Monopoly

A firm is a monopoly if

• It is the sole seller of its product
• its product does not have close substitute
• the market has barriers of entry

Three sources of bariers of entry

• A single firm owns a key resource
• The govt gives a single firm the exclusive right to produce the good
• Costs of production make a single producer more efficient than a large number of producers

A natural monopoly is when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms

Natural monopoly arises when there are economies of scale over the relevant range of output

The ATC in a natural monopoly is downward sloping due to huge FC and small MC

Theory of Cost and Theory of Firm

Fixed costs are those which do not vary with the quantity of output produced
Variable costs are those which vary with the quantity of output produced

AFC = FC/Q
AVC = VC/Q
ATC = TC/Q

For any firm Average revenue is the demand curve. How? See below

AR = TR/Q = PXQ/Q = P(which is nothing but the demand curve)

Practice the various cost curves(ATC,AVC,AFC,MC)

Remember , the marginal cost surve crosses the average cost curve at the minimum point which is also called efficient scale.

Also remember
Marginal cost < average total cost, average total cost is falling
Marginal cost > average total cost, average total cost is rising

For a competitive firm AR is independent of output and is parallel to the horizontal axis. How? See the explanantion below

Competitive firm is a price taker firm, you as a firm cannot increase/decrease the price. So, you will charge the same price if one buys 1 item or more than 1 item. So, AR remains the same for any quantity demanded.

For a competitive firm demand curve(AR) is infinitely elastic and for these firms AR=MR=P

Profit maximizing point is at MR=MC

Theory of production

Production Function

Opportunity cost is of two types

1. Explicit -incurred due to factors of production, requires outlay of money
2. Implicit - Does not require outlay of money

An important implicit cost is the cost of capital

Accounting profit = Revenue - explicit cost

Economic profit = Revenue - (Explicit + Implicit cost)

Accounting profit > Economic profit

Sunk costs are costs that have already been incurred and which cannot be recovered to any significant degree

Production function is the correspondence between input and output

The common Cobb-Douglas function used in macroeconomic modeling is

Y = K^αL^{1 − α}

where K is capital and L is labor. When the model coefficients sum to one, as in this example, the production function is first-order homogeneous, which implies constant returns to scale, that is, if all inputs are doubled that output will double.

There is a substitutability between the factors of production. The firm can either use capital-intensive or labor-intensive process.

The relationship between output change and proportionate chnages in both inputs is referred to as returns to scale. This is a long-term phenomenon.

Remember in long run all imputs are variable

In contrast to the concept of returns to scale, when output changes because one input changes while the other remains constant, the changes in the output rates are referred to as returns to a factor.

Remember in short run at least 1 input is fixed.

The production function defines the maximum rate of output per unit time obtained from a given rate of labor and capital input

Total product of labor - is the maximum rate of output forthcoming from combining varying rates of labor input with a fixed capital input

Marginal product of labor - increase in output arising from an additional unit of the variable input, holding all other inputs constant. It is the slope of the total product curve.

Average product of labor - is the total product per unit of the variable input = TPL/L

Inflection point - At this point total product function changes from increasing at an increasing rate to increasing at a decreasing rate.

Remember this

MPL=APL When APL is maximum

MPL>APL when APL is rising

MPL < size="1">L, when APL is falling

Marginal revenue product is defined as marginal revenue times marginal product and represents the value of the extra unit of labor

MRP = MR*MP

Labor will be hired until MRP = W,

We know for a price-taker market MR = P(given)( You can derive this using calculus)

So, P*MP = W (This P*MP is also called value of MP of labor and is denoted by VMPL)

So, MP = W/P

Which stage should a profit-maximizing firm going to operate?

For a production process to be economically feasible profit >=0

i.e; TR>=TC,

PXQ >= wL(w = wage, L =labor)

Q/L >= w/P

APL >= MPL(This is the necessary condition)

The sufficient condition is MPL>=0

Assignment 7

Assignment7

1. It is known that quantity demanded decreases by two units for each $1 increase in price. At a price of $5, quantity demanded is ten units.

a. What will be the quantity demanded if price is zero?
b. Write an equation for quantity demanded as a function of price.
c. Write an equation that expresses price as a function of quantity.
d. Write an equation for total revenue.


Ans : Let us assume that the demand function is given by Q = a + bP

It is given that quantity demanded decreases (Q) by 2 units when Price increases (P) by 1 unit

We know that Slope = Q/P = -2 (negative sign is because if Q decreases , P increases)

Substituting the value of slope in the above equation , we get

Q=a + (-2)P
Q= a – 2P

At P = $5, Q=10

So, 10 = a-2*5
a = 20
Q = 20 – 2P

a. At price=0, Q=20
b. Q=20-2P
c. P=10-0.5Q
d. TR = PQ=10Q-0.5Q2

2. A market consists of three people, A, B, and C, whose individual demand equations are as follows:


A.: P=35-0.5QA
B: P=50- 0.25QB
C: P=40-2.00 QC

The industry supply equation is given by QS = 40 +3.5 P.

a. Determine the equilibrium price and quantity.
b. Determine the amount that will be purchased by each individual.

Ans: Market demand is the horizontal summation of individual demand.
So, first find our indidual demand
QA=70-2P
QB=200-4P
QC=20-0.5P

QD= QA+ QB+ QC=290-6.5P


a. QS =QD (Since at equilibrium quantity demanded = quantity supplied)
Equating the above equation , we get P=25,Q=127.5
b. QA=70-2P = 70-2*25 = 20
QB=200-4P = 200-4*25 = 100
QC=20-0.5P = 20-0.5P = 7.5

3. The demand equation faced by Du Mont Electronics for its personal computers is given by P = 10,000- 4Q

a. Write the marginal revenue equation.
b. At what price and quantity will marginal revenue be zero?
c. At what price and quantity will total revenue be maximized?
d. If price is increased from $6,000 to $7,000, what will the effect be on total revenue? What does this imply about price elasticity?
Ans:
P=10000 – 4Q
a. MR = dPQ/dQ = 10000-8Q
b. MR= 0 = 10000-8Q
So, Q = 1250, P=10000-5000 = 5000
c. TR is maximum when MR =0 , So, TR will be maximized when P=5000 and
Q=1250
d. At price $6000, Q=1000, TR=PQ=6000000
At price $7000, Q=750, TR=PQ=5250000
Since TR decreases, demand is elastic.

