Intro to Microeconomics 9/8/2011 8:29:00 AM

Intro to Microeconomics section E

Course outline.

www.payscale.com/best-colleges/degrees.asp

Review the course outline..
Snadea2@Uottawa.ca

Final exam 30% from first midterm 30% from 2
nd
40% from other.

Principals of Microeconomics

- Virtual Campus

Midterms

40 Multiple choice
3 short answers

Final
80 Multiple choices
3 short answers.

Need text Books
Principals of Microeconomics +study guide






intro to Micro
Chapter #1 9/8/2011 8:29:00 AM
The cost of something is what you give up to get it.
example MKMR #3 P18 ,
you where planning to spend saturday working at your part time job, but a
friend asks you to go skiing,
what is the true cost of going skiing? ski ticket + transportation + lost
wages

now suppose that you had been planning to spend the day studying at the
library what is the cost of styding this case?


# 3 rational people think at the margin

People make decisions by comparing costs and benefits at the margin.

Example ( hot dog stand ) Marginal benefit is 800
Marginal cost is 300$ Marginal benefit is larger then marginal cost to
minimal loss.

#4 Principal. People respond to incentives.
Examples The car grades.
People are rational they make decisions based upon the fact of costs vs
benefits.
The 1997 Ontario case. If you earned 1$ they would take 1$ away from your
welfare check. How does this reform affect the incentive to work? . They
where accepting less money. If they where working they where loosing half
of it. Efficiency gained. The negative is that the people who cant work arent
better off. Although it increases incentives to work.

-Principal # 5 . Trade can make everyone better off . why is trade good? It
allows people to specialize in what they do best.
North Korea doesnt trade = shit economy MKMR #9 page 19
Example, your roommate did all the cooking and did you the cleaning, would
your chores take you more or less time then if you did it individually? YES
Canada vs Costa rica wheat vs Bananas, some people specialize wheat as
costarica specializes in producing bannanas.

Principal # 6 Markets are usually a good way to organize economic activity.
Planned economies. A Market is a group of buyers and sellers. They need
not be in a single location.
Organizes economic activity means determining .
The invisible hand. Its as if there a an invisiable hand that leads households
towards economic prosperity. The interactions of buyers and sellers
determines prices of goods and services. Prices guide self interested house
holds.
Suppose you own a classic fender guitar, Example. Bill should get the guitar
because its worth the most to him.

But central planning is a very tough impossible job. Communist countries
worked on the premise that central planners in the government were in the
best position to guide economic activities.

Principal # 7 Government can sometimes improve market Outcomes.
The market system. Market Failure occurs when the market fails to allocate
resources efficiently.
Externalities ; The impact of one persons action on a bystander eg (
pollution)
When the market fails ( breaks down ) government can intervene to
promote efficiency and equity.

Principal # 8 A countrys standard of living depend on its ability to produce
goods and services.
The countries that are the most productive are richer,

Productivity is dependent on skills, human capitals , efficiency , innovation ,
capital.

Principal # 9
Prices raise when they print too much money,
Inflation occurs when they printed too much money.



Principal # 10 . Society faces a short run tradeoff between inflation and
unemployment.
- the Phillips curve .

Lecture on chapter 2 9/8/2011 8:29:00 AM
Intro to Microeconomics lecture # 3
The Appendix of chapter 2.. then we will start chapter 2

Thinking like an economist... " emmas demand curve
-how to graph. ( easy shit ) Price on Y and units on X (Q)
Basically when people make more money they spend more...
When a variable that is not on the axis changes the curve is going to shift

When two variables move in the same direction --> variables are positively
related or equivalently, the curve is upward sloping....

- If two variables move in opposite directions ( such as emma's demand
curve) variables are negatively related or, equivalently the curve is
downward sloping.
Slope of a curve : A measure of how much one variable responds to changes
in another variable.

Slope = Change in Y/Change in X =deltaY/DeltaX= Y2-Y1/X2-X1

example: Choose the two coordinates (14,7) nd (22,5) = -0.25


CHAPTER # 2
-Thinking like an Economist.
Economists play two roles:
- They play the role of scientists : try to explain the world.
Policy advisors: try to improve it. ( trying to improve the work )

The scientific method - Make assumptions and uses abstract models to
explain how a complex , real world operates.

Assumptions simplifies the world.... Example when studying international
trade , we might assume that the world consists of two countries and two
goods Its unrealistic but simplifies the problem and yields useful insights
about the more complicated real world. The art in scientific thinking is
deciding which assumptions to make.

