Economics 201, Witte, Thursday, September 29, 2005
We will have TA section Friday and Monday, and hopefully an easy quiz.
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Quiz:
Aplia part:
“Principles of Supply II” (due Monday, October 3, 9:PM), TA section part,
be ready to draw a PPF as well as supply and demand curves.
(We’re starting a little bit easy,
and will try to be more challenging in the future.) You can get the class notes and the syllabus
from “Course Documents” for this class at courses.northwestern.edu.
Double Supply & Demand Shifts:
Ambiguity
I.
If only demand shifts, equilibrium P and Q move in the same direction (both increase, or
decrease).
II.
If only supply shifts, equilibrium P and Q move in opposite directions
III.
If demand shifts right, and supply shifts left then equilibrium P rises, but the effect on Q is
uncertain.
IV.
If demand shifts left, and supply shifts right then equilibrium P falls, but the effect on Q is
uncertain.
V.
If both curves shift right, then equilibrium Q rises, but the effect on P is uncertain.
VI.
If both curves shift left then, equilibrium Q falls but the effect on P is uncertain.
Two Important Definitions
I.
Revenue = Price*(Quantity sold) = “Sales”
a.
In growth rates:
(% change in revenue) = (% change in price) + (% change in Q)
II.
Profit = Revenue – Costs, where costs are generally an increasing function of the quantity
produced (more on this later).
The standard assumption in economics is that firms act to
maximize their expected future profits.
Elasticity
I.
A measure of responsiveness, the % change in one thing as a result of a % change in
something else.
(NOT the same as slope, but related.)
II.
There are many kinds of elasticities in economics, elasticity of supply, income elasticity,
cross-price elasticity, but the one we care most about in this class is elasticity of demand.
III.
Extreme examples of elasticity of supply and demand:
a.
“Perfectly inelastic” demand is vertical.
No matter what price is charged, demanders will
buy the same amount.
Insulin?
(But remember, elasticity is not slope!)
b.
“Perfectly inelastic” supply is vertical.
No matter what price is charged, suppliers will
offer the same amount.
Spring water?
(But remember, elasticity is not slope!)
c.
“Perfectly elastic” demand is horizontal.
From a given starting point with a price and a
quantity demanded, if the price rises be even a penny, quantity demanded falls to zero.
But if the price falls by a penny from the original price, quantity demanded heads toward
infinity.
Demand for apples from one particular farm in a homogeneous market?
d.
“Perfectly elastic” supply is horizontal.
From a given starting point with a price and a
quantity supplied, if the price rises be even a penny, quantity supplied heads to infinity.
But if the price falls by a penny from the original price, quantity supplied goes to zero.