Transcript Business Economics - The University of Texas at Dallas

Business Economics
MECO 6303
Fall 2014
Instructor: Alejandro Zentner
Business Economics
Lecture Notes
Demand, Supply, and Equilibrium.
Engel Curves. Policy Applications:
Taxes, Subsidies.
Demand for Coffee
Price
Law of demand:
when the price
goes up the
quantity
demanded goes
down
20 cents a
cup
30 cents a
cup
40 cents a
cup
50 cents a
cup
Quantity
Demanded
5 cups/day
4 cups/day
2 cups/day
1 cups/day
The demand curve
Important to notice the difference between the
demand function and the quantity demanded at
each price.
60
Price per cup
50
40
30
20
10
0
0
1
2
3
Quantity
4
5
6
Two consumers with different demand curves
Changes in Demand
Price
20 cents a
cup
30 cents a
cup
40 cents a
cup
50 cents a
cup
Quantity
Quantity
Demanded Demanded
5 cups/day 6 cups/day
4 cups/day 5 cups/day
2 cups/day 3 cups/day
1 cups/day 2 cups/day
Price per cup
Changes in the demand curve
D’
Coffee and Cream:
The price of cream
increases
Coffee and Tea: The price
of tea increases
D
D’’
Income
changes: you
win the lottery
P
Q’
’
Q
Q’
Quantity
Quantity
Engel Curves
Inferior Good
Normal Good
Income
Probability of Being Caught
(per crime committed)
Application: Demand for Crime
D’
D
P’
P*
D
’’
Q*
Q**
Number of Crimes Committed
Wage per hour
Application: Job Market and Discrimination
D
(white)
Firms demand
labor
D’
(black)
Hours
Quiz
1- When the price goes up, do we expect to see a change
in demand or a change in quantity demanded? Do we
expect to see a movement along the demand curve or a
shift of the demand curve itself?
2- How do you think the demand for fast food shift with an
increase in income?
3- How does the demand for popcorn change with a
decrease in the price of theater tickets?
4- How might an increase in the price of Big Macs affects
the demand for Whoppers?
Price
Market Demand
D2
D1+D2
D1
P
Q1
Q1
Q2
Q1+Q2 Quantity
Price
Elasticity of Demand
D2
D1
P
P’
Q Q’ Q’
1
2
Quantity
Why do we use the elasticity and
not just the slope?
$
D
D
’
Cups per
month
Cups per
week
Why do we use the elasticity and
not just the slope?
$
Euros
D
D
’
Cups per
month
Elasticity
• To compare how responsive is the demand to a
change in prices we use elasticities instead of
slopes.
• Elasticity=Percentage change in quantity/Percentage
change in price
• Elasticity= (Q / Q) /(P / P)  (Q / P)(P / Q)
Elasticity of Demand
D
$
Elasticity=0
Infinite
Elasticity
D
’
Think about elasticities
of parallel demands and
linear demands
Cups per
month
Supply of Coffee
Price
Law of Supply:
when the price
goes up the
quantity supplied
goes up
20 cents a
cup
30 cents a
cup
40 cents a
cup
50 cents a
cup
Quantity
Supplied
100 cups/day
300 cups/day
400 cups/day
500 cups/day
Price
Supply curve
Changes in costs or
technology shift the
supply curve
S’’
S
S’
P’
P
Reduction in price of
an input
Q’
’
Q
Q’
Quantity
Elasticity
• Elasticity is a mathematical concept and can be
applied to any function.
• Elasticity= (y / y) /(x / x)  (y / x)(x / y)
• Elasticity of supply=Percentage change in quantity
divided by percentage change in price
• Elasticity of an Engel Curve=Percentage change in
quantity divided by the percentage change in income
(is a steep Engel curve elastic or inelastic?)
Quiz
1- How do you think an innovation that
reduces the cost of producing corn shift
the supply of corn?
2- How might predicted bad weather affect
the supply of corn?
Equilibrium
Price
Numerical problem
The demand curve for oranges is Q=500-50P and the supply curve for oranges is
Q=800P+250. Compute the equilibrium price and quantities.
