Econ 100.

2
Discussion Class 3
2/1/18
JC Punongbayan
Focus: Production possibilities frontier
Focus: Production possibilities frontier
(hitting 5 birds with one stone)
• 1. Tradeoffs — Resources are scarce.
• 2. Opportunity costs — Law of increasing
opportunity costs.
• 3. Efficiency — A perfectly efficient economic
produces on the curve, not inside it.
• 4. Growth — Economic growth means pushing the
PPF outward.
• 5. Gains from trade & specialization — The basis of
trade is comparative advantage (not absolute
advantage).
1. Tradeoffs
2. Law of increasing opportunity costs
(low-hanging fruit)
3. Efficiency
• Allocative or
Pareto efficiency:
You can’t have
more of a
resource without
having less of
others.
– Versus
inefficiency.
• Unemployment
rate: World War v.
Great Depression
(graph).
 Unemployment rate in the US: 1890-2009

Source: Wikipedia
4. Economic growth
• E.g., PH & Sokor.
• Conditions for
outward shift:
1. More inputs of
production
2. Technological
advances
• Growth does NOT
eliminate scarcity.
 Which of the following
Exercise statements is true?
1. If the PH is producing at point
C, it is using all its resources
efficiently.
2. The opportunity cost of
producing more machines is
constant.
3. Producing at point C is the
most preferable because
butter is a nondurable good.
4. The PH cannot produce at
point E.
5. The economy is not
producing at its potential
since it is not producing at
point D.
Exercise Here’s the PPF of Sam:
1. Starting at B, what is the OC of producing
2 more belts?
2. Starting at C, what is the OC of producing
• xxx
5 more hats?
3. A new tech allowed Sam to produce
twice more hats given existing resources.
Draw the new PPF.
4. At point C, what happened to the OC of
producing 5 more hats?
(0,100)

(20,80)

(40,50)

(50,0)
 Supply and demand
• Quick review
• Things you might be asked.

Source

“Teach a parrot the terms

‘supply’ and ‘demand’ and
you've got an economist.”

— Thomas Carlyle
 Price as a signal
• For consumers
– Buy more of cheaper goods
– Buy less of expensive goods
• For producers
– Produce more of goods
whose price go up
– Produce less of those whose Source
price go down
 A demand curve
Price

5
QD = 25 – 5P
4 25 0
20 1
3 15 2
10 3
2
5 4
0 5
1

Rice (tons)
0 5 10 15 20 25

Source: Prof.
Noel de Dios
 Reasons for downward-
sloping demand
• “Substitution effect”
– As the price of a good goes up, people replace it
with similar goods whose prices have remained
the same
• “Income effect”
– A higher price for the good makes people feel
poorer and therefore buy less of this good and
most other goods
• Ordinary good v. Giffen good (rare).
Changes in other factors shift the demand curve
Price QD = 25 – 5P
QD = 35 – 5P
5

Here 10 units more

4 are demanded
at every price.
3

Rice
0 5 10 15 20 25 30
Source: Prof.
Noel de Dios
 A supply curve
Price

4
QS = – 20 + 10P
3 0 2
10 3
2 20 4
30 5
1

Rice
0 5 10 15 20 25 30
Source: Prof.
Noel de Dios
Note: No “law of supply”
E.g., Backward-bending labor supply
 Shift in the supply curve
Price

4 Here 5 units more

are supplied
at every price.
3

QS = – 20 + 10P
2
QS = – 15 + 10P
1

Rice
0 5 10 15 20 25 30
Source: Prof.
Noel de Dios
 What determines the
price that prevails?
• Equilibrium price
– That price at which quantity demanded equals
quantity supplied
– The price where buyers and sellers see no need to
revise their decisions or actions
• At any other price than equilibrium, buyers
and sellers will revise their plans, since they
cannot fulfill these
Market equilibrium determines price
Price

