Transcript Supply - Typepad

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…