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Econ 200, Autumn 2016 Lecture 3

10/06/2016

  • 1. Log in to Learning Catalytics (session id:15773423 )

  • 2. Comparative Advantage

  • 3. Market Structures

  • 4. Demand Curves

Administration

See Karen from Pearson after class today (in Sav 305) if you still have issues with MEL/LC

HW 1 grades should be in canvas by the end of class. Contact me if there is an issue.

I am working on giving everyone full credit for the lecture 1 LC exercise.

Don’t forget to go to section tomorrow!

Constructing a PPF

Layla the economist spends her time giving lectures and writing papers. In one hour she can either write 3 pages or give 1 lecture. She works 8 hours per day. Draw her PPF for lectures and pages written.

To make it easy to compare answers, be sure to put her output of lectures on the y -axis.

Lectures

8

Layla’s PPF
Layla’s PPF
  • 24 Pages written

Constructing a PPF

Ted is another economist. In one hour, he can either write 6 pages or give 1 lecture. H e also works 8 hours per day. Draw his PPF.

To make it easy to compare answers, be sure to put her output of lectures on the y -axis.

Lectures

8

Ted’s PPF
Ted’s PPF
  • 48 Pages written

Comparative Advantage

Who has the comparative advantage in giving lectures? In writing? (Hint: You need to calculate the opportunity cost of each activity for each actor.)

Economist Opportunity Cost of Giving Lectures Opportunity Cost of Writing Pages Layla 3 pages/lecture 1/3 lecture/page
Economist
Opportunity Cost of
Giving Lectures
Opportunity Cost of
Writing Pages
Layla
3 pages/lecture
1/3 lecture/page
Ted
6 pages/lecture
1/6 lecture/page

Test yourself – Calculate how many pages Layla would have to give up if she wanted to give two more lectures in a given day?

6

Considerations

-What goods and services are produced?

Firms/governments/individuals must decide this while considering the trade-offs and opportunity costs of their choices.

-How are goods and services produced? A firm might have several different methods for producing the same item.

-Who will receive the goods and services? By income? By a principle of equity?

Types of Economies

Centrally planned economies - Governments decide what to produce, how to produce it, and who received the goods and services.

Market economies – Households and firms make these decisions with prices and markets as the deciding force.

Market: A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade

Efficiency of Economies

Market economies promote:

Productive efficiency - Goods or services are produced at the lowest possible cost

Allocative efficiency - The marginal benefit of production is equal to its marginal cost

Production is consistent with consumer preferences

Caveats About Market Economies

Markets may not result in fully efficient outcomes. For example:

• Governments might interfere with market outcomes

• Market outcomes might ignore the desires of people who are not involved in transactions – ex: pollution

Plus, markets may result in high inequality; some people prefer more equity, i.e. fairer distribution of economic benefits.

The Circular-Flow Diagram

The Circular-Flow Diagram Circular-flow diagram : A model that illustrates how participants in markets are linked.

Circular-flow diagram: A model that illustrates how participants in markets are linked.

Households provide factors of production to firms.

Firms provide goods and services to households.

Firms pay money to households for the factors of production.

Households pay money to firms for the goods and services .

Refer to the graphs below. Each graph represents one country. Which country should specialize in the production of chips?

Refer to the graphs below. Each graph represents one country. Which country should specialize in the
  • a. Country A

  • b. Country B

  • c. Neither country. They both should produce some chips.

  • d. Both countries should specialize in the production of chips.

Refer to the graphs below. Each graph represents one country. Which country should specialize in the production of chips?

Refer to the graphs below. Each graph represents one country. Which country should specialize in the
  • a. Country A

What amount of chips can country A consume that will make both countries better off after specialization and trade? Fill in all of the blanks, but the answer you submit should be the value for X.

What amount of chips can country A consume that will make both countries better off after
 

Chips/day

Shirts/day

 

Consumption Without Trade

Country A

60

60

Country B

28

24

Total

88

84

 

Consumption With Specialization & Trade

Country A

X

?

Country B

38

34

Total

?

?

What amount of chips can country A consume that will make both countries better off?

What amount of chips can country A consume that will make both countries better off? Chips/day
 

Chips/day

Shirts/day

 

Consumption Without Trade

Country A

 
  • 60 60

Country B

  • 28 24

 

Total

 
  • 88 84

 

Consumption With Specialization & Trade

Country A

 
  • 82 74

Country B

 
  • 38 34

Total

120

108

Gains from Trade

32

24

Chapter 3: The Interaction of Demand and Supply

How do markets “decide” how much of a good or service to produce?

Can we generalize the notion of the trade-offs involved in every production decision?

