Econowaugh AP

Saturday, October 3, 2015

XED (Cross Price Elasticity) Compliments

XED (Cross Price Elasticity)

XED - the responsiveness of the Qd of a good (Good A) to a change in the price of another good, (Good B). Cross price elasticity determines whether the goods are substitutes or complements.

Formula

Understand: That you will be given a price change of one good (Good A) and then compare it with the quantity change of another good (Good B) and will use this formula for computations.

Understand: That it is more likely that you should be able to recognise that a negative XED (less than zero) is a compliment.

Complements are like bread and butter or hamburgers and fries or Korean fried chicken and beer. Two goods that are consumed/used together.

If the price of Korean Fried chicken increases then we would expect a less quantity demanded of Korean fried chicken. Less fried chicken mean less beer consumed as they are consumed together.

So, price of good A (Korean Fried Chicken) increases and therefore the amount of beer consumed decreases (good B) Price increases and Qd decreases.

again the formula

So, 6 - 8/8 or -.25 which is -1

5- 4/4 .25

So, no absolute value for XED (like PED) and less than 0 (negative) means that the two goods are compliments.

(Obviously, the opposite holds true - If the price decreases (good A) then the Qd of good B will increase.)

Weakly related or strongly related compliments I haven't seen tested in the AP exam but the reference was there in a couple of questions.

To know: Compliments

1) XED - (Cross price elasticity) - definition - the responsiveness of the Qd of a good (Good A) to a change in the price of another good, (Good B). Cross price elasticity determines whether the goods are substitutes or complements.

2) No absolute value for XED

3) XED < 0, then compliments

4) Negative = Compliment

5) Price increases and Qd decreases or Price decreases and Qd increases.

Examples: I have only found one example.

Answer is (D) X is an inferior good and is a compliment to Y.

as the cross-price elasticity is negative, we understand that means the two goods are compliments

Thursday, October 1, 2015

Wages as input costs (objects) vs employees as rational entities

Wages for employment vs. wages as incentives.
Thanks, Charles

Obviously the answer is (B) an increase in wages in the automobile industry.

The supply curve being a clue that the wages are of employees, and employees are looked at in the same way as objects, inputs and therefore resources - resource costs or input costs have increased and the supply curve for automobiles shift left.

While this question compares the wage rates between civilians and the military. The Answer is (B) a decrease in the average wage rate in civilian employment. If the average wage rate in civilian and military is $40,000 a year and the civilian average falls to $20,000. We can expect more civilians to move toward the military with the relatively higher wages. It wasn't that the price(wage) increased for soldiers its that the civilian wages fell.

The point is that in this instance the higher relative wage is an incentive to employment, so a higher relative wage attracts more people to the profession of soldiering.

If we are talking about someone supplying their own service as they are owners of their own labor.

As wage rates (price) increase entices more rational people toward employment and therefore quantity supply increases. Someone supplying their own labor is attracted to the higher wage rate.

Sunday, September 20, 2015

Elasticity Cheat Sheet (updated)

Elasticity Cheat Sheet (updated)

New stuff,, New stuff added to XED and YED. The AP examiners seem to accept the alternative formula for finding PED or the midpoint formula for year 2015 FRQ #3 .

Determinate of Demand - Compliments - Korean Fried Chicken & Beer

Determinate of Demand - Compliments - Korean Fried Chicken & Beer

Korean Chicken and Beer - Chimaek

New York Times- Korean Fried Chicken & Beer

Korean Fried Chicken and Beer are compliments.

If the price of Korean fried chicken increases what happens to the demand curve for beer.

If the price of Korean Fried Chicken increases then the Quantity Demanded will decrease (less chicken being eaten) therefore the demand for beer will decrease (shift leftward).

Saturday, September 19, 2015

Determinate of Demand - Substitutes - Siu Mai vs Har Gow

Substitutes - Siu Mai (HK) vs. Har Gow

(Pork & Mushroom dumpling vs. Shrimp dumplings)

Substitutes are two goods that can be substituted for one another. Usually the substitution happens when the price of one good increases/decreases making the other good a better/worse purchase.

We tend to substitute one good for another to increase/maintain our purchasing power.

The substitution effect reinforces the income effect.

Remember that the 3 reasons the demand curve slopes downward are the:

Income effect - as the price of a good increases our purchasing power decreases, or when prices decrease we tend to buy more stuff (or purchasing power increases)

Substitution effect - When the price of one good increases we substitute a cheaper good to maintain our purchasing power.

Diminishing Marginal Utility - the more we consume the lower the price must be to entice us to consume more as our satisfaction, benefit, value, happiness falls with each unit of consumption.

Siu Mai - Siu Mai Wikipedia

Ha Gow - Har Gow Wikipedia

AP question - The price of Siu Mai increases what happens to the demand curve for Har Gow?

If the price of Siu Mai increases people will substitute Har Gow as it is relatively cheaper. Thus the demand curve for Har Gow will shift rightward to show an increase in demand at all prices.

AP Question - The price of Siu Mai decreases what happens to the demand curve for Har Gow?

The price of Siu Mai has fallen and is therefore relatively cheaper than Har Gow. The demand curve for Har Gow will shift leftward/decrease as the cheaper price of Siu Mai attracts consumers away from the consumption of Har Gow. Less is demanded at every price.

Determinate of Demand - Compliments - Vada Pav and Coriander/Peanut Chutney

Compliments are two goods that are consumed usually with each other.

Compliments are usually introduced in the determinants of demand section, paired with substitutes

Today I want to introduce Vada Pav and Peanut and/or Coriander Chutney as compliments.

This is an Indian dish eaten on the streets and in the homes of Mumbai, India.

Here is a video of Nisha teaching how to create the Vado Pav with its chutney compliments.

Think, potatoes deep-fried with spices and chutney spread on a bun.

Link at wikipedia - Vada Pav

So compliments are two goods that are usually consumed together. The AP asked this question with one good's (Vada Pav) price rising and then asks how this affects the demand curve for the second good.

Example - The price of Vada Pav has increased, how does this effect the demand curve for peanut/coriander chutney.

Obviously, when the price of a good increases this causes a change in the Qd (quantity demand) not the demand curve of the good whose price changed. A change in price affects the quantity demanded not the demand.

BUT, the second part of the question asks what happens to the demand curve for peanut/coriander chutney.

AND, since Peanut/Coriander chutney is eaten with Vada Pav the quantity demanded (consumption) of one will affect the consumption of the other.

Price increases for Vada Pav and therefore the Qd of Vada Pav decreases, it seems reasonable that with less (a decrease) of Vada Pav being consumed that the demand for peanut/coriander chutney would decrease.

So less graph that with a CLG (Correctly Labeled Graph)