Welcome to PMBA0608: EconomicsStatistics Foundation

1
Welcome toPMBA0608 Economics/Statistics
Foundation

• Fall 2006
• Session 5 September 20

2
Exam 1 Saturday, September 30, 1430-1600

• Covers
• Chapters 1 through 4 of Mankiw
• Chapters 1 through 3 of Mendenhall, Beaver and
  Beaver (up to 3.4, Page 102)
• Send me your questions
• I will do one, two or all of the following
• Answer you privately
• Publish the answer to your question on line
• Answer your question right before exam at
  1400-1430, Saturday, September 30.

3
From now on please

• dont turn in your assignments in pieces.
  (separate documents)
• answer the questions in the right order.
• dont forget to put your names on the assignment.
• otherwise, I will deduct points.

4
Discuss Assignment 21. Problem 3, Page 59 of
Mankiw
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Assignment 21. Problem 3, Page 59 of Mankiw

• Pat has absolute advantage in both pizza and beer
  as it takes her less time to produce either of
  these goods.
• Since opp. cost of 1 pizza is less for Pat. She
  will trade away pizza for beer.
• The terms of trade
• 2/3 beer 1 pizza ½ beer

6
Assignment 2 2. Problem 6. Page 60 of Mankiw
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Assignment 2 2. Problem 6. Page 60 of Mankiw

• b. Boston has absolute advantage in both. Boston
  has comparative advantage in white socks and
  Chicago has comparative advantage in red socks.
• c. Boston exports white socks and Chicago exports
  red socks
• 2 red1 white socks 1 red or
• 1 white 1 red socks1/2 white

8
Assignment 23. Application 2.6, Page 24 of
Mendenhall, Beaver and Beaver (Use Excel or
similar program. Explain why one presentation is
more effective.)

• A chart always needs a title
• Pie chart is more effective as it expresses the
  relationship of the part to the whole
• You were graded based on your reasons not your
  opinions.
• Because the book says so is not a reason.

Do you approve of pay raise?
Do you approve of pay raise?
9
Assignment 24. Application 2.12, Page 33 of
Mendenhall, Beaver and Beaver (Use Excel or
similar program.)

• Excel
• Enter the data in one column.
• Enter bin number in next column.
• You want to be able to see what fraction of banks
  granted 10 or fewer loans
• Ideally you want 10 to be the upper limit of a
  bin
• 32 0 32
• 32 is divisible by 2
• I entered 16 bins 2,4,6,8,. 16

10
Assignment 24. Application 2.12, Page 33 of
Mendenhall, Beaver and Beaver (Use Excel or
similar program.)

• Under tools go to data analysis and histograms
• Input range is the first column of your
  worksheet containing 50 values.
• Bin range is the second column of your worksheet
  containing 16 values.
• Select chart.

11
Assignment 24. Application 2.12, Page 33 of
Mendenhall, Beaver and Beaver (Use Excel or
similar program.)
b. Fraction of commercial banks granted 10 or
fewer loans (148563)/50 72

• If you could not easily get this info from your
  chart, you lost 0.5 points.

12
Assignment 25. Exercise 2.47, Page 67 of
Mendenhall, Beaver and Beaver (Use Excel or
similar program.)
Negative correlation Correlation coefficient -
0.9871
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Market Model

• Supply and Demand
• Chapter 4 of Mankiw

14
What are Markets?

• Institutions that allow buyers and sellers to
  exchange
• There are two sides to a market
• Potential buyers ? demanders
• Potential sellers ? suppliers

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Is this a market?

• How is the price determined?
• Auction

16
Is this a market?

• How is the price determined here?
• Haggling

17
Is this a market?

• How is the price determined here?
• Posted-price

18
What determines how much of a good you are
willing and able to buy?

• Price of that good
• Income
• Normal good
• Inferior good
• Price of other goods
• Complements
• Substitutes
• Taste
• Expectations

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Demand Curve

• shows how much of a good consumers are willing
  and able to buy at different prices, holding
  everything else constant.

20
Demand for red roses in Athens

• Demand curve has a ______ slope indicating that
  ceteris paribus as price ____, quantity demanded
  ______. (the law of demand)

Price
B
2
A
Demand curve
1
100
60
Quantity /day
21
Suppose you collect data on price and quantity
demanded of roses in Athens

• And
• The result is a positive correlation

• Is the law of demand violated?
• No, everything else is not constant

Price







Quantity demanded
22
Demand shifters

• What happens on Valentines day?

Price
B
B
2
Demand curve shifts to the right or increases
D2
D1
110
60
Quantity /day
23
Demand shifters

• What happens if average income decreases sharply?

Demand curve shifts to the left or decreases.
Price
B
B
2
D1
D2
40
60
Quantity /day
24
Demand shifters

• What if price of pink roses drops sharply?

Price
Demand for red roses drops
B
B
2
D1
D2
20
60
Quantity /day
25
Demand vs Quantity Demanded
price
P1
movement along the curve
P2
D2
D1
quantity
Q1
Q2
Q3
Change in demand
shift of the entire curve due to a change in a
factor other than the price of the good
Change in quantity demanded
movement along a given curve due to a change in
the price of the good
26
Lets practice

• Price of coffee increases then (demand / quantity
  demands) for sugar (increases/decreases).
• Price of coffee increases then demand for sugar
  decreases.

27
And practice more

• Income increases then (demand/ quantity demanded)
  for Spam (decreases/increases).
• Income increases then demand for Spam decreases.

