Microeconomics 2 John Hey. Questionnaire I would be grateful if you would complete the Lecture Evaluation Questionnaire.

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Presentation transcript:

Microeconomics 2 John Hey

Questionnaire I would be grateful if you would complete the Lecture Evaluation Questionnaire.

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 the econometrics of this chapter in the exams. Note: the data is rather old. If you are keen, you could try and re- estimate using more up-to-date data.

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). Let us go to Maple. This PowerPoint file just contains a summary of notation and results.

YEARNLINALLRALLRFODNFODPALLPFODPMAFPUW

Notation NFOD – Nominal expenditure on FOoD. RFOD – Real expenditure on FOoD. PFOD – Price of FOoD = NFOD/RFOD NALL – Nominal expenditure on ALL commodities. RALL – Real expenditure on ALL commodities. PALL – Price of all ALL commodities = 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 variables in 1999: NALL = PALL = PMAF = 83.7 NLI = 4.7 PUW = 115 QFOD = If we substitute these values in the demand and supply 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.

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 – around 75p per head.

Chapter 16 Goodbye!