Microeconomics KA

7/18/2019 Microeconomics KA

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1.Introduction to economics

"He generally, indeed, neither intends to promote the public interest, norknows how much he is promoting it. By...directing that industry in sucha manner as its produce may be of the greatest value, he intends onlyhis own gain, and he is in this, as in many other cases, led by an invisiblehand to promote an end which was no part of his intention. Nor is it always

the worse for the society that it was no part of it.By pursuing his own interesthe frequently promotes that of the society more effectually than whenhe really intends to promote it" - Adam Smith - 1776 - Declaration ofIndependence.

Microeconomics - The study of individual actors (firms,people,households)How actors make decisions/allocations of scarce resources

Macroeconomics - The study of economy in aggregate.What happens in aggregate economy from millions of individualsactors. Focuses on policy related questions (raise or lower taxes,regulate or deregulate the economy).

Philosophy/Decision making ---> Microeconomics ---> You simplify itso you can start to deal with it with a mathematical sense

"An economist is a man who states the obvious in terms of the incomprehensible"Alfred A. Knopt

"An economist is an expert who will know tomorrow why the things hepredicted yesterday didn't happen today". Laurence J. Peter

Economics is not a science like physics it is opens in subjectivity and thissubjectivity is open in the assumptions you want to make.

The Demand CurveLaw of Demand

If we raise the price of a product that will lower the quantity demandedfor the product.

If we lower the price of a product that will raise the quantity demanded.Release some ebook. - Demand Schedule

(Price)..

4. :.2. :. 10 20 30 40 50 60.------------------------------------(quantity demanded)

Price of related products and demand

Price of related products. Imagine that we have other ebooks price goesup. If other ebooks price goes up my ebook is going to look more desirable.This shifts the demand curve to the right. If other ebooks prices go downthe demand curve shifts to the left.

Scenario 2 - The price of a Kindle goes up - You need it in order to consumeebook. If the complement's price goes up for every given price it will lower


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the quantity demanded - the curve goes left.Kindple price goes down - shifts to the right.

Change in expected future prices and demand.

Expectations of future prices.People expect the future price to go up. You are probably to buy now.

The current demand goes up. This will shift the entire curve to the right.

Imagine what happens in scenario 2. Now people expect future pricesto go down. This is what happens in consumer electronics. We nowassume that the prices will go down. There is less demand. The wholecurve will shift to the left.

Changes in income, population or preferences.

Held constantPrice of related goodsPrice expectations for our good

Income - What happens if everyones income would increase.More disposable income and so for any given price point the demandwould increase. Shifting the entire curve to the right.Income go down - demand go down. This is only true for normal goods.But this is not the case for inferior goods.

Population. If population goes up, obviously more people will want theproduct. Shift the curve to the right.

The last thing is preferences. If preferences actually change. The curvewill change. If the author of the ebook is in a popular show - preferenceswill go up - more people will want to buy the book.

Normal and Inferior Goods

If income goes up for a good laptopt the demand will increase. Shiftgoes to the right. This is the case for the most goods. We call this anormal good.

If income goes up for the cheapest car in the market. People have more moneybut will go to spend their money to the cheapest car in the market? Peoplewill afford for a better car. Actually the demand will increase and the wholecurve will shift to the left. Goods like this we call inferior goods.Goods people don't want to own if they have more money.If income goes down more people will want this car. Demand will go up.Shifts to the right.

Inferior goods clarificationPopulation

-----------------------------------------------------------------------------------------------------------.......................//////////////////////////////////////////////////////////////////////////////]]]]]]]]]]]]]]]]]]]]]]]]Cheap Car Better Car

Rolls Royce-Rich

Income goes up. Some of the poor will buy the better car.

Some other will buy the Rolls Royce.

The quantity demanded for the smallest car went down.


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For the better car and the expensive car went up.

2.The supply curve

Law of supply

If the price goes up then the quantity supplied goes up.

If the price goes down then the quantity supplied goes down.

Grape Supply Schedule

If the price per pound for grapes is 1.00 $ - We can produce 1000 poundsof grapes.

Scenario B

Price Quantity Supplied2.00 2.000 pounds3.00 2500 pounds

.(price)

.

.

.

.4.00 #

.3.00 #

.2.00 #

.1.00#

.------1.000-----2.000-----3.000------4.000-----------------------------------------(Quantity produced next year)

Factors affecting supply

Price goes up more incentive to produce.

Price of inputs - the cost of production.(labour, fuel, land) - if goes up there isless incentive to do it. Quantity produce is less.Supply goes down. Shift of the curve to the left.

Price of inputs goes down. Supply goes up.

Price of related goods. Substitutes for production.Some land for grapes - some for bluberries.If the price goes up for bluberries we will allocate more land to bluberriesIf the price of other things I can produce then my supply of grapes goesdown.

Number of suppliers.The more people they are supplying then the aggregate supply goes up.

Technology. Innovation. Technological improvements.Supply goes up. Cheaper to produce.

The expected future prices. (Oil Producer)

If you expect oil prices to be neutral today and then tomorrowyou know that is going up. (You can store it and wait it to sell itin the future).


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Neutral---Prices go up. The supply lowers. Current supply goes downin order to store it and sell it in the future.

Long term supply curve.

Price .

Of used .40000 + +2000 Honda .3000 +Civic . +

.20000 ( + + . .1000 + + .------------------------------------------------- Quantity 10 20 30Sold per day+ Short Term Supply+the other demand

All towns have equilibirium price of 50000 honda civic.What happens that in our town the price of honda civic goesbelow 50000 - everyone will export them to neighbouring towns.A very small change in price there is an infinite change in quantity.

A fashion model buys a used honda civic - this is happening in ourtown. What's going to happen ? The preferences have change morehonda civics will demanded the demand will increase - shift to the rightIn the short term the equilibrium price will move up 5.100 and theequilibrium quantity will go up.

Overtime is going to shift back to the same point.

Market Equilibrium

Apple Market - Demand and Supply

Price 1$Quant Supplied 1000Quant demanded 4000Shortage

Price is up and quantity is up

Price 3Quant Sup : 3000lbsQuant demanded : 1300 lbsWe face a surplus 700 lbs

Price goes downQuantity goes down

Quantity supply equals the quantity demanded this is the marketequilibrium price. $2.15

Changes in Market Equilibrium

How the equilibrium price or quantity might changedue to change in supply or demand.


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New disease resistant apple invented.They are able to produce more apple.Quantity supply is up. The price goes down.

Study released on how apples prevent cancer.Quantity demanded is going up.The price goes up.

Quantity goes up.

Pear cider industry launches ad campaign.Demand for apples go down.Supply of apples goes down. Shift to the left.The equilibrium quantity goes down but not the price.

Apple pickers unionize and demand wage increases.One of their cost of production - labour goes up.Less willing to produce apples. They will supply a lower quantity.This is going to lower supply. Equilibrium quantity goes down.The price goes up.

Breakdown of Gas prices

Oil Rig - Then it goes to the refinery, transported by pipeline or oil tanker.

$90 oils per barrel - 40 gallons40 gallons crude oil - 20 gallons of gasolinethe rest will be other stuff, waste, byproductsThe refinery can sell 3.25 cents per gallon

Transport for gasoline 10cents for transportation.Gas is heavily taxed. 50 cents a gallon. 3,85

Gas station needs to makes you some money4.00 dollars a gallon.

Short-Run oil prices

Oil producers make the most when the prices are high.

In the short term psychology drives the oil pricesMetaniahu want to destroy Iran or Iran wants todo something crazy. The buy future contracts andtrade it again or hoarded the oil.

Microeconomics KA

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