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, Hello. We're back at the University of Illinois, I'm Jose Vazquez, and we're

Â talking about using the models, supplying the name. And we're going to do the last

Â example of our situation of using the model and I think this one will be the

Â hardest. So I think maybe if you've been kind of not seeing the value of having

Â your work organized vigorously in this framework, perhaps now you see the value

Â because when situations get more complicated it's more, it's easier to

Â follow the logic if you have some kind of aid, and that's what the model of supply

Â and demand is supposed to help you with. Okay, so let's start thinking about

Â continue thinking about the market for tomatoes at the farmers market. Let's say

Â that two things happen at the same time. Two of the changes we have talk about,

Â about before they both happen at the same time 1, the price of gasoline increases.

Â So the price of gasoline goes up that's change 1 and 2, there is actually really

Â bad whether and, you will be in experiencing storms and stuff. So we have

Â this, a second thing is bad whether. So how are these two, if these two things

Â happen at the same time, what will be the effects on market price and market

Â quantity? Well as you can expect, the and the, this answer is going to be a little

Â more complicated, one, and two, since we're changing more than one thing we're

Â going to lose some explanatory power. All right?

Â The easiest way to do this, is to first think about this intuitively, step by

Â step. So, the first thing that happens is that the price of gasoline goes up. So,

Â what is going to effect of this in the market, of the poor tomatoes, the farmer's

Â market? Well probably farmers are not going to bring so many tomatoes, so their

Â supply for tomatoes would go down. That means that, if nothing else happens and

Â the supply goes down, farmers have to increase the price because of the, the,

Â there's, you know there's just not enough many tomatoes as there were before. So,

Â farmers that can make it to farmer's market are going to have a line of people

Â at their tables, so they can increase their price. So, lower supply, increases

Â their price but also reduces their quantity. So, the result we have from the

Â first change is that the so from change one, do it down here, from price of

Â gasoline going up, the result of this is price of x goes up and the quantity of x

Â goes down. What about the second thing? Well, Bad weather is probably going to

Â encourage some people to stay home and not come to the farmer's market. So the they,

Â they are, the tomatoes that are going to, that the farmers thought they were going

Â to sell, they're not going to be able to sell them now. So there's tomatoes rotten.

Â That means that the farmers will have to lower the price, because of the lower

Â demand. Right? So that change 2, bad weather, means that the price and this

Â less demand is going to have to go down and the quantity of x also go down. So,

Â when these two things happen at the same time, both of this effects happen at the

Â same time, right? So we know that the quantity will go down, but the price we

Â don't really know. It depends which, what changes more. So the, that the, the demand

Â is forcing the price to go down, the suppliers forcing the price to go up.

Â Since we don't really know what happens to the price we can't really answer that

Â question. So, the answer we know without using the model we just simply follow the

Â logics organizer this way, is that we can know, we know for sure this it, this two

Â happens, this two things happen the quantity will go down but we can't tell

Â what happens to the price. Now let's see what that means in terms of the model,

Â because that might be helpful to understand why we can't answer this

Â question in terms of the price. Well, the first thing that happens is that the

Â supply curve goes down because the price of gasoline is higher than it was before.

Â So that means that the new supply curve is everywhere to the left of where the first

Â supply curve was. And, also at the same time, the demand curve is going down,

Â because the demand for tomatoes, as I said before because, there's that bad

Â weather.So, that means that the demand curve is going to shift to the left. Let's

Â shift it this way, like this. D1 and D2. Now we have the two curves and we can

Â identify a new equilibrium. Our first equilibrium was at A and new equilibrium

Â is now at B and then we can see what happens to price and quantity. Well, price

Â in this particular case goes up to P2 and quantity goes down to Q2. But in shifting

Â the curve, we made an assumption about the degree of that shift, right? Let's say we

Â have actually shifted the curve of demand, not by that much but by this much. Let's

Â call that D2 prime. Well, in that case the equilibrium price really would have been

Â here right at C and in that case, the price instead of having gone up, it would

Â have gone down. And we don't really know is the demand shifted by more than the

Â supply, right? The bad weather had a, a higher effect on the price of gasoline and

Â you actually, you know for sure you're going to sell less tomatoes, but you don't

Â really know what happens to the price, because we have more things changing,

Â right? So in the model it's clear that if the shift is in demand is this small, then

Â the price goes up. But if the shift in demand is this big, then the price goes

Â down. Since we don't really know what the we will need to know what the actual shift

Â in demand is to say something about, about the price. Since we can't, then we can't

Â say anything about the price. A changing price is ambiguous, or we can't tell. And

Â we can tell for sure that the quantity goes down. So, when two curves are

Â changing at the same time, unless we know the degree of the change, we won't be able

Â to have full explanatory power of the model, and we won't be able to say as much

Â as we did before, okay? So this closes all of the kind of examples

Â of using the model, that what were going to do next is do a little application of

Â using the model to answer our real question, at the beginning of the lesson

Â this week. Produced by OCE, Atl as Digital Media at the University of Illinois Urbana

Â Champagne.

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