Economics and Policy
Economics and Policy ECON 2100
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Econ Final 12142011 64500 PM Demand and Supply for a Product 0 O O O O 0 Buyers willingness to pay is modeled in the demand for products That is demand price is the maximum willingness of buyers to pay for a product The supply of a product models the minimum price that the sellers are willing to accept to produce and sell a certain amount of the product That is supply price is the minimum willingness to accept to sell a product to the buyers Quantity demanded Q of a product o If the fixed factors income price of related product advertisement and number of buyers does not affect the product price o For a product demand only its price P changes anything else is assumed fixed Quantity Demanded Q given all fixed factors at a given price how much manymuch of a product buyers are willing to buy and able to pay for it o Your want does not require the ability to pay while your demand does Law of Demand Ceteris Paribus as the product price P goes down we are willing to buy more of it and reverse is the case when its price goes up o Note that products price change does not change the demand for that product but only causes a change in quantity demanded A P change causes a movement along the same demand line Normal Good the general demand has to be positive 12142011 64500 PM Demand and supply Demand Generalized demand quantity demand simple ordinary demand law of demand inverse demand Shifts in demand normal and inferior goods consumption substitute and complement goods Consumers surplus and its nature For downward sloping demand consumers surplus increases at an increasing at as price goes down or quantity consumed goes up Consumers surplus is zero when demand is horizontal and is infinity when demand is vertical demand for life saving drug or drug addict 4 Supply Generalized supply quantity supplied simple supply law of supply inverse supply Shifts in supply production substitute and complement goods Producers surplus and its nature For upward sloping supply producers surplus increases at an increasing at as price goes up or quantity suppliedsell goes up Producers surplus is zero when supply is horizontal and is the total revenue when supply is vertical OBO supply Equilibrium 1 Market and market adjustment process to reach to equilibrium Definition of equilibrium Formulae for equilibrium quantity and price Changes in equilibrium quantity and price as demandsupply or both change comparative static Here you will be exposed to math But don t worry everything is formula driven Welfare analysis at equilibrium solution Net societal benefit NSB Control Prices 1 Ceiling price is the maximum price that can be charged in the market Conse quences of ceiling price Welfare losses due to ceiling price under no subsidy and under subsidy 2 Floor price is the minimum price that can be charged in the market Consequences of floor price Pricesupport and pricesubsidy by the government to execute the policy Welfare losses due to floor price under no subsidy and under both pricesupport and subsidy policies Note that welfare loss under both pricesupport and subsidy are same Sales tax 1 Definition of specific sales tax its affect on quantity traded burden of sales tax born by buyers and sellers Welfare loss due sales tax Note that for downward sloping demand and upward sloping supply both parties share total tax burden The party that has horizontal demand or supply share no tax burden and the party having vertical demand or supply bears 100 tax burden I may expose you to easy computations in this topic You may need to find the after tax quantity trade tax burdens and deadweight welfare loss Elasticity 1 Price elasticity of demand PED its intuition interpretation Formulae of PED and their application with numerical computations The values of PED along a linear downward sloping demand absolute PED greater than one demand is price elastic absolute PED is less than one demand is price inelastic The upper onehalf of a downward sloping demand line is elastic and the lower onehalf is inelastic Horizontal demand is perfectly totally elastic and vertical demand is perfectly totally inelastic The relationship of PED with total revenue TR or total expenditure TE In the upper onehalf of a demand line is elastic price goes down buyers consume more their total expenditure on the good goes up which is equivalent to sellers revenue going up In this segment TR and P are negatively related Q and TR are positively related The lower onehalf of the demand line is inelastic price goes down consumers consume more but their total expenditure on the good goes down good for buyers and suicidal 5 for the sellers In other words in the lower onehalf of the demand line price and TR are positively related Q and TR are negatively related Uses of PED to take prudent business decisions 2 Crossprice elasticity of demand CPED its concept and application 2 Income elasticity of demand IED its concept and application Consumers behavior 1 Definition of total and marginal utilities law of diminishing marginal utility and its relationship with law of demand Given income and price constraints the rule of utility maximization 2 Consumption adjustment when a consumer is off equilibrium Theory of production Production function atypical production initially increases at an increasing rate reaches a point of inflection after which it increases at a decreasing rate some pro duction function increases at a decreasing rate from the beginning types of input fixed and variable inputs shortrun longrun marginal physical product of labor law of diminishing returns marginal product of labor increases at a decreasing rate reaches a maximum after which it decreases at an increasing rate Returns to scale of production a increasing returns to scale and b decreasing returns to scale Av erage product of labor for a typical production function average product of labor initially increases at a decreasing rate reaches a maximum after which it decreases at an increasing rate The law of marginal and average product of labor Production cost explicit and implicit costs economic profit and accounting profits Fixed cost and variable cost marginal cost and average variable cost and their rela tionship We will also establish relationship between MC and MPL AVC and APL relationships Longrun cost structures Market structures Perfect competition features objective profit maximization out put operating profits and economic profits What happens to profit maximizing out put under different scenarios Derivation of firm s supply curve and relate this with our previous knowledge of supply temporary shutdown rule Long run and shortrun answers Monopoly and its comparisons with perfect competitions Oligopoly and its features and difference with monopoly and perfect competitive mar ket structures Monopolistic competition Macroeconomics starts here Final and intermediate goods Definition of gross domestic product GDP gross na tional product GNP aggregate price level real gross domestic product inflation de flation inflation price stability hyperinflation and different indices Real business cycle economic contraction expansion peak trough depression recession Govern 6 ment spending G households consumer pending C government transfer payments F tax revenue TR net tax revenue TTRF Gross and net investment inven tory investment planned investment aggregate private saving S budget surplus also known as public saving and deficit Three approaches of measuring GDP value added aggregate expenditure and factors income approach exports EX imports IM exchange rate net exports depreciation capital consumption allowance net domestic product NDP national income NI personal income PI disposable in come DI Potential real GDP and real business cycles recession and depression Labor force employed and unemployed workers unemployment rate and its kinds aggregate demand AD and supply both short and longrun equilibrium output and price Why AD is downward sloping The fiscal and monetary policies of the government and their affects on AD and shortrun aggregate supply SAS and on equilibrium output and price Marginal propensity to consume and save mpc and mps aggregate households con sumption function autonomous aggregate consumption a determination of dispos able income aggregate expenditure function autonomous aggregate expenditure A determination of real GDP tax saving etc under different conditions Different multipliers autonomous expenditure government spending tax and balanced budget multipliers Demand pull and cost push inflation Classical and Keynesian schools of macroeconomic thoughts