Economics 111.3 Winter 14
March 5th, 2014Lecture 19
Ch. 9 Ordinal Utility:
Indifference Curve Analysis
Income and substitution effects: sign of an effect Effect is negative, if price and quantity move in opposite directions;Effect is positive, if price and quantity move in the same direction
๐๐๐๐๐๐๐๐๐๐๐๐ก :( ๐ผ๐๐๐๐๐๐โ )โ
Income and substitution effect with an inferior good: substitution effect: opposite of price movementincome effect: same direction as price movement
๐ผ๐๐๐๐๐๐๐ ๐๐๐๐ : ๐ผ๐๐๐๐๐โโด๐โ ,๐๐ h๐๐ก ๐๐ ๐ค๐๐๐๐ ,๐โ๐โโ๐๐๐๐๐๐ก ๐๐ ๐๐๐ ๐๐ก๐๐ฃ๐
๐ผ๐๐๐๐๐๐๐๐๐๐๐ก :( ๐ผ๐๐๐๐๐๐ โ )โ
Giffen good: good for which a decrease in its price causes the quantity demanded to fall
Basketball, Tickets per year
Movies, Tickets per year
L1
L*
Total effectIncome effect
Substitution effect
L2
e1
e2
e*
I 1
I 2
Upward-Sloping Demand Curve: The Giffen Good
When food is an inferior good, and when the income effect is large enough to dominate the substitution effect, the demand curve will be upward-sloping. The consumer is initially at point A, but, after the price of food falls, moves to B and consumes less food. Because the income effect EF2 is larger than the substitution effect F1E, the decrease in the price of food leads to a lower quantity of food demanded.
A Special Case: The Giffen Good
โ Giffen good Good whose demand curve slopes upward because the income effect is larger than the substitution effect.
Some useful terminology:โข Plant โ a physical establishment (factory, mine, store)
that performs one or more functions in fabricating and distributing goods and services
โข Firm โ a business organization that owns and operates plants. A firm:โ Organizes factors of production.โ Produces goods and services.โ Sells produced goods to individuals, businesses or
government.โข Industry โ a group of firms producing the same, or
similar, product.
Firms Maximize Profit
โข Profit is the difference between total revenue and total cost.
Profit = Total revenue โ Total cost
Profit = Total revenue โEconomic cost
Economic costsโข ECONOMIC COST of any
resource is the value or worth it would have in its best alternative use
โข FIRMโS ECONOMIC COST โ those payments a firm must make, or incomes it must provide, to resource suppliers to attract the resources away from alternative production
opportunities.
Economic costs are the sum of
Explicit Costsโข Money payments a firm must
make to non-owners of the firm for the resources they supplied.
Implicit Costsโข Opportunity costs of firmโs own
resources or money payments the self-employed resources could have earned in their best alternative use.