4. Write a demand equation for which the price elasticity of demand is zero for all prices.

Ans: QD = a
5. The price elasticity for rice is estimated to be -0.4 and the income elasticity is 0.8. At a price of $0.40 per pound and a per capita income of $ 20,000, the demand for rice is 50 million tons per year.

a. Is rice an inferior good, a necessity, or a luxury? Explain.
b. If rice per-capita income increases to $20,500, what will be the quantity demanded of rice?
c. If the price of rice increases to $0.41 per pound and income per capita remains at $20,000, what will be the quantity demanded?
Ans:
a. Inferior goods are those where quantity demanded decreases when Income increases. For luxury goods price elasticity is > 1, For necessity price elasticity is less than than 0
In this case income elasticity is 0.8 which is greater than 0 and hence it is not inferior
Price elasticity is -04. which is less than 0 and hence it is a necessity.
b. %change in Q/%change in I = 0.8
Q2-Q1
---------
Q1
--------- = 0.8
I2-I1
---------
I1

Q2-50/50/20500-20000/20000 = 0.8
Q2 = 51
c. Q2-50/50/0.41-0.40/0.40 = -0.4
Q2 = 49.5 million

6. The McNight Company is a major producer of steel. Management estimates that the demand for the company’s steel is given by the equation.

Qs =5,000 – 1,000 Ps +0.1I + 100 Pa

where QS is steel demand in thousands of tons per year, PS is the price of steel in dollars per pound, I is income per capita, and Pa is the price of aluminum in dollars per pound. Initially, the price of steel is $1 per pound, income per capita is $20,000, and the price of aluminum is $0.80 per pound.

a. How much steel will be demanded at the initial prices and income?
b. What is the point income elasticity at the initial values?
c. What is the point cross elasticity between steel and aluminum? Are steel and aluminum substitutes or complements?
d. If the objective is to maintain the quantity of steel demanded as computed in part (a), what reduction in steel prices will be necessary to compensate for a $20 reduction in the price of aluminum?

a. Qs = 5000-1000*1+0.1*20000+100*.80 = 6080
b. Point income elasticity = dQd/dI*I/Qd = 0.1*20000/6080 = 0.33
c. Point cross elasticity = dQs/dPa*Pa/Qs = 100*0.80/6080 = 0.01
d. 6080 = 5000-1000*Ps+0.1*20000+100*0.6
1000Ps = 60+2000+5000-6080
1000Ps = 980
Ps = 0.98
Reduction required = 1-0.98/1*100 = 2%

7. Consider the following five data points:

X -1.0 0.0 1.0 2.0 3.0
Y -1.0 1.0 1.0 2.5 3.5

a. Use regression analysis to calculate by hand the estimated coefficients of the equation Y = B + aX.
b. Compute the coefficient of determination.
c. What is the predicted value of Y for X = 1.0? For X = 3.5?

8. Annual prices and beef consumption per capita in six cities are as follows:

City Price per Pound Consumption per Capita
1 $2.00 55
2 1.90 60
3 2.10 50
4 1.80 70
5 2.30 45
6 2.20 48

If demand equation is to be estimated using these data, would the linear form (i.e., Q = B + aP) or the multiplicative form (i.e., Q = BPa) be more appropriate? Explain.

Ans:
R2(linear model) = 0.92
R2(multiplicative model) = 0.96 Hence multiplicative model is more appropiate

Click below to get the calculations
Click Here

9. The MacWend Drive- In has determined that demand for hamburgers is given by the following equation:

Q = 205.2 + 23.0A – 200.PM + 100.PC + 0.51I

where Q is the number of hamburgers sold per month (in 1,000s), A is the advertising expenditures during the previous month (in $1,000s), PM is the price of MacWend burgers (dollars), PC is the price of hamburgers of the company’s major competitor (dollars), and I is income per capita in the surrounding community (in $1,000s).
a. Are the signs of the individual coefficients consistent with predictions from economic theory? Explain.
b. If A = $5,000, PM = $1, PC = $1.20, and I = $20,000, how many hamburgers will be demanded?
c. What is the advertising elasticity at A = $5,000?

10. Motorland Recreational Vehicles estimates the monthly demand (Q) for its product is given by the equation

log Q = 1.00 – 1.50log P + 3.00 log I R2 = 0.21

where P is price and I is income per capita in thousands. The t-statistics are shown in parentheses and logarithms to the base 10 were used to transform the equation. Assume that estimates are generated by sample of 400 observations.

a. Rewrite the expression as a multiplicative demand equation.
b. Based on the equation, is the product an inferior good, a necessity, or a luxury good?
c. Is the equation likely to be useful in predicting demand for Motorland’s product? Why or why not?

Session 7

Things to remember

B(hat)=

COV(Xi,Yi)
-----------
VAR(Xi)

∑(Xi-X)(Yi- Y )
= -----------------
∑(Xi-X)2

Elasticity =

^{------------P(BAR)
B(HAT)*-----------
------------Q(BAR)}

R² = Coefficient of determination = ESS/TSS= ∑(Y(HAT)-Y(BAR))² /∑(Yi-Y(BAR))²

Always explain R² in EXAM

Qx=4PX^0.3.I^0.7.Py^-0.8.T^0.2

1. X and Y are substitutes
2. X and Y are complements
3. X is a luxury good
4. X is a inferior good

Here cross price elasticity = -0.8, Since it is negative it means if Price of Y decreases, quantity demanded of X increases. Hence they are complements.

In the multiplicative model, elasticity is constant

Assignment 5

Assignment 5 – Principles of Economics

Ans 1


If the price ceiling is above the equilibrium price, the price ceiling is not binding. Market forces will naturally move the economy to the equilibrium and there will be no effect on price or quantity sold as a result of the price ceiling

If the price ceiling is below the equilibrium price, the price ceiling is binding. The quantity demanded in this case will be more than the quantity supplied. This will result in a shortage of tickets. The policy results in less number of people to attend classical music concerts.

















Ans 2

Since the price floor(Pf) is binding, it will be higher than the equilibrium price. At this floor price, the Quantity demanded(Qd) will be less than the quantity supplied(Qs). So there will be a surplus of chees(Qs-Qd) in the market.
This is possible if the price elasticity of the demand for cheese is greater than one (elastic). In this case, the percentage rise in price will be less than percentage decline in the quantity demanded. This will result in decline of total revenue.
The producers benefit from this policy because they will produce the Qs quantity and can sell that to government at the floor price to increase their total revenue. The consumers will still buy Qd amount and will neither gain nor lose. The losers will be the taxpayers because the government will buy the excess supply and will distribute that cost to the taxpayers.














Ans 3.

From the figure above, it is clear that the equilibrium price is $400 and equilibrium quantity is 300
Since the price ceiling is now 300, it is less than the equilibrium price and is binding. The new market price is $300 and at this price number of bedrooms rented will be 200





The new market price will be 450 and the number of rooms rented will be 275



Ans 4

Before tax was implemented, Pe is the price received by the suppliers; this same price was also paid by consumers. The quantity sold at this price was Qe. The difference between price paid by consumers and price received by suppliers is 0.
After tax, the price received by sellers is Ps and price paid by consumers is Pb, the quantity sold is Qt.

The difference between the price received by suppliers and price paid by consumers is Pb – Ps = 0.50.

The quantity of gasoline sold decreased to Qt



Ans 5

When the senator raised the payroll tax, the cost of hiring the workers will be more. This will result in shifting the demand curve to the left. As a result the firms will hire less workers. This will lead to unemployment which will make workers worser.


