Consumer Theory

class: center, middle, inverse, title-slide

# Consumer Theory
## EC 201: Principles of Microeconomics
### Kyle Raze
### Winter 2020

---

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# Prologue

---
# Housekeeping

.mono[**iClicker**]**:** Register your remote if you haven't already.

- Click the .mono[i>clicker] tab on the course Canvas page and follow the instructions.

**Friday discussions:** Connor will lead you through a consumer theory worksheet.

- Good attendance last week. Keep it up!

**Midterm 1:** Two weeks from today!

- Details next week. 
- I will post practice problems by the end of the week.
- *Note:* I do not post solutions to the practice problems.

---
# Next Week

**Monday:** No lecture (MLK Day).

**Wednesday:** In-class activity!

- More participation points than usual.

---
# Today

## Consumer Theory II

Our exploration of consumer behavior continues!

1. Inflation

2. Individual Responsiveness

3. Determinants of Demand

4. Shipping the Good Apples Out

5. Practice

---
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# Inflation

---
# Inflation

**Q:** Why do we see inflation?

- Big business milks helpless consumers for all it can?

- Unions forces companies to raise wages and then companies have to raise prices to survive?

**Q:** Why do those explanations fail?

- **A:** They are based on *ad hoc* changes in tastes.

---
# Inflation

## Law of demand

> The marginal value of any good falls as the quantity of that good increases *relative* to other goods.

The law of demand also applies to money!

Money is a good with a price.

- The price of one US dollar .mono[=] the amount of other goods a consumer would willingly give up to maintain control of that dollar.

---
# Inflation

## Example

If one unit of good `$x$` has a price of .mono[$]45, then the price of .mono[$]45 is one unit of good `$x$`.

- *i.e.,* the price of .mono[$]1 is one 45.super[th] of a unit of `$x$`.

- If the supply of good `$x$` increases such that the price of `$x$` falls to .mono[$]30, then the price of .mono[$]1 increases to one 30.super[th] of a unit of `$x$`.

**Q:** What happens when the quantity of money increases relative to the quantity of good `$x$`?

- **A.sub[1]:** The price of money falls in terms of good `$x$`.

- **A.sub[2]:** The price of `$x$` rises in terms of money.

---
# Inflation

## Insight

When the government prints new money in greater amounts than the increase in the amount of other goods, the .pink[marginal value of money decreases.]

- Equivalently, .pink[the price of goods in terms of money increases.]

.hi[This is a fundamental reason for inflation!]

---
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# Individual Responsiveness

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**Q:** If there are 10 billion packs of cigarettes sold in a year, how much revenue would a new tax of .mono[$]0.25 per pack generate?

> **A.** Less than .mono[$]2.5 billion.

> **B.** .mono[$]2.5 billion.

> **C.** More than .mono[$]2.5 billion.

---
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**Q:** If there are 10 billion packs of cigarettes sold in a year, how much revenue would a new tax of .mono[$]0.25 per pack generate?

> .pink[**A.** Less than .mono[$]2.5 billion.]

> **B.** .mono[$]2.5 billion.

> **C.** More than .mono[$]2.5 billion.

---
# Price Elasticity of Demand

## Definition

> A measure of the responsiveness of quantity demanded to changes in price:

> `$$\epsilon_d = \dfrac{\text{% change in quantity demanded}}{\text{% change in price}} \leq 0$$`

.hi[Interpretation:] "A one-percent increase the price leads to an `$\epsilon_d$` percent increase in quantity demanded."

- `$\epsilon_d < -1$` .mono[==>] demand is .pink[elastic] or .pink[sensitive] to changes in price.

- `$-1 <\epsilon_d \leq 0$` .mono[==>] demand is .pink[inelastic] or .pink[insensitive] to changes in price.

---
# Price Elasticity of Demand

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-1-1.svg" style="display: block; margin: auto;" />
]

.less-right[
### .pink[Perfectly Elastic Demand]

Quantity demanded falls to zero when the price increases and approaches infinity when the price decreases.

`$\epsilon_d$` .mono[->] `$-\infty$`

]

---
# Price Elasticity of Demand

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-2-1.svg" style="display: block; margin: auto;" />
]

.less-right[
### .pink[Perfectly Inelastic Demand]

Quantity demanded does not change when the price changes.

