Hokay!
Farmers basically experience two kinds of problems which make their lives miserables.
THE LONG TERM PROBLEM is that farmer's incomes fall, relative to the incomes of urban workers. There are three reasons for this.
1: Increasing domestic supply: as time moves on and technologies improve in farming, the domestic supply of farmed products shifts to the right (increases). This wouldn't be necessarily such a bad thing if demand would also shift to the right... however...
2: The is a lagging domestic demand for farm products: Because farm products are necessities (food), they have low income elasticity. As such, increases in income do not cause consumers to purchase much more farm products.
also
3: The is a decreased demand for exported farm goods: There is less of a demand now for Canadian farm products on the global market because countries which we have sold to in the past now produce their own farmed goods domestically.
So basically, demand for farm products remains relatively stagnant, while the supply of farm products increases. This means that the price of farm products inevitally drops, as do farmer incomes.
AGRICULTURE SUPPORT: RAISING INCOME
Government argicultural policy often aims to raise farmer's incomes above what they would make selling goods at equilibrium prices (in addition to stabilizing incomes).
There are two ways to maintain an effective price floor above the equilibrium price
1: PRICE SUPPORT
In price support, the government legislates an effectual price floor, by buying all of a farmer's output at a set price higher than the equilibrium price. By doing this, the government creates a situation where demand is perfectly elastic (and prices will not change regardless of quantity supplied).
The price and quantity exchanged both rise from the orginal equilibrium level. There is, however, an excess in supply (the farmers produce more than customers will actually buy at that set price). Excess supply is stockpiled each year.
The government is subidizing an amount equal to (the artificially inflated price) X (The excess in demand)
The consumer is subsidizing an amount equal to (quantity demanded at inflated prices) X (The difference between the equilibrium price, and the inflated price)
BASICALLY, this method allows farmers to make more money by rellocating money from the consumer and from the taxpayer.
2: QUOTAS
In a quota scenario, the government sets a limit on the quantity of a farm good that is supplied (like a quantity wall). The quota quantity is less than the equilibrium quantity, and as such, the price at the quota quantity is higher than the equilibrium price.
The effect is that quota holders get extra revenue equal to (the difference between the price demanded at the quota quantity and the price supplied at quota quantities)
Because demand is inelastic if for whatever reason quantity falls, farmer's total renevues increase! And quantity cannot rise above the quota level.
Pe X Qe < Pq X Qq BECAUSE OF INELASTIC DEMAND
Advantages: Farmer's income is stabilized without stockpiling
Disadvantages: The consumer pays more for less, and the cost of purchasing quota rights effectually allows quota licenses to become a market in and of themselves.
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THE SHORT TERM PROBLEM is that the prices of farm products fluctuate tremendously, and as a result, the farmer has a difficult time securing a steady income. These fluctuations can happen on a few levels.
INTERNATION MARKETS- changes in world prices cause changes in export prices. When the world market goes up or down, farmers make more or less money off of exports.
Basically, the demand in the world market is perfectly elastic, because Canada's contributions to international farm product markets are so small, they are practically insignificant. As a result, whatever quantities Canadian producers put on the international market do not affect the price determined for the product. FARMERS HAVE NO CONTROL OVER FLUCTUATIONS IN WORLD PRICE. Because prices are uncontrollable, farmers incomes increase in the same direction as supply (if the weather is good for some reason and a large crop is harvested, they make more money) and vice versa. Farmer incomes also increase when world prices arbitrarily rise, and fall when world prices fall.
The big complaint for farmers is that they have very little control over their incomes due to these uncontrollable changes in both the world market and their own supply. As a result, the government will often step in and try and fix things.
STABILIZATION POLICIES FOR INTERNATIONAL MARKETS (in order to adjust for fluctuations)
1: Stabilize Quantity!
How? Stockpile farm products when there are too many being produced (a good year), and then dip into this stockpile when there is not enough being produced (a bad year)
Problems: This won't work for perishable items, and also, there are extra costs farmers will have to pay to stockpile their products.
GATEMAN'S AWESOME SUGGESTION: Why not just save extra money made during good years and borrow money lost during bad years (like the rest of us)
2: Stabilize Price!
How? Create a system of 'guarunteed price' where the government subsidizes farmers when world prices are too low, and farmers pay the government when the prices are too high.
Major Problem: How do you determine what prices are too high and which are too low? If the government sets the 'ideal' price at a rate which does not correspond to acceptable world prices, either the government or the farmers will be getting a bad deal.
GATEMAN'S AWESOME SUGGESTION: Why not just save extra money made during good years and borrow money lost during bad years (like the rest of us)
DOMESTIC MARKETS- Basically, supply is inelastic from year to year (farmers can't substitute inputs and change production mid-growing season without much difficulty), and unplanned changes can occur to this inelastic supply due to changes in weather or other uncontrollable factors.
Domestic demand for farm products is very inelastic (there isn't a whole lot of substitution people can make for food). Because price is so inelastic, farmers can ACTUALLY LOSE OVERALL PROFIT by supplied a LARGER QUANTITY THAN EXPECTED (because, remember, total revenue is price X quantity, and for inelastic demand, total revenue increases when you lower quantity exchanged and increase the price). In other words, farmers incomes will fluctuate in the same direction as the price, and in the opposite direction to supply (the higher the price of wheat, the more money wheat farmers will make), and exogenous factors can raise or lower the price of wheat (by changing the quantity supplied)
HOKAY! Farmers hate this because again, they have no control over their own incomes.
THIS IS WHAT THE GOVERNMENT DOES!
1: Stabilize Quantity!
How? Stockpile farm products when there are too many being produced (a good year), and then dip into this stockpile when there is not enough being produced (a bad year)
Problems: This won't work for perishable items, and also, there are extra costs farmers will have to pay to stockpile their products.
GATEMAN'S AWESOME SUGGESTION: Why not just save extra money made during good years and borrow money lost during bad years (like the rest of us)
2: Stabilize Price!
How? Create a system of 'guarunteed price' where the government subsidizes farmers when world prices are too low, and farmers pay the government when the prices are too high.
Major Problem: How do you determine a good average price? Also, farm income will still vary with the quantity supplied.
GATEMAN'S AWESOME SUGGESTION: Why not just save extra money made during good years and borrow money lost during bad years (like the rest of us)
3: Suggestions for income stabilization in domestic markets:
-With too little government intervention, farmer incomes will vary inversely with supply. (The artificial demand curve is too inelastic)
-With too much government intervention, farmer incomes will vary directly with supply. (The artificial demand curve is too elastic)
-So in order to be most effective, the government tries to intervene in an intermediate fashion by providing unit elasticity. In other words, the government's 'guaranteed' price for farm products will vary in an inverse proportion to the quantity.
FOR EXAMPLE: If output rises 10%, the government allows the 'guaranteed price' to fall 10%, so total revenue remains unchanged.
Agricultural Policies in CANADA:
1: DIFFERENT KINDS OF MARKETING BOARDS
a) Supply Management (which is a marketing board)
-sets quotas
-used for milk, eggs, cheese, butter, and poultry
-they are provincial bodies
-they allow for huge profits for farmers... at the expense of the consumer
-Food processor (who buy farm products as inputs) also incur high costs
-In 1995, the quotas were replaced tariff equivalents in order to conform with the World Trade Organization. The tariffs were set as high at 300% though, so our farmers are still making a lot of money
b) Marketing Agents
-The Canadian Wheat Board in an example of this
-Every farmer is required to sell all of their wheat to the Canadian wheat board
-The wheat board pays the farmer the world price for their wheat
2: INCOME SUPPLEMENTS
"Farm safety net programs"
-Crop failure insurance
-Income stabilization
-Bailouts
Farms are pretty big businesses... small farmers are pretty much a thing of the past. =(
ISN'T IT DEPRESSING!?
Wednesday, September 30, 2009
Friday, September 25, 2009
Eco 101 Income and Cross Elasticity
Here's a quick review of what we know.
Elasticity is basically the responsiveness of demand to changes in price.
There are three equations for elasticity. They all work.
Relative Change in Demand/Relative Change in Price
/\ Q / Avg Q
/\ P / Avg P
(Avg P / Avg Q) X (1 / Slope)
INCOME ELASTICITY OF DEMAND IS EXACTLY THE SAME, except instead of responding to changes in Price, demand is responding to changes in Income. As such, we use 'Y' instead of 'P' in the formula
Relative Change in Demand/Relative Change in Price
/\ Q / Avg Q
/\ Y / Avg Y
(Avg Y / Avg Q) X (1 / Slope)
There are two main kinds of goods which are affected by changes in income in different ways.
Normal goods are items which respond positively to changes in income. If your income increases, you buy more of them. As your income decreases, you buy less of them. These include items such as cars or food.
Inferior goods are abnormal goods (although not necessarily of lower quality) which repond negatively to income changes. You buy less of them as your income increases, and more of them as your income decreases. This includes things like Wal-Mart shoes and craft dinner, but it is also dependent on personal tastes. Some inferior goods may be consumed less as income increases, because education also increases as income increases, and these products are considered unhealthy.
