Time to Party…almost

1. Time to Party…almost Day 1 of Micro Sections 1 & 2

2. Overview • Objective today is to review first two sections • Goal is in & out in 30 minutes • More concerned with you paying attention than taking notes

3. Back to square 1 • Economics is the study of choices • Scarce (limited) resources force us to decide what to do w/ them • In doing so we try to maximize efficiency (most output/input)

4. Case in point…PPC • Graph showing different combos of two goods • Want to do as well as possible • Assuming full use of resources & technology

5. Producers & consumers • Doesn’t matter who you are • Same goal…get as much as possible • MU versus MP • Satisfaction versus profit • Get away from “study” • Get into “thought”

6. Both guided by “invisible hand” • Self-regulating nature of market • We all do what’s good for us • Everyone doing that makes everything function

7. That becomes a problem • Diff between command & market economies • Markets are like pretty flowers • Command are like gym class • All decide What? How? For whom? • Command fail due to lack of incentive • Markets thrive on private property & protection of ability to benefit from hard work

8. Markets on auto pilot • Millions of transactions per day • No one pulling strings • Products & money flow around the circular flow model • Simplified model

9. Factors of Production • Stuff flows one way; money the other • Factor market, product market • Sell factors of production • Buy products • Money is used to buy things, but is not in itself a productive resource

10. Part 2: S/D Interactions • We each pursue our own goals • Need other party to make it happen • Consumers BUY MORE WHEN PRICE IS LOW • Producers SELL MORE WHEN PRICE IS HIGH • Picture worth a million $

11. Why demand down? • Substitution Effect: buy cheaper item • Income Effect: math side; cheaper prices mean you can buy more (more REAL buying power…REAL INCOME) • Law of Diminishing MU: more & more gives you less & less • Not the same for everyone

12. Lots of things change • Don’t worry about the list • What matters is effect • Think about “who” first • If makes us want more or less-Demand • If affects cost-Supply • Change in demand vs change in Q dem • Shift of vs shift along

13. Smelling roses on a spring day • The market is self-correcting • Supply & demand never stationary • PRICES serve as signal • Tell us how much to buy; them how much to make • Keeps things in balance as price can adjust to EQUILIBRIUM

14. Our job is simple • As a consumer thought never progresses…buy what you want • If it’s worth it, buy it • Consider dim MU & how important • ELASTICITY OF DEMAND • Measures how we react to a change in price (how RESPONSIVE we are)

15. Elasticity of Demand • Equation(s) • We don’t care…we buy (or not) • Inelastic: E < 1; Q < P • Necessities, few subs, more “important” • Elastic: E > 1; Q > P • Luxuries, many subs, less “important”

16. We really don’t care…they do • Producers use this to make more $ • Know when to raise price (inelastic) or lower (elastic) • EVERYTHING ALWAYS FITS BOTH • DEMAND CURVE HAS SECTIONS OF EACH • ANALYZE THIS USING GRAPH

17. Use elasticity for evaluation • Analytical tool • Just like cross-price & income elasticity • C-P: determine comps & subs • I: determine normal vs inferior • Equations & examples

18. Not our problem but yours • We buy stuff…we are happy • They have to sell what we want to buy (CONSUMER SOVEREIGNTY) • Their supply is most based on costs of production • Costs change so does supply • Sometimes fast; others slow (TIME)

19. All happy in the end • SUPPLY & DEMAND HAVE AMAZING ABILITY TO BALANCE • Think about now…what happens when we balance? • Better to stay in happiness • Who unhappy w/ high prices? • Low?

20. Sometimes it comes from Gov • Don’t like our price • Can use SUBSIDIES or EXCISE TAXES • Change market price to “make it better” • Also use PRICE CEILINGS & FLOORS • OFFSET THE NATURAL POINT OF EQUILIBRIUM (hurts some; helps others)

21. Part III: The simple life (21-27) • So sweet, so simple • Life as a consumer is pretty good • All we have to do is buy what we want • If we don’t like the price, we don’t buy it • Whole idea is to maximize utility • Utility is satisfaction

22. Once doesn’t mean again • Our satisfaction is our goal • I bought the sweetest minivan on the market…doesn’t mean I would buy a second one • Law of Diminishing MU: the more you have of something the less MU it adds • At some point this always holds true • Doesn’t mean it has to start that way

23. Big menus make life hard • I don’t like restaurants • Choices STINK • I want it all • When I order I usually want what someone else got • Goal is to buy what gives you the highest MU / $

25. But what do I buy next? • The first thing you buy is the one with the highest MU / $ • If you are still hungry you get what has the new highest MU / $ • Could be the same thing, but after the burger and fries you may desire the milkshake the most

26. Eventually E is reached • Consumer equilibrium occurs when MU/$ of each item is equalized • If one thing is best you buy it • Continuing buying until MU < $ • When do it w/ everything end result is • MU1/P1 = MU2/P2 = MU3/P3…

28. Part IV: Producers (28-47) • Consumers buy stuff b/c they want it • Producers make & sell stuff b/c they want our money • Goal is to maximize profit • Total Revenue - Total Costs = PROFIT • Goal then is to maximize output while minimizing costs

29. They need us • Can’t make money if we don’t buy it • We create demand when we are willing & able to buy stuff • Our demand creates DERIVED DEMAND for the things they need to make what we want to buy • They want to buy stuff b/c they can sell it to us

31. Lots of stuff CAN work • I need to make more cookies • I could hire more help • I could buy another oven • I could buy a bigger mixer • Many different inputs can achieve the MB > MC…which one do you buy?

32. The one that does it the best • Want to purchase what gives the highest MP / $ • Same concept as MU / $ for consumers • Buying what gives highest MP / $ helps you to make more money • PRODUCTIVITY: output / input • Typically per human hour worked

34. Result is the same as well • Consumer/producer makes no difference • End result is the same • MP1/P1 = MP2/P2 = MP3/P3… • Least-cost Rule • Tells you what to buy first…but when should you stop buying it?

35. MRP • Marginal revenue product = value of input = demand = willingness to buy it • Tells you how much it’s worth to you • As long as MB > MC it’s ok to buy it • MRP > MC then hire that input

36. Most applicable • MRP = MR x MP • Marginal revenue x marginal product • If I can hire another worker and get another 10 dozen per hour and sell them for $3 profit per item, how much is that guy worth? • Hire him as long as wage < $30

38. MR constant, MP changes • For our level, MR usually always kept constant at the one selling price (PC) • MP will change with additional units • Law of Diminishing MP: KEEPING OTHER FACTORS CONSTANT adding additional units of one input will eventually produce less MP

39. Feed the world from a flower pot • Classical example • If diminishing MP didn’t exist • One flower pot, some sun, and endless fertilizer would produce enough food to feed the world • Obviously not true

41. MP vs returns to scale • MP includes keeping all constant & changing one input • Returns to scale involve changing everything in like quantities • Double everything what happens • Constant, increasing, diminishing • MP would be changing labor but keeping everything else the same

42. Work hard to make $ • Must also consider all costs-both implicit & explicit • Explicit is what normal people think about (stuff you pay for) • Implicit is opportunity cost (stuff you give up) • Economists consider both

43. different types of profit • Accounting = TR > TC • Ignores implicit • Normal Profit: TR = TC • Considers implicit • Economic Profit: TR > TC • Considers implicit

44. Love the costs • FC, VC, TC, AVC, AFC, ATC, MC • FC = capital (output irrelevant) • VC = land & labor (based on output) • MC = cost to make one more • Graphs rule!!!