`$\epsilon_d = 0$`

]

---
# Price Elasticity of Demand

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-3-1.svg" style="display: block; margin: auto;" />
]

.less-right[

*All else being equal*, flatter demand curves are .pink[more elastic] than steeper demand curves.

As `$\epsilon_d$` increases toward zero, the same price increase leads to smaller decreases in the quantity demanded.

]

---
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# Price Elasticity of Demand

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-4-1.svg" style="display: block; margin: auto;" />
]

.less-right[

*All else being equal*, flatter demand curves are .pink[more elastic] than steeper demand curves.

As `$\epsilon_d$` increases toward zero, the same price increase leads to smaller decreases in the quantity demanded.

]

---
count: false
# Price Elasticity of Demand

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-5-1.svg" style="display: block; margin: auto;" />
]

.less-right[

*All else being equal*, flatter demand curves are .pink[more elastic] than steeper demand curves.

As `$\epsilon_d$` increases toward zero, the same price increase leads to smaller decreases in the quantity demanded.

]

---
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# Price Elasticity of Demand

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-6-1.svg" style="display: block; margin: auto;" />
]

.less-right[

*All else being equal*, flatter demand curves are .pink[more elastic] than steeper demand curves.

As `$\epsilon_d$` increases toward zero, the same price increase leads to smaller decreases in the quantity demanded.

]

---
count: false
# Price Elasticity of Demand

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-7-1.svg" style="display: block; margin: auto;" />
]

.less-right[

*All else being equal*, flatter demand curves are .pink[more elastic] than steeper demand curves.

As `$\epsilon_d$` increases toward zero, the same price increase leads to smaller decreases in the quantity demanded.

]

---
# Individual Responsiveness

What influences the responsiveness of an individual's choice of quantity demanded to a change in price?

1. .pink[Availability of close substitutes.]

- More alternatives .mono[==>] higher price sensitivity.

2. .pink[Fraction of income spent on the good.]

- More spending relative to income .mono[==>] higher price sensitivity.

3. .pink[Time.]

- More time to adjust .mono[==>] higher price sensitivity.

---
class: clear-slide

.center[**Real-World Price Sensitivity**]
<table>
 <thead>
  <tr>
   <th style="text-align:left;"> Good/Service </th>
   <th style="text-align:center;"> Elasticity of Demand </th>
   <th style="text-align:center;"> Elastic or Inelastic? </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:left;color: #272822 !important;line-height: 110%;font-style: italic;color: #272822 !important;"> Business travel </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> -0.10 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> Inelastic </td>
  </tr>
  <tr>
   <td style="text-align:left;color: #272822 !important;line-height: 110%;font-style: italic;color: #272822 !important;"> Medical care </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> -0.17 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> Inelastic </td>
  </tr>
  <tr>
   <td style="text-align:left;color: #272822 !important;line-height: 110%;font-style: italic;color: #272822 !important;"> Coffee </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> -0.25 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> Inelastic </td>
  </tr>
  <tr>
   <td style="text-align:left;color: #272822 !important;line-height: 110%;font-style: italic;color: #272822 !important;"> Tobacco </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> -0.45 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> Inelastic </td>
  </tr>
  <tr>
   <td style="text-align:left;color: #272822 !important;line-height: 110%;font-style: italic;color: #272822 !important;"> Movies </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> -0.90 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> Inelastic </td>
  </tr>
  <tr>
   <td style="text-align:left;color: #272822 !important;line-height: 110%;font-style: italic;color: #272822 !important;"> Private school </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> -1.10 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> Elastic </td>
  </tr>
  <tr>
   <td style="text-align:left;color: #272822 !important;line-height: 110%;font-style: italic;color: #272822 !important;"> Restaurant meals </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> -1.60 </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> Elastic </td>
  </tr>
  <tr>
   <td style="text-align:left;font-style: italic;color: #272822 !important;"> Leisure travel </td>
   <td style="text-align:center;"> -2.40 </td>
   <td style="text-align:center;"> Elastic </td>
  </tr>
  <tr>
   <td style="text-align:left;font-style: italic;color: #272822 !important;"> Fresh vegetables </td>
   <td style="text-align:center;"> -3.70 </td>
   <td style="text-align:center;"> Elastic </td>
  </tr>
  <tr>
   <td style="text-align:left;font-style: italic;color: #272822 !important;"> Honda cars </td>
   <td style="text-align:center;"> -4.00 </td>
   <td style="text-align:center;"> Elastic </td>
  </tr>
</tbody>
</table>

---
# Price Elasticity of Demand

## Precise Definition

> A measure of the responsiveness of quantity demanded to changes in price:

> `$$\epsilon_d = \dfrac{\partial Q_d}{\partial P} \dfrac{P}{Q} \leq 0$$`

.hi[Implication:] As quantity demanded increases along a linear demand curve, `$\epsilon_d$` increases toward zero.

