Transcript Intro

Principles of Economics
Dr Martin Jensen (this term / micro)
Dr James Reade (next term / macro)
Exam: Summer 2013 joint for micro and
macro (each weights 50 %).
Course homepage:
socscistaff.bham.ac.uk/jensen/economics101.htm
(or via people->academic staff -> etc.)
(or via WebCT)
Principles of Economics
The textbook is:
Sloman, J., A. Wride, and D. Garrett:
“Economics”, 8th Edition, 2012, Pearson.
Backed up by the 101A booklet (for the few
people who don’t have it already, you can
get this from the secretaries in the Econ.
Dep.)
...And the course homepage.
Principles of Economics
Apart from lectures, there are classes.
Classes take place every two weeks,
beginning either next week or the week
after (depending on which group you’re in).
To sign up for classes, enter Econ101 in
WebCT and press the ”sign up for classes”
link (this is pretty selfexplanatory).
Introduction and
Indifference Analysis
PRICE AND OUTPUT DETERMINATION
• We call the price that obtains in the
market, the market price, or the
Equilibrium price
• We call the quantity demanded and
supplied the equilibrium output.
• We find this by plotting the demand
and the Supply curves.
Equilibrium price and output:
The Market Demand and Supply of Potatoes (Monthly)
Price of Potatoes
Total Market Demand
Total Market Supply
(pence per kilo)
(Tonnes: 000s)
(Tonnes: 000s)
4
700 (A)
100 (a)
8
500 (B)
200 (b)
12
350 (C)
350 (c)
16
200 (D)
530 (d)
20
100 (E)
700 (e)
The determination of market equilibrium
(potatoes: monthly)
E
20
e
Price (pence per kg)
Supply
d
D
16
Cc
12
b
8
B
a
A
4
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
The determination of market equilibrium
(potatoes: monthly)
E
Price (pence per kg)
20
e
Where the two lines cross is
called the equilibrium point
d
D
16
Supply
Pe=12
Cc
12
b
8
B
a
A
4
Qe=350
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Demand
• In this course we want to explore in more detail
what lies behind the demand and supply
decisions that people (agents) make by focusing
on the economics that lie behind the decisions
we actually observe.
• First we are going to focus on Demand. Then we
turn to supply both under perfect competition
and various sorts of imperfect competition.
Finally, we use what we’ve learned to study some
“selected topics”.
Happiness Happiness
• Basically we demand goods because they
make us ‘happy’
• Or at least we would be unhappy if we
didn’t have them.
• Either way we get ‘JOLLIES’ from them
• Economists have a special term for Jollies
– we call it UTILITY
Utility Theory
• Even Better – we have a theory to explain
consumers’ behaviour called:
• Utility Theory
• This theory relies on an important
foundation:
• Rationality
• We assume people choose their desired
consumption rationally or consistently
Rationality
• What do we mean by Rationality ?
• We do not mean that people are fully
informed or fully conscious about every
consumption decision they make
• Rather we mean they act (consciously or
otherwise) in a consistent manner.
Total Utility
.We imagine that consumers
act as if they are trying to
make themselves as happy
as possible (broadly defined)
given their circumstances.
In the adjacent table the
consumer gets ‘jollies’,
called UTILS from
consuming crisps. The
table records his/her total
utility.
Total
Packets
of crisps Utility in
Utils
0
1
2
3
4
5
6
0
7
11
13
14
14
13
Darren’s utility from consuming crisps (daily)
16
TU
14
Utility (utils)
12
10
8
6
4
Packets
of crisps
TU
in utils
0
1
2
3
4
5
6
0
7
11
13
14
14
13
2
0
0
1
2
3
4
-2
Packets of crisps consumed (per day)
5
6
MARGINAL UTILITY THEORY
• Total and marginal utility
• Marginal Utility:
• The change in Total Utility as a result of
consuming one more unit of the good.
TU 1  TU 0
MU 
Q1  Q0
Darren’s utility from consuming crisps (daily)
16
TU1-TU0
TU
14
MU
Packets
TU
of crisps in utils in utils
Utility (utils)
12
10
0
1
2
3
4
5
6
8
6
4
7
4
2
1
0
-1
0
7
11
13
14
14
13
2
0
0
1
2
3
4
-2
Q1-Q0 =3-2=1
Packets of crisps consumed (per day)
5
6
Darren’s utility from consuming crisps (daily)
16
TU1-TU0
TU
14
DTU = 2
Utility (utils)
12
DQ = 1
10
MU = DTU / DQ = 2/1 = 2
8
6
4
2
0
0
1
2
3
4
-2
Q1-Q0 =3-2=1
Packets of crisps consumed (per day)
5
6
Alternative representation of Darren’s Marginal
utility
16
TU
14
DTU = 2
Utility (utils)
12
DQ = 1
10
MU
Packets
TU
of crisps in utils in utils
8
0
1
2
3
4
5
6
6
4
2
7
4
2
1
0
-1
0
7
11
13
14
14
13
0
0
1
2
3
4
-2
Packets of crisps consumed (per day)
5
MU
6
Alternative representation of Darren’s Marginal
Note this is
utility)
16
effectively
measuring the
slope of the
curve
14
Utility (utils)
12
TU
DTU = 2
DQ = 1
10
8
MU = DTU / DQ = 2/1 = 2
6
4
2
0
0
1
2
3
4
-2
Packets of crisps consumed (per day)
5
MU
6
Alternative representation of Darren’s Marginal
utility
16
TU
14
DTU = 2
Utility (utils)
12
DQ = 1
10
8
MU = DTU / DQ = 2/1 = 2
6
4
2
0
0
1
2
3
4
-2
Packets of crisps consumed (per day)
5
MU
6
Graphing Darren’s Marginal utility we get:
16
TU
14
Utility (utils)
12
MU
Packets
TU
of crisps in utils in utils
10
0
1
2
3
4
5
6
8
6
4
7
4
2
1
0
-1
0
7
11
13
14
14
13
2
0
0
1
2
3
4
-2
Packets of crisps consumed (per day)
5
MU
6
MARGINAL UTILITY THEORY
• Total and marginal utility
• Marginal Utility:
• The change in Total Utility as a result of
consuming one more unit of the good.
TU 1  TU 0 DTU
MU 

