Contact Details
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ECON 1 – Section 5
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Demand: The Benefit
Side of the Market.
Sept. 11th, 2002
ECON 1 – Section 5 – Page 1
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GSI: R. Estopina
Sept. 11th, 2002
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Administrative stuff (aprox. 3 min).
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Review of Last Session & Lecture (5 min).
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Exercise 5-3 (10 min).
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Exercise 5-4 only parts a) & b). (5 min)
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Exercise 5-6 (10 min).
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Exercise 5-7 (10 min).
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Feedback from PS-1 (5 min).
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Re-cap (aprox 3 min, let’s see).
ECON 1 – Section 5 – Page 3
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DO’s
„ I read the book and I didn’t
get the elasticity concept.
Can we go over it?
„ Can you explain me again
what sunk costs are?
„ I tried to do problem 5-4
from the book for practice,
but I’m still struggling with
the concepts of substitutes.
Can you help me?
„ Bring pen, pencil & eraser.
Sept. 11th, 2002
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GSI: R. Estopina
Sept. 11th, 2002
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ECON 1 – Section 5 – Page 4
GSI: R. Estopina
Review of Last Session - 9/9th
DO NOT’s
„ I do not have a clue what
elasticity is. Can we go over
it?
„ On the due PS-1, is this a
sunk cost?
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GSI: R. Estopina
PS-1 due TODAY !!! Leave them on
the table.
Do you have name tags?.
Please come on time !!!
I can not make changes to sections.
Students in waiting list will be
notified by JAYA SIL
([email protected]) if accepted.
Administrative Stuff - OH
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ECON 1 – Section 5 – Page 2
Administrative Stuff - reminder
Section 4 Agenda
Sept. 11th, 2002
GSI: Ramon Estopina
Office: Evans 508-5
Office Hours: Tuesday 1-3 PM
Email: [email protected]
Handouts: Trough email. Anybody want
to help?
On the due PS-5, I say these
are substitute markets, am I
right?
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Problems in
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Supply & Demand Curve.
Equilibrium. Disequilibrium.
Movement and Shift of D & S curves.
Exercises 4-2/4-4/4-3/4-13/4-14
Bring pen, pencil & FORGET
eraser.
ECON 1 – Section 5 – Page 5
GSI: R. Estopina
Sept. 11th, 2002
ECON 1 – Section 5 – Page 6
GSI: R. Estopina
1
Review of Last Lecture - 9/9th
Utility, Marginal Utility.
Law of Diminishing Marginal
Utility.
Utility Maximization.
Elasticity (Price elasticity of
Demand, Income Elasticity,
Cross-price Elasticity).
Rational Spending Rule.
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Sept. 11th, 2002
ECON 1 – Section 5 – Page 7
Important to remember !!
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∆Q ∆P ∆Q P
=
×
/
∆P Q
Q
P
GSI: R. Estopina
Sept. 11th, 2002
Trick for elasticity:
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Elastic.
Sept. 11th, 2002
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ECON 1 – Section 5 – Page 9
GSI: R. Estopina
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Martha’s marginal utility form consuming
orange juice = 75 utils/ounce.
Martha’s marginal utility form consuming
coffee = 50 utils/ounce.
Orange juice costs $0.25/ounce. Coffee costs
$0.20/ounce.
Is Martha maximizing her total utility from
the two beverages?.
Sept. 11th, 2002
Utility Maximization: allocation of time and
income to maximize satisfaction.
Marginal Utility: Additional utility gained from
consuming one additional unit of a good.
Rational Spending Rule: Ratio of marginal
utility to price must be the same for each good
the consumer buys.
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<file>
ECON 1 – Section 5 – Page 11
GSI: R. Estopina
What is the Utility Martha receives on her
last $ spent on orange Juice?
MUo 75 utils/ounce
=
= 300 utils/$
Po
$0.25/ounce
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What is the Utility Martha receives on her
last $ spent on orange Juice?
MUc 50 utils/ounce
=
= 250 utils/$
Pc
$0.20/ounce
MUc MUs
=
Pc
Ps
Sept. 11th, 2002
ECON 1 – Section 5 – Page 10
Exercise 5 – 3 (cont’d)
Remember:
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GSI: R. Estopina
Inelastic.
Exercise 5 – 3 (cont’d)
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ECON 1 – Section 5 – Page 8
Exercise 5 – 3 (F&B page 131)
Important to remember (2) !!
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Utility: Satisfaction consumers derive from activities.
Rational Spending Rule: Spending allocated across
goods so MU per dollar (MU / P) is same for each
good.
Total Expenditure = P*Q = Total Revenue (TR).
Price elasticity of demand: percentage change in
quantity demanded divided by percentage change in
price.
GSI: R. Estopina
Sept. 11th, 2002
ECON 1 – Section 5 – Page 12
GSI: R. Estopina
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Exercise 5 – 3 (Conclusion)
Since the two are not equal, she is not
maximizing her utility.
She should spend more on orange juice and
less on coffee.
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Exercise 5 – 4 (F&B page 131)
Packs of Bagels bought in Davis, each day at a
variety of prices.
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Number of packs
Price of Bagels
purchased per day
($/pack)
(000s)
6
0
5
3
4
6
3
9
2
12
1
15
0
18
Remember:
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Law of Diminishing
Marginal Utility: when
consumption of a good
increases beyond some point,
MU of each additional unit
declines (Assumption based
upon observation).
