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Economics1:Introductionto Economics https://bcourses.berkeley.edu/courses/1411451/ assignments/syllabus J.BradfordDeLong<[email protected]> Administrivia https://bcourses.berkeley.edu/courses/1411451/assignments/syllabus J.BradfordDeLong February3,20168-9AM WheelerAuditorium,U.C.Berkeley i>Clickers! • Doyouhavean i>Clicker? A. Yes,Ihaveusedit before B. Yes,andit’snewly registered! C. Yes,butit’snotyet registered D. What’san i>Clicker? E. No i>Clicker:ProblemSet1Was… A. Tooeasy,andtoo short B. Tooeasy,andtoo long C. Toohard,andtoo short D. Toohard,andtoo long E. WhatisProblemSet 1? ProblemSet1:Problem2b • Wasadisaster… • Thoughtyouwouldthink backtoproblem1,and reasonthatasimilar supplycurvewould produceasimilarPPF • Didnot… • Willcurveupanswers… Tutors • Wanttodolearnmorethanhowto parrotbacksentencesfromthe lectureandthetextbook? • 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 • Wehavelotsofoutsideresources tohelpyoulearnstuff TheStudentLearningCenter • Wanttodobetter EconDepartmentTutoring • Wanttodobetter 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