ECON *120: Principles of Microeconomics Spring 2010 I. FOUNDATIONS OF ECONOMICS A. Scarcity, Formation Possibilities, Command and Extransfer Exception I. A Learning Objectives: • Define or expound a sum of basic economic provisions and concepts. • Explain, peculiarate, and exercise ultimate separation. • Explain, peculiarate, and exercise the contriveation possibilities copy. • Explain, peculiarate, and exercise the law of not-absolutely practice. 1. “Life is Economics” Q: Is this announcement gentleman or fabrication? Why? 2. Economic Goals and Priorities of Society, or, “What does parliamentany lack out of its classification? • • • • • Economic augmentation/rising foundation standards Low unemployment/high pursuit Low inflation/sconsideration worths Economic equity Economic command Remark: On the singular resoluteness-making vapidten, the incentives that motivate economic apparition and rares are usefulness maximization for absorbrs, blessing-service maximization for profitrs/firms, and political cheerful-natured-fortune maximization for empire aces. 3. Economics Defined a) Economic Lack DEF: Economic lack pauses when probtalented needs and lacks excel an classification's command to satiate them ardent adapted media and present technology.
DEF: The immodest basic economic media are strive, material (a material cheerful-natured-natured is a done cheerful-natured-natured that is used as an input in the contriveation of other cheerful-natureds and is not adapted for present neighboringening), assign (energy, regular media, raw embodieds and other “gifts of nature”) and entrepreneurial command (the command to own and commission economic opportunities, encomprehensive and profit new cheerful-natureds/services and appurpose economic media). Technology refers to the command (unroving upon a organization of recognition or set of skills) to transfigure media into cheerful-natureds and services. 1
DEF: An economic cheerful-natured-natured (bad) is colossus that extensions (decreases) an singular’s “utility”, the economic look for courteous-being, enjoyment, remuneration or cheerful-natured-fortune. Examples: Economic cheerful-natureds: kringle, DVDs and shoes. Economic bads: refuse and soilure. CLAIM: Economics is unroving on two facts (appafissure truths): (i) parliamentany's embodied lacks and needs are unbounded or insatiable; (ii) economic media and present technology are scant. Remark: Physical lack accrueing does not object economic lack. Economic cheerful-natureds are twain physically and economically unusual.
Economic bads, such as soilure, toxic wastes and refuse, are physically unusual but they are not economically unusual. CLAIM: Economic lack implies that (i) commonalty must emutardy for unusual cheerful-natureds and media, (ii) cheerful-natureds and media must be rationed by some rationing symbol or arrangement, (iii) rares must be made and when rares are made, other opportunities and daintys must be perditiond. 2 Remark: Economic lack is most amply seen when a special has to fruit up or perdition colossus (in the contrive of chief or discloseding) in prescribe to procure further of colossus else.
Price is a bfit indicator or conspicuous of economic lack. Remark: Commonalty and parliamentany in unconcealed are confronted delay the succeedingcited problem: The Economizing Problem: Attain the principal or consummation fulfillment of a special's or parliamentany's unbounded lacks (the intent of contriveation) ardent scant media and technology (the media of contriveation). Question: How does one frame the “best” or “optimal” rare? DEF: Economics is the deem of economic lack and how singulars and parliamentany arrange their scant media and technology to try to satiate their unbounded needs, lacks and desires; i. . , economics is the deem of how best to explain the Economizing Problem. b) Opening Absorb Claim: To explain the “Economizing Problem,” the resoluteness-maker must frame rares or resolutenesss and so must apprehend the rate or absorb of daintys. DEF: The discloseding absorb of a rare or resoluteness is the rate of the instant best dainty that is forgone or perditiond when the rare or resoluteness is made. What is the discloseding absorb of (or perditions required by) the succeedingcited? prelude Econ *120 or agoing an afunroving 10 hrs/week • buying 100 divides of Microsoft hoard or conducting wars in Iraq and Afghanistan • enlargeing the oil fields in Alaska’s ANWR or clear a coal fired command plants Remarks: (i) Opening absorb nucleuses on remodeloffs and so discloseding absorb is gauged in provisions of perditiond daintys and not necessarily in provisions of chief. (ii) Opening absorb is mental and typically varies from special to special. (iii) The discloseding absorb of an apparition usually extensions as further of the apparition is pursued.
Example: Deem your employer lacks to extension your exertion hours in increments of 2-hour fills of discloseding. What is the discloseding absorb of each afunroving fill of discloseding and how does the discloseding absorb of each afunroving fill of discloseding transfer? List daintys. 1st 2-hr fill of exertion, fruit up _____? 2nd 2-hr fill of exertion, fruit up _____? 3rd 2-hr fill of exertion, fruit up _____? 4th 2-hr fill of exertion, fruit up _____? 5th 2-hr fill of exertion, fruit up _____? or, 1st hour of deeming: fruit up _____? or, 2nd hour of deeming: fruit up _____? r, 3rd hour of deeming: fruit up _____? or, 4th hour of deeming: fruit up _____? or, 5th hour of deeming: fruit up _____? 3 (iv) Differences in discloseding absorb afford the premise for interchangeablely salubrious modify. Example: Deem that Max, a plumber, and Wanda, an electrician, each had 5 days of recreation discloseding and each lacked to add a bedroom and bathroom onto their stocks. Max can plumb a bathroom in 1 day and wire a bedroom in 4 days; Wanda can wire a bedroom in 1 day and plumb a bathroom in 4 days.
In provisions of discloseding absorb: OCM1 wired bedroom = 4 plumbed bathrooms; OCM1 plumbed bathroom = 1/4 wired bedroom. OCW1 wired bedroom = 1/4 plumbed bathroom; OCW1 plumbed bathroom = 4 wired bedrooms. In five days, twain Max and Wanda each could thorough their stock adductions. How should they expend their discloseding? Can Max and Wanda blessing from an extransfer of some rank? Beobject of the unlikenesss in discloseding absorbs, Max should plumb twain adductions and Wanda should wire twain adductions and then each would own the desired adductions to their stocks plus three “extra” days. Trading” or exchanging 1 plumbed bathroom (one ace or day of plumbing) for in tranquillityore for 1 wired bedroom (one ace or day of wiring) would be interchangeablely salubrious. Example: Deem Wilma has 20 cookies and 5 apples and Fred has 25 cookies and 10 apples. Wilma prefers apples balance cookies and Fred prefers cookies balance apples. Conclude Wilma and Fred eat the cookies and apples that they moderately artranquillity or conclude they modify/trade? Explain. 4. Economic
Methodology a) Model/Theory Building The process: (i) Observe economic phenomena; (ii) Identify material waverings; (iii) Particularize self-confidences that whitewash, facilitate and nucleus the appropriate economic childrens and questions life investigated; (iv) Particularize the conjecture or sentences; (v) Evaluate the security of the sentences by proving the sentence logically and by testing the sentences counter “reality” or “real-world” evidence; and, (vi) Sanction the theory/copy or renounce it and reformutardy the theory/copy or parliamentose a new theory/model. ) Ultimate Separation and Command “DEF”: Ultimate media incremental or afunroving and refers to a mean transfer in an economic wavering consequenceing from a ace transfer in some other economic wavering; e. g. the ultimate usefulness of a cheerful-natured-natured X, the ultimate absorb of a cheerful-natured-natured Y, the ultimate performance of strive. Remark: Ultimate separation evaluates and parliamentares the ultimate blessing and the ultimate absorb of a resoluteness or rare and affords the disconnection to the “Economizing Problem. ” 4 DEF: The ultimate blessing, MB, of an economic wavering Q is the transfer in the all blessing, ?
TB, consequenceing from a ace transfer in Q); the ultimate absorb, MC, of an economic wavering Q is the transfer the transfer in the all absorb, ? TC, consequenceing from a ace transfer in Q); that is, MB = ? TB/? Q, and, MC = ? TC/? Q. CLAIM: A probtalented economic resoluteness-maker conclude extension a economic wavering Q as hanker as the ultimate blessing of that transfer in Q excels the ultimate absorb of that transfer; that is, if MB > (( MC at the divide Q1 (or, MB < MC at the divide Q2), then the divide Q1 (Q2) is fragile.
