a.p. microeconomics in class review #2. pricing 1.pricing system serves as a rationing device the...
TRANSCRIPT
![Page 1: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/1.jpg)
A.P. MicroeconomicsA.P. MicroeconomicsA.P. MicroeconomicsA.P. Microeconomics
In Class Review #2In Class Review #2
![Page 2: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/2.jpg)
Pricing1. Pricing system serves as a
rationing device• The market decides who gets
g&s by which households are willing to pay the price for it!!
![Page 3: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/3.jpg)
Pricinga. Even when price ceilings are
implemented to keep prices at a “fair” level, the rationing system will usually win out.
• The Market will find a way to get to its happy place, even if it’s illegal!!• Ex) black markets, scalping, eBay, etc.
![Page 4: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/4.jpg)
Pricing• Consumer
SurplusThe difference btwn
utility gained and price paid (what we are willing to pay over actual price)
• Producer SurplusThe difference btwn
what producers are willing to sell at and actual price
Price
Quantity
S
D
PX
Consumer Surplus
Producer Surplus
![Page 5: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/5.jpg)
Elasticity• How sensitive are firms and
households to changes in price (Laws of Supply and Demand)
• To what degree will quantity change?
• Formula%ΔQD %ΔP
![Page 6: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/6.jpg)
Term Def Formula Examples Graph
Elastic
Inelastic
Unit Elastic
%ΔQD > % ΔP
Big change in quantity dem
ED > 1Not urgent,
Large portion of budget,
Lots of substitutes
Low slope,
Higher priced parts of line
%ΔQD < %ΔP
Little change in quantity dem
0 < ED < 1
Urgent, no substitutes, small portion of budget, medical needs
Steep slope,
lower priced parts of line
%ΔQD = %ΔP
Same change in quantity dem
ED = 1Proportional change
45° angle
![Page 7: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/7.jpg)
Term Def Formula Examples Graph
Perfectly Elastic
Perfectly Inelastic
%ΔP = 0 ED = ∞
Perfect Subs, fruits & veggies
Horizontal Line
%ΔQD
= 0ED = 0
No Subs, unique – limited product
Vertical Line
![Page 8: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/8.jpg)
Factors that Effect Elasticity
1. Time2. Substitutability
3. Proportion of Budget
![Page 9: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/9.jpg)
Practice Problems:1. Price of strawberries increase from $3
to $4 per pint and sales of strawberries decrease by 50%, how elastic are demand for strawberries?Q2 – Q1
Q1
P2 – P1
P1
.50___
(4-3)/3
.50___
.33
ED = = =
ED = Elastic
OR - %ΔQD is -50%, %ΔP = 33%
Since quantity changed more than price it is elastic
1.5151
![Page 10: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/10.jpg)
Practice Problem1. Price of iPhones decrease by 25%
and sales increase by 33%, how elastic is the demand for iPhones?
• .33/.25 = 1.32 = Elastic• OR, %ΔQD is +33%, %ΔP = 25%• Since quantity changed
greater than price it is elastic
![Page 11: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/11.jpg)
Demand Graph & Elasticity
Demand
Quantity
Price
Find Midpoint of the line!!!
ED = 1 at midpoint, Unit Elastic
ED > 1 at high prices, Elastic
0 < ED < 1 at low prices, Inelastic
![Page 12: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/12.jpg)
Revenue Test• Total Revenue = p × q
Price Quantity Total Revenue
$1 10
2 8
3 6
4 4
5 2
6 0
$10
$16
$18
$16
$10$0
![Page 13: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/13.jpg)
Revenue Test• Price increase from $1 to $2, type of
elasticity and what happens to TR?ED = Inelastic and TR Increased
• Price change from $3 to $4, type of elasticity and what happens to TR?ED = Unit Elastic and TR Decreased
Price change from $4 to $5, type of elasticity and what happens to TR?ED = Elastic and TR Decreased
How can a firm increase Revenue?
If Elastic – Decrease Price
If Inelastic – Raise Price!!!
![Page 14: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/14.jpg)
Review Unit #2Review Unit #2Review Unit #2Review Unit #2
Have out assignment #2 and Have out assignment #2 and packet #2packet #2
![Page 15: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/15.jpg)
Price
Quantity
D
Revenue
Output
Total Revenue
Elastic Inelastic
Unit Elastic
![Page 16: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/16.jpg)
Cross-Elasticity of Demand
• Measuring the change in quantity of one good when the price of a related good is changed.
%ΔQDY
%ΔPX
RULES: positive sign goods are subsnegative sign goods are comps
![Page 17: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/17.jpg)
Income Elasticity of Demand
• Compares change in income to change in quantity demanded– Normal good = buy more with more $– Inferior good = buy more with less $%ΔQD %ΔIRULES: positive sign = goods are
normalnegative sign = goods are
inferior
![Page 18: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/18.jpg)
Utility, etc.• Utility: satisfaction from
consumption• Marginal Utility: satisfaction
from consumption of additional units
• Diminishing Marginal Utility: decreasing satisfaction from consumption of additional units
![Page 19: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/19.jpg)
Constraints to Utility• Tastes & Preferences• BUDGET!!!
![Page 20: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/20.jpg)
Utility-Maximizing Rule• Ranking choices when consuming
many goods; where will households get most utility per dollar:
MUA MUB MUC
PA PB PC
==
![Page 21: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/21.jpg)
Budget Constraint: $52Price of CDs: $8
Price of Candy: $4Units
of CDs
Utility Marginal Utility
MU
MU/P Units of
Candy
Utility Marginal Utility MU
MU/P
1 56 56 1 32
2 104 48 2 60
3 136 32 3 84
4 160 24 4 104
5 180 20 5 116
6 196 16 6 126
7 208 12 7 134
7
6
43
2.52
1.5
3228242012108
87
6532.5
2
Answer: 4 cds and 5 candies
![Page 22: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/22.jpg)
Income Effect• As the price of a particular good
decreases, a consumer can afford more of it and other goods (changes to buying power)– Ex) a usual expense (rent) gets
cheaper so you have more money to spend!!
– Inheritance/raise/layoff
![Page 23: A.P. Microeconomics In Class Review #2. Pricing 1.Pricing system serves as a rationing device The market decides who gets g&s by which households are](https://reader036.vdocument.in/reader036/viewer/2022062713/56649f4a5503460f94c6c6d6/html5/thumbnails/23.jpg)
Substitution Effect• As the price of a particular
good decreases, a consumer may buy more of this good relative to the price of a substitute good– Ex) moving to a cheaper
apartment