economics 1: introduction to economics...2016/01/27 · the algebra of market equilibrium vi •...
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Administrivia
January27,20168-9AMWheelerAuditorium,U.C.Berkeley
i>Clickers
• i>Clickerbasestationissupposedtoappeartoday• WeneedthebasestationbecauseWheelerdoesnothavethewificapacitytosupport600connections
• Weneedthebasestationbecausethelocalcellularnetworkdoesnothavethecapacityeither
• TheLORDwillingandthecreekdon’trise,wewillstartwithi>ClickerscomeMonday
• Beprepared!
Webtools:NobodyAppearstoLikeiCloud
• AppleiCloudperformanceappearstohavedeterioratedmassivelyoverthecourseofthepastyearorso
• Thereforewearemovingto.pdffiles• The.pdffileswillbekeptonhttp://bradford-delong.com
• Whynotkeep.pdfsonbCourses?• BecauseanyfileskeptonbCourses’spredecessorbSpacesareabouttobetrashed,andalllinkstothembroken.Foolmeonce,shameonyou.Foolmetwice,shameonme…
Webtools:NobodyAppearstoLikebCourses
• Theideaofcreatingobjectsforeachlecturethatthenautomagicallyappearinadynamically-generatedsyllabuslistandonadynamically-generatedcalendarisagoodone.
• But…• YougotothesyllabuspageonbCourses,scrolldown,findthelecture,clickonthelecture,and…• Thecalendarwindowopens…• Anuglysubwindowwiththelecture-objectopens…• Whichyouthenhavetoclickontogetanywhere• Openingthreewindowsandsubwindowsinsteadofoneisnotgood
Webtools:ProposedSolution
• Sowearegoingtolinkeveryfilerelatedtothecourseasapdfoffof:http://www.bradford-delong.com/course-syllabus-econ-1-spring-2016-uc-berkeley.html• YoucanstillgetthereviabCourses:thatfilewillbemirroredandlinkedtoat:https://bcourses.berkeley.edu/courses/1411451/assignments/syllabus
• Andyoumayalsowanttocheck:http://www.bradford-delong.com/2016/01/econ-1-spring-2016-uc-berkeley-things-moved-off-the-course-syllabus-page.html
RoughCourseSchedule:MicroeconomicsI
• Wearenowfarenoughalongandhavegainedenoughfeedbacktohavearoughsenseofwhatispossible:
• Lecture:CourseIntro:ThinkingLikeanEconomist(ReadBernanke,Frank,etal.cos1-2)(2016-01-20We)
• Assignment:READ!ParthaDasgupta(2007):Economics:AVeryShortIntroductionhttp://amzn.to/1ZpuFCQ(Oxford:OxfordUniversityPress:9780192853455)
• Lecture:SupplyandDemand(ReadBernanke,Frank,etal.cos3-4)(2016-01-25Mo)|SectionExercise25/26|SectionExercise27/28
• Assignment:LettertoGSIdue(2016-01-25Mo/-26Tu)• Lecture:Equilibrium(ReadBernanke,Frank,etal.ch5)(2016-01-27We)• Lecture:Surplus(ReadBernanke,Frank,etal.ch6)(2016-02-01Mo)• Assignment:ProblemSet1due(2016-02-01Mo/-02Tu)• Lecture:MarketBlockages:PriceCeilings,PriceFloors,Taxes,andQuotas(ReadBernanke,Frank,etal.ch7)(2016-02-03We)
• Lecture:MarketPower(ReadBernanke,Frank,etal.ch8)(2016-02-08Mo)
RoughCourseSchedule:MicroeconomicsII
• Assignment:ProblemSet2due(2016-02-08Mo/-09Tu)• Lecture:StrategicInteractions(ReadBernanke,Frank,etal.ch9)(2016-02-10We)• Lecture:ExternalitiesandPropertyRights(ReadBernanke,Frank,etal.ch10)(2016-02-17We)
• Lecture:EconomicsofInformation(ReadBernanke,Frank,etal.ch11)(2016-02-22Mo)• Assignment:ProblemSet3due(2016-02-22Mo/-23Tu)• Lecture:LaborMarketsandIncomeDistribution(ReadBernanke,Frank,etal.ch12)(2016-02-24We)
