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ECON 103 Notes Lecture #1-4.docx

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Simon Fraser University
ECON 103
Iryna Dudnyk

Econ 103 Lecture #1 “How much” – “continuous” variables -Joe sits in sushi restaurant and needs to decide how many sushi to eat: need to compare satisfaction -From a piece VS Price per piece -Figure 1.1 Marginal: resulting from a very small change, technically need calculus For simplicity use „marginal‟ as resulting from change of 1 unit. EX. Price per piece is P=$2 quantity = Q Total cost of sushi dinner= 2*Q Marginal cost of a piece = change in cost if person eats 1 more piece if is $2 Scarcity: if something desirable is available in limited amount and it was free (P = 0) then people would want more than what is available - Air(free) and we have enough, not scarce - Food bank food is free and it is food scarce? Yes if it was free for all there would not enough - Eggs not free, P>0 and everyone can buy as many eggs as they want, scarce, if it was free (P=0) the shelves would be empty - Most valuable things are not free, we face trade offs: to have more of something we must have less of another thing. Equilibrium: balance situation, no change. In economics a situation is called equilibrium when no one wants to change their behavior; in equilibrium everyone has made their optimal/maximizing choice under the circumstances Chapter 3 Substitutions: Principle of substitution: everyone is willing to trade (give up) some amount of one good for some amount of another good. Willing: matter of personal preference Some: at least on the margin We can “model” substitution using Marginal Value (MV) – the maximum amount of a good that a person is willing to sacrifice to get 1 more unit of another good. For convenience later we‟ll use “monetary” definition MV=the highest price a person will pay for 1 additional unit of a good. EX. Sally‟s MV of a pair of jeans is $100 i.) She will buy the jeans at P = 80 Net gain = 100 (MV) – 80 (spending) = 20 Satisfaction from consumption measured in dollars ii.) Ifg jeans price is greater than marginal value she will not buy (P = 100.01>MV) iii.) If P = 100 = MV Net gain =0, sally is indifferent between buying/not buying the good Indifferent - Both situations are equally attractive, give the same satisfaction MV and indifference Sally is indifferent between the following consumption baskets (bundles) Bundle A 2 apples 6 hot dogs Bundle B 3 apples 4 hot dogs Suppose she holds bundle A Find MV of 3rd apple: at most she‟ll give up 2 hot dogs MV of 3rd apple = 2 hot dogs MV and trade Sally and Tamara are indifferent between the following bundles Sally Tamara Apples MV apples Hot dogs Apples MV apples Hot dogs 9 5 13 5 2 17 10 8 6 15 11 4 4 7 1 14 1.)Should they trade or “eat” their baskets? Since MV‟s of apples are different, they can gain from trade Sally should “buy” apples from Tamara Sally gets her 11th apple Tamara sells 6th apple 2.)What are acceptable prices? - For the 11th apple Sally will pay at most 4 hot dogs = max possible price - For 6 apples Tamara will accept min price of 2 hot dogs - Any price between 2 and 4 is possible Suppose they trade the apple at P= 3 hot dogs 3.) Gains from trade: Sally – had (10 apples, 8 hot dogs) is as good as (11 apples, 4 hot dogs) After trade (11 apples, 5 hot dogs) “Gained” 1 hot dog in happiness compared to the initial situation Tamara – had (6 apples, 15 hot dogs) is as good as (5 apples, 17 hot dogs) After trade (5 apples, 18 hot dogs) Also gained 1 hot dog in happiness Notice: in total the amount of apples and hot dogs is the same before/after trade, But after trade both are better off. What if they had traded at P = 4 hot dogs Sally gains = 0 Tamara gains = 4-2 =2 Total = 2 What if they traded at P = 2 hot dogs Sally gains = 2 Tamara gains= 0 Total = 2
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