LUXURY: Movies (3.5) Electricity (2.0) Autos (1.0) --------> Elasticity is greater than 1
NECESSITIES: Furniture (0.5) Clothing (0.5) Food (0.2)-----> Elasticity is less than 1, but still positive
INFERIOR: Whole Milk (-0.5) Pig Products (-0.2)---------> Elasticity is negative
There are two factors which determine the elasticity of income:
1: Characteristics of the good
2: Taste Preferences
The nature of the good itself will define elasticity, but often, preferences will determine the necessity level of a good. Often, as income increases, there is a move away from staple foods to produce and meats, to restaurant meals.
CROSS ELASTICITY OF DEMAND: The sensitivity of demand in one product to price changes of another product
Relative Change in Demand for Product X/Relative Change in Price for Product Y
/\ QX / Avg QX
/\ PY / Avg PY
(Avg PY / Avg QX) X (1 / Slope)
There are two different scenarios here:
COMPLIMENTARY GOODS: Eg, CDs and Walkman Players
THESE HAVE A NEGATIVE CORRELATION
In other words, the cross elasticity of demand for complimentary goods is negative.
SUBSTITUTE GOODS: EG, Pepsi and Coke
THESE HAVE A POSITIVE CORRELATION
In other words, the cross elasticity of demand for substitute goods is positive
Here is a case scenario which could make us think about the cross elasticity of substitute goods. Gateman was, at one point, down in Ottawa to study this case. Here, Fritto-Lay (a subsidiary of Pepsico) was essentially buying out Hostess Chips (through a multimillion dollar merger). The government saw that this was essentially the creation of a monopoly in the potato chip industry, and rushed in to prevent the merger. The company lawyers for Fritto-Lay, however, were able to conclusively prove that the merger would not, in effect, create a monopoly, because in real markets, other goods such as popcorn and cheese puffs serve as de facto substitute goods for potato chips. Potato chips have a higher cross elasticity of demand with these substitute snack foods, so as a result, Fritto-lay would not be able to create a real market monopoly. Frito-Lay naturally won the case and was allowed the merger..... Hooray!
Elasticity is basically the responsiveness of demand to changes in price.
There are three equations for elasticity. They all work.
Relative Change in Demand/Relative Change in Price
/\ Q / Avg Q
/\ P / Avg P
(Avg P / Avg Q) X (1 / Slope)
INCOME ELASTICITY OF DEMAND IS EXACTLY THE SAME, except instead of responding to changes in Price, demand is responding to changes in Income. As such, we use 'Y' instead of 'P' in the formula
Relative Change in Demand/Relative Change in Price
/\ Q / Avg Q
/\ Y / Avg Y
(Avg Y / Avg Q) X (1 / Slope)
There are two main kinds of goods which are affected by changes in income in different ways.
Normal goods are items which respond positively to changes in income. If your income increases, you buy more of them. As your income decreases, you buy less of them. These include items such as cars or food.
Inferior goods are abnormal goods (although not necessarily of lower quality) which repond negatively to income changes. You buy less of them as your income increases, and more of them as your income decreases. This includes things like Wal-Mart shoes and craft dinner, but it is also dependent on personal tastes. Some inferior goods may be consumed less as income increases, because education also increases as income increases, and these products are considered unhealthy.
LUXURY: Movies (3.5) Electricity (2.0) Autos (1.0) --------> Elasticity is greater than 1
NECESSITIES: Furniture (0.5) Clothing (0.5) Food (0.2)-----> Elasticity is less than 1, but still positive
INFERIOR: Whole Milk (-0.5) Pig Products (-0.2)---------> Elasticity is negative
There are two factors which determine the elasticity of income:
1: Characteristics of the good
2: Taste Preferences
The nature of the good itself will define elasticity, but often, preferences will determine the necessity level of a good. Often, as income increases, there is a move away from staple foods to produce and meats, to restaurant meals.
CROSS ELASTICITY OF DEMAND: The sensitivity of demand in one product to price changes of another product
Relative Change in Demand for Product X/Relative Change in Price for Product Y
/\ QX / Avg QX
/\ PY / Avg PY
(Avg PY / Avg QX) X (1 / Slope)
There are two different scenarios here:
COMPLIMENTARY GOODS: Eg, CDs and Walkman Players
THESE HAVE A NEGATIVE CORRELATION
In other words, the cross elasticity of demand for complimentary goods is negative.
SUBSTITUTE GOODS: EG, Pepsi and Coke
THESE HAVE A POSITIVE CORRELATION
In other words, the cross elasticity of demand for substitute goods is positive
Here is a case scenario which could make us think about the cross elasticity of substitute goods. Gateman was, at one point, down in Ottawa to study this case. Here, Fritto-Lay (a subsidiary of Pepsico) was essentially buying out Hostess Chips (through a multimillion dollar merger). The government saw that this was essentially the creation of a monopoly in the potato chip industry, and rushed in to prevent the merger. The company lawyers for Fritto-Lay, however, were able to conclusively prove that the merger would not, in effect, create a monopoly, because in real markets, other goods such as popcorn and cheese puffs serve as de facto substitute goods for potato chips. Potato chips have a higher cross elasticity of demand with these substitute snack foods, so as a result, Fritto-lay would not be able to create a real market monopoly. Frito-Lay naturally won the case and was allowed the merger..... Hooray!
