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Lecture 5

ECO100Y5 Lecture 5: Supply Curve

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Lee Bailey

ECO100: Lecture 5 – Supply Curve Income effects: Optimal demand for good x depends positively on income M for the case of normal goods (Refer to Figure 6A-5 in textbook) Own-price effects: Optimal demand for good x depends negatively on its Px(demand curves slope downwards) unless the income effect dominates the substitution effect(Figure 6A-8 and Figure 6-3 in text)  If cost goes down, X goes up  If substitution effect dominates demand, income goes up  M=16, PX=4 PY=2 PX=1  Suppose the price of good falls by 75%  Bundle a(2,4) C(8,4)  C TAN Y/X=1/2= X+2Y=16  Plot points A(2,4) (b(4,2) c(8,4) o Cost = 8 U=8 o CBL 1X+2y = 8(horizontal intercept)  Put these points into a scenario when the person is buying good x,  Key Idea(U=XY) Restrictive Utility Function – C1 Examples i.e. potatoes were an inferior good, irish people were poor and use to eat these potatoes. The price of potatoes went up and there was a substitution effect. To this the irish peasants said the opportunity cost is higher, this makes us so poor. If something little went up by 10% the irish would consume more of those potatoes. This created a sloping demand  Main Idea -> higher pricer, more quantity , in order to be a giffin good, it has to be something inferior good that you would normally buy more of Labour Supply (Leisure Demand) 1. The budget line is affordability F=A + wH and H+Z = 24 2. A worker’s indifference curves embody preferences for leisure z and food f 3. Optimal labour suppliers set their mrs equal to the opportunity cost of leisure tangency 4. The labour supply curve embodies optimal choice 5. Statics(shifts): changes in non-labour income induce parallel shifts of the b-line that cause income effects 6. Statics(Notations): change in the wage induce relations of the b-line that lead to income and substitiution effects Iclicker questions 1. When the price of Good X increases, a maximizing consumer will purchase
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