Chisik’s ECN 104 - Lecture notes for final exams PDF

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Chisik’s ECN 104 Youtube Lecture Notes Chapter 3: Optimization ❖ Optimization: when an economic agent chooses the best feasible option ❖ The Principle of Optimization at the Margin: states that an optimal feasible alternative has the property that moving to it makes you better off and moving away from it makes you worse off. ❖ Marginal cost/ benefit: is the extra cost/ benefit generated by moving from one feasible alternative to the next feasible alternative. ➢ There are 2 ways to calculate optimization: 1. Using total value: calculates the total value of each feasible option and then picks the option with the highest total value. 2. Marginal Analysis: calculates the change in total value when a person switches from one feasible option to another and then uses these marginal comparisons to choose the option with the highest total value. - Easier comes up with important information: Marginal Benefit = Marginal Cost ● Both give the same result ❖ Optimization- Choosing the best feasible option: ➢ Do you always make the best choice? ■ You may make the best choice and still have a bad outcome. Sometimes it is difficult to make choices because: ● You have limited information ● Sorting through information can be complicated ● You are inexperienced in dealing with a given situation ❖ 2 Optimization techniques: 1. Total Value Total benefit - total cost (net benefit) 2. Marginal Analysis - The change in the net benefit of one option compared to another Marginal benefit= Marginal cost ❖ Optimization Application- Renting the optimal apartment: ➢ Apartments on your shortlist, which differ only on commuting time and rent and are otherwise identical ➢ Trade-off: Cost vs. Distance

■ Where should I live? ❏ Optimization using total value 1. Translate all costs and benefits into common units, like dollars per month 2. Calculate the total net benefit of each alternative 3. Pick the alternative with the highest net benefit

❖ What does it cost to commute? ➢ Availability of public transportation ➢ Gasoline ➢ Parking ➢ Wear and tear on car ➢ Opportunity cost of time ➢ If the round trip commute takes 20 hours/month (very far) and the opportunity cost of time is $10/hour, then the dollar cost of the commute is: ■ (20 hours)($10) = ($200) Month hour month

➢ Before and after comparison: What is the opportunity cost of commuting changes? ■ What are the benefits? ❏ Optimization using marginal analysis 1. Translate all costs and benefits into common units, like dollars per month 2. Calculate the marginal consequences of moving between alternatives 3. Choose the best alternative with the property that moving to it makes you better off and moving away from it makes you worse off

Chapter 4: Introduction to Supply, Demand, and the Benchmark, Competitive Equilibrium ❖ Key Ideas ➢ In a perfectly competitive market, 1. Sellers all selling identical good or service, 2. Any individual buyer or any individual seller isn't powerful enough on his or her own to affect the market price of the good or service ➢ The demand curve plots the relationship between the market price and the quantity of a good demanded by buyers ➢ The supplier curve plots the relationship between the market price and the quantity of a good supplied by sellers ➢ the competitive equilibrium price equates the quantity demanded and the quantity supplied ➢ when prices are not free to fluctuate, markets fail to equate quantity demanded and quantity supplied ❖ Markets ➢ A market is a group of economic agents who are trading a good or service plus the rules and arrangements for trading ➢ Informal Market: farmer’s market ■ You come up to the table at a farmer’s market, you ask and negotiate the price ➢ A financial market: ■ Has much stricter rules, the sellers and the buyers all post their prices, therefore it’s different than a farmer’s market, where there is some bargaining allowed. ■ In the financial market, you know the extent of bargaining. ■ Also, the rules are very well defined, some are traded over the counter, some, there’s a market maker who keeps all of the demands and supplies in a book. ■ The market price is the price at which buyers and sellers conduct transactions ■ The financial market is stiffer for many markets, for example; a used car market put a price on a car but there’s some negotiation ● The salesperson does not know how high a price you’re willing to or not willing to pay, and you don’t know how low a price they’re willing to accept

■ In financial markets, you look on the bottom, you see “buy volumes”; which represents how many people are willing to buy at different prices, this information is posted ■ On the other side, we see “sell volumes”, which represents how many people are willing to sell at different prices

- The green is how many people are willing to buy or sell and the yellow is the price.

