Okay. So y'all ready to get started? Today is a review on chapters five and six after five or 60, if demand and outline and chapter six is consumer choice. And the reason that we're doing this, uh, this, uh, presentation is to help you with the midterm exam, right? The term exam is over the first six chapters like, or first three tasks review. They're up on the internet for two and first chapter for the overall review for chapters five and six. So let's just start with, um, with chaptesix, uh, on choice and demand elasticity. That's a big part of this chapter. Uh, what is, you asked, uh, how much quantity demanded changes.
Well, okay, now that's one way to measure productivity if, if price goes up trying to manage change, but the real definition involves total revenue, increased price and total revenue goes up massively. Any last year. Price and total revenue goes down at the last, a cry. Now, the reason that, uh, the explanation is that when we changed price, we got two things happening here, right? If we let, for example, is we raised fries, we're losing money on a per unit basis. I mean, uh, we're, we're gaining money on a per unit basis, right? We raised price, we're losing money because we're going to sell fewer units. Right? So, so, so, so the question now is, okay, we raised price w offset the other more because the higher price and we're making more per unit, or are we gonna lose more because of drop off and sale plastic means that when we changed price, there's not much change and decline demand, it means little changes is price changes.
Little chinky Lastic means change, price changes. Okay. We've got a big chain if we raised and, and, and there's, there's just a small change in quantity demanded our total revenue [inaudible] so that would be an elastic demand curve anyways. And there was a big change in terms of our sales and our total revenue will go down and that's there. But that just makes sense, right? I mean, you know, don't, don't try to memorize this, but it's just, I mean, if you think about it, um, and even the, even the, the terms make sense, right? I mean elastic, I mean that, I mean, if you look at the terms elastic and inelastic, you asked, it would mean, Hey, is stretches easier? You know, it's a big change here. That means, Oh, okay. Maybe it's last. They can, you know, it'll stretch, but it's stretched too, uh, so easily.
Okay. I'm looking at these slides here. Um, uh,
the elasticity is, uh, is, uh, price elasticity of demand equals a percent change in quantity divided by a percent change in price. Now, how do we get the percent change? But what if we go from three years to five units? What percent change?
why not? It's a review, right? You go from three years to five years. What is the percent increase?
how's it calculate that? Okay, we take the difference. A percent change is always the difference between the two numbers. And then you divide by the original number, right? Three. So three years to two divided by three since suites original number, right? Oh, so it would be a 67% increases case, right? Two divided by three. What happens if we went from five to three
high five this time it'd be fine. My straight or I'll tell you in a change, I had three to five or five to three years. Two year in a like if we go from five to three, what's the original number? So it'd be two divided by five. No, a simplistic one. The rough elasticity is the percent change in quantity. So how'd you do that? Well, we, you know, we take the difference between the two numbers divided by original number. Let me divide that by percent change in price. Again, you take the difference between the two fries and then need to buy it by the original price. Except for the fact that in economics this would present us a problem.
What's the problem? I mean the fleet, if we calculated uh, E uh, price and activity demand as the percent change in client abide by the percent change in price. What's the problem? Exactly right? That's the problem. If you take two points on the demand curve, if you go from a to B, you'd get one value for priceless distance, man. But if you go from me to, you can a different fight that pissy demand, even though it's the same, it's the same on the demand curve. That's a little bit uncomfortable. I mean, that's a little bit, um, we don't, we don't like that. So, so what is the solution to this problem?
Right? You take the average, right? It's the incidence of pain. Same 8% change is the difference between the turn numbers divided by the original number, which is what we would do in mathematics, right? How, you know, I'm like no mathematics course and that's how we would calculate the sensations, right? It's difference divided by the original number in order that we are going to get the same value here on the demand curve as we go from a to B. Or if we go from D to, Hey, we change divided by not the original number, but the average of the two numbers, like a, like if we go from three to five. That's true. Right? Divided by lot. And what's what's, uh, now we, this is called the last man. Oh, if we're going to take the percent as we go from three to five using the arts elasticity of demand formula, what would it be?
Yeah, it would be two divided by five plus three is eight survived by twos. Four. All right, let's see how that works. Now we go from five to three. What is the, what would be the last Tricity of demand? Same thing, right? We're taking the difference between the two numbers and divided by the average of the two numbers. Wow. It's the same thing. Five plus three is eight divided by two is four. So, so, so where did we go from three to five or from five to three? We still get a price you that sister to man of one half and that, and that's really our purpose. Now it makes sense. Okay. Now you know we have a, you know, an area or or or portion honor, honor, demand curve. Remember, can we, can we have elasticity if a change doesn't take place? Well, that's the whole point with this city, right? That essentially measures, okay, when a change takes place, what's going to happen? A change has to take place in order for us to have a necessity. So all of the change has to take place in order for us to be able to measure that. [inaudible] then we're talking about two points on the curve.
