In economics we try to choose the optimal way to allocate
resources. This includes considering many different types of resources and
individuals. The classic way to consider this problem in principle level
economics courses is to use the supply and demand graph. This is a good visual
way to see how demanders and suppliers consider the quantity and price that
they are willing to pay and accept respectively. However, this class problem
ignores the question of time and how people and firms include time in their
decision making process. In order for economists to consider both current and
future benefits and costs, their needs to be a mechanism available that allows
the analyst to compare these values over different time periods. In order to do
this, we use what is called a discount rate.

Showing posts with label

**microeconomics**. Show all postsShowing posts with label

**microeconomics**. Show all posts## 6/13/18

## What is a discount rate in cost benefit analysis

Jeff
11:05

## 9/7/15

## What is a price function?

Jeff
14:49

Sometimes you will be asked to define a price function. When you receive such a question, it is probably in regards to a supply and demand graph, and you will be asked to graph said price function. The three components of a price function include: price (as you probably expected), an intercept, and quantity. It is also possible for a price function to include many other variables such as preferences, prices of related goods, income, number of buyers, etc. but this is for more complicated price functions (and upper division style classes).

A price function generally looks like:

A price function generally looks like:

## 6/19/15

## 6/4/15

## Price discriminating monopoly, solving for profit maximization

Jeff
13:28

This post goes over the math required to solve for the profit maximizing price and quantity of a price discriminating monopoly operating in two markets. Consider the following problem:

A cable company sells subscriptions in San Francisco and Boston. The demand function for each of the two groups, which are separate and do not have the ability to re-sell to members of the other community, are Psf = 480 - 4Qsf and Pb = 400 -2 Qb. The cost of providing the cable service for the firm is TC = 500 + 4Q, where Q = Qsf + Qb. If the company can price discriminate between the two markets, what are the profit maximizing prices and quantities for the San Francisco and Boston markets?

To solve this problem, we need to review the steps for finding the profit maximizing price and quantity for a monopoly. We find that we need to find the price and quantity where marginal revenue (MR) is equal to marginal cost (MC).

A cable company sells subscriptions in San Francisco and Boston. The demand function for each of the two groups, which are separate and do not have the ability to re-sell to members of the other community, are Psf = 480 - 4Qsf and Pb = 400 -2 Qb. The cost of providing the cable service for the firm is TC = 500 + 4Q, where Q = Qsf + Qb. If the company can price discriminate between the two markets, what are the profit maximizing prices and quantities for the San Francisco and Boston markets?

To solve this problem, we need to review the steps for finding the profit maximizing price and quantity for a monopoly. We find that we need to find the price and quantity where marginal revenue (MR) is equal to marginal cost (MC).

## Solving for equilibrium with Qs and Qd

Jeff
12:45

This post goes over an example of solving for equilibrium price and quantity using the method detailed in the prior equilibrium solving method post. In this example we are given a Qs equation as shown:

Qs= -7909.88 + 79.0988P

Note that this gives us a positive sloping supply curve and that price has to be at least 100 in order for the supplier to produce anything at all (we can figure this out by dividing the intercept 7909.88 by the coefficient on the price 79.0988).

The next step is exploring the demand equation. In this example we are given a demand function as follows:

Qd= 38650 - 40P

Here we have a downward sloping demand curve and the quantity demanded at a price of 0 will be 38650. Once the price reaches 966.25 we will see a quantity demanded of 0 (found by dividing 38650 by 40).

Qs= -7909.88 + 79.0988P

Note that this gives us a positive sloping supply curve and that price has to be at least 100 in order for the supplier to produce anything at all (we can figure this out by dividing the intercept 7909.88 by the coefficient on the price 79.0988).

The next step is exploring the demand equation. In this example we are given a demand function as follows:

Qd= 38650 - 40P

Here we have a downward sloping demand curve and the quantity demanded at a price of 0 will be 38650. Once the price reaches 966.25 we will see a quantity demanded of 0 (found by dividing 38650 by 40).

