🗊Презентация Supply, Demand, and Prices

meet the lecturers: semester 1

meet the lecturers: semester 2

Before we start… Is Economics 1 the right course for you? We offer another economics course: Economic Principles and Applications

Which course? Economics 1 is for students who do an Economics degree (compulsory); did Higher, A(S)-level, IB Economics or equivalent; did Higher, A(S)-level, IB Mathematics or equivalent; intend to transfer into a degree in economics Otherwise, Economic Principle and Applications (EPA) is likely to be the better course for you.

There are three lectures per week There are three lectures per week Tuesday, Thursday and Friday from 16:10 to 17:00 in this room In semester 1, the Thursday lectures will be about maths There is a two-hour tutorial every week Tutorials start in week 2 and run until week 10 each semester Times vary; you will be signed up automatically by the Student Allocator Attendance and homework submission at tutorials is 10% of your final grade

Assessment 30% : four class exams (one at the end of each 5-week block) The October, February and March exams are 60 minutes, MCQ-based and potentially worth 10% each, but we only count the best 2 out of 3. They occur Semester 1 – Saturday after week 5 (22 October) Semester 2 – Saturday after week 5 (18 February) Semester 2 – Early in week 11 (date to be confirmed) The December exam is 90 minutes, MCQ and written, and counts for 10% of your final grade 10% : Tutorial attendance & homework Details on the next slide 10% : Essay Due in the second semester 50% : Final exam Consists of MCQs and written questions, scheduled in the April/May diet

Tutorial attendance and engagement (10%) To earn points, students must bring homework at the beginning of their tutorial. The homework must be at least three sides of written or two pages of typed work which attempts to answer the questions from the current week’s tutorial sheet. The answers do not have to be correct; all that is necessary is that the questions are attempted. You also need to submit a ‘declaration of work’ coversheet. Each week that a student brings homework and attends their tutorial, they earn 1 mark; Each week that a student attends their tutorial without bringing homework, they earn 0 marks. But you should still attend. Each week students miss their tutorial, they earn 0 marks. A maximum of 14 marks are available, (14 marks are worth 10% of your final grade; fewer marks are worth fewer points on your grade!)

Economics 1 Reading Group Optional reading group Six meetings over the year Lots of work (reading & writing) for the chance at up to a 6% bonus on your final grade Only makes sense if you really like reading and talking about economics More details in the course handbook First meeting : Wed 05 Oct @ 6:15pm Topic of first meeting and other details have already been emailed (please contact sean.brocklebank@ed.ac.uk if in doubt)

Textbooks There are two core textbooks One for micro in semester 1, one for macro in semester 2 These books will be re-used in Economics 2

Math textbook There is a suggested math text Most of you will want the maths book, although it is not obligatory if you are comfortable with the maths Note that the book is in the 4th edition, but you can get any edition (they’re pretty similar)

Helpdesks Twice-weekly Economics 1-only helpdesk staffed by some of the best students who took Econ 1 last year Provisionally it is on Wednesdays and Fridays from 1pm to 2pm in room G3 of 30 Buccleuch Place, but check learn for updates

maths in economics: why? Many economic magnitudes are inherently numerical - prices, quantities, interest rates maths offers a very efficient way to express relationships - between price and quantity demanded, or unemployment and inflation maths enables us to analyse many interacting relationships at the same time a central concept in economics – of rational maximising agents – is naturally modelled using maths we need to formulate and test our theories using statistical techniques which require some maths using maths to develop economic theories reduces the possibility of logical errors and inconsistencies

what maths do we use in Economics 1? basic algebra solving simultaneous linear equations logs and indices basic calculus maximization these techniques are developed and applied as part of the economics on Learn: a guide 'Mathematics for Economics' outlining the techniques used maths exercises included in weekly tutorial sheets. leaflet prepared by Economics Network http://www.economicsnetwork.ac.uk/themes/maths_formula_sheet.pdf http://www.metalproject.co.uk/, website of Mathematics for Economics: enhancing Teaching and Learning; esp. link to Teaching and Learning Guides For a non-mathematical treatment, take Economics: Principles and Applications (EPA)