So by using the dizzy demand formula, when we get to points on the curve where they're going up or down, we're going to get the same value.
okay. So do you think, you know, if you're, if you're given some, uh, questions on the test, you know, we can give them some numbers. Like I just did, you know, three to five. What's the, you know, the price. This is the man using the art out now. Now, if I'm not alive, that's what we use. I mean, if you're, you know, if you're asked to calculate the price of that statistically a demand, then you know, we're, we're always gonna use the architects, the demands long because that's what we do in economics. How we, so far we've been talking about the type activity of DNA, right? Because what changed? Alright, but are there other types of elasticity and all the records, income elasticity of demand process 50th to man. So when, when when when two things are related, then we say, okay, if the price of one changes, how does that affect the younger, how much does it affect the other? And I say, remember your electricity
we know that when price goes down the car, the metal go off crying. I mean, you know, in there's any level of economics and because it's true, 99.9% of the time, you know, demand carriers have a negative salt and we're going to assume that this is always the case in, you know, and this level back, Tom goes down the client and manage those house 50 is all about his mocks, right? How much is that price change effect rather than, or a little that's, that's really, that's, this thing's all about getting numbers right. I mean if we follow this basic demand form it and we say, okay, you know, percent change in quantity divided by percent change in price using the artists van formula, we're going to actually get one number, divide by another number and then you know, and that's when I come out to either lesson one or in a month. Now in rare cases it may equal one, but in most cases, you know, we're going to get a number like 0.4 over, we're going to get number 1.6. I wonder what are these numbers? Tell us, what's the point for lasting any lasted any lasted eight
what's, what's any lasted
yeah. Uh, I see eight tenths, uh, run, uh, or I'm not even sure mathematically wise, but it would be, um, uh, I believe at the 0.8 would be more inelastic.
number two would be the summarize number. It could be more any last 0.4. Oh, okay. 24 see trouble like that. When I do, you know, pull it out of my head, you know? Huh.
But not, but not as in your last is 0.4. Right. Either way is easier, right? I mean if you go like 1.2 or one point what's moving? What's most laughter, that's easy. Right? And 1.6 is more elastic. So anyway, I mean that's the point I'm making here is that, you know, we, we, we use this one when it was set up with numbers. Now these numbers tell us something. Now what is the, what is the whole point to micro economics? It's the whole point to what we're studying this semester is learning how to use certain tools that will bagger and they blessed to make wise decisions. Right? Now in this case, if you were a business owner and you were, you were thinking now maybe you're, maybe you're Austin and going up. I mean that's, that's what's happening today, right? And so let's say your, your, your costs are starting to go up and you say, well, I, I'm not going to have to raise my price.
Well, would it be a good idea to know what effect a certain increase in price will have on your total revenue? That's valuable information. I mean, if you're gonna make wise decisions, it would be really nice to know that if you raise your price by this amount, your total value change by this amount. Right? And that's what elasticity allows us to do. And therefore what we can make, why isn't this decisions alright? Using, you know, we can calculate of course the key here is, you know, can we, and this is, you know, beyond the scope of this course and you know, I mean this is the kind of things, you know, you, you might get involved in, in higher levels of economics purposes here, you know, okay. You know, that there's a method we can follow and we, and, and, you know, given enough time, we can, we can tell populate the price elasticity demand or a certain product and therefore the owner of that, there isn't, this will know beforehand a decrease in price. I mean, it may be a matter of decrease in price, mainly an increase in fighting has photographs. What I'm trying to do here is I'm, I'm trying to, uh, uh, an overview and a, let me just, you know, this, this is, um, just a, um, overview.