## 7/17/14

## Calculating consumer surplus with all you can eat

Jeff
11:24

This post goes over the example problem of calculating consumer surplus from different scenarios. The scenario sets up by giving you a table depicting a demand curve and then asks you to calculate consumer surplus with different prices. Finally, an all you can eat scenario is introduced where you pay a flat fee to enter the transaction but the marginal cost of each additional unit is effectively zero. Check this past post for a review of calculating consumer surplus.

A restaurant sells hot wings. A consumers demand for hotwings can be shown as:

Number of hot wing servings and the willingness to pay for hotwings (each serving)

1 $10

2 $8

3 $6

4 $4

5 $2

6 $0

a. If the price of an additional serving of hotwings is $6, how many servings will be purchased? How much consumer surplus does will you receive?

A restaurant sells hot wings. A consumers demand for hotwings can be shown as:

Number of hot wing servings and the willingness to pay for hotwings (each serving)

1 $10

2 $8

3 $6

4 $4

5 $2

6 $0

a. If the price of an additional serving of hotwings is $6, how many servings will be purchased? How much consumer surplus does will you receive?

## 7/11/14

## Strictly convex vs. convex and well-behaved preferences in economics

Jeff
11:42

This post is going to be a bit more technical than average and will probably be aimed towards the upper division microeconomics or perhaps even the graduate level students. When we go a letter more in depth studying consumer theory we learned about well-behaved preferences and the associated shapes that the indifference curves take on. Below you can see a graph with three different indifference curves where 2 are straight lines and one is bowed in. The curve that is bowed in is strictly convex, and all three of them are convex.

Lines A, B, and C all represent indifference curves, while points D and E represent points where the indifference curves touch or intersect (for discussions sake, point D is the point of tangency between lines C and A).

Lines A, B, and C all represent indifference curves, while points D and E represent points where the indifference curves touch or intersect (for discussions sake, point D is the point of tangency between lines C and A).

## 7/10/14

## Perfectly elastic supply, an example

Jeff
12:28

This post is going to go over the economics of perfectly elastic supply and how to find equilibrium price and quantity as well as consumer surplus when we are given a perfectly elastic supply curve. First, if supply is perfectly price elastic, then it means that any change in price will cause an infinite amount of change in quantity. This is a little unrealistic, however, imagine that you are selling pictures you created. If it costs you $5 (in printing costs and time) to produce one picture, you would be willing to sell as many as you could for $5, however you would NOT be willing to sell any for less than this price. Additionally, if people offered you more than $5, you would be willing to sell an infinite amount (time permitting). This means that you are perfectly price elastic at the $5 mark, and any change in price will cause you to produce nothing or infinity depending on the direction of the price change. This results in a horizontal supply curve.

## 7/7/14

## What happens when the price of a substitute good changes?

Jeff
11:19

This post goes over a scenario where both the demand and supply curves will shift. Sometimes when both curves shift, we are left with an ambiguous (unknown) change in either quantity or price. Let’s look at the following example:

Imagine that there is an increase in popularity of a specialty type of Soy. Suppliers currently focus on GMO (genetically modified) Soy, but there is a growing premium on Organic Soy that is driving grower interest. Because of this, growers have announced that there will be higher prices for the Organic Soy crop. The organization indicated it'll be calling on growers to increase the area planted to the variety later this year.

With markets in Canada, the UK, South East Asia, South Korea and now Russia, the growers hope the industry can triple production for Organic Soy in the next three years.

Using the above scenario...

1. The demand and supply model needs to explain the change happening in the market for Organic Soy and explain the equilibrium achieving process on prices and output of growers’ response. Is there a shortage and a surplus why?

Imagine that there is an increase in popularity of a specialty type of Soy. Suppliers currently focus on GMO (genetically modified) Soy, but there is a growing premium on Organic Soy that is driving grower interest. Because of this, growers have announced that there will be higher prices for the Organic Soy crop. The organization indicated it'll be calling on growers to increase the area planted to the variety later this year.

With markets in Canada, the UK, South East Asia, South Korea and now Russia, the growers hope the industry can triple production for Organic Soy in the next three years.

