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Week 3 Lecture Notes - Microeconomics

by: Claire Notetaker

Week 3 Lecture Notes - Microeconomics ECON 201

Marketplace > University of Oregon > Economcs > ECON 201 > Week 3 Lecture Notes Microeconomics
Claire Notetaker
Principles of Economics: Microeconomics
Bekah S

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About this Document

These are my detailed typed lecture notes from week 3. I try to keep them very organized, easy, and detailed. I hope these notes are helpful!
Principles of Economics: Microeconomics
Bekah S
Class Notes
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This 18 page Class Notes was uploaded by Claire Notetaker on Tuesday October 20, 2015. The Class Notes belongs to ECON 201 at University of Oregon taught by Bekah S in Fall 2015. Since its upload, it has received 8 views. For similar materials see Principles of Economics: Microeconomics in Economcs at University of Oregon.

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Date Created: 10/20/15
Class 5 Supply and Market 102215 1153 AM as the price of a good increases the quantity demanded decreases Holding price constant ceteris paribus increases any of these other things shifts the demand curve Income right if normal good left if inferior good Price of related goods 9right of substitute left id complement Expectations of future price right if expected decrease Tastes and preferences right if you like it more left if less Number of buyers right if more buyers left if less the additional cost to a supplier to produce the next good Supply Quantity Marginal cost 1 05 2 1 3 15 4 2 5 25 For each additional unit the person values it more because they have fewer to consume themselves The price that a supplier is willing to take to produce a good is exactly qual to the marginal cost of producing that good the amount of a good produced by a supplier at a given price notation qu as the price of a good increases the quantity supplied increase 050 040 030 020 010 p y p h l S 100 150 200 250 300 q In competitive markets there are almost always a very large number of suppliers We can combine all of the individual supplies into a market supply just as we did with demand Recall quantity supplied of a good changes when its price changes ceteris paribus What if we hold price constant and change something else gt shift in supply O 0000 Things that would affect supply Cost of inputs Technology or production process TaxesSubsidies Numbers of firms Price expectations For each quantity supplied the marginal cost in now higher because the input cost is higher SlOriginal marginal cost As the price of an input increases the supply of a good decreases shifts left EX The supply of Frappuccinos after an increase I the price of coffee 0 Suppose that there is an improvement in technology to make a good 0 EX Invention of an electronic coffee grinder in producing cups of coffee 0 Consider a case where the government intervenes and decides o tact a particular producer 0 Suppose our original supply curve was SAA1MC and Our new supply curve would be SAA2MC t 0 What would happen graphically 53 MC39Z 51 MC S S q q 0 Suppose the government decides to give a subsidy to another producer of 5 dollars per unit produced What happens of the marginal cost for this producer to make the same number of goods 0 Suppose our original supply curve was SAA1MS and The new supply curve becomes SAA2MC s 0 What happens graphically 51 MC Sg MC S S S q q Thus we can say that taxes effectively decrease supply shift left Subsidies increase supply shift right 0 If the price of a good is expected to increase in the future holding current prices constant quantity supplied today decreases 0 If the price is expected to decrease in the future quantity supplied today increases EX Christmas trees are more expensive in the summer Question A decrease in the supply of Diet Coke could come from which of the following A An increase in the price B An increase in the number if sellers C A decrease in the price of artificial sweetener an input Question Suppose a tornado hits and wipes out a fleet of pizza delivery trucks ceteris paribus How might this affect the supply of pizza How about demand A Supply increases demand decreases C supply stays the same demand decreases D supply decreases demand decreases Consumers want fewer goods as the price increases Suppliers will produce more goods when the price increases P 45 D V q Equilibrium What price and quantity would make both suppliers and consumers satisfied the Salmon Mattet Price per pound S Surplus at a prkc of 1500 1500 1000 4 500 Y Shortage at a prko at 500 a 230 560 750 gum pounds per mount Class 6 and 7 Elasticity Claire Dimmick Price Elasticity of Demand a measure of responsiveness of quantity demanded to a change in price 0 The percent chance in quantity due to a one percent change in price Aqd Percent Change in QuantiLy 96A Percent Change in Price En Elastic Demand demand is sensitive to price changes 0 Price elasticity of demand is greater than 1 in magnitude lEpl 3quot 1 Inelastic Demand demand is not very sensitive to price changes 0 Price elasticity of demand is less that 1 in magnitude En lt7 1 Unite Elastic Demand quantity demanded changed by the same percentage as price Price elasticity of demand is exactly equal to one El 1 Estimating Elasticity using two points P q Points AWL P1 and 8Q2 P2 0 We can estimate the change from A