Transcript 5550_l2_2014-Micro

Microeconomic Tools
Lecture 2
Supply and Demand
• In microeconomics, we typically have
suppliers reacting positively to price,
and demanders reacting negatively.
• The two of them combine to provide an
equilibrium, that indicates the market
quantity and the market price.
Demand for Apples
Price
10.00
7.50
5.00
2.50
100
200
300
400
500
Apples
What affects demand?
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Price of the good
Prices of other goods
Consumer income
Tastes
Demand for Apples
Price
10.00
Demand with higher income
7.50
5.00
2.50
100
200
300
400
500
Apples
Supply of Apples
10.00
7.50
5.00
2.50
100
200
300
400
500
Apples
What affects supply?
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•
•
•
•
Technological change
Input prices
Prices of Production-Related Goods
Size of the Industry
Weather
Supply of Apples
10.00
Poor weather
7.50
Improved technology
5.00
2.50
100
200
300
400
500
Apples
Equilibrium of Demand and
Supply
Supply
Demand
10.00
7.50
5.00
2.50
100
200
300
400
500
Apples
Equilibrium of Demand and
Supply
Supply
Demand
10.00
7.50
5.00
Total Revenue,
Total Expenditures
2.50
100
200
300
400
500
Apples
Equilibrium of Demand and
Supply
Shift in Demand
Supply
Demand
10.00
7.50
5.00
2.50
100
200
300
400
500
Apples
Equilibrium of Demand and
Supply
Supply
Demand
10.00
Shift in Supply
7.50
5.00
2.50
100
200
300
400
500
Apples
Equilibrium of Demand and
Supply
Shift in Demand
Demand
10.00
Supply
Shift in Supply
7.50
5.00
2.50
100
200
300
400
500
Apples
Utility Analysis?
• In Principles courses we often measure
utility -- sometimes use “utils” ...
• Utils ?????
• For several analyses in health economics,
we’ll want to use more modern analysis …,
• Although for insurance, we’ll have to
impose some “cardinality.”
• Ordinal utility
Indifference Curves
100
75
50
25
20
40
60
80
100
Pounds of Spam
Indifference Curves
100
Higher level of utility
75
50
25
20
40
60
80
100
Pounds of Spam
How much is bought?
In a month
Visits = $20/visit
Spam = $10/pound
Income = $1500
100
75
50
25
If price of Spam doubles?
150
20
40
60
80
100
Pounds of Spam
Putting them together
In a month
Prescriptions = $20/visit
Spam = $10/pound
Income = $1500
100
75
50
25
20
40
60
80
100
Pounds of Spam
Putting them together
In a month
Visits = $20/visit
Spam = $10/pound
Income = $1500
U1
100
U2
75
50
47
25
20
40
5660
80
100
Pounds of Spam
Putting them together
100
In a month
Visits = $15/visit
Spam = $10/pound
Income = $1500
U increases
75
More visits
50
More Spam
Why?
25
20
40
60
80
100
Pounds of Spam
A close look at the tangency
In a month
Visits = $20/visit
Spam = $10/pound
Income = $1500
100
U2
75
-phΔv
+psΔs
50
-ΔU/Δv = - Mgl. utility of visits
ΔU/Δs =
Mgl. utility
of Spam
25
20
40
60
80
100
Pounds of Spam
A close look at the tangency
In a month
Visits = $20/visit
Spam = $10/pound
Income = $1500
100
-pvΔv + psΔs = 0
Δv/Δs = ps/pv
Now, for utility
MUv/Mus = (ΔU/Δv)/(ΔU/Δs)
U2
75
= Δs/Δv
ps/pv = Δv/Δs = MUs/Muv
-phΔv
or
Muv /pv = MUs/ ps
+psΔs
50
-ΔU/Δv = - Mgl. utility of visits
ΔU/Δs =
Mgl. utility
of Spam
25
20
40
60
80
100
Pounds of Spam
Utility per $
• Bang/buck has to be the same for each
good!
• Why?