An 11.2-kg block and a 21.7-kg block are resting on a horizontal frictionless surface. Between the two is squeezed a spring (spring constant 1330 N/m). The spring is compressed by 0.141 m from its unstrained length and is not attached to either block. With what speed does each block move away after the mechanism keeping the spring squeezed is released and the spring falls away?
Econ 201- Microeconomics- Glen Waddell Final Study Guide *Bring Green Scantron! *Student or Gov Issued ID *#2 pencils Production technology • Inputs, or factors of production: Anything that in any way contributes to production • Production function: The relationship between inputs and outputs • Total Product: the amount of output obtained in total from a given quantity of input • Marginal Product: The change in the total product that results from a 1 unit increase in an input, holding the amounts of all other inputs constant • The “Law” of Diminishing Marginal Product : As more of one factor of production is used with a fixed quantity of other factors, the marginal product of expanding factors ultimately decreases • Average Product: The total product divided by quantity Inputs TP MP AP 1 3 3 3 2 8 5 4 3 15 7 • How many units of an input (eg labor) will a firm hire o It depends on what the firm wants to do o The firms objective is to maximize profits, the difference between revenue and total cost § Profit= TR-TC o How many units of an input will a profit -maximizing firm hire o They should compare the marginal contribution of the input to the marginal cost of hiring the input • Marginal Revenue Product: the increasing total revenue that results from a 1 unit increase in an input, holding the amounts of all other inputs constant o If we know the MP of an input and the price of the o utput P, then we can calculate the MRP by, § MRP=MPxP Inputs TP MP MRP wL Hire TR TC Profit 1 3 3 30 $40 Yes 30 40 -10 2 8 5 50 $40 Yes 80 80 0 3 15 7 70 $40 Yes 150 120 30 4 21 6 60 $40 Yes 210 160 50 5 26 5 50 $40 Yes 260 200 60 6 30 4 40 $40 Yes 300 240 60 7 22 3 30 $40 No 330 280 50 8 35 2 20 $40 No 350 320 30 9 36 1 10 $40 No 360 260 0 • With well-defined property rights, Resources are allocated such that: o The firm hires 6 units of input (at a cost of 6 x $40=240) o The value of goods produced is $300 o Economic rents of $60 are earned by the firm • Well-defined property rights: exist when a decision maker captures al of the marginal benefits produced by an action and suffers all of the marginal costs of an action • Common land ownership : Rules- o Members of the commune share equally in the v alue of everything produced o Members are free to join or quit the commune at any time • Socialist cooperative: Rules - o Members of the commune share equally in the v alue of everything produced o Members decide how many people will join • Property rights matter Transactioncosts • Originofgainsfromtrade…peoplearebetteroffthroughhavingtheopportunity tovoluntarilyexchangegoods • Withprivateownershipofaresource,theownercandirecttheuthat resource • Ifpropertyrightsaren’twell-defined,transactioncostsarepositiveandresource allocationisdifferentinsofarastheyarespentattemptingtobetter -definethese rights o WhentherighttoaseatatAutzenstadiumarenotwell -defined,resources arereallocatedtowardkeepingthepeace o Whereworkersarepronetoshirk,resourcesarereallocatedtoward monitoringworkers • Difficultyincompletelycontractingwithanotherpersonorworkerisbestthought ofasatransactioncostthatkeepspr opertyrightsfrombeingwelldefined • Example:ConfectionerandaDoctor - o theconfectioner’snoisekeepsthedoctorfromdoingbusinessatan estimatedcostof$400,000 o Tobuildasoundproofwallwouldcost$300,000 o Fortheconfectionertomoveitwouldc ost$900,000 § Inthiscasethecourtshadlittledifficultyingrantingthedoctorthe injunctionhesought. • TheCoaseTheorem:intheabsenceoftransitioncoasts,resourceallocationis independentoftheassignmentofliability(ordistributionofproper tyrights) o Ifrules(propertyrights)arewellknownandenforceabletoall,changesin thoserightswillchangethewealthoftheparticipantsbutnotthe outcomes § Baseball’sreserveclause,freeagency,fault/nofaultdivorce § Ifyouaskyourkidtomakeherbedeverydayforaweekyoupay her$1.75..oryoucouldpayher25centsaday.Ifits25centsaday itonlycostsher25tonotmakeherbed,butifyoupayherbyweek andshedoesn’tmakeherbeditcostsher1.75 • All standard models assume that consumers are fully informed about product prices, attributes, qualities, locations, etc, yet