Lecture 2. 3 Tools Ch 1

Lecture 2. 3 Tools Ch 1 - QuickTime™ and a TIFF...

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Unformatted text preview: QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture. Northwestern University ♦ Winter 2012 ♦ ECON 310-1: Microeconomic Theory ♦ Profs. Ron Braeutigam & Jim Hornsten Three Important Tools of Economic Analysis Notes for Chapter 1 “Learning Outcome”: During this course you will learn how to use three basic tools of economic analysis 1) Equilibrium 2) Constrained Optimization 3) Comparative Statics Can be used with equilibrium analysis and with constrained optimization to analyze a variety of economic problems….. QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture. Northwestern University ♦ Winter 2012 ♦ ECON 310-1: Microeconomic Theory ♦ Profs. Ron Braeutigam & Jim Hornsten Equilibrium Constrained Optimization Comparative Statics Exogenous and Endogenous Variables 2 When using any of these three tools, we need to keep track of: Exogenous Variables Variables taken as given in the analysis Endogenous Variables Variables determined within the system QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture. Northwestern University ♦ Winter 2012 ♦ ECON 310-1: Microeconomic Theory ♦ Profs. Ron Braeutigam & Jim Hornsten First Tool: Equilibrium Analysis 3 Equilibrium: A state or condition that can continue indefinitely until a change in an exogenous variable shocks the system Example: Supply & Demand in a Competitive Market Q is the quantity exchanged Supply: P S = 2Qw Demand: P d = 90 – Q + Y P S is the price suppliers (producers) receive P d is the price demanders (consumers) wage rate in the market pay Y is the income in the market Modeling assumption: Assume the market is a “small” part of the economy. What are the exogenous variables? What variables are taken as given? Y (Market equilibrium has imperceptible effect on Y.) w (Market equilibrium has imperceptible effect on w.) What are the endogenous variables? What variables are determined by the market? Q, and P S and P d (determined by the market) QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture. Northwestern University ♦ Winter 2012 ♦ ECON 310-1: Microeconomic Theory ♦ Profs. Ron Braeutigam & Jim Hornsten Equilibrium Analysis (continued) 4 Example (continued): Supply : P S = 2Qw Demand: P d = 90 – Q + Y Suppose Y = 60 and w = 1 Supply : P S = 2Q Demand: P d = 150 – Q Endogenous variables: Q, and P S and P d (determined by the market) What will be the equilibrium quantity in the market? (Q) What price will producers receive and consumers pay? (P S , P d ) In equilibrium, P S = P d (Equilibrium price P*, equilibrium quantity Q*) Supply P S = 2Q P 100 50 Demand when Y = 60 P d = 150 - Q Q 150 A Finding equilibrium algebraically: 150 – Q* = 2Q* Q* = 50 P* = 100 (point A in graph) 150 QuickTime™ and a...
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This note was uploaded on 02/16/2012 for the course ECON 310-1 taught by Professor Schulz during the Winter '08 term at Northwestern.

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Lecture 2. 3 Tools Ch 1 - QuickTime™ and a TIFF...

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