Outline for Lecture 6 Price
Elasticity of Supply How do we define
price elasticity of supply? The Price Elasticity Coefficient and Formula How do we measure
price elasticity of supply? What is in the numerator of elasticity equation?
What is in the denominator? In elasticity
calculations, we use the midpoint formula to determine percentage changes. According to
midpoint formula, how d
...[Show More]
Outline for Lecture 6
Price
Elasticity of Supply
How do we define
price elasticity of supply?
The Price Elasticity Coefficient and Formula
How do we measure
price elasticity of supply? What is in the numerator of elasticity equation?
What is in the denominator?
In elasticity
calculations, we use the midpoint formula to determine percentage changes.
According to
midpoint formula, how do we measure percentage change in quantity supplied? How
do we measure percentage change in price?
Interpretation of Es
If price
elasticity of supply for a commodity is _____ 1, supply is elastic. What does
elastic supply indicate in terms of how responsive producers are to price
changes?
If price
elasticity of supply for a commodity is _____ 1, supply is unit-elastic.
If price
elasticity of supply for a commodity is _____ 1, supply is inelastic. What does
inelastic supply indicate in terms of how responsive producers are to price
changes?
Numerical Example
Following
textbook, suppose that an increase in the price of a commodity from $4 to $6
raises quantity supplied from 10 to 14 units. What is price elasticity of
supply for this section of supply curve? Is supply elastic, unit-elastic, or
inelastic?
Next, suppose that
price of the commodity rises further from $6 to $8, which raises quantity
supplied from 14 to 18 units. What is price elasticity of supply for this
second section of supply curve? Is supply elastic, unit-elastic, or inelastic?
Finally, suppose
that an additional increase in price of the commodity from $8 to $10 raises
quantity supplied from 18 to 22 units. What is price elasticity of supply for
this third section of supply curve? Is supply elastic, unit-elastic, or
inelastic?
Based on your
calculations, is price elasticity of supply on a given supply curve (Lecture 6)
more or less volatile than price elasticity of demand on a given demand curve (Lecture
5)?
Determinant of Price Elasticity of Supply
Unlike price
elasticity of demand that has several determinants, there is only one factor
that affects price elasticity of supply: ease of shifting resources (physical
capital, labor, raw materials, etc.) from production of one commodity to
another.
Suppose that a
firm produces two goods, basketballs and footballs, and that price of footballs
rises, prompting the firm to produce more footballs and fewer basketballs.
Suppose further
that the firm may operate in two different states of the world: in first state,
footballs and basketballs are produced in the same factory and resources can be
moved from basketball line to football line immediately; in second state,
footballs and basketballs are produced in different factories and the firm has
to move resources from basketball plant to football plant, which will take
time.
We conclude as
follows: the easier (the less time-consuming) it is for the firm to move
resources from basketball to football production, the more _____ is the supply
of footballs. Explain why.
Materials for Lecture 6
Start with textbook to get
familiar with content and progression of the lecture. Then, go to videos (and
supplemental articles, if provided) for further clarification and additional
examples.
Textbook
Read carefully pages 143
through 146 from textbook.
Video
Price Elasticity
of Supply
https://www.khanacademy.org/economics-finance-domain/microeconomics/elasticity-tutorial/price-elasticity-tutorial/v/elasticity-of-supply
Outline for Lecture 7
Cross
Elasticity and Income Elasticity of Demand
Cross Elasticity of Demand
How do we define
cross elasticity of demand?
How do we measure
cross elasticity of demand? What is in the numerator of elasticity equation?
What is in the denominator?
In elasticity
calculations, we use the midpoint formula to determine percentage changes.
According to
midpoint formula, how do we measure percentage changes in numerator and
denominator of cross elasticity formula?
Interpretation
Cross elasticity
of demand can be positive or negative depending on whether two commodities are
substitutes or complements.
Substitute Goods
Consider Pepsi and
Coke.
Suppose that price
of a can of Pepsi rises from $1 to $2. As a result, consumers switch from Pepsi
to Coke, raising quantity of Coke demanded from 10 to 15 cans.
What is cross
elasticity of demand between Pepsi and Coke? Is it positive or negative? Explain
what the sign indicates in terms of how consumers respond to changes in price
of Pepsi.
Complementary
Goods
Consider coffee and
sugar.
Suppose that price
of a pack of ground coffee rises from $4 to $6, which leaves consumers with
less money to spend on sugar. As a result, quantity of sugar demanded falls
from 4 to 2 packs.
What is cross
elasticity of demand between coffee and sugar? Is it positive or negative? Explain
what the sign indicates in terms of how consumers respond to changes in price
of coffee.
Income Elasticity of Demand
How do we define
income elasticity of demand?
How do we measure
income elasticity of demand? What is in the numerator of elasticity equation?
What is in the denominator?
In elasticity
calculations, we use the midpoint formula to determine percentage changes.
According to
midpoint formula, how do we measure percentage change in quantity demanded? How
do we measure percentage change in income?
Interpretation
Incose elasticity
of demand can be positive or negative depending on whether the commodity is a
normal good or an inferior good.
Normal Goods
Consider
restaurant meals.
Suppose that when
income rises from $100 to $200, quantity of restaurant meals demanded increases
from 2 to 5 meals per week.
What is income
elasticity of demand for restaurant meals? Is it positive or negative? Explain
what the sign indicates in terms of how consumers of restaurant meals respond
to income changes.
Inferior Goods
Consider Ramen
noodles.
Suppose that when
income rises from $200 to $400, quantity of Ramen noodles demanded falls from
20 to 5 packs per week.
