Microeconomics Corso E

1. MicroeconomicsCorso E John Hey

2. Chapter 16 • Empirical Analysis of Demand, Supply and Surpluses. • Very important for those who want to be economists. • Difficult because it requires some knowledge of econometrics. • There will not be questions on this chapter in the exams.

3. Chapter 16 • We estimate the demand for food in the U.K. – using our theory. • We estimate the supply of food in the U.K. – using our theory. • We investigate the effect of the imposition of a tax in food on the price of food, the quantity bought and sold and on the surpluses (see chapter 27).

4. Notation • NFOD – Nominal expenditure on FOoD – spesa nominale in beni alimentari. • RFOD – Real expenditure on FOoD – spesa reale in beni alimentari • PFOD – Price of FOoD – prezzo dei beni alimentari = NFOD/RFOD • NALL – Nominal expenditure on ALL commodities – spesa nominale complessiva • RALL – Real expenditure on ALL commodities – spesa reale complessiva • PALL – Price of all ALL commodities – prezzo di tutti i beni = NALL/RALL

6. Chapter 16 • Demand • CD: q = ay/p • RFOD = 0.146 NALL/PFOD + u • SG: q = s + a (y – ps – p2s2 )/p • RFOD = 44491 + 0.065 NALL/PFOD - 23426 QFOD/PFOD + u (without a correction for simultaneous bias) • RFOD = 41962 + 0.049 NALL/PFOD - 14210 QFOD/PFOD + u (with the correction)

7. Extra Notation • Prices of the inputs.... • PMAF – Price of materials and fuels. • NLI – Nominal Long term rate of Interest – Price of capital. • PUW – (Price of) Unit Wages.

8. Chapter 16 • Cobb Douglas cost function: • C(y) = ky1/(a+b) w1a/(a+b) w2b/(a+b) • Supply curve given by marginal cost=price. • Supply curve with Cobb Douglas technology • y = k p (a+b)/(1-a-b) w1-a/(1-a-b) w2-b/(1-a-b) • log(y) = constant + [(a+b) log(p) - a log(w1) - b log(w2)]/(1-a-b) • log(RFOD)= 11.98 + 0.348 log(PFOD) - 0.148 log (PMAF) - 0.0696 log(NLI) - 0.0786log(PUW)

9. Chapter 16 • The values of the variabiles 1999: • NALL = 564368 PALL = 1.10043 PMAF = 83.7 NLI = 4.7 PUW = 115 QFOD =1.10621 • If we substitute these values in the demand and supplu curves we get… • RFOD = 41962 + 0.049 NALL/PFOD - 14210 QFOD/PFOD • log(RFOD)= 11.98 + 0.348 log(PFOD) - 0.148 log (PMAF) - 0.0696 log(NLI) - 0.0786log(PUW) • ...and hence the following graph:

12. The Prices • Without the tax: • Price = 1.076. • With the tax: • Price paid by the buyers = 1.160. • Price received by the sellers = 1.055. • Note: 1.055 + 10% = 1.160 – the tax. • The buyers pay 7.8% more. • The sellers receive 2.0% less.

13. Mistake in the text! • "In corrispondenza del nuovo equilibrio i venditori ricevono un prezzo inferiore e pari a 1.055; il nuovo prezzo di equilibrio pagato dai consumatori `e 1.160(il 10% maggiore di quello pagato prima dell’imposta). La differenza tra il prezzo vigente prima dell’imposta e il nuovo livello di prezzo pagato dai consumatori(0.1055) per ogni unit`a di beni alimentari acquistata viene incamerata dal governo." (pagina 319) • "The new equilibrium price that the sellers receive is the lower price - which is 1.055 - and the new equilibrium price paid by the buyers is the upper price - which is 1.160. This latter is 10% more than the former. The government takes the difference  - 0.1055 - on each unit of the good sold."

14. The losses of surpluses • Buyers: £4423m - assuming 55 million inhabitants - £80 per head. • Sellers: £1106m • Total: £5529m • The government takes in taxes: £5488m • The net loss in surpluses as a result of the tax = £5529m - £5488m = £41m

15. Chapter 16 • Goodbye!