Lecture 5 End of Trade, Start of Demand & Supply Dr. Jennifer P. Wissink ©2018 John M. Abowd and Jennifer P. Wissink, all rights reserved. February 7, 2018

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i>clicker question Given the table, suppose Portugal and England are going to trade wine and cloth with each other. Suppose Portugal is making wine and England cloth. What is the lowest price (in terms of cloth) we would expect to see barrels of wine selling for? 1/10 a yard of cloth 1/20 a yard of cloth 10 yards of cloth 20 yards of cloth 10 barrels of wine LABOR (L) HOURS REQUIRED ENGLAND PORTUGAL 1 yd. cloth 2 hours 1 hour 1 barrel wine 40 hours 10 hours

i>clicker question Given the table, suppose Portugal and England are going to trade wine and cloth with each other. Suppose Portugal is making wine and England cloth. What is the highest price (in terms of cloth) we would expect to see barrels of wine selling for? 40 yards of cloth 1/40 a yard of cloth 10 yards of cloth 20 yards of cloth 20 barrels of wine LABOR (L) HOURS REQUIRED ENGLAND PORTUGAL 1 yd. cloth 2 hours 1 hour 1 barrel wine 40 hours 10 hours

Exchange Rates

W W England’s PPF 8 Portugal’s PPF 2 40 C 80 C

The Combined PPF With 3 Countries! Portugal’s PPF France’s PPF 8 England’s PPF The Combined PPF With 3 Countries! 3 Suppose you add France, who can make either 3 barrels of wine OR 45 yards of cloth OR anything on a straight line between these end points. So… French MOC of cloth=1/15 bls French MOC of wine=15 yds 2 W 80 40 C 45 C C 13 C

An International Cloth Supply Curve W C Portugal’s PPF 80 2 40 England’s PPF 3 45 France’s PPF

Note Of Caution Information on comparative advantage is often given in many other forms - pay careful attention to the information you are given. Three ways to present the same kind of information

The Beauty of the PPF

Simple Model Of A “Free Market” Economy What is a market? A collection of buyers and sellers organized for the purpose of exchanging goods and services for money. Markets can be global, national, regional, or local depending upon the item being bought and sold. What is a free market economy?

A Market Is Perfectly Competitive ... When there are many buyers and sellers. When each item traded in the market is identical to all the others. When firms can freely enter and exit the market. When all buyers and sellers have full and symmetric information. So... The law of one price prevails. No single buyer or seller can cause the price to move up or down. In this case, we say that the buyers and sellers are “price takers.” Use supply and demand. Do “Perfectly Competitive” Markets exist?

Market Model Of Demand & Supply

The Market For Portable Speakers

Demand Concepts The demand function for X: QxD = f(PX, Ps, Pc, I, T&P, Pop) Where: QxD = the number/quantity of units demanded PX = X’s price Ps = the price(s) of substitutes Pc = the price(s) of complements I = income T&P = tastes and preferences Pop = population in market or market size

The Demand Curve (Verbal) The demand curve, a.k.a. demand, describes the relation between a good’s price and the maximum quantity that buyers are willing and able to buy at that price, ceteris paribus. Ceteris paribus means holding all the other demand function variables constant at some given level. QXD = f(PX) given Ps, Pc, I, T&P, Pop The “Law of Demand” the relationship between a good’s price and the quantity demanded of that good is negative. Example: suppose the price of the good falls from $25 to $10, and the quantity demanded rises from 15 to 30. This is referred to as a “change in quantity demanded” and in this case an “increase in quantity demanded.” “Own-price” changes cause movements along a given demand curve.

The Demand Curve (Graph) QXD = f(PX) Note 1: Law of Demand implies a negative or downward slope to the graph. Note 2: In the graph we have switched the axes. Price Quantity Demand $25 15 At P = $25, the quantity demanded = 15. At Q = 15, the demand price = $25.

Movements vs. Shifts QXD = f(PX) given Ps, Pc, I, T&P, Pop A movement along the demand curve for X would be caused by a change in Px. Remember this is referred to as an increase or decrease in quantity demanded! A shift of the entire demand curve would be caused by a change in one of the “ceteris paribus” demand variables. This would be referred to as an increase or decrease in demand. Price Demand 25 15 Quantity

Movements vs. Shifts: Getting It Right Summary Recall: QXD = f(PX) given Ps, Pc, I, T&P, Pop ΔPx Movement along demand curve, Px and QDx move in opposite directions-the law of demand. ΔPS Shift of Demand. Ps and Demand move in the same direction. ΔPc Shift of Demand. Pc and Demand move in opposite directions. ΔI Shift of Demand. Relationship depends on if X is a normal good (same direction) or if X is an inferior good (opposite directions). ΔT&P Shift of Demand. T&P and Demand move in the same direction. ΔPop Shift of Demand. Pop and Demand move in the same direction.