Example 1 the case of a physicist measuring how long it would for an an
object to fall from the top of a building the marble and beach ball theory..
marble with vacume

Economists use models to study economic issues, A model is a highly
simplified representation of a more complicated reality.

Two basic economic models..
The circular Flow Diagram
The production possibilities frontier


The first model we need to learn how to model work and how to use the
model

The circular flow diagram. Is a visual model to show how the economy is
organized and how participants in the economy interacts.
Two actors. Households and Firms A household buy and consumes good
and services, own and sell factors of production.
Firms produce and sell goods and services, hire and use factos of
production...
one of the assumptions is that theyre are these 2 entitites,,,, this recording
is a explication of the concept Another assumption is theyre is only two
markets goods and services ( firms sell and households buy )
Households are selling labor and land to firms . Firms pay the house holds
for all this
A factor of production is anything that helps the production process

The production possibilities frontier, This is a graph that shows the
combinations of output that the economy can possibly produce given the
available factors of production and the available production technology.
Example a simple economie where we have 2 goods.. computers and
wheat. One resource labour ( measured in hours). Economy has 50 000
labour hours per month available for production. One computer requires 00
hours labour and one ton of wheat requires 10 hours of labour.

What is the PPF? its all the possible combinations of outputs this graph
thing easy stuff easy stuff ( will be asked to make one )

A society cannot consume more then it produces

The shape of PPF , if the opportunity cost as the economy shifts resources
from one industry to the other.
If the opportunity cost remains constant , the PPF is a straight line.

IF opportunity cost of a good rises as the

The opportunity cost varies on the graph,

The more you produce the higher standard of living.

Shows all combinations of two goods that an economy can possibly produce,
given its resources and technology. The PPF illustrates the concepts of
tradeoff and opportunity cost, eficience and inefficiency.

The EXample from the book #4 pages 40 3
Lecture #4 9/8/2011 8:29:00 AM
last class chapter 2..
-Microeconomics.. looks at how households and firms make decisions and
how they interact in specific markets

Types of questions in microeconomics aims to answer...
What is the effect of minimum wages on unemployment?
What is the effect of rent controls on the housing market?

Macroeconomics.. looks at the economy as a whole
Economy-wide phenomena, including inflation, unemployment, and
economics growth..

Types of questions macroeconomics aims to answer:
What can the government of the poorest countries do to promote more rapid
economics growth? What can the government do to reduce
unemployment?
What are the costs and benefits of government deficits?
What is the relationship between interest rates and the stock market?
What is inflation and why is it so high in some countries ( printing too much
money)

When economists are trying to explain the word, they are scientists..
Why is unemployment higher for teenagers than for older workers.
( more experience )
When economists are trying to change the world they are policy advisers..
Positive startements are starements that attempt to describe the world as it
is. - Can in principle , be confirmed or refuted by examining evidence.

Normative statements are statements about how the world should be they
are prescriptive.

Normative statements may influence values as a fact.

Positive or normative statements?
Minimum-wage laws cause unemployment among the least skilled.
(POSITIVe)

The gouv should raise minimum wages because a decent society demands
that people who work should earn enough to live on. (NORMATIVE)

Economists in ottawa...
They serve as policy advisors. Finance Canada , help design tax policy,

why economists often disagree

"If all economists were laid ent to end, they would not reach a conclusion.

Two possible reasons why economists often disagree;
Disagree about the validity of alternative positive theories.







Chapter 3 -
Remember economics is the study of how societies produce and
distribute goods in an attempt to satisfy the wants and needs of its
members.
How do we satisfy our wants and needs in a global economy?
- we can be economically self sufficient.
we can specialize in trades and offers.

Show that in general a nation benefits from trading examine what
determines the pattern of production ( that is, what country
produces what ) and trade

Imports are goods produced abroad and sold domestically..
Exports good produced domestically and sold abroad.

Absolute avantage... the country has an absolute advantage when
it requires a smaller amount of imputs to produce that good.

The country that has the lowest opportunity cost of producing a
good is said to have a comparative dvantage in producing that
good.

- Whenever potential trading party have differences in
opportunity costs, they can each benefit from trade.
(PRINCIPAL) a country should specialize in what it does best. In
other words if it has a comparative advantage in a good , it should
specialize in producing that good and trade.