- *i.e.,* demand becomes less elastic.

- **Q:** What does this imply about the effect of a price increase on revenue?

---
# Responsiveness and Revenue

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<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-9-1.svg" style="display: block; margin: auto;" />
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.less-right[
### .pink[Elastic Region]

Price increase .mono[==>] .hi-green[revenue] .green[decreases].

The decrease in quantity demanded (.pink[revenue lost]) outweighs the increase in price (.purple[revenue gained]).

]

---
count: false
# Responsiveness and Revenue

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-10-1.svg" style="display: block; margin: auto;" />
]

.less-right[
### .pink[Elastic Region]

Price increase .mono[==>] .hi-green[revenue] .green[decreases].

The decrease in quantity demanded (.pink[revenue lost]) outweighs the increase in price (.purple[revenue gained]).

]

---
count: false
# Responsiveness and Revenue

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-11-1.svg" style="display: block; margin: auto;" />
]

.less-right[
### .pink[Elastic Region]

Price increase .mono[==>] .hi-green[revenue] .green[decreases].

The decrease in quantity demanded (.pink[revenue lost]) outweighs the increase in price (.purple[revenue gained]).

]

---
# Responsiveness and Revenue

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-12-1.svg" style="display: block; margin: auto;" />
]

.less-right[
### .pink[Unit-Elastic Region]

Price increase .mono[==>] .hi-green[revenue] .green[does not change].

.pink[Revenue lost] .mono[=] .purple[revenue gained].

]

---
count: false
# Responsiveness and Revenue

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-13-1.svg" style="display: block; margin: auto;" />
]

.less-right[
### .pink[Unit-Elastic Region]

Price increase .mono[==>] .hi-green[revenue] .green[does not change].

.pink[Revenue lost] .mono[=] .purple[revenue gained].

]

---
count: false
# Responsiveness and Revenue

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-14-1.svg" style="display: block; margin: auto;" />
]

.less-right[
### .pink[Unit-Elastic Region]

Price increase .mono[==>] .hi-green[revenue] .green[does not change].

.pink[Revenue lost] .mono[=] .purple[revenue gained].

]

---
# Responsiveness and Revenue

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-15-1.svg" style="display: block; margin: auto;" />
]

.less-right[
### .pink[Inelastic Region]

Price increase .mono[==>] .hi-green[revenue] .green[increases].

The increase in price (.purple[revenue gained]) outweighs the decrease in quantity demanded (.pink[revenue lost]).

]

---
count: false
# Responsiveness and Revenue

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-16-1.svg" style="display: block; margin: auto;" />
]

.less-right[
### .pink[Inelastic Region]

Price increase .mono[==>] .hi-green[revenue] .green[increases].

The increase in price (.purple[revenue gained]) outweighs the decrease in quantity demanded (.pink[revenue lost]).

]

---
count: false
# Responsiveness and Revenue

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-17-1.svg" style="display: block; margin: auto;" />
]

.less-right[
### .pink[Inelastic Region]

Price increase .mono[==>] .hi-green[revenue] .green[increases].

The increase in price (.purple[revenue gained]) outweighs the decrease in quantity demanded (.pink[revenue lost]).

]

---
# Policy Effectiveness

**Q:** How might a narcotics bust affect drug-related crime?

**A:** .pink[Narcotics supply decreases] 
<br> `$\quad$` .pink[.mono[-->] price of narcotics increases]
<br> `$\quad$` .pink[.mono[-->] gang revenue increases (inelastic demand)] 
<br> `$\quad$` .pink[.mono[-->] drug-related crime?]

---
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# Determinants of Demand

---
# Determinants of Demand

**Q:** What determines a consumer's demand for a particular product?

- Income or wealth.

- Prices of related goods.

- Expectations about future prices or future income.

- Tastes.

