Every 2 weeksi.Best 5 of 6ii.Problem Setsa.Problem sets 25%i.Midterm/Final 60 pts 35%ii.Participation 5%iii.Gradingb.Overview A.Allocation of scarce resources for most utilitya.Utility maximizationb.Money, time, forgoing other gainsi.Opportunity costii.Cost c.Everybody is rational in choices because everyone maximizes utilityd.EconomicsB.How big is the economy?i.GDP, N, w, etcii.Macroa.Single market for single goodi.Prices/structures, quantity, qualityii.Microb.Picture C.Picture a.D-curve slopes downi.Q responds to priceii.Law of demandb.Change in price -> movement along curvec.Tastes/preferences, income, age, complements, substitutes i.Change in any other factor -> shift in the the curved.Demand CurveD.Upa.p= p(Q)i.Supply Curve b.Q=Q(p)i.Supply Functionc.Supply CurveE.Sensitivity to pricesa.Picturesa)Rent Control1)In SR only middle value can changei)In LR first and last value can change from bikes, carpools, buses, etcii)Qg = [cars/person] + [vehicle miles/cars] + [1/MPG]a)Pictureb)Quantity of gasoline consumed2)Examples i.Goods consumed in conjunction w/capitol goods (eg. Fuel needs car)a.Price Elasticities change over time ii.Can change from SR to the LRb.Elasticity F.Ch 1Wednesday, January 29, 201412:40 PM Int. Micro Lecture notes Page 1Price elasticity E will grow with timei.Goods consumed in conjunction w/capitol goods (eg. Fuel needs car)a.E decreases with timei.Capitol goods themselvesb.E<|1|1)Inelasticiii.E = |1|1)Unity elasticiv.E > |1|1)Elastic v.E is high for luxury goods1)E is low for basic non-luxury goods/necessitiesi.Ex: if market for Beck's beer, E high1)"" all beer, E lower2)"" all goods, E probably 03)E higha)Narrowly define d market4)E lowa)Broadly defined market5)Dependent on market you are looking at ii.Close substitutes leads to high Eiii.E can change over time (fuel, cars)iv.w/income growing, some gods change from luxury good to normal good1)E is a function of incomev.We use absolute values 1)E is negative for demand, positive for supplyvi.Rulesc.E = % ∆Q / %∆Pi.= ∆Q / ∆P x P/Qii.Point Elasticity Formula d.Aka midpoint elasticity a.Use mean as the base, not the original value b.= ∆Q / ∆P x midP/midQc.If ∆P => 10->12, i.E = -.1/.2 = -0.5 1)∆Q => 10->9ii.E = .111/-.1666 = -0.66 1)If ∆P => 12->10iii.Use arc Eiv.Exampled.Arc EG. Int. Micro Lecture notes Page 2Elasticities Use ARC Ei.E = % ∆Q / %∆P = ∆Q/∆P x (P/Q)a.E negativei.Demandb.E positivei.Supplyc.Recall1.Slope =b = ∆Q/∆P1)Look at b, not -b2)Q = a-bPi.Suppose demand function a.Ep = b . (P/Q)i.Ep = (∆Q/∆P) . (P/Q)ii.Thereforeb.Demand Function and Elasticity 2.a= Q* + bP*1)Keep b +2)Rearrange toi.Given demand function Q = a - bPa.Either use a= Q + bP or1)Derive for the slope2)Plug in knowns, solvei.Stepsb.Finding Elasticity for a point3.Ed1p1 = Slope x P/Qa.