Here's one. Uh, here we have um, demand curves and the one on the left is more vertical than the one on the left. The right. Uh, how one of these is for all and which is ice a is for oil and B is for ice cream. It's more vertical and horizontal. So we would say that a is more and B is more elastic. And the reason of course I see notice here way that these two graphs are shown is that there is the same price change. In both cases. The difference is in the quiet demand, right? With the more vertical curve, what happens to the client demanded? Well, it's going to go like if price goes down by the manacle up and how much, well, just a little bit more of a horizontal demand curve, which we would call more elastic. That the same price change. What's happening to the quality demand is changing a whole lot more. [inaudible]
but not hers are, are, are more elastic vert, more vertical curves and more. Anyway. Okay. Uh, let me see what else I can find here. And what kinds of things affect elasticity? Well, there's a list of four things right here. Uh, how many substitute, I mean, you know, when we're looking at [inaudible] we're saying, okay, what's going to happen to our total revenue as we changed the price? Did the determinants of 50 is, would involve maybe substitutes and uh, how many substitutes does this thing happened? The scooter service, another factor would be how, how, how is this in terms of one budget and it would be time for a short period of time, a long period of time because over a long period of time, people try maybe in your short time period, well if we raise price, people might say, well we just got to pay the higher price. I mean it's like gasoline, right? I mean, you know, the price of gasoline is going up and up of yeah. Y'all notice that, you know, the price of gasoline is going up. You know, they expect it to be $4 a gallon by the summer.
Yeah. It goes up and down, but, but generally it's been going up. Right. And, uh, and so, uh, well if you're talking about elasticity, uh, and in the short amount of time, you know, increase in price of gasoline, it would tend to be more elastic. Right. Wow. You know, we still need to get to work. We're still need to get to school. Uh, and you know, we can cut back a little bit in our driving, you know, you know, counts, maybe some unnecessary driving, but I mean, you know, the bulk of our driving is necessary. Long time period. What can we do? Yeah. Buy more fuel efficient cars, you know? Yeah. I mean, if there's this lack of things we can do, you know, given time. So what happens to the overall S, you know, as time goes on, live becomes more and more elastic. So, so that's time and need of course at eight, you know, the, the more, the more we need something after, so that's when we need it. The more he lasts. That's a industry.
you're just trying to pick up things that are critical, but maybe, uh, let's, let's go on and any, let's, we can go on here. I think I just, you know, I covered the basics of this, uh, chapter. Uh, I, uh, any questions about that? You left this city?
Let's go onto the next chapter is on consumer choice and demand. What we're talking about a lot is, uh, you know, when you talking about consumers talking about and curves and a lot of what we've got here in this chapter here, um, uh, never review chapter three, but it just goes into a demand in more detailed in chapter three, chapter three was on design a demand and supply curves through your chapter four, depending upon what, what folks you have, um, true or false, if the price goes down, the man goes up.
Why is that false? What's that thing there? Yes, I was at fault. Those down man goes up. Why does that fall in something changes? What's changed? The quantity demanded is it price goes down, demand does not go up. What goes up is the quantity. And as you just said, uh, if demand is going to change, then something has to change other than price, right? Something has to change to other than price because when we change price, what assumption do it all? Everything else remained the same. Always make that assumption. Now this is why we can say like if talking about supply curves, this is why we can say that that if you own the business and the price of your product goes out
how, what? What's causing the price for product to go off market the market, right? The market determines price over time. It's the market which is supply in demand. Determined price. Correct. So you own the business and the price of your product is going up. The market is dictating a higher price. How do we know? Absolutely that. Now, this is just an example of what I just talked about.
How do we know hundred percent sure that if the price goes up, you'll make more money
because we may, you sound shun that nothing else is going to change. That's really the only reason I mentioned there this I'm, I'm emphasizing the fact that you, that when price changes, we assume that nothing else changes. Now if you own a business and the price of your product goes up and it's the market that's dictated in the higher price, then we know that you've got to make more money because your costs are the same. You know, the size of the market's the same. I mean, you know, I mean everything's the same. The only thing that's changed is the price of your product has gone up and therefore you have to make more money. And that explains why supply hikers have a positive slope. PRI goes up and the suppliers are making more and more money as the price. What happens? Their incentive to supply
okay, after his time is on consumer choice and demand. But I was just using supply and again, you know, this is a review and you know, these are things that we've talked about, but that is an important assumption for you to always be aware of that you know, that when we change price, we assume that nothing else. If we allow other things to change, well we, you know, we can never come to any definitive those things that could change. I mean if we, if we relaxed the everything else being equal assumptions and you know, what kinds of things would cause a shift in demand
of related goods. That's [inaudible] I think there were six of them we talked about. That's one. What's, what's another one that's too, y'all there at the mall. You can jump in here to you and all the people on the market as three patients. That's four. Yeah. Technology, consumer income isn't that one consumer income. Um, when you say consumer income, what income do we mean? Because we already in economics we always assume if you say anything Tom, that determines the man. Right?
