product being examined causes a movement along the demand curve this is a change in the quantity demanded Any other change affecting demand causes the entire demand curve to shift This is a change in demand Changes in expectations about future prices Consumers decide which products to buy and when to buy them Future products are substitutes for current products An expected increase in price tomorrow increases demand today An expected decrease in the price tomorrow decreases demand today The law of supply the rule that holding everything else constant increases in price cause increase in the quantity supplied and decreases in price cause decreases in the quantity supplied Supply curves slope upwards lncrease and decrease in supply A change in something other than price that affects supply causes the entire supply curve to shift A shift to the right is an increase in supply A shift to the left is a decrease in supply As the supply curve shifts the quantity supplied will change even if the price doesn t change The quantity supplied changes at every possible price Variables that shift Market Supply prices of inputs technological change prices of substitutes in production number of firms in the market expected future prices Changes in prices of inputs inputs are things used in the production of a good or service Ex for smartphones Computer processor Plastic housing Labor An increase in the price of an input decreases the profitability of selling the good causing a decrease in supply A decrease in the price of an input increases the profitability of selling the good causing an increase in supply Technological change A firm may experience a positive or negative change in its ability to produce a given level of output with a given quantity of inputs This is a technological change Changes raise or lower firms costs hence their supply of the good Prices of substitutes and number of firms Many firms can produce and sell more than one product More firms in the market will result in more product available at a given price greater supply Fewer firmssupply decreases Change in expected future prices If a firm anticipates that the price of its product will be higher in the future it might decrease its supply today in order to increase it in the future products that can be stored must be non perishable products Change in supply vs change in quantity supplied A change in the price of a product being examined causes a movement along the supply curve This is a change in quantity supplied any other change affecting the supply causes the entire supply curve to shift this is a change in supply Market Equilibrium a situation in which quantity demanded equals quantity supplied A market equilibrium with my buyers and sellers is competitive market equilibrium A surplus in the market At a price of 250 Consumers want to buy 9 million smartphones while Producers want to sell 11 million This gives a surplus of 2 million smartphones a situation in which quantity supplied is greater than quantity demanded Prediction sellers will compete amongst themselves driving the price down Shortage in the market for ssmartphones at a price of 100 consumers want to buy 12 million smartphones while producers want to sell 8 million The reason the market stays at 200 is because competition between buyers and sellers Demand and supply both count price is determined by the interaction of buyers and sellers neither group can dictate price in a competitive market However changes in supply and or demand will affect the price and quantity demanded Finishing chapter 3 then starting chapter 6 Equilibrium in competitive markets The shapes of these curves elasticity Table 33 effects of changes in demand or supply Demand curve Q unchanged Q increases Q decreases unchanged P unchanged P decreases P increases Demand curve Q increases shifts right P increases Demand curve Q decreases shifts left P decreases If the demand shift is smaller than the supply shift then quantity will still increase but the price will fall If the demand shift is larger than the supply shift then quantity will still increase but price will increase also It is important to know movement along the curve caused by price change vs shifting the curve caused by other changes Exaggerate curve shifts to illustrate a change Completely label your graphs Shapes of Graphs Look at the slope of the demand curve Look at the slope in percentage terms is one unit a lot is one dollar a lot Price elasticity of demandpercentage change in quantity demandedpercentage change in price Slope and elasticity are not the same thing Since price and quantity change in opposite directions on the demand curve the price elasticity of demand is a negative number use absolute value for changes in elasticity A large value for the price elasticity of demand means that quantity demanded changes a lot in response to a price change demand is price elastic if its elasticity of demand is larger than 1 absolute value demand is price inelastic if its price elasticity of demand is smaller than 1 absolute value demand is unit price elastic if the price elasticity of demand is exactly equal to 1 absolute value percentage change ABAB2 Price Elasticity of demandQ2 Q1Q1Q22P2 P1p2p12 Slope and elasticity are not the same If 2 demand curves go through the same point the one with the higher slope also has the higher more negative elasticity A vertical demand curve means that quantity demanded does not change as the price changes So elasticity is O A vertical demand curve is perfectly inelastic A horizontal demand curve means quantity demanded is indefinitely responsive to price changes Elasticity is infinite A horizontal demand curve is perfectly elastic If demand is Elastic then the absolute value of price is greater than 1 Inelastic then the absolute value of price is less than 1 Unit elastic then the absolute value of price elastically is equal to 1 The definition of the market The more narrowly defined the market the more substitutes are available and hence the more elastic is demand The share of a good in a consumer s budget If a good is a