Econ 201 9/6/2013 Still on Demand/Supply curves Chapter 4 Notes competitive market: a market where there are so many

buyers and sellers that no one has an impact on price. market demand: the sum of all individual demands in the market, sum it horizontally.

Demand Curve Shifters:

1) # of Buyers (Population): As # of buyers increases, overall demand increases at every point on the curve, so shift right. 2) Income: When you have less disposable income, you generally buy less. Normal goods will decrease in demand, while inferior goods will increase in demand. 3) Substitutes and Complements: Substitutes: When the increase in demand of one good decreases the demand of another good Ex: Ice cream and Frozen yogurt Complements: When the increase in demand of one good increases the demand of another good. Ex: Peanut butter and Jelly 4)Tastes and Preferences: Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right. Example: Dieting pills became a huge trend 5)Expectations: If you expect to earn more income, you may buy more. If you expect price to decrease in the next month, demand will fall as people wait.

TIPSE *Changing the price of the good only causes MOVEMENT ALONG CURVE.

Supply Curve
Quantity supplied: The amount of a good the suppliers are willing and able to sell at a given price. Law of Supply: An increase in price of a good results in an increase in supply of that good. Supply Schedule: Table of supply at different prices Market Supply is the sum of all Individual Supplies, summed horizontally just like demand.

Shifts in the Supply Curve

1) Technology: Advancements in technology make producing more efficient (such as reducing input costs) , so supply increases with better technology. 2) Input prices: As input prices increase, profit decreases. Thus, an increase in input prices decreases supply to the left. 3) # of sellers (Population): If there are more sellers in the market, then market supply would increase. 4) Expectations: Firms react to expectations as well. If they expect prices to increase, it will store some of its goods and decrease supply today.

Supply and Demand Together

Equilibrium: when the market price has reached the level at which market supply and market demand meet. Natural forces (Concept paragraph): Market naturally moves towards equilibrium. If there is a surplus, suppliers cannot sell all their goods and will decrease the price of them. This falling of prices increases quantity demanded, but also decreases quantity supplied. These movements along the curve continue until they meet. The Law of Supply and Demand: the claim that the price of a good adjusts to bring the quantity demanded and quantity supplied into balance. *Make sure you know difference between change in demand/supply and change in quantity demanded/supplied.

The table below summarizes how changes in demand and supply affect equilibrium price (P) and quantity (Q).

no change in supply (no shift) increase in supply (shift right) decrease in supply (shift left)

no change in demand (no shift) no change in P no change in Q P decreases Q increases P increases Q decreases

increase in demand (shift right) P increases Q increases P? Q increases P increases Q?

decrease in demand (shift left) P decreases Q decreases P decreases Q? P? Q decreases

*****When both in same direction, price is ambiguous *****When opposite directions, quantity is ambiguous

Chapter 5: Elasticity and its Applications

Elasticity: A measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants Price Elasticity of Demand: A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price. Determinants of Price Elasticity of Demand 1) Availability of close substitutes: Goods with substitutes tend be more elastic because increasing price will cause consumers to switch to the other good. 2)Necessities versus Luxuries: Yacht demand will probably be very elastic, while life-saving medicine will be inelastic -- Depends on buyer's preferences though. 3) Definition of the market: Elasticity of demand in a market depends on WHAT THAT MARKET IS. Food, a very broad market, will be inelastic because there is no good substitute for it. Ice cream, more specific market, would be elastic because there is substitutes. 4) Time Horizon: Goods tend to have more elastic demand over longer time horizons.

Ex: When gasoline increases in price, demand doesn't change too much at first. But over time, people buy more efficient cars, switch to public transport, etc. After a few years, the demand will have changed a lot more. Formula: Price elasticity of Demand = % change in qty. demanded/ % change in price More accurate method (Midpoint Formula): Midpoint of % change Qty. Demanded / Midpoint of % change in price The Variety of Demand Curves unit elasticity: When the quantity moves in proportion to price. Correlation between elasticity and slope of demand curve. - Flatter the curve, the greater the elasticity (Because quantity is changing more) - Steeper the curve, the smaller the price elasticity of demand. Total Revenue and the Price Elasticity of Demand total revenue: the amount paid by buyers and received by sellers of a good, computed as the price of the good times quantity sold (P * Q). 3 General Rules of total revenue, stemming from nature of elasticity and demand: 1) When demand in inelastic (<1), price and total revenue move in same direction 2) When demand is elastic (>1), price and total revenue move opposite of each other. 3) When demand is unit elastic (=1), price does not change total revenue.

Other Demand Elasticities income elasticity of demand: A measure of how much the quantity demanded of a good responds to a change in consumer's income, computed as the percentage change in quantity demanded divided by the percentage change in income. Income elasticity of demand = (% change in qty. demanded of good)/ (% change in income) - Inferior goods will have negative income elasticity, while normal goods will have positive.