we would acknowledge that consumers often have incomplete information • Asymmetric information: One party to a transaction knows a material fact that the other party doesn’t o Can lead to non existence of equilibrium, or resources being used less efficiently that they would be if there were perfect inf ormation ObservableLowquality • Intheusedcarmarket,isitnotmorelikelythatthecurrentownerhas learnedovertimeifthecarhasneededfrequentrepairsandifthecar hasbeentakencareofAtbest,buyersmayonlyknowtheprobability ofgettingahighqualitycar o Wetrytosellourselveshigh o Ifbuyerscan’tdistinguishbetweenlowandhighqualityused cars,thecarssellforthesameprice Highquality o Unabletodistinguish -theexpectedvalueofarandomlychosen usedcarwouldbe$7500 § You’reeithergoingtogetacarworth6000or9000,never7500,but suppliersarenevergoingtoselltheircarfor9000, abovetheirmarginalvalue § Thelowqualitycarseventuallydriveoutthehigh qualitycars § Usedcarsmarketsare nowindicatorsoflowqualitycars o Whyisitmeaningfultocertifycars -givesthecarsmeaning, Unobservablequality lettingthemchargemore. • Can’tmakethemallcertifiedbecausethenitbecomes meaningless • Certifytheonesthatarelesscostlytorepair • Insurancemarkets:Healthinsurancebecomesmoreexpensiveasoneagesasthe likelihoodofneedingtheinsuranceincreases.Itispossiblethathealthyelderlypeople mayfindittooexpensivetopurchasehealthinsurance o Pricesareinflatedbytheunhealthypeople o Adverse selection: As price of the policy rises, the insurance company ends up selling insurance only to those with the most need for insurance o What do insurance companies do that could be thought of as a response to adverse selection in insurance markets § Is there equality in health insurance markets No, but that’s not necessarily a bad thing… • Home repair: If homeowners cannot observe the quality of workmanship, those who cut corners (yielding lower costs) may drive out those who don’t • Possiblesolutions: o Guaranteesorwarranties o Liabilitylaws-you’re“onthehook,”willingtopaymoremoneynow • NashEquilibrium:Asetofstrategiesinwhichnoplayerwantstochangegiven the otherplayersactions Catastrophic Regulation: The Case of US air Traffic Controllers • Aregulationisdesignedtoalterbehaviorofanindividual o Usingsomeappropriatesetifincentives o Raisethegainsorlowerthecost • TheFederalEmployeesCompensationAct guaranteestheincomeofanyfederal employeewhoisinuredordisableswhileservingthefederalgovernment o In1974,CongresschangedtheFECAdisabilityprogramtomakeiteasiertoqualifyfor compensation o Byjoiningtheprogram,aworkergivesuphisorherrighttosuetheemployerforonthe jobinjuriesinexchangeforguaranteedinjurycompensationnomatterwhomayhave beenatfault. § Theinjurywasdisabling § Theinjurywasjobrelated o Inthe74amendmentscongressmadetwoproceduralchangesintheprogram § Psychologistgavemedicalevidence o Loweredthecosttoanemployeeclaimingadisability(especiallyneuropsychiatric) whenitdidn’tactuallyexist o TheOfficeofWorkersCompensationProgram sinstructedclaimsexaminerstolook forparticularincidentsthatweresymptomsoforcontributedto,amentaldisability § Drewthecontrollersattentiontotherelevanceofspecificevents § Thereporthadtobeaccompaniedbyacorroboratingstatementfr omhisorher supervisor o FAAminimumseparationrequirementsforAirRouteTrafficControlCenters § Fivemileshorizontally,2000feetvertically § Minimumseparationis3mileshorizontally,1000ftvertically • Anyviolationofstandardminimumsconstitutesa systemerror o Whatresponsewouldweexpectfromacontrollerwhoiscontemplation“punchingout” ondisabilitycompensation § The74changestoFECAshouldleadtoariseinsystemerrors • AccordingtotheFAA data,between1962and1973therewereroughly 280systemerrorsannually • In1974therewere340 • 1975-420 • 1976-491 o Adjustingforotherpossibleexplanationsfortheincreaseinsystemerrors,these changesarestatisticallysignificant. o TheamendmentstotheFECA,andthehandlingoftheOWCPdisabilityclaimshad inducedcontrollerstoallowairplanestopasstooclosetogether o Howclosedoesthecontrolleractuallyallowtheplanestoget § Nearmid-aircollisions: • Critical-lessthan100ft • Potential-lessthan500ft • NoHazard-collisionimprobable § Itsalmostimpossibleforacontrollertodeterminefromconvergingradar blimpswhetheraircraftactuallypasswithinthedistancesoutlinedintheFAA’s definitionof“nearmiss” o Duetotheaddedcosts ofanearmissandtheabsencesofoffsettinggains,wewould expecttofindnoincreaseinnearmissesafter1975 § Controllerwouldbewatchingscreenmorecarefullyduringaplannedsystem error § Controllerwouldwanttopickaslowerandsmallerplanecar ryingfewer passengers § Controllerwouldwanthisplannedsystemerrortooccurwhenhisassigned airspacewasn’tcrowded • Optimalsecurityalertstatus o Weshouldestablishwhyoneshouldcare(anormativeposition supportedbysomethingpositive) o HomelandSecurityAdvisorySystem -Afivecolorschemewas introducedbytheBushadministrationinMarch2002 § Green(Lowriskterroristattack)throughRed(severerisk) o TheNationalTerrorismAdvisorySystemreplacedthecolorcoded HomelandSecurityAdvisorySys temin2011 o Whatisfundamentallyatissueinconsideringsecurityalerts - Incompleteinformation o Whatmustthesecurityalertprovideifitsgoingtofixthefundamental problem-Information • Why does a football coach make more than the President o Marginal Value o Diamond-water paradox • Search theory and the margins of importance in job acquisition o First-third cut... little use investing in X unless X is at the margin. Consider investing in the Xs that show up earlier in the firm’s search • Media bias Really o Not just market segmentation Further encouraged by advances in technology The more you can segment the market the higher you are willing to pay • Penalty severity and drug potency o Shipping the good apples out o Drug potency increases - demand for higher quality goes up • Are morals exchangeable (Why do they differ across people at a given time Why do they differ across time for a given person o Church used to think that interracial marri age was of the devil... now their view is different and the battle is against same sex marriage o That declared morals change requires explanation. Driven by changes in marginal values. • Litmus test for presidential candidates (their positions on abortion, gay marriage, etc.) o What is that ignoring o Is that all that matters o Using litmus test for how you vote is ignoring marginal ____ o The less likely X is going to be re -adjudicated, the less important X should be to casting one’s vote • Do you want to split the check o If we don’t split the check then I will pay for this time and you will pay for the next... creating a next time o Wait until they’ve ordered, don’t start by telling them “this is on me” because then they will be less conscious of their costs o Property rights not well defined • You don’t have to actually learn anything in college for college to be worthwhile. Why o It Was costly to take time out of your life o Get a higher paying job • You’re rebuilding where Should disaster relief be given to those who build in high -risk areas o They pay less to live in that high risk area o Prices adjust with risk • Personal genetics: Should people be require to reveal what they know o Should we get those fancy tests that tell us what we are going to die from Some people want to know some people don’t o Adverse selection problem Moral hazard o Issues with sexism in the work place: women are likely to get pregnant, more apt to take off… How do I decide who to train, Male or Female Male because they’re less likely to leave. ànot equal, moral hazard Preliminaries • Whatiseconomics • Whatisourrole -No single person directs any more than a tiny part of the production of any good Theeconomicproblem • Theorganizationofaneconomy o What should we produce o How should we produce o For whom should we produce • Pricesandmarkets • Theory-testability • Policyanalysis(DWIexample) • Scarcityandcompetition -wedon’thaveunlimitedsupply • Cost-valueofthenextbestalternative • Demandandsupply ConsumerTheory • Individualpreferencesandbehavioralpostulates - o Theyreallydohavepreferences o Moreisbetter o Willingtosubstitute o DiminishingMarginalValue • Valuation-totalversusmarginal • Theoptimalpurchaseruleanddemandtheory -youbuyuntilthepriceishigher thanyourmarginalvalue;happensbecausemarginalvalueisdeclining • Thediamondwaterparadox -whatactuallydrivesprices • Saleprices-pricesfollowvaluation(buyonegetonefreeisaboutrecognizing what’strueaboutvaluationwithh umans) • Inflation • Individualresponsiveness-priceelasticity • Demanddeterminants o ChangeinIncome o Normalgoodvs.inferiorgood o Substitutes-Pricesfolloweachother o Compliments-ifbagelsaremoreexpensivethenIdon’tneedasmuch creamcheese(pricegoesup,otherpricegoesdown) • Shippingthegoodapplesout ExchangeandSupply • Voluntaryexchange-youcan'tbeforcedintoit • Thesupplysideofthemarket • Organizedmarkets DemandandSupply • Demanddeterminantsandchangesindemand -marginalvalue • Supplydeterminantsandchangesinsupply -marginalcost • Interactionsbetweenmarkets-taxisaremoreexpensive,thereforepeopleare lesslikelytobuydrinksatresturants • Pricecontrols • Blackmarkets Costandproduction • Productiveadvantages • Society’sproductionchoice • Marginalcostandsupply • Marketefficiency Production,ProfitandPropertyRights • Productiontechnology • Factordemand Markets,Bythenumbers • Demand • Supply • Equilibrium Production,Profit,andPropertyRights • Productiontechnology • Factordemand • Propertyrightsandprivateownership GameTheory • Preliminaries • Games Information • Preliminaries • Informationasymmetries-IknowmoreaboutthequalityofthiscarbutIcan’t findsomeonethattrustsmeenoughtopayforis Definitions: Normal good: is a good for which demand increases as income increases Income elasticity: % change in quantity of x/ % change in income Cross Price Elasticity: % change in quantity of x/ % change in y Price floor: a government imposed limit on how low a dollar price can be charged Imposed above (below) the equilibrium price is effective… surplus (ineffective... it doesn’t change anything) § Agriculture price supports § Dairy price supports § Federal minimum wage (higher minimum wage, higher unemployment) Price Ceiling: a government imposed limit on how high a dollar price can be charged Imposed below (above) the equilibrium price is effective (ineffective) § Insurance and utility rates § Gas § Food § Prescription drugs § Rent controlled apartments § Tuition) Productions Possibilities Frontier: The combinations of various goods that can be produced given available resources and technology Absolute Advantage: if that individual can produce more than others in the same time or the same amount as others in less time Comparative Advantage: if the individual can produce the good at lower cost than others Specialization • Would we both be better off through specialization • If your roommate is good at math do you ask him to help you with your math homework or your English homework If you’re good at English and he’s not, do you switch homework You’d both be better off focusing on what you can produce better • Through specialization you both end up with more stuff • What will happen over time as specialization occurs o You’re going to get better at producing your product o Your production possibilities frontier is going to decrease because you’re focusing on one item The Principle of increasing Opportunity cost: As the production of one good increases, the opportunity cost of producing another unit (marginal cost) of producing that good generally increases Consumer Surplus: the amount producers receive upon selling the units above the costs of producing unit Efficiency: the absence of waste. Obtained where Marginal cost of production equals the Marginal Values of consumption Welfare: the sum of consumer and producer surplus. Defined this way, it’s maximized in perfectly competitive markets The “Law” of demand: as the price of an item rises, the quantity demanded of the item generally falls • Qd(p)=a-bp, where a>; 0, b>0 • Since, b>0, inversely related o Qd(p)=10-2p § At p=2 quantity demanded in the market is 10-2(2)=6units Supply: • Qs(p)=2+2p • Quantity supplied rises two units for every dollar increase in price Equilibrium • Suppose that Qd(p)=50-p and Qs(p)=20+2p o Qd(p)=Qs(p) o 50-p=20+2p o p=$10 à Qd(10)=Qs(10)=40 • Suppose Qd(p)=400-10p and Qs(p)=100+2p. Is a price ceiling of p=$10 effective o 400-10p=100+2p o p=25 o $10 price ceiling is effective because 10<25 o Shortage (Qd(p)=400-10(10)=300, Qs(p)=100+2(10)=120 • Inverse demand: p(Qd)=60-Qd • Inverse supply: p(Qs)=0.5Qs Inputs, or factors of production: Anything that in any way contributes to production Production function: The relationship between inputs and outputs Total Product: the amount of output obtained in total from a given quantity of input Marginal Product: The change in the total product that results from a 1 unit increase in an input, holding the amounts of all other inputs constant The “Law” of Diminishing Marginal Product: As more of one factor of production is used with a fixed quantity of other factors, the marginal product of expanding factors ultimately decreases Average Product: The total product divided by quantity Marginal Revenue Product: the increasing total revenue that results from a 1 unit increase in an input, holding the amounts of all other inputs constant o If we know the MP of an input and the price of the output P, then we