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
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
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
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
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
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"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
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 ...
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