The Cross-Price Elasticity of Demand: a measure of how much the quantity demanded of one good responds to a change in price of another good, computed as the % change in quantity demanded of one good divided by the % change of price of the second good. Cross-Price Elasticity of Demand = (% change in qty. demanded of good 1)/(% change of price in good 2) - Positive or negative depends on whether goods are substitutes or complements. - Positive = substitutes, Negative = Complement Price Elasticity of Supply and its Determinants price elasticity of supply: a measure of how the quantity supplied of a good responds to change in price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price. Determinants: -The more easily sellers can change the quantity they produce, the greater the price elasticity of supply. Mostly time horizon: in the short term, firms have a hard time producing more (making new factories etc), but in long term they can, and more firms can join the market, etc. Computing Price Elasticity of Supply Same as demand, use midpoint method as well for more accurate answer. The Variety of Supply Curves inelastic (vertical), elastic(horizontal), and curves in between. in some markets, price elasticity of supply varies along the curve. For example, at lower levels of quantity supplied, price elasticity if higher because the firm will likely have idle resources that it is not utilizing. However, as quantity supplied increases and the firm reaches capacity, the supply will become less elastic because it doesn't have enough resources (may need to create a whole new factory, and a larger increase in price must occur to induce this). (refer to graphs later, page 100) ***Rest of chapter is some real life examples and the economic thought process behind them.

Chapter 6: Supply, Demand, and Government Policies Conceptual Questions *What are price ceilings and price floors? - What are some examples of each? *How do price ceilings and price floors affect market outcomes? *How do taxes affect market outcomes? - How do the effects depend on whether the tax is imposed on buyers or sellers. Government Policies that Alter the Private Market Outcome Price controls: Price ceiling: a legal maximum on the price of a good or service Ex: rent control Price floor: a legal minimum on the price of a good or service Ex: minimum wage

Taxes: The government can make buyers or sellers pay a specific amount on each unit

How Price Ceilings Affect Market Outcomes If price ceiling is above equilibrium >> nothing happens. If price ceiling is below equilibrium >> A shortage occurs caused by too much demand for less quantity supplied. In the long run, the supply and demand become more elastic and the shortage increases. Shortages and Rationing With a shortage, sellers must ration the goods among buyers: 1) Long lines 2) Discrimination according to seller's bias These mechanisms are often unfair, and inefficient: the goods do not necessarily go to the buyers who value them the most.

In contrast, when prices are not controlled, the rationing mechanism is efficient (the goods go to the buyers that value them most highly) and impersonal (fair) Taxes The government levies taxes on many goods & services to raise revenue to pay for national defense, public schools, etc. the govt can make buyers or sellers pay the tax Tax can be a % of a good's price or a specific amount for each unit of good sold. Tax = vertical line large rectangle = what government receives small box to right = dead-weight loss caused by inefficiency tax causes in market The outcome is the same in both cases: if you put tax on sellers or buyers, exact same thing occurs. Effect of tax you must know how to calculate: new Q: new Pb: new Ps: Class notes 9/23/2013 .Elasticity and Tax Incidence Case 1: Supply is more elastic than demand It's easier for sellers to leave market than for buyers. Buyers bear most of the burden of the tax. Case 2: Demand is more elastic than supply It's easier for buyers than sellers to leave the market. Sellers bear most of the burden of the tax. Case Study: Who pays the luxury tax? 1990: Congress adopted a luxury tax on yachts, private airplanes, etc. Goal: To raise revenue from those who could most easily afford to pay Question: who really pays this tax? In the market for yachts, demand is price-elastic while supply is inelastic. Thus, the companies are taxed more rather than the wealthy consumers.

2011 Payroll Cut: Less than 2%, draw graph. How do you know ' less than 2%? Since tax cut will be shared by workers and employers, worker's take-home pay must be an increase of less than 2%. **Important concept: Tax burden is almost always shared. If labor demand is more elastic than labor supply, workers get more of the tax cut than employers. If labor demand is less elastic than labor supply, employers get the larger share of the tax cut. Conclusion: Government Policies and the Allocation of Resources Example 1: A tax on pizza reduces equilibrium Q. With less production of pizza, resources will become available to other industries. Example 2: A binding minimum wage causes a surplus of workers, a waste of resources. So it's important for policymakers to apply such policies very carefully.

RICHARD STUDY TAXES PLZTY.**********

Chapter 7: Consumers, Producers, and the Efficiency of Markets Consumer surplus and Producer surplus. Consumer surplus: when what a consumer pays is less than how much they value the good. Good for consumers. Producer surplus: When how much consumer buys a good is more than cost of production. Good for producers. Taxes reduce consumer surplus and reduce producer surplus because of the tax burden(which goes to government). Dead-weight loss also becomes more apparent.