Outline of weeks 1 - 5 Frank & Cartwright Thinking Like an Economist Ch1 Supply and Demand Ch2 Rational Consumer Choice Ch3 Individual and Market Demand Ch4 week 5, Saturday, 22th October, MCQ exam

some things to note these lectures will not be repeating the text book read the text book ahead of the lectures if I don’t mention something in the lectures, it may still be examined

to illustrate the economic approach, consider some interesting problems: the market for lemons the prisoners’ dilemma ice cream wars the demand for things without a market e.g. good state schools

the market for lemons a seller has a car that is either good (a plum) or bad (a lemon) plum lemon value to buyer 3,000 1,500 value to seller 2,500 1,000 the difference of 1,500 between plum and lemon reflects repair costs to convert a lemon to a plum with complete information: a plum would sell for between 2,500 and 3,000 a lemon would sell for between 1,000 and 1,500

what if the quality of the car is private information and hence unknown by the buyer? what if the quality of the car is private information and hence unknown by the buyer? if the buyer cannot tell a plum from a lemon then there cannot be separate prices for the two types So, how much would a buyer pay for a car of unknown type? Recall: plum lemon value to buyer 3,000 1,500 value to seller 2,500 1,000

if the proportion of plums and lemons offered for sale is 50-50, then a randomly selected car would have an expected or average value to the buyer of ½ (3000+1500) = 2250 if the proportion of plums and lemons offered for sale is 50-50, then a randomly selected car would have an expected or average value to the buyer of ½ (3000+1500) = 2250 this is the maximum price a buyer would be willing to pay for a randomly selected car but at this price or less no owner of a plum would be willing to sell, since he values a plum at 2,500 only lemons are offered for sale this is a severe case of adverse selection theory developed by Akerlof in 1970s (got Nobel prize in 2001)

Question Suppose the proportion of plums and lemons offered for sale is ¾ and ¼ and a buyer is offered a randomly selected car. What is the maximum price a buyer would be willing to pay? 1 1,000 2 1,500 3 2,025 4 2,625 5 3,000

if the proportion of plums and lemons offered for sale is ¾ and ¼ , then a randomly selected car would have an expected or average value to the buyer of ¾ x 3000 + ¼ x 1500 = 2625 at this price, both sellers of plums and lemons are willing to sell a buyer might get lucky or unlucky but he or she is willing to take the risk note: we are implicitly assuming risk neutrality

market failure if the maximum price a buyer is willing to pay is less than 2500, only lemons are offered for sale buyers realise this (or find out through various sources) and hence would not be prepared to pay more than 1,500 only lemons are sold, even though there is a potential gain from a market in plums owners of plums cannot convince buyers that their cars are plums mere verbal assurances about quality are not convincing since this is a tactic that can be costlessly imitated by owners of lemons

the ubiquity of (possible) adverse selection insurance markets careful/reckless drivers healthy/already ill people labour markets conscientious/lazy workers capital markets entrepreneurs with high/low risk projects asset markets car owners know if the clutch is no good house sellers know where the dry rot is

adverse selection and liquidity banks selling bundles of debt (CDOs) know if the underlying loans are toxic or not here, market failure means a breakdown of secondary financial markets and a possibly severe loss of liquidity this can be contagious and have macro (economy wide) consequences

signalling: one way to overcome adverse selection an informative signal of quality is one that it is not worth the owner of a lemon imitating e.g. the seller of a plum can offer a warranty that a lemon owner would find unprofitable in labour markets, education can be seen as a signal of productivity not because education makes you productive but because only productive workers can acquire education at low cost this view of education developed by Spence, who shared the 2001 Nobel prize with Akerlof and Stiglitz

the prisoners’ dilemma

Question : what happens?