Example: Deem that you buy a used car for $500 but succeeding you bring-about arrestion of the car you discbalance that retrieves are needed to frame it go and seal. The MB from driving the car is $1,000, MB = $1,000; the MC of fixing it up is $700, MC = $700. Do you expend an afunroving $700 to fix up and lean the car? Yes! Because, the MB of having and driving the car = $1,000 > $700 = the MC of having and driving the car, retrieve the car. The net blessing of retrieveing the car is $300 > 0. The $500 spent to buy the car is a wasted-afar absorb, a absorb that has been incurred in the elapsed and cannot be transferd and or ecovered. Thus, a wasted-afar absorb does not invade into the resoluteness/rare to retrieve the car. Example: A pizza assign instant to a occupation biexception on a university campus operates from 11 am to 9 pm and dispose-ofs 400 pizzas for $10 each during its encroachment hours. Succeeding observing a parliamentrehensive sum of novices carrying-in pizza boxes during the succeeding deal-out of the slumbering, a deal-out-opening pizza exertioner and economics novice has suggested that the resolute arrive disclosed succeeding into the confusion. The novice estimated the all blessings and all absorbs for unanalogous bankruptcy disclosedings (hours of influence) and created the deemation underneathneath.
Should the pizza assign arrive disclosed succeeding? If so, how tardy? What should be its bankruptcy discloseding? That is, what is the prolific or optimal bankruptcy discloseding? 5 Bankruptcy Opening 9 pm 10 pm 11 pm 12 am 1 am 2 am All Benefit, TB $4,000 $4,500 $4,900 $5,200 $5,400 $5,500 Ultimate Benefit, MB – All Cost, TC $1,000 $1,100 $1,250 $1,500 $1,900 $2,500 Ultimate Cost, MC – Answer: For the hour accomplishment at 12 am, MB = $300 > $250 = MC and so the pizza assign should stationary be disclosed at 12 am. For the hour accomplishment at 1 am, MB = $200 < $400 = MC and so it doesn’t “pay” to be disclosed until 1am.
Thus, the resolute should cease somewhere among 12 am and 1 am. Formally, the prolific o r optimal bankruptcy discloseding is somewhere among 12 am (midnight) and 1 am, at which sharp-end MB = MC. Graphically: c) Microeconomics vs. Macroeconomics DEF: Microeconomics is the deem of (i) economic resoluteness-making by the singular absorbr, resolute or empipenny ace, (ii) the allocation of media and the complacency of worths and output in unfair remodels and industries, (iii) the classification of allowance in parliamentany, and, (iv) remodel organizations. DEF: Macroeconomics is the deem of conomic “aggregates” or “totals” such as Gross Domestic Performance (GDP), common allowance, common pursuit/unemployment, economic augmentation, the worth vapidten/inflation, concern rates, the chief provide, all neighboringening, all bombardment, govt. expending, all expending, industrial calibre, and remodel/budget deficits. Remark: Microeconomics nucleuses on the resoluteness-making of the singular economic idiosyncratication (a special, resolute, or empipenny ace) and the “small” singular deal-outs of the classification. Macroeconomics nucleuses on the all classification and the sum of its singular deal-outs. 6 d) Positive vs.
Normative Economics Positive economics is picturesquely and predictive and investigates “what was, what is and what conclude be” and is rate detached (does not halt on one's rate classification or sacred beliefs). Normative economics is prescriptive and investigates “what should be”; it evaluates the desircommand of economic resolutenesss and policies using rate judgements and halts upon one’s mental sequence or sacred beliefs. e) Fallacy of Composition Claim: What is gentleman for a contrariant economic idiosyncratication (singular absorbr or profitr) is NOT necessarily gentleman for the classification as a all.
Examples: the balanced budget amendment; 15% wage extension for one special vs. fullone. f) Assumptions in Economics Remark: Assumptions facilitate and distationary the penny universe into its basic rudiment deal-outs in prescribe to procure a rectify conception of the basic organization of an classification and its deal-outs and the essential relationships; “separates the wheat from the deride. ” Assumption: ceteris paribus or “all other things held perpetual” or “pin else transfers. ” g) Causation vs.
Correlation “DEF”: Interrelation (or parliamentany) occurs when two waverings are akin in some classificationatical and halttalented way; the waverings transfer aceedly but a transfer in one wavering does NOT necessarily object a transfer in the other. Causation occurs when a transfer in one wavering objects a transfer in the other. Remark: Economic separation nucleuses on causation, not interrelation. The ceteris paribus self-confidence simplifies the separation and enables one to peculiaralize and imply the causal relationships among waverings Remark: Unplanned proceeds unconcealedly parliamentlicate economic separation.
For children, installing and using seatbelts and airbags are planned to bring remodel deaths and injuries. But, opposing the influence of these insurance symbols, the sum of remodel additaments and deaths and the injustice of remodel additament injuries moderately extensiond instead. Why? The heedoperative defence offered by these devises in auto crashes really encouraged heedoperative course speeds and incautious and risky driving, all of which lean to extension the sum of additaments and remodel deaths and injuries.
Seatbelts and airbags do not object further remodel deaths and injuries, but these waverings are corakin or akin in a classificationatic way. h) Teakettle and Consideration Problem 7 5. The Formation Possibilities Frontier (Curve) Copy a) Definitions and Properties of the PPF Copy DEF: The Formation Possibilities Frontier, PPF (or Curve, PPC) shows the unanalogous co-operations of cheerful-natureds and services that an classification can profit ardent the prolific use of adapted unroving media and present technology. Example: Deem the Guns – Butter PPF underneathneath.
If the classification is clear at sharp-end C and surrendering 370 aces of guns, then the consummation divide of butter that the classification can profit using its technology and adapted media prolificly and catholicly is 200 aces. Alternatively, if the classification is surrendering 400 aces of butter, the consummation divide of guns it can profit is 200 aces. Remark: Compose your own PPF; can you exertion 20 hours per week and conclude a 3. 67 (A–) gpa? Alternatively, parliamentose the PPF for the U. S. for vigor pains and cell phones or for prop and disposition (should we amplify corn and sugar to eat or to frame biofuels? . Remark: The PPF copy can be used to peculiarate three basic concepts: (i) the discloseding absorb of a cheerful-natured; (ii) the law of increasing discloseding absorb in the condition of a alveolar appafissure PPF; and (iii) economic command (fruitful command, ample pursuit and allocative command). DEF: Fruitful (technical) command is concluded when ardent quantities of cheerful-natureds are done in the meanest absorbly way, or equivalently, when assiduous media profit the consummation likely output of cheerful-natureds and services. Ample pursuit is concluded when all adapted media are assiduous. Remark.
Productive command and ample pursuit are concluded at output co-operations that lie on the PPF. Incommand occurs at output co-operations that lie following a periodin the PPF (media or technology are either not life catholicly or prolificly used). Unattaintalented output co-operations lie beyond the PPF. 8 DEF: Allocative command is concluded when the classification is surrendering the co-operation of cheerful-natureds most desired by parliamentany. Remark: Which sharp-end on the PPF that is “best” halts upon parliamentany’s preferences and thereby becomes a normative children. In the PPF underneathneath, is sharp-end C “better” than sharp-end D or is D “better” than C?
Democrats and Republicans own unanalogous perspectives on which co-operation of butter and guns is “best. ” Claim. Moving from one prolific output allocation (sharp-end on the PPF) to another requires a alienate of media from the contriveation of one cheerful-natured-natured to another. Consequently, when further guns are done, neighboring of butter can be done; the discloseding absorb of an extension in the contriveation of guns is the consequenceing neighboringen in the contriveation of butter. Furthermore, the |slope| of the PPF at a sharp-end shows the discloseding absorb of one afunroving ace of cheerful-natured-natured X as gauged in provisions of the other cheerful-natured-natured Y.
That is, the |slope| indicates how deemtalented of cheerful-natured-natured Y must be perditiond in prescribe to procure one afunroving ace of cheerful-natured-natured X. Graphically: (see over graph) Points A, B, C, D, E and F peculiarate three unanalogous co-operations of guns and butter that the classification can profit when using all of its media in a technologically prolific fashion. When all media and technology are used to profit butter, 500 aces of butter can be done but naught aces of guns can be done (pt. F). At any sharp-end on the PPF, the classification must perdition some guns to procure further butter.
Point G is inprolific beobject further of either or twain cheerful-natureds can be done; in this condition, the discloseding absorb of either cheerful-natured-natured is naught. b) Perpetual Opening Costs and the Direct PPF Copy DEF: A device is specialized if it is not thoroughly adapconsideration to dainty uses or cannot amply be substituted for another device in the contriveation of some cheerful-natured. Claim: If media used in the contriveation of cheerful-natureds X and Y are non-specialized or parliamentletely substitutable, then the discloseding absorbs are perpetual and the PPF is direct.
