Econ50F14Lecture2 - Econ 50 Fall 2014 Lecture 2 September 25 2014 Some reminders No sec=ons tomorrow Homework 1(due October 3 will be posted by this

Econ50F14Lecture2 - Econ 50 Fall 2014 Lecture 2 September...

This preview shows page 1 out of 25 pages.

Unformatted text preview: Econ 50 Fall 2014 Lecture 2: September 25, 2014 Some reminders: •  No sec=ons tomorrow •  Homework 1 (due October 3) will be posted by this weekend •  Sign up for a sec=on in Coursework, if you haven’t yet •  Sign up for Piazza •  Office hours will begin next week (=mes & loca=ons will be announced on Coursework) •  Have your clickers ready! 2 Agenda for today: •  Applica=ons of compara've sta'cs reasoning –  “If there is a change in some exogenous variable, what will be the effect on one or more endogenous variables, such as might characterize… –  a market equilibrium –  or an individual agent’s op=mal choice.” •  Quan'fying compara=ve sta=cs by defining, interpre=ng, and using elas'ci'es –  own-­‐price vs. cross-­‐price –  income –  supply vs. demand –  individual vs. market 3 The first part of Chapter 2, in brief: in characterizing market equilibrium, remember the factors that cause changes in supply and/or in demand 4 U.S. | !N YT NOW A California Dream: Not Having to Settle for Just One Bedroom By JENNIFER MEDINA SEPT. 23, 2014 IRVINE, Calif. — This was the state that embodied the middle-class American dream: Move west, acquire a small slice of property, perhaps with a palm tree or two. For decades, comfortable suburbs like this one just south of Los Angeles boomed with new housing tracts designed to attract the latest arrivals. When space started to come at a premium, developers moved inland, building more homes for people who could not afford the more expensive coastal areas. But now, cities across the state are grappling with a dwindling stock of housing that can be considered affordable for anyone but the wealthiest. In much of the state, a two-bedroom apartment or home is virtually impossible to acquire with anything less than a six-figure salary. “It’s hard to imagine how all of California doesn’t become like New York City and San Francisco, where you have very rich people and poor people but nothing in between,” said Richard K. Green, an economist and director of the Lusk Center for Real Estate at the University of Southern California. “That’s socially unhealthy and unsustainable, but it’s where we are going right now — affordability is its worst ever, and we’re seeing a hollowing-out of the middle class here.” The problem extends far beyond San Francisco, where wealth from the 5 Large fluctua=ons in market equilibrium prices are associated with: A.  Highly elas=c demand B.  Highly elas=c supply C.  Both A and B D.  None of the above! 6 Compara=ve sta=cs in diagrams •  Let’s depict the effect on market equilibrium of a surge in demand –  For more elas'c and less elas'c supply •  …and the effect of a surge in supply –  For more elas'c and less elas'c demand •  …and the effect on an individual household’s consump'on of a good, in response to an increase in the market price. 7 Print This Article Back to Article advertisement | your ad here Drivers in California bought 1.8% less gas in 2011 David R. Baker Saturday, March 31, 2012 Squeezed by rising prices, California drivers bought 1.8 percent less gasoline in 2011 than they did the year before, according to data released Friday by the State Board of Equalization. Californians bought 14.6 billion gallons of gasoline last year, compared with 14.9 billion in 2010. The drop came as the state's gas prices, which had been held down by the recession, jumped 23 percent. "Many Californians are straining to pay the increasing price of gasoline and seeking ways to reduce their consumption, such as driving vehicles that consume less gas or using alternative methods of transportation," said Betty Yee, a member of the board. The board tracks fuel sales through tax receipts. Gasoline sales, both in California and the nation as a whole, used to rise every year, as population growth put more drivers on the road. But the state's gasoline usage peaked in 2005 at 15.9 billion gallons and has fallen almost every year since, according to the board. California now uses 8.4 percent less gasoline than it did in 2005. In contrast, sales of diesel fuel rose 1.2 percent in 2011 to reach 2.6 billion gallons. Diesel is used primarily in trucks, and the state's improving economy last year prompted truckers to log more miles on California roads. David R. Baker is a San Francisco Chronicle staff writer. [email protected] This article appeared on page D - 1 of the San Francisco Chronicle 8 For a general downward-­‐sloping straight-­‐line demand curve: A.  