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Economics 2: Spring 2014

Economics 2: Spring 2014. J. Bradford DeLong <jbdelong@berkeley.edu>; Maria Constanza Ballesteros <mc.ballesteros@berkeley.edu>; Connie Min <conniemin@berkeley.edu> http://delong.typepad.com/sdj/econ-2-spring-2014/. Economics 2: Spring 2014: Supply and Demand Algebra: Shifting Curves.

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Economics 2: Spring 2014

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  1. Economics 2: Spring 2014 J. Bradford DeLong <jbdelong@berkeley.edu>; Maria Constanza Ballesteros <mc.ballesteros@berkeley.edu>; Connie Min <conniemin@berkeley.edu> http://delong.typepad.com/sdj/econ-2-spring-2014/

  2. Economics 2: Spring 2014: Supply and Demand Algebra: Shifting Curves http://delong.typepad.com/sdj/econ-1-spring-2014/ February 3, 2014, 4-5:30 101 Barker, U.C. Berkeley

  3. Comparative Statics: Start from an Initial Equilibrium • Supply: • P=15 x Q • Demand: • P=100-(5/3)Q

  4. To Your i>Clickers • Supply: P=15 x Q. Demand: P=100-(5/3)Q • P = ((15)100 – (5/3)0)/(15 + 5/3) • What is the equilibrium price? • A. 90 • B. 10 • C. 50 • D. 6 • E. None of the Above

  5. To Your i>Clickers • Supply: P=15 x Q. Demand: P=100-(5/3)Q • What is the equilibrium price? • A. 90 • B. 10 • C. 50 • D. 6 • E. None of the Above • 15Q=100-(5/3)Q  (50/3)Q=100  Q=6  P=90 • Supply slope 9 times demand slope  equilibrium price 9/10 of way from ZQ supply intercept (0) to ZQ demand intercept (100)  90

  6. Comparative Statics: Start from an Initial Equilibrium • Supply: • P=15 x Q • Demand: • P=100-(5/3)Q • Equilibrium • P=90 • Q=6

  7. Comparative Statics: Change Something and Calculate the New Equilibrium • Initial: • S: P=15 x Q • D: P=100-(5/3)Q • E: P=90, Q=6 • Change and calculate • Assert that when or if that change comes, the economy will jump

  8. For Example, an Increase in Supply • Initial: • S: P=15 x Q • D: P=100-(5/3)Q • E: P=90, Q=6 • Turns out Tyrion shows up and, it turns out, is Targaryen: willing to fly 4 missions for free • New supply: P=15Q - 60

  9. Ladies and Gentlemen: To Your i>Clickers… • Initial: S: P=15Q. D: P=100-(5/3)Q. E: P=90, Q=6 • New supply: P=15Q – 60 • By how much does the equilibrium price change? • A. It falls by 6 • B. It rises by 6 • C. It falls by 60 • D. It rises by 60 • E. None of the above

  10. Ladies and Gentlemen: To Your i>Clickers… • Initial: S: P=15Q. D: P=100-(5/3)Q. E: P=90, Q=6 • New supply: P=15Q – 60 • By how much does the equilibrium price change when Tyrion shows up? • A. It falls by 6 • B. It rises by 6 • C. It falls by 60 • D. It rises by 60 • E. None of the Above • Since slopes are unchanged, equilibrium price is still 1/10 of the way from demand curve ZQ intercept to supply curve ZQ intercept. • Supply curve ZQ intercept now 60 lower  equilibrium price lower by 6

  11. And on the Graph…

  12. What’s the New Equilibrium Quantity? • P = 100 – (5/3)Q • 90 = 100 – (5/3)Q  Q=6 • 84 = 100 – (5/3)Q  Q=9.6 • Quantity grows by 3.6 • Alternatively: if a drop in price by 10 raises quantity by 6, a drop in price by 6 will raise quantity by 3.6 • What do fractional quantities mean here?