• Lecture:AdverseSelectionandMoralHazard(ReadBernanke,Frank,etal.ch13)(2016-02-29Mo)
• Assignment:ProblemSet4:due(2016-02-29Mo/-03-01Tu)• Lecture:PublicGoodsandPoliticalEconomy(ReadBernanke,Frank,etal.ch14)(2016-03-02We)
• Lecture:WhatWeHaveLeftOutinMicroeconomics(2016-03-07Mo)• Assignment:ProblemSet5due(2016-03-07Mo/-08Tu)• We:MICROMIDTERM(2016-03-09)
RoughCourseSchedule:MacroeconomicsI
• Lecture:MeasuringtheMacroeconomy(ReadBernanke,Frank,etal.chs15-17)(2016-03-14Mo)
• Lecture:EconomicGrowthintheVeryLongRun(ReadBernanke,Frank,etal.ch18)(2016-03-16We)
• OverSpringVacation:readTomSlee,NobodyMakesYouShopatWal-MartandMiltonFriedmanandRoseDirectorFriedman,FreetoChoose(2016-03-17Th/-27Su)
• Lecture:Saving,Investment,andFinance(ReadBernanke,Frank,etal.ch19)(2016-03-28Mo)
• Assignment:ShortPaperdue(2016-03-28Mo/-29Tu)• Lecture:Money,Prices,andBanking(ReadBernanke,Frank,etal.ch20)(2016-03-30We)
• Lecture:BusinessCycles(ReadBernanke,Frank,etal.ch21)(2016-04-04Mo)• Assignment:ProblemSet6due(2016-04-04Mo/-05Tu)• Lecture:TheKeynesianApproach(ReadBernanke,Frank,etal.ch22)(2016-04-06We)
RoughCourseSchedule:MacroeconomicsII
• Lecture: The Federal Reserve and Monetary Policy (Read Bernanke, Frank, et al. ch 23) (2016-04-11 Mo)
• Assignment: Problem Set 7 due (2016-04-11 Mo/-12 Tu) • 2016-04-13 We: Lecture: Aggregate Demand and Aggregate Supply
(Read Bernanke, Frank, et al. ch 24) • Lecture: Macroeconomic Policy (Read Bernanke, Frank, et al. ch 25)
(2016-04-18 Mo) • Assignment: Problem Set 8 due (2016-04-18 Mo/-19 Tu) • Lecture: The International Economy (Read Bernanke, Frank, et al. ch
26) (2016-04-20 We) • Lecture: What We Have Left Out of Macroeconomics (2016-04-25
Mo) • Problem Set 9: International Economics due (2016-04-25 Mo/-26 Tu) • FINAL REVIEW (2016-04-27 We) • Section Review Meetings (2016-05-02 Mo/-06 Fr) • 2016-05-09 Mo: FINAL EXAM
TheProblemofTomSlee… • We will figure out what to do with the problem of Tom Slee…
SupplyandDemandAlgebra
January27,20168-9AMWheelerAuditorium,U.C.Berkeley
SeetheNiceStraight-LineSupplyandDemandCurves?• Theyhaveniceequationrepresentations
• Thissupplycurveis:• P=0+Qs/4000–Whywriteoutthe“0”?Itistheinterceptofthesupplycurve
– Itwillingeneralnotbe0
–Whatisthe1/4000?Itistheslopeofthesupplycurve
SeetheNiceStraight-LineSupplyandDemandCurves?
• Thisdemandcurveis:
• P=6-Qd/4000– The“6”istheinterceptofthedemandcurve
– The1/4000istheslopeofthedemandcurve.
SeetheNiceStraight-LineSupplyandDemandCurves?• Thesupplyinterceptisthepricejustabovewhichsuppliersshowup
• Thesupplyslopeishowmuchextrasupplyiscalledforthbyaprice$1higher.
• Thedemandinterceptisthepriceabovewhichzeroisdemanded
• Thedemandslopeishowmuchextrademandiscalledforthbyaprice$1lowe
TheAlgebraoftheMarket• Let’swritesupply:– P=Ps0+sxQs
– (Ps0forthepriceatwhichsupplyiszero)
– sforthesupplyslope
• Anddemand:– P=Pd0-dxQd
– (Pd0forthepriceatwhichdemandiszero)
– dforthedemandslope
TheAlgebraoftheMarketII• Thenwecanderiveasimpleformulaforwhattheequilibriumpriceandquantitywillbe.
