Econ Chapter 4

A normal good is defined as

A good that when the income rises we buy more because we can afford to. Example: When you get more money, you buy more shoes

(Continuing from the last flashcard) and at the current price of burger king, the quantity demanded of burger king shifts up so we see

A price rise in Mcdonalds causes the quantity demanded of Burger king to rise

Firms hope for as inelastic demand as possible...

Because then they get more of dat mula $$$

Another possible relation between goods is

Complements

IF QUANTITY DEMANDED CHANGES PROPORTIONALLY MORE THAN THE PRICE, (5% increase in price causes 8% decrease in quantity demanded)

Demand is responsive and Elastic

Anybody who says policy is simple...

Is either simple minded or thinks you are

How can policy affect the "price" of choices?

It can change with actually prices like taxes. Or it can change time prices like with HOV lanes.

Inelastic goods are

A Necessity, has no good substitutes, and little time to adjust, and also pretty inexpensive. Example: Insulin

Markets are like a spider web b.c..

A change in one affects everywhere. There is a complex web of connections

IF QUANTITY DEMANDED CHANGES PROPORTIONALLY LESS THAN THE PRICE, (5% increase in price causes 1% decrease in quantity demanded)

Demand is not responsive and is Inelastic

The equation for cross price elasticity, E is

E(1x2)=%(delta)Q2/%(delta)p1

For inferior goods E is <> 0

E1<0

Income elasticity equation

E1= %(delta)Q/%(delta)I

For normal goods E< or E> 0?

E1>0

What does E<1 and E>1 mean?

E<1 = Inelastic E>1 = Elastic

How the quantity demanded changes proportionally to price can be represented by the equation,

E= I %(delta)Qa/%(delta)Pa I E stands for own price elasticity or epsilon and the delta (its the triangle lookin things) means change in BUT IT'S THE ABSOLUTE VALUE

A demand curve with a lower slope is...

Elastic

An inferior good is one that we buy less as our income rises

Example: Cheap ramen noodles that broke college kids slurp up

More demanders mean more

Quantity demanded at any given price So entry demand shifts to the right (Example a ton of baby boomer are of the age to purchase an item so the demand shifts right)

More suppliers mean more

Quantity supplied at any given price so supply shifts to the right

Let's say for the burger things. If people are substituting BK for McD at any given price then people want more BK burgers. What happens to the demand curve?

So the demand curve shifts to the right.

If E>1, Q changes proportionally more than p

So this is elastic case

If E<1, Q changes proportionally less than p

So this is the inelastic case

Subsitutes

If one gets more expensive people will replace it with the other and if it gets less expensive people will buy it over the other.

How do you know when it's elastic?

If the quantity demanded changes proportionally more than the price, the demand is responsive or Elastic. (if the change in quantity demanded is higher than the change in price)

Elasticity Is very important for private policy

If you're going to make a pricing decision because it will either increase or reduce your total revenue

Another shift variable for product demand is

Income

I stands for

Income

In a perfectly competitive world, we assume:

Individual firms can't distinguish their products, competitors can't be kept away, and individual suppliers face a perfectly elastic demand line.

A demand curve with a very high slope is..

Inelastic

Less suppliers mean less quantity supplied at any given price so

Supply shifts to the left

Individuals maximize utility by...

balancing at the margin

Changes in the price of related goods...

shift demand lines

If taste gets weaker for an item

People will buy less at any given price and Demand shifts left

No children eat spinach

Negative Compliment Positive Substitute

T stands for

Tastes

Complements

Two goods that are consumed together. (Example: Marijuana and Papers or Burgers and French Fries)

This is why we call this price of a related good

A shift variable because the price of a substitute can shift a demand curve

How can a firm affect the own price elasticity of demand for its product?

By changing perceptions with respect to -necessity versus luxury -the quality of available substitutes -time frame

Decrease in the demand for french fries

Causes a increase in the demand for pizza

Lets use the burger king example again. The price of Mcdonalds goes up then the quantity demanded of burger king

Goes up

If n goods have different prices, then a balanced marginal utility over $ optimization would look like

MU1/p1=MU2/p2...=MUn/pn

Elastic goods are

More luxurious, good substitutes, have time to adjust, and price is high relative to income. Example: Jordans and Rolexes and McDonalds

A perfectly inelastic Demand curve is totally vertically straight which means...