= dQ/dP x P/Qi.Derivative b.Elasticities with calculus 4.Edi = %∆Q/%∆I = 1i.If income goes up by a certain percentage, then Q goes up by same percentageii.Bill always spends 20% of income on wine, regardless of price. What is the income E of his wine demand?a.E = -1i.Perfect tradeoff between Q and Pii.S = P x Qa)Spending constant = price x quantityb)Derivation:1)%∆P => -%∆Qiii.Jerry always spends $20 on gas, no matter what the price is. What is his E of demand with respect to price?b.Important Examples5.Ed1Pi = %∆Qi / %∆Pii.Own Price Elasticity a.For substitutes, CPE positive1)For Complements, CPE Negative2)Ed1pk = %∆Qi / %∆Pki.Cross Price Elasticityb.Ed1I = %∆Qi / %∆PIi.Consume more but takes time1)Opposite true for durable goods2)Larger in the LR than SRii.Income Elasticityc.Types of Elasticities6.Gas more expensive, people still need. In LR they buy fuel efficient car1)More elastic in LR than SRi.Opposite true for durable goodsii.Demanda.More elastic1)LRi.SRii.Supplyb.Short Run and Long Run Elasticities 7.Problem set end of the weekCh 2Monday, February 3, 20143:50 PM Int. Micro Lecture notes Page 3More Inelastic1)Firms face capacity constraints2)Need time to expand to produce more3)SRii.Even if slope constant, Elasticities can be different as P & Q change8.9. Int. Micro Lecture notes Page 4Picturei.Leads to shortagea.Price ceilings 1.Picture i.Leads to surplusa.Price Floors2.Who bears the tax?a.Suppose tax on consumers $1i.Consumers and producers both get less1)How much they bear is dependent on their elasticity2)Equal share of tax burden ii.iii.Tax on consumersb.Results in same outcomei.ii.Tax on producersc.Tax incidence 3.Ch 2.5Wednesday, February 19, 201410:24 PM Int. Micro Lecture notes Page 5High elasticity (flat) for luxury goodsa.Consumers pay little of taxi.Producers pay a lot of taxii.Low elasticity for producers, especially in short runb.c.Example: Tax on Yachts4.Lower Elasticity wins/loses more 5.a.Subsidy to consumers6. Int. Micro Lecture notes Page 6Know choices and preferencesi.Know rank of what you likeii.Completenessa.W>B and B>M, then we infer W > Mi.Transitivityb.[More of a good is better than less]c.Assumptions1.Suppose 2 goods and utility from botha.Looking at 2 goods2.Tradeoff of one good to anotheri.Infinite curvesii.On any point, utility is the samea.Indifference Curves, U-curves, Utility Isopoint3.-∆y/∆xa.MUx/Muyb.MRS = positive slopec.MRS is positive slope of indifference curved.MRS is value of x expressed in terms of Ye.∆y x MUy1)Loss componenti.∆x x Mux1)Gain Component ii.f.MRS of x is greater1)If fewer x, it is more valuable than the many y'si.Factsg.Marginal Rate of Substitution 4.2 goods, proportions are fixeda.b.Increases in Y but no increase in utility i.From A -> A'c.Perfect Complements5.Ch 3 Consumer TheorySaturday, February 8, 20144:32 PM Int. Micro Lecture notes Page 7Increases in Y but no increase in utility i.MRS = X = ∞1)Any increase in X leads to higher U curveii.2 goods, both are the samea.b.Perfect Substitutes 6.Y = don’t carei.X = goodii.a.Y = badi.X = goodii.b.Goods and Bads7.Price of XValue of XPx/Py-∆y/∆x = MUx/MUy Slope of BCMRS Int. Micro Lecture notes Page 8Y = badi.X = badii.c.If too much of one, it turns bad1)Two goods that turn into badsi.Like connecting goods and bads graphsii.d.We can assign numbers to utilitya.Only rank the utilityb.Cardinal vs Ordinal8.Pb = 51)Ps = 42)Oktoberfest i.a.Budget Constraints 9. Int. Micro Lecture notes Page 9Ps = 42)Income = 203)All the points that you can buy thingsii.i.Effects of income changesb.I = px.X + py.Yi.Constant term and slope1)y = (I/py) - (px/py)xii.Equationc.Minimize cost to reach