okay, let's see. Uh, and of course, expectations is, is an important factor here. Uh, it, the one very important factor cause it's very important for you to realize that so much
Happens the way it does. Why? Because of what happens. But because of how people perceive what happened
not what happens very often, but is people's perception of what happens that really makes a difference? If, you know, the example I gave earlier is that if, uh, uh, if interest rates goes down
what happens to the price of stocks and the stock market?
perception, perception, investors' perception of that fall in interest rates high. They might look at that fall interest rates and they might say something like, well, because this is going to make a, you know, borrowing not easier and it's going to be a stimulus to the economy and a, so this is a good thing. And, uh, because it's a good thing, I, you know, we believe that the, you know, tomorrow will be better than today. And, uh, so, uh, maybe, you know, this would be a good time to start, you know, buying more than selling in terms of stock market and the price of stocks go up
but they very well could look at that decline in interest rates and take a different viewpoint. You know, they might say, you know, really bad, you know, for like the federal reserves, lower interest rate, this is a sign that really things are bad and we read that this declined, it declined. But it's not enough. That's gonna make that much difference. And, and I mean, and some they're real pessimistic. I mean, you find this is straight even make, make some pessimistic and then what happens? Will they sell more than they buy and pipe stocks go down? I mean, there's been times when, uh, some well known, uh, profitable companies like Microsoft, um, I know several cases where, where, um, you know, come out with a, uh, an annual report and they would say, uh, last year was, uh, you know, 20%
well, that's pretty good growth rate. Right? Wow. 25%. And the price, their stock will go down because it, we're expecting a maybe a 50%. No, I mean, it's all, I mean, it's all, you know, emotion and uh, you know, based on, uh, you know, what we're expecting. I mean if something happens that we didn't expect or we were expecting 50, but I only got 25 and instead of 25 increased being something, you know, it ends up being negative. And uh, so I mean this is, you know, actually patients what sets us apart. And what's so tricky about it of course, is that these things can change overnight. I mean, you have a certain happening, I mean, I'm not getting changed. Interest rates are or you know, I mean, it could be anything, some artistic and a Monday we get, you know, maybe some news and maybe, uh, the next week on a Monday we get the same news and the opposite happens. I mean, people react the opposite as they did just a week ago. I mean, you know, they, these things can happen. And that's what's so tricky about, about understanding economics because it's not what happens often how people perceive what happened. And because we are all emotional beings, right? People are emotional. And very often when we make decisions based on, on solid facts or, or, or, or our intelligence, but starts off, we make decisions just based on our feelings, our emotions, and sometimes those emotions. And why does it differ day to day.
And anyway, this is a very important factor when you were talking about here is consumer choice and demand. How, um,
are they part of this chapter is on marginal analysis. Marginal analysis may be certainly one of the most important principles. This is, this course is called the principles of economics, right? This happens to be the principles of micro economics and one of those trends. So what we're doing is we're learning just really a handful of principles and, and how you know, and how to use these understanding, use these principles to marginal analysis is one of these principles. Very important one. Um, and uh, and again we're talking about decision making and remember the, the example I gave you know earlier is that you've got money in your pockets, you're kind of thirsty, standing in front of a soda machine. Pops are priced at a dollar. Oh, it's fashion is. And these are the questions that economists get all excited about him. All you are, will you not? Well overall I want to say how many soda pops are you going to buy? Now we're assuming that because you're an economic person, you have more than less and you're always making decisions trying to maximize your level of satisfaction and and the unit of measure that we use here is called utility.
How much is it useful knows? I know and you know that 10 utiles twice the value of five years old. That's how we use youthful, right? This email as a measurement anyway, I don't want to know how many soda pops you're going to buy to maximize your, your, you know, your your levels as fashion.
Oh, how do we, how many Carmen, how many soda pops you're going to buy then using marginal analysis, where do we begin at the beginning, which is the first one. Oh, the question then goes down to you are will you not buy that first soda pop in West answer?
