ECO100Y5 Lecture 3: Lecture 3 - September 19, 2017

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10 Dec 2017

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Pri(cid:272)e elasti(cid:272)it(cid:455) of suppl(cid:455), i(cid:374)(cid:272)o(cid:373)e elasti(cid:272)it(cid:455), cross-pri(cid:272)e elasti(cid:272)it(cid:455) of de(cid:373)a(cid:374)d, Ta(cid:454)es & su(cid:271)sidies, pri(cid:272)e floors/ceili(cid:374)gs, bla(cid:272)k markets, total e(cid:454)pe(cid:374)diture. For an entire market, not just one firm. How much tx changes with price changes depends on elasticity. For more information on equations, see chapter 5 notes. If ab > 0, then x & y are substitutes. If ab < 0, then x & y are compliments. Cross price elasticity of demand ( ab) = | (cid:2900)(cid:2915)r(cid:2913)(cid:2915)(cid:2924)(cid:2930) (cid:4666)%(cid:4667) (cid:2887)(cid:2918)a(cid:2924)(cid:2917)(cid:2915) (cid:2919)(cid:2924) (cid:2901)(cid:2931)a(cid:2924)(cid:2930)(cid:2919)(cid:2930)y (cid:2888)(cid:2915)(cid:2923)a(cid:2924)(cid:2914)(cid:2915)(cid:2914) (cid:2925)(cid:2916) g(cid:2925)(cid:2925)(cid:2914) (cid:2885) (cid:2900)(cid:2915)r(cid:2913)(cid:2915)(cid:2924)(cid:2930) (cid:4666)%(cid:4667) (cid:2887)(cid:2918)a(cid:2924)(cid:2917)(cid:2915) (cid:2919)(cid:2924) (cid:2900)r(cid:2919)(cid:2913)(cid:2915) (cid:2925)(cid:2916) g(cid:2925)(cid:2925)(cid:2914) (cid:2886) Cross price elasticity of demand ( ab) = | (cid:2901)(cid:2888) (cid:2925)(cid:2916) g(cid:2925)(cid:2925)(cid:2914) (cid:2885) / (cid:2885)vg (cid:2925)(cid:2916) (cid:2901)(cid:2888) (cid:2925)(cid:2916) g(cid:2925)(cid:2925)(cid:2914) (cid:2885) (cid:2900)r(cid:2919)(cid:2913)(cid:2915) (cid:2925)(cid:2916) g(cid:2925)(cid:2925)(cid:2914) (cid:2886) / (cid:2885)vg (cid:2925)(cid:2916) (cid:2900)r(cid:2919)(cid:2913)(cid:2915) (cid:2925)(cid:2916) g(cid:2925)(cid:2925)(cid:2914) (cid:2886) | Income elasticity of demand ( y) = | (cid:2900)(cid:2915)r(cid:2913)(cid:2915)(cid:2924)(cid:2930) (cid:4666)%(cid:4667) (cid:2887)(cid:2918)a(cid:2924)(cid:2917)(cid:2915) (cid:2919)(cid:2924) (cid:2901)(cid:2931)a(cid:2924)(cid:2930)(cid:2919)(cid:2930)y (cid:2888)(cid:2915)(cid:2923)a(cid:2924)(cid:2914)(cid:2915)(cid:2914) (cid:2900)(cid:2915)r(cid:2913)(cid:2915)(cid:2924)(cid:2930) (cid:4666)%(cid:4667) (cid:2887)(cid:2918)a(cid:2924)(cid:2917)(cid:2915) (cid:2919)(cid:2924) i(cid:2924)(cid:2913)(cid:2925)(cid:2923)(cid:2915) If y > 1, the good is a luxury good.

