Class1

Access to Commerce

Economics

Simon [email protected]

http://accesstocommerce.wordpress.com/

Class 126th February 2009

1Tuesday 3 March 2009

mailto:[email protected]

mailto:[email protected]

http://www.scribd.com/people/view/359415-simonward

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Course Info...

• Thursdays 7.30 pm

• 80% Attendance required

• Essay...

• Textbook: Economics & Society (McDowell and O’Grada)Principles of Economics - an Irish Textbook (Turley & Maloney).

• Exam on the 23th April


Economics Drop in Centre

• 1-3pm on Mondays

• 11am – 1pm on Fridays

• Q257


Question....

WHAT IS ECONOMICS?


Introduction

• So what is economics all about?

• Leaving Cert definition: Economics is a social science which allocates scarce resources, with various uses, among the infinite needs and wants of mankind


Ok...

• ...but what do economists do?

Some economical questions...

• Do doctors induce demand?

• What are the returns to education?

• How do we reduce the level of unemployment, and then control inflation?

• Congestion charges - How can we achieve the optimum traffic in a city?


TANSTAAFL...

• You simply cannot avoid the need to trade off.

• Scarcity is always a factor

Hospital beds? Why are beds still scarse when spending continues to rise? What do we spend limited taxes on?

• The consumer is therefore faced with choices

• First assumption: Rationality


Gary Becker“agents are maximizing welfare but it is based on individual conception constrained by income, time, and imperfect memory and calculation capabilities”


Spock10Tuesday 3 March 2009

Costs & Benefits?


The two branches...

• Macroeconomics: Study of the interaction of countries and major issues affecting the economy as a whole

• Microeconomics: Concentrates on the market - Made up by the person, the firm and the industry


Evaluating the costs and benefits

• V


Rationality

• Bill will weight up the costs and benefits

• When will he pick up the money?

• Choice made through his expectations

• He’ll make the choice that will benefit him, ie. the benefits from the action chosen exceed the benefits from the action foregone

• That is the opportunity cost

• But do consumers always act rationally? 15Tuesday 3 March 2009

Opportunity Cost

• You win a free ticket for a Killers concert that’s on tonight. You cannot resell it.

• U2 are also on. Their ticket is 40euro, but you’re willing to pay E50.

• If P(u2) > 50, you’d rather do something else

• What is the opportunity cost of attending the Killers?


Should he be his own secretary?


Supply and Demand

• The market: The arrangement that facilitates all the buyers and sellers of a good/service.

Turley et. al: Chapter 2

• So the market for say.... pizza?

• Lets look at the demand first


Demand Curve

Price Quantity

10 20

12 16

14 12

Price

Quantity10 12 14

20

12

16


The law of demand

• In terms of demand - there’s a negative relationship between price and quantity

• This follow the normal law of demand

• As price increases, the demand for it will fall


Illustrating the lawPrice

Quantity10 12 14

20

12

16

• When either change in either price or quantity takes place, there is a movement along the demand curve


So what about the supply side?

• So now that we’ve dealt with consumers, what about the suppliers?What do they want?

• If you were running a company, what kind of market would you like to sell in?

• We assume that all firms want to maximise profits, and make as much money as they can


The Supply Curve• Supply is the quantity sellers want to sell at

every conceivable price

• So under what conditions will the supplier want to sell more?

• As prices increase, firms enter the market to pursue profits

• Implies a positive relationship between price and quantity


The Supply CurvePrice

Quantity10 12 14

20

12

16

• Normal law of supply indicates that if price goes up quantity supplied goes up.

• Positive relationship between Qs and P


Other changes...

• What about changes to other things?

• Question: What outside factor could influence the price or quantity?


Family fortunes...


Top answers:Shifts in the demand curves

• Price of other goods- Substitutes- Complements

• Income

• Tastes

• Future Expectations

• Other things?


Substitutes and complements

• A substitute good. If good A and good B are substitutes, then if the price of A increases, the demand for B increases

• But if the goods are complements, then if the price of A goes up, then demand for B will fall


Graphing the shift

Price

Quantity

SubstituteWhat happens

when our competitors price

goes up?


Graphing the shift

Price

Quantity

What happens when the price of a complement

goes up?


Substitutes and complements

• A substitute good. If good A and good B are substitutes, then if the price of A increases, the demand for B increases

• But if the goods are complements, then if the price of A goes up, then demand for B will fall

Changes to other goods


Substitutes

PriceSubstituteWhat happens

when our competitors price

goes up?

Quantity demanded

Good for usExtra demand but

price stays unchanged


Complements

Price ComplementWhat happens a complement’s price goes up?

Quantity demanded

Bad for usLess demand but

price stays unchanged


Income Changes

• One of the main factors which shift the demand curve

• But how do various goods react to a change in income? How do we classify them?


Types of goods• How does a good respond to a change in

income?


3 Goods, 3 Types• The normal good - The Salmon

Income Quantity

30,000 20

40,000 35

50,000 50

Income

Quantity demanded


3 Goods, 3 Types• The inferior good - The Baked Beans

Income Quantity

30,000 40

40,000 35

50,000 30

Income

Quantity demanded


3 Goods, 3 Types• The giffen* (weird) good - The potato

Price Quantity

2 30

3 40

4 50

Price

Quantity demanded


Giffen good• When the price of potatoes went up,

people’s consumption of them also went up

• Why?

• Potatoes are inferior. They were the staple dietThey made up a large portion of Irish incomePrice increase then reduced real income...So people cut back on other luxury foods


Combining supply and demand

Price

Quantity demanded

Demand Curve

Price

Quantity supply

Supply


Market EquilibriumPrice

Quantity

D

S

EQUILIBRIUM


Nutley Avenue, Donnybrook


“This is an exciting opportunity to acquire a very attractive detached family residence, occupying a magnificent sunny and secluded site extending to ¼ acre”Drawing Room (6.78 x 3.71)Dining Room (3.45 x 5.95)Hall (2.61 x 5.95)Family Room (3.8 x 3.71)Kitchen/Breakfast Room (4.52 x 5.95)Garage (3.54 x 6.98)

Bedroom 1 (3.54 x 4.68)Bedroom 2 (2.34 x 3.5)Bedroom 3 (2.06 x 3.5)Bedroom 4 (2.64 x 2.88)Bedroom 5 (3.54 x 5.9)Dressing Room (2.6 x 1.98)Shower Room (2.52 x 1.76)En Suite (3.8 x 1.88)


Consumer & Producer Surplus

• Consumer surplus is how much consumers benefit by purchasing a good for less than they were willing to pay

• Producer surplus is how much sellers benefit by selling a good for more than they were willing to sell


Consumer & Producer Surplus

Price

Quantity

D

S

EQUILIBRIUMCS

PS


A price floor

• How about the price of wages?

• What if we introduce a minimum wage?


Floors and ceilingsPrice

Quantity

D

S

EQUILIBRIUM

Excess supply


Floors and ceilings


Example: New York Housing

• Price ceiling was enacted for soldiers returning from WWII


Floors and ceilingsPrice

Quantity

D

S

EQUILIBRIUM

Excess demand


Elasticity

• But how much do people actually care about price changing?

• This is an important bit of information for suppliers

• It explains what the demand curve looks like


Elasticity

Price

Quantity demanded

Price

Quantity demanded

Like this... ...or like this


Class1

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