• Putthesupplyequationontheleftandthedemandequationontherightoftheequalssign– P=Ps0+sxQs=Pd0-dxQd
• Rearrangeterms:– sxQs+d+Qd=(Pd0-Ps0)
• Requirethatthequantitiessuppliedanddemandedbeequal,andjustcallitQ:– (s+d)xQ=(Pd0-Ps0)
TheAlgebraoftheMarketIII• Requirethatthequantitiessuppliedanddemandedbeequal,andjustcallitQ:– (s+d)xQ=(Pd0-Ps0)
• Anddividetosolvefortheequilibriumquantity– Q=(Pd0-Ps0)/(s+d)
– Takethedifferenceoftheintercepts—thepriceatwhichzeroisdemandedandthepriceatwhichzeroissupplied—anddividebythesumoftheslopes.That’sthequantityatequilibrium.
TheAlgebraoftheMarketIV• TaketheequilibriumquantityQ• ThenusethatQtosolvefortheequilibriumpriceineitherthesupplyorthedemandequation:– P=Ps0+sx[(Pd0-Ps0)/(s+d)]
– P=[d/(s+d)]xPs0+[s/(s+d)]xPd0– Takethesupplyinterceptandthedemandinterceptbytheratioofthetwoslopesofthesupplyandthedemandcurve.
– Andthatwillbetheequilibriumprice.
TheAlgebraofMarketEquilibriumV• Here,theslopesareequalinmagnitude
• Thustheequilibriumpriceishalfwaybetweenthesupplyanddemandintercepts
• Ifoneofthecurveswereflatter—moreelastic—theequilibriumpricewouldbeclosertothatequation’sintercept
• Thatsideofthemarketwouldhavelesspricingpower…
TheAlgebraofMarketEquilibriumVI• Thesumoftheslopesis1/4000+1/4000=2/4000
• Thedifferenceintheinterceptsis6-0=6
• Theequilibriumquantityisthefirstdividedbythesecond:12000
THISONLYWORKSFORLINEARDEMANDANDSUPPLYCURVES!!
• Onlyifbothcurvesarelinear—anintercept,aslope,andnothingelse—canyouwrite:
• Q=(Pd0-Ps0)/(s+d)
• P=[d/(s+d)]Ps0+[s/(s+d)]Pd0
• Butifyoudohavelineardemandandsupplycurves,itisausefulshortcut
WheretheCurvesCross…• …ifboththesupplyanddemandcurvesaresatisfied…
• …whentherearenodissatisfiedbuyerswhowishtobuyatthemarketpricebutcan’tfindaseller…
• …andnodissatisfiedsellerswhofindthemselvesunabletofindabuyeratthemarketprice…
• …wesaythemarketis“inequilibrium”…
• andweeconomistslookwell-nighexclusivelyatsuch“equilibria”
Assumption:TheMarketWillNotStayOutof“Equilibrium”Long
• Iftherearesellerswhocannotfindbuyersatthecurrentprice,then:• Somesellerswillgiveupindisgust,andsupplywillshrink• Buyerswillnoticethatthereareextrasellers,andcutthepricetheyoffertopay
• Thisprocesswillworkitselfoutquickly• Iftherearebuyerswhocannotfindsellersatthecurrentprice,then:• Somebuyerswillgiveupindisgust,anddemandwillshrink• Sellerswillnoticethatthereareextrabuyers,andraisethepricetheydemand
• Thisprocesswillworkitselfoutquickly
DoesIt?• TheAmericanlaborforceismadeupofpeopleatworkoractivelylookingforwork
• Theproportionofthatlaborforcethatwasunemployedatthestartof2007was4.5%
• Itjumpedupto10%bythestartof2010.
• Ithasjustgottenbackto5%—that’ssixyears
AndWhatIfThereIsMorethanOneEquilibrium?• Thereisnorulethattherecannotbetwo,three,ormore...• Howdoestheeconomychoose?• Thesearestickyandknottyquestions• Wewillignorethemuntiljustbeforespringbreak• Wewillassume,untilthen,thatmarketsconvergequicklyenoughtoasingle,stableequilibrium
• Wewillassumethatwedonothavetoworryabout:• Marketsthatdonotclear• Producerswithunsoldproducts• Consumerswithunspentmoney
• Butthisisanassumptiononly…
Surplus
January27,20168-9AMWheelerAuditorium,U.C.Berkeley
ConsideraMarketinEquilibrium
ConsideraMarketinEquilibriumII• SupplyCurve:• P=Ps0+sQs• P=1+0.0001Qs
• Theminimumopportunitycostofthesupplierwiththegreatestcomparativeadvantageis$1/latte• A$1/lattepriceincreaseisneededtocallforthanextra10,000insupply
AMarketinEquilibriumIII• SupplyCurve:• P=Ps0+sQs• P=1+0.0001Qs
• DemandCurve:• P=Pd0-dQd• P=10-0.0002Qd
• Thegreatestwillingness-to-payis$10/latte• Each$1/lattepricedeclinecallsforthdemandforanextra5,000lattes
AMarketinEquilibriumIV• SupplyCurve:• P=Ps0+sQs• P=1+0.0001Qs
• DemandCurve:• P=Pd0-dQd• P=10-0.0002Qd
• Equilibrium:• P=$4• Q=30000
• Nounsatisfiedbuyersorsellers
HowHappyAreConsumerswiththeDealsTheyGet?
