Welcome to PMBA0608: Economics/Statistics Foundation

1. Welcome toPMBA0608: Economics/Statistics Foundation Fall 2006 Session 5: September 20

2. Exam 1 Saturday, September 30, 14:30-16:00 • Covers • Chapters 1 through 4 of Mankiw • Chapters 1 through 3 of Mendenhall, Beaver and Beaver (up to 3.4, Page 102) • Send me your questions • I will do one, two or all of the following: • Answer you privately • Publish the answer to your question on line • Answer your question right before exam at 14:00-14:30, Saturday, September 30.

3. From now on please • don’t turn in your assignments in pieces. (separate documents) • answer the questions in the right order. • don’t forget to put your names on the assignment. • otherwise, I will deduct points.

4. Discuss Assignment 21. Problem 3, Page 59 of Mankiw

5. Assignment 21. Problem 3, Page 59 of Mankiw • Pat has absolute advantage in both pizza and beer as it takes her less time to produce either of these goods. • Since opp. cost of 1 pizza is less for Pat. She will trade away pizza for beer. • The terms of trade: 2/3 beer >1 pizza> ½ beer

6. Assignment 2 2. Problem 6. Page 60 of Mankiw

7. Assignment 2 2. Problem 6. Page 60 of Mankiw b. Boston has absolute advantage in both. Boston has comparative advantage in white socks and Chicago has comparative advantage in red socks. c. Boston exports white socks and Chicago exports red socks • 2 red>1 white socks> 1 red or 1 white >1 red socks>1/2 white

8. Assignment 23. Application 2.6, Page 24 of Mendenhall, Beaver and Beaver (Use Excel or similar program. Explain why one presentation is more effective.) • A chart always needs a title • Pie chart is more effective as it expresses the relationship of the part to the whole • You were graded based on your reasons not your opinions. • “Because the book says so” is not a reason. Do you approve of pay raise? Do you approve of pay raise?

9. Assignment 24. Application 2.12, Page 33 of Mendenhall, Beaver and Beaver (Use Excel or similar program.) • Excel • Enter the data in one column. • Enter bin number in next column. • You want to be able to see what fraction of banks granted 10 or fewer loans • Ideally you want 10 to be the upper limit of a bin • 32 – 0 = 32 • 32 is divisible by 2 • I entered 16 bins: 2,4,6,8,…. 16

10. Assignment 24. Application 2.12, Page 33 of Mendenhall, Beaver and Beaver (Use Excel or similar program.) • Under tools go to data analysis and histograms • Input range is the first column of your worksheet containing 50 values. • Bin range is the second column of your worksheet containing 16 values. • Select chart.

11. Assignment 24. Application 2.12, Page 33 of Mendenhall, Beaver and Beaver (Use Excel or similar program.) b. Fraction of commercial banks granted 10 or fewer loans = (14+8+5+6+3)/50 = 72% • If you could not easily get this info from your chart, you lost 0.5 points.

12. Assignment 25. Exercise 2.47, Page 67 of Mendenhall, Beaver and Beaver (Use Excel or similar program.) Negative correlation Correlation coefficient = - 0.9871

13. Market Model Supply and Demand Chapter 4 of Mankiw

14. What are Markets? • Institutions that allow buyers and sellers to exchange • There are two sides to a market • Potential buyers  demanders • Potential sellers  suppliers

15. Is this a market? • How is the price determined? • Auction

16. Is this a market? • How is the price determined here? • Haggling

17. Is this a market? • How is the price determined here? • Posted-price

18. What determines how much of a good you are willing and able to buy? • Price of that good • Income • Normal good • Inferior good • Price of other goods • Complements • Substitutes • Taste • Expectations

19. Demand Curve • shows how much of a good consumers are willing and able to buy at different prices, holding everything else constant.

20. Demand for red roses in Athens • Demand curve has a ______ slope indicating that ceteris paribus as price ____, quantity demanded ______. (the law of demand) Price B $2 A Demand curve $1 60 100 Quantity /day

21. Suppose you collect data on price and quantity demanded of roses in Athens • And • The result is a positive correlation * • Is the law of demand violated? • No, everything else is not constant Price * * * * * * * Quantity demanded

22. Demand shifters • What happens on Valentine’s day? Price B B’ $2 Demand curve shifts to the right or increases D2 D1 60 110 Quantity /day

23. Demand shifters • What happens if average income decreases sharply? Demand curve shifts to the left or decreases. Price B B’ $2 D2 D1 40 60 Quantity /day

24. Demand shifters • What if price of pink roses drops sharply? Price Demand for red roses drops B’ B $2 D1 D2 20 60 Quantity /day

25. Demand vs Quantity Demanded price P1 movement along the curve P2 D2 D1 quantity Q1 Q3 Q2 Change in demand: shift of the entire curve due to a change in a factorother than the price of the good Change in quantity demanded: movement along a given curve due to a change in the price of the good

26. Let’s practice • Price of coffee increases then (demand / quantity demands) for sugar (increases/decreases). • Price of coffee increases then demand for sugar decreases.

