Welcome toPMBA0608: Economics/Statistics Foundation

Fall 2006Session 5: September 20

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.

From now on please

1. don’t turn in your assignments in pieces. (separate documents)

2. answer the questions in the right order.

3. don’t forget to put your names on the assignment.

4. otherwise, I will deduct points.

Discuss Assignment 21. Problem 3, Page 59 of Mankiw

A gallon of Beer

Pizza Opp cost of 1 pizza

Opp cost of 1 beer

Pat 4 hours

2 hours

½ gallons of beer

2 pizzas

Kris 6 hours

4 hours

2/3 gallons of beer

1.5 pizza

Assignment 21. Problem 3, Page 59 of Mankiw

a. Pat has absolute advantage in both pizza and beer as it takes her less time to produce either of these goods.

b. Since opp. cost of 1 pizza is less for Pat. She will trade away pizza for beer.

c. The terms of trade:2/3 beer >1 pizza> ½ beer

Assignment 2 2. Problem 6. Page 60 of Mankiw

Red socks

White socks

Price of 1 white socks = opp cost

Price of 1 red socks = opp cost

Boston 3 3 1 red socks 1 white socks

Chicago 2 1 2 red socks ½ white socks

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

d. 2 red>1 white socks> 1 red or 1 white >1 red socks>1/2 white

Assignment 23. Application 2.6, Page 24 of Mendenhall, Beaver and Beaver (Use Excel or similar program. Explain why one presentation is more effective.)

74%

20%

6%

Approve

Disapprove

Don't Know

• A chart always needs a title

• Pie chart is more effective as it expresses the relationship of the part to the whole

1. You were graded based on your reasons not your opinions.

2. “Because the book says so” is not a reason.

0

10

20

30

40

50

60

70

80

Approve Disapprove Don't Know

Response

Perc

enta

geSeries1

Do you approve of pay raise?Do you approve of pay raise?

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

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.

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%

Histogram

0

2

4

6

8

10

12

14

16

2 6 10

14

18

22

26

30

More

Bin

Fre

qu

en

cy

Frequency

•If you could not easily get this info from your chart, you lost 0.5 points.

Assignment 25. Exercise 2.47, Page 67 of Mendenhall, Beaver and Beaver (Use Excel or similar program.)

Bivariate Data

0

1

2

3

4

5

6

0 1 2 3 4 5 6 7

x

y

Negative correlation

Correlation coefficient = - 0.9871

Market Model

Supply and DemandChapter 4 of Mankiw

What are Markets?

Institutions that allow buyers and sellers to exchange

There are two sides to a market

1. Potential buyers demanders

2. Potential sellers suppliers

Is this a market?

How is the price determined? Auction

Is this a market?

How is the price determined here? Haggling

How is the price determined here? Posted-price

Is this a market?

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

Demand Curve

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

Demand for red roses in Athens Demand curve has a ______ slope indicating

that ceteris paribus as price ____, quantity demanded ______. (the law of demand)

Price

Quantity /day

A$1

$2B

Demand curve

10060

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

Demand shifters What happens on Valentine’s day?

Price

Quantity /day

$2B

D1

11060

B’

Demand curve shifts to the right or increases

D2

Demand shifters What happens if average income decreases

sharply?

Price

Quantity /day

$2B

D1

60

B’

40

D2

Demand curve shifts to the left or decreases.

Demand shifters What if price of pink roses drops sharply?

Price

Quantity /day

$2B

60

D1D2

Demand for red roses drops

20

B’

D1

quantity

price

P1

Q1Change in demand:

Change in quantity demanded:

shift of the entire curve due to a change in a factor other than the price of the good

movement along a given curve due to a change in the price of the good

D2

Q2

P2

Q3

movem

ent along the curve

Demand vs Quantity Demanded

Let’s practice

Price of coffee increases then (demand / quantity demands) for sugar (increases/decreases).

Price of coffee increases then demand for sugar decreases.

And practice more

Income increases then (demand/ quantity demanded) for Spam (decreases/increases).

Income increases then demand for Spam decreases.

Examples

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

Price of chocolate increase the

quantity demanded for chocolate decreases.

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

Supply Curve

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

Supply of red roses in Athens supply curve has a ______ slope indicating that

ceteris paribus as price ____ quantity supplied ______. (the law of supply)

Price

Quantity /day

A$1

$2B

6020

Supply curve

Supply shifters New fertilizer increases productivity

Price

Quantity /day

$2B

60

S1

120

B’

Supply curve shifts to the right or increases

S2

Supply shifters Cost of production increases

Price

Quantity /day

$2B

60

S1

Supply curve shifts to the left or decreases

$2.75

S2B’

Supply vs Quantity SuppliedA movement from A to Bis caused by ______in _______ and it results in

an increase in quantity supplied.

A shift in supply iscaused by a changein__________ and it results

in a change in supply.

S1

quantity

price

S2

S3

increase

decrease

A *

B *

Market Equilibrium

quantity

price

D1

S1

P1= $2

Q1

= 60

At P1: Qd = Qs

PHi

PLo

QsQd

At PHi: Qd < Qs

Surplus

Pressure on price to fall

At PLo: Qd > Qs

Shortage

Pressure on price to rise

Disequilibrium

Surplus

The market “clears”

QdQs

Shortage

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?

Price

Quantity

S1

D1

$2

60

e1

D2

20

•Demand for roses drops

•At P= 2, there is a surplus Price drops

•Pe drops and Qe drops$1.50

e2

30

Market of red roses is in equilibrium

Until a draught diminishes productivity How will this affect the equilibrium prices

and quantity of red roses?

Price

Quantity

S1

D1

$2

60

e1

•Supply decreases

•At P= 2, there is a shortage Price increases

•Pe increases and Qe drops

S2

e2

50

$2.50

Let’s memorize

1. If D↑ Pe↑ and Qe↑2. If D↓ Pe↓ and Qe↓3. If S↑ Pe↓ and Qe↑4. If S↓ Pe↑ and Qe↓

What if

Supply and demand increase at the same time

1. If D↑ Pe↑ and Qe↑2. If S↑ Pe↓ and Qe↑ Then Qe↑ but the change in Pe is

indeterminate

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)???

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.

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?

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_______.

Probability Of An Event

P(A) =   The number of ways event A can occur / the total number of possible outcomes

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

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

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

Let’s spin

P (1) = ?

P (red) = ?

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  

Here is where a tree diagram will help

1st spin

P (1) 2nd spin P (red)

P (1 and red)

1 1/4 1/2 1/4 • 1/2 = 1/8

Independent events Two events are said to be

independent if the result of the second event is not affected by the result of the first event.

In our example, the event of a 1 on the first spin is independent from the event of a red on the second spin

If A and B are independent events,P(A and B) = P(A) x P(B).

Let’s spin once

P (1 and yellow) = ?

P (1 and yellow) =0

1 and yellow are mutually exclusive

So probability of both happening at the same time = 0

Let’s spin once

P (1 or yellow) = ?

P (1 or yellow) = ¼ + ½ = ¾

1 and yellow are mutually exclusive

So probability of 1 or yellow = P(1) + P (yellow)

Let’s spin

P (2 or 3 or 4)= ?

P (2 or 3 or 4)= ¾

Together 2 and 3 and 4 are complements of 1

P (complements of 1) = 1- P (1)