- Age, health, quality, advertising, cost of maintaining the good, legality of the good, *etc.*

---
# Determinants of Demand

Income and the prices of other goods have **ambiguous** effects on the demand for a good.

- The demand response to income depends on whether the good is .hi[normal] or .hi[inferior].

- The demand response to the price of an other good depends on whether the goods are .hi[substitutes] or .hi[complements].

---
# Changes in Demand

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-19-1.svg" style="display: block; margin: auto;" />
]

.less-right[
### .pink[Demand Increase]

At every price, the individual is now willing and able to purchase more units than before.

Equilibrium quantity increases.

Equilibrium price increases.

]

---
count: false
# Changes in Demand

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-20-1.svg" style="display: block; margin: auto;" />
]

.less-right[
### .pink[Demand Increase]

At every price, the individual is now willing and able to purchase more units than before.

Equilibrium quantity increases.

Equilibrium price increases.

]

---
# Changes in Demand

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-21-1.svg" style="display: block; margin: auto;" />
]

.less-right[
### .pink[Demand Decrease]

At every price, the individual is now willing and able to purchase fewer units than before.

Equilibrium quantity decreases.

Equilibrium price decreases.

]

---
count: false
# Changes in Demand

.more-left[
<img src="04-Consumer_Theory_files/figure-html/unnamed-chunk-22-1.svg" style="display: block; margin: auto;" />
]

.less-right[
### .pink[Demand Decrease]

At every price, the individual is now willing and able to purchase fewer units than before.

Equilibrium quantity decreases.

Equilibrium price decreases.

]

---
# Normal Good

## Definition

> A good for which .pink[demand increases] as .pink[income increases], *all else being equal*.

## Examples

- Organic food
- Fine dining
- Air travel
- Political donations
- Consumer electronics
- Children?

---
# Inferior Good

## Definition

> A good for which .pink[demand decreases] as .pink[income increases], *all else being equal*.

## Examples

- Top Ramen
- Fast food
- Canned vegetables
- Second-hand furniture
- Public transportation
- Payday loans

---
# Substitutes

## Definition

> Two goods for which the .pink[demand of one good increases] as the .pink[price of the other good increases], *all else being equal*.

## Examples

- Uber .mono[<->] traditional taxis
- Levi jeans .mono[<->] Wrangler jeans
- MacBook Pro .mono[<->] Microsoft Surface Pro
- Honda CRV .mono[<->] Toyota RAV4
- Pepsi .mono[<->] Coca-Cola
- Small coffee .mono[<->] Large coffee

---
# Complements

## Definition

> Two goods for which the .pink[demand of one good decreases] as the .pink[price of the other good increases], *all else being equal*.

## Examples

- Peanut butter .mono[<->] jelly
- Flexible work .mono[<->] school
- Gasoline .mono[<->] giant, gas-guzzling SUVs
- Paper .mono[<->] pencils
- Wine .mono[<->] cheese
- Coffee .mono[<->] milk

---
class: inverse, middle

# Shipping the Good Apples Out

---
# Shipping the Good Apples Out

**Q:** Why do grocery stores in apple-importing areas have a higher proportion of .green[**high-quality apples**] (.green[🍏]) to .red[**low-quality apples**] (.red[🍎]) than stores in apple-growing areas?

**Q:** If we add a fixed transportation cost, `$\boldsymbol{t}$`, to the existing prices of two goods, what happens to their *relative* prices?

<table class="table" style="margin-left: auto; margin-right: auto;">
 <thead>
  <tr>
   <th style="text-align:center;">  </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 0 </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 1 </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 2 </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 3 </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> Price of 🍏 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> 4 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> 5 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> 6 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> 7 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> Price of 🍎 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> 2 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> 3 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> 4 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> 5 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> Ratio of prices </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> <font color="#007935">2</font>:<font color="#b92e34">1</font> </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> <font color="#007935">1.7</font>:<font color="#b92e34">1</font> </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> <font color="#007935">1.5</font>:<font color="#b92e34">1</font> </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> <font color="#007935">1.4</font>:<font color="#b92e34">1</font> </td>
  </tr>
</tbody>
</table>

---
count: false
# Shipping the Good Apples Out
**Q:** Why do grocery stores in apple-importing areas have a higher proportion of .green[**high-quality apples**] (.green[🍏]) to .red[**low-quality apples**] (.red[🍎]) than stores in apple-growing areas?

