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http://web.utk.edu/~scho9/ Class presentation (10% of your grade) • A group (6-7 people) presentation: 11 groups starting 3/18 (Fri) for every Thursday at the end of the class • 10 min presentation about a group’s own example of economics in real world – Raise any question that is relevant to the ‘economics’ in real world – Attempt to answer the raised question based on your economic logic and understanding • Individuals in each group have 10 min to be creative – You are free to use anything you want to be creative – Individuals in each group will share the same grade (absolute group work) Possible question • Why do brides spend so much money – often thousands of dollars – on wedding dresses they will never wear again, while grooms often rent cheap tuxedos, even though they will have many future occasions that call for one? Suggested answer • The answer proposed is that because most brides wish to make a fashion statement on their wedding day, a rental company would have to carry a huge stock of distinctive gowns, many for each size. Each garment would thus be rented only infrequently– perhaps once every five years. This would force the company to charge a rental fee greater than the purchase price of the garment to cover its costs. As buying the same gown would be cheaper, no one would rent. In contrast, grooms are willing to settle for a standard style. Therefore, a rental company can serve the market with an inventory of only two or three tuxedos in each size. Each suit is rented several times a year and the rental fee is only a fraction of the purchase price. Three players of microecomics • Consumer – Maximize individual happiness (utility) • Producer – Maximize profit, minimize cost • Government – Maximize public happiness (utility) Three key trade-offs of microeconomcis • Which goods and services to produce • How to produce • Who gets the goods and services Who makes the decisions? • NBA players’ salaries (Kobe Bryant, $24.8M, ‘10-11 season) vs. computer disk ($0.5 or less) – Market economy • Current Biomass energy Industry in the US (Energy Independence and Security Act 2007) • Centrally planned economy – Ethanol: mandatory uses, as when it serves as a fuel additive or to meet state mandates • Is US economy market economy? – Mixed with planned Economic Model • A description of the relationship between two or more economic variables • Simplifications by assumption – Ceteris paribus • Testing theory – e.g., Having more income makes people happier. Cool model of economics • http://www.flixxy.com/200-countries200-years-4-minutes.htm Positive vs. Normative • Positive statement – A testable hypothesis about cause and effect – We can test, “Having more income makes people happier” • Normative statement – A conclusion as to whether something is good or bad – We can’t test, “People should be happier if they have more income.” Example: Use of microeconomic model in natural resource/environmental economics • Hypothesis: People pay a premium for water view on their house – Simplified relationship between water view and house price Chapter 2. Supply and Demand Demand Demand • Factors determining demand – Consumer’s taste (utility function) – Information – Prices of other goods – Income – Government rules and regulations – Other factors (mobile phone, Christmas tree…) Demand Curve A shift of demand curve Demand function • Q=D(p,pb,pc,Y) • Q=171-20p+20pb+3pc+2Y • Given pb=4, pc=3.3,Y=12.5, Q=286-20p P=14.3-0.05Q Summing Demand Curves Quiz #1 1) Why current biomass energy in the US is viewed as centrally planned economy? 2) Why Kobe Bryant is paid $24.8M this season and price of computer disk is a quarter or less? 3) What are the three players of microeconomics and their objectives? 4) The following is the demand curve for processed pork in Canada. Along the line of demand curve, the relationship of the two factors is expressed. What are the two factors? 5) By expressing the relationship of the two factors on the curve, we are implicitly assuming every other factor to be constant. What are the other factors? 6) What happens to the pork demand, if the price of pork increases from $3.30 to $4.30? Quiz #1 answer 1) Why current biomass energy in the US is viewed as centrally planned economy? Answer) Current biomass energy is operated by government mandatory requirement such as Energy Independence and Security Act of 2007. 2) Why NBA player, Kobe Bryant is paid millions of dollars and price of computer disk is a quarter or less? Answer) Both are highly demanded but supply is limited for Kobe Bryant. 3) What are the three players of microeconomics and their objectives? Answer) Consumer – Maximize happiness (utility) Producer – Maximize profit, minimize cost Government – Maximize public happiness (utility) 4) The following is the demand curve for processed pork in Canada. Along the line of demand curve, the relationship of the two factors is expressed. What are the two factors? Answer) Two factors: Price and quantity of pork, 5) By expressing the relationship of the two factors on the curve, we are implicitly assuming every other factor to be constant. What are the other factors? Answer) Other factors: Preference, information, income, price of other goods, government rules and regulations, season, culture.. 6) What happens to the pork demand, if the price of pork increases from $3.30 to $4.30? Answer) The demand will decrease from 220 to 200 (move along the demand curve).