Time to Party…almost
-
Upload
pearl-brock -
Category
Documents
-
view
15 -
download
6
description
Transcript of Time to Party…almost
1
Time to Party…almostTime to Party…almost
Day 1 of MicroSections 1 & 2
Day 1 of MicroSections 1 & 2
2
OverviewOverview
◊ Objective today is to review first two sections
◊ Goal is in & out in 30 minutes◊ More concerned with you paying
attention than taking notes
◊ Objective today is to review first two sections
◊ Goal is in & out in 30 minutes◊ More concerned with you paying
attention than taking notes
3
Back to square 1Back to square 1
◊ Economics is the study of choices◊ Scarce (limited) resources force us
to decide what to do w/ them◊ In doing so we try to maximize
efficiency (most output/input)
◊ Economics is the study of choices◊ Scarce (limited) resources force us
to decide what to do w/ them◊ In doing so we try to maximize
efficiency (most output/input)
4
Case in point…PPCCase in point…PPC
◊ Graph showing different combos of two goods
◊ Want to do as well as possible◊ Assuming full use of resources &
technology
◊ Graph showing different combos of two goods
◊ Want to do as well as possible◊ Assuming full use of resources &
technology
5
Producers & consumersProducers & consumers
◊ Doesn’t matter who you are◊ Same goal…get as much as
possible◊ MU versus MP◊ Satisfaction versus profit◊ Get away from “study”◊ Get into “thought”
◊ Doesn’t matter who you are◊ Same goal…get as much as
possible◊ MU versus MP◊ Satisfaction versus profit◊ Get away from “study”◊ Get into “thought”
6
Both guided by “invisible hand”Both guided by “invisible hand”◊ Self-regulating nature of market◊ We all do what’s good for us◊ Everyone doing that makes
everything function
◊ Self-regulating nature of market◊ We all do what’s good for us◊ Everyone doing that makes
everything function
7
That becomes a problemThat becomes a problem
◊ Diff between command & market economies
◊ Markets are like pretty flowers◊ Command are like gym class◊ All decide What? How? For whom?◊ Command fail due to lack of incentive◊ Markets thrive on private property &
protection of ability to benefit from hard work
◊ Diff between command & market economies
◊ Markets are like pretty flowers◊ Command are like gym class◊ All decide What? How? For whom?◊ Command fail due to lack of incentive◊ Markets thrive on private property &
protection of ability to benefit from hard work
8
Markets on auto pilotMarkets on auto pilot
◊ Millions of transactions per day◊ No one pulling strings◊ Products & money flow around the
circular flow model◊ Simplified model
◊ Millions of transactions per day◊ No one pulling strings◊ Products & money flow around the
circular flow model◊ Simplified model
9
Factors of ProductionFactors of Production
◊ Stuff flows one way; money the other
◊ Factor market, product market◊ Sell factors of production◊ Buy products◊ Money is used to buy things, but is
not in itself a productive resource
◊ Stuff flows one way; money the other
◊ Factor market, product market◊ Sell factors of production◊ Buy products◊ Money is used to buy things, but is
not in itself a productive resource
10
Part 2: S/D InteractionsPart 2: S/D Interactions
◊ We each pursue our own goals◊ Need other party to make it happen◊ Consumers BUY MORE WHEN PRICE
IS LOW◊ Producers SELL MORE WHEN PRICE
IS HIGH◊ Picture worth a million $
◊ We each pursue our own goals◊ Need other party to make it happen◊ Consumers BUY MORE WHEN PRICE
IS LOW◊ Producers SELL MORE WHEN PRICE
IS HIGH◊ Picture worth a million $
11
Why demand down?Why demand down?
