Contact Details ECON 1 Section 5 Demand: The Benefit Side of the Market. GSI: Ramon Estopina Office: Evans 508-5 Office Hours: Tuesday 1-3 PM Email: estopina@haas.berkeley.edu Handouts: Trough email. Anybody want to help? ECON 1 Section 5 Page 1 ECON 1 Section 5 Page 2 Section 4 Agenda Administrative stuff (aprox. 3 min). Review of Last Session & Lecture (5 min). Exercise 5-3 (10 min). Exercise 5-4 only parts a) & b). (5 min) Exercise 5-6 (10 min). Exercise 5-7 (10 min). Feedback from PS-1 (5 min). Re-cap (aprox 3 min, let s see). Administrative Stuff - reminder PS-1 due TODAY!!! Leave them on the table. Do you have name tags?. Please come on time!!! I can not make changes to sections. Students in waiting list will be notified by JAYA SIL (jsil@are.berkeley.edu) if accepted. ECON 1 Section 5 Page 3 ECON 1 Section 5 Page 4 Administrative Stuff - OH Review of Last Session - 9/9 th DO s I read the book and I didn t get the elasticity concept. Can we go over it? Can you explain me again what sunk costs are? I tried to do problem 5-4 from the book for practice, but I m still struggling with the concepts of substitutes. Can you help me? Bring pen, pencil & eraser. DO NOT s I do not have a clue what elasticity is. Can we go over it? On the due PS-1, is this a sunk cost? On the due PS-5, I say these are substitute markets, am I right? Bring pen, pencil & FORGET eraser. Problems in Supply & Demand Curve. Equilibrium. Disequilibrium. Movement and Shift of D & S curves. Exercises 4-2/4-4/4-3/4-13/4-14 ECON 1 Section 5 Page 5 ECON 1 Section 5 Page 6
Review of Last Lecture - 9/9 th Utility, Marginal Utility. Law of Diminishing Marginal Utility. Utility Maximization. Elasticity (Price elasticity of Demand, Income Elasticity, Cross-price Elasticity). Rational Spending Rule. Important to remember!! Utility: Satisfaction consumers derive from activities. Rational Spending Rule: Spending allocated across goods so MU per dollar (MU / P) is same for each good. Total Expenditure = P* = Total Revenue (TR). Price elasticity of demand: percentage change in quantity demanded divided by percentage change in price. P / = P P P ECON 1 Section 5 Page 7 ECON 1 Section 5 Page 8 Important to remember (2)!! Trick for elasticity: Elastic. Inelastic. Exercise 5 3 (F&B page 131) Martha s marginal utility form consuming orange juice = 75 utils/ounce. Martha s marginal utility form consuming coffee = 50 utils/ounce. Orange juice costs $0.25/ounce. Coffee costs $0.20/ounce. Is Martha maximizing her total utility from the two beverages?. ECON 1 Section 5 Page 9 ECON 1 Section 5 Page 10 Exercise 5 3 (cont d) Utility Maximization: allocation of time and income to maximize satisfaction. Marginal Utility: Additional utility gained from consuming one additional unit of a good. Rational Spending Rule: Ratio of marginal utility to price must be the same for each good the consumer buys. MUc MUs = Pc Ps Exercise 5 3 (cont d) What is the Utility Martha receives on her last $ spent on orange Juice? MUo 75 utils/ounce = = 300 utils/$ Po $0.25/ounce What is the Utility Martha receives on her last $ spent on orange Juice? MUc 50 utils/ounce = = 250 utils/$ Pc $0.20/ounce ECON 1 Section 5 Page 11 ECON 1 Section 5 Page 12