Q1  Q0
DQ
The principle of diminishing marginal utility
Note that the Marginal Utility curve is downward
Sloping
This gives us:
The principle of diminishing marginal utility
– As more units of a good are consumed,
additional units will provide us with less
additional satisfaction than previous units
Now let’s look at two goods
Packets
of crisps
0
1
2
3
4
5
6
MU
TU
in utils in utils
0
7
11
13
14
14
13
7
4
2
1
0
-1
Pints
of Beer
0
1
2
3
4
5
6
7
MU
TU
in utils in utils
0
70
130
180
217
220
220
0
70
60
50
37
12
0
-220
Packets
of crisps
0
1
2
3
4
5
6
MU
TU
in utils in utils
0
7
11
13
14
14
13
7
4
2
1
0
-1
Pints
of Beer
0
1
2
3
4
5
6
7
MU
TU
in utils in utils
0
70
130
180
217
220
220
0
70
60
50
37
12
0
-220
Looking at the utility from beer compared with crisps
do you think Darren should spend all his money on
beer?
Packets
of crisps
0
1
2
3
4
5
6
MU
TU
in utils in utils
0
7
11
13
14
14
13
7
4
2
1
0
-1
Pints
of Beer
0
1
2
3
4
5
6
7
MU
TU
in utils in utils
0
70
130
180
217
220
220
0
70
60
50
37
12
0
-220
Suppose that Crisps cost 25p
And Beer cost 1.50 per pint,
How should Darren allocate his income between beer and crisps
Bang per buck
Packets
of crisps
0
1
2
3
4
5
6
MU
TU
in utils in utils
0
7
11
13
14
14
13
7
4
2
1
0
-1
Pints
of Beer
0
1
2
3
4
5
6
7
MU
TU
in utils in utils
0
70
130
180
217
220
220
0
70
60
50
37
12
0
-220
The crucial issue is not how many utils you get from
consuming another beer or packet of crisps
But rather the ‘bang per buck’ or utils per pound
Bang per buck
Packets
of crisps
0
1
2
3
4
5
6
MU
TU
in utils in utils
0
7
11
13
14
14
13
7
4
2
1
0
-1
Pints
of Beer
0
1
2
3
4
5
6
7
MU

