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July03
- 1. Outline for Thurs, July 3 Remember Quiz on Friday Homework due Monday Review from WednesdayReview from Wednesday The Supply & Demand Model Using the graph Assumptions
- 2. Review from Wednesday What do we mean by _____ and why is it important to our understanding of markets? Scarcity Opportunity costOpportunity cost Decisions at the margin Rationality
- 3. Review from Wednesday What is the single key difference between positive and normative claims?
- 4. Review from Wednesday What is the single key difference between positive and normative claims? Testability
- 5. Review from Wednesday What is the single key difference between positive and normative claims? Testability What makes a bad model?What makes a bad model?
- 6. Review from Wednesday What is the single key difference between positive and normative claims? Testability What makes a bad model?What makes a bad model? Wrong answers Inconsistent assumptions or answers
- 7. Review from Wednesday What is the single key difference between positive and normative claims? Testability What makes a bad model?What makes a bad model? Wrong answers Inconsistent assumptions or answers What can we do with positive statements?
- 8. Review from Wednesday What is the single key difference between positive and normative claims? Testability What makes a bad model?What makes a bad model? Wrong answers Inconsistent assumptions or answers What can we do with positive statements? Explain Predict Choose between policies, given a normative goal
- 9. What you’ll be tested on Explanations, not definitions We need to speak the same language, but that doesn’t mean memorizing the glossary
- 10. What you’ll be tested on Explanations, not definitions We need to speak the same language, but that doesn’t mean memorizing the glossary (…until we get to game theory)
- 11. What you’ll be tested on Explanations, not definitions We need to speak the same language, but that doesn’t mean memorizing the glossary (…until we get to game theory) For example, equilibrium is
- 12. What you’ll be tested on Explanations, not definitions We need to speak the same language, but that doesn’t mean memorizing the glossary (…until we get to game theory) For example, equilibrium is Where the supply and demand curves meet Where no buyers and sellers wish to change their actions What real markets should “tend towards” over time
- 13. What you’ll be tested on Explanations, not definitions We need to speak the same language, but that doesn’t mean memorizing the glossary (…until we get to game theory) For example, equilibrium is Where the supply and demand curves meet Where no buyers and sellers wish to change their actions What real markets should “tend towards” over time The general concept is more useful than a narrow definition in most economic arguments
- 14. How do economists argue? (1) Use mathematics as a shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English.(3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can't succeed in 4, burn 3. This last I did often. Alfred Marshall, S&D guy
- 15. Outline for Thurs, July 3 Remember Quiz on Friday Homework due Monday Review from WednesdayReview from Wednesday The Supply & Demand Model Using the graph Assumptions
- 17. The curves: Demand The demand curve tells us how much will be bought at every price
- 18. The curves: Demand The demand curve tells us how much will be bought at every price It slopes downward (usually) This is the Law of DemandThis is the Law of Demand The exceptions are called Giffen goods
- 19. The curves: Demand The demand curve tells us how much will be bought at every price It slopes downward (usually) All other factors besides price are held constantAll other factors besides price are held constant
- 20. The curves: Demand The demand curve tells us how much will be bought at every price It slopes downward (usually) All other factors besides price are held constantAll other factors besides price are held constant A change in these factors creates a shift in demand, moving the curve. This is also referred to as a change in demand
- 21. The curves: Demand The demand curve tells us how much will be bought at every price It slopes downward (usually) All other factors besides price are held constantAll other factors besides price are held constant A change in these factors creates a shift in demand, moving the curve. This is also referred to as a change in demand A change in the price of the good changes the quantity demanded, moving it along the stationary curve
- 22. The curves: Demand The demand curve tells us how much will be bought at every price. It slopes downward D price quantity demanded
- 23. The curves: Demand A change in these factors creates a shift in demand, moving the curve. This is also referred to as a change inreferred to as a change in demand p q q2 D D2
- 24. The curves: Demand A change in the price of the good changes the quantity demanded, moving it along the stationary curvestationary curve p q p3 q3 D
- 25. The curves: Demand For practice: what happens when both the price and a demand factor change p q D
- 26. The curves: Supply The supply curve tells us how much will be sold at every price It usually slopes upward, but there is no law of supplysupply All other factors besides price are held constant A change in these factors creates a shift in supply, moving the curve. This is also referred to as a change in supply A change in the price of the good changes the quantity supplied, moving it along the stationary curve
- 27. Using the curves: What’s happening?
