ECON 200A - Week 2
Popular in Microeconomics
Biol 1020 - 002 (BIOL, Christine A. Sunderman, Principles of Biology (1020))
verified elite notetaker
verified elite notetaker
verified elite notetaker
Popular in Department
This 9 page Class Notes was uploaded by Alex Capi on Monday October 26, 2015. The Class Notes belongs to ECON 200 at University of Washington taught by Haideh Salehi-Esfahani in Fall 2015. Since its upload, it has received 106 views.
Reviews for ECON 200A - Week 2
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: 10/26/15
ECON 200A Principles of Microeconomics Professor Haideh SalehiEsfahani WEEK 2 NOTES October 13 2015 WATERDIAMOND PARADOX 1 Applications of concepts of marginal value and total value Marginal Value vs Quantity TVDiamonds f MVDiamonds CSDiamonds TEDiamonds TVWater f MVWater CSWater TEWater QDiamonds QWater a Diamonds are much more highly priced than water Does it mean that we value diamonds which we can live without more than water which is essential to life 1 As the quantity increases the marginal value decreases and the total value increases ii Diamonds have a much higher price than water however process re ects marginal value not total value The marginal value of a good depends on the amount of that good already available iii While the MV of an extra unit of water may be small due to the large supply of water its total value is much larger than that of diamonds iv The amount of CS is much larger in consumption of water relative to the consumption of diamonds Therefore While diamonds are highly priced implying that they have a high MV their total value TV is less than water the more essential good 2 The Insights a Neither the price nor the total expenditures on a good measure the total value of the quantity of that good for the consumers b There exists some consumer surplus 3 Applications of WaterDiamond Paradox a Plumbers amp Nurses i ii Of plumbers ana burses which one earns a higher salary Plumbers Does that mean we value our kitchen sinks more than our health No b University Professors i Does the lower salary of humanities professors reflect the fact that we do not value them as much as computer science professors No because even though there is a high demand in the computer science major the marginal value doesn t re ect the salaries of the humanities professors Whereas the total value does MOTIVATING THE IDEA OF CONSUMPTION SMOOTHING OVER TIME 1 Use of the declining MV concept to explain why people engage in borrowing and lending a Example 1 of Consumption Smoothing i ii iii iv Suppose you get paid in pizzas every two days On Pay Day today you get two freshoff theoven pizzas You are not getting any pizza tomorrow Do you consume both pizzas today or do you keep one for tomorrow Use the Postulate of Marginal Value or Law of Demand to explain why people tend to save or lend or dissave borrow in various phases of their lifetime Consider the marginal value of l Consuming the second pizza today 2 Keeping the second pizza and consuming it tomorrow Labeling the graph of the marginal value of present consumption Marginal Value vs Present Consumption Marginal Value of Present Consumption Present Consumption per 1000 We use this graphical analysis to explain why people engage in lending and borrowing b Possibility 1 Consider Joe earning 20k one year and 40k the next year The total earning for two year years is 60k and the average earing is 30k per year Joe consumes 20k one year and 40k the next year erratic consumption Marginal Value vs Present Consumption Marginal Value of Present Consumption Present Consumption per 1000 i From the graph the total value of two years of consumption 1 Total value in Year 1 Area A under the marginal value 2 Total value in Year 2 Areas ABC 3 TV of two years consumption AABC BgtC ii Possibility 2 Consider Joe earning the same as possibility I but consuming 30k each year smooth consumption Marginal Value vs Present Consumption Marginal Value of Present Consumption Present Consumption per 1000 iii From this graph the total value of two years of consumption 1 Total value in Year 1 AB 2 Total value in Year 2 AB 3 Total value of two good consurnptions AABB BgtC iv According to the Law of Demand if vacations become cheaper people should tale rnore vacations However most people take exactly one vacation per year Whatever the cost Does the law of demand not apply here Yes Marginal Value vs Quantity V Q1 Q2 of ActivitiesVacation CONCEPT OF DEMAND AND GRAPHICAL REPRESENTATION OF THE DEMAND CURVE price Pr1ce vs Quantlty Quantity per period 1 Definition a Keeping all else income prices of other goods and services constant if price rises quantity will fall and vice versa b What matters to the law of demand is i The dollar price of the good ii The relative price of a good c Examples i Alfredo buys only two good and spends all his income on two goods salad and pizza The prices of these goods in 2012 and 2013 are 2012 Price 2013 Price Salad 2 per LB 4 per LB Pizza 12 18 Suppose Alfredo has enough income in 2013 to buy the same amounts as in 2012 Will Al ea o buy more less or the same amounts in 2013 as compared with 2012 More The relative price or opportunity cost of a pizza in 2012 is 6 122 salads forgone This means that for every additional pizza consumed Alfredo has to give up 6 salads In 2013 the opportunity cost of a pizza is 45 According to the Law of Demand as the opportunity cost of a good decreases the quantity of that