Economics 2: Spring 2014

Economics 2: Spring 2014

J. Bradford DeLong <jbdelong@berkeley.edu>; Maria Constanza Ballesteros <mc.ballesteros@berkeley.edu>;

Connie Min <conniemin@berkeley.edu>

http://delong.typepad.com/sdj/econ-2-spring-2014/

Economics 2: Spring 2014: Supply and Demand Algebra:

Recaphttp://delong.typepad.com/sdj/econ-1-spring-2014/

February 5, 2014, 4-5:30101 Barker, U.C. Berkeley

The Y-Intercept: Price at Which Supply Is 0.

• Supply:– P = Ps0 + a x Qs

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.

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

Demand Coefficients: The Price at Which Demand Is Zero, and the Slope• Supply:– P = Ps0 + a x Qs

– P = Ps1 x Qs(a)

• Demand:– P = Pd0 - b x Qd

– P = Pd1 x Qd(-b)

• Which means:– To call forth 1 more

unit of demand requires a price decrease of b

– To call forth a 1% increase in quantity demanded requires a price decrease of b%

Ladies and Gentlemen, to Your i>Clickers!

• Suppose: P = Pd0 - b x Qd

• Pd0 = 100 :: b = 2

• At what price is the quantity demanded going to be 0?

– A. 55– B. 30– C. 100– D. 35– E. None of the Above

Ladies and Gentlemen, to Your i>Clickers!

• Suppose: P = Pd0 - b x Qd

• Pd0 = 100 :: b = 2• At what price is the quantity demanded going to

be 0?– A. 55– B. 30– C. 100– D. 35– E. None of the Above• That’s what the Pd0 is: the price at which the

quantity demanded is zero…

With This Demand and Supply Curve, Where Is Quantity Demanded = Quantity Supplied?

• Linear Case:–P = Ps0 + a x Qs

–P = Pd0 - b x Qd

• Solve:– Pd0 - b x Qd = Ps0 + a x Qs

– Pd0 - Ps0 = (a+b) x Qs

• Equilibrium–Q = (Pd0 - Ps0 )/(a+b)

Calculating the Equilibrium Quantity

• Equilibrium: Q = (Pd0 - Ps0 )/(a+b)

Ladies and Gentlemen, to Your i>Clickers!

• Suppose: P =10 + 7 x Qs :: P = 100 - 2 x Qd

• What is the market equilibrium quantity going to be?

– A. 10– B. 30– C. 74.29– D. 35.71– E. None of the Above

Ladies and Gentlemen, to Your i>Clickers!

• Suppose: P =10 + 7 x Qs :: P = 100 - 2 x Qd

• What is the market equilibrium quantity going to be?– A. 10– B. 30– C. 74.29– D. 35.71– E. None of the Above• Remember our equation: Q = (Pd0 - Ps0 )/(a+b)– The gap between the zero-quantity reservation prices—(Pd0 -

Ps0 )—is 90.– The sum of the slopes is 9– The equilibrium quantity is (the gap between the zero-quantity

reservation prices)/(the sum of the slopes) = 90/9 = 10

Calculating the Equilibrium Price

• P = (b/(a+b))Ps0 + (a/(a+b))Pd0

Ladies and Gentlemen, to Your i>Clickers!

• Suppose: P =10 + 2 x Qs :: P = 100 - 7 x Qd

• What is the market equilibrium price going to be?

– A. 55– B. 30– C. 74.29– D. 35.71– E. None of the Above

Ladies and Gentlemen, to Your i>Clickers!

• Suppose: Supply: P = 10 + 2 x Qs :: Demand: P = 100 - 7 x Qd

• What is the market equilibrium price going to be?– A. 55– B. 30– C. 74.29– D. 35.71– E. None of the Above• You take the slope-weighted average of the two zero quantity prices,

10 and 100.• That means you are 2/9 of the way from one ZQ value to the other• Which one is it? The demanders care a lot about higher prices, so that

means they have morebargaining power—and to the equilibrium price of 30 is much closer to the suppliers’ ZQ price than to that of the demanders…

Equilibrium Quantity Is the Gap Between the ZQ Parameters Divided by the Sum of the Slopes…

• Supply: P = Ps0 + a x Qs Demand: P = Pd0 – b x Qd

• Equilibrium: Q = (Pd0 - Ps0 )/(a+b) :: P = (b/(a+b))Ps0 + (a/(a+b))Pd0

Ladies and Gentlemen, to Your i>Clickers!

• Suppose: P =10 + 7 x Qs :: P = 175 - 4 x Qd

• What is the market equilibrium quantity going to be?

– A. 14.5454– B. 115– C. 70– D. 15– E. None of the Above

Ladies and Gentlemen, to Your i>Clickers!

• Suppose: P =10 + 7 x Qs :: P = 175 - 4 x Qd

• What is the market equilibrium quantity going to be?– A. 14.5454– B. 115– C. 70– D. 15– E. None of the Above

• The equilibrium quantity will be the net intensity of relative demand—the gap between the ZQ reservation prices—divided by the sum of the slopes– The ZQ prices are 10 and 175, so the gap is 165– The sum of the slopes is 15– 165/11 = 15

Equilibrium Price Is a Slope-Weighted Average of the Zero-Quantity Price Intercepts…

• Supply: P = Ps0 + a x Qs Demand: P = Pd0 – b x Qd

• Equilibrium: Q = (Pd0 - Ps0 )/(a+b) :: P = (b/(a+b))Ps0 + (a/(a+b))Pd0

Memorize This!

• Supply: P = Ps0 + a x Qs Demand: P = Pd0 – b x Qd

• Equilibrium: Q = (Pd0 - Ps0 )/(a+b) :: P = (b/(a+b))Ps0 + (a/(a+b))Pd0

Ladies and Gentlemen, to Your i>Clickers!

• Suppose: P =10 + 7 x Qs :: P = 175 - 4 x Qd

• What is the market equilibrium price going to be?

– A. 55– B. 30– C. 110– D. 115– E. None of the Above

Ladies and Gentlemen, to Your i>Clickers!

• Suppose: P =10 + 7 x Qs :: P = 175 - 4 x Qd

• What is the market equilibrium price going to be?– A. 55– B. 30– C. 110– D. 115– E. None of the Above

• The equilibrium price will be a slope-weighted average of the ZQ prices– The ZQ prices are 10 and 175– Since demand is moreelastic, the price will be closer to the ZQ demand value…– Since the slopes are 4 and 7, the equilibrium price will be 4/11 of the way from

one ZQ value and 7/11 of the way from the other…– THAT MEANS 115