Transcript Session 5

Welcome to
PMBA0608:
Economics/Statistics
Foundation
Fall 2006
Session 5: September 20
Exam 1
Saturday, September 30, 14:3016:00
 Covers
 Chapters 1 through 4 of Mankiw
 Chapters 1 through 3 of Mendenhall,
Beaver and Beaver (up to 3.4, Page 102)
 Send me your questions
 I will do one, two or all of the following:
 Answer you privately
 Publish the answer to your question on line
 Answer your question right before exam at
14:00-14:30, Saturday, September 30.
From now on please
1. don’t turn in your assignments
in pieces. (separate documents)
2. answer the questions in the
right order.
3. don’t forget to put your names
on the assignment.
4. otherwise, I will deduct points.
Discuss Assignment 2
1. Problem 3, Page 59 of Mankiw
A
Pizza
gallon
of
Beer
Pat 4
2
hours hours
Opp cost of
1 pizza
Opp cost of 1
beer
½ gallons of 2 pizzas
beer
Kris 6
4
2/3 gallons
hours hours of beer
1.5 pizza
Assignment 2
1. Problem 3, Page 59 of Mankiw
a. Pat has absolute advantage in both
pizza and beer as it takes her less
time to produce either of these
goods.
b. Since opp. cost of 1 pizza is less for
Pat. She will trade away pizza for
beer.
c. The terms of trade:
2/3 beer >1 pizza> ½ beer
Assignment 2
2. Problem 6. Page 60 of Mankiw
Red
White Price of 1
socks socks white socks
= opp cost
Price of 1 red
socks = opp
cost
3
3
1 red socks
1 white
socks
Chicago 2
1
2 red socks
½ white
socks
Boston
Assignment 2
2. Problem 6. Page 60 of Mankiw
b. Boston has absolute advantage in
both. Boston has comparative
advantage in white socks and
Chicago has comparative advantage
in red socks.
c. Boston exports white socks and
Chicago exports red socks
d. 2 red>1 white socks> 1 red or
1 white >1 red socks>1/2 white
Assignment 2
3. Application 2.6, Page 24 of Mendenhall, Beaver and
Beaver (Use Excel or similar program. Explain why one
presentation is more effective.)
•
A chart always needs a title
•
Pie chart is more effective as it expresses the relationship of
the part to the whole
1.
You were graded based on your reasons not your opinions.
2.
“Because the book says so” is not a reason.
Do you approve of pay raise?
80
Do you approve of pay raise?
70
6%
20%
Approve
Disapprove
Don't Know
Percentage
60
50
40
Series1
30
20
10
74%
0
Approve
Disapprove
Response
Don't Know
Assignment 2
4. Application 2.12, Page 33 of Mendenhall, Beaver and
Beaver (Use Excel or similar program.)
 Excel
 Enter the data in one column.
 Enter bin number in next column.
 You want to be able to see what fraction of
banks granted 10 or fewer loans
 Ideally you want 10 to be the upper limit of
a bin
 32 – 0 = 32
 32 is divisible by 2
 I entered 16 bins: 2,4,6,8,…. 16
Assignment 2
4. Application 2.12, Page 33 of Mendenhall, Beaver and
Beaver (Use Excel or similar program.)
 Under tools go to data analysis and
histograms
 Input range is the first column of your
worksheet containing 50 values.
 Bin range is the second column of your
worksheet containing 16 values.
 Select chart.
Assignment 2
4. Application 2.12, Page 33 of Mendenhall, Beaver and
Beaver (Use Excel or similar program.)
b. Fraction of commercial banks granted 10
or fewer loans = (14+8+5+6+3)/50 = 72%
Histogram
16
14
10
8
Frequency
6
4
2
Bin
More
30
26
22
18
14
10
6
0
2
Frequency
12
•If you could
not easily get
this info from
your chart,
you lost 0.5
points.
Assignment 2
5. Exercise 2.47, Page 67 of Mendenhall, Beaver and
Beaver (Use Excel or similar program.)
