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Access to Commerce Economics Simon Ward simon.ward@ucdconnect.ie

http://accesstocommerce.wordpress.com/ Class 1 26th February 2009 Tuesday 3 March 2009

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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 Tuesday 3 March 2009

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Economics Drop in Centre

• 1-3pm on Mondays • 11am – 1pm on Fridays • Q257

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Question....

WHAT IS ECONOMICS?

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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

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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?

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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

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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

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Spock Tuesday 3 March 2009

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Costs & Benefits?

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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

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Evaluating the costs and benefits

•V

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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

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Opportunity Cost

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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?

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Should he be his own secretary?

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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

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Demand Curve Price

20 16 12

10 12 14

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Quantity

Price

Quantity

10

20

12

16

14

12

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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

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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

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Quantity

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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

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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

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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

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Quantity

between Qs and P

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Other changes... • What about changes to other things? • Question: What outside factor could influence the price or quantity?

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Family fortunes...

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Top answers: Shifts in the demand curves

• Price of other goods - Substitutes - Complements

• Income • Tastes • Future Expectations • Other things? Tuesday 3 March 2009

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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

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Graphing the shift Price

Substitute What happens when our competitors price goes up?

Quantity Tuesday 3 March 2009

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Graphing the shift Price

What happens when the price of a complement goes up?

Quantity Tuesday 3 March 2009

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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

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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

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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

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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?

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

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

Income

Quantity

30,000

20

40,000

35

50,000

50 Quantity demanded

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

Income

Quantity

30,000

40

40,000

35

50,000

30 Quantity demanded

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

Price

Quantity

2

30

3

40

4

50 Quantity demanded

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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

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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

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Nutley Avenue, Donnybrook

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“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)

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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

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Consumer & Producer Surplus Price

CS

S

EQUILIBRIUM

PS D

Quantity Tuesday 3 March 2009

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A price floor • How about the price of wages? • What if we introduce a minimum wage?

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Floors and ceilings Price S

EQUILIBRIUM

D

Excess supply Tuesday 3 March 2009

Quantity 56


Floors and ceilings

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Example: New York Housing

• Price ceiling was enacted for soldiers returning from WWII

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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

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Elasticity Like this...

...or like this

Price

Price

Quantity demanded Tuesday 3 March 2009

Quantity demanded 61


Class1