◊ Substitution Effect: buy cheaper item◊ Income Effect: math side; cheaper
prices mean you can buy more (more REAL buying power…REAL INCOME)
◊ Law of Diminishing MU: more & more gives you less & less• Not the same for everyone
◊ Substitution Effect: buy cheaper item◊ Income Effect: math side; cheaper
prices mean you can buy more (more REAL buying power…REAL INCOME)
◊ Law of Diminishing MU: more & more gives you less & less• Not the same for everyone
12
Lots of things changeLots of things change
◊ Don’t worry about the list◊ What matters is effect◊ Think about “who” first◊ If makes us want more or less-Demand◊ If affects cost-Supply◊ Change in demand vs change in Q dem◊ Shift of vs shift along
◊ Don’t worry about the list◊ What matters is effect◊ Think about “who” first◊ If makes us want more or less-Demand◊ If affects cost-Supply◊ Change in demand vs change in Q dem◊ Shift of vs shift along
13
Smelling roses on a spring daySmelling roses on a spring day◊ The market is self-correcting◊ Supply & demand never stationary◊ PRICES serve as signal
• Tell us how much to buy; them how much to make
◊ Keeps things in balance as price can adjust to EQUILIBRIUM
◊ The market is self-correcting◊ Supply & demand never stationary◊ PRICES serve as signal
• Tell us how much to buy; them how much to make
◊ Keeps things in balance as price can adjust to EQUILIBRIUM
14
Our job is simpleOur job is simple
◊ As a consumer thought never progresses…buy what you want
◊ If it’s worth it, buy it◊ Consider dim MU & how important◊ ELASTICITY OF DEMAND
• Measures how we react to a change in price (how RESPONSIVE we are)
◊ As a consumer thought never progresses…buy what you want
◊ If it’s worth it, buy it◊ Consider dim MU & how important◊ ELASTICITY OF DEMAND
• Measures how we react to a change in price (how RESPONSIVE we are)
15
Elasticity of DemandElasticity of Demand
◊ Equation(s)◊ We don’t care…we buy (or not)◊ Inelastic: E < 1; Q < P
• Necessities, few subs, more “important”
◊ Elastic: E > 1; Q > P• Luxuries, many subs, less “important”
◊ Equation(s)◊ We don’t care…we buy (or not)◊ Inelastic: E < 1; Q < P
• Necessities, few subs, more “important”
◊ Elastic: E > 1; Q > P• Luxuries, many subs, less “important”
16
We really don’t care…they doWe really don’t care…they do◊ Producers use this to make more $◊ Know when to raise price
(inelastic) or lower (elastic)◊ EVERYTHING ALWAYS FITS BOTH◊ DEMAND CURVE HAS SECTIONS OF
EACH◊ ANALYZE THIS USING GRAPH
◊ Producers use this to make more $◊ Know when to raise price
(inelastic) or lower (elastic)◊ EVERYTHING ALWAYS FITS BOTH◊ DEMAND CURVE HAS SECTIONS OF
EACH◊ ANALYZE THIS USING GRAPH
17
Use elasticity for evaluationUse elasticity for evaluation◊ Analytical tool◊ Just like cross-price & income
elasticity◊ C-P: determine comps & subs◊ I: determine normal vs inferior◊ Equations & examples
◊ Analytical tool◊ Just like cross-price & income
elasticity◊ C-P: determine comps & subs◊ I: determine normal vs inferior◊ Equations & examples
18
Not our problem but yoursNot our problem but yours
◊ We buy stuff…we are happy◊ They have to sell what we want to
buy (CONSUMER SOVEREIGNTY)◊ Their supply is most based on
costs of production◊ Costs change so does supply◊ Sometimes fast; others slow (TIME)
◊ We buy stuff…we are happy◊ They have to sell what we want to
buy (CONSUMER SOVEREIGNTY)◊ Their supply is most based on
costs of production◊ Costs change so does supply◊ Sometimes fast; others slow (TIME)
19
All happy in the endAll happy in the end
◊ SUPPLY & DEMAND HAVE AMAZING ABILITY TO BALANCE
◊ Think about now…what happens when we balance?
◊ Better to stay in happiness◊ Who unhappy w/ high prices?◊ Low?
◊ SUPPLY & DEMAND HAVE AMAZING ABILITY TO BALANCE
◊ Think about now…what happens when we balance?
◊ Better to stay in happiness◊ Who unhappy w/ high prices?◊ Low?