No matter how the price changes quantity demanded stays exactly the same

One of the shift variables for product demand is the

Price of related goods

Elasticity examples in private and public policies

Private example: McDonalds changing prices Public example: Public transportation price changes

Product demand shift variables

Q1D=D (P1/pr, I, T)

Product demand shifts in the direction of tastes. So as taste gets stronger for an item

People will buy more at any given price and demand shifts to the right

E=0

Perfect Inelasticity (Pay at any price)

Responsiveness of Qd to a change in its own price "p"

Response to a given price change can vary significantly

Examples on this last slide in commercial advertising

Smell like a Man, Man. -Old Spice

The cross price elasticity can equal zero

So a change in the price of another good has no effect on the quantity demanded of another good Example: Gas and wool

So following the trend of hamburgers and fries cuz we love that shit, the demand of french fries shifts to the right as people have fries with their burgers and at the current price of french fries the quantity demanded of french fries goes up...

So we see a price in hamburgers fall caused by a quantity demanded of french fries rise which is confusing as hell

Why does elasticity matter

Suppose you're Mcdonalds ad want to increase revenue from hamburger sales, you would want to raise the price right? NOPE. Because them whoppers are elastic so demand would reduce by a lot. So on the other hand you might wanna reduce the price to increase demand.

The third shift variable for product demand is

Tastes

In the case of taxing inelastic goods...

Tax is paid almost entirely by the consumer

For the government to generate tax revenue

Tax revenue= Tax x quantity

And (Continuing from the last flashcard) as people substitute more Burger king for Mcdonalds cuz Mcdonalds sucks ass and is overhyped and overpriced

The Demand curve for burger king shifts to the right

In theory there is no such thing as unrelated markets so...

The cross price elasticity is actually very close to zero but can be treated as zero

If there is a decrease in the price of a whopper in response to the quantity demanded of the whopper going up, and If we assume that any reasonable person will "have fries and a pop with that" as a compliment...

The demand for fries and other complements shifts to the right increasing the Quantity demanded So in conclusion microeconomics is a huge reason for obesity

Cross Price Elasticity

The measure of the responsiveness of a good to a change in the price of a related good Example: If burger king raises the price of its hamburgers what happens to the quantity of hamburgers McDonalds sells?

As the demand for something shifts to the right

The quantity demanded goes up

Market quantity demand

The sum of the individual quantities demanded at a given price. Example If at 1 dollar price Quantity person A demands is 3 Quantity person b demands is 4 Then at the 1$ price The market demand is 7. (3+4)=7

In the case of elastic goods

The tax burden goes primarily to the supplier

If P1 goes up and quantity demanded of 2 goes down

Then the goods have a negative cross price elasticity and are complements

If the price of one thing goes up and the quantity demanded of the other goes up

Then the goods have a positive cross price elasticity and are substitutes examples are like coke and pepsi.

own price elasticity of demand

This is a measure of the responsiveness of the Quantity Demanded to a change in its own price

How does the Government use policies?

To Generate Revenue or to change behavior

Total Revenue Equation

Total Revenue= Price x Quantity

E=1

Unitary or Unit Elastic

If the quantity demanded changes proportionally less than the price...

We say that demand is not very responsive. So it is inelastic. (If the percent change in price is higher than the percent change in demand)

How do price and Qd work For complements?

When price of a goes up Qd of b goes down

Increase in the price of hamburgers causes

ceteris paribus

Less demanders mean

less quantity demanded at any given price So with exit demand shifts to the left (Example all the baby boomer die so demand on some goods shift to the left)

If the government wanted to discourage consumption it would...

tax elastic goods to cause a more significant drop in Qd even though less tax $ is raised.

P stands for

the price of related goods

If the government wanted to raise revenue,...

they would tax inelastic goods

There are different attitudes...

to different products