Economics 349
Intermediate Micro Theory
Fall 2013
Dr. Delemeester
Syllabus Quiz
Course Essentials
• Course web page
• www.marietta.edu/~delemeeg/econ349
• Microeconomics (Worth, 1e) by Goolsbee, Levitt, and Syverson
• Grade
▫ Exams (65%)
▫ Homework (20%)
▫ Spreadsheet Projects (15%)
Economic Roundtable
• …to promote an interest in and to enlighten its
members and others in the community on
important governmental, economic, and social
issues…
• Business networking opportunity
• Student memberships: $5
economicroundtable.org
Amity Shlaes
Author/Journalist
Jim Meil
Eaton Corp.
Laurence
Kotlikoff*
Boston University
Robert Tyler
Pittsburgh
Steelers
Affordable Care Act
Forum
Rational Man Model
▫ An individual seeks to maximize his or her utility.
This involves taking actions until the marginal
private cost of further action equals the
marginal private benefit of that action.
▫ For social optimality the rule is:
Taking action until the marginal social cost of
further action equals the marginal social
benefit of that action
Best Undergrad College Degrees by Salary
Major
Starting Median Salary
Mid-Career Median Salary
Petroleum Engineering
$97,900
$155,000
Physics
$49,800
$101,000
Economics
$47,300
$94,700
Math
$47,000
$89,900
MIS
$51,000
$88,200
Finance
$46,500
$87,300
Political Science
$40,100
$81,700
Chemistry
$39,900
$80,100
Accounting
$44,700
$75,700
Marketing
$38,200
$73,500
Management
$41,000
$70,500
History
$37,800
$69,000
Journalism
$36,100
$66,400
English
$37,100
$65,800
Psychology
$35,000
$61,300
Graphic Design
$35,600
$56,500
Source: www.payscale.com
Theories and Models
• Economics is concerned with explanation of
observed phenomena
▫ Theories are used to explain observed phenomena
in terms of a set of basic rules and assumptions:
 The Theory of Consumer Behavior
 The Theory of the Firm
 The Theory of Markets
Braille keypad on drive-up ATMs?
Redcoats and phalanxes?
Markets (aka the Price System)
 Allocation
 Distribution
 Coordination
Price
S1
P1
D1
Q1
Quantity
Market Model
Consider the demand for beer during the summer months. Let
Qd = 30 – 5P + 0.01I – 2R
Where Q is measured in thousands of 6-packs, P is the price per
6-pack in dollars, I is income, and R is the number of rainy days
during the summer.
Supply is given by Qs = -100 + 20P
a)
b)
Plot the supply and demand curves if I = $20,000 and
R = 15. What is the equilibrium price and quantity?
If I = $20,000 and R = 10, plot the new demand curve and find
the new equilibrium. Compare this to the original equilibrium.
Does the movement in P and Q make sense with the decline in the
number of rainy days?
Market Price
• Market price – price prevailing in a competitive
market
▫ Some markets have one price: price of gold
▫ Some markets have more than one price: price of
Tide versus Wisk
Real Versus Nominal Prices
RealPrice 
baseyear
CPIbase y ear
CPIcurrent y ear
x Nominal Pricecurrent y ear
Real Price of College
Year
Nom.
Price
CPI
Real Price
1970
$2,530
38.8
1990
$12,018
130.7
38.8

* $2,530  $2,530
38.8
38.8

* $12,018  $3,569
130.7
2010
$34,939
218.056

38.8
* $34,939  $6,217
218.056
The real price of a college
education rose 145.7%
percent from 1970 to 2010
Market for a College Education
S2010
P
(annual cost in
1970 dollars)
$6,217
S1970
New
equilibrium
was reached
at $6,217 and
a quantity of
17.5 million
students
$2,530
D2010
8.6
17.5
Q (millions enrolled)
Price Elasticity of Demand
• Measures the sensitivity of quantity demanded
to price changes
DQ Q
% QPD Q
E E P  
P P% Q
P P
D
Price Elasticity of Demand
• When |ED| > 1, the good is price elastic
|%Q| > |%P|
• When |ED| < 1, the good is price inelastic
|%Q| < |% P|
Income Elasticity of Demand
• Measures how quantity demanded responds to a
change in income
Q/Q I Q
EI 

I/I Q I
Cross-Price Elasticity of Demand
• Measures how quantity demanded responds to a
change in the price of a related good
EQb Pm
Qb Qb Pm Qb


Pm Pm Qb Pm
Price Elasticity of Supply
%Q S
E 
% P
S
P
Elasticity: Application I
• Supply: QS = 1800 + 240P
• Demand: QD = 3550 – 266P
• Solve for equilibrium P and Q.
Elasticity: Application I
QD = QS
1800 + 240P = 3550 – 266P
506P = 1750
P = $3.46 per bushel
Q = 1800 + (240)(3.46) = 2630 million bushels
Elasticity: Application I
QD = 3550 – 266P
QS = 1800 + 240P
• We can find the elasticities of demand and
supply at these points
P QD
3.46
E 

(266)  0.35
Q P
2,630
D
P
P QS
3.46
E 

(240)  0.32
Q P
2,630
S
P
Elasticity: Application II
• Given the following info on the market for copper:
Q = 12 million metric tons per year
P = $2 per pound
ED = -0.5
ES = 1.5
• Solve for the linear Demand and Supply equations:
QD= a – bP
QS = c + dP
Welfare Analysis
Garden of Eden Choice:
1.
2.
3.
4.
5.
Choice One
Choice Two
Choice Three
Choice Four
Choice Five
Adam
Eve
12
0
9
3
5
5
4
8
0
12
0%
1.
0%
2.
0%
3.
0%
4.
0%
5.
Welfare Analysis
• Normative Measures
▫ Pareto Criterion
▫ Efficiency Criterion: maximize SW = CS + PS
Adam
Eve
12
0
9
3
5
5
4
8
0
12
CS = Buyer Value - Price
PS = Price – Seller Cost
Price
Deadweight Loss
Supply
CS
P*
PS
Demand
Q
Q*
• Free Market Outcome: P*, Q*
▫ Maximizes social welfare: SW = CS + PS
quantity
Applications
•
•
•
•
•
Price Ceilings
Price Floors
Taxes
Subsidies
Quotas