Robert Ackerman rkackerm@live.unc.edu Office Hours: 2:00-3:00PM T/Th Office: PA202 (Phillips Hall Annex) Economics 101
Economics 101
Today Questions/issues? Frequently missed Aplia Q s Week 2 topics Week 3 topics Economics 101
Aplia Questions Overall people are doing really well, especially with the recent material Two commonly missed problems from Week 1, Class 2 HW
Week 1, Class 2 #11 Economics 101
Electric Cars Production Possibilities Frontier 12 11 10 9 8 7 6 5 4 3 2 1 0 U.S. PPF 0 4 8 12 16 20 24 28 32 36 40 44 48 Smart phones
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?
Week 1, Class 2 #15 What is the decision we are being asked to analyze?
Opportunity cost Definition: the value of the next best alternative that the decision forces the decision-maker to forgo. Economics 101
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:
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
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:
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?
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
Week 2 topics Principle of Increasing Cost Division of Labor Specialization Demand/Supply Curves Equilibrium Anything particularly troubling?
Week 2 topics Demand/Supply Curves Equilibrium Economics 101
Pizza example Price Demand Supply 10 0 10 9 1 9 8 2 8 7 3 7 6 4 6 5 5 5 4 6 4 3 7 3 2 8 2 1 9 1
George s Demand Curve Price 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 Quantity
Price George s Demand Curve 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 Quantity
George and Maria s Demand Curves Price 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 Quantity
Aggregate Market Supply & Demand Price 10 9 8 7 6 Supply p* 5 4 3 2 1 0 Demand 0 100 200 300 400 500 600 700 800 900 1000 q* Quantity
Price p Consumer Surplus 10 9 8 7 6 5 4 3 2 1 0 ½(B*H)=1/2(5*5)=12.5 Demand 0 1 2 3 4 5 6 7 8 9 10 Quantity
Consumer Surplus Price 10 9 8 7 6 5 4 3 2 1 0 1(1+2+3+4)=10 0 1 2 3 4 5 6 7 8 9 10 Quantity
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
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
George pizza/coffee table Economics 101 Pizza Total utility MU MU per $ Coffee Total utility MU MU per $ 1 75 75 15 1 60 60 30 2 145 70 14 2 116 56 28 3 210 65 13 3 168 52 26 4 270 60 12 4 216 48 24 5 325 55 11 5 260 44 22 6 375 50 10 6 298 38 19 7 415 40 8 7 331 33 16.5 8 435 20 4 8 356 25 12.5 9 445 10 2 9 380 24 12 10 445 0 0 10 400 20 10 11 416 16 8 12 430 14 7 13 442 12 6 14 452 10 5 15 460 8 4 16 460 0 0
Budget Set: all of the possible combinations that a consumer can afford Economics 101
George pizza/coffee example Economics 101 P C 10 8 6 4 2 0
George pizza/coffee example Economics 101 P C 10 0 8 5 6 10 4 15 2 20 0 25
George s Budget Set Pizza 10 9 8 7 6 5 4 3 2 1 0 0 5 10 15 20 25 Coffee
George s Budget Set Pizza 10 9 8 7 6 5 4 3 2 1 0 0 5 10 15 20 25 Coffee
Utility: A measure of satisfaction associated with consuming a good or service. Economics 101
Marginal utility: Marginal utility is the additional utility associated with consuming an additional unit of a good or service Economics 101
Marginal utility per dollar spent Marginal utility price per unit Economics 101
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
Calculating total combined utility Pizza Coffee Total combined utility 10 0 8 5 6 10 4 15 2 20 0 25
Pizza Coffee Total combined utility 10 0 445 8 5 695 6 10 775 4 15 730 2 20 605 0 25 460 Economics 101 Calculating total combined utility
George s Budget Set Pizza 10 9 8 (445) (695) 7 6 (775) 5 4 (730) 3 2 1 0 (605) (460) 0 5 10 15 20 25 Coffee
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.
Indifference curve for 605 Utility Pizza Utility Coffee Utility Total 1 75 27.5 460 535 2 145 15-25 460 605 3 210 <10 395 605 4 270 >7 335 605 5 325 <6 280 605 6 375 <5 230 605 7 415 <4 190 605 8 435 >3 170 605 9 445 <3 160 605 10 445 <3 160 605 Economics 101
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
Optimal Purchase Rule One good: Book: Marginal Monetary Utility(MMU)=price Two goods: Class: Marginal Utility 1 /$spent=marginal Uitility 2 /$spent
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?
Optimal Purchase Rule (for X.5 values of coffee just split the difference) Pizza MU/$ Coffee MU/$ 4 15 5 12.5 6 10 7 7.5
Optimal Purchase Rule Pizza MU/$ Coffee MU/$ 4 12 15 4 5 11 12.5 6.5 6 10 10 10 7 8 7.5 14.5
Optimal purchase rule & the Demand Curve Price 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 Pizzas
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!
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.