Robert Ackerman Office Hours: 2:00-3:00PM T/Th Office: PA202 (Phillips Hall Annex) Economics 101

Transcription

1 Robert Ackerman Office Hours: 2:00-3:00PM T/Th Office: PA202 (Phillips Hall Annex) Economics 101

2 Economics 101

3 Today Questions/issues? Frequently missed Aplia Q s Week 2 topics Week 3 topics Economics 101

4 Aplia Questions Overall people are doing really well, especially with the recent material Two commonly missed problems from Week 1, Class 2 HW

5 Week 1, Class 2 #11 Economics 101

6 Electric Cars Production Possibilities Frontier U.S. PPF Smart phones

7 Production Possibilities Frontier: A graph that indicates the maximum amount of one good that can be produced for every possible level of production of the other good Does a shift in the unemployment rate, change the possible combinations of goods we could make if we employed all of our available resources?

8 Week 1, Class 2 #15 What is the decision we are being asked to analyze?

9 Opportunity cost Definition: the value of the next best alternative that the decision forces the decision-maker to forgo. Economics 101

10 Week 1, Class 2 #15 Start a Business Get a Job Pay workers -$100 Income 8x$10 Buy machines -$100 Profits +$240 Total +$40 Total +$80 Opportunity cost: Total costs: Profits-costs:

11 Week 1, Class 2 #15 Start a Business Get a Job Pay workers -$100 Income 8x$10 Buy machines -$100 Profits +$240 Total +$40 Total +$80 Opportunity cost: -$80 Total cost: -$280 Profits-costs: $240-$100-$100-$80=-$40

12 Week 1, Class 2 #15 Go to college Get a Job Pay tuition -$100 Income 8x$10 Buy books -$100 Total -$200 Total +$80 Opportunity cost: Total cost:

13 Week 1, Class 2 #15 Go to college Get a Job Pay tuition -$100 Income 8x$10 Buy books -$100 Total -$200 Total +$80 Opportunity cost: -$80 Total cost: -$280 What is missing? Why go to college?

14 Week 1, Class 2 #15 Go to college Get a Job Pay tuition -$100 Income 8x$10 Buy books -$100 Get a better job +$300 Total $100 Total +$80 Benefit-cost: $300-$100-$100-$80=$20

15 Week 2 topics Principle of Increasing Cost Division of Labor Specialization Demand/Supply Curves Equilibrium Anything particularly troubling?

16 Week 2 topics Demand/Supply Curves Equilibrium Economics 101

17 Pizza example Price Demand Supply

18 George s Demand Curve Price Quantity

19 Price George s Demand Curve Quantity

20 George and Maria s Demand Curves Price Quantity

21 Aggregate Market Supply & Demand Price Supply p* Demand q* Quantity

22 Price p Consumer Surplus ½(B*H)=1/2(5*5)=12.5 Demand Quantity

23 Consumer Surplus Price ( )= Quantity

24 Week 3 topics Price floors/ceilings Consumer Choice Law of Demand Utility Budget Set Optimal Purchase rule Marginal Utility Indifference Curves Consumer surplus Economics 101

25 Consumer choice example from class George has $50 He can only spend his money on two things pizza ($5) and coffee ($2) He can afford many different combinations but they give him different utility

26 George pizza/coffee table Economics 101 Pizza Total utility MU MU per $ Coffee Total utility MU MU per $

27 Budget Set: all of the possible combinations that a consumer can afford Economics 101

28 George pizza/coffee example Economics 101 P C

29 George pizza/coffee example Economics 101 P C

30 George s Budget Set Pizza Coffee

31 George s Budget Set Pizza Coffee

32 Utility: A measure of satisfaction associated with consuming a good or service. Economics 101

33 Marginal utility: Marginal utility is the additional utility associated with consuming an additional unit of a good or service Economics 101

34 Marginal utility per dollar spent Marginal utility price per unit Economics 101

35 Book vs. class on marginal utility Book: monetary utility Class: utility Book: marginal monetary utility Class: marginal utility per dollar spent Book: Forcing a one to one ratio between a unit of utility and price Class: A more general form of this specific assumption the book makes

36 Calculating total combined utility Pizza Coffee Total combined utility

37 Pizza Coffee Total combined utility Economics 101 Calculating total combined utility

38 George s Budget Set Pizza (445) (695) 7 6 (775) 5 4 (730) (605) (460) Coffee

39 Indifference curves it connects all combinations of the commodities that are equally desirable to the consumer. Another name: isoutility = same utility Why indifferent? Because you get the same utility.

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41 Indifference curve for 605 Utility Pizza Utility Coffee Utility Total < > < < < > < < Economics 101

42 Optimal Purchase Rule The consumer chooses the one combination of goods and services that gives the maximum utility from among the set of all affordable combinations Economics 101

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44 Optimal Purchase Rule One good: Book: Marginal Monetary Utility(MMU)=price Two goods: Class: Marginal Utility 1 /$spent=marginal Uitility 2 /$spent

45 Optimal Purchase Rule As long as the ratio (marginal utility per dollar spent) for good A is larger than for good B, you should expand consumption of good A and reduce consumption of good B. Start with 4 Pizza and 15 Coffee. What are the marginal-utility ratios? What do we do? Where do we stop?

46 Optimal Purchase Rule (for X.5 values of coffee just split the difference) Pizza MU/$ Coffee MU/$

47 Optimal Purchase Rule Pizza MU/$ Coffee MU/$

48 Optimal purchase rule & the Demand Curve Price Pizzas

49 Optimal purchase rule & the Demand Curve What if the price of pizza changes? George again solves his optimal purchase rule, and we get a new point on the demand curve. Demand curves come from optimal choices!

50 For next week Continue to send me any examples you find in the news Complete Aplia assignment for week Do the Preparing the Equilibrium Price and Quantity Experiment on Aplia.