, Hello. We're back at the University of Illinois, I'm Jose Vazquez, and we're
talking about using the models, supplying the name. And we're going to do the last
example of our situation of using the model and I think this one will be the
hardest. So I think maybe if you've been kind of not seeing the value of having
your work organized vigorously in this framework, perhaps now you see the value
because when situations get more complicated it's more, it's easier to
follow the logic if you have some kind of aid, and that's what the model of supply
and demand is supposed to help you with. Okay, so let's start thinking about
continue thinking about the market for tomatoes at the farmers market. Let's say
that two things happen at the same time. Two of the changes we have talk about,
about before they both happen at the same time 1, the price of gasoline increases.
So the price of gasoline goes up that's change 1 and 2, there is actually really
bad whether and, you will be in experiencing storms and stuff. So we have
this, a second thing is bad whether. So how are these two, if these two things
happen at the same time, what will be the effects on market price and market
quantity? Well as you can expect, the and the, this answer is going to be a little
more complicated, one, and two, since we're changing more than one thing we're
going to lose some explanatory power. All right?
The easiest way to do this, is to first think about this intuitively, step by
step. So, the first thing that happens is that the price of gasoline goes up. So,
what is going to effect of this in the market, of the poor tomatoes, the farmer's
market? Well probably farmers are not going to bring so many tomatoes, so their
supply for tomatoes would go down. That means that, if nothing else happens and
the supply goes down, farmers have to increase the price because of the, the,
there's, you know there's just not enough many tomatoes as there were before. So,
farmers that can make it to farmer's market are going to have a line of people
at their tables, so they can increase their price. So, lower supply, increases
their price but also reduces their quantity. So, the result we have from the
first change is that the so from change one, do it down here, from price of
gasoline going up, the result of this is price of x goes up and the quantity of x
goes down. What about the second thing? Well, Bad weather is probably going to
encourage some people to stay home and not come to the farmer's market. So the they,
they are, the tomatoes that are going to, that the farmers thought they were going
to sell, they're not going to be able to sell them now. So there's tomatoes rotten.
That means that the farmers will have to lower the price, because of the lower
demand. Right? So that change 2, bad weather, means that the price and this
less demand is going to have to go down and the quantity of x also go down. So,
when these two things happen at the same time, both of this effects happen at the
same time, right? So we know that the quantity will go down, but the price we
don't really know. It depends which, what changes more. So the, that the, the demand
is forcing the price to go down, the suppliers forcing the price to go up.
Since we don't really know what happens to the price we can't really answer that
question. So, the answer we know without using the model we just simply follow the
logics organizer this way, is that we can know, we know for sure this it, this two
happens, this two things happen the quantity will go down but we can't tell
what happens to the price. Now let's see what that means in terms of the model,
because that might be helpful to understand why we can't answer this
question in terms of the price. Well, the first thing that happens is that the
supply curve goes down because the price of gasoline is higher than it was before.
So that means that the new supply curve is everywhere to the left of where the first
supply curve was. And, also at the same time, the demand curve is going down,
because the demand for tomatoes, as I said before because, there's that bad
weather.So, that means that the demand curve is going to shift to the left. Let's
shift it this way, like this. D1 and D2. Now we have the two curves and we can
identify a new equilibrium. Our first equilibrium was at A and new equilibrium
is now at B and then we can see what happens to price and quantity. Well, price
in this particular case goes up to P2 and quantity goes down to Q2. But in shifting
the curve, we made an assumption about the degree of that shift, right? Let's say we
have actually shifted the curve of demand, not by that much but by this much. Let's
call that D2 prime. Well, in that case the equilibrium price really would have been
here right at C and in that case, the price instead of having gone up, it would
have gone down. And we don't really know is the demand shifted by more than the
supply, right? The bad weather had a, a higher effect on the price of gasoline and
you actually, you know for sure you're going to sell less tomatoes, but you don't
really know what happens to the price, because we have more things changing,
right? So in the model it's clear that if the shift is in demand is this small, then
the price goes up. But if the shift in demand is this big, then the price goes
down. Since we don't really know what the we will need to know what the actual shift
in demand is to say something about, about the price. Since we can't, then we can't
say anything about the price. A changing price is ambiguous, or we can't tell. And
we can tell for sure that the quantity goes down. So, when two curves are
changing at the same time, unless we know the degree of the change, we won't be able
to have full explanatory power of the model, and we won't be able to say as much
as we did before, okay? So this closes all of the kind of examples
of using the model, that what were going to do next is do a little application of
using the model to answer our real question, at the beginning of the lesson
this week. Produced by OCE, Atl as Digital Media at the University of Illinois Urbana
Champagne.
