Microeconomics - Prof. Lieberman NYU CAS Econ PDF

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Prof. Lieberman NYU CAS Econ...

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∂Online modules for help 2 lowest scores of problem sets get deduced Review notes and add written notes, online graphs ----------------------------------------------------------------------------------------------------------------------------

January 23rd Economics : the study of choice under conditions of scarcity Time is the ultimate scarcity… What is scarce for a society is resources Every good or service we produce comes from resources Economists have found it useful to categorize them 1. Land (natural resources) a. Ex. oil deposits 2. Labor (time human beings spend producing stuff) 3. Capital (long lasting tool that labor uses to produce goods and services) a. Tricky thing is that capital itself must also be produced b. 2 kinds of capital i. Physical capital 1. Ex. shovel, computer, manufacturing plant ii. Human capital 1. Skills and training that labor has to produce things more effectively 2. Ex. knowledge of a surgeon iii. Entrepreneurship capital 1. Innovator, risk-taker 2. Ability of human to design different tasks Resources exist in limited quantities, every society has to make choices Every society faces the problem called resource allocation 1. What is going to be produced? 2. How are we going to produce it? 3. How is it going to be distributed / who gets it? 3 methods of Allocating resources 1. Command system : government authority tells business firms what they are going to produce, how, and who will get it a. Ex. old soviet system, north korea now, cuba transitioning away from this, China 15 years ago 2. Traditional system : What is produced = what we’ve always produced, in the same way we’ve always produced it, and who always gets it still gets it a. Ex. primitive societies, societies with a social hierarchy, these

societies are stable but never have any progress 3. The Market System : everybody does what they want, with what they’ve got a. What is produced - whatever people want to produce… no tradition or government to tell you what to produce, its when you discover a need in society b. Ex: All economies except for North Korea and maybe Cuba are market economies, but does not mean that ALL resources are allocated with market system i. Ex. USA used command market system for taxes, need money for government ii. Ex. parents supplying you with food example of traditional system Tension between Command & Market 1. Most decisions are market system: resource allocation is done primarily by the market, most resources are owned privately (individuals own land, labor, capital, and entrepreneurship they provide to the market ) No dominant force controlling resource allocation 1. No legal or regulatory structure telling resources where to go EXAMPLE: Cost of 1 year of college : Tuition fees: $33,480 Books & Supplies : $1,230 Room & Board : $11, 890 Transportation: $2,720 Total outlook: $49,320 Most people would say this is cost of college but economists called these out of pocket expenses Opportunity cost of college (make a choice) some of these are part of out-of-pocket costs (things you’re giving up to go to college ) Some are their own thing entirely Out of pocket: $14, 610 Both: $34,710 = (explicit opp. cost: money is actually paid out) Opportunity: $25,000 (implicit opp. cost- idea u cant earn income in college so giving up that money in theory) This would equal: $59,710 times 4 = $240k Other intangible benefits

MISSING January 8th

January 30th Model : abstract representation of reality (not necessarily realistic, just represents reality) - A model takes certain things from reality that are of purpose to us Assumptions 1. Critical a. Conclusions you are going to reach depend on accuracy of critical assumption (ex. Reading that a road is closed for construction when looking for fastest route) 2. Simple a. Keep model simple but does not affect conclusion (ex. No trees on a map does not affect you choosing fastest route) Supply & demand is a model built to explain how prices are determined in many types of markets -what determines how these things are priced?

Example of supply and demand model with gasoline Q d = # of gallons of gas buyers would like to buy in the US each month given the constraints they face 1. Q d = quantity demanded 2. Like = quantity demanded in this model is hypothetical, don’t know how much they will buy for sure 3. Constraints = limited income Demand function Q d is a function of the price of gas 1. . Q d goes in opposite direction of gas (laws of demand always go in opposite directions) 2. Quantity demanded is a function of …..(when you move up demand curve u r assuming all variables r staying same except price 3. Q d = D(P gas , income , wealth P substitute P complement , population ) -preferences 4. Normal good: when income goes up, quantity of demand goes up (organic food) 5. Inferior good: when income goes up, quantity of demand goes down (ramen) 6. Substitute good = if price increase for sub, qd of gas go up, shift demand curve up // if price decreases for qd, shift demand curve down 7. Complements : if price of complement falls, other complement demand curve shifts right( supply stays the same) 8. Population goes up, demand also goes up 9. All of this is in ceteris paribus context Income is what you earn over period of time