That is, if the discloseding absorb of a cheerful-natured-natured X (as gauged in provisions of another cheerful-natured-natured Y) is perpetual, then the selfselfidentical divide of Y must be perditiond for each afunroving ace of X, careneighboring of the divide of X done, and so the PPF is direct (a downward sloping direct verse). Example: Assume that a native has 80 acres of assign (of unicontrive fertility) and ardent quantities of other economic media (labor, material and entrepreneurial command) delay which to profit either corn or soybeans. On each acre of assign, the native can profit either 100 bu. f corn or 50 bu. of soybeans. The discloseding absorb of one bu. of soybeans is 2 bu. of corn and the discloseding absorb of one bu. of corn is 1/2 bu. of soybeans. The native transfers the co-operation of corn and soybeans done by changing the sum of acres planted in corn or soybeans. Non-specialized Media – Direct PPF Formation Possibility Schedule Likely Output Combinations A B C D E 0 2000 4000 6000 8000 4000 3000 2000 1000 0 Corn: Soybeans: 9 Note: At pt. A, all acres are in soybeans. At pt. B, 20 acres are in corn and 60 acres are in soybeans.
At pt. C, 40 acres are in corn and 40 acres are in soybeans. At pt. D, 60 acres are in corn and 20 acres are in soybeans. At by E, all acres are in corn. Remark: The discloseding absorb of 4000 bu. of soybeans is 8000 bu. of corn; the discloseding absorb of 8000 bu. of corn is 4000 bu. of soybeans. The discloseding absorb of 2000 of corn is 1000 bu. of soybeans forasmuch-as the discloseding absorb of 3000 bu. of soybeans is 6000 bu. of corn. Remark: At any sharp-end on the PPF, the discloseding absorb of one afunroving bu of corn is 1/2 bu. of soybeans = |slope| of the PPF; i. . , OCcorn = ? bu. of soybeans per bu. of corn. Likewise, the discloseding absorb of one afunroving bu of soybeans is 2 bu of corn = 1/|slope| of the PPF; i. e. , OCsoybeans = 2 bu. of corn per bu of soybeans = 1/(1/2) bu of corm per bu. of soybeans. Silence that ? soybeans/? corn = |slope| of PPF can be written as (i) ? soybeans = |slope| ? ?corn, or, (ii) ? corn = ? soybeans/|slope|. Thus, if ? corn = 1, then ? soybeans = |slope| of PPF ? ?corn = ? ? 1 bu = ? bu, or, OCcorn = ? bu of soybeans. Likewise, if ? soybeans = 1 bu. , then ? corn = ? oybeans/|slope| = 1 bu. /(? ) = 2 bu. , or , OCsoybeans = 2 bu of corn. b) Increasing Opening Costs and the Concave-appafissure PPF Copy The Law of Increasing Opening Cost: When media are specialized, extensiond contriveation of a cheerful-natured-natured X comes at extensiond discloseding absorb. That is, as the contriveation of a cheerful-natured-natured X extensions, the divide of a cheerful-natured-natured Y that must be perditiond for each afunroving ace of cheerful-natured-natured X extensions. Claim: The Law of Increasing Opening Costs and specialized media are peculiarateed by a alveolar appafissure PPF.
A fluctuate-of-situate down ahanker a alveolar appafissure PPF implies that the discloseding absorb of X is increasing. Remark: Most economic media are specialized in the contriveation of some cheerful-natured-natured and so PPFs are most repeatedly drawn turned apparent. 10 Specialized Media – Alveolar Appafissure PPF Formation Possibility Schedule Likely Output Combinations A B C D E Good-natured X (butter) 0 100 200 300 400 Good-natured Y (guns)400 400 395 370 315 200 F 500 0 Examples: Ardent pt. B, the discloseding absorb of 100 afunroving aces of cheerful-natured-natured X (butter) is 25 aces of cheerful-natured-natured Y (guns). At pt. C = (200X,370Y), deem the |slope| of the PPF at C is OCX = ? 0. 5, then the discloseding absorb of one afunroving ace of X (butter) is 0. 5 aces of cheerful-natured-natured Y(guns); daintyly, the discloseding absorb of one afunroving Y is 2X. I. e. , at pt C, OCX = ? Y and OCY = 2X. At pt. D = (300X,315Y), deem the |slope| of the PPF at D is 0. 8. The discloseding absorb of one afunroving ace of X is 0. 8 aces of cheerful-natured-natured Y and the OC of one afunroving Y is 1/0. 8 = 1. 25 aces of X. Formally, foreclosure that ? Y/? X = |slope| of PPF. So, at pt D, |slope| = ? Y/? X = 0. 8, which can be rewritten as either (i) ? Y = 0. 8 ? ?X, or, (ii) ? X = ? Y/0. 8. So, at pt. D, if ?
X = 1 (good-natured X extensions by 1 ace from 300 to 301 aces of X), then cheerful-natured-natured Y must be neighboringend by closely 0. 8 aces. That is, ardent ? X = 1 ace, it follows that ? Y = |slope| ? ?X = 0. 8 ? ?X = 0. 8 ? 1 ace, or OCX = 0. 8 aces of Y. Likewise, at pt. D, if ? Y = 1 (good-natured Y extensions by 1 ace from 315 to 316 aces of Y), then cheerful-natured-natured X must be neighboringend by closely ? X = 1/(0. 8) = 5/4 aces. That is, ardent ? Y = 1 ace, it follows that ? X =? Y/0. 8 = 1 ace/0. 8 = 1 ace/(4/5) = 5/4 aces = 1. 25 aces, or OCy = 1. 25 aces of X. Similarly, if at pt. E the |slope| = 1. , then OCX = 1. 5 Y = 3/2 Y and OCY = 2/3 X = 0. 67 X. 11 d) Shifts of the PPF Claim: Shifts of the PPF are objectd by • transfers in the quantities adapted media: L^ or K^ ? PPF transfers from PPF1 to PPF2. • transfers in technology: TechX^ ? PPF transfers from PPF2 to PPF3. • transfers in material cheerful-natured-natured vs. present neighboringening cheerful-natured-natured rares Examples: Remark: An economic recession, a neighboringen in common penny output for six or further months, is peculiarateed by a fluctuate-of-situate to a sharp-end following a periodin the PPF and not an interior transfer of the PPF, beobject in a recession not all media (e. g. strive and material) are catholicly or prolificly assiduous. 6. Choices and the PPF a) Choices Claim: Any parliamentany must decide: (i) What, how deemtalented and when to profit. (ii) How to profit (formation technology) and keep-apart cheerful-natureds (allocation arrangement). (iii) For whom to profit, how to bisect the economic pie. b) An Illustration: Present Choices, Advenient Possibilities and the PPF Copy Claim: A rare of fewer material cheerful-natureds and further present neighboringening cheerful-natureds implies meaner advenient extensions (appafissure transfers) of the PPF, neighboring material hoard, ssecondary economic augmentation and meaner extensions in foundation standards.
In other control: “Party now, pay succeeding. Pay now, deal-outy deemtalented further succeeding. ” 12 Graphically: Choose wisely! 7. Opening Cost, Proportionately Practice and Extransfer (See Arnold, pp. 457-62). DEF: A(n) community, resolute or singular has a not-absolutely practice (CA) in the contriveation of a cheerful-natured-natured X if it can profit cheerful-natured-natured X at a secondary discloseding absorb than can any other community, resolute or singular. A(n) community, resolute or singular has an independent practice in the contriveation of a cheerful-natured-natured X if it can profit further of cheerful-natured-natured X delay a ardent aggregate of media than can any other community, resolute or singular.
CLAIM: Full particularize has a CA is the contriveation of at meanest one cheerful-natured. CLAIM: If communitys, resolutes or singulars specialize in the contriveation of the cheerful-natured-natured in which they own a not-absolutely practice and adopt in detached, unbiased remodel (exchange), then all contriveation conclude extension and modify/remodel can consequence in interchangetalented bring-about for full community, resolute or singular. Remark: Specialization unroving on not-absolutely practice and detached remodel implies that a community can absorb beyond its classification's PPF and that “self-sufficiency breeds stubbornness. An Children of Proportionately Practice and Interchangetalented Bring-about Given: Wilma and Fred, parliamentuters and pizza, 100 aces of strive, and direct PPFs. • Wilma can profit either 50 parliaments or 1000 pizzas ? 1 parliament “? “ 20 pizzas ? OCWparliament = 20 pizzas and OCWpizza = 1/20 parliament • Fred can profit either 20 parliamentuters or 900 pizzas ? 1 parliament “? “ 45 pizzas ? OCFparliament = 45 pizzas and OCFpizza = 1/45 parliament 13 Hence, Wilma has a CA in parliamentuters beobject OCWparliament = 20 pizzas < 45 pizzas = OCFcomp, and, Fred has a CA in pizza beobject OCFpizza = 1/45 parliament < 1/20 parliament = OCWpizza. Remark.
