Math Review

1
Math Review

• Building Models
• What is equilibrium
• stable, neutral, unstable?
• Functional relations Y f(X1, X2 , X3 )

2
Why do we trade?

• To improve our bundle.

3
The Law of Demand

• When the price of a good or service goes up,
  people buy less of it.

4
What explains the Law of Demand?

• The Substitution Effect
• The Real-Income Effect

5
The Demand Function

• We are interested in what determines the quantity
  demanded, Qd.
• The word Demand often refers to the Curve.

6
Qd fp, op, e, y, T, bc

• EXOGENOUS VARIABLE RELATIONSHIP TO Qd
• 1. Price p Inverse
• 2. Other prices op
• Price of a Compliment Inverse
• Prices of a Substitute Positive
• 3. Expectations e
• 4. Income y Positive
• 5. Tastes or preferences T Positive
• 6. Background Conditions bc

7
The Demand Curve
P
D
Q
d
8
Elasticity

• Definition
• ? in an endogenous variable
• divided by
• ? in an exogenous variable.
• Elasticity--Responsiveness
• Elasticity can be in response to anything--
  price, income, other prices, etc.

9
Elasticity of Demand -- ? in Qd divided by ?
in price.

• Increase price one percent-- very little change
  in Qd. What does that mean? There is an
  inelastic demand for it.
• Example of an inelastic good - insulin.
• Increase price one percent-- Qd falls in half.
  What does that mean? There is an elastic demand
  for it.
• Example of an elastic good - Cherios

10
The Relationship Between Rent and Utilization

• The case of a garden tiller.

11
Concepts of Production

• The Law of Diminishing Returns
• Efficiency
• The Law of Increasing Costs

12
The Supply Function

• The Supply Function or Schedule is the quantity
  of a good or service producers wish to sell at
  each price.
• Why?

13
Collection of profit maximization points.

• Each point on a supply function is the quantity
  that will maximize profits for that price.

14
Qsfp, ip, e, T, n, bc

• EXOGENOUS VARIABLE RELATIONSHIP TO Qs
• 1. Price p Positive
• 2. Input Prices ip Inverse
• 3. Expectations e
• 4. Technology T Positive
• 5. Number of firms n Positive
• 6. Background Conditions bc

15
The Supply Curve
P
S
Q
s
16
A Rise in costs
S
P
S
Q
s
17
Supply and Demand and the Equilibrium Point.
P
S
P
E
D
Q
Q
E
18
Excess Supply, Excess Demand
P
S
Excess

Supply
P
1
P
E
P
2
Excess

Demand
D
Q
19
Two Markets for One Good

• N. OXFORD S. OXFORD
• P Qd Qs Qd Qs
• .90 24 6 14 9
• 1.00 22 7 13 13
• 1.10 18 8 10 20
• 1.20 10 10 9 26

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What Happens when Two Markets Merge?

• N. OXFORD S. OXFORD TOTAL
• P Qd Qs Qd Qs Qd Qs
• .90 24 6 14 9 38 15
• 1.00 22 7 13 13 35 20
• 1.10 18 8 10 20 28 28
• 1.20 10 10 9 26 19 36

21
Did you learn?

• What is a demand function?
• What is a supply function?
• What is the difference between supply and demand?
• What is equilibrium?
• How inflation and unemployment are measured?
• What is the difference between debt and deficit?
• What is the difference between the government
  deficit and the current account deficit?