Econ 3120 Fall 2016 Xi Wang

Transcription

1 Econ 3120 Fall 2016 Xi Wang Review opportunity cost Review optimizing behavior: private & (versus?) public interest Review optimizing behavior: in levels & at the margin Introduction to Demand, Supply, Equilibrium

2 Economics are all about Choice--All behavior are outcome of choices Why did you choose to take this class? Choices of whom? Economic agent, an individual or a group that is making decision. You can be an economic agent; A hedge fund can be too! Why do they need to choose? And How? Daddy, Why cannot I have all the candies? We always want more~~~~~candies!!!! unlimited wants v.s limited resource

3 Since Resources are scarce Since they are scarce, we need to allocate them in an efficient way? In what sense, are resources scarce? Allocation?Emm... Too Abstract. What are Economic Agents doing?(choose) Then How?

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5 Consider the following example your total benefits from consuming different quantities of gasoline each week can be expressed via this table. Suppose the price of gasoline is $4/gallon. What is the net benefit of consuming gasoline? What is the optimal level of gasoline consumption?

6 Gallons of gasoline per week Total Benefit ($) Net Benefit ($) Marginal Benefit ($/gallon)

7 Gallons of gasoline per week Total Cost ($) Total Benefit ($) Net Benefit ($) Marginal Benefit ($/gallon)

8 Same example your total benefits from consuming different quantities of gasoline each week can be expressed via this table (handout). Suppose the price of gasoline is $4/gallon. Can you show that 5 gallons (per week) is the optimal quantity via the principle of optimization at the margin?

9 Gallons of gasoline per week Total Benefit ($) Net Benefit ($) Marginal Benefit ($/gallon)

10 Gallons of gasoline per week Total Benefit ($) Net Benefit ($) Marginal Benefit ($/gallon) Marginal Cost ($/gallon)

11 Your friend Charles asks you to drive him to the airport. He says that he will reimburse you for the cost of going to the airport. It is a two-hour roundtrip to the airport, and you will use $15 of gas. If Charles pays for the cost of gas, has he paid your full cost of taking him to the airport?

12 Let's think deeper this time What do I mean choose Most of the time, in life, we only have single choice question!!!! Opportunity Cost: the best alternative use of a resource(and we can try to assign a monetary value to it whenever possible)

13 When you choose to drink Pepsi, you will not drink Coca at that moment!! It means what? When you choose something, it means you abandon something else.

14 For example, Your time You can spend your one hour and 15 mins in classroom and study, or spend them to work part time, or stay in classroom watching Youtube. You can only choose one

15 Another example, You have a used car. You can (1) sell it on Craglist for $ 1000 (2) give it to Jim as a gift (3) Do nothing! Keep it. You have to make a choice, am I right?--- if you choose (2) the cost of this decision would be $ Opportunity cost Single choice problem is another fundermental building block of Scarce Resource.

16 Think a about a senario: Uncle Azariadis gives you $2640 dollars as a gift. (Limited Amount!) How would you like to spend this budget? For example: Small latee($4 each, 60 cups), Macro text book($150), Iphone 6+($600), Cal v.s Worrior ticket($1050), Round fly to San. Fran($400), Hotel ($200)

17 Same example your total benefits from consuming different quantities of gasoline each week can be expressed via this table (handout). Suppose a tax of $2/gallon is imposed (where the sellers remit the tax). What is the optimal quantity of gasoline consumption per week?

18 Gallons of gasoline per week Total Benefit ($) Net Benefit ($) Marginal Benefit ($/unit)

19 Gallons of gasoline per week Total Cost ($) Total Benefit ($) Net Benefit ($) Marginal Benefit ($/unit) Marginal Cost ($/unit)

20 In equilibrium, everyone is simultaneously optimizing, so no one would benefit by changing his/her behavior. Results from Microeconomics: When a market is perfectly competitive, agents individual optimizing behaviors result in the equilibrium outcome being best from society s point of view

21 Apartment Commuting time Rent cost Very Close 5 H $ 1180 Close 10 H $ 1090 Far 15 H $ 1030 Very Far 20 H $ 1000

22 Hourly Wage(Opportunity cost): $10/H Apartment Commuting time Rent cost Commuting Cost Total Cost Very Close 5 H $ 1180 $ 50 $ 1230 Close 10 H $ 1090 $ 100 $ 1190 Far 15 H $ 1030 $ 150 $ 1180 Very Far 20 H $ 1000 $ 200 $ 1200

23 Apartment Commutin g cost Marginal Commutin g cost Rent cost Marginal Rent cost Total cost very close Marginal cost close far very far

24 Optimization, Choose the best feasible option We are all making our optimal decision We use data to test theories, insead of experiment. Too abstract, right?- Next Lecture

25 Economics is the study of how agents choose to allocate scarce resources and how those choices affect our society Positive: What are you doing; Help us to understand the world; Like Science! Normative: What shall we do? Oops! This would be a little subjective.

26 TextBook: Page 2-16 TextBook: Page 42-48, 50-52