P
MU
TU
in utils in utils
0
70
130
180
217
220
220
0
70
60
50
37
12
0
-220
The crucial issue is not how many utils you get from
consuming another beers or packet of crisps
But rather the ‘bang per buck’ or utils per pound
We should allocate our spending such
that
MU
Packets
TU
of crisps in utils in utils MU/P
0
1
2
3
4
5
6
0
7
11
13
14
14
13
7
4
2
1
0
-1
28
16
8
4
0
-4
Pints
of Beer
0
1
2
3
4
5
6
7
MU
TU
in utils in utils MU/P
0
70
130
180
217
229
220
0
70
46.6
60
40
50
33.3
37
24.6
12
8
0
0
-220 -146.6
MU c
2
12
MU B

8

Pc
.25
1.50
PB
We should allocate our spending such
that
MU A MU B MU c MU D MU E




PA
PB
Pc
PD
PE
Etc,etc
Alternatively we can write the condition
for equilibrium as:
MU A MU B

PA
PB
MU A PA

MU B PB
INDIFFERENCE ANALYSIS
• A more sophisticated way to analyse this
problem is to use what is known as
Indifference Analysis. For that we need to:
– Construct an indifference curve
Constructing an indifference curve
The data in this table
tells us about various
combinations that
make ‘Clive’ equally
happy.
He is ‘Indifferent’ between
10 Pears and 13 Oranges
And
14 pears and 10 Oranges
Pears Oranges
30
24
20
14
10
8
6
6
7
8
10
13
15
20
Point
a
b
c
d
e
f
g
Combinations of pears and
oranges that Clive likes
the same amount as
10 pears and 13 oranges
Pears
Constructing an indifference curve
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
a
Pears Oranges
30
24
20
14
10
8
6
0
2
4
6
8
10
12
Oranges
14
a
b
c
d
e
f
g
6
7
8
10
13
15
20
16
Point
18
20
22
Pears
Constructing an indifference curve
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
a
Pears Oranges
b
0
2
4
6
30
24
20
14
10
8
6
8
10
12
Oranges
14
a
b
c
d
e
f
g
6
7
8
10
13
15
20
16
Point
18
20
22
Pears
Constructing an indifference curve
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
a
Pears Oranges
b
30
24
20
14
10
8
6
c
d
Point
a
b
c
d
e
f
g
6
7
8
10
13
15
20
e
f
g
0
2
4
6
8
10
12
Oranges
14
16
18
20
22
Constructing an indifference curve
30
a
28
Pears Oranges
26
b
24
30
24
20
14
10
8
6
22
c
Pears
20
18
16
d
14
Point
a
b
c
d
e
f
g
6
7
8
10
13
15
20
12
e
10
f
8
g
Joining all these points
gives us AN indifference
curve
6
4
2
0
0
2
4
6
8
10
12
Oranges
14
16
18
20
22
INDIFFERENCE ANALYSIS
• Indifference curves
– constructing an indifference curve
– the shape of an indifference curve
Constructing an indifference curve
30
a
Notice that this curve is
downward sloping
28
26
b
24
22
c
Pears
20
18
16
d
14
Why is this and does it
have any economic
meaning?
12
e
10
f
8
g
6
4
2
0
0
2
4
6
8
10
12
Oranges
14
16
18
20
22