Econ 2 1
Instructor: Richard Carson Office Hours Sequoyah Hall Room 250 Tuesday 2:00-3:00pm Wednesday 1:30-2:30pm Email: rcarson@ucsd.edu Phone: (858) 534-3384 2
TA Section Time All Sections Meet WLH 2205 Office Hour Location Office Hours Zachary Cloyd W 5pm Sequoyah 244 T 4-5pm Th 4-5pm Denise Hernandez Th 8am Sequoyah 256 T 3:30-5:30pm Eric Giambattisata W 4pm Sequoyah 244 T 11-12pm Th 11-12pm Marya Gottlieb M 9am Sequoyah 206 M 10:30-12:30pm Margaret Huang F 2pm Sequoyah 256 W 1-2pm F 1-2pm Justin Rao T 7pm Sequoyah 228 M 10-11am W 10-11am 3
Text: Robert H. Frank and Ben S. Bernanke, Principles of Economics, Second edition, 2004, McGraw-Hill Irwin. Course website: http://weber.ucsd.edu/~rcarson/econ2.html 4
To drop or add the course or change discussion section: Sequoyah Hall Room 245 8:00 a.m. 12:00 p.m. and 1:00 p.m. 4:30 p.m. 5
Exams: Thursday Feb 2 9:30-10:50 a.m. Thursday Feb 23 9:30-10:50 a.m. Friday March 24, 8:00-11:00 a.m. No one can leave exam room during an exam 6
Option 1: 25% first exam 25% second exam 50% on final Option 2: 25% on best of first two exams 75% on final 7
Problem sets: Are not required Don t count for your grade Are nevertheless a good idea Should be done before your discussion section meets 8
Problem Set 1 (Should be done before before your discussion section meets week of Jan 16-20) Prob # 1a-b-c, pages 188-189. Prob #4a-b-c, pages 189-190. 9
Comments on taking notes: (1) Copies of slides posted on course web page day after lecture. (2) Private notes are available through AS Lecture Notes (located by the old student center over in Revelle College) 10
Chapter 7: Efficiency and Exchange A. Producer surplus 11
Employment opportunity: landscape services 10 hours per week cash pay, no benefits 12
Employment opportunity: landscape services 10 hours per week cash pay, no benefits 13
Hourly wage Number of workers $4 1 $6 6 $8 40 14
Supply of labor curve $12 Wage ($ per hour) $10 $8 $6 $4 $2 $0 0 20 40 60 80 100 Number of workers 15
Supply of labor curve: to hire a given number of workers (represented by a point on horizontal axis) we would have to pay a certain wage (represented by a point on vertical axis) 16
Height = opportunity cost for that potential worker 17
If you would be willing to work for $8 and we pay you $10, then your surplus as a producer is $2 18
Supply of labor curve Wage ($ per hour) $14 $12 $10 $8 $6 $4 $2 $0 0 100 200 300 400 Number of workers 19
Supply of labor curve Wage ($ per hour) $14 $12 $10 $8 $6 $4 $2 $0 Surplus of 100 th person is $2 0 100 200 300 400 Number of workers 20
Supply of labor curve Wage ($ per hour) $14 $12 $10 $8 $6 $4 $2 $0 Surplus of 100 th person is $2 Surplus of 50 th person is $4 0 100 200 300 400 Number of workers 21
If hire 200 workers and pay each one $10, total producer surplus is area above supply curve and below the wage 22
Supply of labor curve Wage ($ per hour) $14 $12 $10 $8 $6 $4 $2 $0 0 100 200 300 400 Number of workers 23
Another example: to bring more strawberries to market, producers could: Harvest more intensively Cultivate land being used for something else Cultivate less desirable land 24
Supply of strawberries curve Price per pound $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 0 50 100 150 Tons of strawberries 25
If this region is a triangle, can find its area from Area = (1/2) base x height 26
Producer Surplus in the Market for Milk 3.00 S Price ($/gallon) 2.50 2.00 1.50 Producer surplus = $4,000/day 1.00.50 D 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity (1,000s of gallons/day) 27
Chapter 7: Efficiency and Exchange A. Producer surplus B. Consumer surplus 28
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` Price 10 cents 50 cents $1.00 $2.00 Number willing to buy 112 27 9 2 30