Demand is equally elas=c at every point. B.  Demand is most elas=c toward the upper-­‐ lec. C.  Demand is most elas=c toward the lower-­‐ right. D.  None of the above is generally true (it depends on the precise func=onal form)! 9 Defining & compu=ng the (own-­‐)price elas=city of demand •  εQD,P = %ΔQD / %ΔP = [ΔQD/QD] / [ΔP/P] = [ΔQD/ΔP] x [P/QD] =[dQD/dP] x [P/QD] (in the limit, as ΔP approaches zero, and assuming QD is a differen'able func'on of P, etc.) •  Now let’s compute the elas=city for the linear demand curve XD=a-­‐bPX 10 Price elas=city along a linear demand curve (5th ed. Fig 2.17; 4th ed. Fig 2.16) 11 A category of demand curves such that price elas=city is constant (and a useful mathema=cal equivalence): •  Consider XD=A/(PXb) = APX-­‐b : εXD,PX = -­‐bAPX-­‐b-­‐1(PX/APX-­‐b) = -­‐b •  Note that we can express this demand curve in natural log form: ln(XD) = ln(A) – b ln(PX) •  We can see that εX ,PX can also be expressed (and computed) as dln(XD)/dln(PX) •  This is a general result, for differen=able demand func=ons: D εX ,P = [dXD/dPX][PX/XD] = dln(XD)/dln(PX) D X •  You don’t have to compute elas=ci=es this way, but in some cases it makes the math easier! 12 Consider a market in which there are 5 consumers, each with demand xD=PX-­‐1/4. The price elas=city of market demand is: A.  -­‐5 B.  -­‐5/4 C.  -­‐1 D.  -­‐1/4 E.  None of the above! Note the connec'on between individual and market elas'ci'es! 13 Empirical evidence on price elas=ci=es (perfectly? rela=vely? unitary? Giffen?) 14 Empirical evidence on price elas=ci=es (perfectly? rela=vely? unitary? Giffen?) 15 Empirical evidence on price elas=ci=es (perfectly? rela=vely? unitary? Giffen?) 16 17 Defining and compu=ng other kinds of elas=ci=es •  A demand func'on shows how the quan=ty demanded for some good, X, depends on its own price (PX) and on other variables such as income (I) and the prices of other goods (PY). •  The income elas=city and cross-­‐price elas=city of demand are defined in a predictable way: εXD,PY = (ΔXD/ΔPY) (PY/XD) εXD,I = (ΔXD/ΔI) (I/XD) •  Let’s compute the elas=ci=es for the demand func=on XD = I / (PX+PY) = I (PX+PY)-­‐1 18 Empirical evidence on income elas=ci=es (normal or inferior?) 19 Empirical evidence on cross-­‐price elas=ci=es (subs'tutes or complements?) 20 How elas=c, and how subs=tutable? 21 All three elas=ci=es: 22 Cooper, “Price Elas=city of Demand for Crude Oil,” OPEC Review (March 2003), based on data for 1970-­‐2000 23 Suppose supply is described by the curve XS=4PX. Which of the following is true? A.  The price elas=city of supply is 4 at every point on the curve. B.  The price elas=city of supply is ¼ at every point on the curve. C.  Supply is more elas=c as we move up and to the right. D.  Supply is more elas=c as we move down and to the lec. E.  None of the above. 24 In summary… •  Be able to conceptualize elas=city in several ways –  perfectly elas'c vs. perfectly inelas'c –  more vs. less elas=c –  graphically (the shape of a curve) vs. numerically (a precise number) •  Note that all elas=ci=es are defined in similar ways –  % change / % change –  but don’t confuse them with each other! •  e.g. income & price elas=ci=es give us different informa=on •  Don’t confuse inferior with Giffen, etc. (although we’ll explore their connec=on later) •  With informa=on about elas=ci=es, plus market data on price & quan=ty, we can infer demand (and/or supply) curves. •  Elas=city is not the same as slope •  Elas=city is usually not constant –  so it may be quite different in different por=ons of the same demand (or supply) curve. 25 ...
View Full Document

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture