Lecture 16: Empirical Evidence on Demand, Supply and

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
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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
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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
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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!