Transcript Economics 2: Spring 2014 J. Bradford DeLong ; Maria Constanza Ballesteros ; Connie Min http://delong.typepad.com/sdj/econ-2-spring-2014/

Economics 2: Spring 2014
J. Bradford DeLong <[email protected]>; Maria
Constanza Ballesteros <[email protected]>;
Connie Min <[email protected]>
http://delong.typepad.com/sdj/econ-2-spring-2014/
Economics 2: Spring 2014:
Supply and Demand Algebra:
Price Ceilings
http://delong.typepad.com/sdj/econ-1-spring-2014/
February 5, 2014, 4-5:30
101 Barker, U.C. Berkeley
Consider a Market in Equilibrium…
Consider a Market in Equilibrium…
• Demand:
– P = 100-(5/3)Qd
• Supply:
– P = 15Qs
• Equilibrium:
– Q = (100-0)/(15+(5/3)
– P=(15/(15+(5/3)))100+
((5/3)/(15+(5/3)))0
– P = 90, Q = 6
Consider a Market in Equilibrium…
• Demand:
– P = 100-(5/3)Qd
• Supply:
– P = 15Qs
• Equilibrium:
– P = 90, Q = 6
• Surplus:
– Demanders pay
6x90=540; average
value=95; consumer
surplus=95x6540=30
Consider a Market in Equilibrium…
• Demand:
– P = 100-(5/3)Qd
• Supply:
– P = 15Qs
• Equilibrium:
– P = 90, Q = 6
• Surplus:
– Consumer surplus =
95x6-540=30
– Suppliers earn
6x90=540; averge
cost=45; producer
surplus=540-45x6=270
Consider a Market in Equilibrium…
• Demand:
– P = 100-(5/3)Qd
• Supply:
– P = 15Qs
• Equilibrium:
– P = 90, Q = 6
• Surplus:
– Consumer surplus =
30
– Producer surplus =
270
The Government Says: This Isn’t
Fair!
• The situation:
– Demand: P = 100(5/3)Qd
– Supply: P = 15Qs
– Equilibrium: P = 90, Q = 6
– Surplus: Consumer = 30;
Producer = 270
• Why should suppliers
get nine times as much
surplus?
• The Westerosi Army
needs to buy other
things as well! They will
have to face the ice
zombies!
The Government Imposes a Price
Ceiling on What You Can Charge: 60
• The situation:
– Demand: P = 100(5/3)Qd
– Supply: P = 15Qs
– Equilibrium: P = 90, Q = 6
– Surplus: Consumer = 30;
Producer = 270
• Why should suppliers
get nine times as much
surplus?
• The Westerosi Army
needs to buy other
things as well! They will
have to face the ice
zombies!
What Happens?
• The situation:
– Demand: P = 100(5/3)Qd
– Supply: P = 15Qs
– Equilibrium: P = 90, Q
=6
– Surplus: Consumer =
30; Producer = 270
• Why should suppliers
get nine times as
much surplus?
• The government
imposes a price ceiling
of 60
Ladies and Gentlemen, to Your
i>Clickers!
•
The situation: Demand: P = 100(5/3)Qd Supply: P = 15Qs
Equilibrium: P = 90, Q = 6 Surplus:
Consumer = 30; Producer = 270
• A PRICE CEILING OF 60
• How many dragon-training flights will be flown
with the price ceiling?
• A. 6
• B. 4
• C. 24
• D. 14
• E. None of the above
Ladies and Gentlemen, to Your
i>Clickers!
• The situation: Demand:
P = 100-(5/3)Qd Supply:
P = 15Qs Equilibrium: P =
90, Q = 6 Surplus:
Consumer = 30;
Producer = 270
• A PRICE CEILING OF 6
• How many dragon-training flights will be
flown with the price ceiling? A. 6. B. 4. C. 24.
D. 14. E. None of the above
Ladies and Gentlemen, to Your
i>Clickers!
•
The situation: Demand: P = 100(5/3)Qd Supply: P = 15Qs
Equilibrium: P = 90, Q = 6 Surplus:
Consumer = 30; Producer = 270
• A PRICE CEILING OF 6
• How many dragon-training flights will be flown with
the price ceiling? A. 6. [B. 4.] C. 24. D. 14. E. None of
the above
• Why 4?
