- See class website for answers to HW #1- HW for Monday: read chapters 6 & 7 (and can start reading 8)Review of supply & demand:- Market demand curve: the horizontal summation of individual demand curves- Supplyo Supply is a function of: (+ = positive correlation, - = negative correlation) Price of the good (+) Price of inputs (-) Technology (+/-) Number of firms (+) Weather (+/-) Government policies (+/-) Expectations about future prices (-)o Supply scheduleo Supply curveo Supply vs. quantity suppliedo Shift (change in determinants except price) vs. movement along the supply curve (change in price)o Market supply curve is the horizontal summation of individual firm supply curves- Equilibrium: Qd = Qso Solving 2 equations with 2 unknownso Excess demand: shortageo Excess supply: surpluso Price ceiling: maximum price, must be below equilibrium to have an effecto Price floor: minimum price, must be above equilibrium to have an effecto Indeterminacy: when you can’t make a prediction about either the price or the quantity after both curves shift (e.g. if both shift to the right, the equilibrium price is indeterminate)o Consumer Surplus (CS)o Producer Surplus (PS)o Deadweight Loss (DWL)- Trade (examples)o In a small, closed economy w/demand and supply for widgetso Domestic demand: P = 10 – Qo Domestic supply: P = (2/3)Q Solve for equilibrium: 10 - Q = (2/3)Q Q* = 6, P* = 4 Consumer surplus: top triangle = (1/2)*b*h = (1/2)(6)(6) = $18 Producer surplus: bottom triangle = (1/2)*b*h = (1/2)(6)(4) = $12 Total surplus = CS + PS = $30o Same problem, except now they have an open economy, and the world price (Pw) for widgets is $6 We expect exports, because Pw > P* Qd domestic: P = 10 – Q 6 = 10 – Q Qd = 4 Qs domestic: P = (2/3)Q 6 = (2/3)Q Qs = 9 Exports: Qs – Qd = 5 units Total surplus is greater than without trade: CS = $8, PS = $27, total = $35o Same problem, there is still an open economy, but now Pw = $2 We expect imports, because Pw < P*CSPS Qd domestic: P = 10 – Q 2 = 10 – Q Qd = 8 Qs domestic: P = (2/3)Q 2 = (2/3)Q Qs = 3 Imports: Qd – Qs = 5 units Total surplus is greater than without tradeo Same problem, Pw = $2, but a tariff is imposed that raises Pw to $3/widget The quantity imported is lowered to 2.5 units (calculate Qd – Qs with Pw = $3) Tariff revenue = quantity imported*tariff = C = 2.5*1 = $2.5 CS = $24.50 PS = $6.75 DWL = B + D on figure = $1.25 (ignore areas F, G, and H and P
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