Demand Schedules and Quantity Demanded

Demand schedule: A table that shows the relationship between the price of a product and the quantity of the product demanded.

Demand curve: A curve that shows the relationship between the price of a product and the quantity of the product demanded.

A demand schedule and a demand curve
A demand schedule and a
demand curve

Demand Curve and Market Demand

Quantity demanded: The amount of a good or service that a consumer (or market of consumers) is willing and able to purchase at a given price.

Market demand: the demand by all the consumers of a given good or service.

A demand schedule and a demand curve
A demand schedule and a
demand curve

Ceteris Paribus

When drawing the demand curve, we assume ceteris paribus – all variables except price and quantity are assumed to be held constant.

A demand schedule and a demand curve
A demand schedule and a
demand curve

The Law of Demand

Law of demand: Holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and vice versa.

Implication: Demand curve slopes downward

A demand schedule and a demand curve
A demand schedule and a
demand curve

What Explains the Law of Demand?

When the price of a product falls, two effects cause consumers to purchase more of it:

The product has become cheaper relative to other goods, so consumers substitute toward it. This is the substitution effect.

The consumer now has greater purchasing power, and elects to purchase more goods overall. This is income effect.

Substitution Effect + Income Effect = Total Change in Quantiy Demanded Due to a Price Change

Increase and Decrease in Demand

A change in something other than price:

Shift in demand

A shift to the right (D 1 to D 2 ) is an increase in demand.

A shift to the left (D 1 to D 3 ) is a decrease in demand.

Increase and Decrease in Demand A change in something other than price:  Shift in demand

Shifting the demand curve

Shifts of the Demand Curve

As the demand curve shifts, the quantity demanded changes at every possible price.

P 1 Q 2 Q 1 Q 3
P
1
Q 2
Q 1
Q 3

Shifting the demand curve

Change in Income of consumers

Normal good:

A good for which the demand increases as income rises, and decreases as income falls.

Inferior good:

A good for which the demand decreases as income rises, and increases as income falls.

Change in Income of consumers Normal good : A good for which the demand increases as

Effect of increase in income, if good is normal

Change in Income of consumers Normal good : A good for which the demand increases as

Effect of increase in income, if good is inferior

Change in the Price of Related Goods

Substitutes:

Goods and services that can be used for the same purpose.

Complements:

Goods and services that are used together.

Change in the Price of Related Goods Substitutes : Goods and services that can be used

Effect on demand for Big Macs, if price of Whopper increases

Change in the Price of Related Goods Substitutes : Goods and services that can be used

Effect on demand for Big Macs, if price of McDonald’s fries increases

Other sources: Change in tastes, change in demographics

Change in Demand vs. Change in Quantity Demanded

A change in the price of the product causes a movement along the demand curve.

This is a change in quantity demanded.

Any other change causes the entire demand curve to shift.

This is a change in demand.

Change in Demand vs. Change in Quantity Demanded A change in the price of the product

A change in demand versus a change in quantity demanded

What is achieved when a good or service is produced up to the point where the marginal benefit to consumers is equal to the marginal cost of producing it?

What is achieved when a good or service is produced up to the point where the marginal benefit to consumers is equal to the marginal cost of producing it?

Allocative Efficiency

Refer to the graph below. The dot represents a point on the individual’s yearly demand curve for rock concerts. Which of the following interpretations of the dot on this graph is correct?

Refer to the graph below. The dot represents a point on the individual’s yearly demand curve
  • a. The dot shows that this individual spends $125 on five rock concerts each year.

  • b. When one rock concert costs $125, this individual goes to five of them per year.

  • c. When five concerts cost a total of $125, this individual goes to up to five per year.

  • d. At $125, the quantity of concerts demanded equals the quantity supplied.

Refer to the graph below. The dot represents a point on the individual’s yearly demand curve for rock concerts. Which of the following interpretations of the dot on this graph is correct?

Refer to the graph below. The dot represents a point on the individual’s yearly demand curve
  • b. When one rock concert costs $125, this individual goes to five of them per year.

On the graph below, draw the direction of change for the demand curve for concert tickets when consumers' incomes rise, ceteris paribus. Assume that concert tickets are a normal good.

Price of Rock Concerts ($) D1
Price of Rock Concerts
($)
D1

Quantity of Rock Concerts

On the graph below, draw the direction of change for the demand curve for concert tickets when consumers' incomes rise, ceteris paribus. Assume that concert tickets are a normal good.

D2 Price of Rock Concerts ($) D1
D2
Price of Rock Concerts
($)
D1

Quantity of Rock Concerts