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Lecture 3

Lecture 3. Reading: Chapter 4 and part of Chapter 5. Let us think of price for a moment.

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Lecture 3

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  1. Lecture 3 Reading: Chapter 4 and part of Chapter 5

  2. Let us think of price for a moment • Quantitify objects – height, weight, distance, price tag, price resulted from auction, gross national product, (average) wage level, (general) price level, (national) income level • (1) use market force to affect price • (2) use price to analyze the market • Former: auction, prices rise after hurricane • Latter: focusing on D and S curves

  3. Market demand; market supply • Price system • Qd := F(P, income, other prices, health, status, religion, …)use a functional form to describe the behavioral assumption how about quantities of other goods demanded? • Qs := G(P, input prices, prices of other products, technology, market conditions, business environment, …) how about quantities of other goods supplied? • Qd := f(P) and Qs := g(P) mkt demand; mkt supply • Why Q-P not P-Q?

  4. Two ways of interpreting curves (see board) • Starting at some price -- go horizontally • Starting at some level -- go vertically • Market equilibrium • Excess demand • Excess supply • soon: slope, change in percentage, elasticity

  5. An example of Critical thinking • What is wrong with discussion on pp.70-71? • Two ways to reduce the quantity of smoking demanded • (1) warning on pack; 公益廣告shift D inward • (2) tax – move along D upward

  6. Incorporating (加入) the supply curve • individual supply curve and individual demand curve?Individual equilibrium? • market supply curve and market demand curve • market equilibrium (Qx*, Px*) 均衡交易量與價格 市場供給函數market supply function, 以h表示 Qx := h(Px) 市場需求函數market demand function, 以f表示 Qx := f(Px) • Intersection (相交) of two curves on Qx-Px space

  7. example • market demand curve Qx = a + bPx (略上標d ) • market supply curve Qx = c + dPx (略上標s ) • 如何對參數a, b, c, and d 施以最小的限制，保證存在唯一且有意義之市場均衡？ • Hint: 應確保Qx* 與Px* 為正; 注意曲線與兩軸之交點 (依序作圖 見黑板)

  8. solving; characterizing (see board) • Meaning of (market) equilibrium (市場均衡的意義) • Key:quantity demanded equals quantity supplied 由a + bPx = c + dPx解得Px = (a - c)/(d - b) > 0 (why?) 代入任一式，知 Qx = a + b[(a - c)/(d - b)] = [(ad - ab) + (ab - bc)]/(d - b) = (ad - bc)/(d - b). [討論正負] Note: • b < 0 (to satisfy law of demand) • d > 0 (to satisfy law of supply) • d - b > 0 for sure; c < 0 (why?); a > 0 (why?) [hence a - c > 0] • ad > bc (to make px* and Qx* positive)

  9. 自我練習題 market demand curve Px = a + bQx market supply curve Px = c + dQx 如何對參數a, b, c, and d 施以最小的限制，保證存在唯一且有意義之市場均衡？也求出消費者剩餘 market demand function f(Px) = a - bPx market supply function h(Px) = -c + dPx 如何對參數a, b, c, and d 施以最小的限制，保證存在唯一且有意義之市場均衡？也求出消費者剩餘

  10. Consumers’ surplus and producers’ surplus • Also see the first few pages in Ch.7 • Recall our “vertical view” • Willingness to pay; willingness to produce (slide no.4) • Graphical illustration (below) 課堂顯示

  11. 針對市場需求對商品分類 (also see Ch.4) recall slide no.3 • Qd := F(P1, income, P2, health, status, religion,…) (-) (+) (-) (0) (+) (-) (0) (+) Find examples!

  12. 針對市場需求對商品分類 (continued) • Qd := F(P1, income, P2, health, status, religion,…) (-) law of demand (+) normal good (-) inferior good (0) neutral good (+) both are substitutes (-) both are complements (0) e.g.? (+) Giffen good Economic intuition?

  13. On demand curve: slope and elasticity • consider: Q = 10 - P slope 為-1最簡例子 • 繪圖標示 (0, 10), (10, 0), (5, 5), (6, 4), (4, 6) 需求量變化之比例/價格變化之比例？

  14. Elasticity: Misunderstanding • P Q text:(DQ/Q)/(DP/P) = [(Q1 - Q0)/Q0]/[(P1 - P0)/P0] ? • 10 0 • 0 10 • 5 5 elasticity is • 4 6 elasticity is • 6 4

  15. slope and elasticity (續) • 由(4, 6)到(5, 5) DP = 5 - 6 = -1, DQ = 5 - 4 = 1 DP/P = -1/6, DQ/Q = 1/4 (DQ/Q)/(DP/P) = -3/2 < -1 彈性？not yet • 由(5, 5)到(6, 4) DP = 4 - 5 = -1, DQ = 6 - 5 = 1 DP/P = -1/5, DQ/Q = 1/5 (DQ/Q)/(DP/P) = -1 • 由(6, 4)到(5, 5) DP = 5 - 4 = 1, DQ = 5 - 6 = -1 DP/P = 1/4, DQ/Q = -1/6 (DQ/Q)/(DP/P) = -2/3 > -1 心得?

  16. slope and elasticity (續) • 由(Qo, Po)到(Q1, P1) -- 變化後紅色 DP := P1 - Po, DQ := Q1 - Qo (DQ/Q)/(DP/P) = [(Q1 - Qo)/Qo]/[(P1 - Po)/Po] = [(Q1 - Qo)/(P1 - Po)][Po/Qo] (曲線斜率之倒數)(Po/Qo) if it is a straight line (limit of DQ/DP)/(Po/Qo) if it is not a straight line微分 這才是 point elasticity 之由來與定義 係針對(Qo, Po)進行評估

  17. Midterm exam info • Ch.1 to Ch.5 plus everything covered during lectures • Next Monday, April 25, 2005, 1:30 pm – 2:45 pm • Open books/notes exam • Can bring anything in hard copy with you • Borrowing items is strictly prohibited • Lecture notes will be uploaded on web site by April 19.

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