Negative correlation
Correlation coefficient = - 0.9871
Bivariate Data
6
5
y
4
3
2
1
0
0
1
2
3
4
x
5
6
7
Market Model
Supply and Demand
Chapter 4 of Mankiw
What are Markets?
 Institutions that allow
buyers and sellers to
exchange
 There are two sides to a
market
1. Potential buyers 
demanders
2. Potential sellers  suppliers
Is this a market?
 How is the price determined?
 Auction
Is this a market?
 How is the price determined here?
 Haggling
Is this a market?
 How is the price determined here?
 Posted-price
What determines how much of a good
you are willing and able to buy?
 Price of that good
 Income
 Normal good
 Inferior good
 Price of other goods
 Complements
 Substitutes
 Taste
 Expectations
Demand Curve
shows how much of a good
consumers are willing and
able to buy at different
prices, holding everything
else constant.
Demand for red roses in Athens
 Demand curve has a ______ slope indicating
that ceteris paribus as price ____, quantity
demanded ______. (the law of demand)
Price
B
$2
A
$1
60
100
Demand
curve
Quantity /day
Suppose you collect data on price and
quantity demanded of roses in Athens
 And
 The result is a positive correlation
Price
*
*
*
*
*
*
•Is the law of demand
violated?
*
•No, everything else is
not constant
*
Quantity
demanded
Demand shifters
 What happens on Valentine’s day?
Price
B
$2
B’
D2
D1
60
110
Demand
curve shifts
to the right
or increases
Quantity /day
Demand shifters
 What happens if average income decreases
sharply?
Demand curve
shifts to the left
or decreases.
Price
B’
$2
B
D2
40
60
D1
Quantity /day
Demand shifters
 What if price of pink roses drops sharply?
Price
B’
Demand for
red roses
drops
B
$2
D2
20
60
D1
Quantity /day
Demand vs Quantity Demanded
price
P1
P2
D2
D1
Change in demand:
Q1
Q3 Q2
quantity
shift of the entire curve due to a change in a factor
other than the price of the good
Change in quantity demanded:
movement along a given curve due to a change in the
price of the good
Let’s practice
 Price of coffee increases then
(demand / quantity demands) for
sugar (increases/decreases).
 Price of coffee increases then demand
for sugar decreases.
And practice more
 Income increases then (demand/
quantity demanded) for Spam
(decreases/increases).
 Income increases then demand for
Spam decreases.
Examples
 Price of chocolate increase the
(demand/quantity demanded) for
chocolate (increases/decreases).
 Price of chocolate increase the
quantity demanded for chocolate
decreases.
What determines how much of a good
producers are willing and able to
supply?
Price of that good
Price of inputs (factors of
production)
Technology
Expectations
Supply Curve
shows how much of a good
producers are willing and
able to supply at different
prices, holding everything
else constant.
Supply of red roses in Athens
 supply curve has a ______ slope indicating
that ceteris paribus as price ____ quantity
supplied ______. (the law of supply)
Price
B
$2
$1
Supply
curve
A
20
60
Quantity /day
Supply shifters
 New fertilizer increases productivity
Price
S1
B
$2
60
S2
B’
120
Supply curve
shifts to the
right or
increases
Quantity /day
Supply shifters
 Cost of production increases
Price
S2
B’
$2.75
S1
Supply curve
shifts to the left
or decreases
B
$2
60
Quantity /day
Supply vs Quantity Supplied
S3
price
A movement from A to B
is caused by ______
in _______ and it results
in an increase in
quantity supplied.
A shift in supply is
caused by a change
in__________ and it
results in a change in
supply.
decrease
S1
S2
B*
increase
A
*
quantity
Market Equilibrium
Surplus
price
At P1: Qd = Qs
The market “clears”
S1
PHi
P1= $2
Disequilibrium
Surplus
PLo
D1
At PHi: Qd < Qs
Shortage
 Pressure on price to fall
Qsd
Shortage
At PLo: Qd > Qs
 Pressure on price to rise
Q1
=
60
QsQd
quantity
Market of red roses is in
equilibrium
 Until red roses lose their popularity
 How will this affect the equilibrium
prices and quantity of red roses?
