economic

Week 2

Chapter 5

Price elasticity of demand =

Elastic >1: large change in Qd

Inelastic <1: small change in Qd

Unit elastic=1

决定Ped因素：

· The number and closeness of substitute goods,

· The proportion of income spent on the good: the bigger will be income effect and the more elastic will be the demand.

· The time period: the longer time period, the more elastic is demand.

当demand is elastic: (收入随Q走）

price ups,Q proportionately fall more,TR falls

Price falls,Q proportionately up more,TR ups

当demand is inelastic,(价格的改变在revenue作用更大, TR跟P走)

Price falls, Q proportionately up, TR falls

Price ups, Q proportionately falls,TR ups

Income elasticity of demand=

Cross-price elasticity of demand=

Price elasticity of demand =

决定Pes 的因素：

The time period

Immediate: Pes=0 SI

Short term: inputs up, others remain fixed, SS

Long term: 对于所有all input有足够的时间增加， new firms enter industries, supply is highly elastic. SL

The longer time period, the bigger the response and thus, the greater the elasticity of supply and demand.

Speculation:the behavior of looking into future and making buying and selling decisions based on your prediction.

Speculation tends to be self-fulfilling: the action of speculation to cause the very effect that they had anticipated.

Speculation tends to have a stabilising effect on price fluctuations when suppliers and demanders believe that a change in price is only temporary.( speculator reduce price fluctuations)

Speculation tends to have a destabilising effect that a change in price heralds similar change to come.( make price movement larger)

Risk is when an outcome may or may not occur, but its probability of occurring is known.

Uncertainty: the probability of occurring is not known.

Future or forward market: a market which contracts are made to buy or sell at some future at a price agreed today

Future price: a price agreed today at which an item will be exchanged at some set date in the future.

Spot price: the current market price

CHAPTER 6

Total utility is the total satisfaction that a person gains from all those units of a commodity consumed within a given time period.

Marginal utility is the additional satisfaction gained from consuming one extra unit with a given period of time.

When consume more,MU falls.这就叫principle of diminishing marginal utility.

Marginal consumer surplus is the difference between the maximum amount that you are willing to pay for one more unit of a good and what you are actually charged.

MCS=MU-P

Total consumer surplus is the sum of all the marginal consumer surplus you have obtained from all the units of a good you have consumed.

TCS=TU-TE

Rational consumer behavior is the attempt to maximize total consumer surplus.

Risk

Expected value

Risk neutral:always choose the option with the highest expected value.

Risk averse: never take risk, the greater level of risk averse, the greater EV of a gamble they are willing to give up

Risk loving

Diminishing marginal utility of income: the more you earn, the lower will be the utility from extra $1.

Insurance is the opposite of gambling, insurance company spread its risk.

How to spread risk:

· law of large number (the larger number of events of a particular type,the more predictable will be their average or expected outcome)

· Risk should be independent, it means that if one person makes a claim, it does not increase the chances of another person making claim.

· Diversification: the more types of insurances company offers, the greater the likelihood the risk would be independent.

Asymmetric information:unobservable characteristics (adverse selection)and unobservable actions (moral hazard).