09.08.08 - ECONOMICS 1 Professor Kenneth Train 9/8/08...

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ECONOMICS 1 Professor Kenneth Train 9/8/08 Lecture 3 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ANNOUNCEMENTS The first problem set is due first section meeting in the week of September 15 th . LECTURE Today I want to use supply and demand to see how the government intervenes in markets. This will help us determine when it is advisable for government to intervene and when it is not. One method of intervention is a price control . Sometimes government comes in to prevent the price from rising above a certain level, as in the case of rent control. You can also keep the price from dropping below a certain level, as with agricultural subsidies. When for some reason we do not think the equilibrium is appropriate, how do we intervene? First we use policy. Second, taxes. Who ends up paying these taxes and what is their effect on the market? Many of these issues have to do with the shape of the demand and supply curves, and with how the situation plays out. DEMAND CURVE RESPONSIVENESS Steeper : Less Responsive Demand Curves The steepness of a demand curve tells you how people respond to a price-increase. Raise the price and you can see how two types (of steepness) represent different responses. A steep demand curve means that there is a very small response in demand (change in the amount demanded) to a change in price. Cigarettes are a good example of this, medicine because you need it to get well so you will pay what is necessary, and food. These are things you really have to have. If the price goes up you do without other things and keep buying these goods. Less Steep : More Responsive Demand Curves Substitutions The availability of alternatives to a product means that the same increase in price will make people buy less of that good. What is an example of this? Student : A banana. Right. I do not have to get a banana. I could buy an apple or orange instead. This points out a distinction within markets. There are classes of goods, like food, with steep demand curves. And then there are specific subsets within each class,
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ECONOMICS 1 ASUC Lecture Notes Online: Approved by the UC Board of Regents 9/8/08 D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. 2
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09.08.08 - ECONOMICS 1 Professor Kenneth Train 9/8/08...

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