Class #27 11/4/11

Rizzo started class by putting up various graphs with the main idea that as price goes up, demand goes down. At the price of $0, someone will not buy infinite amount of material though. They will stop at a point where they feel that they will use all of the things that they buy for $0 for good use. The idea he conveyed with this is that you don't want to think about prices but what you would do with the money if you didn't buy that product. This analysis tells you whether it was worth it or not. When the demand is 0 for a certain price, it is because people are not able or wiling to buy for that price. This is due to too high of a cost. When you purchase something you aren't buying the good. Price tells you what things you are using from that resource. He later talked about demand curve lines and how they always have a negative slope with the independent variable on the Y-axis. Price x Quantity tells us the total price for that product. What a demand curve graph tells us is

1. Marginal values
2. total expenditures
3. total value
4. buyers net gains --> consumer surplus.

1+3= water/diamond paradox from earlier lectures
2+3= buyers net gain

We behave this way because

1. Wealth effects
2. substitution availability
3. diminishing marginal utilities.

When a snow storm happens, people buy milk with higher prices. Does this refute the law of deamand?
When any part of a trade off changes, feelings change about the trade off. If a parachute became more reliable, then more people will skydive. Price makes us worry about values of everyone else as well as weigh all of the options before buying something.

WHEN PRICES GO UP, WE BECOME POORER. WHEN WE'RE POORER WE CONSUME LESS.

If someone's income is $50 and the price of corn is $1. The nominal income is $50, but real income which is purchasing power is 50 corns. If corn increases by a dollar, it makes real income 25 corns. If we spend $10 on corn and $40 on other things. If corn doubles, it takes away money from everything else that we can buy. Now we have to spend $20 on corn. If we make more money and corn still doubles, we'll still spend less on corn. Most of the money goes to other products. When oil prices rise, it incentivises us to look towards alternate energy. By increasing the price of energy to not pollute the earth, they increase the pay from poor. We want to get people on board of increased environmental costs by making it cheaper.

Diminishing marginal return- each satisfaction purchase of a god gives you less than the previous one. (ex. the 7th pizza slice isn't as enjoyable as the first. ) People are generally not willing to pay as much for the 7th slice as they are for the first slice. When price is $3 and buy 4 burritos, we value the 4th burrito at $3.