Using the above scenario...

1. The demand and supply model needs to explain the change happening in the market for Organic Soy and explain the equilibrium achieving process on prices and output of growers’ response. Is there a shortage and a surplus why?

## 6/30/14

## Types of Market Failure

Jeff
13:35

This post goes over a quick discussion of the invisible hand, and introduces the invisible foot (kicking you in the ass for believing that markets work :) OR market failure).

There are four basic types of market failure for goods/services or environmental resources:

Externalities, public goods, common property, and hidden information.

There are four basic types of market failure for goods/services or environmental resources:

Externalities, public goods, common property, and hidden information.

**Externality**: this is the most common case, where an activity has an effect on a third party who is not involved in the activity. Some examples include the student in front of you enjoying a bean burrito (and then polluting your air), a factory polluting a river that others then cannot swim in (who didn't buy the factory's product), and finally your dorm mate listening to music really loud and it annoys you (negative externality) or your enjoy it (positive externality).- Ecosystem externalities: It is crucial for natural scientists and economists to work together to properly understand these externalities and their effects on humans. For example, mining any type of ore out of the ground can result in forms of pollution or diminished air/water quality that affects people who either did not work for the mining firm or purchase their products.
**Public goods:**Goods that are non-excludable (anyone can use them at any time), and non-rival (one persons consumption does not affect another's ability to consume). Pure public goods are both non-excludable and non-rival, while impure public goods are one or the other but not both. Allocation of public goods are generally inefficient because of...

## 6/27/14

## Expected Value vs. Expected Utility, what is the difference?

Jeff
11:53

This post highlights the differences between expected value and expected utility and demonstrates how the difference between the two is in how they are calculated. Expected value shows us the value that is to be expected from engaging in a lottery (or risky situation) where there are 2 or more possible outcomes. Likewise, Expected utility shows us the utility that is expected out of a lottery with two or more possibilities. Remember that utility shows the satisfaction or happiness derived from a good/service/money while value simply shows us the monetary value. That is why the two terms are measured differently and show us different things. The rest of this post will describe how to calculate expected value and expected utility and has solved examples demonstrating the importance of the difference between them.

A good rule of thumb is to read the problem, and identify all of the key information. You need to know 4 things:

1) what is the probability of outcome 1?

2) what is the monetary value of outcome 1?, these go into the first term of your equations.

3) what is the probability of outcome 2? This can either be stated explicitly in the problem, or calculated from the probability given for outcome 1.

4) what is the monetary value of outcome 2?, these go into the second term of your equations.

Equations:

A good rule of thumb is to read the problem, and identify all of the key information. You need to know 4 things:

1) what is the probability of outcome 1?

2) what is the monetary value of outcome 1?, these go into the first term of your equations.

3) what is the probability of outcome 2? This can either be stated explicitly in the problem, or calculated from the probability given for outcome 1.

4) what is the monetary value of outcome 2?, these go into the second term of your equations.

Equations:

## 6/25/14

## An introduction to microeconomics

Jeff
09:55

What is economics? The science of resource allocation. Microeconomics can be thought of as the study of decision making.

Why is this important? Scarcity… unlimited wants and desires but limited resources. (any examples where scarcity doesn’t take place? Air/water, etc.--while these aren't scarce in the classic sense, clean air and water are scarce)

In economics we use models, simplified versions of the real world, like a map. A map is a terrible representation of the real world, but is extremely valuable as a tool.

Three key ideas going forward in economics:

Why is this important? Scarcity… unlimited wants and desires but limited resources. (any examples where scarcity doesn’t take place? Air/water, etc.--while these aren't scarce in the classic sense, clean air and water are scarce)

In economics we use models, simplified versions of the real world, like a map. A map is a terrible representation of the real world, but is extremely valuable as a tool.

Three key ideas going forward in economics:

## 9/16/12

## Introduction to Microeconomics

Jeff
11:00

**Economics**– study of decisions when faced with scarcity, or the allocation of scarce resources.

**Scarcity**– Entities with unlimited wants but limited resources. Imagine if resources were unlimited, everything would be free because it was unlimited (imagine someone charging for air).