EX, Canada vs Japan
Our example
Two countries: Canada and Japan
Two goods: computers and wheat
One resource: labour, measured in hours
Canada has 50,000 hours available for production, per month.
Producing one computer requires 100 hours of labour; producing one ton
of wheat requires 10 hours of labour.
Japan has 30,000 hours available for production, per month.
Producing one computer requires 125 hours of labour; producing one ton
of wheat requires 25 hours of labour.
We will look at how much of both goods each country produces and
consumes
if the country chooses to be self-sufficient if it trades with the other
country

What country has an absolute advantage in producing computers .
Canada has an absolute advantage to produce wheat & computers,
Japan has a comparative advantage of producing computers.

Gains from specialization and trade.

When ( that is, at what price in terms of computers. Tons of wheat
is Canada interested in trading wheat for computers.
When is japan interest in trading computers for wheat?
answers.. canada will want to sell wheat as long as the price it gets is
greather then its opportunity cost of producing wheat.


EXAMPLE #4 PAGE 64


Example: Problem #4, page 64
Hours Needed to Make 5 L of root Beer 1 pizza
Pat 4 Kris 6 4
2
a.
Opportunity Cost of Making. 1 pizza
Pat Kris
2.5 L of root beer 3.33 L of root beer
Absolute advantage in making pizza: Pat (takes 2 instead of 4 hours)
Comparative advantage in making pizza: Pat (lowest opportunity cost)
b. Who will specialize in pizza? Pat because he has a comparative advantage
c. Lowest price: 2.5 L of root beer/pizza, otherwise Pat would not want to
sell
as he would get less than what it costs him to do the pizza. Highest price:
3.33 L of root beer/pizza, otherwise Kris would not want to buy
21
as it would be cheaper


Lecture # 5 9/8/2011 8:29:00 AM
Last class we started Chapter 3 Interdependence and gains from trade
Absolute advantage .. a country has an absolute advantage when it requires
less of something to produce a good then another country.
Comparaive advantage is when a country has the lowest opportunity cost of
producing a good is said to have a comparative advantage is producing that
good.
Principle : If a country has a comparative advantage in a good, it should
specialize in producing a good.
Finish chapter 3. In particular , will show that countries gain from trading.
Recall on Canada-japan example :
Another thing what determines a countrys standard of living? How much it
can consume
What is the maximum a country can consume if there is no trade? Points
on the PPF
If there is no trade the PPF is also the Consumption Possibilities Frontier
(CPF) If a country produces 200 computers and 700 cars, it will be able to
consume 2000 computers and 700 cars * could not consume the bundle B
for example)
When tech advantages happen the Y axis n this case will go up

Gains from trade ( Japan )
What can japan consume if no trade? ( ITS PPF) it can only consume what it
produces
(tons)

For example, it could consume the 240 computers and not consume any
wheat. Or it could consume 135 computers and sell the rest (that is, 105
computers) for 700 tons of wheat (105 x 6.667 = 700). Or it could sell all
its computers and consume only wheat (240 x 6.666 =1600)

What can Canada consume if no trade?
If no trade, Canada can consume only what it can produce, that is, it
cannot consume more than the points along its PPF (its CPF is then its PPF)
What can Canada consume if it specializes in wheat and trade? In other
words, what is Canadas CPF when it trades?
For example, could produce 5,000 tons of wheat and consume all of them.
Or, could produce 5,000 tons of wheat, consume 4000 of them and sell the
rest
Wheat (tons)
(that I, 1000) for 150 computers (1000 x 0.15 =150). Or, could produce
5,000 tons of wheat and consume 3400 of them and sell the
5,000
rest for 240 computers (240 = (5000-3400) x 0.15). Or, if it wants to
consume only computers, it could produce 1600 tons of wheat
and sell them for 240 computers (the whole production of Japan), and make

All countries benefit from tade; even those that are less competitive in every
way.
-This does not mean though that no one would loose his/her job if a country
enters a free-trade agreement with another country (or that one country will
not benefit more than another one from international trade.)

Some workers can loose their jobs but they should be able to find jobs in
other sectors. The issue that the society as a whole is better-off when there
is international trade.
Economists generally agree that globally, international trade creates more
jobs that it destroys.
Trading with another country is conceptually equivalent to shifting the PPF
to the rightit is equivalent to a technological advance.

First example..


What is the opportunity cost
The opportunity cost for 1 car is 15 tons of wheat. Opportunity cost of 1 ton
of wheat is 1/15 cars . STRAIGHT CURVE = CONSTENT OPPORTUNITY COST.
if it wants to produce 10 M cars it can produce 150 M tons of wheat.
20




Answer.. (really easy )

9/8/2011 8:29:00 AM
Chapter 4) The market forces of supply and demand.

