İktisada Giriş INTRODUCTION TO ECONOMICS - 2 ilyas köse (ahmet çalışkan) econ101 - 1 - 4. Markets and Welfare Show whether free markets achieve the largest possible welfare for the society If free competitive markets achieve the largest possible welfare, then they must be efficient 4.1. Demand and Marginal Benefit A consumer’s demand curve shows her marginal (the last) benefit (MB) for every unit of a good consumed. It is the value of enjoyment that an individual receives from consuming the last unit of a good. Mary’s Demand for Cookies Price Mary’s Demand 2.5 0 2 1 1.5 2 1 3 0.5 4 0 0,5 1 1,5 2 2,5 0 1 2 3 4 Quantity Price (liras) Marginal Benefit Height of the demand curve tells us the amount of marginal benefit that the consumer receives from consuming that one unit Economists argue that a consumer’s marginal benefit decreases as she consumers more of the same good. 4.2. Individual and Market Demand Let us assume that only Mary and David buy cookies in this simple economy. Market demand is horizontal sum of individual demand curves and is calculated by adding the quantities demanded at every price. Price Mary’s Demand David’s Demand Market Demand 2.5 0 0 0 2 1 0 1 1.5 2 0 2 1 3 1 4 0.5 4 2 6 0 0,5 1 1,5 2 2,5 0 1 2 3 4 5 6 Quantity Price marginal benefit of society from the 4th cookie The market demand curve shows the marginal benefit of the society from consuming each unit of that good. 4.3. Consumer Surplus Let us assume that the market price of 1 cookie is 1 lira. Mary’s MB from the 1 st cookie: 2 liras She has to pay 1 lira in order to buy the 1 st cookie. Extra Benefit = Consumer Surplus 07 NOVEMBER VOCABULARY Achieve: Başarmak, Elde etmek Welfare: Refah Competitive: Rekabetçi Efficient: Etkin, Verimli Sum: Toplam, Meblağ ilyas köse (ahmet çalışkan) econ101 - 2 - 0 0,5 1 1,5 2 2,5 0 1 2 3 4 5 Quantity Price (liras/cookie) consumer surplus D=MB market price Consumer surplus is the Marginal Benefit of the good minus the price paid for it summed over all units consumed. David’s Consumer Surplus 0 0,5 1 1,5 2 0 1 2 3 Quantity Price (liras/cookie) CS: 1x0.5/2= 0.25 market price 4.4. Supply and Marginal Cost Each producer’s objective is to maximize profit. Profit: Total Revenue – Total Cost (Price x Qty. demand) (Supply show Marginal Cost) Cost of producing the last unit of a good is called “marginal cost” The height of supply curve shows the marginal cost of producing the last unit. Economists assume that as quantity increases, Marginal Cost (MC) increases. 4.5. Producer Surplus Assume that the eqbm price of a cookie is 2 liras. Kadir’s Cookie Store 0 0,5 1 1,5 2 2,5 0 1 2 3 4 5 Quantity Price (liras/cookie) Producer Surplus (ex tr a benefit: 0.5) market price S=MC Producer surplus is the area above the supply curve and below market price. 4.6. Is the Free & Competitive Market Efficient? Total Surplus = MB – MC 0 0,5 1 1,5 2 2,5 3 3,5 4 4,5 5 0 1 2 3 4 5 Quantity 100 th S=MC 1000 th eqbm qty 10000 th Price C.S P.S eqbm price D=MB - At 100 cookies, the MB of consuming the 100 th unit to society is larger than MC of 100 th cookie. This means there is an opportunity to increase TS if the economy produces 1 more cookie. - At 10 000 cookies, MC of making 10000 th cookie is larger than MB of the eating the 10000 th cookie to society. Welfare = Total Surplus = Cons.S + Prod.S. ilyas köse (ahmet çalışkan) econ101 - 3 - Chapter 7: Theory of Consumer Choice Propose a model of how consumers choose what to consume. There are 4 elements in this model 1. Consumer’s Income 2. Price of Goods and Services 3. People’s Preferences and Tastes 4. Consumers choose the bundle that maximized their utility level. 7.1. Budget Constraint Consumer’s income and prices describe the budget constraint The budget constraint describes combinations of goods that the consumer can buy and can’t buy. Ex: Income: 100 liras/week Two goods: Lahmacun and Baklava Prices of a lahmacun is 10 liras Prices of 1 kg baklava is 20 liras 0 1 2 3 4 5 6 0 2 4 6 8 10 12 unaffardable K budget line A (4,3) B (6,2) L (9,3) Spend all money on lahmacun: Buy 10 lah, 0 Baklava “ “ “ “ Baklava : Buy 0 lah, 5 baklavas For point L: 9x10+3x20=150 liras (unaffordable) There is no saving or borrowing in this model, so choosing point K (2,2) doesn’t make sense. - Trade off for every additional lahmacun 1 have to give up ½ baklavas - For every additional baklava 1 have to give up 2 lahmacuns - The relative(real) price of a baklava in terms of lahmacuns is 2 lahmacun/baklava - The relative price of a lahmacun is ½ baklava/lahmacun Relative Price= baklava lahmacun P P Slope of a line is the change in the vertical axis divided by the change in the horizontal axis. Ex: Slope between A›B= (4,3) ›(6,2) = 2 1 4 6 3 2 - = - - 7.2. Tastes and Preferences Preferences rank alternative bundles of goods according to the utility they give. There are 4 assumptions that we make about preferences 1) Consumers are able to rank alternative bundles 2) While consumers do this ranking, they are consistent A (3,3) B (2,4) C (1,5) If the consumer prefers A to B and also prefers B to C, than she must prefer A to C for consistency 3) More is better 14 NOVEMBER VOCABULARY Constraint: Kısıtlama Unaffordable: Parası yetmemek Additional: Ek, Dlave Give Up: Vazgeçmek Slope: Eğim 08 NOVEMBER VOCABULARY Above: Üstünde Below: Altında Bundle: Paket, Deste A Preferred to A B A is preferred to here Oranges Apples ilyas köse (ahmet çalışkan) econ101 - 4 - D C Positive Function (Each other are increase) Marginal Rate of Substitution (MRS) (Keeping total utility constant) How many baklavas would you give up in order to get one more lahmacun. This amount is the MRS of lahmacuns for baklavas between K and H, MRS of lahmacuns for baklavas is 2 baklavas for 1 lahmacun. - MRS between point H and C is 1/3 baklavas to 1 lahmacun 4) Preferences exhibit (show) diminishing MRS. This is because consumers prefer more balanced combinations to more extreme combinations. Indifference Curves The consumer is indifferent to all the points on an indifference curve Slope of the indifference curve is the equal to the MRS Properties of Indifference Curves 1) Can indifference curves be positively sloped? No, because this contradicts the “more is better” assumption. 2) Can indifference cross each other? Z is better but in this case Z has to equal the X (Answer: No) 7.3. Consumer Choose the Bundle That Maximizes her Utility Combine the budget constraint and preferences Ex: Income : 100 liras Prices : 1 lahmacun= 10 liras 1 baklava= 20 liras Consumer chooses a point on the budget line Consumer choose the highest affordable indifference curve that is tangent to the budget line Consumer’s optimal choice happens at a point where MRS (equal to ½ baklava/lahmacun) is equal to the slope of the indifference curve 7.4. Applications of the Model 1- When preferences are different See whether this model produces different choices when preferences are different Consider Joseph who likes lahmacun more and Müjgan who likes baklava more. 15 NOVEMBER VOCABULARY Indifferent: Kayıtsız olmak Rank: Sıraya koymak Consistency: Tutarlılık Diminishing: Azaltmak Tangent: Teğet 10 C H Baklava Lahmacun 5 A K U2 U2 U3 U3 Slope (Eğim) 1 2 1 2 x x y y x y - - = ? ? = Orange Apple U 1 U 2 ? Z X ? Y ? L B 5 10 Baklava Lahmacun U 1 U 3 U 2 C Maximum Possible Utility ilyas köse (ahmet çalışkan) econ101 - 5 - Consumer is indifferent to all the points on an indifference curve. Marginal rate of substation is the slope of the indifference curve MRS is the amount of baklava that is given up by the consumer for one more lahmacun Joseph who likes lahmacun more than baklava Steep and MRS is high Müjgan who likes baklava more than lahmacun Flat and MRS is small [ MRS is equal to relative price of the optimal point ] Income: 100 liras Prices : 10 liras/lahmacun 20 liras/baklava Does this model produce different when preferences are different? - Joseph likes lahmacun more and his MRS is high - Müjgan likes baklava more and her MRS is small Our model chooses a point with - large amount of lahmacun and a small amount of baklava for Joseph - large amount of baklava and small amount of lahmacun for Müjgan 2- When income changes - How a consumer changes her consumption when her income increases or decreases. Consider the case where income increases from 100 liras to 160 liras/week Price : 10 liras/Potatoes : 20 liras/Eggs Slope of budget line is the relative price of potatoes in terms of eggs: 10 5 = 2 1 - When consumer’s income increases, her budget line shifts parallely outwards. - Relative prices and slope of budget line doesn’t change Income Elasticity of Demand (IED) IED patatoes = income in change % demanded qty in changes % % 60 100 4 4 5 × - = 42 . 