can calculate the MRP by, o MRP=MPxP The Coase Theorem: in the absence of transition coasts, resource allocation is independent of the assignment of liability (or distribution of property rights) Table example (definition equations put to use) Inputs TP MP MRP wL Hire TR TC Profit 1 3 3 30 $40 Yes 30 40 -10 2 8 5 50 $40 Yes 80 80 0 3 15 7 70 $40 Yes 150 120 30 4 21 6 60 $40 Yes 210 160 50 5 26 5 50 $40 Yes 260 200 60 6 30 4 40 $40 Yes 300 240 60 7 22 3 30 $40 No 330 280 50 8 35 2 20 $40 No 350 320 30 9 36 1 10 $40 No 360 260 0 Questions: • Farmerscanplanteithercornorsoybeansintheirfields.Supposethatthefirstdecade st ofthe21 century,anewtechnologyforconvertingcornintoliquidfurlincreasesthe demandforcorn.Whatwillhappen o Thesupplyofsoybeanswilldecrease • InMayof1996aValueJetairlinercrashedinFlorida.Allegationsweremadethatcost cuttingbyValueJethadledtoreducesafetymeasures.Onthedayfollowingthecrash, airlinestockrallied.UALgained6to214,AMRgained2.5to92andDeltaairrose3.375 to85.657 o Anticipatedbehaviorchangedsostockpricesrosebecauseeveryonewanteda pieceoftheotherairlines(demandforairlinestockincrease -pricesadjust upward) • Supposethatovertime,technologicalinnovationsacttolowerthecostofmusicpiracy. Whatwouldyouexpecttohappenintheretailmarketforrecordedmusc o Demandintheretailsectorfallsandpricesadjustdownward…fewerunitsare exchanged o Longrunpredictions:ifthemarketissegmentedandthosewithahigher willingnesstopay -retailpricesshouldincrease • Thewallstreetjournalreportsthatcrudeoilpricessoared aftertheU.N.frozetheIraqi oilpactthatwastopermitIraqtoresumesalesofoilontheworldmarket.Whyshould oilpricesrisewhenIraqwasnotsellingoilatthetime o Expectations–demandadjusts o Pricesadjustupward o Quantityincreases Surplus: • Tutor:$10anhour TimeBenefitPrice/HourPriceNetBenefit 1 30 10 10 20 2 45 10 20 25 3 60 10 30 30 4 70 10 40 30 5 75 10 50 25 • With3hoursofTutoringyougetthesameNetBenefitas4hoursoftutoring • TotalSurplus=ConsumerSurplus+ProducerSurplus • ConsumerSurplus: ProducerSurplus: • • • • • Supposethegovernmentbuildsadamonariverinordertogenerateelec tricity. Thedamalsocreatesalakethatenhancesrecreationaluseoftheland.Asa resultrentsonthelandincreaseandcampersandhikersarechargedahigher feeforuseofland o Theseincreaseinuse -freesareameasureofbenefitscreatedbythedam o Thelakeisworththatuse -fee • Ifpropertyrightsaren’twell-defined,transactioncostsarepositiveand resourceallocationisdifferentinsofarastheyarespentattemptingtobetter - definetheserights o WhentherighttoaseatatAutzenstadiumareno twell-defined, resourcesarereallocatedtowardkeepingthepeace o Whereworkersarepronetoshirk,resourcesarereallocatedtoward monitoringworkers SelfReviewChecklist: Preliminaries • Whatiseconomics • Whatisourrole Theeconomicproblem • Theorganizationofaneconomy • Pricesandmarkets • Theory • Policyanalysis • Scarcityandcompetition • Cost-valueofthenextbestalternative • Demandandsupply ConsumerTheory • Individualpreferencesandbehavioralpostulates • Valuation-totalversusmarginal • Theoptimalpurchaseruleanddemandtheory • Thediamondwaterparadox • Saleprices • Inflation • Individualresponsiveness • Demanddeterminants • Shippingthegoodapplesout ExchangeandSupply • Voluntaryexchange-youcan'tbeforcedintoit • Thesupplysideofthema rket • Organizedmarkets DemandandSupply • Demanddeterminantsandchangesindemand • Supplydeterminantsandchangesinsupply • Interactionsbetweenmarkets • Pricecontrols • Blackmarkets Costandproduction • Productiveadvantages • Societysproductionchoice • Marginalcostandsupply • Marketefficiency Production,ProfitandPropertyRights • Productiontechnology • Factordemand First Midterm Review: Definitions: • Price: Ratio of exchange -Ex: Raise price of DUI- raises the number of hit and runs • Theory Value: Testability- How well it predicts behavior -Scientist cant prove anything. At best we fail to refute Ex: one cannot prove gods existence or lack there of • Regulation: designed to alter the behavior of individuals by using some appropriate set of incentives (sanctions and rewards) to induce us to incur the costs of a behavior change -We put costs in front of the unethical forms of competition to push people into the right paths -Ex: Punishments for immoral actions like jail, fines, tickets, etc. • Incentive: must serve to raise the gains or lower the costs (positive incentive) or opposite (negative) • Scarcity: not having enough of the items we find desirable to satisfy our wants -Ex: Mineral, water, clean