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AS F581
INTRODUCTION
Background Why study economics? What to expect from this unit? What is expected of you? Plagiarism Homework Mock Exam
WHAT IS ECONOMICS?
Economics is the study of how people choose to use resources. "Economics is the study of people in the ordinary business of life." -- Alfred Marshall, Principles of economics; an introductory volume (London: Macmillan, 1890) "Economics is the science which studies human behaviour as a relationship between given ends and scarce means which have alternative uses." -- Lionel Robbins, An Essay on the Nature and Significance of Economic Science (London: MacMillan, 1932) Economics is the "study of how societies use scarce resources to produce valuable commodities and distribute them among different people." -- Paul A. Samuelson, Economics (New York: McGraw-Hill, 1948)
ECONOMICS IS..
Economics is the study of how we choose to use limited resources to obtain the maximum satisfaction of unlimited human wants. This definition has four parts that we need to discuss: the "study of" economics choice scarcity maximizing satisfaction
OH CHOICES!!!
aa
VS
ACTIVITY 1
Make a in your own words of some of the economic choices at Your personal level Your family level Organisational Level The country level
SCARCITY..
The reason why I didn't have a castle, or the reason why you don't have everything that you want is because of SCARCITY. Scarcity highlights another point.the point of demand. Scarcity in economics doesnt mean that something is limited in resources but it means that something in limited and is not wanted/demanded.
SCARCITY EXAMPLE
Scarcity does not mean that only a little of something is available. For example, I grew up in Multan, Pakistan . About 30 miles away from my hometown was the town of Murkaan. Just outside of town a certain type of rock exists that occurs nowhere else in the world. They have named it Murkanite". Murkanite is only found near Murkaan, Pakistan and only a little of it has ever been found. BUT IT IS NOT SCARCE. -- WHY? - Because nobody wants it. For there to be scarcity things must be LIMITED and WANTED. There is plenty of MURKINITE and it IS NOT SCARCE because nobody wants it.
If I own a PS3 I would want unlimited games or the latest model of PS3.
A need is something that can be seen as being essential to survival, such as food, water, shelter and warmth. A want is something that we would like to have but which is not essential to survival - a car, the latest version of the PlayStation, that new top you have seen in Top Shop, the mobile phone with all the latest gadgets on etc.
COORDINATION PROBLEM
With so many decision makers in the economy how do we coordinate the wants and needs for all of them? How do we make them coherent? For this we need to understand the economic systems.
Economy? The ways people try to fulfil their wants and needs. Incentives: Tax Breaks? Scrap car scheme? Money?
ECONOMY TYPES
Market economy: Market forces are allowed to guide the allocation (distribution?) of resources.
Prices play an important role. Role of competition Government undertakes the coordination role (allocation). Administratively a costly option Soviet bloc in 1990s, North Korea, Chavez, Cuba. Market Forces + Government Intervention Should governments be market friendly? Incentives VS. State Directives
Mixed Economy:
ACTIVITY 2
Divide issues you came up with in Activity one in Micro and Macro. BBC website economics articles The Economist article http://www.economist.com/businessfinance/ec onomicsfocus/
SO WHAT IS A RESOURCE?
Finite, scarce or limited Renewable, Perishable, Natural, Basic Types: Land Labour Capital Entrepreneurship/Enterprise Resources available in an economy are called factors of production.
RESOURCES.
http://www.harpercollege.edu/mhealy/eco212i/l ectures/5es/5es.htm
HOMEWORK
Explain and make a mind map, poster, or other presentation of the economic problem as it affects yourself, your family or country.
AS ECONOMICS
Lecture 2
LAND
Land includes all of the natural physical resources for example the ability to exploit fertile farm land, the benefits from a temperate climate or the ability to harness wind and solar power and other forms of renewable energy. Some nations are richly endowed with natural resources and then specialise in the extraction and production of these resources for example the development of the North Sea oil and gas in Britain and Norway or the high productivity of the vast expanse of farm land in Canada and the United States and the oil sands in Alberta, Canada. Other countries have a smaller natural factor endowment and may be more reliant on importing these resources. Japan for example is the worlds second largest economy but remains heavily dependent on imported oil.