Wednesday, September 23, 2009
Econ-101-Elasticity continues
Announcements: It's flu season, apparently. If you're sick, don't show up. It's that simple!
Review:
Elasticity of Demand: The sensitivity of quantity demanded to changes in price
Relative change in Q
Relative change in P
or
/\Q / Average Q
/\P / Average P
or
(Average P / Average Q) X (1 / Slope)
It's an oversimplification, but flat demand is more elastic, and steep demand is less elastic. This is due to the increase or decrease in inverted slope
Also, more right-shifted demand curves are less elastic than left-shifted demand curves. This is due to the increase or decrease in average quantity demanded at any price
HOKAY!
Why do we get different sensitivity rates to price changes (elasticity rates) for different products?
Why are certain firms able to get away with 'jacking up the price' of certain products?
THE ANSWER:
Different degrees of availability of substitutes products (outputs on the demand side) effect elasticity. The more options, and higher the quality of available substitutes, the easier it will be for consumers to simply buy a substitute product if the price of a good increases. This means that it is easier for consumers to respond to price changes by lowering or heightening demand for products with many viable substitutes...
MORE SUBSTITUTES = HIGHER ELASTICITY
The more specific a product is, the higher elasticity will be.
Coke is much more elastic as a good than 'pop'
Pop is much more elastic as a good than 'fluids'
TIME PERIOD EFFECTS THINGS
Over time, competition increases, the availability of substitutes increases, and elasticity increases.
PERCEPTION ALSO EFFECTS THINGS
products viewed as 'luxury' items will simply not be purchased if their price is raised. How consumers perceive products effects elasticity.
HOKAY Time for comparisons
NAME SHAPE ELASTICITY REASON
perfectly inelastic vertical line 0 demand never changes with price
inelastic steep line less than 1 /\ Q < /\ P
unit elastic rectangular hyperbola 1 /\ Q = /\ P
elastic flat line more than 1 /\ Q > /\ P
perfectly elastic horizontal line infinite price never changes with demand
THE PRICE ELASTICITY OF SUPPLY!
-the responsiveness of supply to changes in price
-the formulas are the same...
HOWEVER, unit elasticity is a straight line through the origin, not a rectangular hyperbola. Why- ask Jude Drutz!
Here, elasticity is determined by the availability of substitute inputs!
The more viable substitute factors of production you have to work with as a producer, the more elastic the supply if your product will be.
EG: you farm wheat and oats. It is fairly easy to divert production towards wheat if the price of wheat increases, because wheat is a substitute input for many other grain products, it is also easy to divert production away from wheat, because it uses the same machinery and land as other substitute crops. SO WHEAT has a high price elasticity of supply.
Durin fruit is difficult and unique to farm. It requires a very specific method to cultivate and harvest, which is not used to cultivate other fruits. It is very difficult to change the production quantity of Durin in response to price changes, so Durin has low elasticity.
FIN
Review:
Elasticity of Demand: The sensitivity of quantity demanded to changes in price
Relative change in Q
Relative change in P
or
/\Q / Average Q
/\P / Average P
or
(Average P / Average Q) X (1 / Slope)
It's an oversimplification, but flat demand is more elastic, and steep demand is less elastic. This is due to the increase or decrease in inverted slope
Also, more right-shifted demand curves are less elastic than left-shifted demand curves. This is due to the increase or decrease in average quantity demanded at any price
HOKAY!
Why do we get different sensitivity rates to price changes (elasticity rates) for different products?
Why are certain firms able to get away with 'jacking up the price' of certain products?
THE ANSWER:
Different degrees of availability of substitutes products (outputs on the demand side) effect elasticity. The more options, and higher the quality of available substitutes, the easier it will be for consumers to simply buy a substitute product if the price of a good increases. This means that it is easier for consumers to respond to price changes by lowering or heightening demand for products with many viable substitutes...
MORE SUBSTITUTES = HIGHER ELASTICITY
The more specific a product is, the higher elasticity will be.
Coke is much more elastic as a good than 'pop'
Pop is much more elastic as a good than 'fluids'
TIME PERIOD EFFECTS THINGS
Over time, competition increases, the availability of substitutes increases, and elasticity increases.
PERCEPTION ALSO EFFECTS THINGS
products viewed as 'luxury' items will simply not be purchased if their price is raised. How consumers perceive products effects elasticity.
