economics 1: introduction to economics...2016/02/03 · our standard example: supply and demand for...

Economics1:IntroductiontoEconomics

https://bcourses.berkeley.edu/courses/1411451/assignments/syllabus

J.BradfordDeLong<[email protected]>


Administrivia


J.BradfordDeLong

February3,20168-9AMWheelerAuditorium,U.C.Berkeley


i>Clickers!• Doyouhaveani>Clicker?A. Yes,Ihaveusedit

beforeB. Yes,andit’snewly

registered!C. Yes,butit’snotyet

registeredD. What’san

i>Clicker?E. No

i>Clicker:ProblemSet1Was…A. Tooeasy,andtoo

shortB. Tooeasy,andtoo

longC. Toohard,andtoo

shortD. Toohard,andtoo

longE. WhatisProblemSet

1?

ProblemSet1:Problem2b• Wasadisaster…

• Thoughtyouwouldthinkbacktoproblem1,andreasonthatasimilarsupplycurvewouldproduceasimilarPPF

• Didnot…

• Willcurveupanswers…

Tutors• Wanttodolearnmorethanhowtoparrotbacksentencesfromthelectureandthetextbook?

• Tutoring!

• StudentLearningCenter• 1-4PMM-Th,CesarChavez

• EconDeptTutoring• 12-1:30M,8-9:30&11-12Tu,12-1&3-4:30W,8-9:30&11-12Th,8-10&2-4F,Evans

• Wehavelotsofoutsideresourcestohelpyoulearnstuff

TheStudentLearningCenter• Wanttodobetter

EconDepartmentTutoring• Wanttodobetter

UsingtheMarshallianToolkit

J.BradfordDeLong


TheMarshallianToolkit• Startedworkingonthisinthe1720s

• Took150yearstogetit(largely)right:Alfred(andMaryPaley)Marshall

• Startwithproperty,exchange,individuals’capabilitiesandpreferences

• Deriveopportunitycostandwillingness-to-pay

• Calculatesupplyanddemandcurves

• Andthencalculateequilibriumanditsconsequences

TheMarshallianToolkitII• Atthesupply-and-demandlevel,needfourthings:• Needanddesirefortheproduct—themaximumwillingness-to-pay,they-axisdemandintercept

• Extentofdemand—theslope,howquantitydemandedgrowsaspricefalls

• Resourcesneededtostartproducing—theminimumopportunitycost,they-axissupplyintercept

• Supplyresponsiveness—theslope,howquantitysuppliedgrowsasthepricerises

• Withjustthesefour,youcancalculatewhatthemarketwilldo

WhatGoesRightwiththeMarket?• Autilitarianpursuingthegreatest-good-of-the-greatest-numbersaysit:1. Allocatesproductiontothosewhohavetheleast

cost,thelowestopportunitycost.2. Producesatthescalethatgetsallwin-winexchanges3. Allocatestothosewithgreatestwillingness-to-pay—

whobythemoneystandardmostneedandwantit4. Isthebestsocietalresource-useandproduct-

allocatingmechanismthatcanbedevised5. Isveryresponsivetochangingcircumstances

ComparativeStatics

J.BradfordDeLong


ComparativeStatics

• Startfromanequilibrium

• Dosomethingtoshiftsupply(ordemand)

• Calculatewhattheequilibriumshiftsto

• Saythisiswhatwouldhappenifthethingthatshiftedsupply(ordemand)weretotakeplace

OurStandardExample:SupplyandDemandforLattesinAvicenna

• Demand:P=Pd0-dQ• Demand:P=$10-0.0002Q• Supply:P=Ps0+sQ• Supply:P=$1+0.0001Q

• Toyouri>Clickers:Whatistheequilibriumprice?

A. $4/latteB. $1/latteC. $6/latteD. $8/latteE. $10/latte

OurStandardExample:SupplyandDemandforLattesinAvicennaII

• Demand:P=Pd0-dQ• Demand:P=$10-0.0002Q• Supply:P=Ps0+sQ• Supply:P=$1+0.0001Q

• Toyouri>Clickers:Whatistheequilibriumprice?

A. $4/latteB. $1/latteC. $6/latteD. $8/latteE. $10/latte

OurStandardExample:SupplyandDemandforLattesinAvicennaIII• Demand:P=$10-0.0002Q• Supply:P=$1+0.0001Q

• Toyouri>Clickers:Whatistheequilibriumquantity?