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Section I: Supply & Demand Analysis (Chapter 3) In each of the following 10 questions, show what happens to the Demand, Supply, equilibrium price and equilibrium quantity of copper. Show an increase by use of +, a decrease with a -, and no change with 0 (thatâs a zero, not an O or o). Although in the real world, both supply and demand are constantly changing, in the model we are using here, only one curve shifts per problem. So, if demand goes + or -, supply will be 0, and vice versa. In no case will equilibrium price or equilibrium quantity be 0. You may want to sketch out the supply and demand curve analysis to help in answering the questions. You will also be required to identify which determinant (of demand or supply) has changed, thus causing the shift. Rather than actually writing in the determinant, fill in the blank with the number that corresponds to the relevant determinant, based upon the following list. You may want to refer to the lecture notes entitled Determinants of Demand & Supply in the COURSE CONTENTS section. For questions 1 - 10, refer back to this list. Some you may want to use more than once, some you won't use at all. Copy and paste this list to an MS Word document and then print it out if you don't want to keep scrolling back and forth between this list and the question you're trying to answer. Determinants of Demand: 1. Change in buyer tastes 2. Change in number of buyers 3. Change in income 4. Change in the prices of related goods (on the demand side) 5. Change in consumer expectations Determinants of Supply: 6. Change in resource prices 7. Change in technology 8. Changes in taxes and subsidies 9. Change in prices of related goods (on the supply side) 10. Change in producer expectations 11. Change in the number of suppliers. For example, if a rightward shift in the supply curve for an item were caused by an increase in the number of producers of that item, you would indicate this be entering 11 into the relevant blank. If the demand curve shifted to the left because people didn't like that item anymore (like mimeograph machines), you'd enter 1 into the blank. Q#1 President Trump signs into law a bill that says the U.S. government will subsidize the construction of new homes, office buildings, bridges, and other infrastructure projects requiring copper. Demand; Supply: Equilibrium Price: Equilibrium Quantity Exchanged; Which determinant changed?: Q#2 Non-capitalist economies around the world begin a phase of rapid economic development, construction and growth, becoming increasingly wealthy, as they begin to adopt more capitalist institutions, as in China, Russia, and the former communist countries of East Europe. Demand; Supply: Equilibrium Price: Equilibrium Quantity Exchanged: Which determinant changed?

1. The following table provides the quantity of fish and coconuts that each individual can catch or gather in one hour.

Coconuts Fish
Adam 6 2
Friday 6 4

a. Who has the absolute advantage in catching fish?
b. What is Friday's opportunity cost of gathering one coconut?
c. Who has the comparative advantage in catching fish?

2. Classify each statement as either a normative economic statement or a positive economic statement.
a. As a person consumes more and more of a good, marginal utility declines.
b. The United States has the best health care system in the world.

3. Consider the market for the Apple iPod, a normal good, for the month of September. Record in the following table how the following event would affect the market for an iPod. Use the words increase, decrease, unchanged, and uncertain.

Event Supply Demand Equilibrium Price Equilibrium Quantity {this is the table}

There is a technological advance in the manufacture of an iPod.

4. You own an electronics company that supplies to local businesses. In a typical month, you sell 200 Dell laptops and 200 HPlaptops. HP estimates the price elasticity of demand for their laptops to be -1.5. Dell estimates that the cross-price elasticity of demand between their laptop computers and HP laptops is 0.80 (Monday's lecture will help you answer this part of the question). This month HP lowered the price of their computers by 5 percent. Based on this information, what would expect to happen to your sales of HP and Dell computers? (State whether this change is an increase or decrease and give the percentage change.)

HP _____________ of ______________%

Dell ______________ of ____________%

Given your answers above, estimate the number of HP and Dell computers you will sell this month.

HP:_______________ Dell:_____________________

Representative multiple-choice questions.

5. If there is a surplus of a product, its price:
a. is in equilibrium.
b. is below the equilibrium level.
c. will rise in the near future.
d. is above the equilibrium level.

6. Suppose that steak and potatoes are complements. Then, other things being equal, an increase in the supply of steak will lower its price and:
a. increase the demand for potatoes and increase the price of potatoes.
b. increase the demand for potatoes and decrease the price of potatoes.
c. decrease the demand for potatoes and increase the price of potatoes.
d. decrease the demand for potatoes and decrease the price of potatoes.

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ECO100Y5 Lecture 3: Lecture 3 - September 19, 2017

ECO100Y5 Full Course Notes

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