Ans 6

The price paid by consumers will rise by less than $500 if the government imposes a $500 tax on luxury cars. The burden of any tax will be shared by both producers and consumers. In this case since the demand for luxury cars is more elastic the major portion of the tax will be borne by the seller.

Ans 7

a.

It will not make a difference if the tax is imposed on producers or consumers. If the tax is imposed on producers the supply curve will shift upwards by an amount of 50 cents to S2. The equilibrium quantity becomes Q2, the price paid by consumers is P2 and price received by suppliers is P2-0.50.

If tax is imposed on consumers, the demand curve shifts by an amount of 50 cents to D2. The equilibrium quantity is again Q2 and the price paid by consumer is P2, the price received by suppliers is P2-50.


b. The tax will be more effective when the demand curve is more elastic. Greater elasticity of gasoline means that percentage decrease in quantity demanded will fall more in response to the %increase in price of gasoline. The above figure gives a clear picture of this fact. D1 is the elastic demand. In this case quantity shift is Q3-Q1 when price rises to P2. The D2 curve is less elastic and the shift in quantity is Q2-Q1 when price rises to P2.
c. The consumers of gasoline will be hurt because now they now get less gasoline at a higher price.
d. Since the quantity demanded will decrease, it will also decrease the supply of gasoline. The decrease in output may throw some workers out of job. If the price elasticity of gasoline demand is more the TR will fall which might reduce the wages of the workers.


Ans 8

The market wage is W2, Q3 people are employed, Q3-Q1 people are unemployed. The total wage payments = W2*Q3

b. An increase in the minimum wage will decrease employment.

The change in employment depends only on the elasticity of demand and not on elasticity of supply because there is a surplus in the market.

c. The increase in minimum wage will increase unemployment

The change in unemployment depends on both elasticity of demand and elasticity of supply. The elasticity of demand determines the quantity of labor demanded and the elasticity of supply determines the quantity of labor supplied. The difference between quantity supplied and quantity demanded of labor determines the total unemployment.

d. If the demand of unskilled labor were inelastic, the increase in minimum wage would raise the total wage paid to the unskilled workers. This is because since the demand is inelastic the percentage decline in employment will be less than the % rise in wage, so total wage payment will increase.

If the demand were elastic, total wage payment would decline because in that case the % decrease in employment would be more than the % increase in wage.

11.a.



The effect of the subsidy is a shift in the demand curve from D1 to D2 by 0.50 at each quantity . The effect can be seen in the figure above. The seller will now receive a price of P3 and buyer will pay a price of P2 which is equal to P3-0.50. The quantity sold before subsidy is Q1, after subsidy it will be Q2

b. Consumers are better off because they now get more icecream at the same price.
The buyers will also be better off because they will sell more at a higher price. Government is the loser who pays the amount that is subsidized.

Economics - Quiz1 Prep

Economics is the study of how society manages its scarce resources

Principles of Economic
1. Every decision involves tradeoffs



Efficiency - getting the most out of scarce resources
Equity - distributing the benefits of those resources fairly among society's members

2. The cost of something is what you give up to get something

The opportunity cost of an item is what you give up to get that item

3. Rational people think at the margin

Q. Why is water cheap while diamonds are expensive


A. Rational people think at margin. The marginal utility of diamond is more than the marginal utility of water. It does not matter much if you drink 1 unit of water or 2, but definitely an additional unit of diamond matters a lot .

4. People respond to incentives

5. Trade can make everyone better off.

6. Markets are a good way to organize economic activity

7. Governments can sometimes improve market outocmes

A market failure is a situation in which a market left on its own fails to allocate
resources efficiently

Externality : Impact of one person's action on the well being of a bystander

Public goods : Characteristics of non-excludability and non-rivalry in consumption

Market power : The ability of a single person (or small group) to unduly influence market prices

8. A country's standard of living depends on it ability to produce goods and services.

9. Prices rise when government prints too much money.

10.Society faces a short-run trade-off between inflation and unemployment

The market forces of demand and supply

Remember in the exam if nothing is mentioned, assume it is a normal good

Normal goods are those for which demand increases(decreases) when income increases(decreases)

Giffen goods do not follow law of demand , when price falls demand also falls e.g exclusive brand of liquor

Inferior goods are those where demand increases(decreases) when income decreases(increases)

Shift in the demand curve happens when non-price determinant things change


Fall in price in one good reduces the demand for another good, the two goods are substitutes.
Fall in price of one good raises the demand for another good, the two goods are compliments.

Increase in demand shifts the demand curve outwards(away from the Y-AXIS)
Decrease in demand shifts the demand curve inwards(towards the Y-AXIS)

Increase in supply shifts the supply curve outwards(towards the X-Axis)
Decrease in supply shifts the supply curve inwards(away from the X-Axis)

Q3 Page 85

a. The price of grain is kind of raw material for producing eggs. If the price of grain falls, the producers will have to bear less price to produce the eggs. So, at a given price the eggs supplied will be more, the supply curve will shift outwards reducing the equilibrium price to P2 and increasing the equilibrium quantity to Q2




b. Bacon and egg are complements. So, in this case if price of Bacon falls, demand for bacon will rise which will in turn increase the demand for eggs increasing the equilibrium price to P2 and equilibrium quantity to Q2




c. In this case the demand for egg will fall, which will shift the demand curve inwards reducing both the equilibrium price and quantity

d. In this case the supply of eggs will be reduced which will shift the supply curve inwards increasing the equivalent price and reducing the equivalent quantity.

e. The demand for egg will increase which will shift the demand curve outwards.


Elasticity and its application

Price elasticity of demand = %change in Qd/%change in P
Remember to use midpoint formula to claculate price elasticity of demand
According to this formula
e = (Q2-Q1)/[(Q2+Q1)/2]
------------------------
(P2-P1)/[(P2+P1)/2]


Determinants of Price Elasticity(very important concept)

1. Price elasticity is higher when substitutes are available
2. Price elasticity is higher for narrowly defined goods
3. Price elasticity is higher for luxuries
4. Price elasticity is higher in the long run

Rule of thumb
Flatter the curve, bigger the elasticity(memory tip: big f(l)at guy)
Steeper the curve,smaller the elasticity(memory tip, if curve is (S)teeper, elasticity is (S)maller)

e>1 - Elastic demand
e = 0 - Perfectly inelastic
e = infinity - Perfectly elastic
e= 1 - unit elastic

e= lower protion of the demand curve/upper portion of the demand curve

e= (dQ/dP)P/Q

Total revenue = P*Q
Average revenue = TR/Q = P*Q/Q = P, so AR curve is the demand curve itself
Marginal revenue = change in revenue/change in output = ΔTR/ΔQ

Remember this

1. MR is steeper than AR
2. MR is the slope of the total revenue curve
3. At maximum TR, MR is zero
4. AR and MR curve have the same vertical intercept
5. TR will increase if demand is inelastic
6. TR will decrease if demand is elastic
7. TR will remain same if demand is unitary elastic

