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Exercise 3
1. The main criticisms Friedman makes of the neo-classical approach are what?
While this is the “orthodox” approach, popular with “neoclassical” economists, I find it
ridiculous because people cannot survive as individuals living by themselves. Humans
are social animals; methodological individualists cannot reasonably explain such
common and necessary phenomenon as parents caring for children or the readiness of
people to sacrifice anonymously for each other. (p7)
Following Clark, economists have abandoned the social science approach to ground their
work in methodological individualism. There are some wonderful advantages to this
approach. By ignoring social institutions, by grounding economics in what they assume
to be universal motives of individuals, neoclassical economists have developed a theory
that they claim can be applied universally, to different times and places. Neoclassical
economists regularly apply their models to countries throughout the world, caring little
and, often, knowing even less of any country’s particular political situation, its history, or
its social structure. Neoclassicists have been criticized for ignoring history and social
institutions; but their theory is powerful and can be applied universally because these are
irrelevant in their models.
Note that the neoclassicists omit from their list of crucial factors social relations,
including laws, institutions, and the products of human history and past conflict. Instead,
neoclassicists treat economic relationships as asocial as if they were between people and
things rather than between people and other people. (p79)
Basically neoclassicists ignore institutions and history, because of their methodological
individualism. That is Friedman’s main criticism.
2. What problem is neo-classical economics trying to solve? Why is it interesting?
Abandoning the class analysis and political concerns of classical political economy, along
with their disconcerting political implications, they brought economic analysis back to
the Panglossian dichotomy between virtuous individuals and evil collectives. In their
analysis, they refounded economics on the basis of individual action coming from
autonomous and independent individual preferences. The central concern for the
neoclassical microeconomists has been to explain relative prices, the distribution of
income, and the mix of products produced in a society with a settled distribution of
property and power; with power fixed, none of the variation in economic outcomes will
be attributed to political action or changes in social institutions.
3. Draw a diagram and explain what happens to consumer surplus and producer
surplus in equilibrium.
4. Consider the following data. Supply: when p = 2,q = 0, when p = 3,q = 2, when p =
4,q = 4. Demand: when p=2,q=3,when p=3,q=2, when p=4,q=1. Draw the curve and finds
the affine (straight line) equation that defines it.
Remember in economics we put price in y-axis and q in x-axis even though price is the independent
variable.
You want to find the equation for a line that passes through the two points:
(p1,q1) and (p2, q2) or in the case of supply, for example,
(2,0) and (4,4).
First of all, remember what the equation of a line is.
y = mx+b
In our case,
q=mp+b
Where:
m is the slope, and
b is quantity when price is zero (the q intercept)
The slope in our case is defined as "the change in q over the change in p" or
m=(q2-q1)/(p2-p1)
so, m = (4-0)/(4-2)
m= 4/2
m=2
Then,
q=2p+b
To find b, use one of the sets of points and solve for b.
Using (4,4)
4 = 2*4 + b
4=8+b
4–8=b
b = -4
so q = 2p – 4. This is the equation that defines our supply curve.
Apply the same process for the demand
Using (2,3) and (4,1)
m = (1 – 3) / (4 -2)
m = -2 / 2
m = -1
Using (4,1)
1 = 4*-1 + b
1 = -4 + b
b=5
q = -p + 5, which is the equation that defines our demand curve.
5. a. What would happen to the supply curve if the cost of production changed and the
quantity supplied at each price were half the original. What would happen if for every
price one additional unit of the good were produced. Draw it.
6. Let qs and qd be the quantities supplied and demanded, p = price and a, b, c, m be
positive constants. Draw the following supply and demand curves and give their
intercepts on the p and q axes.
qs =ap−b & qd =−cp+m
Q6 Ex 3
6. Let qs and qd be the quantities supplied and demanded, p = price and a, b, c, m be
positive constants. Draw the following supply and demand curves
qs =ap−b
qd =−cp+m
and give their intercepts on the p and q axes.