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:

Surplushttp://delong.typepad.com/sdj/econ-1-spring-2014/

February 5, 2014, 4-5:30101 Barker, U.C. Berkeley

Consider a Market in Equilibrium

How Happy Are the Demanders with the Deals They Get?

How Happy Are the Demanders with the Deals They Get?

• They pay 6 x 90 = 540

• What is what they get worth to them?

Consumer Willingness to Pay for the Average Unit Purchased

• They pay 6 x 90 = 540

• What is what they get worth to them?

• Well, the first unit is worth a little less than 100 and the sixth unit is worth a little more than 90, so on average 95

Calculating the Average Willingness to Pay for Units Purchased

• They pay 6 x 90 = 540• What is what they get

worth to them?• Well, the first unit is

worth a little less than 100 and the sixth unit is worth a little more than 90, so on average 95.

• Same for the second and the fifth, and the third and the fourth…

• The average unit is worth 95.

Total Value of the Market to Producers

• They pay 6 x 90 = 540• What is what they get

worth to them?• Well, the first unit is worth

a little less than 100 and the sixth unit is worth a little more than 90, so on average 95.

• Same for the second and the fifth, and the third and the fourth…

• The average unit is worth 95.

• Since there are six units, the opportunity to buy is worth:

• (95-90) x 6 = 30

The Producer Surplus Triangle• They pay 6 x 90 = 540• What is what they get worth

to them?• Well, the first unit is worth a

little less than 100 and the sixth unit is worth a little more than 90, so on average 95.

• Same for the second and the fifth, and the third and the fourth…

• The average unit is worth 95.• Since there are six units, the

opportunity to buy is worth:• (95-90) x 6 = 30• Or the area of this triangle: the

consumer surplus triangle:

The Producer and Consumer Surplus Triangles

• Consumers– Average unit is worth half

the difference between ZQ parameter and price

– Subtract off price, multiply, and find that consumer surplus is the consumer surplus triangle.

• Producers– Average unit costs half

the difference between the ZQ parameter and price

– Subtract from price, multiply, and find that producer surplus is the producer surplus triangle.

Ladies and Gentlemen, to Your i>Clickers…

• D: P=100-(5/3)Q• S: P=15Q• What is the

producer surplus?– A. 60– B. 30– C. 540– D. 270– E. None of the

above

Ladies and Gentlemen, to Your i>Clickers…

• D: P=100-(5/3)Q• S: P=15Q• What is the producer surplus?

– A. 60– B. 30– C. 540– D. 270– E. None of the above

• The first unit made costs a little more than zero to make, the last unit made a little less than 90…

• Thus the average unit made costs 45…

• Thus on 6 units the producers make 270

Ladies and Gentlemen, to Your i>Clickers…

• S: P=15Q• D: P=100-10Q• What is the consumer

surplus?–A. 80–B. 30–C. 120–D. 160– E. None of the above

Ladies and Gentlemen, to Your i>Clickers…

• S: P=15Q• D: P=100-10Q• What is the consumer surplus?– A. 80– B. 30– C. 120– D. 160– E. None of the above

• With this demand curve, the equilibrium P=60, Q=4

• The average unit is worth 80 to consumers

• (80 – 60) x 4 = 80

Ladies and Gentlemen, to Your i>Clickers…

• S: P=15Q• D: P=100-(5/3)Q• What is the consumer

surplus?–A. 80–B. 30–C. 120–D. 160– E. None of the above

Ladies and Gentlemen, to Your i>Clickers…

• S: P=15Q• D: P=100-(5/3)Q• What is the consumer surplus?– A. 80– B. 30– C. 120– D. 160– E. None of the above

• The equilibrium price is 90; six units are bought; the average unit is worth 95 to consumers

• (95 – 90) x 6 = 30

A Question…• S: P=15Q• With demand P=100-(5/3)Q– We had 30 of consumer surplus

• With demand P=100-10Q– We had 80 of consumer surplus

• In the second case, demand is weaker—consumers don’t like the good as much.

