Download Shifting and Tilting the Demand Curve

Economics1:Introductionto
Economics
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J.BradfordDeLong<[email protected]>
Administrivia
https://bcourses.berkeley.edu/courses/1411451/assignments/syllabus
J.BradfordDeLong
February3,20168-9AM
WheelerAuditorium,U.C.Berkeley
i>Clickers!
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long
E. WhatisProblemSet
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ProblemSet1:Problem2b
• Wasadisaster…
• Thoughtyouwouldthink
backtoproblem1,and
reasonthatasimilar
supplycurvewould
produceasimilarPPF
• Didnot…
• Willcurveupanswers…
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UsingtheMarshallianToolkit
J.BradfordDeLong
February3,20168-9AM
WheelerAuditorium,U.C.Berkeley
TheMarshallianToolkit
• Startedworkingonthisinthe
1720s
• Took150yearstogetit(largely)
right:Alfred(andMaryPaley)
Marshall
• Startwithproperty,exchange,
individuals’capabilitiesand
preferences
• Deriveopportunitycostand
willingness-to-pay
• Calculatesupplyanddemand
curves
• Andthencalculateequilibriumand
itsconsequences
TheMarshallianToolkitII
• Atthesupply-and-demandlevel,need
fourthings:
• Needanddesirefortheproduct—
themaximumwillingness-to-pay,the
y-axisdemandintercept
• Extentofdemand—theslope,how
quantitydemandedgrowsasprice
falls
• Resourcesneededtostartproducing
—theminimumopportunitycost,
they-axissupplyintercept
• Supplyresponsiveness—theslope,
howquantitysuppliedgrowsasthe
pricerises
• Withjustthesefour,youcancalculate
whatthemarketwilldo
WhatGoesRightwiththeMarket?
• Autilitarianpursuingthegreatest-good-of-the-greatestnumbersaysit:
1. Allocatesproductiontothosewhohavetheleast
cost,thelowestopportunitycost.
2. Producesatthescalethatgetsallwin-winexchanges
3. Allocatestothosewithgreatestwillingness-to-pay—
whobythemoneystandardmostneedandwantit
4. Isthebestsocietalresource-useandproductallocatingmechanismthatcanbedevised
5. Isveryresponsivetochangingcircumstances
ComparativeStatics
J.BradfordDeLong
February3,20168-9AM
WheelerAuditorium,U.C.Berkeley
ComparativeStatics
• Startfromanequilibrium
• Dosomethingtoshift
supply(ordemand)
• Calculatewhatthe
equilibriumshiftsto
• Saythisiswhatwould
happenifthethingthat
shiftedsupply(ordemand)
weretotakeplace
OurStandardExample:Supplyand
DemandforLattesinAvicenna
•
•
•
•
Demand:P=Pd0-dQ
Demand:P=$10-0.0002Q
Supply:P=Ps0+sQ
Supply:P=$1+0.0001Q
• Toyouri>Clickers:Whatisthe
equilibriumprice?
A. $4/latte
B. $1/latte
C. $6/latte
D. $8/latte
E. $10/latte
OurStandardExample:Supplyand
DemandforLattesinAvicennaII
•
•
•
•
Demand:P=Pd0-dQ
Demand:P=$10-0.0002Q
Supply:P=Ps0+sQ
Supply:P=$1+0.0001Q
• Toyouri>Clickers:Whatisthe
equilibriumprice?
A. $4/latte
B. $1/latte
C. $6/latte
D. $8/latte
E. $10/latte
OurStandardExample:Supplyand
DemandforLattesinAvicennaIII
• Demand:P=$10-0.0002Q
• Supply:P=$1+0.0001Q
• Toyouri>Clickers:Whatis
theequilibriumquantity?
A. 10000lattes
B. 20000lattes
C. 30000lattes
D. 40000lattes
E. 50000lattes
OurStandardExample:Supplyand
DemandforLattesinAvicennaIV
• Demand:P=$10-0.0002Q
• Supply:P=$1+0.0001Q
• Toyouri>Clickers:Whatisthe
equilibriumquantity?