Wealth is what you what you own right now (one can go up while other stays same) Ceteris paribus: all else the same, stabilize certain variables constant to simply economic outcome predictions? Ex. Stabilize all other variables in gasoline example except price Q d = D(P gas ) Dependant v (Qd) on horizontal axis Independent v (P) on vertical axis

Demand curve (called curve even when straight)

Δ P good = Δ Qd good

(a change in anything other than price can change

the quanity of demand ) Input prices

Supply function Q s = S(P gas policy)

P input

P alternate

# of firms P expected

Supply curve (opposite direction of demand curve)

government

What changes would shift the supply curve to the left? = P make)

alternate (ie. another thing you can

Price goes up, qs goes up Input prices: factor prices (factors of production) -labor Input goes up, supply curve goes left Number of firms goes up, supply shifts to right Price expectation goes up,supply shifts to right (government policy - has to do sub taxes and subsidies ) Anything other than the price of a good shifts the supply curve

Putting supply and demand curves together

Looking for equilibrium : point of rest a. Set of values of the endogenous variables in the model that won’t change as one or more of the exogenous variables changes Two types of variables that can exist in any model a. Exogenous variables: given to us outside the model (all the rest) b. Endogenous variables: determined inside the model (price and quantity)

If price is above intersection point there’s excess supply, if price is below intersection excess demand As price goes down, move left on supply and demand curve

February 1st Excess supply (above equilibrium) = Qs - Qd (surplus) Excess demand (below equilibrium) = Qd-Qs (shortage) Equilibrium = where price won’t change on its own, sellers want this price Comparative statics : What happens if one of these variables we were holding constant to simplify equation changes?

Δ one or more of the exogenous variables If one of the exog are changing we need seperate ceteris paribus NOTES:

February 8th: ELASTICITY : synonym for sensitivity EX: The price elasticity of demand = how sensitive the quantity demanded is to price changes

WRONG TO ASSUME Measure the sensitivity but how steep or flat demand curve is Demand curve is steep = quantity demanded is not sensitive to price changes Insensitive = inelastic demand Sensitive = elastic demand Want to look how much quantity changes RELATIVE to the quantity demanded Chocolate bars : insensitive Private jets : sensitive Chocolate bars less sensitive cause cheaper so doubling the price is less dramatic The price elasticity of demand is defined as the percentage change of quantity demanded divided by percentage change of price (get rid of any negative signs) new/old - 1 New = old(1+r) -Suppose we have market for gasoline (P) Price per gallon $3 $3.30 $3.60

(Qd) Number of gallons per week 10,000 8,000 6,000

Trying to figure out how sensitive the demand for gasoline is to the price changes WRONG: Percentage change in quantity demanded : goes down by 2k gallons but….2000 divided by 10,000 would equal 20% and 2000 divided by 8000 is 25%... Don't use this way to calculate… RIGHT: Midpoint rule: change in quantity demanded DIVIDED by midpoint between quantity started with and ended with (same vice versa for price) So then… Percentage change in quantity demanded : 2k divided by 9k (avg between 10 & 8) Elasticity is just a pure number...not measured in anything, not a percent

The larger the price elasticity of demand.. The more sensitive demand is to price Categories of elasticity (what does graph look like?) Elastic demand : when elasticity value is greater than 1 1. when demand for good is elastic 2. (implies when price goes up by 1%, quantity demanded goes down by more than 1%) 3. (Numerator bigger than denominator) Inelastic demand : when elasticity value is below 1 1. Denominator bigger than numerator Unit Elastic : when elasticity is equal to 1 1. When price goes up 1%, quantity demanded goes down by 1% Infinitely Elastic : elasticity approaches infinity (ie. dimes) 1. Demand curve would almost be horizontal line