LABOUR
Labour is the human input into the production process. It is inevitable that some workers are more productive than others because of the education, training and work experience they have received. What matters is the size and quality of the workforce. An increase in the size and the quality of the labour force is vital if a country wants to achieve economic growth. In recent years the issue of the migration of labour has become important, can migrant workers help to solve some of the labour shortages that many countries experience? And what of the longterm effects on the countries who suffer a drain
CAPITAL
To an economist, investment is not the money that people put into the stock market or into bank and building society accounts. Instead, in economics the term capital means investment in capital goods that can then be used to produce other consumer goods and services in the future.
Fixed capital includes machinery, plant and equipment, new technology, factories and other buildings. Working capital refers to stocks of finished and semi-finished goods (or components) that will be
CAPITAL CONTINUED
Capital inputs and productivity New items of capital machinery, buildings or technology are generally used to enhance the productivity of labour. For example, improved technology in farming has vastly increased the productivity of our agricultural sector and allowed people to move out of working on the land into more valuable jobs in other parts of the economy. And, investment in information and communication technology can increase the efficiency of workers across many industries. Infrastructure Infrastructure is the stock of capital used to support the entire economic system. Examples of infrastructure include road & rail networks; airports & docks; telecommunications eg cables and satellites to enable
The Gatwick Express the railway infrastructure is an essential part of our transport network
The global oil and gas industry uses a huge amount of capital equipment to get the product crude oil to the refineries and processing stages.
ENTREPRENEURSHIP
An entrepreneur is an individual who seeks to supply products to a market for a rate of return (i.e. to make a profit). Entrepreneurs will usually invest their own financial capital in a business (for example their savings) and take on the risks associated with a business investment. The reward to this risk-taking is the profit made from running the business. Many economists agree that entrepreneurs are in fact a specialised part of the factor input
OPPORTUNITY COST
The cost of next best alternative thing forgone when a choice is made.
EXERCISE 1.1
Andrew has just started his AS courses, and has chosen to take economics, mathematics, geography and French. Although he was certain about the first three, it was a close call between French and English. What is Andrews opportunity cost of choosing French?
SOLUTION 1.1
TRADE-OFFS
A trade-off (or tradeoff) is a situation that involves losing one quality or aspect of something in return for gaining another quality or aspect. It implies a decision to be made with full comprehension of both the upside and downside of a particular choice. It is a situation that involves calculation. Same value??
Curves
Economists rely heavily on diagrams to help in their analysis. Production possibility curve (PPC) shows the maximum combinations of quantities between two goods or services that can be produced in a set period of time given the available resources and technology.
Show the different combinations of goods and services that can be produced with a given amount of resources No ideal point on the curve Any point inside the curve suggests resources are not being utilised efficiently Any point outside the curve not attainable with the current level of resources Useful to demonstrate economic growth and opportunity cost
Units of food Units of clothing (millions) (millions) 8m 7m 6m 5m 4m 3m 2m 1m 0 0.0 2.2m 4.0m 5.0m 5.6m 6.0m 6.4m 6.7m 7.0m
a
7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8
Units of food Units of clothing (millions) (millions) a 8m 7m 6m 5m 4m 3m 2m 1m 0 0.0 2.2m 4.0m 5.0m 5.6m 6.0m 6.4m 6.7m 7.0m
Units of food Units of clothing (millions) (millions) 8m 7m 6m 5m 4m 3m 2m 1m 0 0.0 2.2m 4.0m 5.0m 5.6m 6.0m 6.4m 6.7m 7.0m
b
3 2 1 0 0 1
c
Units of food Units of clothing (millions) (millions) 8m 7m 6m 5m 4m 3m 2m 1m 0 0.0 2.2m 4.0m 5.0m 5.6m 6.0m 6.4m 6.7m 7.0m
Units of food Units of clothing (millions) (millions) 8m 7m 6m 5m 4m 3m 2m 1m 0 0.0 2.2m 4.0m 5.0m 5.6m 6.0m 6.4m 6.7m 7.0m
w x
Yo
A (Xo, Yo)
Y1
Xo
X1 Xm Consumer Goods
x
1
5 4 3 2 1 0 0 1 2 3 4
y
1
2
z
1
Economic Growth
Total output in an economy in a given period is measured by its GDP (Gross Domestic Product)
Y1 Yo
A
B
Xo X1
Consumer Goods
Fig 1.2
Scarcity
Inefficiency
Activity
The car production industry in an economy is facing increasing competition from producers elsewhere. In order to offset this, car manufacturers have developed more advanced robots to carry out production.
1. 2.
3.