Key objectives:
See what determines the
-Demand for a good in a competitive market.
-Supply of a good in a competitive market.

A market is a group of buyers and sellers of a particular good or service.
Buyers determine demand. Sellers determine supply.

Competitive markets..


Characteristics of competitive markets:
1. The goods being offered for sale are all the same; and
2. The buyers and sellers are so numerous that no single buyer or seller can
influence the market price (that is, they are price takers).
Examples of other types of markets:
Only one seller who sets the price: monopoly (e.g., cable T.V.) (Chap. 15)
Few sellers that do not compete aggressively: oligopoly (e.g., airlines)
(Chap. 16)
Many sellers but slightly different products: monopolistic competition (e.g.,
magazine publishers) (Chap. 17)

The demand curve

Definitions:
The demand curve expresses the relationship between price and quantity
demanded
The quantity demanded of any good is the amount of the goods that
buyers are willing to purchase at a given price.

Relationship between quantity demanded and price
Quantity demanded (X) price (Y) ( downward slope) ( for most goods in an
exonomy, the quanitity demanded goes down as the price goes up ( law of
demand) in other words the quantity demanded is negatively related to
price demand curve is downward sloping.


Individual demand curve

Individual demand curve: demand curve for one good by one person
Example: Catherines demand schedule for ice cream (page 72 in book).
Price of Ice-Cream Cone
Quantity of Cones Demanded
$0.00 0.50 1.00 1.50 2.00 2.50 3.00
12 10 8 6 4 2 0








Market demand curve..

A demand curve is derived holding all variables constant (except price and
quantity).
This means that changes in any variable other than price or quantity may
shift the demand curve.
More formally, any change that alters the quantity demanded at every
price will shift the demand curve
If change increases the quantity demanded for every price: increase in
demand (curve shifts to the right)
If change decreases the quantity demanded for every price:






Curve shifts up if their income increases..



Demand Curve: Different types of goods Normal vs Inferior goods
As income increases the demand for a normal good will increase.
As income increases the demand for an inferior good will decrease.
Example: bus rides is typically an inferior good
Substitutes and Complements
When a fall in the price of one good reduces the demand for another good,
the two goods are called substitutes.
When a fall in the price of one good increases the demand for another
good, the two goods are called complements.

The supply curve.

Definitions:
The supply curve expresses the relationship between price and quantity
supplied
The quantity supplied of a good is the amount of the good that sellers are
willing and able to sell at a given price


Individual supply curve: supply curve for one good by one seller
Market supply: the sum of all individual supplies for all sellers of a
particular good or service.
Graphically, individual supply curves are summed to obtain the market
supply curve

9/8/2011 8:29:00 AM
The supply curve, ( Shift in demand curve )
Finish Chap. 4
Shifts in the supply curve
Put the supply and demand curves together to obtain the equilibrium price
and equilibrium quantity.
Examine why the intersection of the supply and demand curves is an
equilibrium situation.
Use the supply-demand model to predict the impact on the price and
quantity sold of a good following an economic shock

Change in supply
Shift in the supply curve
Caused by a change in a variable other than price (e.g., change in input
prices)
Change in Quantity Supplied
Movement along the supply curve.
Caused by a change in the price of the product



Equilibrium refers to a situation in which the price has reached the level
where quantity supplied equals quantity demanded.
Equilibrium Price The price that balances quantity supplied and quantity
demanded.
On a graph, it is the price at which the supply and demand curves
intersect.
Equilibrium Quantity The quantity supplied and the quantity demanded
at
the equilibrium price.
On a graph it is the quantity at which the supply and demand curves
intersect.
SUPPLY
DEMAND
EQUILIBRIUM is @ 2$ as both = 7

The equilibrium of supply and demand Graphically
IF the price is above 2.00 they will have a surplus and will be pressured to
lower the price to an equilibrium price.
If the price is below the equilibrium price then theyre will be pressure to
raise the price.

quilibriumLaw of supply and demand Law of supply and demand
The price of any good adjusts to bring the quantity supplied and the
quantity demanded for that good into balance.
If the price is too high, there will be a surplus and the price will decrease.
If the price is too low, there will be a shortage and the price will increase.