• SUPPLY:P=1+0.0001Qs• DEMAND:P=10-0.0002Qd• Equilibrium:
• P=$4• Q=30000
• Thefirstlatteisboughtbysomeonewhohasanopportunitycostof10andpaysapriceof$4• Theopportunitytobuyisthusworth$6tohimorher
HowHappyAreConsumerswiththeDealsTheyGet?II
• SUPPLY:P=1+0.0001Qs• DEMAND:P=10-0.0002Qd• Equilibrium:
• P=$4• Q=30000
• Thefirstlatteisboughtbysomeonewhohasawillingnesstopayof$10andpaysapriceof$4• Theopportunitytobuyisthusworth$6tohimorher
HowHappyAreConsumerswiththeDealsTheyGet?III
• SUPPLY:P=1+0.0001Qs• DEMAND:P=10-0.0002Qd• Equilibrium:
• P=$4• Q=30000
• Thelastlatte—number30000—isboughtbysomeonewhohasawillingnesstopayof$4andpaysapriceof$4• Theopportunitytobuyisthusworth$0tohimorher
HowHappyAreConsumerswiththeDealsTheyGet?IV
• SUPPLY:P=1+0.0001Qs
• DEMAND:P=10-0.0002Qd• Equilibrium:• P=$4;Q=30000
• Forthispairoflattes—thefirstandthelast—theexcessofwillingness-to-payovercostis$6
HowHappyAreConsumerswiththeDealsTheyGet?V
• SUPPLY:P=1+0.0001Qs• DEMAND:P=10-0.0002Qd• Equilibrium:
• P=$4;Q=30000• Forthenextpairoflattes—thesecondandthesecond-to-last:• Thewillingness-to-payofthesecondpurchaseris$10-0.0002=$9.9998• Thewillingness-to-payofthesecond-to-lastpurchaseris$4+0.0002=$4.0002
• Theirtotalwillingness-to-payis$14.Theirtotalcostis$8.Theirsurplusis$6
HowHappyAreConsumerswiththeDealsTheyGet?V
• SUPPLY:P=1+0.0001Qs• DEMAND:P=10-0.0002Qd• Equilibrium:
• P=$4;Q=30000• Foreverysinglepairofpurchasers:• Theirtotalwillingness-to-payis$14.Theirtotalcostis$8.Theirsurplusis$6• Thatistrueforall15,000purchaser-pairs• Hencethesurplusforconsumers—theconsumersurplus,,theCS—is$6x$15,000=$90,000
HowHappyAreConsumerswiththeDealsTheyGet?VI
• SUPPLY:P=1+0.0001Qs• DEMAND:P=10-0.0002Qd• Equilibrium:
• P=$4;Q=30000• Thesurplusforconsumers—theconsumersurplus,,theCS—is$6x15,000=$90,000• Thatistheareaofthetrianglelabeled“CS”:• Heightof6,baseof30000,andit’satriangle
HowHappyAretheProducerswiththeDealsTheyGet?
• SUPPLY:P=1+0.0001Qs• DEMAND:P=10-0.0002Qd• Equilibrium:
• P=$4;Q=30000• Wecouldrunthroughthesameargumentforproducers,substituting“opportunitycost”for“willingnesstopay”• Wewouldreachtheconclusionthatthesurplustoproducersis$3x30000x1/2=$45000• Thatistheareaofthetrianglelabeled“PS”
TotalSurplus• TotalSurplus=ConsumerSurplus+ProducerSurplus
• TS=CS+PS• TS=$90000+$45000=$135000
• Howcomeconsumersget2/3ofthesurplus?