Draw PPC assuming1200 cars can be produced Approximately how many more cars can be produced when the number of television sets made is 1,000? How does the number of cars that can be produced change as television production falls
many workers does it take to make a pin? 18th century economist, Adam Smith suggested that 10 people are needed to make a pin. A worker on its own produced 20 pins if he/she carried out all the steps by himself. But, 10 workers produced 200 pins
ACTIVITY
Calculating Opportunity cost for Debbie To make pots; 18/36 = 0.5 To make bracelets; 36/18 = 2 Calculating Opportunity cost for Colin To make pots; 12/12 = 1 To make bracelets; 12/12 = 1 It doesnt really matter for Colin but as Debbie is extremely good at making bracelets Colin would be better off concentrating on making pots. Resulting in 6 extra bracelets in the same
HOMEWORK
Would you like to go through the book? Any questions from the book? Next Week Mock Exam
AS ECONOMICS
The Nature of Demand and Supply
LEARNING OUTCOMES
Introduction
to the notion of demand for a good or service Relationship between price and demand Law of demand demand curve Movement along the curve and a shift in the curve Normal and inferior goods
WHAT IS DEMAND
The quantity of a good or service that consumers choose to buy at any possible price in a given period. 4 things influence demand for a good Price Price of other things (substitutes) Income Other personal preferences
CHOICES
INDIVIDUALS CHOOSE DIFFERENT PEOPLE VALUE THINGS DIFFERENTLY PEOPLE USE MARKETS TO EXCHANGE WHEN YOU STUDY THE MARKET, YOU STUDY YOURSELF
DEMAND
THE AMOUNT OF A GOOD OR SERVICE THAT A CONSUMER IS WILLING AND ABLE TO BUY AT VARIOUS POSSIBLE PRICES DURING A GIVEN TIME PERIOD
QUANTITY DEMANDED
THE AMOUNT OF A GOOD OR SERVICE THAT A CONSUMER IS WILLING AND ABLE TO BUY AT EACH PARTICULAR PRICE DURING A GIVEN TIME PERIOD
CETERIS PARIBUS
Latin. other things being equal. http://dictionary.reference.com/browse/ceteris+pa ribus A ceteris paribus assumption is often fundamental to the predictive purpose of scientific inquiry. In order to formulate scientific laws, it is usually necessary to rule out factors which interfere with examining a specific causal relationship. Under scientific experiments, the ceteris paribus assumption is realized when a scientist controls for all of the independent variables other than the one under study, so that the effect of a single independent variable on the dependent variable can be isolated. By holding all the other relevant factors constant, a scientist is able to focus on the unique effects of a given factor in a complex causal situation.
demand curve is the downwardsloping line that shows in graph form the quantities demanded at each possible price.
GOOD
Inversely proportional
LAW OF DEMAND
AN INCREASE IN A GOODS PRICE CAUSES A DECREASE IN THE QUANTITY DEMANDED AND A DECREASE IN PRICE CAUSES AN INCREASE IN THE QUANTITY DEMANDED
DETERMINANTS OF DEMAND
CONSUMER TASTES AND PREFERENCES MARKET SIZE INCOME PRICE OF RELATED GOODS
CONSUMER EXPECTATIONS
HOMEWORK
Mock Exam
http://www.bized.co.uk/educators/1619/economics/markets/activity/demandsupply.h tm
Change in quantity
Change in price
SNOB EFFECT
Pointed out by Thorstein Veblen at the end of nineteenth century. Conspicuous (attracting special attention) consumption The argument is that some people would regard some goods highly simply because they are expensive. Rolex Watches, Luxusry Cars etc. It is to do with the joy people get when other people around them notice them wearing those goods.
Substitutes Two goods are said to be substitutes if the demand for one good is likely to rise if the price of the other good rises.
CONSUMER SURPLUS
The extra amount that a consumer is willing to pay for a product above the price that is actually paid.
Supply
Firm
An organisation that brings together the factors of production to in order to produce output. Sole proprietor, partnership, public, private, limited etc.
Competitive Market
A market in which individual market can not influence the price of good or service they are selling because of competitions from other firms.
SUPPLY
THE QUANTITY OF GOODS AND SERVICES THAT PRODUCERS ARE WILLING TO OFFER AT VARIOUS POSSIBLE PRICES DURING A GIVEN TIME PERIOD
QUANTITY SUPPLIED
THE AMOUNT OF A GOOD OR SERVICE THAT A PRODUCER IS WILLING TO SELL AT A PARTICULAR PRICE
A graph showing the quantity supplied at any given price. The Supply Curve is the upward-sloping line that shows in graph form the quantities supplied at each possible price.