Demand for coke curve $2.50 Price ($ per can) $2.00 $1.50 $1.00 $0.50 $0.00 0 50 100 150 Number willing to buy 31
Demand curve: to sell a certain number of units (represented by a point on horizontal axis) we would have to charge a sufficiently low price (represented by a point on vertical axis) 32
Height = value of the product to that potential buyer 33
If you would be willing to pay 75 cents and we sell it to you for 50 cents, then your surplus as a consumer is 25 cents 34
Demand for coke curve $2.50 Price ($ per can) $2.00 $1.50 $1.00 $0.50 $0.00 0 50 100 150 Number willing to buy 35
Demand for coke curve $2.50 Price ($ per can) $2.00 $1.50 $1.00 $0.50 $0.00 Surplus of 40 th buyer is 25 cents 0 50 100 150 Number willing to buy 36
Demand for coke curve $2.50 Price ($ per can) $2.00 $1.50 $1.00 $0.50 $0.00 Surplus of 22 nd buyer is 50 cents 0 50 100 150 Number willing to buy 37
If 65 people each pay 50 cents, total consumer surplus is area below demand curve and above the price 38
Consumer surplus 39
If this region is a triangle, can find its area from Area = (1/2) base x height 40
Example: Demand for heating oil Price ($/gallon) 2.00 1.80 1.60 1.40 1.20 1.00.80 S D Consumer surplus = (1/2) (0.6) (3000) = $900/day 1 2 3 4 5 8 Quantity (1,000s of gallons/day) 41
Chapter 7: Efficiency and Exchange A. Producer surplus B. Consumer surplus C. Total economic surplus Total economic surplus in a given market is the total surpluses of all participants in the market If only participants are buyers and sellers, then total economic surplus is the sum of producer surplus plus consumer surplus 42
Economic Surplus in an Unregulated Market for Home Heating Oil Price ($/gallon) 2.00 1.80 1.60 1.40 1.20 1.00.80 Consumer surplus = $900/day S Producer surplus = $900/day D Without price controls: Equilibrium Price = $1.40 Consumer surplus = (1/2)(3,000)(.60) = $900/day Producer surplus = (1/2)(3,000)(.6) = 900/day Economic surplus = $1,800/day 1 2 3 4 5 Quantity (1,000s of gallons/day) 8 43
Chapter 7: Efficiency and Exchange A. Producer surplus B. Consumer surplus C. Total economic surplus D. Applications. 1. Costs of price ceilings 44
The Cost of Preventing Price Adjustments Price Ceilings: Do They Help the Poor? An Example A Price Ceiling for Home Heating Oil 45
The Waste Caused by Price Controls 2.00 S Price Ceiling set at $1.00 1.80 Consumer surplus 1.60 1.40 Price ($/gallon) 1.20 1.00.80 D Producer surplus = (1/2) (0.2) (1000) = $100/day 1 2 3 4 5 Quantity (1,000s of gallons/day) 8 46
Area of trapezoid = (1/2) x (base_1 + base_2) x (height) 47
The Waste Caused by Price Controls 2.00 S Price Ceiling set at $1.00 1.80 1.60 1.40 Consumer surplus = (1/2) (1 + 0.8) (1000) = $900/day Price ($/gallon) 1.20 1.00.80 D Producer surplus = (1/2) (0.2) (1000) = $100/day 1 2 3 4 5 Quantity (1,000s of gallons/day) 8 48
The Waste Caused by Price Controls 2.00 S Price Ceiling set at $1.00 Price ($/gallon) 1.80 1.60 1.40 1.20 1.00.80 D Consumer surplus = $900/day Lost economic surplus = (1/2) (0.8) (2000) = $800/day Producer surplus = $100/day With price controls: Producer surplus = (1/2)(1,000)(.20) = $100/day or a loss of $800/day Economic surplus = $1,000 or a loss of $800/day 1 2 3 4 5 Quantity (1,000s of gallons/day) 8 49
The Cost of Preventing Price Adjustments The reduction in economic surplus from a price ceiling will be underestimated when The consumers who receive the product are not the consumers who value it the most. Consumers take costly actions to enhance their chances of being served. 50