Rice
0 5 10 15 20 25 30
Source: Prof.
Noel de Dios
 Computing for equilibrium
price & quantity (simple algebra)
• Table method (meh…)
• Given:
– Supply curve: Qs = 120 + 1.5P
– Demand curve: Qd = 189 – 2.25P
• Goal: At what price P is Qs = Qd?
 Q1
• Given the following, graph Kevin’s demand
schedule for J.Co donuts.
Quantity
demanded
by Kevin
Price (pesos (donuts per
per donut) week)
50 5
35 10
20 15
15 20
5 25
Source
 Q2
• Below are the demand schedules for J.Co donuts for Ellen, Tobi, and Cali.
If the three of them constituted the whole market, what would the
market demand schedule look like?
Quantity demanded (donuts per week)
Price
(pesos per donut) Ellen Tobi Cali
50 0 5 10
35 5 10 15
20 10 15 20
15 15 20 25
5 20 25 30
 Q3
Price (pesos) • Starting at point (a), which point
represents a:
– Decrease in quantity demanded?
– Decrease in demand?
c – Increase in demand?
d – Increase in quantity demanded?
a
e
b

0 Ate Leony’s siomai

 Q4
• Using the demand curve, show
the effect of the following
events on the market for beef:
– The price of chicken increases.
– The price of barbecue grills
increases.
– Consumer income rises.
• Assuming beef is a normal good.
– The price of beef increases.
– The price of beef is expected to
increase a week from now.
– An outbreak of “mad cow”
disease occurs.
 Q5
• Which curve (supply or demand) would shift which way
in the following scenarios?
– An increase in the price of a substitute.
– An increase in income for an inferior good.
– Producers’ expectations that prices will fall soon.
– Increasingly costly government regulations directed to firms.
– An increase in income.
– A decreasing price of a complement for a normal good.
– A technological advance.
– Lower input prices.
 Q6
• What would be the effects of the
following on the world supply of coffee?
In each case, identify the determinant
of supply.
– Freezing temperatures wipe out half of
Source
Brazil’s coffee crop.
– Wages of coffee workers in Latin America
rise as unionization efforts succeed.
– Indonesia offers big subsidies to its coffee
producers.
– Genetic engineering produces a sugar
coffee bean that grows faster and needs
less care.
– Coffee suppliers expect prices to be higher
in the future.
 Supply and demand, together
(Things you will be asked, part 2)
• What is the market equilibrium price? Why “equilibrium”?
• What happens to equilibrium price and quantity if one or both curves
shift?
• Shortages and surpluses
– How does the market return to equilibrium?
• Price controls (more later)
– What is the effect of a price ceiling? A price floor?
 Q7
• Given the monthly demand and
supply schedules for cans of
macadamia nuts:
– What is the equilibrium price of Source
macadamia nuts?
– At $7/can, is there equilibrium, a Price Quantity Quantity
shortage, or a surplus? If a (dollars per demanded supplied
shortage/surplus, how large is it? can) (cans) (cans)
6 700 100
– At $10/can, is there equilibrium, a
shortage, or a surplus? If a 7 600 200
shortage/surplus, how large is it? 8 500 300
9 400 400
10 300 500
 Q8
• Market research has revealed the
following information about the
market for ramen:
– The demand schedule can be
represented by equation Qd =
380 — 20P where Qd is the quantity Source
demanded and P is the price.
– The supply schedule can be
represented by Qs = –120 + 30P
where Qs is the quantity supplied.
• What is the equilibrium price and
quantity in the market for ramen?
 Q9
• The demand for churros is respresented
by equation Qd = 480 — 20P where Qd is
the quantity demanded and P is the
price.
• Assume that the supply schedule can be
represented by Qs = –120 + 30P where Qs is
the quantity supplied.
• What is the equilibrium price and
quantity in the market for churros?
Source
• In 2015 churros became more
fashionable to eat and the demand
equation became Qd = 600 – 20P. What
is the new equilibrium price and
quantity?
Tidbit: How old is the supply and demand
diagram?
Cournot
Cournot [1838]
[1838]
Mangoldt
[1863]

Mangoldt
[1863] Jenkin Marshall [1895]
[1870]
END