of Applications the Neoclassical Model Shifts in Supply and Demand: Increases in demand lead to (demand curve shift along supply curve) an increased equilibrium price and an increased equilibrium quantity Decreases in demand lead to (demand curve shift along supply curve) a decreased equilibrium price and a decreased equilibrium quantity Increases in supply lead to (supply curve shift along demand curve) a decreased equilibrium price and an increased equilibrium quantity Decreases in supply lead to (supply curve shift along demand curve) an increased equilibrium price and a decreased equilibrium quantity But we do know what causes the shifts in demand or supply: Demand may change due to changes in tastes, incomes, or prices for substitutes/complements Supply may change due to changes in technology or prices of inputs The magnitudes of equilibrium price and quantity changes depends on elasticities Another Look at Trade Consider two individuals with their own demand (MV) and MC functions. Each could maximize her own surplus. But if their equilibrium prices (P=MV=MC, remember!) differ, they both can benefit from trade: MC, MV MV1 QD MC2 MV2 QD Demand MC, MV QS MC1 QS Supply
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Tax A simple graphical analysis suggests: A perunit tax T raises the price by the amount less than T Part of the tax is paid by consumers, and part of the tax is paid by sellers, no matter who the government nominally collects the tax from Who pays greater part of the tax depends on elasticities of the demand and supply A tax creates the deadweight loss A size of the deadweight loss depends on elasticities of the demand and supply (it is more efficient to collect the taxes from the markets with inelastic demand/supply) Agricultural Quotas An effective quota: Reduces market quantity Raises market price Creates deadweight loss Redistributes surplus from consumers to farmers (the explicit goal is usually to support the farmers' incomes, and that's what it does) Creates the transitional gains trap Warm Houses in Cold Climates It is tempting to predict that indoor temperature must be lower in cold climate houses because it is more expensive to heat a house in Ottawa than in Vancouver during winter, BUT The cost of heating is TC = PhB(Ti To), meaning MC of heating is flat The benefits from insulation are greater in cold climates, thus homes are optimally more insulated there o Which implies MC of heating is lower in cold climates
And so, the indoor temperature must be lower in cold climate houses Crime and Punishment As any other activity the levels of crime can be seen as market equilibrium outcome Recall that equilibrium quantity can be decreased due to a) decrease in demand, b) decrease in supply
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So, there are 2 methods to reduce crime Make it less attractive (protection, punishment) Make it more costly (improve alternatives)
Punishment is most discussed part of it Expected punishment depends on probability of detection and sentencing, and on severity of a sentence Since detection is costly, it is tempting to maximize sentence BUT Criminal punishment is costly, too There must be a room for marginal increase in cost of more serious crime and
Mating Marriage Read it on your own in the textbook (pp. 204206) Choice over Time So far there was no talk about decisions to allocate our consumption timewise (call it intertemporal choices). Some issues (often generally poorly understood) are naturally about intertemporal choices wealth, investments, savings, etc. While it is possible for intertemporal goods to be complements (think high school education and college/university education), we'll restrict our analysis to substitutes if you consume more today, you reduce your tomorrow demand. The key to understanding an intertemporal choice is interest rate. For starters, keep in mind that the interest rate is the price of early consumption the cost of consuming today rather than in future. Interest rate is NOT the price of money. We will explicitly show the meaning of this price and look into a market that determines it as an equilibrium price. It is convenient sometimes to distinguish between perishable goods (those that one has to consume right away or they'll expire [think a cup of coffee]) and durable goods (those that can be used over many periods [think a house]). There are 3 major determinants of an intertemporal choice: 1. People like to "smooth" their consumption over time. This is a fairly straightforward implication of maximization and diminishing MV if one consumes many units of a good today and very few tomorrow, today's MV is low and tomorrow's MV is high, so one can increase utility by reducing consumption today and increasing it tomorrow. 3
2. People are impatient Maybe, people do not trust they'll received promised goods in the future Maybe, people are not sure they themselves will survive to enjoy promised goods in the future Maybe, we are biologically hardwired to be impatient (our ancestors had to grab the immediate food to be able to live and see tomorrow) Rate of Time Preference: People prefer a good...