Class 29 – Elasticity for Campbell’s Soup = Mmmmmmm….

The law of demand says that when something is more expensive, we consume less of it

Elasticity = m - %change in QD / %change in whatever you are interested in

Here’s an example:

-Price elasticity of demand for apples:

Initial price = $1.50/lb            Initial QD = 6 lbs

Final price = $2.00/lb              Final QD = 2 lbs

m = ((2-6)/6)/ ((2.00-1.50)/1.50) = (2/3)/(1/3) = 2

The price elasticity demand for apples at that price is 2. If it was 10, you would be very sensitive and would probably stop consuming apples.

M:

If (-1 > m < 1) = inelastic = people are NOT very sensitive to price change = vertical graph (“I”)

If (-1 = m = 1) = unit elastic

If (-1 < m > 1) = elastic = people are very sensitive to price change = horizontal graph

Impacts of Elasticity:

            Time – not instantaneous

            Budget – some goods are a small portion so price change doesn’t matter

            Substitutes

More narrowly define a goods = higher number of substitues

-car, minivan, red ford minivan           red ford minivan = highest elasticity – more elasticity

Class 28 – Demand Change and Elasticity

Today we talked about what affects market demand. Comparative statics are what things impact the amount of a good we buy.

To move up and down the demand curve: price changes. (change quantity demand).

To move the demand curve (shift whole demand curve left or right):

            Changes in income – more income doesn’t mean you consume more.

            Price of other things change

            Expectations change – what the future predicts about demand impacts us today

            Tastes change – preferences change

            Number of participants

Normal goods – income increases = quantity demand increases

Inferior goods – income increases = quantity demand decreases

Substitute goods – price of good X increases – demand for good Y increases

Compliment goods – price of good X increases – price for good Y increases

Quantity demand is defined as how much of a good we consume as a function of our ability/willinness to buy it.

Elasticity:

When the law of demand seems to not apply.

Elastic - consumption is VERY responsive to change in price

Inelastic - consumption is NOT that responsive to change in price

We measure this using Own Price Elasticity of Demand:

m=%change in quantity demanded / %change in price.

If m =2, and price increases by 10% then you consume 20% less.

POW

Planes, Trains, and Alarm Clocks

This weekend I found that demand plays a huge part in my life. I have a very large demand for a flight to Boston. I also have a very large demand for a new alarm clock.

On Saturday I kinda sorta slept in. Usually this isn't a problem, but it was when I had a flight that left 2 and half hours before I woke up.

I realized that I had a huge demand for a plane ticket and was willing and able to pay for it up to a certain price while I sacrifice some cash. I had a lengthy phone call with my parents. At first my parents said don't bother because you would be paying for a ticket on top of the other ticket I wasted. I explained that I already had a sunken cost of the first plane ticket and that should be ignored and that the benefits of me coming home outweighed the cost of the money of the second ticket. I was on standby and magically got home.

I really wanted to go home and I had a huge demand to go home. However, other people in Rochester didn't have such a demand - proving demand is subjective - and I was able to get that last minute seat.

I also found that I have a huge demand (more of a necessity) for a new alarm clock. I went online (Amazon - my favorite middleman) and bought an alarm clock that shakes my bed. I was willing to sacrifice the cost of it because the benefits of me waking up for class, tests, more planes, will forever be worth it. My demand is really high up to a particular outrageous price. I lacked this alarm clock for so long because I never really had a reason to get it - now I had a reason. There was the transaction cost of me formerly not needing the earthquake alarm clock and that I don't have a car as a freshman in college. But because of the middleman of Amazon, the transaction costs were lowered and the trade occurred and both parties benefited - company gets $, I wake up.

Lessons - Don't sleep in and miss flights home. But if you do, make sure you live in Rochester because there is very little demand for flights compared to say JFK airport.

Class 27 - We Demand Burritos, Occupy Chipotle

Demand schedule = plan

Rachel’s Demand Schedule of Burritos.

