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Micro Change in supply factors → Shift in supply curve → Change in price → change in quantity demandedChange in demand factors → Shift in demand curve → Change in price → Change in quantity suppliedPrice s1D1 Qd, QsEndogenous – Variables inside the model. Labels are on their axises. Response to change in something. P, Qd, Qs.Exogenous – Cause. An exogenous variable is a factor that is outside of an economic model; it has an impact on the outcome of the model, but changes in the model do not affect these factors. Put simply, an exogenous variable is something that affects a particular outcome without being controlled by that outcome in return. Exogenous variables are sometimes referred to as independent variables, as opposed to dependent — or endogenous — variables, which are explained by the mathematical relationships in the model. While endogenous variables can be manipulated within the economic model, exogenous variables are generally uncontrollable.One way to better understand exogenous variables is to look at a basic economic model, such as that for the supply and demand for a certain good in terms of the quantity demanded and supplied of that good for different price levels. In the basic version of this model, changes in the amount of money the consumer has to spend on the product affects the amount ofdemand for the good, but the demand csriable. 2 types of problem:You know the change in the exogenous factor, so you must give the effect on p (price) & q (quantity).P S2 There was a drought this summer. How did it effect the price and quant. of tofu?S1 Supply curve shifts to the left. Price goes up, quantity goes down.p2p1 d1Tofu qd, qsYou know the new p and/or new q and you must determine what exogenous variable changed. The price of gasoline over the summer went up A: Demand goes up because it's the summer, less supply, higher price.. S1D2 qd, qs D1Price is always endogenous. It's ALWAYS is an effect, NOT a cause. Trick question on tests!The only thing that can raise both the quantity and the price at the same time is a shift in demand.Elasticity – How we respond to a change in price. Technically called price elasticity of demand. Ex. Just because the price of salt goes down, doesn't mean we go out and buy more. It's already pretty inexpensive. What is the consequence of increasing gasoline prices? It becomes an issue of scarce resources. You must look at how you spend your money and determine opportunity costs (where can I take money from which would be the least harmful?) Reallocation problem.Price elasticity of demand = f(# of viable substitutions, % of budget spent on this item, time to respond)Anything that you really need to buy, have inelastic supply curves. They're very high/narrow. How much we use (either more or less) only changes a little bit if the price changes.Things you can give up or substitute easily are the opposite. Use a lot more or less if price changes.Vertical supply curve – Quantity supplied is limited (perfectly inelastic). Demand can go up, which willcause price to increase. Example: At Fenway Park, the Red Sox is playing the World Series. Number of seats is the same, but more people want to go, so the price goes up.Skip the section of cross-price elasticity in the book. Read Ch. 5 by


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NU ECON 1116 - Lecture notes

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