When the Pie Is Larger, Everyone Can Have a Bigger Slice Surplus with price controls Surplus with income transfers and no price controls R R P P With price controls set at $1.00 the economic surplus is $1,000/day *R = economic surplus received by rich people *P = economic surplus received by poor people Without price controls & with income transfers economic surplus is $1,800/day *R & P have the same share and a much larger economic surplus 51
The Cost of Preventing Price Adjustments What types of programs could be used to help the poor get heating oil that would be more efficient than a price ceiling? Is housing different? 52
Chapter 7: Efficiency and Exchange A. Producer surplus B. Consumer surplus C. Total economic surplus D. Applications. 1. Costs of price ceilings 2. Effects of taxes 53
The Market for Potatoes Without Taxes 6 5 Total economic surplus = $9 million/month S Price ($/pound) 4 3 2 1 1 2 3 4 5 D Quantity (millions of pounds/month) 54
The Effect of a $1 per Pound Tax on Potatoes 6 S + tax S 5 Price ($/pound) 3.50 2.50 4 3 2 How a tax collected from a seller affects economic surplus 1 D 1 2 3 4 5 2.5 Quantity (millions of pounds/month) 55
Taxes and Efficiency Deadweight Loss The reduction in total economic surplus that results from the adoption of a policy 56
The Effect of a $1 per Pound Tax on Potatoes 6 S + tax S 5 Price ($/pound) 3.50 2.50 4 3 2 How a tax collected from a seller affects economic surplus 1 D 1 2 3 4 5 2.5 Quantity (millions of pounds/month) 57
The Deadweight Loss Caused by a Tax S + tax 6 S 5 Price ($/pound) 3.50 2.50 4 3 2 Deadweight loss caused by tax 1 D 1 2 3 4 5 2.5 Quantity (millions of pounds/month) 58
Elasticity of Demand and the Deadweight Loss from a Tax Deadweight loss Deadweight loss S + T S + T Price ($/unit) 2.40 2.00 1.40 S D1 Price ($/unit) 2.60 2.00 1.60 S D2 19 24 Quantity (units/day) 21 24 Quantity (units/day) The greater the elasticity of demand, the greater the deadweight loss from a tax 59
Elasticity of Supply and the Deadweight Loss from a Tax Deadweight Loss S1 + T Deadweight Loss S2 + T Price ($/unit) 2.65 2.00 1.65 S1 D Price ($/unit) 2.35 2.00 1.35 S2 D 57 72 Quantity (units/day) 63 72 Quantity (units/day) The greater the elasticity of supply, the greater the deadweight loss from a tax 60
Taxes and Efficiency Who Pays A Tax Imposed On Sellers of a Good? Answer depends on the elasticity of demand and supply 61
The Effect of a Tax on Sellers of a Good with Infinite Price Elasticity of Supply Assume a tax levy of $100 tax/car Price ($/car) $20,100 $20,000 S + $100 S Supply shifts to $20,100 The burden of the tax falls entirely on the consumer D 1.9 2.0 Quantity (millions of cars/month) 62
The Effect of a Tax on the Equilibrium Quantity and Price of Potatoes 6 Without a tax P = $3/lb and Q = 3 million lbs/month S + tax S 5 Price ($/pound) 3.50 2.50 4 3 2 1 With a tax of $1/lb increases by $1/lb Supply shifts up by $1 P = $3.50; Q = 2.5 million Consumers and producers share the burden of the tax equally Producers receive $2.50/lb Consumers pay $3.50/lb D 1 2 3 4 5 2.5 Quantity (millions of pounds/month) 63
Chapter 7: Efficiency and Exchange A. Producer surplus B. Consumer surplus C. Total economic surplus D. Applications. 1. Costs of price ceilings 2. Effects of taxes 3. Effects of subsidies 64
The Cost of Preventing Price Adjustments Price Subsidies: Do They Help the Poor? By how much do subsidies reduce total economic surplus in the market for bread? Assume a small nation imports all its bread at the world price of $2.00 65
Economic Surplus in a Bread Market Without Subsidy Price of bread ($/loaf) 5.00 4.00 3.00 Consumer surplus = $4,000,000/month Economic surplus maximized where ($2) = MB($2) at 4 million loaves World price = $2.00 S 1.00 D 2 4 6 8 Quantity (millions of loaves/month) 66
