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Berkeley ECON 100A - ECON 100A Section Notes 2

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Section Notes 2, Econ 100A Spring ’06 1Section Notes 2Covering material from Lecture on January 17thClass Outline1. Consumer Price Index2. Supply Curve: What is it and who is it for?3. Demand Curve: What is it and who is it for?4. Supply and Demand Together1 Consumer Price IndexSome quick definitions:• Nominal Price: Absolute Price of a good, unadjusted for inflation.•• Real Price: Price of a good relative to an aggregate measure of prices; price adjusted for inflation.• Consumer Price Index: Measure of the aggregate price level.The CPI is just one way in which real prices can be measured. When doing economic analysis doesone of these prices have more meaning than the others?Problem: (P&R, Ch.1, Problem 2)The following table shows the average retail price of butter and the CPI from 1980 to 2000.1980 1990 2000CPI 100 158.56 208.98Retail Price of Butter $1.88 $1.99 $2.521. Calculate the real price of butter in 1980 dollars.2. What is the percentage change in real price from 1980 to 2000?3. Convert the CPI into 1990 = 100 and determine the real price of butter in 1990 dollars.Section Notes 2, Econ 100A Spring ’06 22 Supply Curve: What is it and who is it for?The supply curve is given by: QS= QS(P ), but what goes into making it and which individuals doe s itrepresent?Graphically we have:6-6-PQ QP3 Demand Curve: What is it and who is it for?The demand curve is given by: QD= QD(P ), but what goes into making it and which individuals does itrepresent?Graphically we have:6-6-PQ QPSection Notes 2, Econ 100A Spring ’06 34 Supply and Demand TogetherLet’s look at an example of supply and demand curves and how they work together. Assume Supply andDemand are given by the following two equations:QD(P ) = 100 − 2PQS(P ) = −20 + 2PFirst graph them and find where the market equilibrium is. What can cause a potential disequilibrium?What about factors that affect supply and demand? What if the government intervenes?6-6-PQ QPProblem: (P&R, Ch.2, Exercise 5)Much of the demand for U.S. agricultural output has come from other countries. In 1998, the total demandfor wheat was Q = 3244 − 283P . Of this, total domestic demand was QD= 1700 − 107P , and domesticsupply was QS= 1944 + 207P . Suppose the export demand for wheat falls by 40%.1. U.S. farmers are concerned about this drop in export demand. What happens to the free-marketprice of wheat in the United States? Do farmers have much reason to worry?2. Now suppose the U.S. government wants to buy enough wheat to raise the price to $3.50 per bushel.With the drop in export demand, how much wheat would the government have to buy? How muchwould this cost the


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Berkeley ECON 100A - ECON 100A Section Notes 2

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