Income elasticity = %change in Qd/%change in Income

Cross price elasticity = % change in Qd for good 1 / % change in price of good 2

Session 6

Price ceiling

• A legal maximum on the price at which a good can be sold
• Example : Rent Control

Price floor

• A legal minimum on the price at which a good can be sold
• Example : Minimum wage

Tax incidence

• the manner in which the burden of tax is shared among participants in a market

If supply is more price-elastic than demand, greater burden is borne by buyers

If demand is more price-elastic than supply, greater burden is borne by sellers

Assignment 4

1. For each of the following pairs of goods,which good you expect to have more elastic demand and why?
a) Required textbooks or mystery novels.
b) Beethoven recordings or classical music recordings in general.
c) subway rides during the next 6 months or subway rides during the next 5 years
d) root beer or water
Ans :
a) Required textbooks or mystery novels - Mystery novels will have more elastic demand because they are not necessities compared to textbooks. We cannot do away with textbooks as they are necessary to complete a particular subject. As a result textbooks will have a inelastic demand relative to the mystery novels.
b) Beethoven recordings or classical music recordings in general - Beethoven recordings are more narowly defined form of music. Narrowly defined things have more substitutes and so are more elastic in demand
c) Price elasticity is higher in the long run than in short run. It might be possible to find more substitutes for rides during the next 5 years. So subway rides during the next 5 years will be more elastic.
d) Water is a necessity and does not have a close substitute. So water will have less elastic demand compared to root beer which is not a necessity and also have more close substitutes.
2. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:

style='margin-left:18.5pt;border-collapse:collapse;mso-padding-alt:0in .5pt 0in .5pt'>

Price	Quantity Demanded (Business Travelers)	Quantity Demanded (Vacationers)
150	style='mso-spacerun:yes'>           2100 tickets	style='mso-spacerun:yes'>           1000 tickets
200	2000	800
250	1900	600
300	1800	400

a) As the price of tickets rises from $200 to $250, what is the price elasticity of demand for (i) business travelers and (ii) vacationers? (Use the midpoint formula in your calculations.)
b) Why might vacationers have a different elasticity from business travelers?
Ans:
a)
i) Price elasticity for business travellers
= (Q2-Q1)/[(Q2+Q1)/2]/(P2-P1)/[(P2+P1)/2]
= [(1900-2000)/1950]/[(250-200)/225]
= -0.23
Therefore, elasticity = |-0.23| = 0.23

ii) Price elasticity for vacationers = (Q2-Q1)/[(Q2+Q1)/2]/(P2-P1)/[(P2+P1)/2]
= [(600-800)/700]/[(250-200)/225]
= -1.29
Therefore, elasticity = |-1.29| = 1.29
b) For vacationers, travel is of less necessity compared to business travellers. Vacationers have longer time horizon for travel while the business travellers have a very short time to travel. Vacationers also have several other subsitutes like travelling by car. That substitute is not appropiate for business travellers as they need to reach faster to their place of destination.
This is why vacationers will have a higher elasticity of demand for air tickets compared to the business travellers
3. Suppose the price elasticity of gasoline is 0.3 in the short run and 0.9 in the long run.
a) If the price of a gallon of gasoline falls from $2.50 to $2.25, what happens to the quantity of gasoline demanded in the short run ?In the long run ?(Use the midpoint formula in your calculations.)
b) Why might the elasticity of demand for gasoline depend on time horizon?

Ans : a) The percentage change in price = (2.25 - 2.50)/2.375 = 0.11 = 11%. The price elasticity in the short term is 0.3, so quantity demanded will rise by 0.3*.11 =33%. Since the long run elasticity is 0.9, it will rise by 0.9*0.11 = 99% in the long run.
b) Overtime people might prefer to drive their cars to work instead of car pooling, because they might see more value in that. As the gas price has decreased, driving their own car will not cost much and also they will be more independent regarding when to start or or leave from office.
4. Suppose that your demand scheduled for T shirt is as follows
style='margin-left:18.5pt;border-collapse:collapse;mso-padding-alt:0in .5pt 0in .5pt'>

Price	Quantity Demanded (Income-$12000)	Quantity Demanded (Income-$15000)
$5	style='mso-spacerun:yes'>           20 Tshirts	style='mso-spacerun:yes'>           25 Tshirts
8	16	22
11	12	19
14	8	16
17	style='mso-spacerun:yes'>                               4	13

a. Use the midpoint method to calculate your price elasticity of demand as the price of T shirts increases from $5 to $8 if (i)your income is $12000 and ii)your income is $15000.
b.Calculate your income elasticity of demand as your income rises from $12000 to $15000 if (i) the price is $14 and (ii) the price is $17
Ans : a) If your income is $12000, the price elasticity of demand when price increases from $5 to $8 is [(16-20)/18]/[(8-5)/6.5] = 0.48

If your income is $15000, the price elasticity of demand when price increases from $5 to $8 is [(22-25)/23.5]/[(8-5)/6.5] = 0.28
b)Income elasticity at price $14 = [(16-8)/12]/[(15000-12000)/13500] = 3
Income elasticity at price $17 = [(13-4)/8.5]/[(15000-12000)/13500] = 4.76

5. Maria has decided always to spend one-third of her income on clothing
a) What is her income elasticity of clothing demand ?
b) What is her price elasticity of clothing demand ?
c) If Maria's tastes change and she decides to spend only 1/4 of her income on clothing,how does her demand curve change? What is her income elasticity and price elasticity now?

Ans:
a) Her income elasticity of clothing demand will be 1. This is because since she is spending a constant fraction of her income, her percentage change in clothing demand must equal to her percentage change in income. Suppose her income is $6000 and price of clothing is $2, then she buys 1000 clothes. If her income rises by 5% it becomes 6300 and she buys 1050 clothes, a 5%increase in demand.

b)The price elasticity of her clothing demand will also be 1. An increase in the price of clothes would lead to reduce her purchase by the same percentage. Suppose the price of clothing is $2 and her income is $6000, she will buy 1000 clothes. If the price increases by 1%, she will buy 990 clothes which is a 1% reduction.

c) Since she will now spend less on clothes, for any given price she will buy less clothes. He demand curve will shift to the left . But becasue she will still spend a fixed portion of her inclome on clothing, her income and price elasticity of demand will still be 1.

6. The New York Times reported(Feb 17 1996 P 25) that subway ridership declined after a fare increase: "There were nearly four million fewer riders in December 1995, the first full month after the price of a token increased 25 cents to $1.50, than in the previous December, a 4.3 percent decline."
a. Use these data to estimate the price elasticity of demand for subway rides.
b. According to your estimate , what happens to the Transit Authority's revenue when the fare rises?
c.Why might your estimate of the elasticity be unreliable?

