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: Surplus http://delong.typepad.com/sdj/econ-1-spring-2014/ February 5, 2014, 4-5:30 101 Barker, U.C. Berkeley

Consider a Market in Equilibrium

How Happy Are the Demanders with the Deals They Get?

How Happy Are the Demanders with the Deals They Get? • They pay 6 x 90 = 540 • What is what they get worth to them?

Consumer Willingness to Pay for the Average Unit Purchased • They pay 6 x 90 = 540 • What is what they get worth to them? • Well, the first unit is worth a little less than 100 and the sixth unit is worth a little more than 90, so on average 95

Calculating the Average Willingness to Pay for Units Purchased • They pay 6 x 90 = 540 • What is what they get worth to them? • Well, the first unit is worth a little less than 100 and the sixth unit is worth a little more than 90, so on average 95. • Same for the second and the fifth, and the third and the fourth… • The average unit is worth 95.

Total Value of the Market to Producers • They pay 6 x 90 = 540 • What is what they get worth to them? • Well, the first unit is worth a little less than 100 and the sixth unit is worth a little more than 90, so on average 95. • Same for the second and the fifth, and the third and the fourth… • The average unit is worth 95. • Since there are six units, the opportunity to buy is worth: • (95-90) x 6 = 30

The Producer Surplus Triangle • They pay 6 x 90 = 540 • What is what they get worth to them? • Well, the first unit is worth a little less than 100 and the sixth unit is worth a little more than 90, so on average 95. • Same for the second and the fifth, and the third and the fourth… • The average unit is worth 95. • Since there are six units, the opportunity to buy is worth: • (95-90) x 6 = 30 • Or the area of this triangle: the consumer surplus triangle:

The Producer and Consumer Surplus Triangles • Consumers • Average unit is worth half the difference between ZQ parameter and price • Subtract off price, multiply, and find that consumer surplus is the consumer surplus triangle. • Producers • Average unit costs half the difference between the ZQ parameter and price • Subtract from price, multiply, and find that producer surplus is the producer surplus triangle.

Ladies and Gentlemen, to Your i>Clickers… • D: P=100-(5/3)Q • S: P=15Q • What is the producer surplus? • A. 60 • B. 30 • C. 540 • D. 270 • E. None of the above

Ladies and Gentlemen, to Your i>Clickers… • D: P=100-(5/3)Q • S: P=15Q • What is the producer surplus? • A. 60 • B. 30 • C. 540 • D. 270 • E. None of the above • The first unit made costs a little more than zero to make, the last unit made a little less than 90… • Thus the average unit made costs 45… • Thus on 6 units the producers make 270

Ladies and Gentlemen, to Your i>Clickers… • S: P=15Q • D: P=100-10Q • What is the consumer surplus? • A. 80 • B. 30 • C. 120 • D. 160 • E. None of the above

Ladies and Gentlemen, to Your i>Clickers… • S: P=15Q • D: P=100-10Q • What is the consumer surplus? • A. 80 • B. 30 • C. 120 • D. 160 • E. None of the above • With this demand curve, the equilibrium P=60, Q=4 • The average unit is worth 80 to consumers • (80 – 60) x 4 = 80

Ladies and Gentlemen, to Your i>Clickers… • S: P=15Q • D: P=100-(5/3)Q • What is the consumer surplus? • A. 80 • B. 30 • C. 120 • D. 160 • E. None of the above

Ladies and Gentlemen, to Your i>Clickers… • S: P=15Q • D: P=100-(5/3)Q • What is the consumer surplus? • A. 80 • B. 30 • C. 120 • D. 160 • E. None of the above • The equilibrium price is 90; six units are bought; the average unit is worth 95 to consumers • (95 – 90) x 6 = 30

A Question… • S: P=15Q • With demand P=100-(5/3)Q • We had 30 of consumer surplus • With demand P=100-10Q • We had 80 of consumer surplus • In the second case, demand is weaker—consumers don’t like the good as much. • So how is it that they get more surplus out of the market in the second case than the first?