A. 10000lattes
B. 20000lattes
C. 30000lattes
D. 40000lattes
E. 50000lattes
• Q*=(Pd0-Ps0)/(s+d)
WhatHappensWhentheSupply
CurveShiftsUporDown?
J.BradfordDeLong
February3,20168-9AM
WheelerAuditorium,U.C.Berkeley
ShiftingtheSupplyCurve
• Demand:P=$10-0.0002Q
• Supply:P=$1+0.0001Q
• Yes,equilibriumis:
• P*=$4,Q=30000
• Globalwarminginthe
tropicsharmscoffee
harvest,raisesthe
minimumopportunitycost
from$1/latteto$4/latte?
TiltingtheSupplyCurveII
• Demand:P=$10-0.0002Q
• OldSupply:P=$1+0.0001Q
• NewSupply:P=$4+0.0001Q
• Toyouri>Clickers:Whathappensto
theequilibriumprice?
A. Increasesfrom$1to$4/latte
B. Increasesfrom$4to$6/latte
C. Increasesfrom$4to$7/latte
D. Decreasesfrom$4to$2/
latte
E. Decreasesfrom$4to$1/
latte
ShiftingtheSupplyCurveIII
• Demand:P=$10-0.0002Q
• OldSupply:P=$1+0.0001Q
• NewSupply:P=$4+0.0001Q
• Toyouri>Clickers:Whathappenstothe
equilibriumprice?
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
• Andtheconsequentshiftofthe
pricefromP*=$4toP*=$6/latte
• Andtheconsequentshiftofthe
quantityfromQ*=30000to
Q*=20000/day
• Graphically…
• Algebraically…
• Narratively…
UnderstandingThisShift:
Graphically
Ps0:$1/latte—>$4/latte
P*:$4/latte—>$6/latte
Q*:30000/day—>20000/day
Graphically:thegreen-line
thingeemovesupby$3/latte…
• Becausetheblue-linethingeeis
halfasresponsiveasthegreenlinethingee…
• Theequilibriumpointmovesup
by2/3asmuchasthegreen-line
thingee—by$2/latte
• Anditmovestotheleftaccording
totheslopeoftheblue-line
thingeetokeepitontheline—by
-10000/day
•
•
•
•
UnderstandingThisShift:
Algebraically
• Ps0:$1/latte—>$4/latte
• P*:$4/latte—>$6/latte
• Q*:30000/day—>
20000/day
• Algebraically:weknow
that:
• 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,the
P*,by(d/(d+s))asmuch.
• Sincethesupplyparametersshows
supplytwiceasresponsiveasdemand
d,2/3oftheincreaseintheMOC
showsupasanincreaseinprice
• AndraisingtheMOC,thePs0by$3
reducesthequantityoflattesproduced
by1/(s+d)asmuch—by10000/day
UnderstandingThisShift:
Narratively
• Globalwarmingharmedthe
productivityoftropical
coffee-growingregions,and
madecoffeemoreexpensive
tostartproducing.
• Thisgreaterresourcecostof
makinglattesmeansthatan
economytryingtosatisfy
people’sneedswillshift
resourcesintosectorswhere
resourcecostshavenot
increased,orhavefallen.
UnderstandingThisShift:
Narratively
• Globalwarmingharmedtheproductivity
oftropicalcoffee-growingregions,and
madecoffeemoreexpensivetostart
producing.
• Thisgreaterresourcecostofmakinglattes
meansthataneconomytryingtosatisfy
people’sneedswillshiftresourcesinto
sectorswhereresourcecostshavenot
increased,orhavefallen.
• Therisingmarketpriceoflattesisasignal
totheeconomytomoveresourcesoutof
makinglattesandintoteachingyoga.
• Asthepriceoflattesrose,thenumberof
lattespurchasedfellaspeople’s
willingness-to-paynolongerexceededthe
marketprice.
