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Economics1:IntroductiontoEconomics
https://bcourses.berkeley.edu/courses/1411451/assignments/syllabus
J.BradfordDeLong<[email protected]>
Administrivia
https://bcourses.berkeley.edu/courses/1411451/assignments/syllabus
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
February3,20168-9AMWheelerAuditorium,U.C.Berkeley
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
February3,20168-9AMWheelerAuditorium,U.C.Berkeley
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
February3,20168-9AMWheelerAuditorium,U.C.Berkeley
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
• Toyouri>Clickers:Whathappenstotheequilibriumprice?
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)
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)
• 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.
UnderstandingThisShift:Narratively
• 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
• Narratively,algebraically,graphically—allthreeareconsistent,allthreearecoherentviewsofunderstandingthesameeconomicprocess
• Whatisthateconomicprocess?• Itisthemarketeconomyreactingtoachangeincircumstancesbyshiftingresourcesaroundtokeepproductionefficientandarrangeproductiontosatisfyconsumerdemandsasfullyaspossible
WhatHappensWhentheSupplyCurveTilts?
J.BradfordDeLong
February3,20168-9AMWheelerAuditorium,U.C.Berkeley
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
• Toyouri>Clickers:Whathappenstotheequilibriumprice?
A. Itincreasesfrom$1/latteto$4/latte
B. Itdecreasesfrom$4/latteto$1/latte
C. Itincreasesfrom$4/latteto$7/latte
D. Itdecreasesfrom$4/latteto$3/latte
E. Itincreasesfrom$4/latteto$5/latte
TiltingtheSupplyCurveIII• Demand:P=$10-0.0002Q• OldSupply:P=$1+0.0001Q• NewSupply:P=$1+0Q
• Toyouri>Clickers:Whathappenstotheequilibriumprice?
A. Itincreasesfrom$1/latteto$4/latte
B. Itdecreasesfrom$4/latteto$1/latte
C. Itincreasesfrom$4/latteto$7/latte
D. Itdecreasesfrom$4/latteto$3/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
UnderstandingThisShift:Algebraically
• s:0.0001—>0.0000• P*:$4/latte—>$1/latte• Q*:30000/day—>45000/day
• Algebraically:weknowthat:
• P*=(d/(d+s))Ps0+(s/(d+s))Pd0• Q*=(Pd0-Ps0)/(s+d)
UnderstandingThisShift:Algebraically
• s:0.0001—>0.0000• P*:$4/latte—>$1/latte• Q*:30000/day—>45000/day
• 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.
UnderstandingThisShift:Narratively
• Improvingthetrainingofbaristasmadetheresponsivenessofsupplymuchmuchgreater—infact,madesupplyperfectlyresponsive.
• Thislesserresourcecostofmakinglargenumbersoflattesmeansthataneconomytryingtosatisfypeople’sneedswillshiftresourcesintothelattesector,andawayfromsectorswhereresourcecostshavenotfallen.
UnderstandingThisShift:Narratively
• 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
• Narratively,algebraically,graphically—allthreeareconsistent,allthreearecoherentviewsofunderstandingthesameeconomicprocess
• Whatisthateconomicprocess?
WaysofUnderstandingThisShift…• s:0.0001—>0.0000• P*:$4/latte—>$1/latte• Q*:30000/day—>45000/day
• Narratively,algebraically,graphically—allthreeareconsistent,allthreearecoherentviewsofunderstandingthesameeconomicprocess
• Whatisthateconomicprocess?• Itisthemarketeconomyreactingtoachangeincircumstancesbyshiftingresourcesaroundtokeepproductionefficientandarrangeproductiontosatisfyconsumerdemandsasfullyaspossible
WhatHappensWhentheDemandCurveShiftsorTilts?
J.BradfordDeLong
February3,20168-9AMWheelerAuditorium,U.C.Berkeley
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
February3,20168-9AMWheelerAuditorium,U.C.Berkeley
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