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| | We are now two weeks past the midterm, but do not forget that the midterm exam is part of this course, and please refer to the questions you answered incorrectly -- and perhaps a few that you answered correctly by guessing. Make sure that you fully understand as many of the concepts as possible. Be prepared to apply those same principles correctly to new problems. The lighter lecture and assignment this week give you the opportunity to "catch up" on aspects of this course you haven't yet fully learned. | | We are now two weeks past the midterm, but do not forget that the midterm exam is part of this course, and please refer to the questions you answered incorrectly -- and perhaps a few that you answered correctly by guessing. Make sure that you fully understand as many of the concepts as possible. Be prepared to apply those same principles correctly to new problems. The lighter lecture and assignment this week give you the opportunity to "catch up" on aspects of this course you haven't yet fully learned. |
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| − | We have learned 80% of the course material and you can begin applying your knowledge to businesses and activities that you encounter in your daily lives. For example, what are the costly inputs and sources of revenue for a newspaper? A movie theater? A book? How elastic are the demands in those markets? How competitive or monopolistic? The more you quiz yourself, the better you will learn the principles. | + | We have already covered 80% of the course material and you can begin applying your knowledge to businesses and activities that you encounter in your daily lives. For example, what are the costly inputs and sources of revenue for a newspaper? A movie theater? A book? How elastic are the demands in those markets? How competitive or monopolistic? The more you quiz yourself, the better you will learn the principles. |
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| − | From now until the end of the course, we will have a few sections each lecture devoted to review and reinforcement of concepts already learned. | + | From now until the end of the course, we will have a few sections in each lecture devoted to review and reinforcement of concepts already learned. |
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| | == Review: Price Elasticity of Demand == | | == Review: Price Elasticity of Demand == |
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| − | Last class one student asked this question: what are some example price elasticities of demand? Here are some: | + | Last class one student asked this question: what are some example price elasticities of demand? Recall the cutoff of 1: price elasticity less than 1 is inelastic, and more than 1 is elastic. Here are specific examples: |
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| − | As review, recall that if price elasticity of demand is greater than 1, then the quantity demanded changes by more than the price change. Revenue, which is price times quantity, decreases when the price increases. When the price elasticity is less than 1, then the quantity demanded changes by less than the price change. Revenue increases when the price increases. When price elasticity is precisely 1, then the quantity demanded changes by the same percentage as the price change. Revenue remains constant when the price increases. | + | *rice in Japan: 0.2 (inelastic because it is such a basic food there) |
| | + | *travel by bus: 0.2 (inelastic because it is a necessity) |
| | + | *cigarettes: 0.5 (inelastic because of the addiction) |
| | + | *gambling: 0.8 (inelastic because of the addiction) |
| | + | *movies: 0.2 for teenagers (inelastic), but 2 for adults (elastic) |
| | + | *beef: 1.6 (elastic because there are substitutes like chicken) |
| | + | *soda: about 4 (elastic) |
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| | + | As review, recall that if price elasticity of demand is greater than 1, then the quantity demanded changes by more than the price change. Revenue, which is price times quantity, then decreases when the price increases. When the price elasticity is less than 1, then the quantity demanded changes by less than the price change. Revenue then increases when the price increases. When price elasticity is precisely 1, then the quantity demanded changes by the same percentage as the price change. Revenue then remains constant when the price increases. |
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| | Now we can expand on what we learned by asking this obvious question: what affects the price elasticity of demand? Here are the major factors: | | Now we can expand on what we learned by asking this obvious question: what affects the price elasticity of demand? Here are the major factors: |
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| | *whether the good is a necessity or a luxury | | *whether the good is a necessity or a luxury |
| | *the percentage of one's income allocated to the good: if it is a large percentage, then it will have higher price elasticity | | *the percentage of one's income allocated to the good: if it is a large percentage, then it will have higher price elasticity |
| − | *the longer the time period, the more price elastic it will be; in the short run, demand may not respond as fully to a price change | + | *the longer the time period, the more price elastic it will be, because in the long run demand can more fully respond to a price change |
| − | *whether the good is addictive; if they are, they are price inelastic because the buyers are hooked on them | + | *whether the good is addictive, because addictive goods are inelastic due to how the buyers are hooked on them no matter what the price is |
| − | *whether the market is at "peak" or "off-peak" demand; trying to buy an airplane ticket the day before Thanksgiving, when many people traveling, will be price inelastic | + | *whether the market is at "peak" or "off-peak" demand; people want airline tickets the day before Thanksgiving, when many people traveling, even if the price increases |
| − | *the more narrowly defined a good is, as in looking at a specific brand of hamburger, will be more price elastic than a broad definition, such as all hamburger | + | *the more narrowly defined a good is (e.g., a specific brand of hamburger rather than all hamburgers), the more price elastic it will be due to the availability of substitutes |
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| | == Review: Returns to Scale == | | == Review: Returns to Scale == |
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| | Answer 3 out of 4: | | Answer 3 out of 4: |
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| − | 8. Explain what “economic rent” is in your own words, using your own example.
| + | 7. Explain what “economic rent” is in your own words, using your own example. |
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| − | 9. An agreement by different firms with each other to reduce output is illegal. Why should that be illegal?
| + | 8. An agreement by different firms with each other to reduce output is illegal. Why should that be illegal? |
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| − | 10. What is your favorite concept in Economics, and why?
| + | 9. What is your favorite concept in Economics, and why? |
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| − | 11. Nash equilibrium, revisited: What is the Nash equilibrium for two gas stations (an oligopoly) that are situation immediately across the street from each other? In other words, what price to they sell at, expressed in terms of one of their cost measures? Explain the process that reaches that "equilibrium".
| + | 10. Nash equilibrium, revisited: What is the Nash equilibrium for two gas stations (an oligopoly) that are situation immediately across the street from each other? In other words, what price to they sell at, expressed in terms of one of their cost measures? Explain the process that reaches that "equilibrium". |
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| | [[Category:Economics lectures]] | | [[Category:Economics lectures]] |
| | {{DEFAULTSORT: Economics Lecture 12}} | | {{DEFAULTSORT: Economics Lecture 12}} |