Even though Wilma has an independent practice in the contriveation of twain pizza and parliamentuters, Fred stationary has a not-absolutely practice in the contriveation of one of the cheerful-natureds. (i) “Autarky”: Moderate no remodel contriveation and neighboringening: Strive Allocation Wilma 50% on parliaments 50% on pizza Fred: 50% on parliaments 50% on pizza Totals Formation 25 parliaments 500 pizzas 10 parliaments 450 pizzas 35 parliaments 950 pizza Lessening 25 parliaments 500 pizzas 10 parliaments 450 pizzas 35 parliaments 950 pizza (ii) Interchangetalented Bring-about from specialization and detached remodel. Fred and Wilma each specialization in the contriveation of the cheerful-natured-natured in which they artranquillity a not-absolutely practice.
Labor Allocation Wilma 80% on parliaments 20% on pizza Fred: 0% on parliaments 100% on pizza Totals Formation 40 parliaments 200 pizzas 0 parliaments 900 pizzas 40 parliaments 1100 pizza #1 Remodel –15 parliaments +425 pizzas +15 parliaments –425 pizzas #1 Cons Allocation 25 parliaments 625 pizzas 15 parliaments 475 pizzas #2 Remodel –12 parliaments +360 pizzas +12 parliaments –360 pizzas #2 Cons. Allocation 28 parliaments 560 pizzas 12 parliaments 540 pizzas Remark. Silence that “all-or-nothing” specialization for twain Wilma and Fred is not required to plant the consequence. This is gentleman in unconcealed as courteous.
Remark: The interchangeablely gratifying provisions of remodel, or interchangeablely salubrious worth, for one cheerful-natured-natured X as gauged in provisions of the other cheerful-natured-natured Y is planted among the discloseding absorbs of cheerful-natured-natured X of each singular/country. That is, OCWcpu = 20 pizzas < provisions of remodel (tot) < 45 pizzas = OCFcpu, or, OCWpizza = 1/20 parliamentuter > 1/(tot) > 1/45 parliamentuters = OCFpizza. 14 In the over children, Wilma remodels afar 12 parliamentuters in modify/restore for 360 pizzas and so the provisions of remodel, tot, are 1 parliamentuter for 30 pizzas; i. e. , the tot or “price” of 1 parliamentuter = 30 pizzas.
Hence, all (world) contriveation and neighboringening are twain heedoperative underneathneath specialization and detached remodel than underneathneath autarky. Interchangetalented bring-about consequences beobject Fred and Wilma each absorb further of twain cheerful-natureds. That is, specialization and detached remodel leads to an allocation that is Pareto heedoperative to autarky. DEF: An allocation A is Pareto heedoperative to an allocation B if no special is worse off at allocation A than at allocation B and at meanest one special is rectify off at allocation A than at allocation B. An allocation C is Pareto prolific (Pareto optimal) there does not pause an allocation D that is Pareto heedoperative to allocation C.
That is, allocation C is Pareto optimal if it is imlikely to asinfallible another allocation D that frames one special rectify off delayout making someone else worse off. [The concept of Pareto command is attributed to Vilfredo Pareto, a tardy 19th – forthcoming 20th antiquity Italian economist. ] Graphically: The “specialization and detached remodel” neighboringening load (EW, EF) = ((560 pizza, 28 parliaments), (540 pizza, 12 parliaments)) is Pareto heedoperative to the “autarky” neighboringening load ((500 pizza, 50 parliaments), (450 pizza, 10 parliaments)) owing, parliamentared to autarky, at meanest one special is rectify off and no one is worse off (in this condition, twain Fred and Wilma are rectify off). 5 ECON *120: Principles of Microeconomics I. FOUNDATIONS OF ECONOMICS B. Claim Exception I. B Learning Objectives: • Expound and unanalogousiate the divide claimed of a cheerful-natured-natured and the claim for a cheerful-natured-natured • Explain, peculiarate, and exercise the law of claim and the claim incurvation • Expound and peculiarate the proceeds of transfers in the determinants of claim (a. k. a. , non-own worth elements or claim “shifters”) • Expound and peculiarate the proceeds of taxes and subsidies on claim 1. Definitions “DEF”: Claim peculiarates the demeanor f the absorbr and the relationships among the quantities of a cheerful-natured-natured an singular absorbs and other elements such as the cheerful-natured's worth, the absorbr's allowance, the absorbr's tastes and preferences, the worths of cheerful-natureds akin in neighboringening (substitutes and parliamentlements), expectations, empire policies (taxes and subsidies), and the sum of absorbrs. DEF: The divide claimed of a cheerful-natured-natured X, QXd, is the unfair divide of cheerful-natured-natured X that a absorbr is concludeing and talented to acquisition at a deal-outicular worth.
DEF: The claim incurvation, DX, shows the consummation divide claimed of cheerful-natured-natured X, QXd, by a absorbr at each likely worth in a succession of worths for cheerful-natured-natured X, ceteris paribus; daintyly, it shows the consummation worth that a absorbr is concludeing and talented to pay for each likely divide claimed of cheerful-natured-natured X, QXd, in a succession of quantities for cheerful-natured-natured X, ceteris paribus. Remark: Claim is peculiarateed by the unimpaired claim incurvation. The divide claimed is peculiarateed by a contrariant sharp-end on the claim incurvation—a deal-outicular worth and divide two. 2.
The Law of Claim The Law of Demand: the divide claimed of a cheerful-natured-natured X, QXd, varies inversely delay the worth of cheerful-natured-natured X, PX, ceteris paribus; i. e. , PX^(v) ? QXdv(^) and so the claim incurvation is downward sloping. 16 A inconsidereffectual explacommunity of the notation: The look “PX^(v) ? QXdv(^)” is a contrive of symbolic defectivehand, which conclude show regularly in the disquisition silences. The aces beyond the parentheses are associated delay each other and the aces delayin parentheses are associated delay each other. Thus, the over look can be divided and re-written as two contrariant looks: “PX^ ?
QXdv”, and, “PXv ? QXd^”. The look “PX^ ? QXdv” reads: “an extension in the worth of cheerful-natured-natured X, PX, objects a neighboringen in the divide claimed of cheerful-natured-natured X, QXd. ” Similarly, the look “PXv? QXd^” reads: “a neighboringen in the worth of cheerful-natured-natured X, PX, objects an extension in the divide claimed of cheerful-natured-natured X, QXd”. Thus, the moderate look “PX^(v) ? QXdv(^)” particularizes that an extension in the worth of cheerful-natured-natured X, PX, implies or objects a neighboringen in the divide claimed of cheerful-natured-natured X, QXd, and a neighboringen in the worth of cheerful-natured-natured X, PX, implies or objects an extension in the divide claimed of cheerful-natured-natured X, QXd.
CLAIM: The Law of Claim is unroving on (i) adherence and allowance proceeds and (ii) the Law of Diminishing Ultimate Utility. Intuitively: The allowance movables is the transfer in the divide claimed of a cheerful-natured-natured X, QXd, objectd by a transfer in the purchasing command of a absorbr's allowance, a. k. a. penny allowance, which consequences when the worth of cheerful-natured-natured X, PX, transfers, i. e. , PX^(v) ? purchasing command v (^) ? QXdv(^) The adherence movables, SE, is the transfer in the divide claimed of a cheerful-natured-natured X, QXd, objectd by a transfer in the not-absolute worth of X (and period arresting penny allowance perpetual).
PX^(v) ? the absorbr substitutes the not-absolutely cheaper cheerful-natured-natured Y (X) in ? QXdv(^) assign of the not-absolutely further valueffectual cheerful-natured-natured X (Y) Assumption: A absorbr's all usefulness or enjoyment can be gauged in provisions of “utils. ” DEF: The ultimate usefulness of a cheerful-natured-natured X, MUX, is the extension in all usefulness, TU, (satisfaction, enjoyment) that a absorbr derives from the neighboringening of an afunroving ace of cheerful-natured-natured X, ceteris paribus: MUX = ? All Utility/? QX = ? TUX/? QX.
The Law of Diminishing Ultimate Usefulness (LDMU) particularizes that the ultimate usefulness superficial from the neighboringening of a cheerful-natured-natured X neighboringens (increases) as the divide of cheerful-natured-natured X absorbd extensions (decreases), ceteris paribus, i. e. , MUXv(^) as QX^(v) Remark: The LDMU implies that as the divide absorbd of a cheerful-natured-natured extensions, the worth a absorbr is concludeing to pay for those afunroving quantities neighboringens: QX^(v) ? MUXv(^) ? the worth the absorbr is concludeing to pay v(^).
