Economics 2: Spring 2014

J. Bradford DeLong <jbdelong@berkeley.edu>; Maria Constanza Ballesteros <mc.ballesteros@berkeley.edu>;

Connie Min <conniemin@berkeley.edu>

http://delong.typepad.com/sdj/econ-2-spring-2014/

Economics 2: Spring 2014: Supply and Demand Algebra:

Shifting Curveshttp://delong.typepad.com/sdj/econ-1-spring-2014/

February 3, 2014, 4-5:30101 Barker, U.C. Berkeley

Comparative Statics: Start from an Initial Equilibrium

• Supply:– P=15 x Q

• Demand:– P=100-(5/3)Q

To Your i>Clickers

• Supply: P=15 x Q. Demand: P=100-(5/3)Q• P = ((15)100 – (5/3)0)/(15 + 5/3)• What is the equilibrium price?– A. 90– B. 10– C. 50– D. 6– E. None of the Above

To Your i>Clickers• Supply: P=15 x Q. Demand: P=100-(5/3)Q• What is the equilibrium price?– A. 90– B. 10– C. 50– D. 6– E. None of the Above

• 15Q=100-(5/3)Q (50/3)Q=100 Q=6 P=90• Supply slope 9 times demand slope equilibrium

price 9/10 of way from ZQ supply intercept (0) to ZQ demand intercept (100) 90

Comparative Statics: Start from an Initial Equilibrium

• Supply:– P=15 x Q

• Demand:– P=100-(5/3)Q

• Equilibrium– P=90– Q=6

Comparative Statics: Change Something and Calculate the New

Equilibrium• Initial:– S: P=15 x Q– D: P=100-(5/3)Q– E: P=90, Q=6

• Change and calculate

• Assert that when or if that change comes, the economy will jump

For Example, an Increase in Supply• Initial:– S: P=15 x Q– D: P=100-(5/3)Q– E: P=90, Q=6

• Turns out Tyrion shows up and, it turns out, is Targaryen: willing to fly 4 missions for free– New supply:

P=15Q - 60

Ladies and Gentlemen: To Your i>Clickers…

• Initial: S: P=15Q. D: P=100-(5/3)Q. E: P=90, Q=6• New supply: P=15Q – 60• By how much does the equilibrium price

change?– A. It falls by 6– B. It rises by 6– C. It falls by 60– D. It rises by 60– E. None of the above

Ladies and Gentlemen: To Your i>Clickers…

• Initial: S: P=15Q. D: P=100-(5/3)Q. E: P=90, Q=6• New supply: P=15Q – 60• By how much does the equilibrium price change when Tyrion shows

up?– A. It falls by 6– B. It rises by 6– C. It falls by 60– D. It rises by 60– E. None of the Above

• Since slopes are unchanged, equilibrium price is still 1/10 of the way from demand curve ZQ intercept to supply curve ZQ intercept.

• Supply curve ZQ intercept now 60 lower equilibrium price lower by 6

And on the Graph…

What’s the New Equilibrium Quantity?

• P = 100 – (5/3)Q– 90 = 100 – (5/3)Q

Q=6– 84 = 100 – (5/3)Q

Q=9.6– Quantity grows by 3.6

• Alternatively: if a drop in price by 10 raises quantity by 6, a drop in price by 6 will raise quantity by 3.6

• What do fractional quantities mean here?

A Decrease in Supply

• Initial:– S: P=15 x Q– D: P=100-(5/3)Q

– E: P=90, Q=6• Everyone

decides: I want to be paid 30 more…

• New supply:– P = 15Q + 30

Ladies and Gentlemen, to Your i>Clickers!

• Initial: S: P=15Q. D: P=100-(5/3)Q. E: P=90, Q=6

• New supply: P = 15Q + 30• By how much does the equilibrium quantity change?• A. - 1.8• B. 7.8• C. 5.2• D. + 3.6• E. None of the Above

Ladies and Gentlemen, to Your i>Clickers!

• Initial: S: P=15Q. D: P=100-(5/3)Q. E: P=90, Q=6• New supply: P = 15Q + 30• By how much does the equilibrium quantity change?

• A. - 1.8• B. 7.8• C. 5.2• D. + 3.6• E. None of the Above

• Initial quantity = (Difference in ZQ values)/(sum of slopes) = 100/(16 2/3) = 6

• Change difference in ZQ values by 30 Change quantity by 3/10 x 6 = 1.8• Quantity falls by 1.8 to 4.2

A Decrease in Supply

• Initial: P=15Q. P=100-(5/3)Q. P=90, Q=6

• New supply: P=15Q+30

• New quantity: 4.2

• New price?

A Decrease in Supply

• Initial: P=15Q. P=100-(5/3)Q. P=90, Q=6

• New supply: P=15Q+30

• New quantity: 4.2

• New price?– Anybody?

A Decrease in Supply• Initial: P=15Q.

P=100-(5/3)Q. P=90, Q=6

• New supply: P=15Q+30

• New quantity: 4.2

• New price is 93– Given the ratio

of slopes, 1/10 of the way from one ZQ parameter to the other

A Decrease in Demand

• Initial: P=15Q. P=100-(5/3)Q.

P=90, Q=6• The Master

of Coin embezzles 40.

• New demand: P=60-(5/3)Q

Ladies and Gentlemen, to Your i>Clickers…

• Initial: P=15Q. P=100-(5/3)Q. P=90, Q=6• The master of coin embezzles 40: new

demand: P=60-(5/3)Q• What is the new equilibrium price?– A. 86– B. 54– C. 50– B. 70– E. None of the Above

Ladies and Gentlemen, to Your i>Clickers…

• Initial: P=15Q. P=100-(5/3)Q. P=90, Q=6• The master of coin embezzles 40: new demand: P=60-(5/3)Q• What is the new equilibrium price?

– A. 86– B. 54– C. 50– B. 70– E. None of the Above

• Remember: the ratio of the slopes tells us how the equilibrium price falls between the two ZQ parameters

• For this case, that’s 1/10• We just moved one of the ZQ parameters by 40:• We thus moved the price by 36—down from 90 to 54

A Decrease in Demand

• Initial: P=15Q. P=100-(5/3)Q.

P=90, Q=6• New demand:

P=60-(5/3)Q• New

equilibrium:• P=54• Q=3.6

Elastic and Inelastic Supply and Demand

• When demand is elastic, changes in supply conditions move quantity by a lot and price by only a little.

• When demand is inelastic, changes in supply conditions move price by a lot and quantity only by a little.

• When supply is elastic, changes in demand conditions move quantity by a lot and price by only a little.

• When supply is inelastic, changes in demand conditions move price by a lot and quantity only by a little.

This You Must Now…

• Finding equilibrium, and figuring out immediately how equilibrium shifts when supply and demand change…

• This you MUST know:– Moses:

• And these words, which I command thee this day, shall be in thine heart:

This You Must Now…

• And thou shalt teach them diligently unto thy children

This You Must Now…

• And shalt talk of them when thou sittest in thine house, and when thou walkest by the way, and when thou liest down , and when thou risest up.

This You Must Now…

• And thou shalt bind them for a sign upon thine hand, and they shall be as frontlets between thine eyes.

This You Must Now…

• And thou shalt write them upon the posts of thy house, and on thy gates…

For This Is the Law and the Profits…

• …of economics, at least