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Lecture 15

# Lecture 15 - ECONOMICS 100A Professor Dan Acland Lecture 15...

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ECONOMICS 100A Professor Dan Acland 10/14/10 Lecture 15 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy, or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ICLICKER QUIZ ANNOUNCEMENTS 1. Problem Set #4 has been posted. It is due Tuesday, October 26. It isn’t posted yet. I’ll post it right after the lecture. 2. Problem Set #2 will be returned next week. 3. The exam will be returned within two weeks. LECTURE Today I will talk about market equilibrium. Slide : Lecture outline: 1. Supply equals demand: what does that mean? a. Mathematically b. How to solve for it 2. Supply equals demand: why do we call it equilibrium? 3. Supply equals demand: Is it a fact, or is it an assumption? a. Modeling based on assumptions, not reality 4. Comparative statics: what can we do with this model? a. Having solved for equilibrium, how do we think about the way equilibrium changes when circumstances in the economy or real world outside the economy changes. Slide : 1. Supply equals demand: what does that even mean? - Quantity supplied is equal to Quantity demanded at the equilibrium price. Usually what we mean when we say supply equals demand mathematically is that the quantity supplied in the marketplace equals the quantity demanded at the equilibrium price. So far we have been saying prices are exogenous ; people and firms are price takers . And based on what prices are, they make their decisions on how much to buy or sell. Now, magically, we’re in a world where prices are allowed to change . You have to watch carefully or else you won’t see what happens, because, so far in our model, we don’t change price at all. We just have quantities moving around. What w e’re going to do is slap on this new idea. We believe that, in general, people making their choices are going to take prices as given, but somehow, we also believe that in reality prices move around until things reach some sort of equilibrium . We’re going to define that equilibrium as supply equals demand . This means that once price reaches equilibrium, it will be the case that the quantity supplied at that price equals the quantity demanded. Supply is a function of price, and it equals A+Bp. I don’t know what A and B are. A is the inter cept of the line, and B is the slope of the line. So A is zero in this case, but it could have been anywhere. And Demand is also some function of price: C-Dp. So C is the intercept, and it falls with the slope of C-A B+D (AD+BC) B+D A P C Q Supply Q S = S(p) = A+Bp Q S = Q D Demand Q D = D(p) = C-Dp

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