Lecture 1 09 26 2013 Economics allocating scarce resources 2 f words Free fair Micro individual decision makers Diffrence b w wants needs scarcity aren t enough resources shortage At what price positive you can test normative opinion rational respond to price self interest people do things for satisfaction Lecture 2 09 26 2013 Rational self interest hypotheses that decision makers are self interested self satisfaction EX Mother Teresa she got satisfaction from helping always trade offs in economics economics is choices Opportunity cost the best forgone alternative what you value most of your alternatives Ceterus Paribas everything else held constant EX tuition raised 10 keep everything constant that effects enrollment except tuition only enrollment and tuition association as causation cause effect fallacy EX tubing tripled in 1999 of bankruptcy in south increased by 10 but fallacy of composition just because one part is true does not mean its true EX one cotton farmer switched to sorgon that doesn t mean all cotton both are completely unrelated for all of the whole farmers will benefit by switching Resources Labor People Land oil coal minerals water etc Capitol Factories machinery buildings more capital the more money the country will make Entrepreneurship Risk taker Questions based on supply and demand what are we going to produce How much Distribution what technique EX labor technology Production possibilities with given recourses Guns Butter A 200 0 B 150 75 C 100 125 D 50 145 E 0 150 Moving from E to D the cost is 5 lbs of butter to gain 50 guns and so on The opportunity cost keeps increasing because you loose more butter It doesn t matter what you choose on the table its all a matter of opinion what s needed ppc would shift in or out depending on population Population matters educated population will produce more bigger will produce more Capital goods Machines Buildings Consumption goods EX pens computers If you use more capital you will get less consumption Capital goods depreciate Lecture 3 09 26 2013 Most decisions are made by supply and demand Not made by S D when its EX if we are going to send a bomber in price system Demand consumer phenomenon Consumers determine demand Supply producer phenomenon Utility maximizers consumers and suppliers want maximum happiness Demand side Cons willing and able to pay Law of demand as price increases ceterus paribus quantity demanded decreases P 1000 750 500 250 0 QD 25 50 150 175 250 Demand curves are not linear Movement on a demand curve is called increase decrease in quantity demanded Determinants of demand o Income shifter of demand curve Normal goods demand increases if income goes up Inferior goods demand will decrease if income goes up EX ramen chicken necks o Population shifter o Tastes Preferences shifter o Consumers Expectations shifter Dont have to be true to effect demand o Change in price of a substitute or a compliment EX pepsi and coke PRICE NEVER CHANGES IT Y mx b P 80 1 10Qd slope 1 10 P 0 30 60 80 Qd 80 500 200 0 Lecture 4 P 80 1 10Qd 09 26 2013 Consumer surplus value to consumers over and above what the actually had would increase if Qd increased decrease if Qd decreased Almost law of supply as price increases Ceterus Peribus quantity supply to pay increases Q S increases only if price increases Determinants of supply Technology productivity o EX Improves product and lowers price INCREASES SUPPLY Change in price of input o EX plastic goes up in price DECREASE IN SUPPLY o EX plastic goes down in price INCREASE IN SUPPLY Change in number of suppliers o EX merger the SUPPLY DECREASES Change in price of a related good you plant sorgom easy switch Change in producer expectations o EX demand for sorgom goes sky high and instead of wheat o EX next year demand of product is going to soar then save some product for when it soars P 30 1 10QS slope 1 10 p 0 30 40 50 QS 300 0 100 200 Movement from E1 to E2 is an increase of Q S caused by and increase in price which was caused by and increase in demand P 80 1 10Qd P 30 1 10Qs 80 1 10Qd 30 1 10Qs Q 250 P 55 Government can put price ceiling on item EX put down price from equilibrium to 45 It doesn t work out well to fine the just insert 45 into p there a shortage if gov lowers price theres a surplus if price is raised Lecture 5 09 26 2013 Markets create incentives Price ceilings price cannot go above what government sets distort the market Price floor price cannot go bellow what government sets a PF is set bellow equilibrium then it has no effect on market vise versa for PC EX earthquake in San fran D1 is before quake and d2 after the price increases for water bottles b c demand went up and supply went down Elasticity allows us to measure sensitivity to other products Inelastic insensitive less responsive About graph Heroin responds much less If price increases in kellogs then QD decreases No such thing as a perfectly vertical demand curve Determinants of price elasticity of demand of substitutes luxury or a necessity Percentage of budget Time 09 26 2013 Lecture 6 About graph Insert graph Price Elasticity of supply formula on paper always positive Supplier of b is much more sensitive to price increase Law of diminishing marginal utility consumer choice Utility happiness Marginal change Consume more and more in a time period at some point the additional utility you get from more will diminish o Ex homeless guy walking in hot w o shoes guy drives by and says poor guy wish I could help so gives him shoes homeless guys utility increased another person drives buy feels bad and gives the homeless guy some shoes utility for homeless guy goes up but not as much as it did the first time he got some shoes MU change in TU Look in packet Change in Q Indifferent curve analysis 3 consumer axioms o rank preferences EX Bag a meat Bag b fruit Bag C DP cheetos rank them o Preferences are transitive o More less EX Bag A Fruit Bag B Fruit and money Lecture 7 09 26 2013 Marginal rate of substitution name of slope of indifference curve Rate he is willing to trade x for y Is marginal utility of y greater at point A or D D is greater Is bundle A preferred to bundle D no they are on same indif curve Is bundle A preferred to bundle F no he s indifferent Is bundle C preferred to bundle B preferred but cant afford it Is he indifferent a and G no Insert graph Indifference curves are concentric When price of x goes up quantity demanded goes down Income effect of price change when income goes up price goes up