small portion of your budget you will likely not be very sensitive to its price Elasticity continued Surplus HW Monday quiz article response 1 week from this Friday midterm 1 week from next Tuesday Total revenue The total amount of funds received by a seller of a good or service calculated by multiplying the price per unit by the number of units sold If demand is ineasticcustomers aren t sensitive to the price decreasing the price will not mean more sales If demand is inelastic then you should raise price If the price of elasticity of demand is greater than 1 then the quantity demanded goes up by a higher percentage than price raising the revenue Elasticity is not constant along a linear demand curve Revenue curve is a parabola opening downwards Cost price elasticity of demand measures the strength of substitute or complement relationship between goods Substitutes cross price elasticity of demand will be positive Compements cross price elasticity of demand will be negative Unreated cross price elasticity of demand will be zero Normal and inferior goods Income elasticity of demand measures the strength of the effect of income on quantity demanded If the income elasticity is positive but less than 1 so the good is normal and a necessity If the income elasticity is positive and greater than 1 then the good is normal and a luxury If the income elasticity is negative then the good is inferior Price elasticity of supply is very much analogous to price elasticity of demand Chapter 4 Economists use the idea of surplus to refer to the benefit that people derive from engaging in market transactions Consumer surplus the different between the highest price a consumer is willing to pay for a good or service and the actual price the consumer receives Producer surplus the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives Margina cost the additional cost to a firm of producing one more unit of a good or service Total producer surplus is equal to the area above the supply curve and below the market price Consumer surplus measures the net benefit to consumers from participating in a market rather than the total benefit Consumer surplus in a market is equal to the total benefit received by consumers minus the total amount they must pay to buy the good or service A market is efficient if all trades take place where the marginal benefit exceeds the marginal cost and no other trades take place A market is efficient if it maximizes the sum of consumer and producer surplus ie the total net benefit to consumers and firms known as the economic surplus Economic efficiencyA market outcome in which the marginal benefit to consumers of the last unit produced us equal to its marginal cost when the sum of consumer and producer surplus is at a maximum Surplus and efficiency Midterm in 2 weeks Article response due Friday Consumer surplus the different between the highest price a consumer is willing to pay for a good or service and the actual price the consumer receives The area below the demand curve and above the price Producer surplus the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives Producer surplus is equal to the area above the supply curve and below the market price margina benefit the additional benefit to a consumer from consuming one or more unit of a good or service marginal cost the additional cost to a firm of producing one more unit of a good or service at a low price the firms with the lowest marginal cost are willing to sell 1 A market is efficient if all trades take place where the marginal benefit exceeds the marginal cost and no other trades take place 2 A market is efficient if it maximizes the sum of consumer and producer surplus ie the total net benefit to consumers and firms known as the economic surplus Economic efficiency A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer and producer surplus is at a maximum If the quantity is too high the cost to producers of the last unit is greater than the value consumers derive from it Only at the competitive equilibrium is the last unit valued by consumers and producers equaly economic efficiency The reduction in economic surplus resulting from a market not being in competitive equilibrium is known as deadweight loss Deadweight loss can be thought of as the amount of inefficiency in a market In competitive equilibrium deadweight loss is zero Price floor legally determined minimum price that sellers may receive Price ceiling egally determined maximum price sellers can charge Welfare analysis of taxation Trade and comparative advantage We can think of the market in 2 ways 1 A market is efficient if all trades take place where the marginal benefit exceeds the marginal cost and no other trades take place 2 A market is efficient if it maximizes the sum of consumer and producer surplus ie the total net benefit to consumers and firms known as the economic surplus Economic efficiency A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer and producer surplus is at a maximum A tax will cause an upwardinward shift of the supply curve tax adds to marginal costs the firms costs goes up they have to pay the tax consumers and producers are unhappy because of taxes they both lose surplus some consumer surplus and producers surplus will become tax revenue for the government and some will become deadweight loss Tax incidence who actually pays the tax the actual division of the burden of a tax between buyers and sellers in a market Workers are more willing to work for a lower wage than sellers are willing to sell at a lower price so workers end up with the burden of the tax International trade Falling shipping and transportation costs have made international trad more profitable and desirable tariffs taxes on imports imports goods and services bought domestically but produced in other countries absolute advantage japan can produce more than the US with the same amount of resources autarky only produce for themselves don t trade with other countries terms of tradeis the ratio at which a country can trade its exports for imports from other countries quota a numerical limit