Class Summary #28 for 11/7/11

Today in class, we went over demand curves. Because I am unsure how to, I will not post all the graphs from class in this blog post, but I will post the information learned in class in this blog post.

Class began with us learning about comparative statics, which refers to:

1. How things change in this economy and how we model these out.
2. What things impact how much we buy?
1. Quantity demanded: prices of the good itself
2. All the other costs to people/stuff=changes in demand

Below is a list of things that might change (other than the price of the good) that will affect whether we buy more or less of a product (*note: burritos were used as an example of a good):

1. Income- when you get more, you will consume more. When income increases, so does quantity demanded. This is referred to as the "normal" goods". "Inferior Goods" refer to lower quality goods AKA Raman Noodles.
1. It is important to remember though that no good is universally normal or inferior. The reason why is because preferences are subjective. I might value Raman Noodles as normal while others might value it as inferior.
2. Prices of other things- There are two types of goods in relation to burritos that I might be consuming where prices could change my consumption of burritos;
1. Substitutes (other foods such as tacos, fish fry, etc.) If the prices for substitutes go up, my consumption for burritos go up because those options are less attractive. The opposite can be said if the price of burritos goes up. Remember that price does not have to just refer to money.
1. Substitutes are decided by the graph based on substitute price increases. Can't say that a taco and burrito are substitutes just because.
2. There are no natural pairing of goods. Look at the relationships of goods. If the consumption of one thing goes down when price of another goes up, we treat them in same way as if price is associated with burrito.
2. Complements
3. Expectations (about the price of a good or quality of a good)- perfect example of this is student loans. We expect to have higher income after going to college so we take out loans. We are willing to borrow money and live freely today (eat and enjoy college life) because we think that someday, college will help us make enough money so we can pay off these debts. We wouldn't do this if we didn't expect to get a job after college.
1. When you think future prices of something will go up (your future expectations), you might consume more of that good before the price does go up.
4. Tastes and preferences
5. # of participants

When something other than price changes and this change makes you want to consume more, the whole relationship changes. This is referred to as "Demand Shifts Out".

"Demand Shifts In" refers to when: even though prices didn't change, something occurred to make us consume LESS burritos.

Class was concluded with Prof. Rizzo reviewing what Elasticity is: How sensitive you are to changes in price. It allows us to measure with respect to anything.

So, Elasticity would measure how much our behavior would change if the price of a burrito changed. The way we express elasticity is as follows:

Percent change in Qd (consumption) divided by the percent change in the price.

Next class, we are going to go into more detail about elasticity and everything it represents.