Download Economics 101 - Robert Ackerman

Economics 101
Robert Ackerman
•  [email protected]
•  Office Hours: 2:00-3:00PM T/Th
•  Office: PA202 (Phillips Hall Annex)
Economics 101
Economics 101
Today
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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
Economics 101
Week 1, Class 2 #11
Economics 101
Production Possibilities Frontier
Electric Cars
U.S. PPF
12
11
10
9
8
7
6
5
4
3
2
1
0
0
4
8
12
16
20 24 28 32
Smart phones
36
40
44
48
Economics 101
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?
Economics 101
Week 1, Class 2 #15
What is the decision we are being asked to
analyze?
Economics 101
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
Buy machines
Profits
Total
Income 8x$10
-$100
-$100
+$240
+$40
Opportunity cost:
Total costs:
Profits-costs:
Total
+$80
Economics 101
Week 1, Class 2 #15
Start a Business
Get a Job
Pay workers
Buy machines
Profits
Total
Income 8x$10
-$100
-$100
+$240
+$40
Total
+$80
Opportunity cost: -$80
Total cost: -$280
Profits-costs: $240-$100-$100-$80=-$40
Economics 101
Week 1, Class 2 #15
Go to college
Pay tuition
Buy books
Total
Get a Job
-$100
-$100
-$200
Opportunity cost:
Total cost:
Income 8x$10
Total
+$80
Economics 101
Week 1, Class 2 #15
Go to college
Pay tuition
Buy books
Total
Get a Job
-$100
-$100
-$200
Income 8x$10
Total
Opportunity cost: -$80
Total cost: -$280
What is missing? Why go to college?
+$80
Economics 101
Week 1, Class 2 #15
Go to college
Get a Job
Pay tuition
-$100
Buy books
-$100
Get a better job +$300
Total
$100
Income 8x$10
Total
Benefit-cost: $300-$100-$100-$80=$20
+$80
Economics 101
Week 2 topics
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Principle of Increasing Cost
Division of Labor
Specialization
Demand/Supply Curves
Equilibrium
Anything particularly troubling?
Economics 101
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
Economics 101
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
Economics 101
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
Economics 101
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
Economics 101
Aggregate Market Supply & Demand
Price 10
9
Supply
8
7
6
p*
5
4
3
2
1
Demand
0
0
100 200 300 400 500 600 700 800 900 1000
Quantity
q*
Economics 101
Consumer Surplus
Price 10
9
8
½(B*H)=1/2(5*5)=12.5
7
6
p 5
4
3
2
1
Demand
0
0
1
2
3
4
5
6
Quantity
7
8
9
10
Economics 101
Consumer Surplus
Price 10
9
1(1+2+3+4)=10
8
7
6
5
4
3
2
1
0
0
1
2
3
4
5
6
7
8
9 10
Quantity
Economics 101
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
Economics 101
George pizza/coffee table
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
Economics 101
Budget Set:
all of the possible combinations that a
consumer can afford
Economics 101
George pizza/coffee example
P
10
8
6
4
2
0
C
Economics 101
George pizza/coffee example
P
C
10 0
8
5
6
10
4
15
2
20
0
25
Economics 101
George’s Budget Set
Pizza
10
9
8
7
6
5
4
3
2
1
0
0
5
10
15
20
25
Coffee
Economics 101
George’s Budget Set
Pizza
10
9
8
7
6
5
4
3
2
1
0
0
5
10
15
20
25
Coffee
Economics 101
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
Economics 101
Calculating total combined utility
Pizza Coffee Total combined utility
10
0
8
5
6
10
4
15
2
20
0
25
Economics 101
Calculating total combined utility
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
George’s Budget Set
Pizza
(445)
10
9
(695)
8
7
(775)
6
5
(730)
4
3
(605)
2
1
(460)
0
0
5
10
15
20
25
Coffee
Economics 101
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.
Economics 101
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
Economics 101
Optimal Purchase Rule
One good:
Book:
Marginal Monetary Utility(MMU)=price
Two goods:
Class:
Marginal Utility1/$spent=Marginal Uitility2/$spent
Economics 101
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?
Economics 101
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
Economics 101
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
Economics 101
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
Economics 101
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!
Economics 101
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.