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Lecture+26+December+9

# Lecture+26+December+9 - Todays agenda Pick u p hand out...

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Today’s agenda Overview and review Review session and exam information Pi ck u p han d o u t

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1. The Problem of Economizing a. scarcity and choice b. opportunity cost c. comparative advantage: relation to opportunity cost; basis for gains from trade
2. Supply and demand a. methods of analysis i. geometric: intersection of S, D curves ii. algebraic: simultaneous solution of S, D equations b. comparative statics: effect on P, Q when S or D or c. Role of prices as signals to firms and consumers d. Price elasticity of demand i. methods of calculation: which one to use depends on the data at hand 1) point elasticity 2) elasticity by midpoint formula ii. relationship of price elasticity of demand to TR or total expenditure e. Other elasticities

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2. Supply and demand f. interventions in workings of price mechanism i. price ceilings and floors ii. black markets iii.excise tax incidence: legal incidence economic incidence; latter depends on elasticities of supply and demand
3. Consumer theory a. Point of consumer theory: tools for analyzing consumer demand behavior, in particular, why demand slopes down b. indifference curves c. budget lines: Income M = p A A + p B B; mechanics of plotting budget lines d. MRS AB = p A /p B : tangency condition describing optimal choice along budget line e. derivation of optimum bundle (or whole demand curve): solve simultaneously the two previous equations f. reasons for negative slope: income and substitution effects—verbally and geometrically g. Income-leisure choice, supply of labor, relevance of income and substitution effects here

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4. Producer theory a. Point of producer theory: tools for analyzing cost, supply, especially when and why supply slopes up or is horizontal b. production functions c. short run cost i. TP L , MP L , AP L (and average-marginal relationships) ii. TVC from TP L iii. STC iv. AVC, AFC, SATC v. SMC--upward slope result of diminishing returns assumption d. long run cost i. MP L /p L = MP K /p K
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