What is income
elasticity of demand for Ramen noodles? Is it positive or negative? Explain
what the sign indicates in terms of how consumers of Ramen noodles respond to
income changes.
Materials for Lecture 7
Start with textbook to get
familiar with content and progression of the lecture. Then, go to videos (and
supplemental articles, if provided) for further clarification and additional
examples.
Textbook
Read carefully pages 146
through 149 from textbook.
Video
Cross elasticity
of demand
https://www.khanacademy.org/economics-finance-domain/microeconomics/elasticity-tutorial/price-elasticity-tutorial/v/cross-elasticity-of-demand
Income elasticity
of demand
https://www.youtube.com/watch?v=a6AHaqlm7J4
Effect of income
changes on demand for normal and inferior goods
https://www.khanacademy.org/economics-finance-domain/microeconomics/supply-demand-equilibrium/demand-curve-tutorial/v/normal-and-inferior-goods
Article
Series of articles on cross
and income elasticities of demand
http://econblog.garven.com/2009/10/04/elasticity-of-demand-some-real-world-examples/
Outline for Lecture 8
Law of Diminishing
Marginal Utility
How we define the law of
diminishing marginal utility?
Provide an example and
describe how utility we receive from additional units of a product changes as we
consume more of that product.
Terminology
How do we define utility?
Is utility objective or
subjective; is utility derived from a particular commodity constant, or does it
vary by individual? Explain with an example.
Total Utility
Figure 7.1 and
accompanying table present data on total utility and marginal utility received
from consuming tacos.
How do we define total
utility?
What is total utility
consumer gets from eating one taco? How about two tacos? Report total utilities
for remaining quantities: three, four, five, six, and seven tacos.
What type of trend do we
see in total utility figures?
Marginal Utility
How do we define marginal
utility? Explain how marginal utility is related to total utility.
What is marginal utility
of the first taco? How about the second taco? Report marginal utilities for
remaining quantities: third, fourth, fifth, sixth, and seventh tacos.
What type of trend do we
see in marginal utility figures? Is this trend consistent with the law of
diminishing marginal utility? Explain.
Materials for Lecture 8
Start with textbook to get
familiar with content and progression of the lecture. Then, go to videos (and
supplemental articles, if provided) for further clarification and additional
examples.
Textbook
Read carefully pages 153
through 155 from textbook.
Video
Law of diminishing marginal
utility
http://www.youtube.com/watch?v=KOUJEyy48qY&list=PL336C870BEAD3B58B&index=20
Another take on
diminishing marginal utility in first seven minutes
https://www.khanacademy.org/economics-finance-domain/microeconomics/choices-opp-cost-tutorial/marginal-utility-tutorial/v/marginal-utility
Consumer choice from
a cross-cultural perspective, outside of class material but funny and
interesting
http://www.youtube.com/watch?v=uGKaNWUn8cw
Outline for Lecture 9
Theory of Consumer
Behavior
Utility-Maximizing Rule
According to utility-maximizing
rule, how should a consumer allocate limited income across different products?
Numerical Example
For a numerical example, suppose
that consumer has $10 of income and buys only two goods (apples at $1 and oranges
at$2) as shown by Table 7.1.
How do we define marginal
utility per dollar? Explain the difference between marginal utility and
marginal utility per dollar?
Given marginal utilities
(from columns 2a and 3a) and product prices, what are per-dollar marginal
utilities for apples and oranges for units one through seven?
We now go through utility
maximization process.
Step 1
Consumer compares
per-dollar marginal utility of first apple, ____ units, to per-dollar marginal
utility of first orange, ____ units. Because first ____ yields greater
per-dollar utility than first ____, consumer buys ____.
At the end of step 1,
consumer has ____ in his consumption basket and income falls to ____.
Step 2
Consumer compares
per-dollar marginal utility of ____ apple, ____ units, to per-dollar marginal
utility of ____ orange, ____ units. Because ____ yields the same per-dollar
utility as ____, consumer buys ____.
At the end of step 2, consumer
has ____ in his consumption basket and income falls to ____.
Step 3
Consumer compares
per-dollar marginal utility of ____ apple, ____ units, to per-dollar marginal
utility of ____ orange, ____ units. Because ____ yields greater per-dollar
utility than ____, consumer buys ____.
At the end of step 3,
consumer has ____ in his consumption basket and income falls to ____.
Step 4
Consumer compares
per-dollar marginal utility of ____ apple, ____ units, to per-dollar marginal
utility of ____ orange, ____ units. Because ____ yields the same per-dollar
utility as ____, consumer buys ____.
At the end of step 4, consumer
has ____ in his consumption basket and exhausts his income.
At this point, you may
refer to Table 7.2 to confirm your work.
Is final consumption
basket consistent with utility-maximizing rule: are per-dollar marginal
utilities equal for last apple and last orange purchased?
Based on marginal utility
figures reported in columns 2a and 3a, what is total utility consumer receives
from this basket? Is this the highest possible utility with $10 of income?
Explain.
Materials for Lecture 9
Start with textbook to get
familiar with content and progression of the lecture. Then, go to videos (and
supplemental articles, if provided) for further clarification and additional
examples.
Textbook
Read carefully pages 155 through
158 from textbook.
Video
Utility maximization process
http://www.youtube.com/watch?v=JiJlZGqZXZk&list=PL336C870BEAD3B58B&index=20
Another take on utility maximization
after seven minute mark
https://www.khanacademy.org/economics-finance-domain/microeconomics/choices-opp-cost-tutorial/marginal-utility-tutorial/v/marginal-utility
[Show Less]