Price. $$$                    Quantity of Burritos

      0                                         12

    0.75                                      10

    1.50                                       8

    2.25                                       6

      3                                          4

    3.75                                       2

    4.50                                       0

Quantity demanded and values are subjective – different for all people and different under circumstances.

When price is low - the tradeoffs for the use of that good is low.

When price is high - the tradeoffs for the use of that good is high.

(i.e. burrito baseball.)

There’s no right way to consume things. When prices increase – you give up uses of a burrito that are least pleasurable first.

Demand Curves

Show relationships of demand schedule.

Price is independent variable - on y-axis.

People buy less because when prices increase, you are poorer, and you consume less.

Wealth effects
ex. oil prices increase and widens range of substitutes available - look for them and consume less.
ex. my income is $50 (corn is $1). My income is 50 corn so if corn price doubles, my income is halved. If I spend $10 on corn and $40 on other things, then I have less to spend on other things. Also if  corn price increases I will look for substitutes. I buy less corn.

Demand Curve
  - marginal values ($3 = 4 burritos) - The price of the 4th burrito is $3.
  - total expenditures ($3 x 4 burritos = $12 spent)
  - total values - area under curve = $14.25
  - buyer's net gains = consumer surplus $14.25 - total expenditures $12.00 = $2.25 buyer's net gain
  - total value = $14.25 vs marginal value = $3

We behave this way - demand curve slopes down because 1. wealth effects, 2. substitution availability, 3. **diminishing marginal utility**

Diminishing marginal utility = each unit you purchase as a good gives less satisfaction than the previous good (pizza example). Even when price is low, I am not willing as much to pay for more.

Class 26 - Transaction Costs and Demand

Transaction costs = stop beneficial transactions. Middlemen have the comparative advantage to lower transaction costs – able to bring consumers/producers together. Supermarkets are middlemen. Price is higher but consumers don’t have to travel all the way to factories or farms. Middlemen exchange property rights. They bridge barriers between transaction costs and get rich.

Demand

Demand is a relationship between the amount of something you wish to get and the sacrifices needed to get it.

We moderate this when circumstances change.

This is not an all or nothing concept. It is not a marginal concept.

People specialize and don’t resort to self-sufficiency because we live in a large, impersonal world. Exchange can occur in small communities.

Problems in a huge world = information problems and transaction costs.

The price is information – signals to buyers/sellers about costs and values. The knowledge and resources allow order to emerge.

Quantity demand is a number. It’s the amount of a good that buyers are willing and able to consume at a particular price.

Law of Demand = other things equal. The quantity demanded good falls when price rises. We buy less when things get expensive.

Markets are any group of buyers and sellers. It is any unorganized, decentralized interaction between buyers and sellers. This causes 1 of 2 things to emerge: money prices or non-money prices (education/healthcare/etc). Markets blend the 2 and get order.

Buyers = demanders. In goods markets, the demanders are households and in factor markets the demanders are firms.

Sellers = suppliers. In a goods market, the suppliers are the firms and in goods markets they are the households.

Class 25 - Outsourcing is Good?

Today we talked about how trade is always balanced and political borders have no real purpose in deciding the benefits of trade. Rizzo talked about a suit that cost $10,000 because it took 500 man-hours at $20/hr to make the suit with materials within 100 miles.

If there were 1,000 jobs outsourced to India, the workers would lose their $100,000 pay (wages, pensions, health care) so the company saves (the people lose) $100 million dollars. But the company only outsourced to minimize prices for consumers. So now the products in India are $2 cheaper. Therefore, the consumers gain $120 million and lose $100 million.

Cope rations don’t flee to pollution havens because of environmental conditions AND infrastructure and political stability

Things that trade does to be beneficial:

1.     Smithian Notions = You specialize because of trade, allocate time to learn one thing, and gain knowledge to get capital. Specializing = extend the market (economics of scale).

2.     Racardian Notions = Comparative advantage.

People value things differently = needed for trade.

Transaction costs = cost of negotiating contracts and agreements

            -physical barriers, ignorance of opportunities, interference