• Andsothepriceroseandthequantityfell
untilsupplyanddemandwereonceagain
inbalance
WaysofUnderstandingThisShift…
• Ps0:$1/latte—>$4/latte
• P*:$4/latte—>$6/latte
• Q*:30000/day—>
20000/day
• Narratively,algebraically,
graphically—allthree
areconsistent,allthree
arecoherentviewsof
understandingthesame
economicprocess
WaysofUnderstandingThisShift…
• Ps0:$1/latte—>$4/latte
• P*:$4/latte—>$6/latte
• Q*:30000/day—>20000/day
• Narratively,algebraically,graphically
—allthreeareconsistent,allthree
arecoherentviewsofunderstanding
thesameeconomicprocess
• Whatisthateconomicprocess?
• Itisthemarketeconomyreactingto
achangeincircumstancesby
shiftingresourcesaroundtokeep
productionefficientandarrange
productiontosatisfyconsumer
demandsasfullyaspossible
WhatHappensWhentheSupply
CurveTilts?
J.BradfordDeLong
February3,20168-9AM
WheelerAuditorium,U.C.Berkeley
TiltingtheSupplyCurve
• Demand:P=
$10-0.0002Q
• Supply:P=$1+0.0001Q
• Yes,equilibriumis:
• P*=$4,Q=30000
• Whathappensif
improvementsintraining
newbaristaschangethe
responsivenessofsupply
froms=0.0001tos=0.0?
TiltingtheSupplyCurveII
• Demand:P=$10-0.0002Q
• OldSupply:P=$1+0.0001Q
• NewSupply:P=$1+0Q
• Toyouri>Clickers:Whathappensto
theequilibriumprice?
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:Whathappensto
theequilibriumprice?
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
• Andtheshiftoftheequilibrium
priceP*:$4—>$1/latte
• Andtheshiftofthequantity
Q*: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-line
thingeeflattenscompletely…
• Theequilibriumpointmoves
downtotheminimum
opportunitycost—by$3/latte
• Anditmovestotheright
accordingtotheslopeofthe
blue-linethingeetokeepiton
theline—by+15000/day
UnderstandingThisShift:
Algebraically
• s:0.0001—>0.0000
• P*:$4/latte—>$1/latte
• Q*:30000/day—>
45000/day
• Algebraically:weknow
that:
• 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)
• Flatteningtheresponsivenessofsupply
changestheweightofthemaximum
willingness-to-pay,thePd0,inthe
weightedaveragecalculationofP*from
1/3to0.P*thusfallstotheminimum
opportunitycost,thePs0.
• Flatteningthesupplycurvereducesthe
sumoftheslopeparametersby1/3,and
soincreasesthequantityproducedand
consumedby1/2.
UnderstandingThisShift:
Narratively
• Improvingthetrainingof
baristasmadethe
responsivenessofsupply
muchmuchgreater—infact,
madesupplyperfectly
responsive.
• Thislesserresourcecostof
makinglargenumbersof
lattesmeansthataneconomy
tryingtosatisfypeople’s
needswillshiftresourcesinto
thelattesector,andaway
fromsectorswhereresource
costshavenotfallen.
UnderstandingThisShift:
Narratively
• Improvingthetrainingofbaristasmadethe
responsivenessofsupplymuchmuch
greater—infact,madesupplyperfectly
responsive.
• Thislesserresourcecostofmakinglarge
numberslattesmeansthataneconomy
tryingtosatisfypeople’sneedswillshift
resourcesintothelattesector,andaway
fromsectorswhereresourcecostshavenot
fallen.
• Thefallingmarketpriceoflattesisasignal
totheeconomytomoveresourcesinto
makinglattesandoutofteachingyoga.
• Asthepriceoflattesfell,thenumberof
lattespurchasedfellasmorepeople’s
willingness-to-payexceededthemarket
price.
• Andsothepricefellandthequantityrose
untilsupplyanddemandwereonceagainin
balance
WaysofUnderstandingThisShift…
• s:0.0001—>0.0000
• P*:$4/latte—>$1/latte
• Q*:30000/day—>45000/
day
• Narratively,algebraically,
graphically—allthreeare
consistent,allthreeare
coherentviewsof
understandingthesame
economicprocess
• Whatisthateconomic
process?
WaysofUnderstandingThisShift…
• s:0.0001—>0.0000
• P*:$4/latte—>$1/latte
• Q*:30000/day—>45000/day
• Narratively,algebraically,graphically
—allthreeareconsistent,allthree
arecoherentviewsofunderstanding
thesameeconomicprocess
• Whatisthateconomicprocess?