❖ Perfectly competitive market: ➢ Every buyer pays and every seller charges the same market price, no buyer or seller is bug enough to influence that market price, and all sellers sell identical goods and services. ❖ How do buyers behave? ➢ Quantity Demanded ■ The amount of a good that buyers are willing to purchase at a given price ➢ Demand Schedule ■ A table that reports the quantity demanded at different prices, holding all else equal ➢ Demand Curve ■ Plots the quantity demanded at different prices.

➢ Market Demand Curve ■ The sum of the individual demand curves of all the potential buyers. The market demand curve plots the relationship between the total quantity demanded and the market price, holding all else equal. ➢ Law of Demand ■ In almost all cases, the quantity demanded rises when the price falls (holding all else equal) - The demand curve is the relationship between quantity and price

❖ Shifts of the Demand Curve occur when one of the following changes: 1. Tastes and preferences 2. Income and wealth 3. Availability and prices of related goods 4. Number and scale of buyers 5. Buyers’ expectations about the future -

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There is a difference between along a demand curve (the relationship between price and quantity)(as price or quantity demanded changes) Anything else causes a shift or a movement of the entire demand curve Very important to understand the movement along the curve and the shift in the curve

Ceteris Paribus- holding all the other factors like income, weather, advertisement, constant. If everything is not held constant then the demand curve shifts left and right.

❖ Shifts in Demand: ➢ Changes in Tastes and Preferences ■ A change in what we personally like, enjoy, or value ➢ Changes in Income and Wealth ■ A change in income affects your ability to pay for goods and services ■ Normal goods and Inferior goods ● Normal goods: If your income goes up and you buy more goods, most goods are normal ● Inferior goods: are not necessarily inferior but as your income goes up, you buy fewer goods that are cheap ◆ Example; Spam (canned meat), most people if they have a lot of money aren’t going to buy spam ➢ Changes in Availability and Price of Related Goods ■ A change in the availability and prices of related goods will shift the demand curve ■ Substitutes (white sugar and brown sugar) and Complements (peanut butter and jam) ➢ The only reason for a movement along the demand curve: ■ A change in the product’s own price ❏ How much more gasoline would people buy if its price were lower? ❖ How do sellers Behave? ➢ Quantity Supplied ■ The amount of a good that sellers are willing to sell at a given price ➢ Supply Schedule ■ A table that reports the quantity supplied at different prices ➢ Supply Curve ■ Plots the quantity supplied at different prices ➢ Market Supply Curve ■ Plots the relationship between the total quantity supplied and the market price, holding all else equal ➢ Law of Supply ■ In almost all cases, the quantity supplied rises when the price rises (holding all else equal)

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➢ Changes in Prices of Inputs Used to Produce Goods ■ An input is a good or service used to produce another good or service If input prices changed, then we would think that the supply curve could change. So for whatever reason, if its harder to build a pipeline, if its harder to provide trucking to get the oil to market, any of those things are going to affect the supply curve of oil and it isn’t the price If the price changes then we just have movement along the supply curve If the supply curve shifts left that means for the same quantity supply the seller has to be given a higher price

➢ Shifts of the Supply Curve occurs when one of the following changes: 1. Input prices 2. Technology 3. Number and scale of sellers 4. Seller’s expectations about the future ➢ Changes in Technology Used to Produce the Goods ○ What if a new technology made it easier to access previously unavailable oil reserves (eg. fracking)? ➢ Changes in the Number and Scale of Sellers ○ When the numbers of sellers increase, the supply curve shifts to the right. When the number of sellers decreases, the supply curve shifts to the left. ➢ Changes in Sellers’ Beliefs about the Future ○ Corn farmers in the Middlewest build storage for their crops based on the belief that prices will improve during non- harvest months.

❖ Supply and Demand in Equilibrium ➢ Competitive Equilibrium ■ The point at which the market comes to an agreement about what the price will be (competitive equilibrium price) and how much will be exchanged (competitive equilibrium quantity) at that price ➢ Excess Demand ■ This occurs when consumers want more than suppliers provide at a given price. This situation results in a shortage. ➢ Excess Supply ■ This occurs when suppliers provide more than consumers want at a given price. This situation results in a surplus. ◆ EQUILIBRIUM: SUPPLY = DEMAND...