A. 10000lattesB. 20000lattesC. 30000lattesD. 40000lattesE. 50000lattes

OurStandardExample:SupplyandDemandforLattesinAvicennaIV

• Demand:P=$10-0.0002Q• Supply:P=$1+0.0001Q

• Toyouri>Clickers:Whatistheequilibriumquantity?

A. 10000lattesB. 20000lattesC. 30000lattesD. 40000lattesE. 50000lattes

• Q*=(Pd0-Ps0)/(s+d)

WhatHappensWhentheSupplyCurveShiftsUporDown?

J.BradfordDeLong


ShiftingtheSupplyCurve

• Demand:P=$10-0.0002Q• Supply:P=$1+0.0001Q• Yes,equilibriumis:• P*=$4,Q=30000

• Globalwarminginthetropicsharmscoffeeharvest,raisestheminimumopportunitycostfrom$1/latteto$4/latte?

TiltingtheSupplyCurveII• Demand:P=$10-0.0002Q• OldSupply:P=$1+0.0001Q• NewSupply:P=$4+0.0001Q

• Toyouri>Clickers:Whathappenstotheequilibriumprice?

A. Increasesfrom$1to$4/latteB. Increasesfrom$4to$6/latteC. Increasesfrom$4to$7/latteD. Decreasesfrom$4to$2/

latteE. Decreasesfrom$4to$1/

latte

ShiftingtheSupplyCurveIII• Demand:P=$10-0.0002Q• OldSupply:P=$1+0.0001Q• NewSupply:P=$4+0.0001Q


A. Itincreasesfrom$1/latteto$4/latte

B. Itincreasesfrom$4/latteto$6/latte

C. Itincreasesfrom$4/latteto$7/latte

D. Itdecreasesfrom$4/latteto$2/latte

E. Itdecreasesfrom$4/latteto$1/latte

WaysofUnderstandingThisShift…• …ofthesupplyinterceptfrom:

• Ps0=$1• to:

• Ps0=$4• AndtheconsequentshiftofthepricefromP*=$4toP*=$6/latte

• AndtheconsequentshiftofthequantityfromQ*=30000toQ*=20000/day

• Graphically…• Algebraically…• Narratively…

UnderstandingThisShift:Graphically

• Ps0:$1/latte—>$4/latte• P*:$4/latte—>$6/latte• Q*:30000/day—>20000/day• Graphically:thegreen-linethingeemovesupby$3/latte…

• Becausetheblue-linethingeeishalfasresponsiveasthegreen-linethingee…

• Theequilibriumpointmovesupby2/3asmuchasthegreen-linethingee—by$2/latte

• Anditmovestotheleftaccordingtotheslopeoftheblue-linethingeetokeepitontheline—by-10000/day

UnderstandingThisShift:Algebraically

• Ps0:$1/latte—>$4/latte• P*:$4/latte—>$6/latte• Q*:30000/day—>20000/day

• Algebraically:weknowthat:

• P*=(d/(d+s))Ps0+(s/(d+s))Pd0• Q*=(Pd0-Ps0)/(s+d)


• Ps0:$1/latte—>$4/latte• P*:$4/latte—>$6/latte• Q*:30000/day—>20000/day• Algebraically:weknowthat:• P*=(d/(d+s))Ps0+(s/(d+s))Pd0• Q*=(Pd0-Ps0)/(s+d)

• Raisingtheminimumopportunitycost,thePs0raisestheequilibriumprice,theP*,by(d/(d+s))asmuch.

• Sincethesupplyparametersshowssupplytwiceasresponsiveasdemandd,2/3oftheincreaseintheMOCshowsupasanincreaseinprice

• AndraisingtheMOC,thePs0by$3reducesthequantityoflattesproducedby1/(s+d)asmuch—by10000/day

UnderstandingThisShift:Narratively

• Globalwarmingharmedtheproductivityoftropicalcoffee-growingregions,andmadecoffeemoreexpensivetostartproducing.

• Thisgreaterresourcecostofmakinglattesmeansthataneconomytryingtosatisfypeople’sneedswillshiftresourcesintosectorswhereresourcecostshavenotincreased,orhavefallen.


• Globalwarmingharmedtheproductivityoftropicalcoffee-growingregions,andmadecoffeemoreexpensivetostartproducing.

• Thisgreaterresourcecostofmakinglattesmeansthataneconomytryingtosatisfypeople’sneedswillshiftresourcesintosectorswhereresourcecostshavenotincreased,orhavefallen.