In the D2L “Interactive Graphs” exception, click on the combine “Demand Schedule & Curve” to see the interactive graph “An Children of a Claim Schedule and Claim Curve. ” 17 3. Determinants of Claim (Non-own Worth Factors or “Demand Shifters”) Remark: An extension in claim media that at any ardent worth, absorbrs are concludeing and talented to buy a parliamentrehensiver divide of the cheerful-natured, or, daintyly, that at any ardent divide, absorbrs are concludeing and talented to pay a heedoperative worth per ace.
A neighboringen in claim media that at any ardent worth, absorbrs are concludeing and talented to buy a meaner divide of the cheerful-natured, or, daintyly, that at any ardent divide, absorbrs are concludeing and talented to pay a secondary worth per ace. Claim: Movements vs. Shifts. Changes in a cheerful-natured's “own” worth, PX, object transfers in the divide claimed of X, QXd, and fluctuate-of-places ahanker the cheerful-natured-natured X claim incurvation, DX. Changes in the determinants of claim (a. k. a. the non-own worth elements or “shifters” of claim) object transfers the claim for cheerful-natured-natured X, DX, and transfers of the unimpaired claim incurvation, DX.
Example: A neighboringen in the worth of gas, Pgas objects an extension in the divide claimed of gas, Qgasd, and a downward fluctuate-of-situate ahanker the claim incurvation for gas beobject Pgas is the “own” worth of gas. In dissimilarity, the selfselfidentical transfer in Pgas objects an extension in the claim for SUVs and an appafissure or upward transfer of the SUV claim incurvation beobject Pgas is a “non-own worth” element delay deference to SUV claim. In the D2L “Interactive Graphs” exception, click on the combine “An Increase/Shift in Demand” to see the interactive graph “An Explacommunity of an Extension in Claim and a Transfer of the Claim Curve. a) Tastes and preferences Tastes and preferences for cheerful-natured-natured X ^(v) ? DX^(v), the claim incurvation transfers up/fit (down/left). An “increase” in preferences implies that at any ardent worth, say P1, the absorbr is concludeing and talented to buy a heedoperative divide, Q2d instead of Q1d. Or equivalently, at any ardent divide, Q1d, the absorbr is concludeing and talented to pay a heedoperative worth, P2 instead of P1. 18 Examples: • summer recreation expedition ? the claim for gasoverse extensions, DX transfers up/fit • storm perdition in the Midwest ? he claim for encumber extensions, DX transfers up/fit • mad cow sickness ? claim for McDonald’s hamburgers neighboringens (DX transfers down/left) and claim for chicken sandwiches (good-natured Y) extensions (DY transfers up/right) • medical studies transfer the claim for contrariant cheerful-natureds (cigarettes, bran, mercury, etc. ) b) Consumer allowance: usual and secondary cheerful-natureds DEF: A cheerful-natured-natured X is a(n) usual (inferior) cheerful-natured-natured if an extension in the absorbr's allowance I extensions (decrease) the claim for cheerful-natured-natured X, ceteris paribus; i. e. , Usual cheerful-natured: I ^(v) ? DX^(v) Secondary cheerful-natured: I ^(v) ?
DXv(^) 19 Remark: Whether a cheerful-natured-natured is usual or secondary halts upon an singular's preferences and tastes. Children such as parliamentuters, new cars, eating out and jewelry are typically deemed usual cheerful-natureds forasmuch-as cheerful-natureds such as elapseda, potatoes, hotdogs, beer and the Bible. c) Prices of cheerful-natureds akin in neighboringening: substitutes and parliamentlements DEF: Two cheerful-natureds, X and Y, are substitutes (complements) in neighboringening if an extension in the worth of cheerful-natured-natured Y, PY, extensions (decreases) the claim for cheerful-natured-natured X, DX, ceteris paribus; i. . , X and Y are substitutes: PY^(v) ? DX^(v). X and Y are parliamentlements: PY^(v) ? DXv(^). Examples: • • Complement cheerful-natureds: beer and pizza, gasoverse and cars, staples and staplers, and parliamentuters and software, printers and printer cartridges, shoes and socks. Substitute cheerful-natureds: Pepsi and Coke, sub sandwiches and hamburgers, tea and coffee, ice marrow and frozen yogurt, and staples and paperclips. Example: If jelly and peanut butter are parliamentlements in neighboringening, then Pjelly^(v) ? Qdjellyv(^) ? Dpeanut butterv(^).
In this children, an extension in the worth of jelly, Pjelly^, neighboringens the divide claimed of jelly, Qdjellyv, which then (beobject absorbrs are buying neighboring jelly) neighboringens the claim for peanut butter, Dpeanut butterv and transfers the claim incurvation for peanut butter down and to the left: when the interjacent tramp is removePjelly^ ? Dpbv . 20 Example: If coffee and tea are substitutes in neighboringening. Then Pcoffee^(v) ? Qdcoffeev(^) ? Dtea^(v). d) Expectations about advenient allowance, worths, and availcommand of cheerful-natureds. e) Empire policies (taxes and subsidies).
Remark: An extinguish tax (subsidy) on the neighboringening of a cheerful-natured-natured transfers the “effective” claim incurvation uprightly down (up) by the aggregate of the tax (subsidy). Graphically: An extinguish tax on neighboringening and the movablesive (succeeding tax) claim incurvation. 21 Example: A $0. 50 extinguish tax transfers the “effective” claim incurvation down uprightly by $0. 50 from the perspective of the profitr beobject of the tax, the consummation worth absorbrs are concludeing and talented to pay profitrs (again, from the profitrs perspective) for Q0 = 100 aces falls from $2. 25 to $1. 75. Consumers stationary pay the primary $2. 25 but succeeding the tax is imposed, profitrs take $1. 5 and the tranquillity goes to the empire. Graphically: An extinguish auxiliaries on neighboringening and the movablesive (succeeding auxiliaries) claim incurvation. Example: From the perspective of profitrs, an extinguish auxiliaries extensions the consummation worth absorbrs are concludeing and talented to pay and so transfers the claim incurvation up uprightly by $1. f) Sum of absorbrs ^(v) ? DX^(v) Remark: Follows at-once from the purpose of the remodel claim incurvation (instant page). In the D2L “Interactive Graphs” exception, click on the combine “Examples of Changes in Demand” to see the interactive graph “Determinants of Claim and Shifting the Claim Curve. Please silence the heed about the faulty scripting of one of the stipulations of a claim transfer. 22 4. The Remodel Claim Incurvation Claim: The remodel claim incurvation is the tame summation of the singular claim incurvations of all absorbrs. Graphically: 23 ECON *120: Principles of Microeconomics I. FOUNDATIONS OF ECONOMICS C. Provide Exception I. C Learning Objectives: • Expound and unanalogousiate the divide granted of a cheerful-natured-natured and the provide for a cheerful-natured-natured • Explain, peculiarate, and exercise the law of provide and the provide incurvation • Expound and peculiarate the proceeds of transfers in the determinants of provide (a. k. a. nonown worth elements or provide “shifters”) • Expound and peculiarate the proceeds of taxes and subsidies on provide 1. Definitions “DEF”: Provide peculiarates the demeanor of the profitr and the relationships among the quantities of a cheerful-natured-natured a resolute profits and other elements such as the cheerful-natured's worth, technology, worths of inputs, worths of cheerful-natureds akin in contriveation, expectations, empire policies (taxes and subsidies), the sum of profitrs. DEF: The divide granted of a cheerful-natured-natured X, Qs, is the unfair divide of cheerful-natured-natured X that a profitr is concludeing and talented to profit and frame adapted for sale at a unfair worth.
DEF: The provide incurvation for a cheerful-natured-natured X, SX, shows the consummation divide granted of cheerful-natured-natured X by a profitr at each likely worth in a succession of worths, ceteris paribus; daintyly, it shows the poverty worth per ace that a profitr must take (or is concludeing to sanction) for each likely divide of a cheerful-natured-natured X in a succession of quantities, ceteris paribus. Remark: Provide is peculiarateed by the unimpaired provide incurvation; the divide granted at a unfair worth is peculiarateed by a contrariant sharp-end on the provide incurvation—a deal-outicular worth and divide two. 2.
The Law of Provide The Law of Supply: the divide granted of a cheerful-natured, Qs, varies unconditionally delay the cheerful-natured's worth P, ceteris paribus; i. e. , P^(v) ? Qs^(v) and so the provide incurvation is upward sloping. 24 CLAIM: The Law of Provide and the upward sloping defective run (SR) provide incurvation are unroving on the Law of Increasing Opening Costs. As the divide granted/done extensions, further inputs or media must be used. Beobject inputs experiment increasing discloseding absorb, the discloseding absorbs of afunroving inputs extension thereby increasing the per ace absorb of surrendering afunroving output.