a government imposes on the quantity of a good that can be imported into that country protects from foreign competition Comparative advantage can derive from a variety of natural and man made sources Climate and natural resources Reative abundance of labor andor capital Technoogical differences Externa economics Welfare analysis of trade Externalities Midterms12369 Scantron Simple calculator Ruler Comparative Advantagedifferences in opportunity cost means there are gains from uade countries will trade when the terms of trade are better than producing domestically new and better technology is basically what trade is Let countries specialize in what they are good at the total world will be more productiveefficiency nternationa trade is only good for everybody on a national level some individual firms and consumers will lose out due to international trade Quota a numerical limit a government imposes on the quantity of a good that can be imported into that country Free Trade Total surplus goes up Producer surplus goes down but consumer surplus goes up more than producer s lose Overall economic surplus rises the gains to consumers outweigh the losses to producers Firms that face competition from imported goods lose out when trade is allowed These firms appear to deserve sympathy especially when their workers start to lose their jobs Tariffs taxes imposed by a government on goods imported into a country Quotas and Voluntary Export Restraint VERs limits imposed upon quotas or negotiated between VERs countries on the quantity of a good imported by one country to another Consumers lose more than the producers and government gains There is deadweight loss Lowering tariffs make your own counties surplus go up A quota gives surplus to foreign producers it doesn t raise government revenue a tariff has the same effect but raises revenue Finish trade Start chapter 5 externalities not on midterm Midterm covers 14 6 9 scantron pencil basic calculator A less common but still important barrier to trade is the imposition of higher standards on imported goods Smoot Hawley tariff increased tariff s to gt50quoto World Trade Organization replaced GATT member states agree to liberalize international trade Dumping selling a product for a price below its cost of production WTO s approach countries can claim dumping if product is exported for a lower price than it is sold domestically Comparative advantage is the basis for trade a nation may have an absolute advantage in nothing or in everything and still benefit from trade Tariffs are effectively taxes on imports they do not ban imports in any way Trade creates winners and losers to claim otherwise is dishonest Chapter 5 Cost of producing electricity for firms Buildings Equipment Fuel Labor etc Those firms make their decisions about how much to produce based on these private costs But social cost is higher the cost to society includes both the private cost and the external cost of the pollution When the market is left alone in this case the result is inefficient because total surplus is less than the loss to the farmers Pollution is an example of a negative externality in production Externalities might also be positive with social benefits exceeding private benefits College education Private benefit the benefit received by the consumer of a good or service Social benefit If there are negative or positive externalities the market equilibrium will not result in the efficient quantity being produces There will be deadweight loss market outcome is inefficient This is an example of market failure a situation in which the market fails to produce the efficient level of output The larger the externality the great is likely to be the size of the deadweight oss the extent of the market failure Externalities arise because of incomplete property rights or from the difficulty of enforcing property rights in certain situations Good property rights avoid the market failure Property rights the rights individuals or businesses have to the exclusive use of their property including the right to buy or sell it Having too much pollution is bad we can have an efficient amount of pollution Transaction costs the cots in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services Coase theorem also requires that parties have full info about the costs and benefits involved Chapter 5 externalities Chapter 10 Taxing firms for the exact amount to cover the social cost means the private cost with the tax is the same as the social cost which is the efficient price Corrective taxes move the equilibrium price to the efficient price Taxes worked to solve the problem of negative externalities because negative externalitites caused too much to be produced while taxes reduced the amount of output When there is a positive externality there is the private benefit but there is also an extra benefit to society Excludable Nonexcludable You can be prevented from No one is stopped from it getting them Rival Private Goods Common Resources If I can consume it you cannot Market demand for public goods we add up everyone s benefit to see the benefit to society Rationality achieving goals in the most efficient way Budget Constraint the limited amount of income available to consumers to spend on goods and services Utility satisfaction that people obtain from consuming goods and services Marginal utiity amount utility changes when consuming an extra unit of a good or service Law of diminishing marginal utility the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time If two things have the same utility the cheaper product is a better deal Marginal utility per dollar is the marginal utility divided by the price Conditions for Maximizing utility 1 Satisfy the rule of equal marginal utility per dollar spent MU pizzaPpizzaMU cokePcoke 2 balance your budget The income effect of a price change refers to the change in the quantity demanded of a good that results from the effect of the change in price on consumer purchasing power holing all other factors constant The substitution effect
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