• Itisthemarketeconomyreactingto
achangeincircumstancesby
shiftingresourcesaroundtokeep
productionefficientandarrange
productiontosatisfyconsumer
demandsasfullyaspossible
WhatHappensWhenthe
DemandCurveShiftsorTilts?
J.BradfordDeLong
February3,20168-9AM
WheelerAuditorium,U.C.Berkeley
ShiftingandTiltingtheDemandCurve
• Wecoulddoasimilarexample
forshiftingthey-axisinterceptof
thedemandcurve—the
maximumwillingness-to-pay,the
Pd0coefficient,theintensityof
greatestneedordesireforthe
commodity.
• Wecoulddoasimilarexample
forshiftingtheslopeofthe
demandcurve—the
responsivenessofconsumer
tastestofallingprices,thed
coefficient,thepotentialextent
ofdemand.
ShiftingandTiltingtheDemandCurve
• Wecoulddoasimilarexampleforshifting
they-axisinterceptofthedemandcurve
—themaximumwillingness-to-pay,the
Pd0coefficient,theintensityofgreatest
needordesireforthecommodity.
• Wecoulddoasimilarexampleforshifting
theslopeofthedemandcurve—the
responsivenessofconsumertastesto
fallingprices,thedcoefficient,the
potentialextentofdemand.
• Thestorieswouldbethesame—except
thatinsteadofbeingdrivenbychangesin
thetechnologyofproduction,theywould
bedrivenbychangesinthepreferences
orthewealthofpotentialconsumers.
ShiftingandTiltingtheDemandCurveII
• Thestorieswouldbethesame—
exceptthatinsteadofbeingdrivenby
changesinthetechnologyof
production,theywouldbedrivenby
changesinthepreferencesorthe
wealthofpotentialconsumers.
• Peoplewouldchangetheirbehaviorin
responsetothedifferentsignalsabout
resourceavailabilityandultimate
consumerneedanddesiresentbythe
pricesystem
• Andtheeconomywouldstriveto:
A. Keepproductionefficient
B. Satisfyasmuchconsumerneed
anddesireaspossiblegiven
shiftingpreferencesandwealth
TheMarketSystem:Balance
Sheet
J.BradfordDeLong
February3,20168-9AM
WheelerAuditorium,U.C.Berkeley
WhatGoesRightwiththeMarket?
•
•
•
•
•
Thecompetitivemarket
Inequilibrium
Withsecurepropertyrights
Andsecurecontractrights
Fromtheperspectiveofautilitariangreatest-good-of-the-greatest-number:
1. Allocatestherolesofproducersandsellerstothosewhocanmake
andsellinawayleastcostlytosociety’sresources,thosewiththe
lowestopportunitycost.
2. Producesatascalethatexhaustsallpossiblewin-winexchanges
3. Rationsthegoodsproducedtothosewiththegreatestwillingness-topay—thosewho,bythemoneystandard,needandwantitthemost
4. Respondstochangingresourcesandtechnologiesandtochanging
consumerpreferencesandwealthbyadjustingwhatismade,howis
made,andforwhomitismadeinordertokeepproductionefficient
andsatisfyasmuchofconsumerneedanddesireasisattainable.
WhatCanGoWrongwiththeMarket?
• Itcanbeoutofequilibrium
• Itcanbemessedupbyagovernmentthatimposesquotas
• (Thenthepriceadjuststomakethebestofabadsituation)
• Itcanbemessedupbyagovernmentthatfixesprices
• (Thenpeoplerespondtothewrongpricesignals)
• Thatisasfaraswehavegottensofar
• Andnowweareroughlytotheendofchapter7.Ontochapter8!
NextTimeWeAddto:WhatCanGoWrongwith
theMarket?
• Itcanbeoutofequilibrium
• Itcanbemessedupbya
governmentthatimposes
quotas
• (Thenthepriceadjusts
tomakethebestofa
badsituation)
• Itcanbemessedupbya
governmentthatfixesprices
• (Thenpeoplerespondto
thewrongpricesignals)
• Inaddition:itcanfailtobe
competitive