Welfare Economics Recall, the allocation of resources refers to: how much of each good is produced which producers produce it which consumers consume it Welfare economics studies how the allocation of resources affects economic well-being. Willingness to Pay (WTP): A buyer's willingness to pay for a good is the maximum amount the buyer will pay for that good. *Measures how much the buyer values the good Staircase shape occurs when few buyers, but many buyers would be a huge # of tiny steps and turn into a line. At any Q, the height of the D curve is the WTP of the marginal buyer, the buyer who would leave the market if P were any higher. Consumer surplus (CS) Consumer surplus is the amount a buyer is willing to pay minus the amount the buyer actually pays: CS = WTP - P ***on a large-scale supply-demand curve, the consumer surplus is the sum of all those tiny steps (buyers) = the area above equilibrium.

****REREAD CHAPTER 1 PLZ******

IMPORTANT= Marginal buyer is an INDIVIDUAL and the drop or addition of a marginal buyer is what creates movement in the line. How a Higher Price Reduces CS It will shrink consumer surplus because difference between WTP and equilibrium will decrease. How does price elasticity of demand effect CS? More inelastic will decrease CS much more than elastic, because a small change in price will have a larger effect.

*** if price decreases, what is the consumer surplus caused by additional buyers? Cost and the Supply Curve Cost is the value of everything a seller must give up to produce a good (i.e., opportunity cost) *Includes cost of all resources used to produce good, including value of the seller's time. - A seller will produce and sell a good/service only if the price exceeds his or her cost. - Hence, cost is a measure of willingness to sell. At each Q, the height of the S curve is the cost of the marginal seller , the seller who would leave the market if the price were any lower. Producer Surplus: The amount a seller is paid for a good minus the seller's cost (profit).

***STUDY YOU LAZY FUCK

Class notes 9/30/2013 CS, PS, and Total Surplus CS: (value to buyers) - (amount paid by buyers) = buyers' gain from participating in the market PS: (amount received by sellers) - (cost to sellers) = sellers' gain from participating in the market Total surplus = CSPS = total gains from trade in a market = (value to buyers) - (cost to sellers) [look at graph if you don't get it] The Market's Allocation of Resources *In a market economy, the allocation of resources is decentralized ,determined by the interactions of many self-interested buyers and sellers. *Is this desirable? Would a different allocation better? - Desirable = maximum welfare = happiness

* Use total surplus as a measure of society's well-being, and we consider whether the market's allocation is efficient. Efficient = "max welfare" = max Total Surplus Efficiency *The goods are consumed by the buyers who value them most highly *The goods are produced by the producers with the lowest costs *Raising or lowering the quantity of a good would not increase ______? Deadweight-loss is the inefficiency in a market caused by a tax (Quantifiable amount) Class notes 10/2/2013 [Midtermprotip]****PRACTICE TAX PROBLEMS WITH MINIMUM INFO (SPEED), ALSO PRACTICE GETTING LINE EQUATIONS. Pd(line equation) - Ps(Line equation) = tax Answer = quantity at tax What Determines the Size of the DWL Which goods or services should gov't tax to raise the revenue it needs? *Goods that have the smallest dead-weight loss >> relatively inelastic demand or supply. How Big Should the Government Be? * A bigger government provides more services, but requires higher taxes, which causes DWL. *The larger the DWL from taxation, the greater the argument for smaller government *The tax on labor income is especially important; it's the biggest source of gov't revenue. Laffer curve: People react to incentives. If you tax too much, tax revenue decreases (think of french actor who is now russian citizen!) If you tax 100%, you will get 0$ of revenue because no one will work.

Interdependence and the Gains from Trade Some questions: 1) Why do people- and nations- choose to be economically interdependent 2) How can trade make everyone better off? 3) What is absolute advantage? 4) What is comparative advantage? 5) How are these concepts similar? 6) How are they different? Interdependence Every day you rely on many people from around the world, most of whom you've never met, to provide you with the goods and services you enjoy. Trade can make everyone better off Self-sufficient country >> Production possibility frontier (PPF) Comparative vs Absolute advantage. Always better to trade! Know how to calculate production of one good given the qty of other good. Chapter 3 and 9 International Trade Adam Smith (18th Century) - Absolute Advantage -Even if a country has an absolute advantage, it should still specialize in where it has a comparative advantage and trade. Acceptable trade: Trade that both countries will accept *be able to calculate min/max of what countries will trade Relative Price: Price of computer/price of wheat = 1100 / 275 = 4 1 computer = 4 tons of wheat Price on international market benefits both countries. Split the difference and both profit. (Think of graph of two elastic lines and international market as the area in between) The exporting country gets higher price in international market, while the importing country gets to pay a lower price than what it would have.

Other benefits of International Trade: Consumers enjoy increased variety of goods Producers sell to a larger market, may achieve lower costs by producing on a large scale Competition from abroad may reduce market power of domestic firms, which would increase total welfare. Then why all the opposition to trade? *Trade can make everyone better off. *The winners from trade could compensate the losers and still be better off *Yet, such compensation rarely occurs. *The losses are often highly concentrate among a small group of people, who feel them acutely. The gains are often spread thinly over many people, who may not see how trade benefits them. *Hence, the losers have more incentive to organize and lobby for restrictions on trade.