Download Lecture 2 3-8-2011

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).