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Examples

• Price of chocolate increase the (demand/quantity
  demanded) for chocolate (increases/decreases).
• Price of chocolate increase the quantity demanded
  for chocolate decreases.

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What determines how much of a good producers are
willing and able to supply?

• Price of that good
• Price of inputs (factors of production)
• Technology
• Expectations

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Supply Curve

• shows how much of a good producers are willing
  and able to supply at different prices, holding
  everything else constant.

31
Supply of red roses in Athens

• supply curve has a ______ slope indicating that
  ceteris paribus as price ____ quantity supplied
  ______. (the law of supply)

Price
B
2
Supply curve
A
1
60
20
Quantity /day
32
Supply shifters

• New fertilizer increases productivity

Supply curve shifts to the right or increases
Price
S1
S2
B
B
2
120
60
Quantity /day
33
Supply shifters

• Cost of production increases

Supply curve shifts to the left or decreases
S2
Price
B
2.75
S1
B
2
60
Quantity /day
34
Supply vs Quantity Supplied
S3
price

• A movement from A to B
• is caused by ______
• in _______ and it results in an increase in
  quantity supplied.
• A shift in supply is
• caused by a change
• in__________ and it results in a change in supply.

S1
decrease
S2
B
increase
A
quantity
35
Market Equilibrium
price
Surplus
S1
At P1 Qd Qs
The market clears
PHi
P1 2
Disequilibrium
PLo
Surplus
D1
At PHi Qd Shortage
? Pressure on price to fall
quantity
Q1 60
Qs
Qd
Qd
Qs
Shortage
At PLo Qd Qs
? Pressure on price to rise
36
Market of red roses is in equilibrium

• Until red roses lose their popularity
• How will this affect the equilibrium prices and
  quantity of red roses?

• Demand for roses drops
• At P 2, there is a surplus? Price drops
• Pe drops and Qe drops

S1
Price
e1
2
e2
1.50
D1
D2
Quantity
60
20
30
37
Market of red roses is in equilibrium

• Until a draught diminishes productivity
• How will this affect the equilibrium prices and
  quantity of red roses?

S2

• Supply decreases
• At P 2, there is a shortage? Price increases
• Pe increases and Qe drops

S1
Price
e2
2.50
e1
2
D1
Quantity
60
50
38
Lets memorize

• If D?? Pe? and Qe?
• If D?? Pe? and Qe?
• If S?? Pe? and Qe?
• If S?? Pe? and Qe?

39
What if

• Supply and demand increase at the same time
• If D?? Pe? and Qe?
• If S?? Pe? and Qe?
• Then Qe? but the change in Pe is indeterminate

40
Applying the Model

• What is this painter saying?
• My cost will go up.
• My supply will shift left
• Price will go up.
• So, I supply less now (i.e. ask for a higher
  price now)???

41
Gasoline prices are going down. Why?

• In its monthly report, the International Energy
  Agency forecast world crude-oil demand in 2006
  would be lower than previously expected at a time
  when inventories in the U.S. and Asia are at a
  20-year high.
• In the near future, you can sell your oil for
  less that you previously expected
• So sell more now? S shifts right, Pe goes down.

42
Probability (Chapter 3 of Stat.)

• Problem   A spinner has 4 equal sectors colored
  yellow, blue, green and red. What are the chances
  of landing on blue after spinning the spinner?
  What are the chances of landing on red?

43
Definitions

• Experiment A situation involving chance or
  probability that leads to results called
  outcomes.
• In the problem above, what is the experiment?
• Outcome The result of a single trial of an
  experiment.
• What are the possible outcomes of this
  experiment?
• Event One or more outcomes of an experiment.
• One event of this experiment is landing on _____.
• Probability Measure of how likely an event is.
• The probability of landing on blue is_______.

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Probability Of An Event

• P(A)    The number of ways event A can occur /
  the total number of possible outcomes

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In our problem

• P(yellow)    number of ways to land on yellow /
  total number of colors     1/4
•  P(green)   1/4
• P(red)   1/4
• P(blue) 1/4

46
Simple events

• Are mutually exclusive
• Are the events in our example simple?
• In simple event probabilities
• Each probability lies between 0 and 1
• The sum of probabilities is 1

47
Lets practice

• A pair of dice is rolled.  Two possible events
  are rolling a number greater than 8 and rolling
  an even number.  Are these two events mutually
  exclusive events?
• Numbers greater than 8 9,10,11, 12
• Even numbers 2,4,6,8,10,12
• Two events share outcomes
• They are not mutually exclusive

48
Lets spin
P (1) ? P (red) ?
49
Lets spin twice

• What is the probability that the spinner will
  land on a 1 on the first spin and on a red region
  on the second spin? 
• Choosea) 1/2b) 1/4c) 1/6 d) 1/8  

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Here is where a tree diagram will help
51
Independent events

• Two events are said to be independent if the
  result of the second event is not affected by the
  result of the first event.
• In our example, the event of a 1 on the first
  spin is independent from the event of a red on
  the second spin
• If A and B are independent events,P(A and B)
  P(A) x P(B).

52
Lets spin once
P (1 and yellow) ? P (1 and yellow) 0 1 and
yellow are mutually exclusive So probability of
both happening at the same time 0
53
Lets spin once
P (1 or yellow) ? P (1 or yellow) ¼ ½ ¾ 1
and yellow are mutually exclusive So probability
of 1 or yellow P(1) P (yellow)
54
Lets spin
P (2 or 3 or 4) ? P (2 or 3 or 4) ¾ Together 2
and 3 and 4 are complements of 1 P (complements
of 1) 1- P (1)