Ans:
a. The percentage price increase = 0.25/1.25 = 20%, The price elasticity of demand of subway rides = 4.3/20 = 0.215 which is inelastic
b. Since the demand is inelastic, the total revenue of Transit Authority will rise.
c. The elasticity is unreliable because the elasticity is calculated over a short period(only the first month after the fare increase). In the long run people might switch other means of transportation which might increase the price elasticity of demand and reduce the total revenue.

7.Two drivers - Tom and Jerry-each drive up to a gas station .Before looking at the price ,each places an order.Tom says ."I'd like 10 gallons of gas."Jerry says ,"I'd like $10 worth of gas." what is each driver's price elasticity of demand?

Ans: The price elasticity of Tom's demand is zero because his quantity of demand always remains the same irrespective of the price.

The price elasticity of Jerry's demand is 1 because he spends the same amount of money on gas irrespective of the price.which means his percentage change in quantity is equal to the percentage change on price.

8.Consider public policy aimed at smoking.
a.Studies indicate that the price elasticity of demand for cigarretes is about 0.4. If a pack of cigarretes currently costs $2 and the government wants to reduce smoking by 20 percent, by how much should it increase the price.

b.If the governement permanently increases the price of cigarrettes, will the policy have a larger effect on smoking 1 year from now or 5 years from now?

c. Studies also find that teenagers have a higher price elasticity than do adults. Why might this be true?

Ans: a) Pice elasticity = %change in quantity demanded/%change in price. Since the price elasticity = 0.4, to reduce the quantity demanded to 20% will require a 50% increase in price(0.4 = 20/%change in price, %change in price = 20/0.4 = 50). Using the midpoint method, the new price should be as below

X2-2/(X2+2)/2 = 0.50.

So, X2(new price) should be $3.33.

9. You are the curator of a museum. The museum is running short of funds,so you decide to increase revenue.Should you increase or decrease the price of admission? Explain.

Ans : This depends on the price elasticity of demand
If the demand for visiting meuseums is inelastic, the price should be increased
If the demand for visiting meuseums is elastic, the price should be decreased

10.Corn has a elastic demand and gasoline has an inelastic demand. Suppose that the government places a tax on each product that lowers the supply of each product by half (that is ,the quantity supplied at each price is 50 percent of what it was)
a. What happens to the equilibrium price and quantity in each market?
b. Which product experiences a larger change in price?
c. Which product experiences a larger change in quantity?
d. What happens to total consumer spending on each product?

Ans:
a. The decrease in supply will raise the equivalent price but reduce the equivalent quantity in both the markets. But the increase in equivalent price will be more in the market of gasoline which has an inelastic demand. The decrease in equivalent quantity will be more in the market of corn which is elastic in nature.
b. The market of gasoline will experience a larger change in price.
c. The market of corn will experience a greater change in quantity
d.In the market of gasoline the %increase in price will be more than the % decrease in quantity demanded. So, the total consumer spending will increase in this market.

In the market of corn the %increase in price will be less than the %decrease in quantity demanded. So, the total consumer spending will decrease in this market.

11. Beachfront resorts have an inelastic supply,and automobiles have an elastic supply. Suppose that a rise in population doubles the demand for both products (that is, the quantity demanded at each price is twice what it was).
a. What happens to the equilibrium price and quantity in each market ?
b. Which product experiences a larger change in price ?
c. Which product experiences a larger change in quantity ?
d. What happens to total consumer spending on each product ?

Ans:
a. The increase in demand will increase both equilibrium price and quantity
b. In the beachfront resorts market which is a inelastic supply, the increase in demand leads to a relativley large increase in price and less increase in quantity.
c. In the automobile market which is a elastic supply, the increase in demand leads to a relativley large increase in quantity and less increase in price.
d. Since both equilibrium price and quantity increase the consumer spending will increase.in both markets.

12. Several years ago,flooding along the Missouri and Mississippi rivers destroyed thousands of acres wheat.
a. Farmers whose crops were destroyed by the floods were much worse off, but farmers whose crops were not destroyed benefited from the floods. Why?
b. What information would you need about the market for wheat to assess whether farmers as a group were hurt or helped by the floods?

Ans :
a. Destruction of some of the crops reduced the supply which increased the eqilibrium price. This is the reason why farmers whose crops were not destroyed benefitted.
b. We need to know the price elasticity of demand for wheat .

13. Explain why the following might be true : A drought around the world raises the total revenue that farmers receive from the sale of grain, but a drofht only in Kansas reduces the total revenue that Kansas farmers receive.

Ans : World wide market is a broader market and people will not have much substitute for grain if we consider the world market as a result the demand will be inelastic. Due to the drought supply will reduce and it will increase the price. Since the demand is inelastic in this case total revenue will increase if the price is raised.

Kansas market is a subset of the world market and is narrowly defined. People will have options other than the Kansas market to buy the grains. So, in the case the price elasticity of demand will be elastic. Due to the drought supply will reduce, price will increase but since the price elasticity of demand is inelastic total revenue will fall in this case.

Session 5

Examples of:

Elastic :

Δ Q > Δ P

Inelastic:
Δ Q < Δ P

Unit elastic:
Δ Q = Δ P

Perfectly inelastic -
Δ Q = 0
e.g; competitive market eg a potato market where everyone knows the proce of each other's potato.

Perfectly elastic

Note:

1.When slope is constant, elasticity varies from 0 to α
2.As you raise price,elasticity also increases
3.e = Lower part of the curve/upper part of the curve
4.Revenue is a seller concept

Total revenue(TR) = Price x Quantity - It is the price paid by buyers and received by sellers of a good

Average revenue (AR) = TR/Q = PxQ/Q = P - It is the total revenue divided by the number of units sold. AR curve is the demand curve itself.

Marginal revenue(MR) = ΔTR/ΔQ - It is the extra revenue that the seller gets by offering an extra unit for sale.

Note:

1. MR is steeper than AR
2. MR is the slope of the total revenue curve
3. At maximum TR, MR is zero
4. AR and MR curve have the same vertical intercept
5. TR will increase if demand is inelastic
6. TR will decrease if demand is elastic
7. TR will remain same if demand is unitary elastic

Assignment 3

1. Explain each of the following statements using supply-and-demand diagrams.
a) "When a cold snap hits florida,the price of orange juice rises in supermarkets throughout the country."
b) "When the weather turns warm in New England every summer,the price of hotel rooms in Caribbean resorts plummets."
c) "When a war breaks out in the Middle East,the price of gasoline rises,and the price of a used Cadillac falls."
Ans : a)
In this case below things will happen
1. The cold snap in Florida will destroy oranges
2. This will reduce the quantity of oranges produced which in turn will reduce the supply of the quantity of oranges
3. So, for the same price now there will be less oranges which will shift the supply curve inward.
4. As the figure shows this decrease in supply raises the equilibrium price.
b)
In this case the below things will happen
1. When the weather turns warm, there will be fewer people who will be eager to visit warm places like Carribean
2. So, at the existing prices the hotel rooms will be empty in Caribbean. In other words there will be a decrease in demand for hotel rooms
3. The demand curve will shift to the left
4. The hotel owners will reduce the price to keep the rooms booked
5. As the figure suggests, this will reduce equilibrium price.
c)
In this case following things happen
1. War destroys oil fields ,oil tankers which reduces the supply of oil
2. The supply curve for oil moves inward as a result the supply curve of gasoline, made of oil, also moves inward
3. Thus the price of gasoline increases as is evident from the figure
4. On the other hand, since used Cadillac consumes lot of gasoline, it becomes expensive to run Cadillac
5. People demands less of this car as a result the demand curve moves to the left
6. This reduces the price of used Cadillac cars as is evident from the figure.