• Because only 4 potential riders think it’s worth
showing up at the dragonstrip if you are only going to
be paid £60
• But then what is the 24 number?
• That’s how many people show up with plans for
training missions…
Is This New Situation a Better
Equilibrium?
• The situation:
– Demand: P = 100(5/3)Qd Supply: P =
15Qs
– Price ceiling = 60
• Equilibrium: P =
60, Q = 4
Let’s Calculate the Surplus…
• The situation:
– Demand: P = 100(5/3)Qd Supply: P =
15Qs
– Price ceiling = 60
• Equilibrium: P = 60,
Q=4
• Producer Surplus:
– 4 missions flown
– What’s the average
cost?
Ladies, Gentlemen, and Large Intelligent
Fire-Breathing Reptiles, to Your
i>Clickers…
• The situation:
•
–
Demand: P = 100-(5/3)Qd Supply: P = 15Qs
–
Price ceiling = 60
Equilibrium: P = 60, Q = 4
• What’s the average cost to producers of the
four dragon-training missions flown?
• A. 45
• B. 60
• C. 30
• D. 15
• E. None of the above
Ladies, Gentlemen, and Large Intelligent
Fire-Breathing Reptiles, to Your
i>Clickers…
• The situation:
– Demand: P = 100(5/3)Qd Supply: P =
15Qs
– Price ceiling = 60
• Equilibrium: P = 60,
Q=4
• What’s the average cost to producers of the
four dragon-training missions flown? A. 45.
B. 60. C. 30. D. 15. E. None of the above
Ladies, Gentlemen, and Large Intelligent
Fire-Breathing Reptiles, to Your
i>Clickers…
• The situation:
– Demand: P = 100-(5/3)Qd
Supply: P = 15Qs
– Price ceiling = 60
• Equilibrium: P = 60, Q = 4
• What’s the average cost to producers of the
four dragon-training missions flown?
• A. 45. B. 60. [C. 30.] D. 15. E. None of the
above
• Yes: the first mission costs a little more than
0, the last a little less than 60, the average
costs 30
Ladies, Gentlemen, and Large Intelligent
Fire-Breathing Reptiles, to Your
i>Clickers…
• The situation:
–
Demand: P = 100-(5/3)Qd Supply: P =
15Qs
–
Price ceiling = 60
•
Equilibrium: P = 60, Q = 4
•
Average cost: 30
• What’s the producer surplus?
• A. 120
• B. 180
• C. 270
• D. 60
• E. None of the above…
Ladies, Gentlemen, and Large Intelligent
Fire-Breathing Reptiles, to Your
i>Clickers…
• The situation:
– Demand: P = 100(5/3)Qd Supply: P =
15Qs
– Price ceiling = 60
• Equilibrium: P = 60, Q
=4
• Average cost: 30
• What’s the producer surplus?
• A. 120. B. 180. C. 270. D. 60. E. None of the
above…
•
Ladies, Gentlemen, and Large Intelligent
Fire-Breathing Reptiles, to Your
i>Clickers…
The situation:
–
Demand: P = 100-(5/3)Qd Supply: P = 15Qs
–
Price ceiling = 60
•
Equilibrium: P = 60, Q = 4
•
Average cost: 30
• What’s the producer surplus?
• [A. 120.] B. 180. C. 270. D. 60. E. None of
the above…
• Producer surplus = (price – average
cost)x(units)
• Producer surpus = (60 – 30) x 4 = 120
Is This New Situation a Better
Equilibrium?
• The old situation:
– Demand: P = 100(5/3)Qd
– Supply: P = 15Qs
– Equilibrium: P = 90, Q
=6
– Surplus: Consumer =
30; Producer = 270
• Impose a price ceiling
of 60
– New equilibrium: P =
60, Q = 4
– Reduce producer
surplus from 270 to
120
Is This New Situation a Better
Equilibrium?
• The situation:
– Demand: P = 100(5/3)Qd Supply: P = 15Qs
– Equilibrium: P = 90, Q = 6
– Surplus: Consumer = 30;
Producer = 270
• Impose a price ceiling of
60:
– New equilibrium: P = 60,
Q = 4. Reduce producer
surplus from 270 to 120
• What happens to
consumer surplus?