  13. A Decrease in Supply • Initial: • S: P=15 x Q • D: P=100-(5/3)Q • E: P=90, Q=6 • Everyone decides: I want to be paid 30 more… • New supply: • P = 15Q + 30

  14. Ladies and Gentlemen, to Your i>Clickers! • Initial: S: P=15Q. D: P=100-(5/3)Q. E: P=90, Q=6 • New supply: P = 15Q + 30 • By how much does the equilibrium quantity change? • A. - 1.8 • B. 7.8 • C. 5.2 • D. + 3.6 • E. None of the Above

  15. Ladies and Gentlemen, to Your i>Clickers! • Initial: S: P=15Q. D: P=100-(5/3)Q. E: P=90, Q=6 • New supply: P = 15Q + 30 • By how much does the equilibrium quantity change? • A. - 1.8 • B. 7.8 • C. 5.2 • D. + 3.6 • E. None of the Above • Initial quantity = (Difference in ZQ values)/(sum of slopes) = 100/(16 2/3) = 6 • Change difference in ZQ values by 30  Change quantity by 3/10 x 6 = 1.8 • Quantity falls by 1.8 to 4.2

  16. A Decrease in Supply • Initial: P=15Q. P=100-(5/3)Q. P=90, Q=6 • New supply: P=15Q+30 • New quantity: 4.2 • New price?

  17. A Decrease in Supply • Initial: P=15Q. P=100-(5/3)Q. P=90, Q=6 • New supply: P=15Q+30 • New quantity: 4.2 • New price? • Anybody?

  18. A Decrease in Supply • Initial: P=15Q. P=100-(5/3)Q. P=90, Q=6 • New supply: P=15Q+30 • New quantity: 4.2 • New price is 93 • Given the ratio of slopes, 1/10 of the way from one ZQ parameter to the other

  19. A Decrease in Demand • Initial: P=15Q. P=100-(5/3)Q. P=90, Q=6 • The Master of Coin embezzles 40. • New demand: P=60-(5/3)Q

  20. Ladies and Gentlemen, to Your i>Clickers… • Initial: P=15Q. P=100-(5/3)Q. P=90, Q=6 • The master of coin embezzles 40: new demand: P=60-(5/3)Q • What is the new equilibrium price? • A. 86 • B. 54 • C. 50 • B. 70 • E. None of the Above

  21. Ladies and Gentlemen, to Your i>Clickers… • Initial: P=15Q. P=100-(5/3)Q. P=90, Q=6 • The master of coin embezzles 40: new demand: P=60-(5/3)Q • What is the new equilibrium price? • A. 86 • B. 54 • C. 50 • B. 70 • E. None of the Above • Remember: the ratio of the slopes tells us how the equilibrium price falls between the two ZQ parameters • For this case, that’s 1/10 • We just moved one of the ZQ parameters by 40: • We thus moved the price by 36—down from 90 to 54

  22. A Decrease in Demand • Initial: P=15Q. P=100-(5/3)Q. P=90, Q=6 • New demand: P=60-(5/3)Q • New equilibrium: • P=54 • Q=3.6

  23. Elastic and Inelastic Supply and Demand • When demand is elastic, changes in supply conditions move quantity by a lot and price by only a little. • When demand is inelastic, changes in supply conditions move price by a lot and quantity only by a little. • When supply is elastic, changes in demand conditions move quantity by a lot and price by only a little. • When supply is inelastic, changes in demand conditions move price by a lot and quantity only by a little.

  24. This You Must Now… • Finding equilibrium, and figuring out immediately how equilibrium shifts when supply and demand change… • This you MUST know: • Moses: • And these words, which I command thee this day, shall be in thine heart:

  25. This You Must Now… • And thou shalt teach them diligently unto thy children

  26. This You Must Now… • And shalt talk of them when thou sittest in thine house, and when thou walkest by the way, and when thou liest down , and when thou risest up.

  27. This You Must Now… • And thou shalt bind them for a sign upon thine hand, and they shall be as frontlets between thine eyes.

  28. This You Must Now… • And thou shalt write them upon the posts of thy house, and on thy gates…

  29. For This Is the Law and the Profits… • …of economics, at least

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