• Therisingmarketpriceoflattesisasignaltotheeconomytomoveresourcesoutofmakinglattesandintoteachingyoga.

• Asthepriceoflattesrose,thenumberoflattespurchasedfellaspeople’swillingness-to-paynolongerexceededthemarketprice.

• Andsothepriceroseandthequantityfelluntilsupplyanddemandwereonceagaininbalance

WaysofUnderstandingThisShift…

• Ps0:$1/latte—>$4/latte• P*:$4/latte—>$6/latte• Q*:30000/day—>20000/day

• Narratively,algebraically,graphically—allthreeareconsistent,allthreearecoherentviewsofunderstandingthesameeconomicprocess

WaysofUnderstandingThisShift…• Ps0:$1/latte—>$4/latte• P*:$4/latte—>$6/latte• Q*:30000/day—>20000/day


• Whatisthateconomicprocess?• Itisthemarketeconomyreactingtoachangeincircumstancesbyshiftingresourcesaroundtokeepproductionefficientandarrangeproductiontosatisfyconsumerdemandsasfullyaspossible

WhatHappensWhentheSupplyCurveTilts?

J.BradfordDeLong


TiltingtheSupplyCurve

• Demand:P=$10-0.0002Q

• Supply:P=$1+0.0001Q• Yes,equilibriumis:• P*=$4,Q=30000

• Whathappensifimprovementsintrainingnewbaristaschangetheresponsivenessofsupplyfroms=0.0001tos=0.0?

TiltingtheSupplyCurveII• Demand:P=$10-0.0002Q• OldSupply:P=$1+0.0001Q• NewSupply:P=$1+0Q



B. Itdecreasesfrom$4/latteto$1/latte



E. Itincreasesfrom$4/latteto$5/latte

TiltingtheSupplyCurveIII• Demand:P=$10-0.0002Q• OldSupply:P=$1+0.0001Q• NewSupply:P=$1+0Q



B. Itdecreasesfrom$4/latteto$1/latte



E. Itincreasesfrom$4/latteto$5/latte

WaysofUnderstandingThisShift…• …ofthesupplyslopefrom:

• s=0.0001• to:

• s=0.0000• AndtheshiftoftheequilibriumpriceP*:$4—>$1/latte

• AndtheshiftofthequantityQ*:30000—>45000/day

• Graphically…• Algebraically…• Narratively…

UnderstandingThisShift:Graphically

• s:0.0001—>0.0000• P*:$4/latte—>$1/latte• Q*:30000/day—>45000/day

• Graphically:thegreen-linethingeeflattenscompletely…

• Theequilibriumpointmovesdowntotheminimumopportunitycost—by$3/latte

• Anditmovestotherightaccordingtotheslopeoftheblue-linethingeetokeepitontheline—by+15000/day



• Algebraically:weknowthat:

• P*=(d/(d+s))Ps0+(s/(d+s))Pd0• Q*=(Pd0-Ps0)/(s+d)



• Algebraically:weknowthat:• P*=(d/(d+s))Ps0+(s/(d+s)Pd0• Q*=(Pd0-Ps0)/(s+d)

• Flatteningtheresponsivenessofsupplychangestheweightofthemaximumwillingness-to-pay,thePd0,intheweightedaveragecalculationofP*from1/3to0.P*thusfallstotheminimumopportunitycost,thePs0.

• Flatteningthesupplycurvereducesthesumoftheslopeparametersby1/3,andsoincreasesthequantityproducedandconsumedby1/2.


• Improvingthetrainingofbaristasmadetheresponsivenessofsupplymuchmuchgreater—infact,madesupplyperfectlyresponsive.

• Thislesserresourcecostofmakinglargenumbersoflattesmeansthataneconomytryingtosatisfypeople’sneedswillshiftresourcesintothelattesector,andawayfromsectorswhereresourcecostshavenotfallen.


• Improvingthetrainingofbaristasmadetheresponsivenessofsupplymuchmuchgreater—infact,madesupplyperfectlyresponsive.

• Thislesserresourcecostofmakinglargenumberslattesmeansthataneconomytryingtosatisfypeople’sneedswillshiftresourcesintothelattesector,andawayfromsectorswhereresourcecostshavenotfallen.

• Thefallingmarketpriceoflattesisasignaltotheeconomytomoveresourcesintomakinglattesandoutofteachingyoga.

