Chap6 - Krugman and Wells Chapter 6 Steven J. Haider EC201...

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Krugman Krugman and Wells and Wells Chapter 6 Chapter 6 Steven J. Haider EC201 Spring 2010
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EC201-6-p2 Overview Overview Chaps. 3-5 have started to lay out how competitive markets work Chap 3: shifts in S or D will cause the equilibrium price and quantity to change in a market Chap 4: competitive markets are efficient Chap 5: price and quantity controls were analyzed This chapter: how much do prices and quantities change? Depends on the slopes of S and D Depends on how much S and D shift We measure these features with elasticities Note: I cover the same material in the chapter, but take a pretty different tack… Caution: if you are uncomfortable with math, this week may look daunting. Let us help you! It isn’t that bad.
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EC201-6-p3 Example 1: daily sandwich demand Example 1: daily sandwich demand At $5, you sell 250 for daily revenue of $1250 At $6, you sell 220 for daily revenue of $1320 Maybe no close substitutes nearby? At $5, you sell 250 for daily revenue of $1250 At $6, you sell 50 for daily revenue of $300 Maybe another sandwich shop nearby? You are a pastrami shop owner on Grand River. You’re thinking about raising your price from $5 to $6. Should you? Q P D 1 250 Q P D 2 250 5 6 220 50
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EC201-6-p4 Example 1: daily sandwich demand Example 1: daily sandwich demand At $5, you sell 250 for daily revenue of $1250 At $6, you sell 220 for daily revenue of $1320 Maybe no close substitutes nearby? At $5, you sell 250 for daily revenue of $1250 At $6, you sell 50 for daily revenue of $300 Maybe another sandwich shop nearby? You are a pastrami shop owner on Grand River. You’re thinking about raising your price from $5 to $6. Should you? Q P D 1 250 Q P D 2 250 5 6 220 50
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EC201-6-p5 Example 2: recession and groceries Example 2: recession and groceries Milk Quantity drops a little Recession causes income to decline and milk is a normal good Perhaps small shift in demand--milk is central to the diet of many Dove ice cream bars Quantity drops a lot Recession causes income to decline and Dove bars are a normal good Perhaps large shift in demand--pretty easy to do without If you are a grocer, it may be very useful to know buying patterns over business cycle. Q P D 1 Q P D 1 4 D 2 D 2
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Example 2: recession and groceries Example 2: recession and groceries Milk Quantity drops a little Recession causes income to decline and milk is a normal good Perhaps small shift in demand--milk is central to the diet of many Dove ice cream bars Quantity drops a lot Recession causes income to decline and Dove bars are a normal good Perhaps large shift in demand--pretty easy to do without If you are a grocer, it may be very useful to know buying patterns over business cycle. Q
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Chap6 - Krugman and Wells Chapter 6 Steven J. Haider EC201...

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