This preview shows page 1. Sign up to view the full content.
Unformatted text preview: Principles of Economics I
Economics 101 Section 400 Class 5 Announcements General access office hours: Mon Tues Wed Thur Fri 4:00 5:30 (Jiang, Lorch 116) 10:00 11:30 (Owen, Lorch 104) 10:30 12:00 (Chad, Lorch M109) 12:00 1:30 (Dan, Lorch 102) 10:00 11:30 (Brian, Lorch 102) 10:30 12:00 (Chad, Lorch M109) 9:00 10:30 (Shaun, Lorch 104) HW Assignment 3 Quiz this week Available on line Please spend some time on this prior to section
Class 5 2 1/26/2009 Readings Chapter 3 Chapter 4 Specifically p6779 Specifically p.101105 Next Class: Chapter 3, p7994 1/26/2009 Class 5 3 Supply Curve
($/unit) P2 MOC1 P1* Dollar value of MOC Q1*
1/26/2009 Class 5 Q1
4 What Determines the Shape of the Supply Curve? Shape of the PPF This dictates the shape of the MOC curve Depends upon Note: If the production possibility set is convex, the supply curve is upward sloping Technology Cost of and availability of factors of production Price of alternative products Enables us to generate a dollar value of the marginal opportunity cost (which is measured in units of alternative products) Reflects the fact that production decisions are truly a function of relative prices Class 5 5 1/26/2009 Supply is determined by Four significant factors:
1. 2. 3. 4. Price of the good Price of alternative products Technology Price or availability of factors of production When the price of the good changes, quantity supplied changes according to the "Law of Supply" Changes in the other factors will shift the supply curve
Class 5 6 1/26/2009 Q2 Technology Shock:
Productivity in the good 1 sector improves. MOC falls Supply curve shifts right (an increase in supply) Q1 P2.MOC' P1 ($) P2.MOC 1/26/2009 Q1 Class 5 7 Q2 Input Price Shock:
Fall in the price of an input used in producing good 1. MOC falls Supply curve shifts right (an increase in supply) Q1 P2.MOC' P1 ($) P2.MOC 1/26/2009 Q1 Class 5 8 Q2 Alternative Product Price Shock:
Fall in the price of an alternative product, good 2. MOC curve is unaffected Supply curve shifts right (an increase in supply) due to the reduction in the dollar value of the MOC P1 ($) Q1 P2.MOC P2'.MOC 1/26/2009 Q1 Class 5 9 Increasing Supply: Shifting the Supply Curve Right
Improvement in production technology Reduction in input prices or increased availability of an input Reduction in price of alternative product Q1
1/26/2009 Class 5 10 P1 Reducing Supply: Shifting the Supply Curve Left
P1 Deterioration in production technology Increase in input price or reduced availability of an input Increase in price of alternative product Q1
1/26/2009 Class 5 11 What about changes in the price of the good itself?
1/26/2009 Class 5 12 Warning Do not confuse: Increase in quantity supplied as a result of an increase in the price of the good Increase in supply as a result of an improvement in production technology (for example) Identified by a movement along the supply curve The supply curve shifts
Class 5 1/26/2009 13 Measuring Benefits to Producers Supply decisions: Allocate marginal productive resources to their most highly valued use Implicitly defines a measure of benefits for producer How much more valuable are the resources in one use than in the other? Measure the value of output in dollars Compare this to the dollar value of the opportunity cost
Read this from the supply curve Value of the marginal unit is simply the price Marginal unit of the good confers benefit equal to the difference between these two measures 1/26/2009 Class 5 14 Marginal Producer Surplus
P Supply Curve P*
Value of the marginal unit of output Surplus generated on the marginal unit Value of the marginal opportunity cost Q* Q*+1
1/26/2009 Class 5 Q
15 Producer Surplus
P Supply Curve P* Producer Surplus Q*
1/26/2009 Class 5 Q
16 Changes in Producer Surplus
P P1 P0 Increase in Producer Surplus Q0
1/26/2009 Class 5 Q1 Q
17 Demand Decisions Previous discussion focused on supply decisions Expressed these in the "Supply Curve" Graphical method of expressing dependence of quantity supplied upon (relative) price We wish to do the same with respect to demand decisions What variables influence the quantity of a good demanded?
Class 5 18 1/26/2009 Demand Decisions Supply decisions were made by referring to the opportunity cost of producing Demand decisions are made by referring to the opportunity cost of consumption What is the opportunity cost of consumption? The forgone consumption of other goods Consumer has limited resources (budget) The more of that budget that is allocated to consumption of good A, the less good B can be consumed 1/26/2009 Class 5 19 Consumer Valuation A consumer's value of a good is simply the greatest opportunity cost she would bear in order to consume the good i.e. How much consumption of "other goods" would she forgo to consume the good in question? In the market place, those "other goods" could be purchased for a dollar amount The value of a good can be expressed in a dollar amount by using market prices to evaluate the other goods the consumer would be prepared to forgo Class 5 20 1/26/2009 Consumer Valuation Your valuation of an item is The highest price you would ever pay to receive the good At a price higher than your valuation you would not buy the good At a price equal to your valuation, you must be indifferent between buying or not buying If you pay this price, you receive no net benefit from buying the good Marginal valuation Refers to the value of the marginal unit of a good
Class 5 21 1/26/2009 Consumer Valuation: An Example Imagine you were presented with the chance to buy a BLACK FOREST CAKE Three layers of rich chocolate cake Delicious whipped cream Tart cherry filling How much would you pay for such a cake? 1/26/2009 Class 5 22 mmmmmm... BLACK FOREST CAKE!!!!! 1/26/2009 Class 5 23 Chocolate Cake Auction Auctioning the black forest cake in class
Everybody stands up (when asked) Auctioneer calls out prices Price will increase Sit down when the price is too high for you Last person standing wins the cake Pays the last price quoted by the auctioneer 1/26/2009 Class 5 24 Chocolate Cake Auction All proceeds of the auction will go to Heifer International: http://www.heifer.org/ or First Step Project on Domestic Violence http://www.firststepmi.org/programs/advocacy.htm 1/26/2009 Class 5 25 ...
View Full Document