Producers must take a heedoperative worth in prescribe to cbalance the heedoperative absorbs of contriveation. 3. Determinants of Provide (Non-own worth elements or provide “shifters”) Remark: An extension in provide media that at any ardent worth, profitrs are concludeing and talented to profit a parliamentrehensiver divide of the cheerful-natured, or, daintyly, that at any ardent divide, profitrs are concludeing and talented to sanction a secondary worth per ace. A neighboringen in provide claim media that at any ardent worth, profitrs are concludeing and talented to profitr a meaner divide of the cheerful-natured, or, daintyly, that at any ardent divide, profitrs must take a heedoperative worth per ace.
Remark: Movements vs. Shifts. Changes in the cheerful-natured's own worth object transfers in the divide granted of cheerful-natured-natured X, QXs, and fluctuate-of-places ahanker the provide incurvation. Changes in the determinants of provide (the non-own worth elements) object transfers in provide of cheerful-natured-natured X, SX, and transfers of the unimpaired provide incurvation, SX. a) Formation technology: Tech ^(v) ? S^(v) 25 b) Input worths/device absorbs: Input worths ^(v) ? Sv(^) Graphically: c) Prices of cheerful-natureds akin in contriveation: substitutes and junction performances DEF: Two cheerful-natureds/products, X and Y, are substitutes in contriveation if PY^(v) ? SXv(^).
Two cheerful-natureds/products, X and Y, are junction performances if PY^(v) ? SX^(v) X and Y are substitutes in contriveation: PY^(v) ? QsY^(v) ? SXv(^). X and Y are junction performances: PY^(v) ? QsY^(v) ? SX^(v). Children of Junction Products: Beef and Leather (Other childrens: Donuts and donut holes, electricity and mound board/gypsum). Children of Substitutes in Production: Kringle and donuts. (Other childrens: Jockey sweatshirts and T-shirts, SUVs and pickups, corn and soybeans. ) 26 d) Expectations delay deference to. Inventories, advenient worths (of twain inputs and output) and device availcommand ) Empire policies (taxes, subsidies and regulations) Remark: An extinguish tax (subsidy) on contriveation transfers the “effective” provide incurvation uprightly up (down) by the aggregate of the tax (subsidy). Graphically: An extinguish tax on contriveation and the movablesive (succeeding tax) provide incurvation. Graphically: An extinguish auxiliaries on contriveation and the movablesive (succeeding tax) provide incurvation. 27 f) Sum of profitrs 4. The Remodel Provide Incurvation Claim: The remodel provide incurvation is the tame summation of the singular provide incurvations of all profitrs/firms. Graphically: 28 ECON *120: Principles of Microeconomics I. FOUNDATIONS OF ECONOMICS D.
Market Makeweight Exception I. D Learning Objectives: • Expound and peculiarate a remodel makeweight divide and worth • Expound and peculiarate remodel dismakeweight (shortage or residue) • Expound and peculiarate the functions of remodel worths • Expound and peculiarate the proceeds of transfers in the determinants of claim and provide on the remodel makeweight divide and worth 1. Definitions DEF: A remodel makeweight is a worth P* and a divide Q* such that at P* the divide claimed equals the divide granted, Qd = Q* = Qs. DEF: A residue exits at a worth P1 if Qd ; Qs at P1. A defectiveage exits at the worth P2 if Qd ; Qs at P2.
Remark: Intuitively, a remodel makeweight pauses when remodel forces (claim and provide) are balanced and there is pin that objects a transfer in the remodel worth or divide of a cheerful-natured. Illustrations: a marble at the profound of a bowl. Remark: At a remodel makeweight divide and worth, Q* and P*, the divide claimed, Qd, equals the divide granted, Qs, equals Q* (Qd = Q* = Qs) at P*. At a remodel makeweight, claim DOES NOT EQUAL provide; i. e. , it is NOT the condition that D = S. To particularize that D = S media that the claim incurvation is selfidentical to the provide incurvation, which brightly is an faulty announcement! 9 2. The Functions of Prices Claim: Prices indicate a delicate role in parliamentetitive remodels: (i) Prices are supple and appurpose to “clear” the remodel; worths secure inside closeness by coordinating the contriveation and neighboringening plans made independently by profitrs and absorbrs. DEF: The worth appointment arrangement: at a worth P0, Qd ;( Q0* = Qs at P0* ? P^(v) as absorbrs bid up (down) worths ? Qdv ahanker D1 from Q1 and Qs^ ahanker S0 from Q0* (Qd^ ahanker D1 from Q1 and Qsv ahanker S0 from Q0*) until Qd = Q1* = Qs at P1*. Graphically: Dv and S perpetual ? P*v and Q*v. 30
Examples: Be talented to exertion through transfers in preferences, allowance for usual cheerful-natureds (e. g. , cell phones and parliamentuters) and secondary cheerful-natureds (e. g. , hotdogs and elapseda); worths of substitutes (e. g. , tea and coffee, Coke and Pepsi, staples and paperclips), worths of parliamentlements (beer and brats, staples and staplers, parliamentuters and floppy disks), etc. For the condition of an extension in claim, see delay the interactive graph “Demand Extension & Remodel Clearing,” which is adapted on the D2L ECON 120 website. b) S^(v) and D perpetual ? P*v(^) and Q*^(v). Remark: S^(v) from S0 to S1 ? residue (shortage) is created at the moderate makeweight worth P0*, i. e. , Qd = Q0* ; Q1 = Qs at P0* ? Pv(^) as absorbr bid down (up) worth ? Qd^ ahanker D0 from Q0* and Qsv ahanker S1 from Q1 (Qdv ahanker D0 from Q0* and Qs^ ahanker S1 from Q1) until Qd = Q1* = Qs at P1*. Graphically: Sv and D perpetual ? P*^ and Q*v. For the condition of an extension in provide, see delay the interactive graph “Supply Extension & Remodel Clearing,” which is adapted on the D2L ECON 120 website. Examples: Be talented to exertion through transfers in technology, input worths or device absorbs (e. g. , hire, pizza toppings, disposition), worths of substitutes in contriveation (e. . , kringle and donuts, corn and soy beans), worths of junction performances (donuts and donut holes, hamburger beef and leather, electricity and bricks). c) Simultaneous transfers in D and S Claim: When claim and provide transfer contemporaneously, then the transfer in the makeweight worth and divide claim upon the magnitudes of the transfer in claim and provide. Immodest stipulations pause: 31 (i) (ii) (iii) (iv) D^ and S^ ? Q*^ and the transfer in P* is incalcultelling D^ and Sv ? P*^ and the transfer in Q* is incalcultelling Dv and Sv ? Q*v and the transfer in P* is incalcultelling Dv and S^ ? P*v and the transfer in Q* is incalculable
Graphically: Condition (i) D^ and S^ ? Q*^, P* may extension, accrue perpetual, or neighboringen (? P*??? ). Or, equivalently: Exertion through the accrueing stipulations on your own! 32 ECON *120: Principles of Microeconomics I. FOUNDATIONS OF ECONOMICS Exception I. E Learning Objectives: • Expound and peculiarate absorbr residue and profitr residue • Expound and peculiarate all blessing and all absorb • Expound and peculiarate the command of a parliamentetitive remodel makeweight for a unmixed secret cheerful-natured-natured • Expound and peculiarate the proceeds of worth controls, taxes and subsidies and the consequenceing deadweight missinges E.
Applications 1. Consumer and Object Residue Recall: The Ultimate Benefit, MB (Marginal Cost, MC) of a cheerful-natured-natured Q is the extension in all blessing, TB (cost, TC) consequenceing from a ace extension in Q; i. e. , MB = ? TB/? Q (MC = ? TC/? Q). Claim: Beobject the consummation worth a absorbr is concludeing and talented to pay for an afunroving ace of a cheerful-natured-natured is unroving upon the absorbr’s MB from consuming that afunroving ace, the claim incurvation peculiarates the ultimate blessing superficial from the neighboringening of the cheerful-natured.
Likewise, beobject the poverty worth a profitr is concludeing and talented to sanction for an afunroving ace of a cheerful-natured-natured is unroving upon the profitr’s MC from surrendering that afunroving ace, the provide incurvation peculiarates the ultimate absorb incurred from the contriveation of the cheerful-natured. Thus, the claim (supply) incurvation can be used to gauge a absorbr's (producer’s) “economic cheerful-natured-fortune” at a ardent divide. CS (PS) is used to gauge the transfer in absorbr (producer) cheerful-natured-fortune consequenceing from a transfer in the worth and divide and of a cheerful-natured-natured absorbd by absorbrs (done by profitrs).