LAW OF SUPPLY
PRODUCERS SUPPLY MORE GOODS AND SERVICES WHEN THEY CAN SELL THEM AT HIGHER PRICES AND FEWER GOODS AND SERVICES WHEN THEY MUST SELL THEM AT LOWER PRICES
PROFIT
THE AMOUNT OF MONEY REMAINING AFTER PRODUCERS HAVE PAID ALL OF THEIR COSTS
Exercise 3.1
COSTS OF PRODUCTION
WAGES AND SALARIES RENT INTEREST ON LOANS BILLS RAW MATERIALS ANY OTHER GOODS AND SERVICES
Technology
Firms are there to maximise profits Improved technology means firms can produce more cost effectively i.e. cheaper
Substitution in firms factors of production i.e. a firm may be able to produce a range of different products. For example, a farmer may switch to growing swedes from potatoes if there is no price difference between potatoes and swedes.
Expected Prices
Production is time consuming that is why firms take supply decisions on the basis of expected future prices. With greater time period comes higher risk therefore higher returns e.g. commodity, oil, wine, bonds, financial instruments.
GROUP DISCUSSION
The Heatwave of 2003 During the summer of 2003, the UK experienced record temperatures as a heatwave swept across the country. The hot weather encouraged people to visit coastal regions for the weekend, to take short break holidays in the UK rather than abroad and to get outside to enjoy the sunny weather. Such a scenario is likely to have an impact on the demand and supply of a number of different items. Look at the items below: Ice creams Pimms Beer Wheat Hotel rooms Lettuce Barley Barbeque charcoal Beef burgers Maize Garden swings Explain what you think is likely to happen to the demand and the supply of these items. Try to offer some ideas as to how far the demand and supply would change and why.
Now you have made some predictions, let's look at some facts: Sales of ice cream doubled in some parts of the country. Hardware stores reported sharp increases in the sales of garden swings and barbeque charcoal. Sales of Pimms rose by 300% compared to the same period the year before; beer sales also rose dramatically. Sales of salad items and barbeque food rose by around 40%. Hotel bookings at many resorts were significantly up on last year and in many places a reservation was hard to find! Supply of wheat, rice, maize and barley look as though they could be hit badly as predictions for harvests look gloomy. The price of most ice creams, salad items and so on did not rise in general during the heat wave although there may have been some differences
HOMEWORK
Lets play!! Know your group. Check Fronter. Exchange email contact details. Here are the rules: No group would have more than 12 minutes of presentation. It is up to you to determine how many slides you want to go through. Every one in the group would have to take part in the group presentation. If any member of the group is not contributing,
Both price of good and quantity bought and sold have settled into a state of rest The equilibrium price and equilibrium quantity are values for price and quantity in the market but, once achieved, will remain constant
The equilibrium price and equilibrium quantity can be found on the vertical and horizontal axes, respectively
108
E
3.00 H
Excess Demand
1.00
J D
Excess Demand
Excess demand
Price of the good will rise as buyers compete with each other to get more of the good than is available
110
K E
D
35,000 50,000 65,000 Number of Bottles per Month
111
Excess Supply
Excess Supply
Price of the good will fall as sellers compete with each other to sell more of the good than buyers want
112
Suppose that demand is given by the equation , where D is D Q the good. Q 140 10 P the price of quantity demanded, P is Supply is given by where is Q S 80 5P quantity supplied. s Q What is the equilibrium price and quantity?
113
Rightward shift in the demand curve causes rightward movement along the supply curve Equilibrium price and equilibrium quantity both rise
Shift of one curve causes a movement along the other curve to new equilibrium point
114
Figure 3
Price per Bottle
4. Equilibrium price increases
3. to a new equilibrium.
S 2. moves us along the supply curve . . . 1. An increase in demand . . .
4.00 3.00 E
F'
D2 D1
5. and equilibrium quantity increases too. 50,000 60,000 Number of Bottles of Maple Syrup per Period
115
Any change that shifts the supply curve leftward in a market will increase the equilibrium price
116
S1
3.00
Why did Iraqs invasion of Kuwait cause the price of oil to rise?