20
Sometimes it comes from GovSometimes it comes from Gov◊ Don’t like our price◊ Can use SUBSIDIES or EXCISE TAXES◊ Change market price to “make it better”◊ Also use PRICE CEILINGS & FLOORS
◊ OFFSET THE NATURAL POINT OF EQUILIBRIUM (hurts some; helps others)
◊ Don’t like our price◊ Can use SUBSIDIES or EXCISE TAXES◊ Change market price to “make it better”◊ Also use PRICE CEILINGS & FLOORS
◊ OFFSET THE NATURAL POINT OF EQUILIBRIUM (hurts some; helps others)
21
Part III: The simple life (21-27)Part III: The simple life (21-27)
◊ So sweet, so simple◊ Life as a consumer is pretty good◊ All we have to do is buy what we want ◊ If we don’t like the price, we don’t buy
it◊ Whole idea is to maximize utility
• Utility is satisfaction
◊ So sweet, so simple◊ Life as a consumer is pretty good◊ All we have to do is buy what we want ◊ If we don’t like the price, we don’t buy
it◊ Whole idea is to maximize utility
• Utility is satisfaction
22
Once doesn’t mean againOnce doesn’t mean again
◊ Our satisfaction is our goal◊ I bought the sweetest minivan on
the market…doesn’t mean I would buy a second one
◊ Law of Diminishing MU: the more you have of something the less MU it adds• At some point this always holds true• Doesn’t mean it has to start that way
◊ Our satisfaction is our goal◊ I bought the sweetest minivan on
the market…doesn’t mean I would buy a second one
◊ Law of Diminishing MU: the more you have of something the less MU it adds• At some point this always holds true• Doesn’t mean it has to start that way
23
Big menus make life hardBig menus make life hard
◊ I don’t like restaurants◊ Choices STINK◊ I want it all◊ When I order I usually want what
someone else got◊ Goal is to buy what gives you the
highest MU / $
◊ I don’t like restaurants◊ Choices STINK◊ I want it all◊ When I order I usually want what
someone else got◊ Goal is to buy what gives you the
highest MU / $
24
25
But what do I buy next?But what do I buy next?
◊ The first thing you buy is the one with the highest MU / $
◊ If you are still hungry you get what has the new highest MU / $
◊ Could be the same thing, but after the burger and fries you may desire the milkshake the most
◊ The first thing you buy is the one with the highest MU / $
◊ If you are still hungry you get what has the new highest MU / $
◊ Could be the same thing, but after the burger and fries you may desire the milkshake the most
26
Eventually E is reachedEventually E is reached
◊ Consumer equilibrium occurs when MU/$ of each item is equalized
◊ If one thing is best you buy it◊ Continuing buying until MU < $◊ When do it w/ everything end
result is◊ MU1/P1 = MU2/P2 = MU3/P3…
◊ Consumer equilibrium occurs when MU/$ of each item is equalized
◊ If one thing is best you buy it◊ Continuing buying until MU < $◊ When do it w/ everything end
result is◊ MU1/P1 = MU2/P2 = MU3/P3…
27
28
Part IV: Producers (28-47)Part IV: Producers (28-47)
◊ Consumers buy stuff b/c they want it◊ Producers make & sell stuff b/c they
want our money◊ Goal is to maximize profit◊ Total Revenue - Total Costs = PROFIT◊ Goal then is to maximize output while
minimizing costs
◊ Consumers buy stuff b/c they want it◊ Producers make & sell stuff b/c they
want our money◊ Goal is to maximize profit◊ Total Revenue - Total Costs = PROFIT◊ Goal then is to maximize output while
minimizing costs
29
They need usThey need us
◊ Can’t make money if we don’t buy it◊ We create demand when we are
willing & able to buy stuff◊ Our demand creates DERIVED
DEMAND for the things they need to make what we want to buy
◊ They want to buy stuff b/c they can sell it to us
◊ Can’t make money if we don’t buy it◊ We create demand when we are
willing & able to buy stuff◊ Our demand creates DERIVED
DEMAND for the things they need to make what we want to buy
◊ They want to buy stuff b/c they can sell it to us
30
31
Lots of stuff CAN workLots of stuff CAN work
◊ I need to make more cookies◊ I could hire more help◊ I could buy another oven◊ I could buy a bigger mixer
◊ Many different inputs can achieve the MB > MC…which one do you buy?
◊ I need to make more cookies◊ I could hire more help◊ I could buy another oven◊ I could buy a bigger mixer
◊ Many different inputs can achieve the MB > MC…which one do you buy?
32
The one that does it the bestThe one that does it the best◊ Want to purchase what gives the
highest MP / $◊ Same concept as MU / $ for
consumers◊ Buying what gives highest MP / $
helps you to make more money◊ PRODUCTIVITY: output / input
• Typically per human hour worked
◊ Want to purchase what gives the highest MP / $
◊ Same concept as MU / $ for consumers
◊ Buying what gives highest MP / $ helps you to make more money
◊ PRODUCTIVITY: output / input• Typically per human hour worked
33
34
Result is the same as wellResult is the same as well
◊ Consumer/producer makes no difference
◊ End result is the same◊ MP1/P1 = MP2/P2 = MP3/P3…◊ Least-cost Rule◊ Tells you what to buy first…but
when should you stop buying it?
◊ Consumer/producer makes no difference
◊ End result is the same◊ MP1/P1 = MP2/P2 = MP3/P3…◊ Least-cost Rule◊ Tells you what to buy first…but
when should you stop buying it?
35
MRPMRP
◊ Marginal revenue product = value of input = demand = willingness to buy it
◊ Tells you how much it’s worth to you
◊ As long as MB > MC it’s ok to buy it◊ MRP > MC then hire that input
◊ Marginal revenue product = value of input = demand = willingness to buy it
◊ Tells you how much it’s worth to you
◊ As long as MB > MC it’s ok to buy it◊ MRP > MC then hire that input
36
Most applicableMost applicable
◊ MRP = MR x MP◊ Marginal revenue x marginal
product◊ If I can hire another worker and get
another 10 dozen per hour and sell them for $3 profit per item, how much is that guy worth?
◊ Hire him as long as wage < $30
◊ MRP = MR x MP◊ Marginal revenue x marginal
product◊ If I can hire another worker and get
another 10 dozen per hour and sell them for $3 profit per item, how much is that guy worth?
◊ Hire him as long as wage < $30
37
38
MR constant, MP changesMR constant, MP changes
◊ For our level, MR usually always kept constant at the one selling price (PC)
◊ MP will change with additional units◊ Law of Diminishing MP: KEEPING
OTHER FACTORS CONSTANT adding additional units of one input will eventually produce less MP
◊ For our level, MR usually always kept constant at the one selling price (PC)
◊ MP will change with additional units◊ Law of Diminishing MP: KEEPING
OTHER FACTORS CONSTANT adding additional units of one input will eventually produce less MP
39
Feed the world from a flower potFeed the world from a flower pot
◊ Classical example◊ If diminishing MP didn’t exist◊ One flower pot, some sun, and
endless fertilizer would produce enough food to feed the world
◊ Obviously not true
◊ Classical example◊ If diminishing MP didn’t exist◊ One flower pot, some sun, and
endless fertilizer would produce enough food to feed the world
◊ Obviously not true
40
41
MP vs returns to scaleMP vs returns to scale
◊ MP includes keeping all constant & changing one input
◊ Returns to scale involve changing everything in like quantities• Double everything what happens• Constant, increasing, diminishing
◊ MP would be changing labor but keeping everything else the same
◊ MP includes keeping all constant & changing one input
◊ Returns to scale involve changing everything in like quantities• Double everything what happens• Constant, increasing, diminishing
◊ MP would be changing labor but keeping everything else the same
42
Work hard to make $Work hard to make $
◊ Must also consider all costs-both implicit & explicit
◊ Explicit is what normal people think about (stuff you pay for)
◊ Implicit is opportunity cost (stuff you give up)
◊ Economists consider both
◊ Must also consider all costs-both implicit & explicit
◊ Explicit is what normal people think about (stuff you pay for)
◊ Implicit is opportunity cost (stuff you give up)
◊ Economists consider both
43
different types of profitdifferent types of profit
◊ Accounting = TR > TC • Ignores implicit
◊ Normal Profit: TR = TC• Considers implicit
◊ Economic Profit: TR > TC• Considers implicit
◊ Accounting = TR > TC • Ignores implicit
◊ Normal Profit: TR = TC• Considers implicit
◊ Economic Profit: TR > TC• Considers implicit
44
Love the costsLove the costs
◊ FC, VC, TC, AVC, AFC, ATC, MC◊ FC = capital (output irrelevant)◊ VC = land & labor (based on
output)◊ MC = cost to make one more
◊ Graphs rule!!!
◊ FC, VC, TC, AVC, AFC, ATC, MC◊ FC = capital (output irrelevant)◊ VC = land & labor (based on
output)◊ MC = cost to make one more
◊ Graphs rule!!!
45
46
47
48