The Reduction in Economic Surplus from a Subsidy Price of bread ($/loaf) 5.00 4.00 3.00 The cost of the subsidy = $6 million The benefit of the subsidy = $5 million Loss of economic surplus = $1 million Consumer surplus = $9,000/month Reduction in total economic surplus = $1,000,000/month World price = $2.00 S 1.00 D 2 4 6 8 Quantity (millions of loaves/month 67
The Cost of Preventing Price Adjustments Price Subsidies How could we provide assistance to low income consumers more efficiently? 68
The Cost of Preventing Price Adjustments First-Come, First-Served Policies Movie Theatres Restaurants Hotels Airlines 69
Equilibrium in the Market for Seats on Oversold Flights 60 Demand for remaining on the flight Supply of seats Price ($/seat) 24 Seats 33 37 70
Equilibrium in the Market for Seats on Oversold Flights 60 First-come, First-served Reservation prices = (60+59+ +24)/37 = $42/passenger 4 bumped @ $42 each or $168 loss in economic surplus Supply of seats Price ($/seat) 27 24 Seats 33 37 71
The Marginal Cost Pricing of Public Services Example How much should a city charge for water, electricity, or some other service? 72
The Marginal Cost Curve for Water Ocean 4.0 Cost (cents/gallon) 0.8 Spring Lake Three sources of water Spring: 1 million gallons/day.02 cents/gallon Lake: 2 million gallons/day @.08 cents/gallon Ocean: 4 cents/gallon 0.2 1 3 Water supplied (millions of gallons/day) 73
The Marginal Cost Curve for Water Ocean 4.0 Cost (cents/gallon) 0.8 Spring Lake Assume If P = 4 cents/gallon, Q = 4 million gallons Question Why should all residents pay 4 cents per gallon 0.2 1 3 Water supplied (millions of gallons/day) 74
Market Equilibrium and Efficiency Are markets always efficient and equitable? 75
Market Equilibrium and Efficiency A market equilibrium is efficient If price and quantity take any other than their equilibrium values, a transaction that will make at least some people better off without harming others can always be found. This definition is often referred to as Pareto efficiency 76
How Excess Demand Creates an Opportunity for a Surplus-Enhancing Transaction 2.50 S Price ($/gallon) 2.00 1.50 1.25 1.00.50 If P = $1 then Q S = 2,000 gallons/day At 2,000 gallons the consumer is willing to pay $2 and the = $1 If the buyer pays $1.25 for an extra gallon, producer is $.25 better off, and the consumer is $.75 better off, or economic surplus increases by $1.00 At $1, the market is not efficient 1 2 3 4 5 D Quantity (1,000s of gallons/day) 77
How Excess Supply Creates an Opportunity for a Surplus-Enhancing Transaction 2.50 S Price ($/gallon) 2.00 1.75 1.50 1.00.50 If P = $2 then Q D = 2,000 gallons/day Additional output costs only $1 This is $1 less than a buyer would pay If the buyer pays the seller $1.75, the buyer gains an economic surplus of $0.25 then the seller gains an economic surplus of $0.75 1 2 3 4 5 Quantity (1,000s of gallons/day) D 78
Market Equilibrium and Efficiency Observations on Efficiency When price is above or below the equilibrium, the quantity exchanged will be below the equilibrium. The vertical value on the demand curve (marginal benefit) is greater than the vertical value on the supply curve (). Only the equilibrium will maximize economic surplus. 79
Market Equilibrium and Efficiency Markets will be efficient when Buyers and sellers are well informed. Markets are perfectly competitive. Supply measures all relevant costs. Demand measures all relevant benefits. 80
Centrally Planned Economies Government determines what quantity of each good should be produced Government sets price for each good Questions Are the government s desired quantity and price always realized? Why is it impossible to control both? How do markets achieve equilibrium in a centrally planned economy? 81