Calculating Consumer Surplus
• The situation:
– Demand: P = 100-(5/3)Qd
Supply: P = 15Qs
– Equilibrium: P = 90, Q = 6
– Surplus: Consumer = 30;
Producer = 270
• Impose a price ceiling of 60:
– New equilibrium: P = 60, Q
= 4. Reduce producer
surplus from 270 to 120
• What happens to consumer
surplus?
• Only four of the 24
consumers actually get to
fly their planned training
mission…
• How do you select the four?
Calculating Consumer Surplus
•
The situation:
– Demand: P = 100-(5/3)Qd Supply: P =
15Qs
– Equilibrium: P = 90, Q = 6
– Surplus: Consumer = 30; Producer =
270
•
Impose a price ceiling of 60:
– New equilibrium: P = 60, Q = 4.
Reduce producer surplus from 270
to 120
•
•
•
What happens to consumer
surplus?
Only four of the 24 consumers
actually get to fly their planned
training mission… How do you
select the four?
The government asks everybody
to raise their hand if they are
those who have the four highest
willingnesses-to-pay…
Calculating Consumer Surplus
•
The situation:
– Demand: P = 100-(5/3)Qd Supply: P =
15Qs
– Equilibrium: P = 90, Q = 6. Surplus:
Consumer = 30; Producer = 270
•
Impose a price ceiling of 60:
– New equilibrium: P = 60, Q = 4.
Reduce producer surplus from 270
to 120
•
What happens to consumer
surplus? Only four of the 24
consumers actually get to fly their
planned training mission… How
do you select the four?
– The government asks everybody to
raise their hand if they are those
who have the four highest
willingnesses-to-pay…
• Yeah, right, that’s
really going to work
Some Bureaucratic Process Selects
Missions Randomly…
•
The situation:
–
–
•
Impose a price ceiling of 60:
–
•
Demand: P = 100-(5/3)Qd Supply: P =
15Qs
Equilibrium: P = 90, Q = 6. Surplus:
Consumer = 30; Producer = 270
New equilibrium: P = 60, Q = 4. Reduce
producer surplus from 270 to 120
What happens to consumer surplus?
Only four of the 24 consumers actually
get to fly their planned training
mission… How do you select the four?
–
The government asks everybody to
raise their hand if they are those who
have the four highest willingnesses-topay…
• Yeah, right, that’s
really going to work
•
What is the average willingness to
pay of the four selected missions
going to be?
Gentlebeings, to Your i>Clickers…
•
•
The situation:
–
Demand: P = 100-(5/3)Qd Supply: P = 15Qs
–
Equilibrium: P = 90, Q = 6. Surplus: Consumer = 30; Producer = 270
Impose a price ceiling of 60:
–
•
New equilibrium: P = 60, Q = 4. Reduce producer surplus from 270 to
120
Only four of the 24 consumers actually get to fly their planned
training mission. Some bureaucrat selects the four randomly…
• What is the average willingness-to-pay of the four selected
missions going to be?
• A. 95
• B. 80
• C. 96 2/3
• D. 60
• E. None of the above
Gentlebeings, to Your i>Clickers…
•
The situation:
– Demand: P = 100-(5/3)Qd Supply:
P = 15Qs
– Equilibrium: P = 90, Q = 6. Surplus:
Consumer = 30; Producer = 270
•
Impose a price ceiling of 60:
– New equilibrium: P = 60, Q = 4.
Reduce producer surplus from
270 to 120
•
Only four of the 24 consumers
actually get to fly their planned
training mission. Some bureaucrat
selects the four randomly…
• What is the average willingness-to-pay of the four selected
missions going to be?
• A. 95. B. 80. C. 96 2/3. D. 60. E. None of the above
Gentlebeings, to Your i>Clickers…
•
The situation:
–
Demand: P = 100-(5/3)Qd Supply: P = 15Qs
–
Equilibrium: P = 90, Q = 6. Surplus: Consumer = 30; Producer = 270
•
Impose a price ceiling of 60:
•
Only four of the 24 consumers actually get to fly their planned training mission. Some
bureaucrat selects the four randomly…
–
New equilibrium: P = 60, Q = 4. Reduce producer surplus from 270 to 120
• What is the average willingness-to-pay of the four selected
missions going to be?
