Summary_Slides - Buyers in markets The most important...

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1 The most important concept of Micro 1 A socially optimal allocation of resources exists when: MB = MC Buyers in markets • Demand curve can also be interpreted as the willingness to pay curve. • It tells the highest price that people are willing to pay for a given quantity of a good. • The highest price someone is willing to pay is equal to the marginal benefit of the last unit consumed: P=MB Overhead Sellers in markets • The supply curve can be interpreted as a minimum supply price curve. • It tells you the minimum price firms are willing and able to accept for supplying a given quantity of the good. • The minimum price (or reservation price) a firm will accept is equal to the marginal cost of producing the last unit of output: P=MC Factors that cause the demand curve to shift to the right • A decrease in the price of a complement • An increase in the price of substitute • An increase in income for a normal good • A decrease in income for an inferior good • An increase in preferences by buyers (e.g. via advertising or marketing) • An increase in the population of potential buyers • An expectation of higher prices in the future Factors that cause the supply curve to shift to the right • A decrease in the price of inputs • An improvement in technology that reduces the costs of production • An increase in the number of sellers • ‘Good’ weather – for some goods • An expectation of lower prices in the future A graphical interpretation of price elasticity • For small changes in price, the price elasticity of demand is given by 1 slope D Δ QQ P Δ PP Q ε == Where Q is the original quantity and P is the original price.
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2 Price elasticity regions along a straight-line demand curve Quantity Price b/ 2 a/ 2 a b 1 > ε 1 < ε 1 = ε Observation Price elasticity varies at every point along a straight- line demand curve. Total expenditure as a function of price 1800 Price ($/ticket) Total expenditure ($/day) 26 8 1 0 1 2 1600 1000 0 4 12 Quantity (100s of tickets/day) Price ($/ticket) 13 4 5 6 10 8 6 4 2 0 2 Total expenditure is at a maximum at the midpoint on a straight-line demand curve. Equilibrium Conditions 12 1 1 2 2 11 2 2 or AND : M UM U M UP P PM U P PX PX M == += Total and marginal utility from pizza and videos 1.5 3 57 6 1 4 72 6 2 4 54 5 1 .5 6 68 5 3 6 50 4 2.25 9 62 4 5 10 44 3 3 12 53 3 7 14 34 2 4 16 41 2 10 20 20 1 6.25 25 25 1 0 0 0 0 Marginal utility per $ (P = $2) Marginal utility Total utility Units of videos Marginal utility per $ (P = $4) Marginal utility Total utility Units of pizza VIDEOS PIZZA Changes in Price and Income and the Demand Curve • A fall in price causes an increase in demand (downward sloping demand curve). • A fall in price causes the demand curve for a complement (substitute) to shift to the right (left) • An increase in income causes the demand curve for a normal (inferior) good to shift to the right (left) •O v e r h e a d Changes in Price and Income and the Budget Constraint • A change in income leads to a parallel shift of the budget constraint (since relative prices are unchanged).
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This note was uploaded on 08/29/2011 for the course ECON 1101 taught by Professor Janegoley during the Three '08 term at Australian National University.

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Summary_Slides - Buyers in markets The most important...

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