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Sept. 11th, 2002
ECON 1 – Section 5 – Page 13
GSI: R. Estopina
Sept. 11th, 2002
Exercise 5 – 4 (cont’d)
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A) Graph the daily demand curve for packs of
bagels in Davis.
B) Derive an algebraic expression for the
demand schedule.
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Remember:
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Y = a + bX
6
P ($/pack)
5
4
3
2
Where:
a = Vertical Intercept.
b = Slope = Rise / Run.
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1
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0
0
2
4
6
8
10
12
14
16
18
20
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Q (000s of packs/day)
Sept. 11th, 2002
ECON 1 – Section 5 – Page 15
GSI: R. Estopina
Sept. 11th, 2002
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Now is your turn!!!
Do rest of the parts (C to G) at home. We will review
them next session.
Why?
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Show how elasticity varies along D?.
Practice problems?.
Ensure you come next week?.
Ensure you read the lecture notes?.
Make me happier?.
All of the above?
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Sept. 11th, 2002
<file>
ECON 1 – Section 5 – Page 17
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Q
3
GSI: R. Estopina
Is the demand for a particular brand of car,
like a Chevrolet, likely to be more or less
price-elastic than the demand for all cars?
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„ And the winner is …
I’LL TELL YOU NEXT WEEK!!!
ECON 1 – Section 5 – Page 16
P = 6-
Exercise 5 – 6 (F&B page 132)
Exercise 5 - 4 (continued)
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GSI: R. Estopina
Exercise 5 – 4 (cont’d)
7
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ECON 1 – Section 5 – Page 14
Trick: Think in market for cars vs. market for
Chevrolets.
Price elasticity of demand: percentage change
in quantity demanded divided by percentage
change in price.
∆Q ∆P ∆Q P
/
=
×
Q
P
∆P Q
GSI: R. Estopina
Sept. 11th, 2002
ECON 1 – Section 5 – Page 18
GSI: R. Estopina
3
Exercise 5 - 6 (cont’d)
Exercise 5 - 6 (Conclusion)
From lecture:
„
GOOD
Elastic
Inelastic
PRICE
ELAST.
>1
<1
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SUBSTs.?
TR?
Yes
Few
Ð if P Ï
Ï if P Ï
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Also:
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Price elasticity of demand relatively high if
substitutes are readily available.
If share of budget is high (big ticket items), have
higher price elasticity of demand
Timeframe: Price elasticity is higher in long run than
in short run, since substitutions can be made.
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Sept. 11th, 2002
ECON 1 – Section 5 – Page 19
GSI: R. Estopina
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ECON 1 – Section 5 – Page 21
GSI: R. Estopina
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Which is likely to have the most / least
price-elastic demand for membership in
the Association of Business
Professionals?
Sept. 11th, 2002
ECON 1 – Section 5 – Page 22
GSI: R. Estopina
Feedback from PS-1
If share of budget is high (big ticket items), have
higher price elasticity of demand
But, the richer a person is, the smaller a
given expenditure will be as a proportion of
her overall budget, and hence the less likely
she will be to respond dramatically to a price
change.
Thus, senior executives, (assuming they are
the richest of the three), should have the
least price-elastic demand curves.
Students, the poorest, should have the most
price-elastic demand curves.
Sept. 11th, 2002
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senior executives,
junior executives,
students.
Remember:
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GSI: R. Estopina
Consider:
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Exercise 5 – 7 (cont’d)
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ECON 1 – Section 5 – Page 20
Exercise 5 - 7 (F&B page 132)
Suggested by one of your classmates:
Think about the market for gas (petrol,
oil, whatever cars “drink”). Is it likely to
be elastic or inelastic?
What about the demand for gas at the
pump? How is the market of gasstations?
Why the difference? What does it mean
for the petrol companies?
Sept. 11th, 2002
The price elasticity of a good generally
increases with the number of substitutes it
has.
It is easier to substitute a Ford or Toyota
for a Chevrolet than it is to substitute a
motorcycle or a skateboard for a car.
Thus the market demand curve for cars is
likely to be less elastic with respect to price
than the market demand curve for
Chevrolets.
Sept. 11th, 2002
Exercise 5 - 6 (extra)
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So:
ECON 1 – Section 5 – Page 23
GSI: R. Estopina
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First: Did you all handout the PS-1?
What do you think of the PS-1?
Any Questions you want me to prepare
for next week?
Sept. 11th, 2002
ECON 1 – Section 5 – Page 24
GSI: R. Estopina
4
Where to Get More Information
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Summary
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Class Book: Chapter 5.
Class Book: Chapter 6.
Terms:
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Sept. 11th, 2002
ECON 1 – Section 5 – Page 25
GSI: R. Estopina
Utility.
Marginal Utility.
Law of Diminishing Marginal Utility.
Utility Maximization.
Elasticity.
Rational Spending Rule
Applied to: 4 problems.
Sept. 11th, 2002
ECON 1 – Section 5 – Page 26
GSI: R. Estopina
Next class
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Next Class:
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Section 6 – Monday, Sept, 16th.
Finish problem 5-4.
We’ll go over problems 6-3 / 6-4 / 6-5.
Give it a try during the weekend!!!
Volunteers for the handouts distribution?
Read ch. 6 & 7 before section.
Thank you for coming on time !!!
Enjoy the Weekend.
Sept. 11th, 2002
<file>
ECON 1 – Section 5 – Page 27
GSI: R. Estopina
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