HOKAY Time for comparisons
NAME SHAPE ELASTICITY REASON
perfectly inelastic vertical line 0 demand never changes with price
inelastic steep line less than 1 /\ Q < /\ P
unit elastic rectangular hyperbola 1 /\ Q = /\ P
elastic flat line more than 1 /\ Q > /\ P
perfectly elastic horizontal line infinite price never changes with demand
THE PRICE ELASTICITY OF SUPPLY!
-the responsiveness of supply to changes in price
-the formulas are the same...
HOWEVER, unit elasticity is a straight line through the origin, not a rectangular hyperbola. Why- ask Jude Drutz!
Here, elasticity is determined by the availability of substitute inputs!
The more viable substitute factors of production you have to work with as a producer, the more elastic the supply if your product will be.
EG: you farm wheat and oats. It is fairly easy to divert production towards wheat if the price of wheat increases, because wheat is a substitute input for many other grain products, it is also easy to divert production away from wheat, because it uses the same machinery and land as other substitute crops. SO WHEAT has a high price elasticity of supply.
Durin fruit is difficult and unique to farm. It requires a very specific method to cultivate and harvest, which is not used to cultivate other fruits. It is very difficult to change the production quantity of Durin in response to price changes, so Durin has low elasticity.
FIN
Friday, September 18, 2009
Econ 101 4th Real Lecture
Anouncements: The discussion board is up, and test number three is up today!
Review:
Demand is the relationship between the price, and the quantity of any product that a consumer is willing to purchase, given the price, ceteris paribus
Supply is the relationship between the price, and the quantity of any product that a producer is willing to sell, given the price, ceteris paribus
Consumers want to buy more when the price is low because their opportunity cost is lower
Producers want to sell more when the price is high, because their profit margins will be higher
The producer and the consumer don't know each other, so how do we get them to make a deal?
EQUILIBRIUM! YAAAAAAAAAAAY!
Prices ($) Quantity Supplied Quantity Demanded
1.00 7 1
0.80 6 3
0.60 5 5
0.40 3 8
0.20 1 11
An excess in supply (When quantitiy supplied is greater than quantity demanded) creates a pressure for producers to lower their prices
An excess in demand (When quantity demanded is greater than quantity supplied) creates a pressure for producers to raise their prices
BECAUSE OF THIS SUPPLY AND DEMAND TEND TO AUTOMATICALLY GRAVITATE TOWARD A POINT OF EQUILIBRIUM: Where the quanitiy of supply equals the quantity of demand (that is the condition for equilibrium). If you are staying put (remaining constant over time) you are in EQUILIBRIUM! If you are happy, you will stay there.
Stable equilibrium: When changes occur, things resettle toward equilibrium again (things go back to the way they were: eg: blood glucose, a punching bag)
Unstable equilibrium: When change occurs, things do not go back to equilibrium again (eg: the pencil gets knocked over)
LAWS OF SUPPLY AND DEMAND (these deal with SHIFTS in the curve caused by changes in the Ceteris Paribus Variables)
An Increase in Demand increases the equilibrium price, and increases the quantity exchanged (Ipods become more popular, become more expensive, and sell by the truckloads)
A Decrease in Demand lowers the equilibrium price and decreases the quantity exchanged (Tamagotchi becomes unpopular, are bought less often, and can be purchased for fifty cents)
An Increase in Supply decreases the equilibrium price and increases the quantity exchanged (Unconventional Oil lowers the cost of extracting natural gas from rocks, and floods the market with cheap natural gas which costs very little, and is purchased rapidly by consumers)
A Decrease in Supply increases the equilibrium price and decreases the quantity exchanged (Bananas suddenly become extremely expensive to cultivate due to storms ravaging the Caribbean. Producers become less willing to produce bananas, so there are less of them on the market, which sell for a much higher price, because the demand for bananas has not changed)
WOOO
Review:
Demand is the relationship between the price, and the quantity of any product that a consumer is willing to purchase, given the price, ceteris paribus
Supply is the relationship between the price, and the quantity of any product that a producer is willing to sell, given the price, ceteris paribus
Consumers want to buy more when the price is low because their opportunity cost is lower
Producers want to sell more when the price is high, because their profit margins will be higher
The producer and the consumer don't know each other, so how do we get them to make a deal?
EQUILIBRIUM! YAAAAAAAAAAAY!
Prices ($) Quantity Supplied Quantity Demanded
1.00 7 1
0.80 6 3
0.60 5 5
0.40 3 8
0.20 1 11
An excess in supply (When quantitiy supplied is greater than quantity demanded) creates a pressure for producers to lower their prices
An excess in demand (When quantity demanded is greater than quantity supplied) creates a pressure for producers to raise their prices
BECAUSE OF THIS SUPPLY AND DEMAND TEND TO AUTOMATICALLY GRAVITATE TOWARD A POINT OF EQUILIBRIUM: Where the quanitiy of supply equals the quantity of demand (that is the condition for equilibrium). If you are staying put (remaining constant over time) you are in EQUILIBRIUM! If you are happy, you will stay there.
