Access to Commerce Economics Simon Ward simon.ward@ucdconnect.ie
http://accesstocommerce.wordpress.com/ Class 1 26th February 2009 Tuesday 3 March 2009
1
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 Tuesday 3 March 2009
2
Economics Drop in Centre
• 1-3pm on Mondays • 11am – 1pm on Fridays • Q257
Tuesday 3 March 2009
3
Question....
WHAT IS ECONOMICS?
Tuesday 3 March 2009
4
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
Tuesday 3 March 2009
5
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?
Tuesday 3 March 2009
6
Tuesday 3 March 2009
7
TANSTAAFL... • Scarcity is always a factor Hospital beds? Why are beds still scarse when spending continues to rise? What do we spend limited taxes on?
• You simply cannot avoid the need to trade off. • The consumer is therefore faced with choices • First assumption: Rationality Tuesday 3 March 2009
8
Gary Becker “agents are maximizing welfare but it is based on individual conception constrained by income, time, and imperfect memory and calculation capabilities� Tuesday 3 March 2009
9
Spock Tuesday 3 March 2009
10
Tuesday 3 March 2009
11
Costs & Benefits?
Tuesday 3 March 2009
12
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
Tuesday 3 March 2009
13
Evaluating the costs and benefits
•V
Tuesday 3 March 2009
14
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? Tuesday 3 March 2009
15
Tuesday 3 March 2009
16
Tuesday 3 March 2009
17
Opportunity Cost
Tuesday 3 March 2009
•
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?
18
Should he be his own secretary?
Tuesday 3 March 2009
19
Tuesday 3 March 2009
20
Tuesday 3 March 2009
21
Tuesday 3 March 2009
22
Supply and Demand Turley et. al: Chapter 2
• The market: The arrangement that facilitates all the buyers and sellers of a good/service.
• So the market for say.... pizza? • Lets look at the demand first Tuesday 3 March 2009
23
Demand Curve Price
20 16 12
10 12 14
Tuesday 3 March 2009
Quantity
Price
Quantity
10
20
12
16
14
12
24
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
Tuesday 3 March 2009
25
Illustrating the law • When either change in
Price
either price or quantity takes place, there is a movement along the demand curve
20 16 12
10 12 14
Tuesday 3 March 2009
Quantity
26
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
Tuesday 3 March 2009
27
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
Tuesday 3 March 2009
28
The Supply Curve • Normal law of
Price
supply indicates that if price goes up quantity supplied goes up.
20 16 12
• Positive relationship 10 12 14
Tuesday 3 March 2009
Quantity
between Qs and P
29
Tuesday 3 March 2009
30
Other changes... • What about changes to other things? • Question: What outside factor could influence the price or quantity?
Tuesday 3 March 2009
31
Family fortunes...
Tuesday 3 March 2009
32
Top answers: Shifts in the demand curves
• Price of other goods - Substitutes - Complements
• Income • Tastes • Future Expectations • Other things? Tuesday 3 March 2009
33
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
Tuesday 3 March 2009
34
Tuesday 3 March 2009
35
Graphing the shift Price
Substitute What happens when our competitors price goes up?
Quantity Tuesday 3 March 2009
36
Graphing the shift Price
What happens when the price of a complement goes up?
Quantity Tuesday 3 March 2009
37
Changes to other goods 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
Tuesday 3 March 2009
38
Substitutes Price
Substitute What happens when our competitors price Good for us goes up? but Extra demand price stays unchanged
Quantity demanded Tuesday 3 March 2009
39
Complements Price
Complement What happens a complement’s Bad forup? us price goes
Less demand but price stays unchanged
Quantity demanded Tuesday 3 March 2009
40
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?
Tuesday 3 March 2009
41
Types of goods • How does a good respond to a change in income?
Tuesday 3 March 2009
42
Tuesday 3 March 2009
43
3 Goods, 3 Types • The normal good - The Salmon Income
Income
Quantity
30,000
20
40,000
35
50,000
50 Quantity demanded
Tuesday 3 March 2009
44
3 Goods, 3 Types • The inferior good - The Baked Beans Income
Income
Quantity
30,000
40
40,000
35
50,000
30 Quantity demanded
Tuesday 3 March 2009
45
3 Goods, 3 Types • The giffen* (weird) good - The potato Price
Price
Quantity
2
30
3
40
4
50 Quantity demanded
Tuesday 3 March 2009
46
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 diet They made up a large portion of Irish income Price increase then reduced real income... So people cut back on other luxury foods
Tuesday 3 March 2009
47
Combining supply and demand Demand Curve Price
Price
Quantity demanded Tuesday 3 March 2009
Supply
Quantity supply 48
Market Equilibrium Price S
EQUILIBRIUM
D
Quantity Tuesday 3 March 2009
49
Nutley Avenue, Donnybrook
Tuesday 3 March 2009
50
“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)
Tuesday 3 March 2009
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) 51
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
Tuesday 3 March 2009
52
Consumer & Producer Surplus Price
CS
S
EQUILIBRIUM
PS D
Quantity Tuesday 3 March 2009
53
Tuesday 3 March 2009
54
A price floor • How about the price of wages? • What if we introduce a minimum wage?
Tuesday 3 March 2009
55
Floors and ceilings Price S
EQUILIBRIUM
D
Excess supply Tuesday 3 March 2009
Quantity 56
Floors and ceilings
Tuesday 3 March 2009
57
Example: New York Housing
• Price ceiling was enacted for soldiers returning from WWII
Tuesday 3 March 2009
58
Floors and ceilings Price S
EQUILIBRIUM
D
Excess demand Tuesday 3 March 2009
Quantity 59
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
Tuesday 3 March 2009
60
Elasticity Like this...
...or like this
Price
Price
Quantity demanded Tuesday 3 March 2009
Quantity demanded 61