Econ 1110 TA Session

Transcription

1 Econ 1110 TA Session Sep. 18 (Friday) Discussion 214/215 Agenda 1. Guiding Question 2. Review of Supply and Demand graphs 3. Market Demand Curve Construction 4. Summary 5. iclicker question 6. PPF Example: handout 2 1

2 Guiding question(0918) Which of the following would not result in a change in the quantity demanded? A) An increase in population B) A change in tastes C) An increase or decrease in the price of a substitute or complement D) A change in income E) A shift in the supply curve 3 Demand and Supply Graphs (1) 1. Suppose we have a demand/supply curve for Pork 2. Characteristics of a demand curve The willingness of consumers to pay for the good Downward sloping curve 4 2

3 Demand and Supply Graphs (2) 3. Characteristics of a supply curve Willingness of producers to supply the good Upward sloping curve 5 Equilibrium Price / Quantity 1. What is equilibrium? Supply = demand Equilibrium = happiness Price Pork Market 2. Shock this equilibrium. Suppose the price of beef rises (alternative C in our question) e Quantity 6 3

4 When the price of beef rises(1) 1. Pork and Beef: substitutes 2. Price of beef > Demand for Pork > Shift out in the curve 3. Price remains at 3$? If so, excess demand Here, e.d. is 150 mil(q d Q s ) Price($/kg) 5 3 e 2 e mil of kgs 7 [Results] When the price of beef rises(2) 1. Initial Equilibrium(e1) (P,Q)=(3,300) 2. Price beef goes up. 3. Excess demand at price $3 =450300= New equilibrium(e2) (P,Q)=(3.5,350) Price($/kg) e e mil of kgs 8 4

5 Alternative answers A) An increase in population [individual demand schedule] Price($/lb) Demand (lb) per week [market d/s] Price($/unit) Demand 2 80, stores 3 60, , , identical small-sized supermarkets with the same preferences => One big supermarket (e.g. Wegmens) 9 Alternative answers B) A change in tastes New scientific research => Pork: great source of vitamins and omega 3 => 9 out of 10 kids who ate pork everyday came to Cornell => Think about parents action 10 5

6 Alternative answers D) A change in income People can t eat pork everyday due to high cost living Suppose the stock market is booming => People receive large dividends => Increase demand for Pork E) A shift in the supply curve 11 Derive Market demand(1) Assume two goods(x and Y) and two individuals(1 and 2). Each one s demand for X is Q X1 = d X1 (P X,P Y,I 1,Others), Q X2 = d X2 (P X,P Y,I 2, Others) Suppose other factors remain the same Total demand for X Total Q X = Q X 1 + Q X 2 So, Q X = d X 1 (P X,P Y,I 1 ) + d X 2 (P X,P Y,I 2 ) Now Q X = D X (P X,P Y,I 1,I 2 ) 12 6

7 Derive Market demand(2) To construct the market demand, P X is allowed to vary P Y,I 1,I 2 are held constant P X Individual 1 s demand curve P X Individual 2 s demand curve P X Market demand curve P X * d X 1 d X 2 D X X 1 * X X 2 * X X* X X 1 * + X 2 * = X* 13 Market demand: Numerical Example(1) Suppose that individual 1 s demand for Pork is given by Q X1 = 10 2P X + 0.1I P Y and individual 2 s demand is Q 2 X = 17 P X I P Y The market demand curve is Q X =Q 1 X + Q 2 X = 27 3P X + 0.1I I 2 + P Y Q) Is X a normal good for both buyers? 14 7

8 Market demand: Numerical Example(2) Assume values for P Y, I 1, and I 2 Let P Y = 4, I 1 = 40, and I 2 = 20. Then, the market demand curve becomes Q X = 27 3P X = 36 3P X Q) How can you know whether a good x is a substitute for y? 15 Market demand: Numerical Example(3) 1) P y (say beef) rises to 6, then market demand curve shifts outward to Q X = 27 3P X = 38 3P X 2) If I 1 fell to 30 while I 2 rose to 30, the market demand would shift inward to Q X = 27 3P X = P X 16 8

9 Market demand: Generalization Suppose that ngoods(x i, i = 1,.,n) with P i, i = 1.,n There are m individuals The j th s demand for the i th good will depend on all prices and on I j Q i j = d ij(p 1,,P n, I j ) =X ij Market demand function for X i (= Q X ) X i = m j = 1 X ij = Di ( P 1,..., Pn, I 1,..., Im ) Demand/Supply Curve Summary(1) Demand curve represents the willingness of consumers to pay for the goods and service Supply curve represents the willingness of suppliers to provide goods 2. Shiftof demand curve vs Movement along the curve Demand curve for good X is a function of Px,Py, Income, taste and expectations There is a negative relation between price and quantity demanded whenallother factorsarebeing equal 18 9

10 Summary(2) 3. Individual demand vs Market demand versus Market demand curve is the horizontal sum of individual curves Individual Preferences do not need to be the same Market demand curve isalsodownsloping 19 Question 5.12: Price Elasticity and Total Revenue A Cornell student gets $100 per week allowance. No matter what the price, every week she spends all her money on makeup. Her weekly demand curve for makeup is: a) in equilibrium b) perfectly elastic c) perfectly inelastic d) highly inelastic but not perfectly so e) unitary elastic Hint: The best way to answer this question is to sketch the demand curve of this student. Its shape may surprise you. Think about how elasticities are calculated via the total revenue rule. Econ 1110 Professor Burkhauser 10

11 Q. Abe, Betty and Charlie are the only producers/consumers in a small economy. Abe, Betty and Charlie produce and consume only two things: yaks and xylophones. Given 60 hours of work in a week, Abe can produce a maximum of 3 yaks or 15 xylophones, or any combination along a straight line PPF between the two. With 60 hours of work in a week Betty can produce a maximum of 5 yaks or 20 xylophones, or any combination along a straight line PPF between the two. With 60 hours of work in a week Charlie can produce a maximum of 4 yaks or 8 xylophones, or any combination along a straight line PPF between the two. Assume all three will work exactly 60 hours in total each week. 21 a) Fill in the missing numbers in the table Hours Required for one unit of output Person Yak Xylophone Abe 20hrs 4hrs Betty 60/5=12h 60/20=3h Charlie 60/415h 60/8=7.5h b) The opportunity cost of producing 1 unit of Yak Abe: 20h /4h = 5X Betty: 12h / 3h = 4X Charlie: 15 / 7.5 = 2X 22 11