**Q:** If we add a fixed transportation cost, `$\boldsymbol{t}$`, to the existing prices of two goods, what happens to their *relative* prices?

<table class="table" style="margin-left: auto; margin-right: auto;">
 <thead>
  <tr>
   <th style="text-align:center;">  </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 0 </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 1 </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 2 </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 3 </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> Price of 🍏 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;font-weight: bold;"> 4 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> 5 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> 6 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> 7 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> Price of 🍎 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;font-weight: bold;"> 2 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> 3 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> 4 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> 5 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> Ratio of prices </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;font-weight: bold;"> <font color="#007935">2</font>:<font color="#b92e34">1</font> </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> <font color="#007935">1.7</font>:<font color="#b92e34">1</font> </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> <font color="#007935">1.5</font>:<font color="#b92e34">1</font> </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> <font color="#007935">1.4</font>:<font color="#b92e34">1</font> </td>
  </tr>
</tbody>
</table>

---
count: false
# Shipping the Good Apples Out

**Q:** If we add a fixed transportation cost, `$\boldsymbol{t}$`, to the existing prices of two goods, what happens to their *relative* prices?

<table class="table" style="margin-left: auto; margin-right: auto;">
 <thead>
  <tr>
   <th style="text-align:center;">  </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 0 </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 1 </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 2 </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 3 </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> Price of 🍏 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> 4 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;font-weight: bold;"> 5 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> 6 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> 7 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> Price of 🍎 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> 2 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;font-weight: bold;"> 3 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> 4 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> 5 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> Ratio of prices </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> <font color="#007935">2</font>:<font color="#b92e34">1</font> </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;font-weight: bold;"> <font color="#007935">1.7</font>:<font color="#b92e34">1</font> </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> <font color="#007935">1.5</font>:<font color="#b92e34">1</font> </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> <font color="#007935">1.4</font>:<font color="#b92e34">1</font> </td>
  </tr>
</tbody>
</table>

---
count: false
# Shipping the Good Apples Out

**Q:** If we add a fixed transportation cost, `$\boldsymbol{t}$`, to the existing prices of two goods, what happens to their *relative* prices?

<table class="table" style="margin-left: auto; margin-right: auto;">
 <thead>
  <tr>
   <th style="text-align:center;">  </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 0 </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 1 </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 2 </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 3 </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> Price of 🍏 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> 4 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> 5 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;font-weight: bold;"> 6 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> 7 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> Price of 🍎 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> 2 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> 3 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;font-weight: bold;"> 4 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> 5 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> Ratio of prices </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> <font color="#007935">2</font>:<font color="#b92e34">1</font> </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> <font color="#007935">1.7</font>:<font color="#b92e34">1</font> </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;font-weight: bold;"> <font color="#007935">1.5</font>:<font color="#b92e34">1</font> </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> <font color="#007935">1.4</font>:<font color="#b92e34">1</font> </td>
  </tr>
</tbody>
</table>

---
count: false
# Shipping the Good Apples Out

**Q:** If we add a fixed transportation cost, `$\boldsymbol{t}$`, to the existing prices of two goods, what happens to their *relative* prices?

<table class="table" style="margin-left: auto; margin-right: auto;">
 <thead>
  <tr>
   <th style="text-align:center;">  </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 0 </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 1 </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 2 </th>
   <th style="text-align:center;"> $\boldsymbol{t = }$ 3 </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> Price of 🍏 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> 4 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> 5 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;"> 6 </td>
   <td style="text-align:center;color: #007935 !important;line-height: 110%;font-weight: bold;"> 7 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> Price of 🍎 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> 2 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> 3 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;"> 4 </td>
   <td style="text-align:center;color: #b92e34 !important;line-height: 110%;font-weight: bold;"> 5 </td>
  </tr>
  <tr>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> Ratio of prices </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> <font color="#007935">2</font>:<font color="#b92e34">1</font> </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> <font color="#007935">1.7</font>:<font color="#b92e34">1</font> </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;"> <font color="#007935">1.5</font>:<font color="#b92e34">1</font> </td>
   <td style="text-align:center;color: #272822 !important;line-height: 110%;font-weight: bold;"> <font color="#007935">1.4</font>:<font color="#b92e34">1</font> </td>
  </tr>
</tbody>
</table>

---
count: false
# Shipping the Good Apples Out

**Q:** If we add a fixed transportation cost, `$\boldsymbol{t}$`, to the existing prices of two goods, what happens to their *relative* prices?