2. "An increase in the demand for notebooks raises the quantity of notebooks demanded but not the quantity supplied." Is this statement true or false ? Explain.
Ans : This statement is false. The figure below(FIG 1) shows that when the demand increases for notebooks, the quantity supplied also increases. The statement could have been true if the supply curve were a straight line as shown in the figure(FIG 2)
Fig 1
Fig 2


4.Consider the markets for DVD movies, TV Screens, and tickets at movie theaters.
a. For each pair, identify,whether they are complements or substitutes:
DVDs and TV screens
DVDs and movie tickets
TV screens and movie tickets
b. Suppose a technological advance reduces the cost of manufacturing TV screens. Draw a diagram to show what happens in the market for TV screens.
c.Draw two more diagrams to show how the change in the market for TV screens affects the markets for DVDs and movie tickets
Ans :
a)
DVDs and TV screens - Complements
DVDs and movie tickets – substitutes
TV screens and movie tickets – substitutes
b) Let us say that the market for TV screens is in equilibrium at the market price P1 and quantity demanded Q1. The technological advance reduces the cost of manufacturing TV screens. So, the producers will supply more TV screens at each price. This will result in an outward shift of the supply curve. The new equilibrium point is now at Price P2 and quantity Q2. This results in a fall in price and increase in quantity demanded.
c) When the price of TV screens, complement of DVDs, decreases, the demand for DVDs will increase at each price resulting in an outward shift in the demand for DVDs. This will move the new equilibrium to P2 and Q2 increasing the price as well as the quantity demanded.
When the price of TV screens, substitute of movie tickets, decreases, the demand for movie tickets will fall at each price resulting in a leftward shift of the demand for movie tickets. The new equilibrium will now be at P2 and Q2 decreasing the price as well as the quantity demanded of the movie tickets.
6. Consider these two statements from the In the News box:
a. "Political unrest overseas threatens to disrupt the supply of America's sweetest temptations."
b. "As the price goes up , farmers have motivation to do anything they can to get their product to the market."
Which of these statements refers to a movement along the supply curve? Which refers to a shift in the supply curve? Explain
Ans`: The second statement refers to movement along the supply curve. This is because in this case, the increase in quantity supplied is happening for an increasing price and not for a fixed price.
The first statement refers to a shift in the supply curve. In this case for the same price the quantity supplied is decreasing. As a result the supply curve will shift to the left.
8. Suppose that in the year 2010 the number of births is temporarily high. How does this baby boom affect the price of baby-sitting services in 2015 and 2025? (Hint: 5-year-olds need baby-sitters whereas 15-year-olds can be baby-sitters)
Ans: A temporarily high birth in 2010 will result in higher price for baby sitters in 2015 and lower price in 2025. This is because in 2015, there will be more 5-year-olds who will need baby sitters, so the demand for baby sitting services will rise. In 2025 there will be more 15-year-old which will shift the supply of baby sitting services outward. This will result in a fall in the baby sitting service prices.
9. Ketchup is a complement (as well as a condiment for hot dogs. If the price of hot dogs rises what happens to the market for ketchup? For tomatoes? For tomato juice? For orange juice?
Ans :
Market for ketchup:
If the price of hot dogs rises, it will result in a low demand of hot dog. This in turn will result in low demand of ketchup. This will also lead to price fall in ketchup.
Market for tomato:
Since tomato is a raw material for ketchup, fall in price of ketchup will result in fall in demand of tomato leading to a fall in price of tomato as the producers will try to increase sales by cutting price.
Market for tomato juice:
Since tomato juice is produced from tomatoes, fall in price of tomato will lead to more supply of tomato juice at each price. This will shift the supply curve to the right resulting in a fall of price and increase in demand for tomato juice.
Market for orange juice:
If the price of tomato juice decreases, demand for orange juice decreases because it is a substitute of tomato juice.

11. Because bagels and cream cheese are often eaten together, they are complements.
a. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of bagels have risen. What could be responsible for this pattern—a
fall in the price of flour or a fall in the price of milk? Illustrate and explain your answer.
b.Suppose instead that the equilibrium price of cream cheese has risen but the equilibrium quantity of bagels has fallen. What could be responsible for this pattern—a rise in the price of flour or a rise in the price of milk? Illustrate and explain your answer
Ans :
a. The reason for this pattern is a fall in the price of flour.
Bagel market: When the price of flour which is a raw material for bagel falls, the producers will supply more bagel at each price. So, the supply curve of bagel shifts outwards. This will result in a rise in the equilibrium quantity of the bagel as is evident from the figure below. This will also result in reduced price of bagel.

Cream cheese market: When the price of bagel(complement of cream cheese) falls, the demand for cream cheese increases. This shifts the demand curve to the right thus increasing the equivalent price of cream cheese as is evident form the figure below.
b. The reason for this pattern is a rise in the price of milk
Cream cheese market: Due to the increase in the price of milk, the producers will produce less of cream cheese. This will result in a reduction in supply of cream cheese which will shift the supply curve to the left. This results in a rise in the equilibrium price of cream cheese.
Bagel market: Since the price of the complement increases, the demand for bagel falls. The curve shifts to the left. This results in a fall in the equivalent quantity of bagel.

DIAGRAM
12. Suppose that the price of basketball tickets at your college is determined by market forces. Currently, the demand and supply schedules are as follows:

PRICE QUANTITYDEMANDED QUANTITYSUPPLIED
$ 4 10,000 8000
8 8000 8000
12 6000 8000
16 4000 8000
20 2000 8000
a. Draw the demand and supply curves. What is unusual about this supply curve? Why might this be true?
b. What are the equilibrium price and quantity of tickets?
c. Your college plans to increase the total enrollment next year by 5000 students. The additional students will have the following demand schedule:

PRICE QUANTITYDEMANDED
$ 4 4000
8 3000
12 2000
16 1000
20 0
Now add the old demand schedule and the demand schedule for the new students to calculate the new demand schedule for the entire college. What will be the new equilibrium price and quantity?
Ans:
a.
The unusual thing is that the supply curve is vertical.
This might be true because the basketball stadium might have a fixed number of seats irrespective of the price.
b. equilibrium price is $8, equilibrium quantity is 8000
c.
The new equilibrium price is $12 and equilibrium quantity is 8000.

