Econ25200F10Mtg7

# Econ25200F10Mtg7 - Econ 25200 7th Class Demand and Supply...

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Econ 25200 – 7 th Class Demand and Supply Market Efficiency (4)

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Four Topics Varieties of ceteris paribus conditions Adding up demand over individuals “False positives” Understanding ideal markets
Three Types of Ceteris Paribus (1) Dimensional ceteris paribus (2) Technical ceteris paribus (3) Deep ceteris paribus

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Dimensional Ceteris Paribus Occurs when try to exhibit a function of more than one variable on a two- dimensional graph • E.g., y = F(x 1 , x 2 , x 3 ) – If plot y against x 1 , have to hold x 2 , x 3 fixed – Move along curve if x 1 changes, given x 2 , x 3 – Shift of curve if x 2 or x 3 [or F(.)] changes
Dimensionality Suppose have demand for grapes Q g D , with (own)-price of grapes P g D , and with price of cheese P c D , and income Y Suppose demand for grapes is given by: Q g D = 58.5 - 4P g D – (1/2)P c D + (1/20)Y

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Dimensionality From Q g D = 58.5 - 4 P g D – (1/2) P c D + (1/20)Y then if P c D = 8 and Y = 30 (thousands) we have Q g D = 58.5 - 4P g D – (1/2)(8) + (1/20)(30) = [58.5 – 4 + 1.5] - 4P g D = 56 - 4P g D
Dimensionality So long as P c D = 8 and Y = 30 thousands, and preferences for grapes unchanged, then have demand curve for grapes given by: Q g D = 56 - 4P g D If P c D = 4 or Y = 70 or intercept changes to 58 (instead of 56), go to: Q g D = 58 - 4P g D

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Dimensionality . P g D Q g D 0 14 14.5 56 58 Q g D = 56 – 4P g D Q g D = 58 – 4P g D
Dimensionality Here cheese and grapes complements since P c D increase implies Q g D decrease Here grapes are a normal good, since Y increase implies Q g D increase See H&O’B for other possibilities for shifting demand, or supply, curves

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Technical Ceteris Paribus Technical ceteris paribus occurs when need to hold something constant to state theorem of formal model E.g., if demand curve shifts right and supply curve does not shift , then market- clearing price and quantity both rise
. P

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Econ25200F10Mtg7 - Econ 25200 7th Class Demand and Supply...

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