july03
TRANSCRIPT
Outline for Thurs, July 3
� Remember
�Quiz on Friday
� Homework due Monday
� Review from Wednesday� Review from Wednesday
� The Supply & Demand Model
� Using the graph
� Assumptions
Review from Wednesday
� What do we mean by _____ and why is it
important to our understanding of markets?
� Scarcity
�Opportunity cost�Opportunity cost
� Decisions at the margin
� Rationality
Review from Wednesday
� What is the single key difference between positive
and normative claims?
Review from Wednesday
� What is the single key difference between positive
and normative claims?
Testability
Review from Wednesday
� What is the single key difference between positive
and normative claims?
Testability
� What makes a bad model?� What makes a bad model?
Review from Wednesday
� What is the single key difference between positive
and normative claims?
Testability
� What makes a bad model?� What makes a bad model?
�Wrong answers
� Inconsistent assumptions or answers
Review from Wednesday
� What is the single key difference between positive
and normative claims?
Testability
� What makes a bad model?� What makes a bad model?
�Wrong answers
� Inconsistent assumptions or answers
� What can we do with positive statements?
Review from Wednesday
� What is the single key difference between positive
and normative claims?
Testability
� What makes a bad model?� What makes a bad model?
�Wrong answers
� Inconsistent assumptions or answers
� What can we do with positive statements?
� Explain
� Predict
� Choose between policies, given a normative goal
What you’ll be tested on
� Explanations, not definitions
We need to speak the same language, but that doesn’t
mean memorizing the glossary
What you’ll be tested on
� Explanations, not definitions
We need to speak the same language, but that doesn’t
mean memorizing the glossary
(…until we get to game theory)
What you’ll be tested on
� Explanations, not definitions
We need to speak the same language, but that doesn’t
mean memorizing the glossary
(…until we get to game theory)
� For example, equilibrium is
What you’ll be tested on
� Explanations, not definitions
We need to speak the same language, but that doesn’t
mean memorizing the glossary
(…until we get to game theory)
� For example, equilibrium is
�Where the supply and demand curves meet
�Where no buyers and sellers wish to change their
actions
�What real markets should “tend towards” over time
What you’ll be tested on
� Explanations, not definitions
We need to speak the same language, but that doesn’t
mean memorizing the glossary
(…until we get to game theory)
� For example, equilibrium is
�Where the supply and demand curves meet
�Where no buyers and sellers wish to change their
actions
�What real markets should “tend towards” over time
� The general concept is more useful than a narrow
definition in most economic arguments
How do economists argue?
(1) Use mathematics as a shorthand language, rather
than as an engine of inquiry.
(2) Keep to them till you have done.
(3) Translate into English.(3) Translate into English.
(4) Then illustrate by examples that are important in
real life.
(5) Burn the mathematics.
(6) If you can't succeed in 4, burn 3.
This last I did often.
Alfred Marshall, S&D guy
Outline for Thurs, July 3
� Remember
�Quiz on Friday
� Homework due Monday
� Review from Wednesday� Review from Wednesday
� The Supply & Demand Model
� Using the graph
� Assumptions
What you know
Supply
Demand
Equilibrium
The curves: Demand
� The demand curve tells us how much will be bought
at every price
The curves: Demand
� The demand curve tells us how much will be bought
at every price
� It slopes downward (usually)
� This is the Law of Demand� This is the Law of Demand
� The exceptions are called Giffen goods
The curves: Demand
� The demand curve tells us how much will be bought
at every price
� It slopes downward (usually)
� All other factors besides price are held constant� All other factors besides price are held constant
The curves: Demand
� The demand curve tells us how much will be bought
at every price
� It slopes downward (usually)
� All other factors besides price are held constant� All other factors besides price are held constant
� A change in these factors creates a shift in demand,
moving the curve. This is also referred to as a
change in demand
The curves: Demand
� The demand curve tells us how much will be bought
at every price
� It slopes downward (usually)
� All other factors besides price are held constant� All other factors besides price are held constant
� A change in these factors creates a shift in demand,
moving the curve. This is also referred to as a
change in demand
� A change in the price of the good changes the
quantity demanded, moving it along the stationary
curve
The curves: Demand
The demand curve tells us how
much will be bought at every
price. It slopes downward
D
price
quantity demanded
The curves: Demand
A change in these factors
creates a shift in demand,
moving the curve. This is also
referred to as a change in referred to as a change in
demandp
q q2
D
D2
The curves: Demand
A change in the price of the
good changes the quantity
demanded, moving it along the
stationary curvestationary curve
p
q
p3
q3
D
The curves: Demand
For practice: what happens
when both the price and a
demand factor change
p
q
D
The curves: Supply
� The supply curve tells us how much will be sold at
every price
� It usually slopes upward, but there is no law of
supplysupply
� All other factors besides price are held constant
� A change in these factors creates a shift in supply,
moving the curve. This is also referred to as a
change in supply
� A change in the price of the good changes the
quantity supplied, moving it along the stationary curve
Using the curves: What’s happening?
Using the graph: What’s equilibrium?
S
D
Equilibrium
Equilibrium
� Where the supply and demand curves intersect is
called equilibrium
� It is a price and quantity, the ordered pair (p, q)
Equilibrium
� Where the supply and demand curves intersect is
called equilibrium
� It is a price and quantity, the ordered pair (p, q)
� At the equilibrium price, the quantity buyers wish to � At the equilibrium price, the quantity buyers wish to
buy is the same as how much sellers wish to sell. This
quantity is the equilibrium quantity
Equilibrium
� Where the supply and demand curves intersect is
called equilibrium
� It is a price and quantity, the ordered pair (p, q)
� At the equilibrium price, the quantity buyers wish to � At the equilibrium price, the quantity buyers wish to
buy is the same as how much sellers wish to sell. This
quantity is the equilibrium quantity
� Remember that this describes the market for a
single good, not the whole economy
Using the graph: How does the
equilibrium change?