0 60 20 = (income inelastic) Potatoes are a necessity good because their IED is smaller than 1 21 NOVEMBER Consumer who like only lahmacun Lahmacun Baklava U 4 U 2 U 1 Consumer who like only baklava Lahmacun Baklava L B 5 10 Baklava Lahmacun C L B 5 Baklava Lahmacun C 10 20 Eggs Pat… D 2 8 10 5 C ilyas köse (ahmet çalışkan) econ101 - 6 - IED eggs = % 60 100 3 3 5 . 5 × - = 38 . 1 60 83 = (income elastic) Eggs are a luxury good, because their IED is greater than 1 Ex: A: (x) › 5$/unit › 30.000$ (cost) B: (y) › 5.5$/unit › 35.000$ (cost) x+y= 10.000 and total cost is 117.000$, how units are produced in A? 117000 35000 5 . 5 30000 5 = + + + y x 2000 5 . 0 $ 10000 / 5 $ 52000 5 . 5 5 = = + - = + y y x y x x: 6000 y:4000 Income: 100 and increases to 200 liras Relative good price of good x in terms of good y (x in y cinsinden değeri) 2 1 , good y/good x Relative good price of good y in terms of good x 2, good x/good y - When income changes, slope of the budget constraint: relative price of good x in terms of good y does not change 3- When prices change Law of demand says other things equal, if the price of a good increases, qty demanded of the good decreases. Income: 10 liras/week Price of Gözleme: 1 lira Price of Künefe : 2 liras If price of Gözleme increases to 2 liras - Point A is affordable but not give maximum utility - We will separate the movement from C› E into two effects: - Purchasing power has decreased for this consumer - Substitution and income effects - Substitution effect is the adjustment of demand to the relative price changes alone, keeping the utility level constant. - Movement from C › G is the substitution effect - The consumer reduces number of Gözlemes and increase number of Künefes - Income effect is the adjustment of demand to a change in real income alone, keeping the relative price constant - Move from G › D shows the income effect Price elasticity of demand: price in change % demand of qty in changes % 37 . 0 100 5 . 37 100 1 1 2 100 4 4 5 . 2 - = - = × - × - Inelastic for Gözleme 28 NOVEMBER VOCABULARY Purchasing power: alım gücü 1) Point must be affordable (must on budget line) 2) It must maximize utility 3) Both must be satisfied 22 NOVEMBER VOCABULARY Consumption: Tüketim y 20 10 20 40 x E 5 10 Künefes Gözlemes C (4,3) 5 A C G ilyas köse (ahmet çalışkan) econ101 - 7 - Chapter 9: Firm Behaviors 9.1. What is a firm? - A firm chooses what quantity of the good to produce and price of the goods. - Firm’s objective is to maximize profits - Profit is the total revenue minus its total cost Profit= Total Revenue – Total Cost (Price x Quantity) - Total cost is the value of all inputs used in production - Explicit costs: Worker’s wages, electricity, machines, rent - Implicit costs: Farmer Mehmet teaches “saz” lessons for 10 liras/hour One day, he spends 5 hours planting 100 liras worth of wheat on his own farm. In that day, how much total opportunity cost has he incurred? - His explicit cost is 100 liras value of the seed - His implicit cost is 5x10=50 liras Total Opportunity Cost= 100+50=150 liras Account considers only explicit costs If the wheat will be sold for 400 liras, what is Mehmet’s economic profit? - Mehmet’s accounting profit: 400-100= 300 - Mehmet’s economic profit : 400-100-50= 250 Ex: Suppose I have invested 300000 liras for starting a cookie factory Suppose the market interest rate is 5% annually. Implicit cost of financial capital is: 0.05X300000= 15000 liras/year 9.2. Production and Costs Marginal Product MPL (marginal Product Labor): workers of Number Outpot ? economic profit = total revenue - total cost, including both explicit and implicit costs. accounting profit = total revenue - only the firm’s explicit costs. Total Cost = All Opportunity Costs= Explicit Costs + Implicit Costs 29 NOVEMBER VOCABULARY Industry: Sektör Constant: Sabit Reduce: Azaltmak Adjustment of demand: Talep ayarı Explicit Cost: Açık, kesin maliyet Implicit Cost: Örtülü maliyet Annually: Yıllık olarak Revenu Tota opportunit cost How an Economist Views a Firm How an Accountant Views a Firm Revenu Economi profi Implici cost Explici cost Explici cost Accountin profi Quantity of Output (cookies per hour) 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 Number of Workers Hired 0 1 2 3 4 5 Production function