Stable equilibrium: When changes occur, things resettle toward equilibrium again (things go back to the way they were: eg: blood glucose, a punching bag)
Unstable equilibrium: When change occurs, things do not go back to equilibrium again (eg: the pencil gets knocked over)
LAWS OF SUPPLY AND DEMAND (these deal with SHIFTS in the curve caused by changes in the Ceteris Paribus Variables)
An Increase in Demand increases the equilibrium price, and increases the quantity exchanged (Ipods become more popular, become more expensive, and sell by the truckloads)
A Decrease in Demand lowers the equilibrium price and decreases the quantity exchanged (Tamagotchi becomes unpopular, are bought less often, and can be purchased for fifty cents)
An Increase in Supply decreases the equilibrium price and increases the quantity exchanged (Unconventional Oil lowers the cost of extracting natural gas from rocks, and floods the market with cheap natural gas which costs very little, and is purchased rapidly by consumers)
A Decrease in Supply increases the equilibrium price and decreases the quantity exchanged (Bananas suddenly become extremely expensive to cultivate due to storms ravaging the Caribbean. Producers become less willing to produce bananas, so there are less of them on the market, which sell for a much higher price, because the demand for bananas has not changed)
WOOO
Monday, September 14, 2009
Econ 101 Second Lecture
Supply and Demand: This is one of the most important components to Economics.
Demand:
-Quantity Demanded
-Demand Schedules
-Shifts versus Moving Along The Curve
Quantity Demanded is not the same thing as 'Demand'
Supply:
-Quantity Supplied
-Supply Schedules
-Shifts and Movements
Friday: How do you make a deal? How do suppliers and 'demanders' meet in the middle?
DEMAND:
The Quantity Demanded is the quantity a buyer is willing to purchase given the price, (P), with all other things held constant (ceteris paribus).
We are basically measuring two variables against each other: Price and Quantity Demanded. In order to do this, we need to artificially control all of the other possible factors so that they do not affect the graph, etc.
If the price is $1, how many condoms do you want to buy?
If the price is 80 cents, how many condoms do you want to buy?
Here is a demand schedule for Condoms:
Price Quantity Bought
1.00 --> 1
0.80 --> 3
0.60 --> 5
0.40 --> 8
0.20 --> 11
Why do we buy more when the price is lower? BECAUSE THE OPPORTUNITY COST HAS FALLEN! Eg- buying one condom is now the equivalent to 1/16th of a can of coke instead of a whole can of coke.
Price affects our willingness to buy.
There is an inverse relationship between price and the quantity demanded. As price falls, the quantity demanded rises (I work at co-op. I have witnessed this).
HERE ARE THE OTHER FACTORS WHICH CAN AFFECT Quantity Demanded!
-Income
-Tastes
-Advertising
-Price of complimentary goods
-Price of substitute goods
-Population
-Wealth
-Expectations
See Gateman's notes to fill in the details tonight!
Okay. The price of beer drops. What happens to your willingness to buy condoms? It's subjective; different people behave differently. However, for the sake of understanding, you buy more condoms and this is why.
If the price of beer drops, beers opportunity cost is lower, so you will buy more beer. If you buy more beer, you will need to buy more condoms because they are COMPLIMENTARY.
Substitute goods work the opposite way. If two goods are in competition with each other for an example, a drop in Price in one causes you to buy less of the other.
For an example, if the price of coke drops, you will buy less Pepsi.
Wealth is accumulated income, which is storehoused (it's a bit different from income). Generally, the more wealth you have accumulated, the more you spend for both practical and cultural reasons.
Expectations are difficult to prognosticate. The effect of expectations is different for different people. EG: housing market predictions creat expectations.
DEMAND CURVE:
relation between Price, and the Quantity the consumer is willing to purchase, all things held constant (ceteris paribus).
Qd = f (P/I,T,A,Pr, Pop, W, Exp)
Usually, constant variables (the ceteris paribus) are overlined, but he doesn't know how to do this in word processor.
Demand function:
Y = f(x)
Qd = f(P) : This is the math
Inverse Demand Function:
P = g(Qd) : This is the graph
The price is graphed on the Y axis
The Qd is graphed on the X axis
WE DON"T DO QUADRATICS> YAYA!
