Summer 2009
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Where I’m from:
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My “kids”…
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How many of you are here to “avoid” Econ 1014
at Mizzou?
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My personality…
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http://web.missouri.edu/~dls6w4
Syllabus
Calendar
Practice Materials
Homework
Exam Information
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Make sure you have access to Blackboard
You need to either:
◦ Activate your stlcc email account
◦ Update Blackboard to different email
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You are responsible for any announcements I
post/email
Homework
◦ “Long and painful”
◦ Absences will not excuse you from completing
homework
 All will be posted on the webpage
◦ You’ll need to have a strong understanding of the
material
◦ “End of Class”
◦ Group work…
◦ I will take your top 5 scores
4 exams
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Final is cumulative
I will drop your lowest exam score of the first three
The final exam counts
Format:
 You’ll have options
 Each has its trade-offs
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Attendance includes being present, but it also
includes:
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Not disrupting class
Being attentive
Not excessively talking
Not doing anything I deem “annoying”
This will cost you attendance credit
If you come in after roll call, it is your job to
notify me in person that day
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Exams: 60%
◦ Three Midterm exams: 100 points each
◦ Final Exam (cumulative): 100 points
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Homework: 40%
◦ Each homework worth fifty points each
◦ I’ll count the top 5
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Attendance: Loss of 3%
Introduction and Toolkit
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Economics
◦ The study of how society manages its scarce
resources
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Scarcity
◦ The limited nature of society’s resources
◦ The resource must be “desirable”
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In Microeconomics, we want to study how
people/firms/etc. make decisions
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Specifically, we wish to answer three
questions:
◦ What gets produced?
◦ How to produce/Who produces?
◦ Who gets what is produced?
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Costs/Benefits are keys
◦ Application: “Detroitasaurus Wrecks”
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All decisions are made with the specific
intention of “maximizing surplus”
This is what economists consider “rational”
◦ Any decision that maximizes one’s own surplus
 House, MD, 2:19
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Surplus = Benefits – Costs
Things to remember/consider
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Opportunity Costs
Sunk Costs
Psychic Costs/Benefits
“After the fact” changes
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Incentives
◦ Rewards/Punishments to encourage behavior
◦ Most common source of “unintended
consequences”
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Externalities
◦ Decisions of one affect others
◦ “Decider” must not care/know about affects
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Marginal Analysis
◦ Few (if any) do full “pro-con” list
◦ Most “take a step” and evaluate
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Quantity Demanded: the amount of a good
that one is willing and able to purchase at a
given price
◦ Inversely related to prices
◦ Price increases, people buy less, and vice versa
◦ Collection of “Qd”: Demand Curve
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Law of Demand: As price increases, the
quantity demanded falls, all else equal
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Demand curve is a measurement of
willingness (and ability) to pay
◦ Willingness to Pay
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Demand curve also measures the marginal
benefit of the product
◦ If you’re willing to pay $10 for something, it must
be worth $10 to you
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Reservation Price-Highest amount you’re
willing to pay
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Law of Demand is caused by three things
◦ Income Effect
◦ Substitution Effect
◦ Law of Diminshing Marginal Returns
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Illustrates the law of
demand
Graphically
Results in a negativelysloped line
Note: This illustrates the
reaction of consumers
when price changes
Call this “Change in
Quantity Demanded”
Price
Quantity
Demanded
$20
0
$15
2
$10
4
$5
6
$0
8
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Income increase from
$10,000 to $50,000
Graphically
Changing something
other than price:
must shift the
demand curve
Not one of the axes
Price
QD,
Inc.=$10
K
QD,
Inc.=$50
K
$20
0
2
$15
2
4
$10
4
6
$5
6
8
$0
8
10
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Remove the “all else equal”
◦ Change something other than price
◦ What will make you buy more/less of something if
its own price doesn’t change?
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Income
Prices of related goods
Tastes and preferences
Expectations
Number of buyers
◦ This illustrates a Change in Demand
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Quantity Supplied: the amount of a good one
is willing and able to produce at a given price
◦ Directly related to prices
◦ Price increases, people sell more, and vice versa
◦ Collection of “Qs”: Supply Curve
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Law of Supply: As price increases, the
quantity supplied increases, all else equal
◦ Caused by increasing marginal costs
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Supply curve is a measurement of willingness
(and ability) to produce
◦ Willingness to Produce
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Supply curve also measures the marginal cost
of the product
◦ If you’re willing to take $10 for a good, it must cost
$10 or less for you to produce it
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Reservation Price-Lowest amount you’re
willing to accept
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Illustrates the law of
supply
Graphically
Results in a positivelysloped line
Note: This illustrates the
reaction of producers
when price changes
Call this “Change in
Quantity Supplied”
Price
Quantity
Supplied
$20
8
$15
6
$10
4
$5
2
$0
0
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Technology Upgrade
Graphically
Changing something
other than price:
must shift the supply
curve
Not one of the axes
Price
QS, Level QS, Level
One
Two
$20
8
10
$15
6
8
$10
4
6
$5
2
4
$0
0
2
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Remove the “all else equal”
◦ Change something other than price
◦ What would make you sell more of something if its
own price doesn’t change?