13. Market research has revealed the following information about the market for Pizza: The demand schedule can be represented by the equation QD = 380 – 20P, where QD is the quantity demanded and P is the price. The supply schedule can be represented by the equation QS = -120 + 30P,where QS is the quantity supplied. Calculate the equilibrium price and quantity in the market for pizza.
Ans : Equilibrium happens when quantity supplied = quantity demanded.
Therefore, QD=QS
380-20P = -120 + 30P
or, 50P = 500
or, P = 10
Therefore Q = 180
The equilibrium price is 10 and the equilibrium quantity is 180

Assignment 2

ASSIGNMENT 2

4. Draw and Explain a production possibilities frontier for an economy that produces corn and rice. What happens to this frontier if a new fertilizer is developed that increases the amount of corn that can be produced on each acre of land?

The PPF in this case will follow the law of increasing opportunity cost which states that as the economy increases its production of any good along its PPF, the opportunity cost of obtaining an additional unit of the good (in terms of the foregone good) will be increasing. This will result in a non-linear curve , it will be a concave curve

When a new fertilizer increases the amount of corn production, the opportunity cost of corn production will be lowered. This will lead to a shift in the PPF

1. Draw a circular flow diagram.Identify the parts of the model that correspond to the flow of goods and services and the flow of dollars for each of the following activities.

a.Martin earns $15 per hour working in a factory

b.Matilda spends $6 for Pizza

c.Madeline's Bakery pays $500 for the rent on its shop

d.Maria purchases a new pair of earrings for $200

0100090000037800000002001c00000000000400000003010800050000000b0200000000050000000c02ad050807040000002e0118001c000000fb021000070000000000bc02000000000102022253797374656d0005080700003b7600009453110026e20a02f873e6020c020000040000002d01000004000000020101001c000000fb02ceff0000000000009001000000000440001254696d6573204e657720526f6d616e0000000000000000000000000000000000040000002d010100050000000902000000020d000000320a2d00000001000400000000000807aa0520001600040000002d010000030000000000

2. Imagine a society that produces military goods and consumer goods ,which we'll call "guns" and "butter"

a.Draw a production possibilities frontier for guns and butter. Using the concept of oppotunity cost, explain why it most likely has a bowed-out shape.

b. Show a point that is impossible for the economy to achieve.Show a point that is feasible but inefficient

c.Imagine that the society has two parallel parties ,called the Hawks(who want a strong military) and the Doves(who want a samller military). Show a point on your PPF that the Hawks might choose and a point the Doves might choose.

d.Imagine that an aggressive neighboring country reduces the size of its military. As a result both the Hawks and the Doves reduce their desired production of guns by the same amount. Which party would get the bigger "peace dividend", measured by the increase in butter production? Explain

Ans:

`

a. It is bowed because the opportunity cost of butter is calculated based on the number of guns and butter the economy is producing. If the economy produces lot of butter, people who are best suited/skilled to make guns are engaged to produce butter. As a result decrease in each unit of gun production results in a small increase in the butter production. The opportunity cost of producing butter is more and the slope is steep for the PPF. While on the other hand, if the economy is producing lot of guns, people skilled in butter production are being used to produce guns. So for each unit decrease in gun production results in huge increase of butter production. The opportunity cost of producing butter is less which means the slope is less resulting in a flat PPF.

b.The point A which is outside the PPF is impossible to achieve by the economy.

Point B which is inside the PPF is feasible but inefficient because all resources are not used for production.

c. The Hawks might choose point H, where guns are produced more and less of butter is produced.

The Doves might choose D, where more butter and less guns are produced.

d.The Hawks will get a bigger "Peace Dividend" if the production of guns are reduced by the same number by both Hawks and Doves. This is because the frontier is flatter at point H than point D, which means that reducing the production of guns at point H will lead to more production of butter than reducing the production of guns at point D.

3.The first principle of economics discussed in Chapter 1 is that people face trade-offs. Use a production possibilities frontier to illustrate society's trade off between two goods - a clean environment and the quantity of industrial output. What do you suppose determines the shape and position of the frontier? Show what happens to the frontier if engineers develop a new way of producing electricity that emits fewer pollutants.

The shape and position of the PPF depend on how costly it is to maintain a clean environment vs the quantity of industrial output produced.

If engineers develop a new way of producing electricity that emits less pollutant, will lead to a shift in PPF as shown above

4. An economy consists of three workers: Larry,Moe and Curly.Each works 10 hours a day and can produce two services :mowing lawns and washing cars.In an hour, Larry can either mow one lawn or wash one car;Moe can either mow one lawn or wash two cars;and Curly can either mow two lawns or wash one car.
a. Calculate how much of each service is produced under the following circumstances,which we label A,B,C,D:

1. all three spend all their time mowing lawns(A)

2. all three spend all their time washing cars(B)

3. all three spend half their time on each activity(C)

4. Larry spends half his time on each activity,while Moe only washes cars and Curly only mows lawns(D)

b. Graph the production possibilities frontier for this economy. Using your answers to part(a),identify points A,B,C,D on your graph

Ans :

1. 40 lawns mowed, 0 cars washed

2. 0 lawns mowed,40 cars washed

3. 20 lawns mowed,20 cars washed

4. 25 lawns mowed,25 cars washed

6.Classify each of the following statements as positive or normative. Explain.