**Microeconomics**– the study of the decisions that individuals and firms make when faced with scarcity, and the effects that those decisions have on the economy.

- Which goods and services to produce (Why is this a trade-off, it is due to limits on production resources.)
- How to produce these goods and services (Why? Because different mixtures of inputs can produce the same level of output and the prices of those inputs determine the trade-offs made.)
- Who gets the goods and services (Why? Remember, unlimited wants but limited resources, you consuming a private good affects another’s ability to consume that good.)

## 6/4/12

## Is it elastic or inelastic? Understanding the price elasticity of demand measure.

Jeff
03:03

In economics you are required to understand how to calculate the
price elasticity of demand. But at the
same time you need to understand the intuition behind the measure, in particular
what the numbers mean and the implications behind them.

For review, you should understand what elasticity means to economists, and how to use the midpoint formula to calculate elasticity measures. If you understand that, then
you can figure out how the price elasticity of demand, and interpret it using
the table below:

PEoD < -1 means that the good has an ELASTIC PEoD

PEoD = -1 means that the good has a UNIT ELASTIC PEoD

PEoD > -1 means that the good has an INELASTIC PEoD

## 5/15/12

## Comparing perfectly competitive markets with monopolistically competitive markets, the change in surplus and deadweight loss

Jeff
22:24

This post goes over the math required to show the difference between surplus and equilibrium in a perfectly competitive and monopolistically competitive market. Note that a monopolistically competitive market's math and graph will be the same for a monopoly or an oligopoly. Here are the equations to work with:

P = 40 - 8Q

MC = 8

Posted by
Jeff

Labels:
algebra,
deadweight loss,
equilibrium,
microeconomics,
monopoly,
perfect competition,
surplus

## 4/18/12

## Finding labor that maximizes average product of labor

Jeff
02:44

Working with production functions can be tricky. This post goes over the economics of average
and marginal products of labor (or any input for that matter) working with a
production function. To do this we are
going to use the following example:

Let Q = 1200L^2 –L^4 where L is an input (for example,
labor) and Q is the associated output.

## 4/13/12

## How to aggregate demand functions

Jeff
00:18

We will go over the economics of demand functions for
different consumers and how to add them together to get aggregated demand
functions. At the end we will simulate
multiple identical consumers and how this will change the associated demand
functions, first let’s begin with two types of consumers. Consumer type 1 has a demand function of:

Q1 = 20 – 2P

And consumer type 2 has a demand function of:

## 4/12/12

## Monopoly math problem with a tax

Jeff
23:46

This post goes over the algebraic methods necessary to solve
common economics monopoly problems. We
assume that you are given a basic demand function and marginal cost function,
and are asked to derive marginal revenue function and find out what the
monopoly price and quantity will end up being.

First we are probably given either a demand function (solved
for Q) or an inverse demand function (solved for P). We need the inverse demand function because
this gives us the slope of the demand curve (since P is on the Y axis). Once we have the inverse demand function we
can solve for the marginal revenue function by doubling the slope (making it
steeper). A past post goes over the math behind calculating monopoly equilibrium price and quantity, so I will go over
another example really quickly then introduce the idea of combining demand
curves and adding a tax into the mix.

## 4/10/12

## Example of calculating consumer surplus from a College Education

Jeff
21:18

Receiving a college education is a big deal, and can help improve
your opportunities later in life. For
most people, the benefits of receiving a college education far outweigh the
costs, which is an example of consumer surplus.
This post goes over the economics of calculating consumer surplus using
the market for College Education as an example.

## Examples of income elasticity of demand.

Jeff
20:46

When considering the income elasticity of demand principle, it is
important to understand two things:

- The equation to derive the income elasticity of demand.
- What the sign of the income elasticity of demand means.

The equation for deriving the income elasticity of demand is very
similar to the equation for the price elasticity of demand. Instead of having percent change in quantity
over percent change in price, we have percent change in quantity over percent
change in income, or