Demand:
-Quantity Demanded
-Demand Schedules
-Shifts versus Moving Along The Curve
Quantity Demanded is not the same thing as 'Demand'
Supply:
-Quantity Supplied
-Supply Schedules
-Shifts and Movements
Friday: How do you make a deal? How do suppliers and 'demanders' meet in the middle?
DEMAND:
The Quantity Demanded is the quantity a buyer is willing to purchase given the price, (P), with all other things held constant (ceteris paribus).
We are basically measuring two variables against each other: Price and Quantity Demanded. In order to do this, we need to artificially control all of the other possible factors so that they do not affect the graph, etc.
If the price is $1, how many condoms do you want to buy?
If the price is 80 cents, how many condoms do you want to buy?
Here is a demand schedule for Condoms:
Price Quantity Bought
1.00 --> 1
0.80 --> 3
0.60 --> 5
0.40 --> 8
0.20 --> 11
Why do we buy more when the price is lower? BECAUSE THE OPPORTUNITY COST HAS FALLEN! Eg- buying one condom is now the equivalent to 1/16th of a can of coke instead of a whole can of coke.
Price affects our willingness to buy.
There is an inverse relationship between price and the quantity demanded. As price falls, the quantity demanded rises (I work at co-op. I have witnessed this).
HERE ARE THE OTHER FACTORS WHICH CAN AFFECT Quantity Demanded!
-Income
-Tastes
-Advertising
-Price of complimentary goods
-Price of substitute goods
-Population
-Wealth
-Expectations
See Gateman's notes to fill in the details tonight!
Okay. The price of beer drops. What happens to your willingness to buy condoms? It's subjective; different people behave differently. However, for the sake of understanding, you buy more condoms and this is why.
If the price of beer drops, beers opportunity cost is lower, so you will buy more beer. If you buy more beer, you will need to buy more condoms because they are COMPLIMENTARY.
Substitute goods work the opposite way. If two goods are in competition with each other for an example, a drop in Price in one causes you to buy less of the other.
For an example, if the price of coke drops, you will buy less Pepsi.
Wealth is accumulated income, which is storehoused (it's a bit different from income). Generally, the more wealth you have accumulated, the more you spend for both practical and cultural reasons.
Expectations are difficult to prognosticate. The effect of expectations is different for different people. EG: housing market predictions creat expectations.
DEMAND CURVE:
relation between Price, and the Quantity the consumer is willing to purchase, all things held constant (ceteris paribus).
Qd = f (P/I,T,A,Pr, Pop, W, Exp)
Usually, constant variables (the ceteris paribus) are overlined, but he doesn't know how to do this in word processor.
Demand function:
Y = f(x)
Qd = f(P) : This is the math
Inverse Demand Function:
P = g(Qd) : This is the graph
The price is graphed on the Y axis
The Qd is graphed on the X axis
WE DON"T DO QUADRATICS> YAYA!
Friday, September 11, 2009
First Lecture
Economic Issues and Concepts:
Proff G uses brainwaves, which are obvious and powerful things to know within the course. They are obvious, logical, and fundamental.
Efficiency principle for example. Efficient things are better than inefficient things. Simple, non?
Often in the class, you will have to ask yourself 'what part of what I know will help me answer the question- this is problem solving skills, which you will have to develop.
Article->Question->Which Component of the course do I use.
The Outlines HELP ORGANIZE IT ALL
HOKAY!
Markets are self-organizing. For an example, you have 4 chicks in a nest, and 2 worms. Who gets the worm? This is an example of scare resources (2 worms) which must be distributed amongst competing uses (4 chicks)
Modern free markets solve this problem on their own. You don't have to run things, they run themselves. Adam smith wrote Wealth of Nations in 1776, and there is a nice quote which basically equates to the fact that we rely on others' self interest to bring us the things we require in life (goods and services). You can be both kind and self-interested. Self interest is not a 'bad thing'.
The invisible hand, coined by Adam Smith, is the market.
Command Markets can get it wrong which is wasteful and inefficient. Boot overproduction would be a waste of effort.
Effecieny: How much bang for your buck are out getting. Output/Input.
Marx observed that markets are good at allocating resources. He, however, believed that markets were not fantastic at distributing income in a fair way. He saw that it was not equal; that the workers got practically nothing. He suggested that there is a need for 'big brother' to determine who should get stuff... Yah!
Intervention Principal!
Here are the characteristics of a free market
1: rational self interest:
People are rational
People love themsleves
Decisions are smaller: Marginal benefits must outweigh marginal costs in order for someone to buy something.
2: Incentives:
People respond to incentives.
3: Prices and Quantities
4: Markets are governed by 'rules of the game'
Laws (Property and Contract Laws are big)
Institutions
Manners, Customs, Conventions: Many markets are based on trusts (Japan they need to establish trust; US they sue each other)
Scarcity -> There isn't enough to fill your desire.