---
# Shipping the Good Apples Out

**A:** If .green[🍏] are *relatively* cheaper in Phoenix, then *relative* demand for .green[🍏] in Phoenix should be greater.

- An apple grower in Yakima will want to ship .green[🍏] to Phoenix and stock local fruit stands with .red[🍎].

We observe similar patterns in other markets, too:

- Christmas trees, wine, beef, avocados, *etc.*

---
class: clear-slide

**Q:** Why is a couple more likely to go out for dinner and a concert than run errands when they pay a babysitter to watch their children?
 
--

**A:** .pink[The added fixed cost of babysitting lowers the price of more-expensive activities *relative* to less-expensive activities.]

---
class: clear-slide

**Q:** In the early 1990s, Singapore imposed extensive automobile taxes to combat road congestion. The new taxes had the effect of driving up the price of
low-cost cars proportionately more than the price of expensive cars. .green[**What do you predict about new car sales?**]

**A:** .pink[Mercedes-Benz models became the best-selling new cars in Singapore.]

---
class: clear-slide

**Q:** Suppose that a choice seat at a college football game costs .mono[$]40 while a standard seat costs .mono[$]20. There are local fans and traveling fans. .green[**Who sits where?**]

**A:** .pink[*All else equal*, the traveling fan is more likely to purchase a choice seat.]

- To a local fan, choice seat is twice as expensive.

- To the fan who spends .mono[$]80 to travel 300 miles to the game, choice seat is only 20% more expensive overall (.mono[$]120 vs. .mono[$]100).

- If relative price of choice-seat package is lower for traveling fan, then relative demand should be higher.

.pink[There is documented evidence that fans who travel the farthest buy the best seats.]

---
class: clear-slide

**Q:** If the Ducks' offense averages 5 yards per running play and 4 yards per passing play, then the team will tend to run more often than pass. .green[**Should the offense run more or pass more when it rains?**].super[.pink[<span>&#8224;</span>]]

.footnote[.pink[<span>&#8224;</span>]: Obviously not an issue in Autzen Stadium.]

- Suppose that rainfall decreases average yardage for both running and passing plays by 2 yards.

**A:** .pink[The offense should run even more when it rains.]

- Although running still has the same 1-yard advantage (3 *vs.* 2 yards per play), the *relative* advantage increases in the rain.

- Running is 25 percent more productive in dry conditions, but 50 percent more productive in wet conditions.

---
class: inverse, middle

# Practice

---
class: clear-slide

**Q:** What changes would you expect in the market for cigarettes when a state raises the minimum age for tobacco purchases from 18 to 21?

> **A.** The equilibrium quantity of cigarettes should increase and their price should also increase.

> **B.** The equilibrium quantity of cigarettes should increase and their price should decrease.

> **C.** The equilibrium quantity of cigarettes should decrease and their price should also decrease.

> **D.** The equilibrium quantity of cigarettes should decrease and their price should increase.

---
count: false
class: clear-slide

**Q:** What changes would you expect in the market for cigarettes when a state raises the minimum age for tobacco purchases from 18 to 21?

> **A.** The equilibrium quantity of cigarettes should increase and their price should also increase.

> **B.** The equilibrium quantity of cigarettes should increase and their price should decrease.

> .pink[**C.** The equilibrium quantity of cigarettes should decrease and their price should also decrease.]

> **D.** The equilibrium quantity of cigarettes should decrease and their price should increase.

---
class: clear-slide

**Q:** What will happen to the market equilibrium of Netflix subscriptions when the price of a Hulu subscription increases?

> **A.** The price will go up and the quantity will fall.

> **B.** The price will go up and the quantity will rise.

> **C.** The price will go down and the quantity will fall.

> **D.** The price will go down and the quantity will rise.

---
count: false
class: clear-slide

**Q:** What will happen to the market equilibrium of Netflix subscriptions when the price of a Hulu subscription increases?

> **A.** The price will go up and the quantity will fall.

> .pink[**B.** The price will go up and the quantity will rise.]

> **C.** The price will go down and the quantity will fall.

> **D.** The price will go down and the quantity will rise.