1. An increase in the minimum wage will increase the rate of teenage unemployment

2. The government should raise the tax on tobacco to reduce the quantity of cigarettes sold

3. An increase in the rate of growth of the money supply will lead to a rise in the price level

4. An increase in the interest rate will cause a decline in investment

5. The government should provide healthcare to anyone who does not have health insurance.

Ans

A . Positive

B. Normative

C. Positive

D. Positive

E. Normative

Assignment 1

3. You have an economics exam tomorrow and you are planning to study tonight. Your best friend calls to tell you that he has an extra ticket to a concert tonight that he will give to you( for free). What is the true cost of attending the concert? Now,suppose that you are scheduled to work tonight at your part-time job.What is the true cost of attending the concert in this case? Explain
Ans : 1. a.Prospect of not doing good in the exam resulting in not getting a better opportunity after passing the exam
b. Spending money to travel to the concert
c. Spending money on food and beverage in the concert.
2. a.Losing the salary of the part time job
b. Spending money to travel to the concert
c. Spending money on food and beverage in the concert.
4. You win $100 in a basketball pool. You have a choice between spending the money now or putting it away for a year in a bank account that pays 5 percent interest. What is the opportunity cost of spending the $100 now.
a.giving up the opportunity to spend $105 after 1 year
5. The company that you manage has invested $5 million in developing a new product,but the development is not quite finished. At a recent meeting,your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $3million.If it would cost $1million to finish development and make the product,should you go ahead and do so? What is the most that you should pay to complete development.
Do not spend $1million - Loss is $5 million
Spend $1million- marginal profit is $2million
Maximum pay - $3million - no more increase in profit at the margin
6. Three managers of the magic potion company are discussing a possible increase in production. Each suggests a way to make this decision.
Harry : We should examine whether our company's productivity--gallons of potion per worker----would rise or fall.
Ron: We should examine whether our average cost -cost per worker - would rise or fall
Hermione:We should examine whether the extra revenue from selling the additional potion would be greater or smaller than the extra costs
Who do you think is right and why?
Hermione is right since she is thinking of marginal profit. Rational people makes decision by comparing marginal benefits and marginal costs
9. Your roommate is a better cook than you are,but you can clean more quickly than your roommate can.If your roommate did all of the cooking and you did all of the cleaning,whould your chores take you more or less time than if you divided each task evenly? Give a similar example of how specialization and trade can make two countries both better off.
Dividing task will take more time. If they take the comparative advantage of each other, it will increase total production and/or reduce total labor
Let us assume that USA can produce 10 computers or 1 bottle of water per worker and India can produce 1 computer or 1 bottle of water per worker.
In USA, the opportunity cost of producing one bottle of water is 10 computers. In India, the opportunity cost of producing one bottle of water is one computer. So, USA has a comparative advantage in computer and India in bottle of water.
If both countries specialize , let us see what is the result. Let us assume both countries have 2 worker. So,US worker will specialize in producing 20 computers and Indian worker in producing two bottles of water. If India trades 1 bottle of water for 5 computers, then India will end up with 5 computers and 1 bottle of water, USA will end up with 15 computers and 1 bottle of water. So, in this process both countries get richer.
11.Nation with corrupt police and court systems typically have lower standards of living than nations with less corruption. Why might be that case?
It reduces productivity for the following reasons
It increases the cost to domestic business which leads to less productivity and also less affordability.
It acts as an inhibitor to foreign direct investment
It affects annual per capita GDP growth

12.Explain whether each of the following government activities is motivated by a concern about equity or a concern about efficiency. In the case of efficiency ,discuss the type of market failure involved.
a. providing unemployment insurance
b. regulating electrical utilities
c. evaluating mergers of American companies
d. operating public health clinics
e. providing national defense
f. instituting fines for firms who pollute
a. equity
b. efficiency - market power
c. efficiency - market power
d. equity
e. efficiency - market power
f. efficiency - externality
13.Discuss each of the following statements from the standpoints of equity and efficiency
a. "Everyone in society should be guaranteed the best healthcare possible."
b."When workers are laid off,they should be able to collect unemployment benefits until they find a new job."
a. Less efficient more equity-- Even the rich who can pay for the healthcare will get the best healthcare(which is costly) at a much lower price. The government could have used the money the rich people would have spend for a better healthcare for some other purposes. So, in this case the resources are not efficiently managed.
More equity because everyone will get the same level of healthcare irrespective of their affordibality.
Less efficient more quity - The money to be paid to the unemployed will collected as taxes from the employed who is earning the money being productive. If higher taxes are levied, their income after tax will reduce , it will be a disincentive to their productivity.

15. Suppose Americans decide to save more of their incomes.If banks lend this extra saving to business ,which use the funds to build new factories,how might this lead to faster growth in productivity?Who do you suppose benefits from the higher productivity? Is society getting a free lunch?

More people will be employed and their hours will be utilized to create more goods and services. So, the hours which were wasted through unemployment is now utilized to create more goods and services.. This enhances the productivity by making more people productive.
The entire society benefits form the higher productivity, the standard of living of the society will increase.
No, the buliding of new factories, more work, more goods and services means
People in the society has now less time to spend on fun and other leisure activities
The factories might contribute to pollution
More goods and services and its demand cause firms to raise prices - Inflation

Economics - Session 4

Elasticity - Elasticity is the responsiveness of demand for change in price. It is calculated by dividing %change in demand by %change in price.

Price elasticity of demand =% change in Qd / % change in P

In a demand curve, P and Q move in the opposite direction which makes price elasticity negative.
Although elasticity value is negative, we take the absolute value of elasticity and represent it by MOD(e) = e

Determinants of Price Elasticity

1. Price elasticity is higher, when close substitutes are
   available
2. Price elasticity is higher for narrowly defined goods than
   broadly defined ones.
3. Price elasticity is higher for luxuries, than for necessities.
4. Price elasticity is higher in the long run, than in the short run

Rule of thumb

Flatter the demand curve, bigger the elasticity Steeper the curve, smaller the elasticity

Variety of Demand curves

Inelastic Demand

1. Quantity demanded does not respond strongly to price changes.
2. Price elasticity of demand is less than 1

Elastic Demand

1. Quantity demanded responds strongly to changes in price
2. Price elasticity of demand is greater than one.

Perfectly Inelastic

1. Quantity demanded does not respond to price changes
2. Price leasticity of demand is zero

Perfectly Elastic

1. Quantity demanded changes infinitely with any change in price
2. Price elasticity of demand is infinite

Unit Elastic

1. Quantity demanded changes by the same percentage as the price
2. Price elasticity of demand is less than one

Furthur reading : Chapter 5 - Principles of Economics by MANKIW

Economics - Session3

DEMAND

The other non-price determinants of Demand are

Number of buyers
Consumer Income
Prics of related goods
Tastes
Expectations

Giffen goods - In a broader sense, goods which do not follow law of demand are giffen goods. In a narrower sense, giffen goods are those goods for which if price falls, demand also falls other things remaining constant.

Giffen goods are named after Sir Robert Giffin. Example of a giffen good may be an expensive brand of liquour. If the price of the brand falls, it is no longer perceived as an exclusive or a high status drink, so its demand falls.
For more information on giffen goods, please visit http://en.wikipedia.org/wiki/Giffen_goods

Normal goods - Normal goods are those for which demand increases when income increases. For eaxample demand for cars increases when one's income increases.
For more information visit http://en.wikipedia.org/wiki/Normal_good

Inferior goods - Goods for which demand decreases when income increases are inferior goods. For example if income increases, demand for two wheeler goes down.
For more information visit http://en.wikipedia.org/wiki/Inferior_good

NOTE: For our exam purpose, if nothing is specified we should assume that the good is a normal good.

1. If price changes movement is along the demand curve. Here the change is of quantity demanded
2. If other non-price determinant thing changes, ther is shift in demand curve.Here the demand changes.

Substitute

Let's say that the price of burger is decreasing, then the demand of burger will increase. When the demand for burger increases people will consume more burger and less hotdog. So the demand for Hot dog falls. In this scenario, burger is a substitue for hot dog.

An increase in price for one kind of good will result in an increase in demand for its substitute good and a decrease in price will result in decrease in demand for its substitute goods.

Other examples of substitute goods are margarine and butter, petroleum and natural gas

Compliments- TO BE DEVELOPED(TBD)

SUPPLY

- TO BE DEVELOPED(TBD)

DEMAND AND SUPPLY

- TO BE DEVELOPED(TBD)