DEF: Consumer Surplus, CS, is the unlikeness among the worth that a absorbr is concludeing and talented to pay and the worth the absorbr must really pay in the remodel. 33 Remark: CS at a divide Q1 is the unlikeness among the all blessing of the absorbr at Q1 (represented by the area underneathneath the claim incurvation among 0 and Q1 or the area of 0abQ1) and absorbr all expenditures at Q1 (= P1? Q1 or the area of 0cbQ1). Thus, CS at Q1 peculiarates the net blessings of absorbrs and is peculiarated by the area among the claim incurvation and the remodel worth verse.
DEF: Object Surplus, PS, is the unlikeness among the worth that a profitr is concludeing and talented to sanction and the worth the profitr really takes for that cheerful-natured-natured in the remodel. Remark: PS of a ardent divide Q1 is the unlikeness among the all wealth of the profitr at Q1 ( = P1? Q1 or the area of 0cbQ1) and the all absorb at Q1 (represented by the area underneathneath the provide incurvation among 0 and Q1 or the area of 0dbQ1). Thus, PS at Q1 peculiarates the net blessings of profitrs at Q1 and is peculiarated by the area among the provide incurvation and the remodel worth verse.
Remark: For absorbrs, a worth extension (decrease) secondarys (raises) absorbr residue CS. The los (gain) of CS gauges the neighboringen (increase) in absorbr economic cheerful-natured-fortune. For prioducers, a worth extension (decrease) raises (lowers) profitrs residue PS. The bring-about (loss) of PS gauges the extension neighboringen) in profitr economic cheerful-natured-fortune. 34 Recall: The All Benefit, TB (Total Cost, TC) at a ardent divide Q1 is peculiarateed by the area underneathneath the MB (MC) incurvation among 0 and the divide Q1. In the graph underneathneath, TB at Q1 = area abQ10 and TC at Q1 = area deQ10. Similarly, TB at Q2 = area acQ20 and TC at Q2 = area dfQ20.
Remark: The transfer in TB objectd by a transfer in Q is ardent by the area underneathneath the MB incurvation for that transfer in Q. For children, ardent an extension in Q from Q1 to Q2, the extension in TB = ? TB = area bcQ2Q1. Likewise, ardent an extension in Q from Q1 to Q2, the extension in TC = ? TC = area efQ2Q1. Remark: At a ardent divide, Q1, the economic bring-about to absorbrs and profitrs at the remodel makeweight is peculiarateed by the All Residue or Net (Social) Blessing = net blessing of absorbrs + net blessing of profitrs = CS(Q1) + PS(Q1) = TB(Q1) – TC(Q1) = area abd in the graph underneathneath. 35 2.
Market Makeweight and Command in the “Private Good” MB/MC Copy DEF: A cheerful-natured-natured is a unmixed secret cheerful-natured-natured if there are no outer blessings or absorbs from the neighboringening or contriveation of that cheerful-natured-natured and so Dmkt = MB = ? iMBi and Smkt = MC = ? jMCj. DEF: In a remodel, the divide Q* is prolific if the consummation worth absorbrs are concludeing and talented to pay per ace for Q*, which peculiarates the ultimate blessing to absorbrs or “consumers worth” equals the poverty worth profitrs are concludeing and talented to sanction per ace for Q*, which peculiarates the ultimate (opportunity) absorb to profitrs or “producers worth”.
That is, the divide Q* is (socially or economically) prolific if MB = MC at Q*. Claim: (The First Essential Theorem of Good-fortune Economics) In a remodel for a unmixed secret cheerful-natured, the remodel makeweight divide is prolific, affordd that infallible technical stipulations are satisfied; i. e. , at the remodel makeweight Q* and P*, P* = MB(Q*) = MC(Q*). Remark: In other control, net political blessing is maximized at Q*. In adduction, if at a divide Q0, MB ) MC, then Q0 is inprolific and a deadweight missing, DWL, (also apprehend as a “good-fortune absorb” or “missing in command”) is imposed upon parliamentany.
The DWL at Q1 (Q2) is peculiarateed underneathneath by the area bce (cgh). Remark: The divide Q1 is inprolific beobject MB(Q1) > MC(Q1); similarly, the divide Q2 is inprolific beobject MB(Q2) < MC(Q2). At Q1 (Q2), parliamentany can be made rectify off by surrendering one further (less) ace of Q. Increasing Q from Q1 to Q* extensions political cheerful-natured-fortune by the aggregate DWL at Q1 = area bce = ? TB – ? TC = area beQ*Q1 – area ecQ*Q1. Alternatively, decreasing Q from Q2 to Q* extensions cheerful-natured-fortune by DWL at Q2 = area cgh = ? TB – ? TC = area Q*chQ1 – area Q*cgQ1. 3.
Price Controls DEF: A worth ceiling is a consummation constitutional worth that a profitr/seller may accuse for a cheerful-natured-natured or service; a worth ceiling, Pc, is movablesive solely if it is underneathneath the remodel makeweight worth (Pc < P*mkt). A worth bottom is a poverty worth, unroving and “supported” by the empire, that a profitr/seller can take for a cheerful-natured-natured or service; a worth bottom, Pf, is movablesive solely if Pf > P*mkt. 36 Claim: At a worth bottom Pf, the divide granted in the remodel, Qsmkt, is inprolific and the cheerful-natured-natured is “overproduced” (i. e. , Qsmkt > Q*mkt) beobject t Qsmkt, the consummation worth absorbrs are concludeing and talented to pay per ace for Qsmkt is neighboring than the poverty worth profitrs are concludeing and talented to sanction per ace for Qsmkt. That is, at Qsmkt, MB < MC and so Qsmkt is fragile. Graphically: (iii) At a worth ceiling, Pc, the divide granted in the remodel, Qsmkt, is inprolific and the cheerful-natured-natured is “under-produced” (i. e. , Qsmkt < Q*mkt) beobject at Qsmkt, the consummation worth absorbrs are concludeing and talented to pay per ace for Qsmkt is heedoperative than the poverty worth profitrs are concludeing and talented to sanction per ace for Qsmkt.
That is, MB > MC and so Qsmkt is fragile. Graphically: 37 4. Taxes and Subsidies: Who Pays and Who Benefits? DEF: Consumers worth vs. profitrs worth. Claim: An extinguish tax (subsidy) drives a “wedge” among the absorbrs’ worth and the profitrs’ worth and imposes a deadweight missing (good-fortune absorb or missing in command) upon parliamentany beobject the missinges in CS and PS excel the tax wealths. Graphically: Extinguish tax on neighboringening. Remark: The succeeding-tax makeweight divide, Qtax, is inprolific beobject MB > MC at Qtax, and so a deadweight missing is imposed upon parliamentany, peculiarateed by DWL(Qtax) = area abc.
The tax wealth is not an economic missing for parliamentany in unconcealed but does depute a reclassification of economic cheerful-natured-fortune from absorbrs and profitrs of the cheerful-natured-natured to parliamentany in unconcealed. The DWL is the unlikeness among the sum of the missing in absorbrs residue, area P*dab, and the missing of profitrs residue, area eP*bc and the tax wealth generated by the extinguish tax, area edac, i. e. , DWL(Qtax) = ? CS + ? PS – Tax Wealth = area P*dab + area eP*bc – area edac = area abc Graphically: Extinguish tax on contriveation. 38 ECON 120: Principles of Microeconomics Spring 2010 II. MICROECONOMIC MODELS AND DECISION-MAKING Exception II. A
Learning Objectives: • Expound and calcutardy the worth buoyantity of claim • Expound and peculiarate buoyant, sturdy, ace buoyant, parliamentletely buoyant, and parliamentletely inbuoyant claim and identical claim incurvations • Expound the determinants of buoyantity • Expound and peculiarate the proceeds on all wealth of profitrs or all expenditures of absorbrs of a transfer in worth ardent buoyant, ace buoyant, and inbuoyant claim • Expound and calcutardy other buoyantities of claim (allowance and peevish worth buoyantities) • Expound and calcutardy the worth buoyantity of provide and its basic determinant • Expound and peculiarate how the buoyantity of claim and provide favor absorbrs and profitrs worths ardent an extinguish tax on contriveation A. Elasticity of Claim and Provide 1. Elasticity of Claim a) The Concept of Elasticity and Elastic/Inbuoyant Claim Curves DEF: The (own) worth buoyantity of claim, Ed, is a numerical gauge of the sensitivity or responsiveness of the divide claimed to transfers in worth, ceteris paribus, and is apportiond as Ed = ? %? Qd/%? P?. Examples: Deem that the divide claimed of gas, Qgas, neighboringens by 10% when the worth of gas, Pgas, extensions by 20%. Then Ed = ? –10%/20%? = 0. 5.
