MicroeconomicsCorso 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 = 0.146 NALL/PFOD + u

• SG: q = s + a (y – ps – p2s2 )/p

• RFOD = 44491 + 0.065 NALL/PFOD - 23426 QFOD/PFOD + u (without a correction for simultaneous bias)

• RFOD = 41962 + 0.049 NALL/PFOD - 14210 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) = ky1/(a+b) w1 a/(a+b) w2b/(a+b)

• Supply curve given by marginal cost=price.• Supply curve with Cobb Douglas technology

• y = k p (a+b)/(1-a-b) w1 -a/(1-a-b) w2 -b/(1-a-b)

• log(y) = constant + [(a+b) log(p) - a log(w1) - b log(w2)]/(1-a-b)

• log(RFOD)= 11.98 + 0.348 log(PFOD) - 0.148 log (PMAF) - 0.0696 log(NLI) - 0.0786log(PUW)

Chapter 16

• The values of the variabiles 1999:• NALL = 564368 PALL = 1.10043 PMAF =

83.7 NLI = 4.7 PUW = 115 QFOD =1.10621• If we substitute these values in the demand and

supplu curves we get…• RFOD = 41962 + 0.049 NALL/PFOD - 14210 QFOD/PFOD

• log(RFOD)= 11.98 + 0.348 log(PFOD) - 0.148 log (PMAF) - 0.0696 log(NLI) - 0.0786log(PUW)

• ...and hence the following graph:

The Prices

• Without the tax:• Price = 1.076.• With the tax:• Price paid by the buyers = 1.160.• Price received by the sellers = 1.055.• Note: 1.055 + 10% = 1.160 – 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 1.160(il 10% maggiore di quello pagato prima dell’imposta). La differenza tra il prezzo vigente prima dell’imposta 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 1.055 - and the new equilibrium price paid by the buyers is the upper price - which is 1.160. This latter is 10% more than the former. The government takes the difference  - 0.1055 - 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!