to B as 72 ql P2 P 9quotquot AP 71 0 P1 gt Let39s give it some numbers A3 2 84 1 4 3 WA 1 o q 1 1 2 AP 05 2 gt Now let s plug it into our elasticity formula Aq 1 2 AP 05 Moving from price of 2 to 1 decreases quantity by 2 percent Moving from a price of 1 to 2 A32 B41 3 4 Aq 025 4 2 1 AP 1 1 gt So the elasticity would be 96Aq O25 o 025 MAP 1 A move in price from 1 to 2 decrease quantity by 025 percent Estimating Elasticity using the Midpoint Estimate the percent changes as being that change in quantity relative to the midpoint of 92 Q 0 P2 P roAq W 39OAP T n b 1 I This will be a compromise between the large and small denominators 3 4 WA 029 q 35 2 1 QIBAP 066 15 Therefor elasticity is QBAQ 029 7 O ZEBAP 066 The Midpoint Theorem To get a more accurate measure of the price elasticity at a point along the demand curve we use the midpoint formula I 1 371in 50 Price Elasticity Along the Curve Suppose price is high and quantity demanded is low Will people be very respondive to a small change in price at this point 9 2 3 1718 When the price is high point A a small decreased in price lands us at point B Using the midpoint formula we find that gt The percent change in price is 13 PI I7 18 006 6W Fa l F52 17 l 182 gt The percent change in quantity is C72 C71 3 2 04 409 m q2 2 3 22 0 gt So the price elasticity of demand is At this high price range demand is very elastic 0 At high prices price is an inhabiting factor dissuade you from your purchase so small decrease will cause large increases in quantity demand When price is high point C a small decrease in prince lands us at point D gt The percent change in price is P2 P1 2 3 P1 P22 25 040 40 v The percent change in quantity is 72 611 1817 006 6 Ch quothim 175 gt So the price elasticity of demand is At this low price demand is very inelastic 0 At low prices price is not much of an inhabiting factor so small decreases in price wont affect you nearly as much Aul Elastic Unit Elastic lnelasticcap gt a Determinants of Price Elasticity of Demand why might some demand curves be more inelastic than others Number of available substitutes Share of budget spent on good Necessities vs Luxuries Short Run vs Long Run If the price increases today but you need the good do you think you will be very responsive to price changes In the long run you can find substitutes and demand will be more elastic Special Cases Perfectly Inelastic goods that are essentially nonresponsive to price changes 0 As price goes up quantity demanded does not change D p2 p1 l q 01 gt Perfectly inelastic demand gt The Aq 0 gt So oAq 0 O DAPAP Perfectly Elastic goods specifically ones that have perfect substitutes where any increase of the price of the good leads to zero quantity demanded 0 Any decrease in the price leads to wanting an infinite amount of the good Pl P1 39 39 D n gt Perfectly elastic demand v The AP 0 gt So Aq oAq E 0 AP 0 Income Elasticity of Demand Holding priced constant we know that an increase in income either increase demand normal goods or decreases demand inferior goods Consequently market equilibrium price and quantity will increase normal goods or decrease inferior goods Pl 5 We can get a measure of how income affects quantity demanded by looking at the Income Elasticity of Demand Q Q E 9 0Aqd I 3quotoAI More normal goods an increase in income increase quantity demanded gt 50 AI 2 O and Aqd L gt Since the numerator and denominator are both positive numbers E 3 0 o For inferior goods an increase in income decreases quantity demanded gt So AI O and Aqd ltquot 0 gt Since the numerator is positive and the denominator is negative E lt 0 Ex Jason is a Pokemon fan He loves to collect more cards any time he gets more money to spend on them Recently he received a 30 increase to his salary income He was buying 4 packs a month and now he is buying 6 What is his income elasticity of demand Does he view Pokemon cards as a necessity luxury or inferior good gt Sol 1 Because E gt O the good is a norma good Because E 2 1 we also know that this is a luxury good CrossPrice Elasticity the responsiveness of quantity demanded to the change in price of a related good We ves also established that a change in the price of a related good complement of substitute affects the demand curve for a good An increase in the price of a substitute leaved to an increase in the demand for a good Likewise an increase in the price of a complement leads to a decrease in the demand for a good 0 I I I I 39 qx F9 399 An increase in the price of a substitute leads to an increase in the equilibrium quantity demanded of a good 0 As Coke becomes more expensive you might decide to consume more Pepsi An increase in the price of a complement leads to a decrease in the equilibrium quantity demanded of a good 0 As peanut butter becomes more expensive we consume it less and want less jelly to go with it CrossPrice Elasticity 139 E Q39EJA Percent Change in Quantity of Good A C 9 6AP5 Percent Change Price of Related Good B gt If E gt 0 then an increase in the price of a related good mAPg gt 0 leads to an increase in the quantity demanded of a good AqA gt O gt We know A and B must be W gt If EC lt1 Q then an increase in the price of a related good AP3 gt 0 leads to an decrease in the quantity demanded of a good oAqA lt 0 gt We know A and 8 must be com lcmcnts gt if EC 2 0 how do you think the two goods are related 102215 1153 AM 102215 1153 AM


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