good purchased increases So pizza is relatively cheaper even though its dollar price has increases October 15 2015 11 Price of gasoline Year Price of all Price of Relative price consumer gasoline of gasoline goods CPI X100 1983 100 120 120 2004 187 179 095 2005 195 250 128 2013 2335 329 141 2015 2386 260 109 In 2004 the dollar price of gasoline was higher than in 1983 179 compared to 120 Would you say that in 2004 people bought less the same of more gasoline than in 1983 More because the relative price in 2004 is lower than the relative price in 1983 APPLICATIONS OF DEMAND INTRODUCTION TO THE CONCEPT OF ELASTICITY AND THE PRICE ELASTICITY OF DEMAND 1 The relative elasticity of demand between two goods a Take the demand for 2 goods for example beef and chicken Suppose the seller of each good faces the demand curves drawn in the figure below the market demand for chicken and the market demand of beef Price vs Quantity lbs Demand for chicken Demand for beef 3 1 P1 Q QChicken QBeef 2 Motivating the price elasticity of demand for a good along the demand curve a Consider a Tshirt producer Who faces the following market for her product Price vs Quantity Price F A 90 IEI gt elastic C 50 lt 1 inelastic B 20 NH 0 10 50 80 100 Quantity of Tshirts For Point A At Q 10 P 90 Total Revenue TR P X Q 90 X 10 900 Suppose that she increases her output by one unit price falls by one unit 1 This is due to the slope of 1 based on her demand curve AtQ11P89TRPXQ89X11979 ForPointB As she then expands her output she finds a very different story AtQ80P20TRPXQ20X801600 As Q goes up to 81 Q 81 P 19 TR P X Q 19 X 81 1539 The price elasticity of demand is the percentage change in Q demanded as P changes in percent change a The measure of price elasticity of demand change in Q E elasticity Change in 41 b Mathematical terms in21 Q 2 E 2 Q1 2 Q 2 Q dQ X P 222 AP dP dP Q P1 P P slope c Examples i Refer to 2a At Point A P 90 Q 10 w l 10 10 l 90 EAzmzizloxIZ39W 90 90 At Point G P 100 Q 0 dQ P 100 EG 1 1 X T 1 x 0 00 Perfect Elast1c1ty 0 EC 2 X 1 x 1 Unitary Elasticity EB X 1 X 025 At Point H P 0 Q 100 dQ P 0 o f 1 1 EH dP X 1 x 100 0Perectylneast1c 1 Where demand is inelastic if the seller raises the price of his product what happens to his total revenue or total expenditures by consumers P rises and Q falls which means the revenues rises 2 What if the demand is elastic Revenues fall 3 How about the unitary elasticity Revenues stay constant ii A seller increases the price of its product by 10 and the quantity sold falls by 20 What is the price elasticity of demand for this product E x 1 X 2 2 2 elastic d For a 1 increase in P results in a 9 drop in Q i gt 1 elastic demand ii lt 1 inelastic demand iii 1 unitary elasticity 4 Facts a An elastic demand Q changes are very responsive to P changes b As P falls by one percentage Q increases by a large percentage so the total revenue of the seller P X Q increases 0 As P rises by one percentage 1 Q falls by a larger percentage so the total revenue of the seller P X Q falls d An inelastic demand Q changes are so responsive to P changes e As P falls by one percentage 1 Q increases by a smaller percentage so the total revenue of the seller P X Q falls f As P rises by one percentage 1 Q falls by a small percentage so the total revenue of the seller P X Q rises 5 Important Applications for Price Elasticity of Demand a Organization of the Petroleum Exporting Countries OPEC i When OPEC meets for decision on their joint product what is their objective To increase revenue ii If demand for oil is inelastic then in order to increase revenues they should cut production of oil iii If demand for oil is elastic in order to increase revenues they should increase production of oil b Drug Interdictions i Drug interdictions causes the price of drugs to rise ii Since demand for drugs is inelastic total expenditures by the drug addicts rise iii Therefore the number of crimes committed is likely to fall iV Law enforcement expenditures will also have to rise Legalizing drugs will force the price go up and with it expenditures will go up making the number of crimes committed will fall Pricing Discrimination i Why do some retailers give discounts to students The quantity changes by a much larger percentage That means that the revenues of the sellers that they make rise That s why they give discounts to students Cheese i Is the price elasticity of demand for the category of food higher or lower than the price elasticity of cheese The price elasticity of food is 1w than the price of elasticity for cheese because you can easily substitute cheese rather than with the whole category of food Brand Names i Do brand names in general tend to have a high or low price elasticity of demand when compared to a whole category Brand names generally tend to have a higher price of elasticity than the whole category of that good because you can easily substitute that particular good rather than with the whole category of that particular good Gasoline s Elasticity Changes Over Time i Will the price of elasticity of gasoline will be higher in the short run or in the l lg w The price of elasticity of gasoline will be higher in the long run because as vehicles are evolving they will become more fuel efficient and more vehicles will eventually find alternative sources for fuel other than gasoline making the price of elasticity for gasoline a bit higher in the long run
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'