Immediately after the invasion, United States led a worldwide embargo on oil from both Iraq and Kuwait A significant decrease in the oil industrys productive capacity caused a shift in the supply curve to the left
118
P2
P1 E
D
Q2 Q1 Barrels of Oil
119
Oil is a substitute for natural gas Rise in the price of a substitute increases demand for a good Rise in price of oil caused demand curve for natural gas to shift to the right
120
F' P4
F P3 D1 D2
Q3
Q4
4. Price decreased . . .
500
B
400
5. and quantity decreased as well. 2.45 3.33 D2002 D2003 Millions of Handheld PCs per Quarter
122
When just one curve shifts (and we know the direction of the shift) we can determine the direction that both equilibrium price and quantity will move When both curves shift (and we know the direction of the shifts) we can determine the direction for either price or quantitybut not both
123
Decide which market or markets best suit problem being analyzed and identify decision makers (buyers and sellers) who interact there Describe conditions necessary for equilibrium in the market, and a method for determining that equilibrium
Explore how events or government polices change market equilibrium
124
Firms demand labour and employees supply labour The demand for labour is derived demand. Derived Demand:
Firms want labour not for themselves but for the output it produces
125
Labour market
Firms would demand more if the price for labour is low More people would tend to offer themselves for work when the wages are high Price of labour = wages Demand for labour is downward sloping Supply for labour is upward sloping
126
If the wage rate is set above the equilibrium level at w1 employers would only demand Ld. At this point there are people who are offering themselves for work but can not find employment. i.e. There is unemployment in the market. Which is caused here by the higher wage rate.
127
There is a market where buying (transaction) is going on. When you go to Spain for holidays, you need to buy Euros. Similarly, when Spanish want to come to UK they need to buy pounds. So the demand for s (by Spanish) or Euros (by British) is dependent upon the exchange rate between Euros and Pounds. When the exchange rate for pounds is high, people would have fewer Euros to buy pounds, i.e. Demand would be relatively low.
128
FX
Similarly, when the pound is weak against Euros foreigners would be able to afford more pounds. Demand would increase. We could also derive from here the fact that when pound is strong, UK exports would not be that competitive and vice versa ceteris paribus. Pounds are supplied by Britishers wanting to buy Euros. When Euro/Pound rate is high, Britishers get more euro goods for their pounds and will tend to supply more. e* is the equilibrium point.
129
People have a demand for money due to operations of markets. Think of functions of money, Medium of exchange Store of value Unit of account Standard of deferred payment Demand for money predominantly depends upon income which influences the number of transactions people are willing to take. Is there a price of money? The price of money can be viewed in terms of opportunity cost. When people choose to hold money they incur an opportunity cost. Why? Rate of interest? Return? 130 Pleasure?
Supply of Money Discussed in detail later in the course BOE takes charge of supply Assume for now that supply of money doesn't depend on the interest rate. Greater the interest rate, greater will be the sacrifice by holding money. Hence the downward sloping demand curve. At r* money market is at equilibrium
131
COMPARATIVE STATICS
Comparative static analysis examines the effect on equilibrium of a change in the external conditions affecting a market. As opposed to ceteris paribus where factors are kept constant, comparative static analysis looks at the before and after affects of a factor.
Suppose a new study proposes that Pasta is the next best food to caviar and this study is further strengthened by marketing campaign. People would buy more demand curve to the right market adjusts to new equilibrium both prices and quantity have increased. Movement along the supply curve
GROUP EXERCISE
Ex 4.3 printoffs
ELASTICITY
Elasticity is a measure of responsiveness Many elasticities can be measured: price elasticity of demand, cross price elasticity of demand, income elasticity of demand, and elasticity of supply Elasticity measures are measures of proportionate responsiveness and are unit free
WHAT IS ELASTICITY?
If
my firm wants to raise revenue, should we decrease or increase the price? The answer relies on elasticity Elasticity is similar to responsiveness Price Elasticity of Demand a measure of how responsive quantity demanded is to a price change Price Elasticity of Supply a measure
Priceelasticityof demand
EXAMPLE
What is the price elasticity of demand for CDs? At a price of $14 per CD, $14 there are 10,000 CDs $12 sold When the price is (11 10) (12 14) E D decreased to $12 per CD, (11 10) / 2 (14 12) / 2 11,000 CDs are sold
D 10 11 Thousands of CDs
price and quantity are inversely related, the price elasticity of demand will be negative This is because a price decrease will cause an increase in quantity demanded (and vice versa) Most of the time, then, I will refer to the absolute value of the elasticity The magnitude is most important
Inelastic Demand a change in price has very little effect on the quantity demanded (-1 < ED < 0)
2.