if the margin fill is greater than the price. Exactly. That's true. If until it is greater enterprise for soda pops, yes, you are giving up something of no value for me seeing something of higher value. Right. Has your place need greater value on the soda pop? Then you are surprised. In this case it's a dollar. So what do we do? The second soda pop. The question is will you, are we not buying the second soda pop and what's the answer? Margin. Chili's. The enterprise answers. Yeah. How about a third soda pop or soda pop? I fixed it. How long? How much sort of pops, you know, as long as margins. Hillary, Oh, when I say [inaudible], what does the word March for me? Alas, you as we're always concerned about any units except the last one saying, okay, for this, this unit we're looking at here is margin facility more than or less than the price. You place a greater value on a dollar or another solar power
Argentina is better in price. You're saying basically greater value in soda pop and I do with dollars. So you'll buy and you'll buy and you'll buy and you'll buy and you'll keep buying as long as margin to a lead is greater than the price, not just as soon as martyrs until it becomes less than the price. What are you going to do shop on? You won't buy that unit. I've been at the size where it lasts. Won't buy that last unit at one point. Are we tending for equally delivering is where margin silly equals price. Now is it necessary that margin Tilly will ever equal price? No, it's not. I mean it would be, I mean, I mean you could reach the point where you say, okay, I know about you're buying another soda pop because it's like I'm placing the same value on the dollars I am. Another soul pop couldn't happen, but normally it would be M you're stating P M is spraying P and then all of a sudden Andy was less than P M you never equals P nonetheless, it's still an equilibrium and that is the point that you are maximizing your level of satisfaction. Right.
What's important here is the concept of marginal analysis and we use it money, different situations. If you, let's say you own a business and manufacturing business and you want to know how many units to produce to maximize your profit, now what do we do? What two things do you consider
marginal revenue and margin? Now, now the terms are different. You know the margin Tillery and price, but the thinking is the same, right? Margin revenue is how much revenue you made in that last year. Then marginal cost, the time I set last year costs you produce. How many units are you going to produce to maximize your profit? How to answer that question. Where do we begin? San Bruno, right? So we go the first year and we say, all right, when we participate, the answer is yes. If marginal revenue is paid in March or cost, what about a second unit? Same thing. A third year, same thing. Fourth year. Fifth year, and we're going to keep on producing as long as mr bear. Now, as soon as we get to a unit where MRRs less than M, see what we do?
Oh, stop this. Oh no, we're not gonna produce that last year. If we produced that last year, that means Hey, loss. No, we still might be making a profit, but we are making a loss on the last unit and therefore we know that we are not maximizing our profit. We produced that last year where mr mr grade MC produce MRV EMC for twos, am I great them super juice and less than MC are not going to produce. So what point are we tending for mr equals MC, which again, you know that that's the equilibrium. That's where profits are maximized. Do you own a restaurant, a new restaurant, and you've got 10 tables, you know, so many square feet. How many waiters are you going to hire max? You know, to maximize your, your, your prop. Well, how do we answer that question?
Martin. Yeah. The first one, see again, we use margin analysis. Now w what's your things are we looking at here? If we're talking about, you know, hiring,
how much money can they bring in if we hire them and how much we're going to pay them. And we call that Martrell product and wait margin price is how much money is that lasts? Look, they're going to bring into our business wages. How much are we going to pay that last word? Will you hire that first layer? Yes you will. If it's greater than a ways. How about the second waiter? Deprived still remain. And then of course each waiter, you know, I mean certainly beyond a certain point you Slater's gonna add less and less your total revenue and then you're going to get your point. Well, or maybe, maybe last later, we'll bring in money, but you won't, you'll bring in less money then. Then we got to pay him. So in other words, margin product is less than the waste. Well, we hide that last waiter now. So it's high margin product or scanning a way to higher margin products, creating a waste. We hire any way higher margin. Pot knows less in the ways. So we don't hire. So, at what point are we tending toward where margin product equals waste and that's where we'll match
marginal analysis. So yeah, every decision that you've ever made since you were born and you make hundreds of decisions every day, either consciously or subconsciously, you have used marginal now
how when you were a baby in the crib, you, you know, you weren't thinking, now I gotta make decision here. And, and what is the thing about Marshall analysis? Now let me, let me evaluate this thing here. I mean, you know, you're not, you're not conscious of, uh, you know, abusing marginal analysis. But I mean, if you think about that, I mean, when you make a decision, that's what you do, right? Should I do this or should I do that? Well, you know, w, you know, w way am I going to get better now that, you know, there's two things here I'm weighing. So I mean, and you gotta do one or the other.
Okay, well that's a pretty good overview. I think they're of, uh, of, um, the concept of, of, of the margin and marginal analysis and which is the really the crux of chapter six. That's how we make consumer choices, right? We make diligent consumer choices. I using margin analysis, and if you're aware of margin analysis, then you should be able to make, you know, better, you know, wiser decisions in certain cases.
Okay. So any questions about [inaudible]?
Okay. Well, let's call it a day then. And, uh, this, uh, you couldn't review in chapter. Well, I should see you all next time.