Lecture 7 _Feb 9_

Lecture 7 _Feb 9_ - Economics 100A Lecture #7: Tuesday,...

Info iconThis preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon
Economics 100A Lecture #7: Tuesday, Feb. 9 Topics in Consumer Demand 1. Price indices 2. Market demand curves 3. Network effects 4. Labor supply
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Wine, Gallons per year 12.0 I*/4 = 5.5 0 58.9 26.7 30.6 Substitution effect Total effect Income effect Beer, Gallons per year I 2 I 1 L * L 2 L 1 e 2 e 1 e * Substitution & income effects: normal good p B = $12 p B = $4
Background image of page 2
Income and substitution effects Negative Positive inferior good Positive Positive normal good income effect substitution effect Reduction in price
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Inflation: general price increases Today’s prices (and hence today’s “cost of living”) differ from yesterday’s prices. Inflation harms lenders and pensioners, but helps others. How to decide if we are better/worse off?
Background image of page 4
Real vs. nominal prices Nominal price = “current dollars” price Real price = “constant dollar” price Do real prices go up/down? The Economist’s Big Mac Index (the BMI): compare cost of a Big Mac across years and across countries
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
BIG MAC PRICE INDEX, 2007 $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 Norway Iceland Switzerland Brazil Britain Canada Colombia Venezuela United States Peru Australia South Korea Poland Mexico Japan Taiwan Pakistan Russia Philippines South Africa Thailand Indonesia Malaysia Hong Kong China
Background image of page 6
Consumer Price Index (CPI) U.S. government attempts to measure general inflation by computing a cost-of-living index Tracks 364 goods and services (including housing, college tuition, taxi fares, women's wigs, hearing aids, and funeral expenses) Finds cost of an “average basket” of all the goods each year. Real price = nominal price times change in CPI CPI for 2000 168.7 price of a burger = 15¢ 94¢ CPI for 1955 26.8 
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 8
Cost-of-living adjustments (COLAs) Many long-term contracts adjust terms to reflect changes in the price level: General business contracts Rental agreements Alimony payments Salaries and pensions
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Price indexes for baskets Suppose only clothing ( C ) and food ( F ) Cost of 1 st year’s basket: Cost of 1 st year’s basket at 2 nd year prices : How much would income have to rise to buy 1 st year’s bundle in the 2 nd year? 11 1 CF Ip C p F 22 21 1 I pC p F 2 1 p F I C p F
Background image of page 10
C 1 C , Units of clothing per year e 1 F , Units of food per year I 1 / p 1 F I 1 / p 1 C F 1 I 2 / p 2 F I 2 / p 2 C BL 1 BL 2
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
The CPI bias When inflation is measured in this way, it’s assumed consumers buy the same basket of goods. Yet we believe consumers substitute away from (towards) relatively more expensive (cheaper) goods. We should ask: How much income needs to change so that consumer is as well off in 2 nd year as in 1 st year? I.e., keep consumer on original indifference curve Sounds like the definition of the substitution effect ! Ability to adjust the basket to new prices generates additional utility can do better than the original basket.
Background image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/18/2010 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at Berkeley.

Page1 / 46

Lecture 7 _Feb 9_ - Economics 100A Lecture #7: Tuesday,...

This preview shows document pages 1 - 13. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online