If the Qd of Mountain Dew neighboringens by 50% when the worth of Mountain Dew extensions by 20%, then Ed = ? –50%/20%? = 2. 5. Remark: %? Qd = – Ed? %? P. Example: If Ed = 2 and worth extensions by 8%, %? P = +8%, then %? Q = –2? (8%) = –16%. If Ed = 0. 4 and worth neighboringens by 25%, %? P = –25%, then %? Q = –0. 4? (–25%) = +10%. Alternatively, if a resolute lacks to extension its sales by 30% and Ed = 1. 5, then it should neighboringen worth by 20% beobject %? P = %? Q/ –Ed = 30%/ –1. 5 = –20%. DEF: Midsharp-end buoyantity contriveula: Ardent two sharp-ends on a claim incurvation, (Q1,P1) and (Q2,P2), the (own) worth buoyantity of claim at the midsharp-end among these two sharp-ends is apportiond by Ed = ? %? Qd/%? P? = ? (Q1 – Q2)/(Q1 + Q2)]/[(P1 – P2)/(P1 + P2)] ?. 39 Example: Let pt A = (Q1,P1) = (8,16); pt. B = (Q2,P2) = (12,14); pt. C = (Q3,P3) = (28,6); pt. D = (Q4,P4) = (32,4). The midsharp-end worth buoyantity of claim among pts A & B: Ed = ? [(8 – 12)/(8 + 12)]/[(16 – 14)/(16 + 14)]? = (4/20)/(2/30) = 3. pts B & C: Ed = ? [(12 – 28)/(12 + 28)]/[(14 – 6)/(14 + 6)]? = (16/40)/(8/20) = 1. pts C & D: Ed = ? [(28 – 32)/(28 + 32)]/[(6 – 4)/(6 + 4)]? = (4/60)/(2/10) = 1/3. Remark: A direct claim incurvation has a unanalogous buoyantity coefficient, Ed, at each sharp-end on the claim incurvation, Ed ranges from Ed = 0 at the tame seize to Ed = ? at the upfit seize.
DEF: Claim is said to be: buoyant if Ed > 1 or ? %? Qd? > ? %? P? , ace buoyant if Ed = 1 or ? %? Qd? = ? %? P? , inbuoyant if Ed < 1 or ? %? Qd? < ? %? P? , parliamentletely buoyant if Ed = ? and parliamentletely inbuoyant if Ed = 0. Remarks: (i) Completely buoyant claim is peculiarateed by a claim incurvation that is tame at the remodel worth. A parliamentletely buoyant claim incurvation implies that, at the remodel worth, absorbrs conclude buy whatever divide profitrs are concludeing and talented to profit. (ii) Completely inbuoyant claim is peculiarateed by a claim incurvation that is upfit at the remodel divide and implies that absorbrs conclude pay whatever worth profitrs lack for the remodel divide. iii) Buoyant claim can be peculiarateed by a claim incurvation that is not-absolutely vapid, such as D3. The bulk of the claim incurvation D3 that shows in the graph is the buoyant concern of the claim incurvation beobject the midsharp-end of the claim incurvation, where Ed = 1, is neighboring the “lower-end” of D3. 40 (iv) Likewise, inbuoyant claim can be peculiarateed by a claim incurvation that is not-absolutely precipitous, such as D2. The bulk of the claim incurvation D2 that shows is the inbuoyant concern of the claim incurvation beobject the midsharp-end of the claim incurvation, where Ed = 1, is neighboring the “upper-end” of D2. b) Determinants of Elasticity Claim: The claim for cheerful-natured-natured X is further buoyant (inelastic) (i) the heedoperative (fewer) the sum of substitutes there are for cheerful-natured-natured X.
Remark: In unconcealed, Edcaterory < Edbrand. For children, beobject very few substitutes for gas pause but multifarious substitutes for Mobil gas pause (such as BP, Citgo, Phillips, Shell, etc. ), Edgas < EdMobil gas. Likewise, Edsoda < EdMountain Dew. (ii) the further (less) an ace absorbs as a divide or concern of a absorbr's budget, Example: Beobject novice expenditures on discipline or fissure as a percentage are deemtalented heedoperative than their expenditures on toothpicks or salt as a percentage of their allowance, Edcollege ; Edsalt. (iii) the neighboring of a requirement and the further of a softness (the further of a requirement and the neighboring of a softness) cheerful-natured-natured X is; for children, Edprop ; Eddiamond jewelry. iv) the hankerer (shorter) the discloseding intermission deemed, which allows for transfers in preferences or the emergence of further substitutes; i. e. Eddefective run ; Edhanker run. c) Elasticity and All Expenditures (Total Revenue) Remarks: All Wealth of profitrs = TR = P? Q = TE = All Expenditures of absorbrs. Beobject TR = TE = P? Q, all wealth or all expenditures can be peculiarateed graphically by the area of a rectangle of width Q and elevation P. 41 Claim: Ahanker the (i) buoyant concern of the claim incurvation, Ed ; 1 or ? %? Qd? ; ? %? P? : Pv(^) ? TE^(v). (ii) ace buoyant sharp-end of the claim incurvation, Ed = 1 or ? %? Qd? = ? %? P? : Pv(^) ? ?TE = 0. iii) inbuoyant concern of the claim incurvation, Ed ; 1 or ? %? Qd? ; ? %? P? : Pv(^) ? TEv(^). Remark: In the graphs underneathneath, deem a ardent transfer in worth, ? P (= P1 – P2 = P3 – P4), and transfer in divide claimed, ? Q (= Q1 – Q2 = Q3 – Q4). Ahanker the buoyant exception of the claim incurvation (left graph), the neighboringen in worth, ? P, from P1 to P2, and the extension in the divide claimed, ? Q, from Q1 to Q2, extensions all expenditures of absorbrs (or all wealth of profitrs); i. e. , TE1 = P1·Q1 ; P2·Q2 = TE2 beobject the extension in expenditures from a heedoperative divide is heedoperative than the neighboringen in expenditures from a secondary worth.
Alternatively, ahanker the inbuoyant exception of the claim incurvation (fit graph), the selfselfidentical neighboringen in worth, ? P (from P3 to P4), and extension in divide claimed, ? Q (from Q3 to Q4), neighboringens all expenditures of absorbrs (or all wealth of profitrs); i. e. , TE3 = P3·Q3 ; P4·Q4 = TE4 beobject the extension in expenditures from a heedoperative divide is neighboring than the neighboringen in expenditures from a secondary worth. 42 Claim: TR is at a consummation at the divide at which Ed = 1. d) Other Elasticities of Claim (i) Allowance buoyantity of claim, EI, is a numerical gauge of the responsiveness or sensitivity of the divide claimed to transfers in allowance, ceteris paribus. If EI ;(( %? P), then provide is buoyant, 1 ; Es ; ?. f contriveation absorbs do NOT extensions as output extensions, then provide is parliamentletely buoyant, Es = ?. • 44 P parliamentletely inbuoyant : ES = 0 S1 S2 sturdy: 0 ; E S ; 1 S3 buoyant: 1 ; E S ?P S4 parliamentletely buoyant : E S = ? ?Q 2 ? Q 3 0 Q0 Q • Ardent S2, a transfer in worth of ? P yields a not-absolutely mean transfer in the divide granted (i. e. , %? P ; 0 ? %? Qs ; 0 but %? P ; %? Qs) and so 0 ; ES = %? Qs/%? P ; 1. For children, if provide is sturdy, then a 5% extension in worth consequences in a neighboring than 5% (may-be 3%) extension in Qs. Ardent S3, a transfer in worth of ? P yields a not-absolutely parliamentrehensive transfer in the divide granted (i. e. , %? P ; 0 ? %? Qs ; 0 but %? P ; %? Qs) and so 1 ; ES = %? Qs/%? P.
For children, if provide is buoyant, then a 5% extension in worth consequences in a further than 5% (may-be 8%) extension in Qs. Ardent S4, a transfer in worth of ? P yields an “infinite” vindication from profitrs. Producers are concludeing to profit and dispose-of whatever divide absorbrs are concludeing and talented to buy at the remodel worth (i. e. , %? P ; 0 ? %? Qs = ? and so ES = %? Qs/%? P = ? ). • • 3. Elasticity and Taxes Claim: Ardent an extinguish tax on either neighboringening or contriveation, if the buoyantity of claim is heedoperative (less) than the buoyantity of provide, then the concern of the tax remunerated by absorbrs is neighboring (greater) than the concern of