Economics is the study of how we manage the worms going to the chicks
Scare resources satisfying UNLIMITED WANT (Is this natural? Do we really need more of everything? We could stop demanding more and more...)
Resources = Factors = Inputs
Outputs = Goods and Services
INPUT: Milk, Mango, Elctricity ---> Production--->OUTPUT: Mango smoothie--->Consumption---> Happiness (Utility)
5 Factors of production:
Capital
Land
Labour
Technological Changes
Entrepreneurship
BUT THEY ARE SCARCE, so we have to make a choice as to what we will do with them.
Politics decides among the unlimited desires.
Goods -> cars
Services -> Haircuts
Choice tradeoff: people make decisions as a tradeoff.
Microeconomics analyzes the decision making: how do you make a choice?
We measure things by their opportunity cost: The value/cost of anything is what you give up to get it (AKA what is the next best alternative that you would have done otherwise?)
Guatamala trip = $4000 O.C.
$2000 for the actual trip, and $2000 in lost wages.
Sunk Costs are costs incurred in the past, and they cannot be recovered, so they are therefore irrelevant. So the past is irrelevant?
If you were waiting for 1 hour, should you have and start walking, or should you wait one more minute?
PPC graphs.
Illustrate 3 concepts. We know this.
But why is it concave.....
Thats all folks
Is there anything which actually is not scarce? Yah- New Ideas aren't scarce! Almost everything else is.
Proff G uses brainwaves, which are obvious and powerful things to know within the course. They are obvious, logical, and fundamental.
Efficiency principle for example. Efficient things are better than inefficient things. Simple, non?
Often in the class, you will have to ask yourself 'what part of what I know will help me answer the question- this is problem solving skills, which you will have to develop.
Article->Question->Which Component of the course do I use.
The Outlines HELP ORGANIZE IT ALL
HOKAY!
Markets are self-organizing. For an example, you have 4 chicks in a nest, and 2 worms. Who gets the worm? This is an example of scare resources (2 worms) which must be distributed amongst competing uses (4 chicks)
Modern free markets solve this problem on their own. You don't have to run things, they run themselves. Adam smith wrote Wealth of Nations in 1776, and there is a nice quote which basically equates to the fact that we rely on others' self interest to bring us the things we require in life (goods and services). You can be both kind and self-interested. Self interest is not a 'bad thing'.
The invisible hand, coined by Adam Smith, is the market.
Command Markets can get it wrong which is wasteful and inefficient. Boot overproduction would be a waste of effort.
Effecieny: How much bang for your buck are out getting. Output/Input.
Marx observed that markets are good at allocating resources. He, however, believed that markets were not fantastic at distributing income in a fair way. He saw that it was not equal; that the workers got practically nothing. He suggested that there is a need for 'big brother' to determine who should get stuff... Yah!
Intervention Principal!
Here are the characteristics of a free market
1: rational self interest:
People are rational
People love themsleves
Decisions are smaller: Marginal benefits must outweigh marginal costs in order for someone to buy something.
2: Incentives:
People respond to incentives.
3: Prices and Quantities
4: Markets are governed by 'rules of the game'
Laws (Property and Contract Laws are big)
Institutions
Manners, Customs, Conventions: Many markets are based on trusts (Japan they need to establish trust; US they sue each other)
Scarcity -> There isn't enough to fill your desire.
Economics is the study of how we manage the worms going to the chicks
Scare resources satisfying UNLIMITED WANT (Is this natural? Do we really need more of everything? We could stop demanding more and more...)
Resources = Factors = Inputs
Outputs = Goods and Services
INPUT: Milk, Mango, Elctricity ---> Production--->OUTPUT: Mango smoothie--->Consumption---> Happiness (Utility)
5 Factors of production:
Capital
Land
Labour
Technological Changes
Entrepreneurship
BUT THEY ARE SCARCE, so we have to make a choice as to what we will do with them.
Politics decides among the unlimited desires.
Goods -> cars
Services -> Haircuts
Choice tradeoff: people make decisions as a tradeoff.
Microeconomics analyzes the decision making: how do you make a choice?
We measure things by their opportunity cost: The value/cost of anything is what you give up to get it (AKA what is the next best alternative that you would have done otherwise?)
Guatamala trip = $4000 O.C.
$2000 for the actual trip, and $2000 in lost wages.
Sunk Costs are costs incurred in the past, and they cannot be recovered, so they are therefore irrelevant. So the past is irrelevant?
If you were waiting for 1 hour, should you have and start walking, or should you wait one more minute?
PPC graphs.
Illustrate 3 concepts. We know this.
But why is it concave.....
Thats all folks
Is there anything which actually is not scarce? Yah- New Ideas aren't scarce! Almost everything else is.
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