air, wildlife, land / Labor hours by labor force / torque of a given turbine engine -Pollution isn’t a scarcity but clean air is • Opportunity Cost: of any decision is the value of the next best alternative foregone -Ex: How does one determine the financial rate of return to a 4-year college degree, most expensive part=time • Consumer theory: characterizes consumers’ choices in a systematic way • Producer theory: characterizes producers’/sellers’ choices in a systematic way • Demand curve shows the amount of a good consumers wish to purchase at specified prices (negative slope) • Supply curve shows the amount if a good producers are willing and able to sell at specified prices (positive slope) • Equilibrium- where the demand curve and supply curve intersect • Surplus: an excess of quantity supplied over quantity demanded • Shortage: an excess of quantity demanded over quantity supplied • Behavior Postulates: People have preference, more is preferred to less, people are willing to ubstitute, marginal values are decreasing - We can’t accurately describe the preferences of a group, It would be problematic if we based theory on groups: ex. 3 people have 3 different Republican-primary candidate preferences • Valuation: we measure value by what one is willing to give up in order to obtain something -Ex: one gives up $40,000 worth of other goods to buy a car reveals that the car has a value of at least $40,000 • Intrinsic Value: we will maintain that an object cant have value beyond what people are willing to pay for right to control the object - Value of human life: US government says $7-8 million to a human life • Total Value: the max amount of money a consumer is willing to pay in order to acquire the good, the minimum amount of money a consumer is willing to accept in order to give up the good • Marginal Value: the max amount a consumer is willing to pay to acquire one more unit of the good • The law of diminishing marginal value: for all individuals and good the marginal value of goods decreases as more of that good is consumer, holding other things constant -After running a marathon, how might you value the first glass of water What about the first relative to the second The first glass of water is a lot more valued than the second • The optimal purchase rule: a consumer is always better off by purchasing an additional unit of a good if the marginal value of that next unit exceeds the price he would be required to pay for that unit -That is, the consumer should continue to purchase additional goods as long as Marginal Values>Price • The law of demand: as the price of an item rises, the quantity demanded of the item generally falls • The Diamond-water paradox: Why are diamonds more expensive than water, which is essential to all life the market prices of goods reflects consumers marginal values of these goods and not their total value -One more glass of water is worth less than one more diamond • Inflation: prices rise - If there are currently 20 million packs of cigarettes sold in a week, how much revenue will a new $.25 per pack tax generate for the government -Will they still sell 20 million after the tax is imposed -Probably less than $5 million (20x.25) • Price-elasticity of demand: measures the responsiveness in quantity demanded to change in price- (%change in quantity of x) / (%change in price of x) -What determines the responsiveness of an individual’s choice of quantity demanded to a change in price The availability of close substitutes, ex: cigarettes, prescription drugs- steep slope The fraction of income spent on the good The unit of tnde: with the passage of time, the response to a given change in price becomes greater (2 law of demand) • Normal Good: A good for which demand increases as income increases • Inferior Good: response to income increases • Substitutes: two goods for which the demand of one good increases as the price of the other good increases § MacBook pro à Dell Latitude § Econ major à Business major § Beer à Spirits • Complements: two goods for which the demand of one good increases as the price of the other good decreases § CDs ßà CD players § IPod ßà ITunes § Coffee ßà Cream • Voluntary Exchange: o What is the basis of trade (why does it exist) § Voluntary exchange is based on mutual benefits § Everything depends on free choice § Are you willing Forced § The only way you can back out value is if the situation was forced/coerced, the rules change