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Technology
Input Prices
Expectations
Number of sellers
◦ This illustrates a Change in Supply
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Simply add up all quantity supplied (or
quantity demanded) at each given price
Example
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Denoted Pe and Qe, respectively
Point where:
◦ QS = QD
◦ D=S
◦ Only “stable” point in the market
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Q S > QD
Excess Surplus
Downward Pressure exerted on price
Price drop causes Qs ↓, Qd ↑
Equilibrium Reached
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Q D > QS
Excess Shortage
Upward Pressure exerted on price
Price increase causes Qd ↓, Qs ↑
Equilibrium Reached
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Suppose something changes in the market
other than the price of the good
Consider the market for oranges
◦ Minimum Wage Increase…
◦ And Minimum Wage increase…
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This is rare; most shocks only cause one shift
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Identify which curve is shifting
Make appropriate shift
Identify change in Pe and Qe
With simultaneous shocks, one will be
indeterminant (unless size is known)
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Denoted by εD
Measures responsiveness of quantity
demanded to a price change
Defined by:
%quantity demanded
D 
%price
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ε > 1 or ε < -1
◦ Elastic
◦ High responsiveness
◦ Value in numerator is “over-adjusting” to the
change from the denominator
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-1 < ε < 1, ε ≠ 0
◦ Inelastic
◦ Low responsiveness
◦ Value in numerator is “under-adjusting” to the
change from the denominator
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ε = -1 or ε = 1
◦ Unit Elastic
◦ One-to-one responsiveness
◦ Value on top is reacting in exactly the same amount
as the value causing the change
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Always negative
◦ Due to the Law of Demand
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Steepness of demand curve
Examples of price elastic goods? Price
inelastic goods?
Determinants
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Availability of Substitutes
Necessity/Luxury
Definition of Market
Time Horizon
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Alternative way of calculating it
P
1
D  x
Q slope
Highly Useful when dealing with a
graph
P
•First you’ll need
the slope
20
18
•Then use the
slope and find the
elasticity at
different points
10
2
2
10
18
•Straight Line D
curves have
multiple
elasticities
Q
20
P
20
Elastic Points
18
Single Unit Elastic Point
10
Inelastic Points
2
2
10
18
20
Q
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Examine the equation for price elasticity of
demand
◦ Elastic points
 To increase TR, lower price
◦ Inelastic points
 To increase TR, raise price
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Between elastic and inelastic:
◦ TR is maximized
◦ Price elasticity of demand = -1
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Salt: -0.1
Coffee: -0.25
Gasoline: -0.2
Movies: -0.9
Airline travel (long-run): -2.4
Restaurant meals: -2.3
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Denoted by εS
Measures responsiveness of quantity
supplied to a price change
Defined by:
%quantity supplied
S 
%price
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Always positive
◦ Due to the Law of Supply
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Steepness of supply curve
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Alternative way of calculating it
P
1
S  x
Q slope
Highly Useful when dealing with a
graph
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Denoted by εxy
Measures responsiveness of quantity
demanded of one good to a price change of
another
Defined by:
%quantity demanded(X )
XY 
%price(Y)
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Positive εxy
◦ Substitutes
 Pepsi and Coke
 Budweiser and Miller Genuine Draft
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Negative εxy
◦ Complements
 Coffee and Milk
 Automobiles and Gasoline
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Number tells how related the two goods are
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Denoted by εI
Measures responsiveness of quantity
demanded to a change in income
Defined by:
%quantity demanded
I 
%income
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Positive εI
◦ Normal Good
 High-performance automobiles
 Event tickets
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Negative εI
◦ Inferior Good
 Used automobiles
 Ramen Noodles
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The number will gauge the good’s tie to
income
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Income Elasticity and Cross-Price Elasticity
measure initial shifts in the demand curve
◦ These are changes in something other than price of
the good
◦ Graphically