S1
Price
$2
$1.50
•Demand for roses
drops
•At P= 2, there is a
surplus Price
drops
e1
e2
D2
20 30 60
D1
•Pe drops and Qe
drops
Quantity
Market of red roses is in
equilibrium
 Until a draught diminishes productivity
 How will this affect the equilibrium prices
and quantity of red roses?
S2
Price
•Supply decreases
S1
e2
•At P= 2, there is a
shortage Price
increases
$2.50
e1
$2
D1
50
60
•Pe increases and
Qe drops
Quantity
Let’s memorize
1.
2.
3.
4.
If
If
If
If
D↑ Pe↑ and Qe↑
D↓ Pe↓ and Qe↓
S↑ Pe↓ and Qe↑
S↓ Pe↑ and Qe↓
What if
 Supply and demand increase at the
same time
1. If D↑ Pe↑ and Qe↑
2. If S↑ Pe↓ and Qe↑
 Then Qe↑ but the change in Pe is
indeterminate
Applying the Model
• What is this
painter saying?
•My cost will
go up.
•My supply will
shift left
•Price will go
up.
•So, I supply
less now (i.e.
ask for a
higher price
now)???
Gasoline prices are going down.
Why?
 In its monthly report, the International
Energy Agency forecast world crude-oil
demand in 2006 would be lower than
previously expected at a time when
inventories in the U.S. and Asia are at a 20year high.
 In the near future, you can sell your oil for less
that you previously expected
 So sell more now S shifts right, Pe goes down.
Probability (Chapter 3 of Stat.)
•Problem: A spinner has
4 equal sectors colored
yellow, blue, green and
red. What are the chances
of landing on blue after
spinning the spinner? What
are the chances of landing
on red?
Definitions
 Experiment: A situation involving chance or
probability that leads to results called outcomes.
 In the problem above, what is the experiment?
 Outcome: The result of a single trial of an
experiment.
 What are the possible outcomes of this experiment?
 Event: One or more outcomes of an experiment.
 One event of this experiment is landing on _____.
 Probability: Measure of how likely an event is.
 The probability of landing on blue is_______.
Probability Of An Event
 P(A) = The number of ways event A
can occur / the total number of
possible outcomes
In our problem
 P(yellow) = number of ways to land
on yellow / total number of
colors = 1/4
 P(green) = 1/4
 P(red) = 1/4
 P(blue) = 1/4
Simple events
 Are mutually exclusive
 Are the events in our example simple?
 In simple event probabilities
 Each probability lies between 0 and 1
 The sum of probabilities is 1
Let’s practice
 A pair of dice is rolled. Two possible
events are rolling a number greater
than 8 and rolling an even
number. Are these two events
mutually exclusive events?




Numbers greater than 8: 9,10,11, 12
Even numbers: 2,4,6,8,10,12
Two events share outcomes
They are not mutually exclusive
Let’s spin
P (1) = ?
P (red) = ?
Let’s spin twice
 What is the probability that the
spinner will land on a 1 on the first
spin and on a red region on the
second spin?
 Choose:
a) 1/2
b) 1/4
c) 1/6
d) 1/8
Here is where a tree diagram will
help
1st
P (1)
spin
2nd spin P P (1
(red)
and
red)
1
1/2
1/4
1/4 •
1/2 =
1/8
Independent events
 Two events are said to be
independent if the result of the
second event is not affected by the
result of the first event.
 In our example, the event of a 1 on
the first spin is independent from the
event of a red on the second spin
 If A and B are independent events,
P(A and B) = P(A) x P(B).
Let’s spin once
P (1 and yellow) = ?
P (1 and yellow) =0
1 and yellow are
mutually exclusive
So probability of both
happening at the
same time = 0
Let’s spin once
P (1 or yellow) = ?
P (1 or yellow) = ¼ +
½=¾
1 and yellow are
mutually exclusive
So probability of 1 or
yellow = P(1) + P
(yellow)
Let’s spin
P (2 or 3 or 4)= ?
P (2 or 3 or 4)= ¾
Together 2 and 3
and 4 are
complements of 1
P (complements of
1) = 1- P (1)