Elastic Demand a change in the price has a relatively large effect on the quantity demanded (ED < -1)
3.
Elasti c
Elasticity of Demand
UnitElastic
Inelastic
-1
ELASTICITY
1.
You respond differently if the price changes from 1 cent to 2 cents, than you do if the price changes from $5 to $10 (both are 100% increases)
2.
More Inelastic
More Elastic
Demand Curve
Q
Elastic
Unit Elastic
Inelastic
TR
you increase or decrease price to increase Total Revenue??? In the elastic portion of the demand curve, the % change in quantity demanded is greater than the % change in price, so you should decrease price in order to increase total revenue In the inelastic portion of the demand curve, the % change in quantity demanded is less than the % change
1.
For a downward sloping linear demand curve, the price elasticity changes as you move along the demand curve Some demand curves have an elasticity that does NOT vary along the demand curve Perfectly Elastic Demand Curve an increase in price reduces the quantity demanded to zero (horizontal demand curve)
Priceelasticityof supply
UnitInelastic Elastic
Elastic
Elasticity of Supply
Just as the elasticity of demand varied both along the demand curve and across products, so does the elasticity of supply
More Inelastic
Supply Curve
More Elastic
1. 2.
For an upward sloping linear supply curve, the price elasticity changes as you move along the supply curve Some supply curves have an elasticity that does NOT vary along the supply curve Perfectly Elastic Supply Curve at the right price, any amount of the product will be supplied (horizontal supply curve) Perfectly Inelastic Supply Curve price changes have no effect on the quantity supplied, which is likely a fixed amount (vertical supply curve)
Elasticity of Demand a measure of the responsiveness of demand to changes in income Elasticity of Demand- a measure of how responsive one goods quantity demanded is to a change in the price of another good (i.e. how do brand Xs sales respond to changes in the
Cross-Price
Inferior
if an increase in the price of one good leads to an increase in the demand for another good, they are substitutes
The Cross-Price Elasticity is POSITIVE Example: Coke and Pepsi have a positive cross-price elasticity
Complements
if an increase in the price of one good leads to a decrease in the demand for another good, they
ELASTICITY EXAMPLES
To
help us think about elasticity concepts, we are going to look at four different industries/products:
Cars, soft drinks, cereal, and beer Your book has a ton of other examples
When
you look at the elasticities, try to explain the differences among brands and products
Substitutability, proportion of income spent on the item, and time to make your
ELASTICITY OF AUTOMOBILES
BMW 735i & Lexus LS400 = 0.336 BMW 735i & Honda Accord = 0.203 BMW 735i & Ford Escort = 0.009
Which cars are close substitutes? What role does income play? Which
Kelloggs Corn Flakes = -3.379 Lucky Charms = -2.536 Rice Krispies = -2.340
Corn Flakes & Wheaties = 0.242 Corn Flakes & Lucky Charms = 0.019 Corn Flakes & Cinnamon Toast Crunch = 0.026 Lucky Charms & Cin. Toast Crunch = 0.102
Coke (2-liter bottle) = -3.89 7-Up (2-liter bottle) = -4.25 Mountain Dew (2-liter bottle) = -3.75
Coke & Pepsi = 0.63 Coke & Mountain Dew = 0.12 Coke & Diet Coke = 0.81
ELASTICITY OF BEER
Miller Lite & Bud Light = 1.26 Miller Lite & Heineken = 0.12 MGD & Bud = 1.68
is the price elasticity of the Ford Escort lower than the BMW? Why is the price elasticity of cereal less than the price elasticity of cars? Why is the cross-price elasticity greater for Corn Flakes & Wheaties than it was for Corn Flakes & Lucky Charms? Are Miller Lite and Bud Light closer
Last year, Homer had an income of $40,000 from his job at the Springfield Nuclear Power Plant. At that level of income, Homer consumed 15 units of Good X. This year, Homer received a $15,000 raise. After his raise, he consumed 18 units of Good X.
a.
Using the above information, please calculate Homers income elasticity of demand.
SOLUTIONS
qnew qold I new I old EI qnew qold / 2 I new I old / 2 18 15 55,000 40,000 18 15 / 2 (55,000 40,000) / 2 3 15,000 0.1875 0.3158 16.5 47,500 0.59
% change in consumptio n EI change in income Normal % good => EI > 0 ? 0.59 ? 5.9 10