27. And practice more • Income increases then (demand/ quantity demanded) for Spam (decreases/increases). • Income increases then demand for Spam decreases.

28. Examples • Price of chocolate increase the (demand/quantity demanded) for chocolate (increases/decreases). • Price of chocolate increase the quantity demanded for chocolate decreases.

29. What determines how much of a good producers are willing and able to supply? • Price of that good • Price of inputs (factors of production) • Technology • Expectations

30. Supply Curve • shows how much of a good producers are willing and able to supply at different prices, holding everything else constant.

31. Supply of red roses in Athens • supply curve has a ______ slope indicating that ceteris paribus as price ____ quantity supplied ______. (the law of supply) Price B $2 Supply curve A $1 20 60 Quantity /day

32. Supply shifters • New fertilizer increases productivity Supply curve shifts to the right or increases Price S1 S2 B B’ $2 120 60 Quantity /day

33. Supply shifters • Cost of production increases S2 Supply curve shifts to the left or decreases Price B’ $2.75 S1 B $2 60 Quantity /day

34. Supply vs Quantity Supplied S3 price S1 A movement from A to B is caused by ______ in _______ and it results in an increase in quantity supplied. A shift in supply is caused by a change in__________ and it results in a change in supply. decrease S2 B * increase A * quantity

35. Market Equilibrium price Surplus S1 At P1: Qd = Qs The market “clears” PHi P1= $2 Disequilibrium PLo Surplus D1 At PHi: Qd < Qs Shortage  Pressure on price to fall quantity Qs Qd Q1= 60 Qs Qd Shortage At PLo: Qd > Qs  Pressure on price to rise

36. Market of red roses is in equilibrium • Until red roses lose their popularity • How will this affect the equilibrium prices and quantity of red roses? • Demand for roses drops • At P= 2, there is a surplus Price drops • Pe drops and Qe drops S1 Price e1 $2 e2 $1.50 D2 D1 Quantity 20 30 60

37. Market of red roses is in equilibrium • Until a draught diminishes productivity • How will this affect the equilibrium prices and quantity of red roses? S2 • Supply decreases • At P= 2, there is a shortage Price increases • Pe increases and Qe drops S1 Price e2 $2.50 e1 $2 D1 Quantity 50 60

38. Let’s memorize • If D↑ Pe↑ and Qe↑ • If D↓ Pe↓ and Qe↓ • If S↑ Pe↓ and Qe↑ • If S↓ Pe↑ and Qe↓

39. What if • Supply and demand increase at the same time • If D↑ Pe↑ and Qe↑ • If S↑ Pe↓ and Qe↑ • Then Qe↑ but the change in Pe is indeterminate

40. Applying the Model • What is this painter saying? • My cost will go up. • My supply will shift left • Price will go up. • So, I supply less now (i.e. ask for a higher price now)???

41. Gasoline prices are going down. Why? • In its monthly report, the International Energy Agency forecast world crude-oil demand in 2006 would be lower than previously expected at a time when inventories in the U.S. and Asia are at a 20-year high. • In the near future, you can sell your oil for less that you previously expected • So sell more now S shifts right, Pe goes down.

42. Probability (Chapter 3 of Stat.) • Problem:   A spinner has 4 equal sectors colored yellow, blue, green and red. What are the chances of landing on blue after spinning the spinner? What are the chances of landing on red?

43. Definitions • Experiment: A situation involving chance or probability that leads to results called outcomes. • In the problem above, what is the experiment? • Outcome: The result of a single trial of an experiment. • What are the possible outcomes of this experiment? • Event: One or more outcomes of an experiment. • One event of this experiment is landing on _____. • Probability: Measure of how likely an event is. • The probability of landing on blue is_______.

44. Probability Of An Event • P(A) =   The number of ways event A can occur / the total number of possible outcomes

45. In our problem • P(yellow)  =  number of ways to land on yellow / total number of colors   =  1/4 •  P(green)  = 1/4 • P(red)  = 1/4 • P(blue) = 1/4

46. Simple events • Are mutually exclusive • Are the events in our example simple? • In simple event probabilities • Each probability lies between 0 and 1 • The sum of probabilities is 1

47. Let’s practice • A pair of dice is rolled.  Two possible events are rolling a number greater than 8 and rolling an even number.  Are these two events mutually exclusive events? • Numbers greater than 8: 9,10,11, 12 • Even numbers: 2,4,6,8,10,12 • Two events share outcomes • They are not mutually exclusive

48. Let’s spin P (1) = ? P (red) = ?

49. Let’s spin twice • What is the probability that the spinner will land on a 1 on the first spin and on a red region on the second spin?  • Choose:a) 1/2b) 1/4c) 1/6 d) 1/8  

50. Here is where a tree diagram will help