EC 100 Class 1
Office: 32 L, 3.01 D
Office Hours: by appointment
Email: t.r.fetzer@lse.ac.uk
First Class Exercise
- Maybe plot the grade distribution if you want,
but don’t reveal individual students results.
- Highlight which questions seem to be difficult.
(you can also draw the distribution across all
class groups if the sample is too small).
- Review concepts of elasticity – in particular,
what means elastic versus inelastic – students
need to get familiar with the terminology
Question 1
• If price is below market-clearing level which of
the following statements is true?
Question 1
• If price is below market-clearing level which of
the following statements is true?
Question 2
• Which of the following is likely to shift the
demand curve for coffee? Mark all that are
correct.
Question 2
• Distinguishing movements along a curve versus
shifts of the curve. [See Whitehead handout 2]
• Demand curve shifts if there are changes in (1)
consumer preferences, (2) changes in price of
substitutes or (3) complements, …
Question 3
• When the price of a good rose by 10%,
demand fell by 25%. What is the price
elasticity of demand?
Question 3
• Define again the elasticity of demand – what
does it measure – what is an example of
elastic versus inelastic demand?
• What is the effect of changes in supply on
equilibrium prices, depending on the elasticity
of demand?
Question 4
• The relatively new technology of fracking
allows natural gas to be extracted from places
that were not previously accessible. What
would you expect to be the effect on prices in
the natural gas market - mark all those
statements you think are true.
Question 4
Question 5
• What would you expect to be the effect of the
increase in fracking to produce natural gas on
the demand curve for oil?
Question 6
• In 2012 the top 1% of income earners in the
US earned 19.8% of total income, the highest
share since 1928. There is a need for policies
to address this problem.
• Is the first of these sentences a positive or a
normative statement? What about the
second?
Question 6
• Positive: judgement free
• Normative: carry subjective assessments.
Question 7
• The supply curve for a good has a price
elasticity of 1. if prices rise by 10%, how much
will supply rise?
Question 7
• Define elasticity of supply – how much quantity
supplied increases, if there is a 1% change in the
price.
• Here price increases by 10% - we move along the
supply curve
• We do not make a statement about the
“equilibrium” price (so we do comparative statics,
holding all else constant – including demand).
[i.e. we are “drawing” the supply curve]
Question 8
• The supply curve for a good has a price
elasticity of 1. Suppose that demand rises by
10% for all prices. From this information,
which of the following statements are correct?
Drawing a graph may help you.
Question 8
• Prices and quantities will rise by equal
amounts, The actual increase in the amount
bought will be less than 10%.
• Why?
Question 8
Question 9
• Suppose the government imposes a tax on all
purchases of a good. Which of the following
statements are true?
Question 8
•
•
•
Imposing a tax on purchases (= shifting the demand curve down)
For a given price, consumers now get less quantity as the price they need to pay
contains the tax per unit
Alternatively: think of upward shift of supply curve by the amount of tax
Price
,P
Supply
Curve
Consumer Price
Equilibrium
price
Demand =
Willingness
to pay
Producer Price
Q
*
2
Q
*
1
Quantity,
Q
Question 10
• The government imposes a tax on all
purchases of a good. In your supply-demand
diagram where the price is the price received
by sellers, what happens to the demand curve
Question 11
• The government imposes a tax on all
purchases of a good. The supply of the good
is completely inelastic. What happens to
prices and quantities in the market?
• Equilibrium price and quantity remain the
same, but consumer price goes down. There is
no “Harberger triangle”, the incidence of the
tax is entirely born by producers.
Question 11
• Illustrate with steep supply curve
Price
,P
Supply
Curve plus
tax
Supply
Curve
Consumer Price
Equilibrium
price
Demand =
Willingness
to pay
Producer Price
Q
*
2
Q
*
1
Quantity,
Q
Question 11
• The steeper the supply curve, the bigger is the
drop in the producer price relative to the increase
in the consumer price.
• Producers can not adjust quantity given their
inelastic supply.
• With perfectly inelastic supply the quantity does
not adjust at all. So equilibrium quantity with a
tax stay the same. The only way the equilibrium
quantity can stay the same is that demand is
unaffected by the tax – hence, the whole tax
burden is paid by producers.
Question 11
• Imposing a tax on purchases (= shifting the demand curve down)
• For a given price, consumers now get less quantity as the price they
need to pay contains the tax per unit
Price
,P
Supply
Curve
Equilibrium
Price =
Consumer
Price
Producer
Price
Demand
Q
*
1
Quantity,
Q
Question 12-15
• Do on the Whiteboard
Discussion Question
• Property prices are high in the UK and many
people struggle to be able to afford to buy a
house. In response to this the government
launched in April 2013 the ‘Help to Buy’
Scheme that makes it easier for potential
house buyers to finance the purchase of a
house.
Effect on Demand and Supply
• Using a demand and supply curve diagram
show what you would expect the effect of the
scheme to be on the demand and supply
curves for housing
– Draw a supply and demand curve
– Demand curve shifts out (maybe more for
relatively low priced housing as scheme geared for
low income households)
– Equilibrium quantity increases, prices go up.
Effect on Demand and Supply
• Using a demand and supply curve diagram
show what you would expect the effect of the
scheme to be on the demand and supply
curves for housing
– Supply in short run likely to be fixed
– Demand curve shifts out (maybe more for
relatively low priced housing as scheme geared for
low income households)
– Equilibrium quantity increases, prices go up.
Effect on Demand and Supply
Effect on Demand and Supply
• If the supply curve is very steep…
– Demand shift does not change equilibrium
quantity in any significant way.
– But equilibrium prices increase – who benefits?
– Current homeowners
• Such a policy could has possible redistributive
effects (from poor to rich).