• A. 95. [B. 80.] C. 96 2/3. D. 60. E. None of the above
• The mission planner with the highest willingness-to-pay is
just shy of 100. The mission planner with the lowest
willingness-to-pay is just more than 60. The average is 80.
• Why is it kosher to calculate the average of the whole
distribution by just adding up the biggest and the smallest
and dividing by 2, anyway?
Gentlebeings, to Your i>Clickers…
•
The situation:
–
Demand: P = 100-(5/3)Qd Supply: P = 15Qs
–
Equilibrium: P = 90, Q = 6. Surplus: Consumer = 30; Producer = 270
•
Impose a price ceiling of 60:
•
Only four of the 24 consumers actually get to fly their planned training mission. Some
bureaucrat selects the four randomly…
–
New equilibrium: P = 60, Q = 4. Reduce producer surplus from 270 to 120
• What is the average willingness-to-pay of the four selected missions
going to be?
• A. 95. [B. 80.] C. 96 2/3. D. 60. E. None of the above
• The mission planner with the highest willingness-to-pay is just shy of
100. The mission planner with the lowest willingness-to-pay is just more
than 60. The average is 80.
• Why is it kosher to calculate the average of the whole distribution by
just adding up the biggest and the smallest and dividing by 2, anyway?
• Anybody?
Gentlebeings, to Your i>Clickers…
•
The situation:
– Demand: P = 100-(5/3)Qd Supply:
P = 15Qs
– Equilibrium: P = 90, Q = 6. Surplus:
Consumer = 30; Producer = 270
•
Impose a price ceiling of 60:
– New equilibrium: P = 60, Q = 4.
Reduce producer surplus from
270 to 120
•
Only four of the 24 consumers
actually get to fly their planned
training mission. Some bureaucrat
selects the four randomly…
•
Average willingness-to-pay: 80
• What is the consumer surplus here?
Gentlebeings, to Your i>Clickers…
•
The situation:
–
Demand: P = 100-(5/3)Qd Supply: P = 15Qs
–
Equilibrium: P = 90, Q = 6. Surplus: Consumer = 30; Producer = 270
•
Impose a price ceiling of 60:
•
Only four of the 24 consumers actually get to fly their planned training mission. Some
bureaucrat selects the four randomly…
•
Average willingness-to-pay: 80
–
New equilibrium: P = 60, Q = 4. Reduce producer surplus from 270 to 120
• What is the consumer surplus here?
• A. 80
• B. 30
• C. 160
• D. 120
• E. None of the above…
Gentlebeings, to Your i>Clickers…
•
•
The situation:
–
Demand: P = 100-(5/3)Qd Supply: P =
15Qs
–
Equilibrium: P = 90, Q = 6. Surplus:
Consumer = 30; Producer = 270
Impose a price ceiling of 60:
–
New equilibrium: P = 60, Q = 4. Reduce
producer surplus from 270 to 120
•
Only four of the 24 consumers actually
get to fly their planned training mission.
Some bureaucrat selects the four
randomly…
•
Average willingness-to-pay: 80
• What is the consumer surplus here?
• A. 80. B. 30. C. 160. D. 120. E. None of the
above…
Gentlebeings, to Your i>Clickers…
•
The situation:
–
Demand: P = 100-(5/3)Qd Supply: P = 15Qs
–
Equilibrium: P = 90, Q = 6. Surplus: Consumer = 30; Producer = 270
•
Impose a price ceiling of 60:
•
Only four of the 24 consumers actually get to fly their planned training mission. Some bureaucrat selects the four
randomly…
•
Average willingness-to-pay: 80
–
New equilibrium: P = 60, Q = 4. Reduce producer surplus from 270 to 120
• What is the consumer surplus here?
• [A. 80.] B. 30. C. 160. D. 120. E. None of
the above…
• Consumer surplus = (avg w-t-p – price) x
quantity
• Avg w-t-p = 80 Price = 60 Quantity = 4
• Consumer surplus = 80
Is This New Situation a Better
Equilibrium?
• The old situation:
– Demand: P = 100(5/3)Qd Supply: P = 15Qs
– Equilibrium: P = 90, Q =
6. Surplus: Consumer =
30; Producer = 270
• Impose a price ceiling of
60:
– New equilibrium: P = 60,
Q = 4.
