L11 - Economics 101:Principles of Microeconomics Professor...

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1 Economics 101:Principles of  Microeconomics Professor Jo Hertel Lecture 13: Finishing up consumer choice: foundations of demand Producer choice – Inputs and costs The production function. Cost curves – average and marginal, short-run and long-run. Technology and economies of scale.
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2 As the price of drinks increases, the consumer changes his consumption – he decreases the amount of soft drinks he consumes drinks sandwiches p S I q D q D ’’ q D Now we know how consumption of soft drinks changes as the price changes – we know the consumer’s demand for soft drinks!
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3 Price changes of related goods As the price of drinks increases, the consumer may increase or decrease his sandwich consumption – depending on whether he views them as substitutes (e S,D >0) or complements (e S,D <0) drinks sandwiches p S I q S q S ’’ q S
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4 Income and consumption:  Normal  goods Rooms in your house Restaurant Meals 40 8 I=$1200/mo 16 80 I=$2400/mo An increase in income leads to an increase in both the size of housing and the number of restaurant meals. We call both these goods normal goods since consumption goes up (down) when income goes up (down): e Y >0.
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5 Income and Consumption:  An  Inferior Good Quantity of Second-Hand Furniture Restaurant Meals 40 I=$1200/mo 80 I=$2400/mo An increase in income lead to a decrease in 2 nd hand furniture consumption. This is an example of an inferior good since consumption moves inversely with income: e Y <0 for 2 nd h.f.
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6 Prices and consumption: Giffen goods  (very rare!) 2 nd hand furniture Meals In this example, the price of 2 nd hand furniture increases, but the quantity demanded does as well. This is an example of a ‘Giffen good’. R 1 R 2 M 1 M 2
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7 Producer choice In this section, we look at where the supply curve comes from: technology input prices To see how much a seller in an industry will find it optimal to produce at any point in time. And: whether sellers want to enter or exit an industry in the long run. The long run is not quite the same as the short run as there are more choices in the long run.
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8 The short and the long run Think about the complete list of inputs for a producer (buildings, land, machinery, labor, materials, electricity, water, stationery. ..) the quantity of any input can be adjusted, but some take longer than others to adjust the amount of time needed to adjust all inputs is the long run (for that industry) any shorter time than that is the short run: fix any short run, then some inputs can be adjusted in
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L11 - Economics 101:Principles of Microeconomics Professor...

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