S
What happens if…
� Demand increases
� Demand decreases
� Supply increases
E
D
pE
qE
� Supply increases
� Supply decreases
� Some combination
We don’t talk about
independent price
changes along
curves
Using the graph: Out of equilibrium
S
What happens if…
� The price is higher
than pE
E
D
pE
qE
p2
Using the graph: Out of equilibrium
S
What happens if…
� The price is higher
than pE
�Quantity supplied
surplus
E
D
pE
qE
exceeds quantity
demanded. This is
called excess
supply or a surplus:
q2S – q2D
p2
q2Sq2D
Using the graph: Out of equilibrium
S
What happens if…
� The price is higher
than pE
�Quantity supplied
surplus
E
D
pE
qE
exceeds quantity
demanded. This is
called excess
supply or a surplus:
q2S – q2D
�What about a
below-equilibrium
price?
p2
q2Sq2D
Using the graph: summary
You should understand
� What do the demand and supply curves mean?
� What makes demand and supply shift or change?
� How do shifts change the equilibrium, where the � How do shifts change the equilibrium, where the
curves intersect?
� What happens when we’re not at the equilibrium
price? shortages and surpluses
Using the graph: summary
You should understand
� What do the demand and supply curves mean?
� What makes demand and supply shift or change?
� How do shifts change the equilibrium, where the � How do shifts change the equilibrium, where the curves intersect?
� What happens when we’re not at the equilibrium price? shortages and surpluses
� Remember that quantity responds to price:
� Buyers choose how much to buy, not at what price to buy
� Sellers choose how much to sell, not at what price to sell
Supply & Demand Model
� Recall that a model is a set of assumptions
� The graph is simply a representation of our model
Supply & Demand Model
� Recall that a model is a set of assumptions
� The graph is simply a representation of our model
� We judge a model by its consistency and accuracy,
not the realism of its assumptionsnot the realism of its assumptions
Supply & Demand Model
� Recall that a model is a set of assumptions
� The graph is simply a representation of our model
� We judge a model by its consistency and accuracy,
not the realism of its assumptionsnot the realism of its assumptions
� We are talking about a single market, but it could
be broadly or narrowly defined
Supply & Demand Model
� Recall that a model is a set of assumptions
� The graph is simply a representation of our model
� We judge a model by its consistency and accuracy,
not the realism of its assumptionsnot the realism of its assumptions
� We are talking about a single market, but it could
be broadly or narrowly defined
� So, let’s go through the assumptions underlying our
market model
Assumption #1: Quantity responds to
price
� Why?
Assumption #1: Quantity responds to
price
� Why? There are a lot of buyers and sellers
� Not all goods have this (government contracts, prime
Manhattan real estate), so we can only consider
markets that do
Assumption #1: Quantity responds to
price
� Why? There are a lot of buyers and sellers
� Not all goods have this (government contracts, prime
Manhattan real estate), so we can only consider
markets that do
� This means that no single buyer or seller can choose the
price: sellers with too high a price will make no sales,
sellers with too low a price will be missing opportunities
Assumption #1: Quantity responds to
price
� There are a lot of buyers and sellers
� This only applies to certain markets
� This means that no one can choose the price
Assumption #1: Quantity responds to
price
� There are a lot of buyers and sellers
� This only applies to certain markets
� This means that no one can choose the price
� So buyers and sellers are both called price-takers� So buyers and sellers are both called price-takers
and this is called the price-taking assumption
Assumption #1: Quantity responds to
price
� There are a lot of buyers and sellers
� This only applies to certain markets
� This means that no one can choose the price
� So buyers and sellers are both called price-takers� So buyers and sellers are both called price-takers
and this is called the price-taking assumption
� This also suggests that buyers and sellers all pay
and see the same price, so there are no
Assumption #1: Quantity responds to
price
� There are a lot of buyers and sellers
� This only applies to certain markets
� This means that no one can choose the price
� So buyers and sellers are both called price-takers� So buyers and sellers are both called price-takers
and this is called the price-taking assumption
� This also suggests that buyers and sellers all pay
and see the same price, so there are no
� Transaction costs
� Search costs
Assumption #2: Scarcity
� The economy must have scarce resources because…
Assumption #2: Scarcity
� The economy must have scarce resources because…
If they are not scarce � an infinite amount of the
good could be made � so no one would pay for it
Assn. #3: Rationality
� People will take advantage of opportunities
Assn. #3: Rationality
� People will take advantage of opportunities
� Without this, we cannot be sure that equilibrium will
be reachedS
surplus
E
D
pE
qE
p2
q2Sq2D
surplus
Assn. #3: Rationality
� People will take advantage of opportunities
� Without this, we cannot be sure that equilibrium will
be reachedS
surplus
E
D
pE
qE
p2
q2Sq2D
surplus
Assn. #3: Rationality
� People will take advantage of opportunities
� Without this, we cannot be sure that equilibrium will
be reachedS
surplus� What really happens?
E
D
pE
qE
p2
q2Sq2D
surplusWhat really happens?
Review
� Remember
�Quiz on Friday
� Homework due Monday
� Review from Wednesday� Review from Wednesday
� The Supply & Demand Model
� Using the graph
� Assumptions