A Question… • S: P=15Q • With demand P=100-(5/3)Q • We had 30 of consumer surplus • With demand P=100-10Q • We had 80 of consumer surplus • In the second case, demand is weaker—consumers don’t like the good as much. • So how is it that they get more surplus out of the market in the second case than the first? • Anyone?

A Question… • S: P=15Q • With demand P=100-(5/3)Q • We had 30 of consumer surplus • With demand P=100-10Q • We had 80 of consumer surplus • In the second case, demand is weaker—consumers don’t like the good as much. • So how is it that they get more surplus out of the market in the second case than the first? • Anyone? • Not a rhetorical question…

A Question… • S: P=15Q • With demand P=100-(5/3)Q • We had 30 of consumer surplus • With demand P=100-10Q • We had 80 of consumer surplus • In the second case, demand is weaker—consumers don’t like the good as much. • So how is it that they get more surplus out of the market in the second case than the first? • Anyone? • Not a rhetorical question… • Bueller? Ferris Bueller?

A Question… • S: P=15Q • With demand P=100-(5/3)Q • We had 30 of consumer surplus • With demand P=100-10Q • We had 80 of consumer surplus • In the second case, demand is weaker—consumers don’t like the good as much. • So how is it that they get more surplus out of the market in the second case than the first? • Anyone? • Not a rhetorical question… • Bueller? Ferris Bueller? • Email me your answers tonight to: jbdelong@berkeley.edu; 200 words max…

What’s Wrong with Surplus as a Human Societal Welfare Measure? • Large demand for food to feed the army and its urban logistics train • Kido Butai • The IJN’s spearhead in 1942 • Visits the Indian Ocean • The rural jute-processing farm workers of Bengal…

The Jute-Processing Industry Collapses… • What can the jute workers sell to earn money?... • What is their willingness-to-pay for food?... • How much food can they buy?... • What happens to them?...

Deaths in the Bengal Famine of 1942 • Between 1.5 and 4 million deaths • Ample food in India as a whole • Yet there is no money to be made by shipping rice from U.P. to Bengal • Where is the government of George Windsor, Kaiser-i-Hind in all this? • His Prime Minister Winston Churchill, telegrams: • If food is so scarce, why hasn't Gandhi died yet? • Not Winston Churchill’s finest hour

Deaths in the Bengal Famine of 1942: 1.5M to 4 M • Yet keeping the food of India in U.P. and Maharashtra in 1942-1943—where there is a substantial willingness to pay—is the wealth-maximizing choice… • Wealth maximization ≠ human well-being • Cf.: Amartya Sen,*Poverty and Famines: An Essay on Entitlement and Deprivation* • http://goo.gl/wqCbnZ

This Is What Karl Marx Was Getting at • Capital, vol. I, ch. 6: “The Buying and Selling of Labour-Power” <http://goo.gl/W5GUDh>: • <snark> [The market] is in fact a very Eden…. There alone rule Freedom, Equality, Property and Bentham. Freedom, because both buyer and seller… contract as free agents…. Equality, because each… exchange[s] equivalent for equivalent. Property, because each disposes only of what is his…. And Bentham, because each looks only to himself….. • And just because they do so, do they all, in accordance with the pre-established harmony of things, or under the auspices of an all-shrewd providence, work together to their mutual advantage, for the common weal and in the interest of all…</snark>

This Is What Karl Marx Was Getting at • Capital, vol. I, ch. 6: “The Buying and Selling of Labour-Power” <http://goo.gl/W5GUDh>: • <serious>On leaving this sphere of simple… exchange… which furnishes the species Freetraderus Vulgus with his… ideas… we can perceive a change…. • The one with an air of importance, smirking, intent on business; the other, timid and holding back, like one who is bringing his own skinto market and has nothing to expect but—a skinning…</serious>

Economics 2: Spring 2014