Economics 2: Spring 2014
J. Bradford DeLong <jbdelong@berkeley.edu>; Maria
Constanza Ballesteros <mc.ballesteros@berkeley.edu>;
Connie Min <conniemin@berkeley.edu>
http://delong.typepad.com/sdj/econ-2-spring-2014/
Economics 2: Spring 2014:
Supply and Demand Algebra:
Shifting Curves
http://delong.typepad.com/sdj/econ-1-spring-2014/
February 3, 2014, 4-5:30
101 Barker, U.C. Berkeley
Comparative Statics: Start from an
Initial Equilibrium
• Supply:
– P=15 x Q
• Demand:
– P=100-(5/3)Q
To Your i>Clickers
• Supply: P=15 x Q. Demand: P=100-(5/3)Q
• P = ((15)100 – (5/3)0)/(15 + 5/3)
• What is the equilibrium price?
– A. 90
– B. 10
– C. 50
– D. 6
– E. None of the Above
To Your i>Clickers
• Supply: P=15 x Q. Demand: P=100-(5/3)Q
• What is the equilibrium price?
–
–
–
–
–
A. 90
B. 10
C. 50
D. 6
E. None of the Above
• 15Q=100-(5/3)Q  (50/3)Q=100  Q=6  P=90
• Supply slope 9 times demand slope  equilibrium
price 9/10 of way from ZQ supply intercept (0) to
ZQ demand intercept (100)  90
Comparative Statics: Start from an
Initial Equilibrium
• Supply:
– P=15 x Q
• Demand:
– P=100-(5/3)Q
• Equilibrium
– P=90
– Q=6
Comparative Statics: Change
Something and Calculate the New
Equilibrium
• Initial:
– S: P=15 x Q
– D: P=100-(5/3)Q
– E: P=90, Q=6
• Change and
calculate
• Assert that
when or if that
change comes,
the economy
will jump
For Example, an Increase in Supply
• Initial:
– S: P=15 x Q
– D: P=100-(5/3)Q
– E: P=90, Q=6
• Turns out Tyrion
shows up and, it
turns out, is
Targaryen:
willing to fly 4
missions for
free
– New supply:
P=15Q - 60
Ladies and Gentlemen: To Your
i>Clickers…
• Initial: S: P=15Q. D: P=100-(5/3)Q. E: P=90, Q=6
• New supply: P=15Q – 60
• By how much does the equilibrium price
change?
– A. It falls by 6
– B. It rises by 6
– C. It falls by 60
– D. It rises by 60
– E. None of the above
Ladies and Gentlemen: To Your
i>Clickers…
• Initial: S: P=15Q. D: P=100-(5/3)Q. E: P=90, Q=6
• New supply: P=15Q – 60
• By how much does the equilibrium price change when Tyrion shows
up?
–
–
–
–
–
A. It falls by 6
B. It rises by 6
C. It falls by 60
D. It rises by 60
E. None of the Above
• Since slopes are unchanged, equilibrium price is still 1/10 of the way
from demand curve ZQ intercept to supply curve ZQ intercept.
• Supply curve ZQ intercept now 60 lower  equilibrium price lower
by 6
And on the Graph…
What’s the New Equilibrium
Quantity?
• P = 100 – (5/3)Q
– 90 = 100 – (5/3)Q 
Q=6
– 84 = 100 – (5/3)Q 
Q=9.6
– Quantity grows by 3.6
• Alternatively: if a drop
in price by 10 raises
quantity by 6, a drop
in price by 6 will raise
quantity by 3.6
• What do fractional
quantities mean here?
A Decrease in Supply
• Initial:
– S: P=15 x Q
– D: P=100-(5/3)Q
– E: P=90, Q=6
• Everyone
decides: I want
to be paid 30
more…
• New supply:
– P = 15Q + 30
Ladies and Gentlemen, to Your
i>Clickers!