Determinants of elasticity : 1. Basic principle a. More substitutes, more elastic b. greater ability or willingness to substitute other goods = more elastic demand 2. Necessity or Luxury a. Ie. medical care as a necessity = inelastic b. Foreign travel as a luxury = elastic 3. Narrowness of the market a. The more narrow we define the market the more elastic the demand b. ie . price of fruit goes up (but all other food stays same) can find substitutes 4. Time horizon (ex. Need a dress last min) a. The longer we wait after a price change to measure the quantity response the more elastic the demand (in general, are exceptions) b. In general long run elasticities are greater than long run elasticities 5. The Percentage of the Buyer’s Budget a. The greater the % of total income spent on a good, the more elastic the demand Demand for medical care is an inelastic Relationship between Elasticity and Total Expenditure 1. Total expenditure (TE) = total spending on good or total revenue of all firms selling good aka combined revenue 2. Total expenditure = price times quantity (area of rectangle on graph) 3. If demand is inelastic: When price goes up, the percentage by which quantity demanded

goes down is less than the percentage that price goes up 4. If demand is elastic: opposite (quantity demanded goes down more than price goes up?) a. Price times quantity will go down, TE goes down Inelastic

Elastic

P ↑

TE

TE

↓

P ↓

TE

TE

↑

↑

↓

Elasticity and Linear Demand Curves As move upward and leftward on curve, the percentage change in quantity gets larger and percentage change of price gets smaller (elasticity is growing) When graph out what parts of graph show elasticity and inelasticity ? When price goes up and demand is an elastic , TR will rise SUBSIDIES?

February 13th Midterm exam All multiple choice From beginning of class to elasticity Email recitation leader to confirm

MORE ELASTICITY 1. If a demand curve is linear when we move along demand curve elasticity is different a. If move up demand curve, percent of change of quantity demanded goes up (don’t forget about midpoint rule) b. Demand is an elastic 2. Mass transit a. Both SR + LR, price elasticity of demand (inelastic) b. Price up, total revenue up, c. 3. War on Drugs a. 70% of economists think all drugs should be legalized i. Hinges on what economists know about elasticity b. Demand for drugs is very inelastic (addiction) c. US drug policy focuses on suppliers d. If drugs were legal, what would the total expenditure & total revenue ? i. e. Issue is crime , drug users desperate to get money i. What happens then if legal and marketing drugs becomes more valuable ? f. Legal vs. illegal markets g. Possibly war on drugs shift demand curve to right? Because given the excessive profits or supplying drugs, thugs are willing to hurt people h. Why war on drugs is a huge failure - video i. Shouldn't legalize but should decriminalize j. How does this shift curves etc etc ------------

FEBRUARY 15TH

ADD NOTES FROM PROBLEM SET Theory of the firm Firms goals: maximize total profit (TR) Basic principles about cost 1. In economics, “cost” is “opportunity cost” 2. “Cost” relates to a decision 3. “Cost” is measured dollars whenever possible, even if its implicit 4. For absences, cost is a flow variable (ie. income ) a. Opposite : network would be a stock variable 5. Some cost for a decision are irrelevant to that decision a. A cost already paid, or cost that must be paid Categories of Cost 1. Explicit a. Part of opp. Cost for which money is paid out 2. Implicit a. Part of opp cost but not money actually paid out Typical Firm Explicit Cost

Implicit Costs

Labor cost, taxes, raw materials

Depreciation

You decide to set up a food truck Local Fees Buy food

Accounting vs. economic costs Fixed vs. variable cost 1. Kinds of inputs 2. Fixed input 3. Variable input Short run vs. long run cost

Short run cost for some firm Trying to decide how much to produce

Q

TFC

TDC

TC

AFC

0

200

0

206

-----

1

‘’

300

500

200

2

‘’

400

600

100

3

‘’

560

760

67

4

‘’

805

1k

50

5

‘’

1280

1400

40

TFC = total fixed cost (“overhead”) TVC = total variable cost (operating cost) Firm follows “least cost rule” Afc : average fixed cost “Spreading your overhead among more output” LOOK UP MATH

FEBRUARY 27TH Textbook and steven to know all the theoretical and mathematical; facts More advantage of resources: TAs, nyu classes answers explained, textbook, steven, students (GO TO OFFICE)

Just did problem set on short run cost Now need to finish notes on long run cost

Economies of scale (left side of graph) 1. Specialization 2. Spreading cost of “lumpy inputs”

Diseconomies of scale (right side of graph) 1. Costs of monitoring employees 2. ____

Expanding firm size MES= minimum efficient sale = lowest output at which LRATC hits bottom

3 simplifying assumptions 1) All firms in market have identical LRATC curves 2) All firms in market sell some products and have equal market (initially)

What happens after bankruptcy of one firm or two firms inverse?

Market structure: Natural olisopoly: few firms (MES is large relative to market demand)...