D
Excess Supply
S
P
P*
P’
Excess Demand
Q’s QD
Q*
QD=QS
Q’DQS
Quantity
Numerical Example of Equilibrium
Qd=100–20p
Qs=20+20p
Two equations in two unknowns
Qd=Qs
100-20p=20+20p
80=40p
p=2
Q=100-20*2=60=20+20*2
{p=2; Q=60}
Equilibrium
6
S
D
D
5
Qd=100–20p then P=100/20-Qd/20
Price
4
Qs=20+20p then
P=-1+Q/20
3
2
1
0
0
10
20
30
40
50
60
70
Quantity
80
90 100 110 120 130
Price of a CD
Changes in Equilibrium Quantities
Music Market and File Sharing
S
D
D
’
P
P’
Q’ Q
Quantity of CDs
Tax on Consumers
Total Amount Consumers Pay=Consumers Pay to the Government
(tax)+Consumers Pay to the Firm
Quantity
Total
Consumers
Amount
Pay to the
Consumers Government
Pay
(tax)
Consumers
Pay to the
Firm
Q*
P*
5 cents
Pf
P*=Pf+5cents
Q**
P**
5 cents
Pff
P**=Pff+5
cents
Price
Policy Application
Tax on Consumers
P**
D
D
’
5 cents
Pff
P*
5 cents
Pf
Q**
Q*
Quantity
Tax on Firms
Quantity
Q**
Total
Firms Pay to
Amount
the
Firms
Government
Receive
(tax)
from
Consumers
Pcc
5 cents
Net
Amount
Firms
Keep
P**
Price
Policy Application
Tax on Firms
S’
S
Pcc
5 cents
P**
Q**
Quantity
Price
Policy Application
Tax on Suppliers Vs Tax on Consumers
S’
D
S
D
’
Pc
5 cents
P*
Pf
Q’ Q*
Quantity
Price
Incidence on Firms and on Consumers
D
D
’
S
Pc
5 cents
P*
Pf
Q’
Q*
Quantity
Price
Incidence on Firms and on Consumers
S
Pc
5 cents
P*
D
Pf
D
’
Q’
Q*
Quantity
Wage per hour
Policy Application: Labor Market
Tax on Firms Vs Tax on Workers
S’
D
S
D
’
What
fraction of
the tax is
paid by
workers and
employers,
respectively?
w firms
w* 5 cents
w worker
Q’ Q*
Hours
A tax on labor
hd=100–20w
hs=20+20w
{hs=hd=60, w=2}
$1 tax an hour is imposed on employers
Compute the new equilibrium quantity, the wage
the employer pays after the tax is imposed,
and the wage that workers receive.
Tax Imposed on Employers
hd=100–20w
20w=100-hd
w=100/20-hd/20
A tax of $1 an hour
w=(100/20-hd/20)-1
w=(5-hd/20)-1
w=4-hd/20
From the supply function
hs=20+20w
w=-1+(1/20)hs
Tax Imposed on Employers
4-h/20=-1+(1/20)h
5=h/20+h/20=(2h)/20
100=2h
h=50
w=4-hd/20
w=1.5
Employers pay 1.5+1
Employees receive 1.5
Price per unit
Policy Application: A Subsidy
S
D’
S’
D
Pf
P*
Pc
Q* Q**
Quantity
Policy problems
• Should taxes be imposed on producers or on
consumers?
• How is the demand curve for cars affected by a
$100 sales tax on cars? How is the supply curve
affected by a $100 tax on suppliers of cars?
• Subsidies: Show in a graph the effect of giving a
subsidy of 5 cents per pound to orange farmers.
• Labor Market: Use a graph to show that it is
equivalent to impose a tax on workers and on
firms. What is more fair: a tax on workers or on
firms?
Questions from Previous Exams
True/False
• The price of gas went up and the quantity sold
went down, therefore the law of supply has been
violated.
Multiple Choice
• If the supply of oil falls and all other relevant
factors remain unchanged, then
a) the demand for oil will fall
b) the quantity demanded for oil will fall
c) the demand for oil will rise
d) the quantity demanded of oil will rise
• ____
3.
An increase in the price of corn will
cause a rise in the supply of corn.
• ____
4.
If the price and quantity exchanged of
a good simultaneously rise, then the law of demand has
been violated.
• ____
6.
Suppose the price of a commodity is
$15 per unit. At that price, consumers wish to purchase
6,000 units weekly and producers wish to sell 4,000 units
weekly. In this situation,
• a.unsatisfied consumers will bid up the market price.
• b.the market price will fall because producers are
unsatisfied.
• c.the price will rise and the demand will fall to bring the
market to equilibrium.
• d.supply will increase by 2,000 units in order to satisfy
consumers.
• 10. To make child daycare more affordable, government
advisors are debating two possible options. Plan A is to
give daycare centers a $100 subsidy per month per
child. Plan B is to give the parents $100 reduction in
taxes per month per child in daycare. Which plan
benefits parents more?
• a.Plan A because it will increase the supply of childcare
and decrease the price.
• b.Plan B because the $100 goes directly to the parents.
• c.The plans are equivalent in terms of their impact on the
price minus subsidy paid by parents.
• d.Plan A because the price will fall, while under Plan B
the price will rise.
18
16
Price (US$)
14
12
10
8
6
4
2
0
0
2
4
6
8
10
12
14
16
18
Cups of coffee per week
• ____
14.
Comparing the elasticity of demand when the
price is 12 and when the price is 4, when is the elasticity
bigger?
• a.They are equal.
• b.The elasticity is bigger when the price is 12.
• c.The elasticity is bigger when the price is 8.
• d.More information is needed to answer this question.