to do today: finish cross elasticity and income elasticity...
TRANSCRIPT
© 2011 Pearson Education
To do today:
Finish cross elasticity and income elasticity
Inequality
Efficiency: Marginal costs and benefits
See my email for the reading assignments from Akerlof and Schiller for the discussions starting next Wednesday.
No homework this weekend. Next due date February 17th.
Income elasticity of demand
% change in Qd
% change in income =
A measure of the extent to which the demand for a good changes when income changes, other things remaining the same.
Income elasticity of demand
Income elasticity of demand for chocolate: Who has the biggest sweet tooth?
Total consumption l USA 0.79 l Germany 0.39 l United Kingdom 0.44 l France 0.60 l Japan 0.08 l Switzerland 1.06 Reference: Henri Jason Trends in cocoa and chocolate
consumption with particular reference to developments in the major markets. Malaysian International Cocoa Conference, Kuala Lumpur, 20-21 October
Singapore
Hong Kong China
US New Zealand Australia Switzerland
Netherlands Canada UK
Denmark Ecuador Norway
Israel
Japan Ireland
France Belgium
Sweden
Spain
Germany Finland
Austria Malaysia
Portugal Korea Rep
Greece Saudi Arabia Thailand Panama
Italy Dominican Rep
Chile S. Africa Lebanon
Costa Rica Mexico Venezuela Brazil Peru
Hungary Tunisia Philippines Argentina Sri Lanka Colombia Czech Rep Turkey Uruguay Bulgaria Zimbabwe Kenya
Slovenia Croatia Syria Cote D'Ivoire
Lithuania Poland Paraguay Romania Pakistan
Iran Algeria Vietnam China Cameroon Belarus Ukraine India
Nigeria Bangladesh
10
100
1000
10000
100000
0 5000 10000 15000 20000 25000 30000 35000
Airl
ine
trav
el (0
00) p
er c
apita
GNP per capita ($ PPP)
Suppose that when the price of a burger falls by 10 percent, the quantity of pizza demanded decreases by 5 percent.
Cross elasticity of demand
– 5 percent – 10 percent
= = 0.5
Cross Elasticity
• Fall in the price of Pepsi: decrease in consumption of Coke
• Qd of coke and P of its substitute change in the same direction.
• Make sure you know why for complements the QD and P change in opposite directions.
Cross Elasticity of Substitutes vs. Complements
Cross elasticity of demand for a substitute is >0
What determines fairness?
Equal opportunity
Equal outcomes
Inequality and efficiency
Main concern of neoclassical theory is efficiency
Efficiency defined by marginal cost and marginal benefit
What about inequality?
Inequality
Inequality
Income share by income group
Inequality in opportunity as well as outcomes
Efficiency: Marginal benefits (MB)
MB: what people are willing to forgo to get one more unit of the good.
MB decreases as the quantity of the good increases—the principle of decreasing marginal benefit
Marginal Cost (MC)
MC increases as more of the good is produced.
MC curve shows the amount of other goods and services that we must give up to produce one more pizza.
A demand curve (D) is a marginal benefit curve.
D shows the value the consumer places on each pizza.
This is equal to MB.
Another look at the demand curve
MB and consumer surplus
Consumer surplus is the MB from a good or service minus the price paid for it, summed over the quantity consumed.
Consumer Surplus (CS) and total benefit
CS from the 10,000 pizzas = MB – P for all the pizzas.
CS = $
The total benefit is expenditure on pizza + consumer surplus =
$
From the Production (Supply) Side of the Market
Supply and Marginal Cost Sellers distinguish between cost and price.
• Cost is what a seller must give up to produce the good.
• Price is what a seller receives when the good is sold.
The cost of producing one more unit of a good or service is its marginal cost (MC).
Cost, Price and Producer Surplus
A supply curve (S) is a MC curve.
S tells us the dollars worth of other goods and services that firms must forgo to produce one more pizza.
That is, the S shows the seller’s cost of producing each unit of pizza.
Producer Surplus
Producer surplus is the price of a good minus the opportunity cost of producing it, summed over the quantity produced.
Cost, Price and Producer Surplus (PS)
PS = P - MC P = $10 PS is the triangle equivalent to CS (upside down)