- 28. Using the graph: What’s equilibrium? S D Equilibrium
- 29. Equilibrium Where the supply and demand curves intersect is called equilibrium It is a price and quantity, the ordered pair (p, q)
- 30. Equilibrium Where the supply and demand curves intersect is called equilibrium It is a price and quantity, the ordered pair (p, q) At the equilibrium price, the quantity buyers wish toAt the equilibrium price, the quantity buyers wish to buy is the same as how much sellers wish to sell. This quantity is the equilibrium quantity
- 31. Equilibrium Where the supply and demand curves intersect is called equilibrium It is a price and quantity, the ordered pair (p, q) At the equilibrium price, the quantity buyers wish toAt the equilibrium price, the quantity buyers wish to buy is the same as how much sellers wish to sell. This quantity is the equilibrium quantity Remember that this describes the market for a single good, not the whole economy
- 32. Using the graph: How does the equilibrium change? S What happens if… Demand increases Demand decreases Supply increases E D pE qE Supply increases Supply decreases Some combination We don’t talk about independent price changes along curves
- 33. Using the graph: Out of equilibrium S What happens if… The price is higher than pE E D pE qE p2
- 34. Using the graph: Out of equilibrium S What happens if… The price is higher than pE Quantity supplied surplus E D pE qE exceeds quantity demanded. This is called excess supply or a surplus: q2S – q2D p2 q2Sq2D
- 35. Using the graph: Out of equilibrium S What happens if… The price is higher than pE Quantity supplied surplus E D pE qE exceeds quantity demanded. This is called excess supply or a surplus: q2S – q2D What about a below-equilibrium price? p2 q2Sq2D
- 36. Using the graph: summary You should understand What do the demand and supply curves mean? What makes demand and supply shift or change? How do shifts change the equilibrium, where theHow do shifts change the equilibrium, where the curves intersect? What happens when we’re not at the equilibrium price? shortages and surpluses
- 37. Using the graph: summary You should understand What do the demand and supply curves mean? What makes demand and supply shift or change? How do shifts change the equilibrium, where theHow do shifts change the equilibrium, where the curves intersect? What happens when we’re not at the equilibrium price? shortages and surpluses Remember that quantity responds to price: Buyers choose how much to buy, not at what price to buy Sellers choose how much to sell, not at what price to sell
- 38. Supply & Demand Model Recall that a model is a set of assumptions The graph is simply a representation of our model
- 39. Supply & Demand Model Recall that a model is a set of assumptions The graph is simply a representation of our model We judge a model by its consistency and accuracy, not the realism of its assumptionsnot the realism of its assumptions
- 40. Supply & Demand Model Recall that a model is a set of assumptions The graph is simply a representation of our model We judge a model by its consistency and accuracy, not the realism of its assumptionsnot the realism of its assumptions We are talking about a single market, but it could be broadly or narrowly defined
- 41. Supply & Demand Model Recall that a model is a set of assumptions The graph is simply a representation of our model We judge a model by its consistency and accuracy, not the realism of its assumptionsnot the realism of its assumptions We are talking about a single market, but it could be broadly or narrowly defined So, let’s go through the assumptions underlying our market model
- 42. Assumption #1: Quantity responds to price Why?
- 43. Assumption #1: Quantity responds to price Why? There are a lot of buyers and sellers Not all goods have this (government contracts, prime Manhattan real estate), so we can only consider markets that do
- 44. Assumption #1: Quantity responds to price Why? There are a lot of buyers and sellers Not all goods have this (government contracts, prime Manhattan real estate), so we can only consider markets that do This means that no single buyer or seller can choose the price: sellers with too high a price will make no sales, sellers with too low a price will be missing opportunities
- 45. Assumption #1: Quantity responds to price There are a lot of buyers and sellers This only applies to certain markets This means that no one can choose the price
- 46. Assumption #1: Quantity responds to price There are a lot of buyers and sellers This only applies to certain markets This means that no one can choose the price So buyers and sellers are both called price-takersSo buyers and sellers are both called price-takers and this is called the price-taking assumption
- 47. Assumption #1: Quantity responds to price There are a lot of buyers and sellers This only applies to certain markets This means that no one can choose the price So buyers and sellers are both called price-takersSo buyers and sellers are both called price-takers and this is called the price-taking assumption This also suggests that buyers and sellers all pay and see the same price, so there are no
- 48. Assumption #1: Quantity responds to price There are a lot of buyers and sellers This only applies to certain markets This means that no one can choose the price So buyers and sellers are both called price-takersSo buyers and sellers are both called price-takers and this is called the price-taking assumption This also suggests that buyers and sellers all pay and see the same price, so there are no Transaction costs Search costs
- 49. Assumption #2: Scarcity The economy must have scarce resources because…
- 50. Assumption #2: Scarcity The economy must have scarce resources because… If they are not scarce an infinite amount of the good could be made so no one would pay for it
- 51. Assn. #3: Rationality People will take advantage of opportunities
- 52. Assn. #3: Rationality People will take advantage of opportunities Without this, we cannot be sure that equilibrium will be reached S surplus E D pE qE p2 q2Sq2D surplus
- 53. Assn. #3: Rationality People will take advantage of opportunities Without this, we cannot be sure that equilibrium will be reached S surplus E D pE qE p2 q2Sq2D surplus
- 54. Assn. #3: Rationality People will take advantage of opportunities Without this, we cannot be sure that equilibrium will be reached S surplus What really happens? E D pE qE p2 q2Sq2D surplus What really happens?
- 55. Review Remember Quiz on Friday Homework due Monday Review from WednesdayReview from Wednesday The Supply & Demand Model Using the graph Assumptions