ARE120_20LN00_7E2008

ARE120_20LN00_7E2008 - ARE 120 Julian Alston Spring 2008...

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ARE 120 Spring 2008 Julian Alston April 1, 2008 Lecture 0 SUPPLY, DEMAND, WELFARE ECONOMICS REVIEW Reading: 100A notes and text on supply, demand, and market equilibrium (e.g., Pindyck and Rubinfeld). Outline: 0.1 Supply, Demand, Producer and Consumer Surplus 0.2 Market Equilibrium, Total Economic Surplus, Deadweight Loss 0.3 Externalities 0.4 Market Equilibrium and Dynamic Adjustments 0.5 Commodity Price Support Policies: Overview Handouts: Syllabus Figures for lecture 0 Homework 1
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1 SUPPLY, DEMAND, WELFARE ECONOMICS REVIEW 0.1 Supply, Demand, Producer and Consumer Surplus Consumer Demand Key Concepts: Demand function, demand elasticity, and consumer surplus. DEMAND FUNCTION A demand function shows the quantity demanded per unit time for a given price (holding other things constant). It can also be expressed as consumers’ marginal willingness to pay for a given quantity per unit time (holding the same things constant). In the case of linear demand equations P = a - bQ d or Q d = (a/b) - (1/b)P Figure 0-1 shows these relationships diagramatically. e.g., a = 10, b = 2, P = 10 - 2Q d or Q d = 5 - ½P We generally deal with market-level demand, which is the horizontal sum of the demands of individual buyers (or consumers): individual consumer demand => market demand. A lot of the demand equations we use are derived demands (rather than final consumer demands—e.g., demand for wheat vs bread) and residual demands (rather than total demands—e.g., demand for U.S. exports of wheat). DEMAND ELASTICITY η = the percentage change in quantity demanded for a one percent change in price, i.e., Q P P Q P % Q % η = Δ Δ =
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2 CONSUMER SURPLUS Figure 0-1 illustrates consumer surplus (CS), and changes in consumer surplus ( Δ CS) in the case of an exogenous price. Diagramatically (integration => same thing): CS = ½(a - P)Q d = ½(a - [a - bQ d ])Q d = ½b(Q d ) 2 Now, in the specific case when P = 10 - 2Q d (a = 10, b = 2), Q d = 5 - ½P , and CS = (Q d ) 2 When P = $4, Q d = 3, CS = $9; When P = $2, Q d = 4, CS = $16 In figure 0-1, when price falls from P 0 = $4 to P 1 = $2, Δ CS = $7 (consumer benefits). We could compute this as the area of the trapezoid: Δ CS = - Δ P(Q d0 + ½ Δ Q d ), where, in this instance, Δ P = -2, Q d0 = 3, Δ Q d = ½ Δ P = 1 Producer Supply Key Concepts: Supply function, supply elasticity, and producer surplus. SUPPLY FUNCTION
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ARE120_20LN00_7E2008 - ARE 120 Julian Alston Spring 2008...

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