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Economics 2: Spring 2014 J. Bradford DeLong <[email protected]>; Maria Constanza Ballesteros <[email protected]>; Connie Min <[email protected]> http://delong.typepad.com/sdj/econ-2-spring-2014/ Economics 2: Spring 2014: Supply and Demand Algebra: Supply http://delong.typepad.com/sdj/econ-1-spring-2012/ February 3, 2014, 4-5:30 101 Barker, U.C. Berkeley Daily Reading… • Jeff Sachs once told us younglings that the Financial Times <http://ft.com> was "the real newspaper... the newspaper you all need to be reading if you want to become economists..." IMHO, he was correct. • Here we have Emiko Terazono Here we have Emiko Terazono talking about supply, demand, market equilibrium--and the consequences of a shift in preferences that strengthens demand: the dance between nutsnackers in the North Atlantic's, China's, and India's middle classes, cashew traders and brokers, and the cashew farmers of Africa: – Emiko Terazono, “Courted for cashews, west African farmers gain strength…” <http://www.ft.com/intl/cms/s/0/69fbe18a-8203-11e3-87d500144feab7de.html> • Other further reading this week: – Ernst Fehr and Antonio Rangel, “Neuroeconomic Foundations of Economic Choice--Recent Advances” <http://www.rnl.caltech.edu/publications/pdf/fehr2011.pdf> – David Colander, “Retrospectives: Edgeworth's Hedonimeter and the Quest to Measure Utility” <http://sandcat.middlebury.edu/econ/repec/mdl/ancoec/0723.pdf> We Are Never More Going to Have Ugly Kinked Supply Curves, But Smooth Ones… And We Are Going to Have MATH!! Everything Is Going to Be Smooth, and Mathy! • Supply: – P = Ps0 + a x Qs The Y-Intercept: Price at Which Supply Is 0. • Supply: – P = Ps0 + a x Qs We Will Do a Lot of These on Problem Set 2! • Suppose: P = Ps0 + a x Qs – Supply curve is: • Ps0 = 10 • a=7 Ladies and Gentlemen, to Your i>Clickers! • Suppose: P = Ps0 + a x Qs – Ps0 = 10 :: a = 7 • At what price will the quantity supplied be 0? – – – – – A. 59 B. 30 C. 10 D. 35.71 E. None of the Above Ladies and Gentlemen, to Your i>Clickers! • Suppose: P = Ps0 + a x Qs – Ps0 = 10 :: a = 7 • At what price will the quantity supplied be 0? – A. 59 – B. 30 – C. 10 – D. 35.71 – E. None of the Above • That is what the Ps0 parameter is: the price at which the quantity supplied is zero. Ladies and Gentlemen, to Your i>Clickers! • Suppose: P = Ps0 + a x Qs – Ps0 = 10 :: a = 7 • At what price will the quantity supplied be 7? – – – – – A. 59 B. 30 C. 10 D. 35.71 E. None of the Above Ladies and Gentlemen, to Your i>Clickers! • Suppose: P = Ps0 + a x Qs – Ps0 = 10 :: a = 7 • At what price will the quantity suppliedbe 7? – – – – – • A. 59 B. 30 C. 10 D. 35.71 E. None of the Above That is how we calculate the price corresponding to quantity supplied: 10 + 7 x 7 = 59 The Slope: What Change in Price Calls Forth One More Unit of Supply? • Supply: – P = Ps0 + a x Qs • Which means: – To call forth 1 more unit of quantity supplied requires a price increase of the quantity a Ladies and Gentlemen, to Your i>Clickers! • Suppose: P = Ps0 + a x Qs – Ps0 = 10 :: a = 7 • If the price is 38, what is the quantity supplied? – – – – – A. 276 B. 17 C. 5 3/7 D. 4 E. None of the Above Ladies and Gentlemen, to Your i>Clickers! • Suppose: P = Ps0 + a x Qs – Ps0 = 10 :: a = 7 • If the price is 38, what is the quantity supplied? – – – – – A. 276 B. 17 C. 5 3/7 D. 4 E. None of the Above • 38 = 10 + 7 x ?? Q = 4 What Have We Done Here? • Now we have a lot of suppliers… • We can no longer keep track of every individual—their alternative options, their reservation prices, and their productivities in the job… – But the quantity supplied by any individual potential supplier will on their alternative options, on their resulting reservation price, on their productivity, and on the price. • So we have taken shortcuts… • Here we have assumed two things about the population of potential suppliers as a whole: – A price at which the first supplier is just on the point of entering the market: Ps0 – An assumption that each additional increase of a in the price brings forth one additional unit of suppliers – These are unreal assumptions, but they are simple, and an approximation of a number o f possible situations… What Have We Done Here? II • Here we have assumed two things about the population of potential suppliers as a whole: – A price at which the first supplier is just on the point of entering the market: Ps0 – An assumption that each additional increase of a in the price brings forth one additional unit of suppliers – These are unreal assumptions, but they are simple, and an approximation of a number of possible situations… • Specify two parameters—two numbers—and so “model” an entire population of potential suppliers… Is This “Science”? • Isaac Asimov: Second Foundation – They stood together in the light. Each wall was thirty feet long, and ten high. The wri)ng was small and covered every inch. “This is not the whole [psychohistorical] Plan,” said the First Speaker. “To get it all upon both walls, the individual equations would have to be reduced to microscopic size—but that is not necessary. What you now see represents the main portions of the Plan till now. You have learned about this, have you not?” – “Yes, Speaker, I have.” – “Do you recognize any portion?” – A slow silence. The student pointed a finger.... “It,” faltered the Student, “is a Rigellian integral, using a planetary distribution of a bias indica)ng the presence of two chief economic classes on the planet, or maybe a Sector, plus an unstable emotional pattern.” – “And what does it signify?” – “It represents the limit of tension, since we have here... a converging series.”... No, This Is a “What If” Exercise • John Maynard Keynes: “Letter to Roy Harrod, July 4, 1938”: – <http://economia.unipv.it/harrod/edition/editionstuff/rfh. 346.htm> – Economics is a branch of logic, a way of thinking… [not] a pseudo-natural-science.... Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. – It is compelled to be this, because, unlike the typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time…. Good economists are scarce because the gift for using "vigilant observation" to choose good models, although it does not require a highly specialised intellectual technique, appears to be a very rare one… An Alternative, Multiplicative Supply Curve We Will Sometimes Use • Supply: – P = Ps0 + a x Qs • An alternative we will use sometimes – P = Ps1 x Qs(a) • Which is: – ln(P) = ln(Ps1) + a x ln(Qs) Take Logs: Things Become Straight Lines Again • Alternative Supply: – P = Ps1 x Qs(a) • Which is: – ln(P) = ln(Ps1) + a x ln(Qs) • To call forth a 1% increase in quantity supplied requires a price increase of a% • The concept of elasticity…