• Reduce producer
surplus from 270 to 120
• Increase consumer
surplus from 30 to 80
Is This New Situation a Better
Equilibrium?
• The old situation:
– Demand: P = 100(5/3)Qd Supply: P = 15Qs
– Equilibrium: P = 90, Q =
6. Surplus: Consumer =
30; Producer = 270
• Impose a price ceiling of
60: New equilibrium: P =
60, Q = 4.
• Reduce producer
surplus from 270 to 120
• Increase consumer
surplus from 30 to 80
• Reduced total surplus
from 300 to 200
Is This New Situation a Better
Equilibrium?
• The old situation:
– Demand: P = 100-(5/3)Qd
Supply: P = 15Qs
– Equilibrium: P = 90, Q = 6.
Surplus: Consumer = 30;
Producer = 270
• Impose a price ceiling of 60:
New equilibrium: P = 60, Q = 4.
• Reduce producer surplus from
270 to 120
• Increase consumer surplus
from 30 to 80
• Reduced total surplus from
300 to 200
• Huh!? Where did
the extra £100 of
surplus go!?!?!?
Huh?! Where Did the Extra £100 of
Surplus Go!?!?!?
• In the old
situation:
– We matched 6
suppliers with an
average cost of 45
to 6 missions with
an average
willingness-to-pay
of 95
– Generated 6 x 50
= 300 of surplus
Huh?! Where Did the Extra £100 of
Surplus Go!?!?!?
• In the old situation:
– We matched 6 suppliers
with an average cost of 45
– to 6 missions with an
average willingness-to-pay
of 95
– Generated 6 x 50 = 300 of
surplus
• With the price ceiling:
– We match 4 suppliers with
an average cost of 30
– To 4 missions with an
average willingness-to-pay
of 80
– Generate 4 x 50 = 200 of
surplus
Huh?! Where Did the Extra £100 of
Surplus Go!?!?!?
•
•
•
•
In the old situation:
–
We matched 6 suppliers with an average cost
of 45
–
to 6 missions with an average willingness-topay of 95
–
Generated 6 x 50 = 300 of surplus
With the price ceiling:
–
We match 4 suppliers with an average cost of
30
–
To 4 missions with an average willingness-topay of 80
–
Generate 4 x 50 = 200 of surplus
We have made 4 matches instead of 6
We haven’t improved the average
quality of the matches
– We have degraded the average
willingness-to-pay of demanders
– We have improved the cost of
suppliers: if we are only going to
fly four missions, these are the
four who should be flying those
missions
An Anti-Krugman and Wells Rant!
• Here is their
analysis of a price
ceiling—and their
equivalent of the
-100 loss in
surplus that we
have
calculated—this
yellow triangle.
• How large is this
yellow triangle?
An Anti-Krugman and Wells Rant!
• How large is this
yellow “surplus loss”
Harberger triangle?
• Well, its base is from
60 to 100; its height is
from 4 to 6…
• Its area is: 2 x 40 x ½
= 40
• But we found that the
surplus loss was 100…
What Is Going on? Why Do We Find a
Surplus Loss of 100 When KW Only Find a
Surplus Loss of 20?
• Their Harberger
triangle is 40…
• But we found that the
surplus loss was 100…
• They assume the high
willingness-to-pay
demanders get to
purchase when there
is excess supply…
What Is Going on? Why Do We Find a
Surplus Loss of 100 When KW Only Find a
Surplus Loss of 20?
• Their Harberger
triangle is 40…
• But we found that the
surplus loss was 100…
• They assume the high
willingness-to-pay
demanders get to
purchase when there is
excess supply…
• Sometimes that may
happen (secondary
markets, scalping)…
• Sometimes that may
not happen…
What Is Going on? Why Do We Find a
Surplus Loss of 100 When KW Only Find a
Surplus Loss of 20?
• Their Harberger triangle is
40…
• But we found that the
surplus loss was 100…
• They assume the high
willingness-to-pay
demanders get to purchase
when there is excess
supply…
• Sometimes that may
happen (secondary
markets, scalping)…
• Sometimes that may not
happen…
• You need to talk about it,
not just to assume it…
So I Think KW Get This Really Wrong!
• But I haven’t
found anything
else in KW that I
think is equally
really wrong…