the prisoners’ dilemma: the economist’s answer

the payoffs in the prisoners dilemma have a very particular structure the payoffs in the prisoners dilemma have a very particular structure importantly: there are no binding agreements payoffs are completely given by the numbers the game is only played once

the Prisoner’s dilemma is a metaphor for a wide range of situations, the Prisoner’s dilemma is a metaphor for a wide range of situations, where cooperation is mutually beneficial but not individually rational collusion in cartels restrict or expand output set high or low prices trade wars low or high tariffs, quotas overfishing restrict or expand catch CO2 emissions restrict or expand pollution arms races, advertising

some interesting questions to consider What if the situation is repeated? Does cooperation emerge? How can we test this theory? Experimental economics is now a very active research area In practice, people do seem to cooperate more than the theory suggests? Why? Maybe economics does not have the answer to everything!

ice cream wars 2 ice-cream sellers simultaneously choose a location on a beach consumers are distributed evenly along the beach, and buy from the nearest seller each seller’s profits is proportional to sales where do they go?

Question: where do they go? 1 0 and 1 2 0.25 and 0.75 3 0.33 and 0.67 4 both at 0.5 5 none of the above

where do they go? 1 0 and 1 2 0.25 and 0.75 3 0.33 and 0.67 4 both at 0.5 5 none of the above

life’s a beach again, this can be seen as a metaphor for many other situations we have to reinterpret what we mean by ‘the beach’ (known as the Hotelling line) a common application is to explain a lack of product variety, e.g. cars, breakfast cereals in models of political parties, the beach could be a Left-Right spectrum, parties choose a political position, and consumers are voters

some interesting extensions to consider what if there are 3 or more sellers? what if the beach is not a line but the circumference of a circle, or the whole circle, or some other space how would we introduce transport costs? and what do transport costs mean in a non-geographic setting? how do we combine competition in both price and variety?

the demand for things without a market a common problem is how to estimate the benefits of a project or policy e.g. a new bridge, or laws restricting traffic speed if available, data on existing prices and quantities is a starting point if not, behaviour in other markets may give some information e.g. travel costs implicitly it costs time, fuel etc to access some resources, such as a country park if people pay these costs this reveals something about how they value the resource can we use data on time, fuel costs etc to infer these values?

hedonic pricing hedonic pricing people are prepared to pay more for goods of higher quality, or that embody desired characteristics or will accept less pay for jobs that provide valued benefits require more pay for jobs that have costs or disadvantages think of goods or jobs as a bundle can we put a value on each component of the bundle?

using house prices a house: price reflects size, style, number of rooms location: proximity to amenities (parks, transport links, access to state schools) local environment (e.g. noise etc) implicitly there is a market for ‘peace and quiet’, or access to good state schools’ we can collect data on prices and characteristics then statistically disentangle influence on price of each characteristic

house prices and school quality Cheshire and Sheppard, (Economic Journal Nov 2004) looked at house prices in Reading in 1999/2000 price: min=£45,000 max=£385,000 mean=£127,000 price depends on (inter alia): detached, semi, terrace etc size of plot no. of bedrooms, baths etc if near Thames distance from centre of town if near industry transport links ethnic mix quality of primary school (success rate at Key Stage 2) quality of secondary school (success rate at GCSEs)

after much statistical analysis, they worked out ‘the price of quality’

conclusions from the study For the average house the difference between the best and worst schools is secondary: 19% or £23,750. primary: 34% or £42,550. Home buyers discount for risk: the more the variability in a school’s past results, the less is paid for current school quality. i.e. they are risk averse Only the 'best' (top 10%) state schools command major money: being in the catchment area of an average school compared to even that of the very worst has little impact on prices. The added cost for a home with access to the best state schools is close to the total cost of school fees for comparable private schools.

conclusions from these problems simple numerical examples can be very enlightening simple models can be enlightening – no need for lots of complications eventually we do need to test the models with data some concepts appear in totally different settings apparently unrelated problems sometimes have a common structure

How is economics done? constructing theories simplifying assumptions generate (testable) conclusions data gathering statistical sources “experiments” theory testing confront theory with data change theory, gather more data use the theory and data to make statements about the world, formulate policy, make money etc.