• So how is it that they get more surplus out of the market in the second case than the first?

A Question…• S: P=15Q• With demand P=100-(5/3)Q– We had 30 of consumer surplus

• With demand P=100-10Q– We had 80 of consumer surplus

• In the second case, demand is weaker—consumers don’t like the good as much.

• So how is it that they get more surplus out of the market in the second case than the first?– Anyone?

A Question…• S: P=15Q• With demand P=100-(5/3)Q– We had 30 of consumer surplus

• With demand P=100-10Q– We had 80 of consumer surplus

• In the second case, demand is weaker—consumers don’t like the good as much.

• So how is it that they get more surplus out of the market in the second case than the first?– Anyone?– Not a rhetorical question…

A Question…• S: P=15Q• With demand P=100-(5/3)Q– We had 30 of consumer surplus

• With demand P=100-10Q– We had 80 of consumer surplus

• In the second case, demand is weaker—consumers don’t like the good as much.

• So how is it that they get more surplus out of the market in the second case than the first?– Anyone?– Not a rhetorical question…– Bueller? Ferris Bueller?

A Question…• S: P=15Q• With demand P=100-(5/3)Q

– We had 30 of consumer surplus• With demand P=100-10Q

– We had 80 of consumer surplus• In the second case, demand is weaker—

consumers don’t like the good as much.• So how is it that they get more surplus out

of the market in the second case than the first?– Anyone?– Not a rhetorical question…– Bueller? Ferris Bueller?

• Email me your answers tonight to: jbdelong@berkeley.edu; 200 words max…

What’s Wrong with Surplus as a Human Societal Welfare

Measure?• Large demand for food to feed the army and its urban logistics train

• Kido Butai– The IJN’s

spearhead in 1942– Visits the Indian

Ocean• The rural jute-

processing farm workers of Bengal…

The Jute-Processing Industry Collapses…

• What can the jute workers sell to earn money?...

• What is their willingness-to-pay for food?...

• How much food can they buy?...

• What happens to them?...

Deaths in the Bengal Famine of 1942

• Between 1.5 and 4 million deaths

• Ample food in India as a whole

• Yet there is no money to be made by shipping rice from U.P. to Bengal

• Where is the government of George Windsor, Kaiser-i-Hind in all this?

• His Prime Minister Winston Churchill, telegrams:• If food is so scarce,

why hasn't Gandhi died yet?

• Not Winston Churchill’s finest hour

Deaths in the Bengal Famine of 1942: 1.5M to 4 M

• Yet keeping the food of India in U.P. and Maharashtra in 1942-1943—where there is a substantial willingness to pay—is the wealth-maximizing choice…

• Wealth maximization ≠ human well-being–Cf.: Amartya Sen,*Poverty and Famines: An

Essay on Entitlement and Deprivation*• http://goo.gl/wqCbnZ

This Is What Karl Marx Was Getting at

• Capital, vol. I, ch. 6: “The Buying and Selling of Labour-Power” <http://goo.gl/W5GUDh>:– <snark> [The market] is in fact a very Eden…. There

alone rule Freedom, Equality, Property and Bentham. Freedom, because both buyer and seller… contract as free agents…. Equality, because each… exchange[s] equivalent for equivalent. Property, because each disposes only of what is his…. And Bentham, because each looks only to himself…..

– And just because they do so, do they all, in accordance with the pre-established harmony of things, or under the auspices of an all-shrewd providence, work together to their mutual advantage, for the common weal and in the interest of all…</snark>

This Is What Karl Marx Was Getting at

• Capital, vol. I, ch. 6: “The Buying and Selling of Labour-Power” <http://goo.gl/W5GUDh>:– <serious>On leaving this sphere of simple…

exchange… which furnishes the species Freetraderus Vulgus with his… ideas… we can perceive a change….

– The one with an air of importance, smirking, intent on business; the other, timid and holding back, like one who is bringing his own skinto market and has nothing to expect but—a skinning…</serious>