• Initial: S: P=15Q. D: P=100-(5/3)Q. E: P=90, Q=6
• New supply: P = 15Q + 30
• By how much does the equilibrium quantity change?
• A. - 1.8
• B. 7.8
• C. 5.2
• D. + 3.6
• E. None of the Above
Ladies and Gentlemen, to Your
i>Clickers!
• Initial: S: P=15Q. D: P=100-(5/3)Q. E: P=90, Q=6
• New supply: P = 15Q + 30
• By how much does the equilibrium quantity change?
• A. - 1.8
• B. 7.8
• C. 5.2
• D. + 3.6
• E. None of the Above
• Initial quantity = (Difference in ZQ values)/(sum of slopes) = 100/(16 2/3) =
6
• Change difference in ZQ values by 30  Change quantity by 3/10 x 6 = 1.8
• Quantity falls by 1.8 to 4.2
A Decrease in Supply
• Initial:
P=15Q.
P=100-(5/3)Q.
P=90, Q=6
• New supply:
P=15Q+30
• New
quantity: 4.2
• New price?
A Decrease in Supply
• Initial:
P=15Q.
P=100-(5/3)Q.
P=90, Q=6
• New supply:
P=15Q+30
• New
quantity: 4.2
• New price?
– Anybody?
A Decrease in Supply
• Initial: P=15Q.
P=100-(5/3)Q.
P=90, Q=6
• New supply:
P=15Q+30
• New quantity:
4.2
• New price is 93
– Given the ratio
of slopes, 1/10
of the way
from one ZQ
parameter to
the other
A Decrease in Demand
• Initial: P=15Q.
P=100-(5/3)Q.
P=90, Q=6
• The Master
of Coin
embezzles
40.
• New
demand:
P=60-(5/3)Q
Ladies and Gentlemen, to Your
i>Clickers…
• Initial: P=15Q. P=100-(5/3)Q. P=90, Q=6
• The master of coin embezzles 40: new
demand: P=60-(5/3)Q
• What is the new equilibrium price?
– A. 86
– B. 54
– C. 50
– B. 70
– E. None of the Above
Ladies and Gentlemen, to Your
i>Clickers…
• Initial: P=15Q. P=100-(5/3)Q. P=90, Q=6
• The master of coin embezzles 40: new demand: P=60-(5/3)Q
• What is the new equilibrium price?
–
–
–
–
–
A. 86
B. 54
C. 50
B. 70
E. None of the Above
• Remember: the ratio of the slopes tells us how the equilibrium price
falls between the two ZQ parameters
• For this case, that’s 1/10
• We just moved one of the ZQ parameters by 40:
• We thus moved the price by 36—down from 90 to 54
A Decrease in Demand
• Initial: P=15Q.
P=100-(5/3)Q.
P=90, Q=6
• New demand:
P=60-(5/3)Q
• New
equilibrium:
• P=54
• Q=3.6
Elastic and Inelastic Supply and
Demand
• When demand is elastic, changes in supply
conditions move quantity by a lot and price by
only a little.
• When demand is inelastic, changes in supply
conditions move price by a lot and quantity only
by a little.
• When supply is elastic, changes in demand
conditions move quantity by a lot and price by
only a little.
• When supply is inelastic, changes in demand
conditions move price by a lot and quantity only
by a little.
This You Must Now…
• Finding equilibrium, and figuring out
immediately how equilibrium shifts when
supply and demand change…
• This you MUST know:
– Moses:
• And these words, which I command thee this day, shall be
in thine heart:
This You Must Now…
• And thou shalt teach them diligently
unto thy children
This You Must Now…
• And shalt talk of them when thou
sittest in thine house, and when thou
walkest by the way, and when thou
liest down , and when thou risest up.
This You Must Now…
• And thou shalt bind them for a sign
upon thine hand, and they shall be as
frontlets between thine eyes.
This You Must Now…
• And thou shalt write them upon the
posts of thy house, and on thy gates…
For This Is the Law and the
Profits…
• …of economics, at least