Three Steps in Analyzing Changes in Equilibrium
1. Decide whether the event shifts the supply or demand curve (or both).
2. Decidewhetherthecurve(s)shift(s)to the left or to the right.
3. Usethesupply-and-demanddiagramto see how the shift affects equilibrium
price and quantity


EXAMPLE: The Market for Hybrid Cars (cont)
What is the impact of an increase in the price of gaz and a technological
innovation that reduces the cost of producing hybrid cars?
P
Step 1: What curve shifts? Both the S and D curves shifts Step 2: In
what direction? Both curves shift.
Step 3: Impact on P and Q? Q increases but effect on P is
ambiguous. If demand increases more than
Q
supply (D2), P goes up.
But if supply increases more than demand (D2), P goes down.





9/8/2011 8:29:00 AM
Chapter 5
: elasticity and its applications.
Objectives:
Learn the meaning of the elasticity of demand and the elasticity of supply
Examine what determines the elasticity of demand and the elasticity of
supply
Learn how to apply the concept of elasticity


Elasticity
Definition:
Elasticity is a measure of how much buyers and sellers respond to changes
in market conditions

Price Elasticity of Demand Definition:
The price elasticity of demand is a measure of how much the quantity
demanded of a good responds to a change in the price of that good.

EP= Percentage change in quality demanded / Percentage change in price.

EP=


Computing the Price Elasticity of Demand

Example: Suppose that if the price of an ice cream cone increases from
$2.00 to $2.20, the amount you buy falls from 10 to 8 cones. What is then
your elasticity of demand?
QQ D 100 D
= QD E= QD
(
) 100 ( PP
)
PpP
=
(Q2 Q1)/Q1 (P2 P1)/P1
(8 - 10)/10 (2,20 2,00)/2,00
=2





The Midpoint Method: A Better Way of Computing Elasticity

An annoying problem with the preceding formula is that the elasticity varies
depending on whether it is a price increase or a price decrease.
For example :

From A to B, P 25%, Q 33%, elasticit = 33/25 = 1,33

From B to A, P 20%, Q 50%, elasticit = 50/20 = 2,50





The Midpoint Method: A Better Way of Computing Elasticity (cont.)
This problem is solved if we use the midpoint method:
Ep =
(Q2 Q1)/[(Q1+Q2)/2] /
(P2 P1)/[(P1+P2)/2]

Example: the demand for websites
Ep =
(12-8)/(20/2) (200 250)/(450/2)

Elasticy of a linear demand curve.





Elastic vs Inelastic Demand

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

Inelastic Demand
Quantity demanded does not respond strongly to price changes.
Price elasticity of demand is less than one


What determines price elasticity ?

Example 1: Eggs vs Butter
Suppose the prices of both of these goods rise by 20%. For which good
would you expect Qd to drop the most and why?

Eggs have no close substitutes, so consumers would probably not buy
much fewer eggs if their price rises.
So Qd for butter would probably drop the most
Which means that price elasticity of butter would be higher.
Lesson: Price elasticity is higher when close substitutes are
available.


What determines price elasticity?

Example 2: Blue Jeans vs Clothing

Suppose the prices of both of these goods rise by 20%. For which good
would you expect Qd to drop the most and why?
For a narrowly defined good such as blue jeans, there are many
substitutes (khakis, corduroy pants).
There are fewer substitutes available for broadly defined goods (no
substitute for clothing)
So Qd for blue jeans would probably drop the most
Which means that price elasticity of blue jeans would be higher.
Lesson: Price elasticity is higher for narrowly defined goods than
broadly defined ones.


What determines price elasticity?

Example 3: Insulin vs Caribbean cruises
Suppose the prices of both of these goods rise by 20%. For which good
would you expect Qd to drop the most and why?
To millions of diabetics, insulin is a necessity. A rise in its price would
cause little or no decrease in demand.
A cruise is a luxury. If the price rises, some people will forego it.
So Qd for cruises would probably drop the most
Which means that price elasticity of cruises would be higher.
Lesson: Price elasticity is higher for luxuries than for necessities.



What determines price elasticity?

Example 4: Gazoline in the short run vs Gazoline in the long run

Suppose the prices of gazoline rises by 20%. Does Qd drop more in the
short run or the long run and why?
Theres not much people can do in the short run, other than ride the bus
or carpool.
In the long run, people can buy smaller cars or live closer to where they
work.
So Qd for gazoline would probably drop the most in the long run
Which means that price elasticity of gazoline would be higher
in the long run than the short run.
Lesson: Price elasticity is higher in the long run than the short run



What determines the demand elasticity for a good? (Summary)
Generally, demand tends to be more elastic when it is easier for the
consumer to adjust, for example, if:
a large number of close substitutes.
the market is narrowly defined (e.g., food market vs ice cream market).
the good is a luxury.
the longer the time period.



