Microeconomics Corso E John Hey

Chapter 16 Empirical Analysis of Demand, Supply and Surpluses. Very important for those who want to be economists. Difficult because it requires some knowledge of econometrics. There will not be questions on this chapter in the exams.

Chapter 16 We estimate the demand for food in the U.K. – using our theory. We estimate the supply of food in the U.K. – using our theory. We investigate the effect of the imposition of a tax in food on the price of food, the quantity bought and sold and on the surpluses (see chapter 27).

Notation NFOD – Nominal expenditure on FOoD – spesa nominale in beni alimentari. RFOD – Real expenditure on FOoD – spesa reale in beni alimentari PFOD – Price of FOoD – prezzo dei beni alimentari = NFOD/RFOD NALL – Nominal expenditure on ALL commodities – spesa nominale complessiva RALL – Real expenditure on ALL commodities – spesa reale complessiva PALL – Price of all ALL commodities – prezzo di tutti i beni = NALL/RALL

Chapter 16 Demand CD: q = ay/p RFOD = NALL/PFOD + u SG: q = s + a (y – ps – p 2 s 2 )/p RFOD = NALL/PFOD QFOD/PFOD + u (without a correction for simultaneous bias) RFOD = NALL/PFOD QFOD/PFOD + u (with the correction)

Extra Notation Prices of the inputs.... PMAF – Price of materials and fuels. NLI – Nominal Long term rate of Interest – Price of capital. PUW – (Price of) Unit Wages.

Chapter 16 Cobb Douglas cost function: C(y) = ky 1/(a+b) w 1 a/(a+b) w 2 b/(a+b) Supply curve given by marginal cost=price. Supply curve with Cobb Douglas technology y = k p (a+b)/(1-a-b) w 1 -a/(1-a-b) w 2 -b/(1-a-b) log(y) = constant + [(a+b) log(p) - a log(w 1 ) - b log(w 2 )]/(1-a-b) log(RFOD)= log(PFOD) log (PMAF) log(NLI) log(PUW)

Chapter 16 The values of the variabiles 1999: NALL = PALL = PMAF = 83.7 NLI = 4.7 PUW = 115 QFOD = If we substitute these values in the demand and supplu curves we get… RFOD = NALL/PFOD QFOD/PFOD log(RFOD)= log(PFOD) log (PMAF) log(NLI) log(PUW)...and hence the following graph:

The Prices Without the tax: Price = With the tax: Price paid by the buyers = Price received by the sellers = Note: % = – the tax. The buyers pay 7.8% more. The sellers receive 2.0% less.

Mistake in the text! "In corrispondenza del nuovo equilibrio i venditori ricevono un prezzo inferiore e pari a 1.055; il nuovo prezzo di equilibrio pagato dai consumatori `e (il 10% maggiore di quello pagato prima dellimposta). La differenza tra il prezzo vigente prima dellimposta e il nuovo livello di prezzo pagato dai consumatori (0.1055) per ogni unit`a di beni alimentari acquistata viene incamerata dal governo." (pagina 319) "The new equilibrium price that the sellers receive is the lower price - which is and the new equilibrium price paid by the buyers is the upper price - which is This latter is 10% more than the former. The government takes the difference on each unit of the good sold."

The losses of surpluses Buyers: £4423m - assuming 55 million inhabitants - £80 per head. Sellers: £1106m Total: £5529m The government takes in taxes: £5488m The net loss in surpluses as a result of the tax = £5529m - £5488m = £41m

Chapter 16 Goodbye!