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Economics 349 Intermediate Micro Theory

Economics 349 Intermediate Micro Theory. Fall 2013 Dr. Delemeester. Syllabus Quiz. Course Essentials. Course web page www.marietta.edu/~delemeeg/econ349 Microeconomics (Worth, 1e) by Goolsbee , Levitt, and Syverson Grade Exams (65%) Homework (20%) Spreadsheet Projects ( 15%).

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Economics 349 Intermediate Micro Theory

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  1. Economics 349Intermediate Micro Theory Fall 2013 Dr. Delemeester

  2. Syllabus Quiz

  3. Course Essentials • Course web page • www.marietta.edu/~delemeeg/econ349 • Microeconomics (Worth, 1e) by Goolsbee, Levitt, and Syverson • Grade • Exams (65%) • Homework (20%) • Spreadsheet Projects (15%)

  4. Economic Roundtable • …to promote an interest in and to enlighten its members and others in the community on important governmental, economic, and social issues… • Business networking opportunity • Student memberships: $5 economicroundtable.org Amity Shlaes Author/Journalist Jim Meil Eaton Corp. Laurence Kotlikoff* Boston University Robert Tyler Pittsburgh Steelers Affordable Care Act Forum

  5. Rational Man Model • An individual seeks to maximize his or her utility. • For social optimality the rule is: This involves taking actions until the marginal private cost of further action equals the marginal private benefit of that action. Taking action until the marginal social cost of further action equals the marginal social benefit of that action

  6. Best Undergrad College Degrees by Salary Source: www.payscale.com

  7. Theories and Models • Economics is concerned with explanation of observed phenomena • Theories are used to explain observed phenomena in terms of a set of basic rules and assumptions: • The Theory of Consumer Behavior • The Theory of the Firm • The Theory of Markets

  8. Braille keypad on drive-up ATMs?

  9. Redcoats and phalanxes?

  10. Markets (aka the Price System) Price S1 • Allocation • Distribution • Coordination P1 D1 Quantity Q1

  11. Market Model Consider the demand for beer during the summer months. Let Qd = 30 – 5P + 0.01I – 2R Where Q is measured in thousands of 6-packs, P is the price per 6-pack in dollars, I is income, and R is the number of rainy days during the summer. Supply is given by Qs = -100 + 20P • Plot the supply and demand curves if I = $20,000 and R = 15. What is the equilibrium price and quantity? b) If I = $20,000 and R = 10, plot the new demand curve and find the new equilibrium. Compare this to the original equilibrium. Does the movement in P and Q make sense with the decline in the number of rainy days?

  12. Market Price • Market price – price prevailing in a competitive market • Some markets have one price: price of gold • Some markets have more than one price: price of Tide versus Wisk

  13. Real Versus Nominal Prices

  14. Real Price of College The real price of a college education rose 145.7% percent from 1970 to 2010

  15. S2010 (annual cost in 1970 dollars) $6,217 S1970 $2,530 D2010 D1970 Q (millions enrolled) 8.6 17.5 Market for a College Education P New equilibrium was reached at $6,217 and a quantity of 17.5 million students

  16. Price Elasticity of Demand • Measures the sensitivity of quantity demanded to price changes

  17. Price Elasticity of Demand • When |ED| > 1, the good is price elastic |%Q| > |%P| • When |ED| < 1, the good is price inelastic |%Q| < |% P|

  18. Income Elasticity of Demand • Measures how quantity demanded responds to a change in income

  19. Cross-Price Elasticity of Demand • Measures how quantity demanded responds to a change in the price of a related good

  20. Price Elasticity of Supply

  21. Elasticity: Application I • Supply: QS = 1800 + 240P • Demand: QD = 3550 – 266P • Solve for equilibrium P and Q.

  22. Elasticity: Application I QD = QS 1800 + 240P = 3550 – 266P 506P = 1750 P = $3.46 per bushel Q = 1800 + (240)(3.46) = 2630 million bushels

  23. Elasticity: Application I QD = 3550 – 266P QS = 1800 + 240P • We can find the elasticities of demand and supply at these points

  24. Elasticity: Application II • Given the following info on the market for copper: Q = 12 million metric tons per year P = $2 per pound ED = -0.5 ES = 1.5 • Solve for the linear Demand and Supply equations: QD= a – bP QS = c + dP

  25. Welfare Analysis

  26. Garden of Eden Choice: • Choice One • Choice Two • Choice Three • Choice Four • Choice Five

  27. Welfare Analysis • Normative Measures • Pareto Criterion • Efficiency Criterion: maximize SW = CS + PS

  28. Free Market Outcome: P*, Q* Maximizes social welfare: SW = CS + PS CS = Buyer Value - Price PS = Price – Seller Cost Price Supply CS Deadweight Loss P* PS Demand Q* quantity

  29. Applications • Price Ceilings • Price Floors • Taxes • Subsidies • Quotas

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