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Everybody is rational in choices because everyone maximizes utility Ch 1 Wednesday January 29 2014 12 40 PM Every 2 weeks Best 5 of 6 A Overview a Problem Sets b i ii Grading i ii iii Economics B Problem sets 25 Midterm Final 60 pts 35 Participation 5 a b c Allocation of scarce resources for most utility Utility maximization Cost i ii Money time forgoing other gains Opportunity cost C d Picture a Macro i ii Micro i ii b How big is the economy GDP N w etc Single market for single good Prices structures quantity quality D Demand Curve Picture Law of demand a b i ii D curve slopes down Q responds to price E Supply Curve Up Supply Curve p p Q a b i c Supply Function i Elasticity F Q Q p a b Sensitivity to prices Can change from SR to the LR i Examples 1 Rent Control a Pictures c d Change in price movement along curve Change in any other factor shift in the the curve i Tastes preferences income age complements substitutes 2 Quantity of gasoline consumed a Qg cars person vehicle miles cars 1 MPG i ii Picture b In SR only middle value can change In LR first and last value can change from bikes carpools buses etc ii Price Elasticities change over time a Goods consumed in conjunction w capitol goods eg Fuel needs car Int Micro Lecture notes Page 1 a Goods consumed in conjunction w capitol goods eg Fuel needs car Price elasticity E will grow with time i i b Capitol goods themselves E decreases with time Inelastic 1 E 1 Unity elastic E 1 1 Elastic 1 E 1 iii iv v ii c Rules i E is low for basic non luxury goods necessities 1 E is high for luxury goods Dependent on market you are looking at Ex if market for Beck s beer E high all beer E lower all goods E probably 0 Narrowly define d market 1 2 3 4 a E high 5 Broadly defined market a E low Close substitutes leads to high E E can change over time fuel cars E is a function of income iii iv v d Point Elasticity Formula i ii E Q P Q P x P Q G Arc E a b c d Aka midpoint elasticity Use mean as the base not the original value Q P x midP midQ Example i ii If P 10 12 Q 10 9 1 E 1 2 0 5 iii If P 12 10 1 E 111 1666 0 66 iv Use arc E 1 w income growing some gods change from luxury good to normal good vi E is negative for demand positive for supply 1 We use absolute values Int Micro Lecture notes Page 2 Problem set end of the week Ch 2 Monday February 3 2014 3 50 PM Elasticities 1 Recall a E Q P Q P x P Q Use ARC E E negative i Demand i Supply i 2 E positive Demand Function and Elasticity Suppose demand function a i Q a bP 1 2 Therefore Slope b Q P Look at b not b i ii Ep b P Q Ep Q P P Q b c b 3 Finding Elasticity for a point a Given demand function Q a bP i Rearrange to 1 2 a Q bP Keep b b Steps i Plug in knowns solve 1 2 Either use a Q bP or Derive for the slope 4 Elasticities with calculus a b Ed1p1 Slope x P Q Derivative i Important Examples dQ dP x P Q 5 a Bill always spends 20 of income on wine regardless of price What is the income E of his wine demand i ii Edi Q I 1 If income goes up by a certain percentage then Q goes up by same percentage b Jerry always spends 20 on gas no matter what the price is What is his E of demand with respect to price i ii iii E 1 Perfect tradeoff between Q and P P Q 1 Derivation a b S P x Q Spending constant price x quantity 6 Types of Elasticities a Own Price Elasticity Ed1Pi Qi Pi b Cross Price Elasticity Ed1pk Qi Pk i i 1 2 Income Elasticity c For substitutes CPE positive For Complements CPE Negative i ii Ed1I Qi PI Larger in the LR than SR 1 2 Consume more but takes time Opposite true for durable goods 7 Short Run and Long Run Elasticities More elastic in LR than SR Opposite true for durable goods 1 Gas more expensive people still need In LR they buy fuel efficient car a Demand i b ii Supply i LR ii SR 1 More elastic Int Micro Lecture notes Page 3 ii SR 1 2 3 More Inelastic Firms face capacity constraints Need time to expand to produce more Even if slope constant Elasticities can be different as P Q change 8 9 Int Micro Lecture notes Page 4 Ch 2 5 Wednesday February 19 2014 10 24 PM 1 Price ceilings a Leads to shortage Picture i 2 Price Floors a Leads to surplus i Picture 3 Tax incidence a b Who bears the tax Tax on consumers i ii Suppose tax on consumers 1 Equal share of tax burden 1 2 Consumers and producers both get less How much they bear is dependent on their elasticity c Tax on producers i Results in same outcome iii ii Int Micro Lecture notes Page 5 4 Example Tax on Yachts a b High elasticity flat for luxury goods Low elasticity for producers especially in short run i ii Consumers pay little of tax Producers pay a lot of tax 5 6 Lower Elasticity wins loses more Subsidy to consumers c a Int Micro Lecture notes Page 6 Ch 3 Consumer Theory Saturday February 8 2014 4 32 PM 1 Assumptions a Completeness i ii Know choices and preferences Know rank of what you like b Transitivity i W B and B M then we infer W M c More of a good is better than less 2 Looking at 2 goods 3 a Suppose 2 goods and utility from both Indifference Curves U curves Utility Isopoint On any point utility is the same a i ii Tradeoff of one good to another Infinite curves 4 Marginal Rate of Substitution a b c d e y x MUx Muy MRS positive slope MRS is positive slope of indifference curve MRS is value of x expressed in terms of Y i Loss component y x MUy 1 ii Gain Component 1 x x Mux g Facts i If fewer x it is more valuable than the many y s 1 MRS of x is greater 5 Perfect Complements a 2 goods proportions are fixed f b c From A A i Increases in Y but no increase in utility Int Micro Lecture notes Page 7 Price of X Value of X Px Py y x MUx MUy Slope of BC MRS i ii Increases in Y …

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