The variety of demand curves
Economists classify demand curves according to their elasticity.
The price elasticity of demand is closely related to the slope of the demand
curve.
Rule of thumb: The flatter the curve, the bigger the elasticity. The
steeper the curve, the smaller the elasticity.
Thenext5slidespresentthedifferent classifications, from least to most
elastic.






As the elasticity gets larger the curve gets straighter ( horizontally )
9/8/2011 8:29:00 AM
3Midterm OCT 20
Chaptr 1- 6 ( emphasis on 2 6 )

Started chap. 5 Elasticity and its applications.





Total Revenue and the Price Elasticity of Demand

Total revenue is the amount paid by buyers and received by sellers of a
good.
Computed as the price of the good times the quantity sold. That is,
TR = P x Q
Often interested in knowing how TR varies with changes in price.
The effects of a change in price on TR depends on the the elasticity of
demand. For example, if price increases
TR increases if demand is inelastic TR decreases if demand is elastic





How total revenue changes when price changes : Inelastic demand.


P = P1, TR = A + B
P= P2, TR = A+C



How total revenue changes when price changes : Elastic demand


P=P1, TR = A + B
P=P2, TR = A + C
TR can go down even if P increases!



EP= deltaQ^s/{(Q1^s+Q2^S)/2}
deltaP/{(P1+P2)/2}



Computing the price elasticity of supply
Example: Suppose that an increase in the price of milk from $2.85 to
$3.15 per L raises the amount that farmers produce from 9000 to 11000 L
per month. What is then the elasticity of supply for milk?
(11,000- 9,000)/10000 =0.2/0.1=2
(3.15-2.85)/3.00
Elasticity= 2


The variety of supply curves
Economists classify supply curves according to their price-elasticity.
The slope of the supply curve is closely related to the inverse of the price-
elasticity of supply.
Rule of thumb: The larger the elasticity, the flatter the curve. The
smaller the elasticity, the steeper the curve.


Black = Inelastic
Red = Perfectly elastic


Determinants of Elasticity of Supply

Ability of sellers to change the amount of the good they produce.
Beach-front land is inelastic.
Books, cars, or manufactured goods are elastic.
Time period. Supply is more elastic in the long run.



An Application of Supply, Demand and Elasticity

Can good news for farming be bad news for farmers?
What happens to wheat farmers and the market for wheat when university
agronomists discover a new wheat hybrid that is more productive than
existing varieties? In particular, what happens to price, quantity and total
revenue?



Recall from Chapter 4, the Methodology to Analyze Changes in
Equilibrium

Examine whether the supply or demand curve shifts.
Determine the direction of the shift of the curve.
Use the supply-and-demand diagram to see how the market equilibrium
changes.


D is Shaped like that because there is no substitute for wheat




Other Elasticities: Income Elasticity of Demand

Definition: Income elasticity of demand measures how much the quantity
demanded of a good responds to a change in consumers income.




Income Elasticity of DemandProperties
Goods consumers regard as necessities tend to be income inelastic
Examples include food, fuel, clothing, utilities, and medical services.
Goods consumers regard as luxuries tend to be income elastic.
Examples include sports cars, furs, and expensive foods.
Inferior goods have a negative income elasticity.


Other Demand Elasticities: Cross-Price Elasticity of Demand

Definition: Cross-Price elasticity of demand measures how the quantity
demanded of a good responds to a change in the price of another good.




9/8/2011 8:29:00 AM
Exam Oct 20
th


Chapter 6
Supply demand and government policies.
Use the supply-demand model to examine the effects of three
government policies:
A ceiling on prices
A floor under prices
A tax on a good

Price Ceiling vs Price Floor
Price Ceiling : a legal maximum on the price
Price Ceiling at which a good can be sold (for example, a rent control
law).

Price Floor: a legal minimum on the price at Price Floor:
which a good can be sold (for example, minimum wages).




Case Study: Rent Control in the Short Run and Long Run

Rent controls are ceilings placed on the rents that landlords may charge
their tenants.

The goal of rent control policy is to help the poor by making housing more
affordable.

But, does it?



























9/8/2011 8:29:00 AM



TaxationSome Basic Principles
Taxes result in a change in market equilibriumprices typically go up and
quantities sold go down.
Buyers and sellers share the tax burden, regardless on whom the tax is
levied.
The burden/incidence of a tax falls more heavily on the side of the market
that is less elastic.



Icidence of a tax : difference between price paid ( received) after tax
inposed and the price paid ( received ) before tax was imposed.