ECO 2023 1 Economic Methodology decreases a Economists claim that when the price of something rises the quantity demanded In order to prove must be isolated without other variables changing i They move inversely ceteris paribus ii iii other things remaining constant iv 2010 Wallstreet Journal Natural Disasters engines of economic growth in developing countries common misconception b Opportunity Cost i Things given up in order to do something ii Actual resources not financial cost iii c Correlation vs Causation i Methodological fallacy ii Ex Cities with more police lead to a higher crime rate 1 Reverse Causation 2 Omitted Variables a Cities hire more police due to higher crime rates Larger cities have both more police and higher crime rates a b The third factor would be size of the city 3 Spurious Correlation a Police and Crime are unrelated b No Cause and Effect relationship 8 27 14 8 29 14 9 3 14 9 5 14 2 Scarcity and Marginal Analysis a Scarcity i Results when the amount of a resource available is insufficient to satisfy ii society s wants Important that there is not solely a limited supply our WANT must exceed that supply iii Relative Scarcity 1 the reason that diamonds are so expensive I E diamonds are not in high demand compared to water but the demand for diamonds in relation to the available supply is high b Marginal Analysis i Economic thinking is marginal thinking choices are made at the margin or around the edges of what you are currently doing Think small incremental changes ii Marginal Value value people place on a small change in the supply at the margin iii MB MC do more iv MB MC do less v MB MC optimum vi People respond to incentives basic econ concept c Opportunity Cost i When we choose to use a scarce resource in a particular way we are simultaneously choosing to give up or forgo something else that could be done with the resource ii The real cost is the highest valued alternative If a resource is scarce there isn t enough of it to do everything we want We must choose to use alternative resources d Choice i e Incentives i Choices are influenced in predictable ways by changes in the MARGINAL benefit and costs of the alternatives 3 Production Possibilities and Comparative Advantage a PPF i Boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced given the available resources w current state of technology ii Valuable tool for showing effects of scarcity vs consequences iii Available resources 9 8 14 1 2 Land Labor 3 Capital a Employed unemployed iv Attainable and Unattainable 4 Demand Supply a Demand vs Quantity Demanded i Quantity Demanded is a single point on the demand curve 1 if the price is 1 per bottle how many bottles per day do the buyers want 9 15 14 2 At a given price how much do the consumers want QD ii Price and Quantity Demanded are inversely related 1 If the price decreases the quantity demanded increases visa versa 2 Does not signify a change in Demand only in Quantity Demanded b Change in Demand i The entire curve moves left or right ii Cause by an outside variable other than the good Such as a Increase in income creates an increase in Demand this is true for normal or superior goods b Though income increase leads to a decrease in inferior goods i e when income increases individuals buy less hamburger meat inferior and more steaks superior 1 Related goods 2 Income 3 Buyer s expectations 4 Number of buyers 5 Preferences a 9 17 14 c Change in Supply i Higher the price more the seller wants to sell ii Movements along the supply curve quantity supplied 1 Caused by a change in the price iii Influences on Supply cause a shift in the curve 1 Related goods be able to differentiate with Demand a Related goods come from the same production process b Either substitutes such as gasoline and fuel oil or compliments such as crude oil and natural gas 2 Price of resources or inputs a b If inputs go up supply goes down If input decreases supply increases i EX If your wages increase cost increases but prices stay the same leads to smaller profit margin as a result you produce less shifting the supply curve in 3 Productivity a Output per unit of input b Increased productivity is a result of increased output from the same input Increased productivity leads to an increase in supply visa versa c 4 Seller s expectations 5 Number of sellers 9 19 2014 iv Market Equilibrium No incentive for buyers or sellers to change their behavior 1 Both are satisfied 2 QD QS intersection of the two curves when quantity demanded meets the quantity supplied i change QD change P ii Midpoint formula to calculate percentages of price and QD change from raw 5 Elasticities of Supply and Demand a Price Elasticity of Demand numbers b Demand Coefficients 9 22 14 9 24 14 1 A demand coefficient greater than 1 means that the demand is elastic a Consumers are relatively sensitive or responsive to price 2 Less than 1 means that the demand is inelastic a Consumers are relatively insensitive or not responsive to price changes changes 3 Equal to 1 means that the good is unit elastic a Consumers are neither very responsive or not very responsive ii What causes goods to be more relatively elastic than others a More alternatives available the more responsive consumers 1 Substitution effect will be 2 Income effects i A lot of alternatives it will be more elastic ii Few alternatives leads to less elasticities a Percentage of your yearly expenditure affects response i If you buy something that is very expensive such as a car you are more likely to be responsive to a change in the price rather than if you buy toothpicks In a short period of time people will not reduce their consumption by a lot for example gas b But if the price of gas goes up a large amount they will reduce their consumption in the coming year 3 Time a 9 26 14 c Total Revenue i Total Revenue Total Expenditure P X Q ii Price Elasticity of Demand 1 If the elasticity of demand is greater than one and is elastic the change in quantity is greater than the change in price If it is inelastic or less than one the change in quantity is less than the change in price If the elasticity of demand is equal to one or unit elastic the change in quantity and the change in price are the same or equal to each other iii Price Elasticity of Supply 1 Price elasticity of supply is the ratio of the percent change in the QS tothe percent change in the price of the good Interpreted the same way as the
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