Economics 001 Principles of Microeconomics

1
Economics 001Principles of Microeconomics

• Professor Arik Levinson

• Lecture 10
• preferences and demand (continued)
• applications

2
Income effects

• Inc falls to 24
• Pmovie6
• Psoda3

12
Income 36
Soda (six-packs per month)
8
j
6
I2
0
3
4
6
Movies (per month)
3
Income effects for an inferior good

• Inc rises from 24 to 36
• Pmovie6
• Psoda3

12
Soda (six-packs per month)
9
8
j
6
Income 36
4
I2
Income 24
I1
0
1.5
2
4
6
Movies (per month)
4
Price effects

• Inc36
• Pmovie falls to 3
• Psoda3

12
Best affordable point movies 6
Soda (six-packs per month)
c
6
I1
0
6
3
Movies (per month)
5
Example Food Stamps

• Food Stamp Act of 1964
• USDA Thrifty food plan
• benefits(cost of TFP) - 0.30 x (income)
• 27 million people in FY 2006 (8.8 percent of
  U.S.)
• gt 30 Billion per year
• average benefit 214 per household 94 per
  person

6
(No Transcript)
7
Food Stamps and the Household Budget

• income 1000/month
• stamps 200/month

1000
B
Other stuff ()
A
1000
1200
Food ()
8
Substitution Effect andIncome Effect

• Substitution effect
• The effect of a change in price on the quantity
  bought when the consumer (hypothetically) remains
  indifferent between the original and the new
  situation.

9
Substitution Effect andIncome Effect

• Income effect
• The change in consumption that results from a
  change in the consumers income, ceteris paribus.

10
Price Effect (again)
10
8
Soda (six-packs per month)
6
4
2
I1
0 2 4 6 8
10
Movies (per month)
11
Substitution Effect andIncome Effect
10
Soda (six-packs per month)
8
7
6
4
2
I1
0 2 4 6 8
10
Movies (per month)
12
Upward sloping Demand (!?)
10
Soda (six-packs per month)
8
7
6
4
2
I1
0 2 4 6 8
10
Movies (per month)
13
Labor supply
wage10/hour
14
Suppose tax30
wage10/hour
work more
work less
15
Two effects of a wage increase

• 1) opportunity cost of leisure higher
• so work more
• (substitution effect)
• 2) budget possibilities larger
• so work less (if leisure a normal good)
• (income effect)
• 3) Question
• why does income effect work in opposite direction
  to substitution effect?

16
Elasticity of labor supply in the USA

• ?LS for men 0.1
• ?LS for women 0.9

17
Savings decisions (supply of capital)
Consumption next year
interest rate5
Consumption this year
18
Suppose we tax interest income
Consumption next year
interest rate5 tax rate 50
Consumption this year
19
A diagram of the economy
Households
goods and services

Firms