ecological economics week 3 tiago domingos assistant professor environment and energy section...
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Ecological EconomicsWeek 3
Tiago DomingosAssistant Professor
Environment and Energy SectionDepartment of Mechanical Engineering
Doctoral Program and Advanced Degree in Sustainable Energy Systems
Doctoral Program in Mechanical Engineering
Assignments
• Preferences (exercise 4) – Convex definition: try to represent the indifference curves
and understand the relationship between the extreme and average bundles.
– Monotony definition: note that we assume that more is better, that is, that we are talking about goods, not bads. More precisely, if is a bundle of goods and is a bundle of goods with at least as much of both goods and more of one, then
The second good is neutral…
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Assignments
• Preferences (extra exercise)– Be aware that, Joana’s parents allow her to leave aside
everything she dislikes eating!!
• Choice (exercise 2)– You should explain the math...
– They are not complements. Y increases with px, there is a substitution. None of them is a bad….
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Demand
Effect on demand of a good
Change in income Quantity demanded increases with income– normal goods. For some normal goods, the quantity demanded increases more than proportionally with income – luxury goods. For other normal goods, the quantity demanded increases less than proportionally with income – necessary goods. Quantity demanded decreases with an increase in income – inferior good (example: low quality food)
Change in own price The quantity demanded for good 1 increases when its price decreases – ordinary goodThe quantity demanded for good 1 decreases with its price – Giffen good
Change in the price of the other good
The demand for good 1 increases when the price of good 2 increases – good 1 is a substitute for good 2 The demand for good 1 decreases when the price of good 2 increases – good 1 is a complement to good 2
Demand
• Market demand – Individual demand
– Market demand
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Note: we sum the quantities, NOT the prices!
Demand
• Elasticity of demand– The price elasticity of demand, ɛ, is defined to be the percent
change in quantity divided by the percent change in price. Elasticity is unit-free.
– Elasticity as the responsiveness of the quantity demanded to price.
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demandinelastic
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Demand
• Income elasticity of demand– Is used to describe how the quantity demanded responds to a
change in income.
– Normal good: income elasticity of demand is positive
– Inferior good: income elasticity of demand is negative
– Luxury good: income elasticity of demand greater than 1
– Necessary good: income elasticity of demand smaler than 1
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quantityinchangeelasticityincome
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Demand
• Revenue– Revenue (R): the price of a good times the quantity sold of
that good.
• Marginal Revenue
– When |ɛ|=1, the marginal revenue curve is constant at zero. Point of maximum revenue.
pqR
dq
dRMR
See Chapter 15 – Market demand: APPENDIX
Technology
• Production set– Combinations of inputs and output that are feasible patterns
of production
• Production function– Upper boundary of production set
Technology
• Returns to scale
– Constant:
– Increasing:
– Decreasing:
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Profit maximization
• Profits (π)– Revenues minus cost
• Maximization of profits
• In the long-run both factors are free to vary while in short-run some factors are fixed
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See Chapter 18 –Profit maximization: APPENDIX
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Cost minimization
• Cost minimization problem– Minimize cost to produce some given level of output
• Integrating cost minimization and profit maximization
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See Chapter 19 –Cost minimization: APPENDIX
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