• Asthepriceoflattesfell,thenumberoflattespurchasedfellasmorepeople’swillingness-to-payexceededthemarketprice.

• Andsothepricefellandthequantityroseuntilsupplyanddemandwereonceagaininbalance

WaysofUnderstandingThisShift…• s:0.0001—>0.0000• P*:$4/latte—>$1/latte• Q*:30000/day—>45000/day


• Whatisthateconomicprocess?

WaysofUnderstandingThisShift…• s:0.0001—>0.0000• P*:$4/latte—>$1/latte• Q*:30000/day—>45000/day


• Whatisthateconomicprocess?• Itisthemarketeconomyreactingtoachangeincircumstancesbyshiftingresourcesaroundtokeepproductionefficientandarrangeproductiontosatisfyconsumerdemandsasfullyaspossible

WhatHappensWhentheDemandCurveShiftsorTilts?

J.BradfordDeLong


ShiftingandTiltingtheDemandCurve• Wecoulddoasimilarexampleforshiftingthey-axisinterceptofthedemandcurve—themaximumwillingness-to-pay,thePd0coefficient,theintensityofgreatestneedordesireforthecommodity.

• Wecoulddoasimilarexampleforshiftingtheslopeofthedemandcurve—theresponsivenessofconsumertastestofallingprices,thedcoefficient,thepotentialextentofdemand.

ShiftingandTiltingtheDemandCurve• Wecoulddoasimilarexampleforshiftingthey-axisinterceptofthedemandcurve—themaximumwillingness-to-pay,thePd0coefficient,theintensityofgreatestneedordesireforthecommodity.

• Wecoulddoasimilarexampleforshiftingtheslopeofthedemandcurve—theresponsivenessofconsumertastestofallingprices,thedcoefficient,thepotentialextentofdemand.

• Thestorieswouldbethesame—exceptthatinsteadofbeingdrivenbychangesinthetechnologyofproduction,theywouldbedrivenbychangesinthepreferencesorthewealthofpotentialconsumers.

ShiftingandTiltingtheDemandCurveII• Thestorieswouldbethesame—exceptthatinsteadofbeingdrivenbychangesinthetechnologyofproduction,theywouldbedrivenbychangesinthepreferencesorthewealthofpotentialconsumers.

• Peoplewouldchangetheirbehaviorinresponsetothedifferentsignalsaboutresourceavailabilityandultimateconsumerneedanddesiresentbythepricesystem

• Andtheeconomywouldstriveto:A. KeepproductionefficientB. Satisfyasmuchconsumerneed

anddesireaspossiblegivenshiftingpreferencesandwealth

TheMarketSystem:BalanceSheet

J.BradfordDeLong


WhatGoesRightwiththeMarket?• Thecompetitivemarket• Inequilibrium• Withsecurepropertyrights• Andsecurecontractrights• Fromtheperspectiveofautilitariangreatest-good-of-the-greatest-number:

1. Allocatestherolesofproducersandsellerstothosewhocanmakeandsellinawayleastcostlytosociety’sresources,thosewiththelowestopportunitycost.

2. Producesatascalethatexhaustsallpossiblewin-winexchanges3. Rationsthegoodsproducedtothosewiththegreatestwillingness-to-

pay—thosewho,bythemoneystandard,needandwantitthemost4. Respondstochangingresourcesandtechnologiesandtochanging

consumerpreferencesandwealthbyadjustingwhatismade,howismade,andforwhomitismadeinordertokeepproductionefficientandsatisfyasmuchofconsumerneedanddesireasisattainable.

WhatCanGoWrongwiththeMarket?• Itcanbeoutofequilibrium• Itcanbemessedupbyagovernmentthatimposesquotas

• (Thenthepriceadjuststomakethebestofabadsituation)• Itcanbemessedupbyagovernmentthatfixesprices

• (Thenpeoplerespondtothewrongpricesignals)• Thatisasfaraswehavegottensofar• Andnowweareroughlytotheendofchapter7.Ontochapter8!

NextTimeWeAddto:WhatCanGoWrongwiththeMarket?

• Itcanbeoutofequilibrium• Itcanbemessedupbyagovernmentthatimposesquotas• (Thenthepriceadjuststomakethebestofabadsituation)

• Itcanbemessedupbyagovernmentthatfixesprices• (Thenpeoplerespondtothewrongpricesignals)

• Inaddition:itcanfailtobecompetitive

economics 1: introduction to economics...2016/02/03 · our standard example: supply and demand for...

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