Class 08 Feb. 8 Last class: 2. Review of economic concepts and methods Class experiments to estimate CS Quiz 2 Today: Result of Quiz 2 2. Review of economic concepts and methods Class exercise Next class: 2. Review of economic concepts and methods Reading: 2. Review of economic concepts

Class 08 Feb. 8 Important date: Problem set 1, due Thursday, Feb. 15 (Download the problem set from the class website)

Result of Quiz 2 N = 35Range 7 – 10 Average = Calculate a simple growth rate 2. Calculate contributions to GNP 3. Normal goods vs. inferior goods 4. Supply and demand (1) Graph the supply and demand functions (2) Derive the equilibrium price and quantity (3) Shift in the demand curve due to a change in the price of another product

2. Review of economic concepts 2.1. An overview of an economy -- How does it work? 2.2. Demand and supply 2.3. Market equilibrium and price determination 2.4. Excess supply and excess demand 2.5. Consumer and producer surplus 2.6. Impacts of market interventions 2.7. International trade & price determination

Class exercise 2 (Feb. 6 and Feb. 8) Demand: Q d = P Supply: Qs = P (1) Draw the excess supply and excess demand functions (2) Derive the ES and excess ED functions: ED = ES = (3) What is the ED or ES when P = 5? (4) What is the ED or ES when P = 2?

2.5. Consumer surplus & producer surplus Consumer surplus (CS): -- Class experiments: (a) One product and one consumer CS = willingness to pay – actual expense (b) One product and a nice consumers CS = willingness to pay – actual expense -- Definition and interpretation (see reading)

2.5. Consumer surplus & producer surplus Consumer surplus (CS): -- A graphical analysis Qd = 100 – 4P Where is a demand function from? PQTotal st unit nd unit rd unit3 244 th unit4 … When price decreases a quarter, the consumer purchases one more unit, what is the mathematical relation between Qd and P?

2.5. Consumer surplus & producer surplus Consumer surplus (CS): -- How to calculate CS at a particular price level? For example: for Q d = 100 – 4 P, what is the CS when P = 10? what is the CS when P = 15?

2.5. Consumer surplus & producer surplus Consumer surplus (CS): -- Change in CS due to a change in price -- A graphical analysis -- How to calculate the change in CS? -- Two-step method: -- One-step method:

Class exercise 3 (Feb. 8) Demand: Q d = P (1) Calculate CS when P = 10 (2) Calculate the CHANGE IN CS when P increased from $10 per unit to $12 per unit

2.5. Consumer surplus & producer surplus Producer surplus (PS): -- Definition and interpretation (see reading) -- A graphical analysis -- How to calculate PS at a particular price level? For example: for Q s = P, what is the PS when P = 80?

2.5. Consumer surplus & producer surplus Producer surplus (PS): -- Change in PS due to a change in price -- A graphical analysis -- How to calculate the change in PS due to a change in price? -- Two-step procedure -- One-step procedure

2.5. Consumer surplus & producer surplus Measurement of total welfare or economic efficiency -- The sum of CS and PS can be used to measure the total welfare -- The sum of CS and PS is at the maximum level when the market is at equilibrium