Exercise 5 3 (Conclusion) Since the two are not equal, she is not maximizing her utility. She should spend more on orange juice and less on coffee. Law of Diminishing Marginal Utility: when consumption of a good increases beyond some point, MU of each additional unit declines (Assumption based upon observation). ECON 1 Section 5 Page 13 Exercise 5 4 (F&B page 131) Packs of Bagels bought in Davis, each day at a variety of prices. Number of packs Price of Bagels purchased per day ($/pack) (000s) 6 0 5 3 4 6 3 9 2 12 1 15 0 18 ECON 1 Section 5 Page 14 Exercise 5 4 (cont d) A) Graph the daily demand curve for packs of bagels in Davis. P ($/pack) 7 6 5 4 3 2 1 0 0 2 4 6 8 10 12 14 16 18 20 (000s of packs/day) Exercise 5 4 (cont d) B) Derive an algebraic expression for the demand schedule. Where: Y = a + bx a = Vertical Intercept. P = 6 - b = Slope = Rise / Run. 3 ECON 1 Section 5 Page 15 ECON 1 Section 5 Page 16 Exercise 5-4 (continued) Now is your turn!!! Do rest of the parts (C to G) at home. We will review them next session. Why? Show how elasticity varies along D?. Practice problems?. Ensure you come next week?. Ensure you read the lecture notes?. Make me happier?. All of the above? And the winner is I LL TELL YOU NEXT WEEK!!! Exercise 5 6 (F&B page 132) Is the demand for a particular brand of car, like a Chevrolet, likely to be more or less price-elastic than the demand for all cars? Trick: Think in market for cars vs. market for Chevrolets. Price elasticity of demand: percentage change in quantity demanded divided by percentage change in price. P P / = P P ECON 1 Section 5 Page 17 ECON 1 Section 5 Page 18
Exercise 5-6 (cont d) From lecture: Also: GOOD PRICE ELAST. SUBSTs.? TR? Elastic >1 Yes if P Inelastic <1 Few if P Price elasticity of demand relatively high if substitutes are readily available. If share of budget is high (big ticket items), have higher price elasticity of demand Timeframe: Price elasticity is higher in long run than in short run, since substitutions can be made. ECON 1 Section 5 Page 19 So: Exercise 5-6 (Conclusion) The price elasticity of a good generally increases with the number of substitutes it has. It is easier to substitute a Ford or Toyota for a Chevrolet than it is to substitute a motorcycle or a skateboard for a car. Thus the market demand curve for cars is likely to be less elastic with respect to price than the market demand curve for Chevrolets. ECON 1 Section 5 Page 20 Exercise 5-6 (extra) Suggested by one of your classmates: Think about the market for gas (petrol, oil, whatever cars drink ). Is it likely to be elastic or inelastic? What about the demand for gas at the pump? How is the market of gasstations? Why the difference? What does it mean for the petrol companies? Exercise 5-7 (F&B page 132) Consider: senior executives, junior executives, students. Which is likely to have the most / least price-elastic demand for membership in the Association of Business Professionals? ECON 1 Section 5 Page 21 ECON 1 Section 5 Page 22 Exercise 5 7 (cont d) If share of budget is high (big ticket items), have higher price elasticity of demand But, the richer a person is, the smaller a given expenditure will be as a proportion of her overall budget, and hence the less likely she will be to respond dramatically to a price change. Thus, senior executives, (assuming they are the richest of the three), should have the least price-elastic demand curves. Students, the poorest, should have the most price-elastic demand curves. Feedback from PS-1 First: Did you all handout the PS-1? What do you think of the PS-1? Any uestions you want me to prepare for next week? ECON 1 Section 5 Page 23 ECON 1 Section 5 Page 24
Where to Get More Information Class Book: Chapter 5. Class Book: Chapter 6. Summary Terms: Utility. Marginal Utility. Law of Diminishing Marginal Utility. Utility Maximization. Elasticity. Rational Spending Rule Applied to: 4 problems. ECON 1 Section 5 Page 25 ECON 1 Section 5 Page 26 Next class Next Class: Section 6 Monday, Sept, 16 th. Finish problem 5-4. We ll go over problems 6-3 / 6-4 / 6-5. Give it a try during the weekend!!! Volunteers for the handouts distribution? Read ch. 6 & 7 before section. Thank you for coming on time!!! Enjoy the Weekend. ECON 1 Section 5 Page 27