Week 2: Demand and Supply in a Competitive Market
- Our first midterm test will be written on Saturday, October 17th at 5 pm (2 hour period with 90
minutes test) (less than 4 weeks away)
- Tentative date for next midterm at Friday November 20th (3 to 5 pm)
- More parts of Course Handbook are up on the UTSC Intranet
- Tutorials start this week…schedule is on website, under ECMA04/Professor and TAs
- Office Hours for help from T.A.s in MW-369 are also up on website in same place (If you need
help…go get it…TAs are paid to help you!)
What did we learn last week?
x definition of economics
x opportunity cost
x production possibilities model
x calculating opportunity cost on PPF
x PPF with increasing costs
x maximizing a value (or utility) function along PPF
Agenda for this week:
x Overview of the competitive market model
x What is a market?
x What is competition?
x Shifts in Demand and Supply: how they affect equilibrium
Don’t forget your tutorials this week. And our 6 new T.A.’s have office hours!
Leslie, Juan, Lisa, Zuoyi, Sam and Shoeb
(check www.utsc.utoronto.ca/~cleveland for the time of office hours in MW-369 and the time and
location of tutorials. Click on the button for ECMA04 and then on the button on the right-hand side for
“Professor and TAs”).
Use questions from a test in previous years to review material on opportunity cost and PPF.)
1-3. A country produces goods X and Y and has the following equation for its production possibilities
frontier: Y2 + 4X2 = 400 or Y = [400 - 4X2]0.5
Questions 1 through 3 concerns this country.
1. You are told that the economy is producing efficiently and has chosen to produce and consume 6 units
of X and 16 units of Y. At this point on the production possibilities frontier, you can use calculus to
obtain the opportunity cost of X as:
dY/dX = 0.5[400 - 4X2]-0.5(-8X) = -4X[400 - 4X2]-0.5
To get opportunity cost of X, use -dY/dX, which is 4X[400 - 4X2]-0.5
Evaluate this expression at X = 6 to get the opportunity cost of X as = (4 x 6) (1/0.5) = 24/16 = 3/2
2. Now you are told that the economy is producing efficiently and has chosen to produce and consume 8
units of X. At this point on the production possibilities frontier, you can use calculus to obtain the
opportunity cost of Y as: