Employability and Careers Centre

1. Employability and Careers Centre What’s on Autumn 2013 • Week 3 • Linked In Lab – setting up a profile 14 Oct, 1-2 • Working in Charities 15 Oct, 1-2 • Effective Applications 16 Oct, 1-2.30 • Bloomberg Aptitude Test 16 Oct, 2-4.30 • Careers with Civil Service Fast Stream 17 Oct, 1-2 • CV Basics on every week! Book on Employability and Careers Centre website Show Week 2/3 www.essex.ac.uk/careers

2. Careers in EU institutions & Brussels – don’t miss this! • An evening withJonathan Millins, European Policy Officer, East of England European Partnership. Great opportunity to hear an expert talk on careers in EU institutions. • Thurs 24 October, 6-7pm • Ivor Crewe A No need to book, just turn up! • PLUS • If you’re really focused on an EU career already, Jonathan will provide1-2-1 advice on specific EU career questions. Same day. • Pop in to the Employability & Careers Centre & book a 10 minute slot between 3 & 5pm on 24 October. Limited places available.

3. The Department of Economics invites you to a talk by one of our alumni, Loukas Spiliotopoulos, entitled: “3 words on the way to landing your dream job” The talk will be held on: Tuesday 5th November from 5.30pm in LTB 8 Loukas graduated from Essex in 2009 and is currently the CEO at Paros Capital and a Director and Partner at Princelet Partners. Don’t miss this great opportunity to see an Essex alumni talk about how they made their way to a successful career after leaving Essex

4. Announcements This week: attend class to go over exercise 1 attend support class (Thurs, 9AM) if you are struggling at all If you find class design could support you better, speak to your GTA start reading for lecture 2 work on exercise 2 You may begin on coursework (posted on ORB), question s A1, B1. Attend employability events and otherwise get yourself participating in department and university! Advanced class October 21 cancelled (due to scheduled surgery)

5. Lecture 2: Markets and Elasticities Reading: Chs (2), 3, 4 in Begg or… Chs 2, 3 Sloman and Wride and… Ec111 lecture 2 notes

6. Outline “Benchmark” market structure: Perfectly Competitive Markets Behaviour of agents: Demand and Supply Assumptions and Mechanics Well-being: Consumer Surplus/Producer Surplus Behaviour of Markets: Equilibrium Assumptions and Mechanics Intervention in markets and changes in well-being Elasticity: The responsiveness of agents to change

7. The market demand curve shows the relation between (own) price and quantity demanded holding all other things constant • Other things include: • The price of related goods • Consumer incomes • Consumer tastes • Consumer expectations • regulation Price D Quantity

8. Assumptions (1) • All consumers are price takers (not price makers) • All units of the good are homogeneous (= identical in the eyes of • consumers) • All consumers have full information on all relevant variables (eg. price)

9. Assumptions (2) • Price and quantity are negatively related (= The Law of Demand) • Why should this be so? • When the price of a good falls, we find it cheaper relative to other • substitutes, so we buy more of it instead of other goods • (substitution effect). • We also feel richer if the good we buy is cheaper because we have • more money left over for other things after purchase. This can make • us purchase more (income effect).

10. Direct Demand and Inverse Demand (1) • If b is a positive constant, “law of demand” holds. a is positive. • Non linear demand function: QD = a-bP2 A Linear direct demand function: QD = a – bP a is the intercept, -b is the slope

11. Direct Demand and Inverse Demand (2) • We can derive an inverse demand function from direct demand by solving for P as a function of QD • How do we do this? QD = a-bP  bP=a-QD  bP/b = a/b – (1/b)QD P Linear inverse demand function: P = a/b – (1/b)QD a/b is the intercept, -1/b is the slope Demand QD

12. Movements Along and Shifts in Demand When own price changes, we move along the demand curve (from A to B if price falls, for example). If any of the “other things” we held constant changes, demand shifts (from green to blue, for example). Price A B D Quantity

13. Deriving Market Demand from Individual Demands P P P Q1 Q2 QD = Q1+Q2 Agent 1 Agent 2 Market Demand To do this mathematically, add direct demands, then convert the total to inverse demands to plot it on a graph.

14. Consumer Surplus The consumer surplus is the difference between the maximum price that she is willing to pay for a given amount of a good or service and the price she actually pays. It is a measure of well being that a consumer extracts from a market trade. Price Consumer surplus P * D Q* Quantity

15. The supply curve shows the relation between (own)price and quantity demanded holding all other things constant S • Other things include: • Technology • Input costs • Government regulations • The number of suppliers Price Quantity

16. Assumptions (3) • All consumers are price takers (not price makers) • All units of the good are homogeneous (= identical in the eyes of • consumers) • All consumers have full information on all relevant variables (eg. price)

17. Assumptions (4) • Price and quantity are positively related (= The Law of Supply) • Why should this be so? • As output rises, costs may rise as well either within the firms already • in the market …or… • less efficient firms enter when the “price umbrella” is higher if they • maximise profits…or… • existing firms may have an incentive to produce more when price rises • if they maximise profits.

18. Direct Supply and Inverse Supply (1) • If d is a positive constants, law of supply holds. c may be positive or negative. • Non linear supply function: QS = c+dP2 A Linear direct supply function: QS = c + dP c is the intercept, d is the slope

19. Direct Supply and Inverse Supply (2) • We can derive an inverse supply function from direct demand by solving for P as a function of QS • How do we do this? QS = c+dP  dP=QS – c  dP/d = -c/d + (1/d)QS P Linear inverse supply function: P = -c/d + (1/d)QS -c/d is the intercept, 1/d is the slope Supply QD

20. Movements Along and Shifts in Supply When own price changes, We move along the supply curve (from A to B if price falls, for example). If any of the “other things” we held constant changes, supply shifts (from green to blue, for example). S Price A B Quantity

21. Deriving Market Supply from Individual Supplies P P P Q1 Q2 QS = Q1+Q2 Agent 1 Agent 2 Market Supply To do this mathematically, add direct supplies, then convert the total to indirect supplies to plot it on a graph.

22. Producer surplus The producer surplus for sellers is the amount that sellers benefit by selling at a market price that is higher than they would be willing to sell for. It is a measure of the well-being that producers extract from a market trade. Price S P * Producer surplus Q* Quantity

23. Perfectly Competitive Market Let us bring together the demanders we depicted in our market demand function and the suppliers whose behaviour we depicted in our market supply function. The arrangements under which they come together this way is called the “market”. Assumption: The costs of trading are low, and there is free entry into and exit from the market. (In other words, new entrants are at no disadvantage compared to existing firms.) How do we characterise behaviour of the market as a whole? Market Equilibrium: A situation where no market participant wishes to change his/her behaviour (ie, no one wishes to change his/her trade).

24. Market equilibrium S Market equilibrium is at E0 where quantity demanded equals quantity supplied: all desired trades are fulfilled. P0 is the equilibrium price. Price E0 P0 D Q0 Quantity

25. A market in disequilibrium excess demand Excess supply S Price Excess demand places upwards pressure on prices as consumers bid up the price in an attempt to secure a source of the good. Similarly, excess supply may result at price P2, placing downward pressure on prices as suppliers attempt to secure buyers for their goods. D P2 E P0 A B P1 D S QS Q0 QD Quantity

26. Movement to a new equilibrium: A shift in demand D0 D1 P0 E0 P1 The demand curve shifts from D0D0 to D1D1. If price stayed at P0 there would be excess supply. So the market moves to a new equilibrium at E1. D0 D1 Q1 Q0 If the price of a substitute good decreases ... less will be demanded at each price. S Price E1 S Quantity Well-being for the traders will change at E1

27. Movement to a new equilibrium: a shift in supply S0 E2 The supply curve shifts to S1S1 P1 S1 S0 So the market moves to a new equilibrium at E2 Q1 S1 Suppose a specific tax is levied on output, and measure after- tax price on the vertical axis. D Price P0 E0 At the new higher price, demand falls so that there is excess supply. D Q0 Quantity

28. The price elasticity of demand It is defined as: % change in quantity demanded % change in price Measures the sensitivity of the quantity demanded of a good to a change in its price

29. m P = –2 7 n Q = 10 Mid P 15 Mid Q Arc Elasticity Calculation DQ DP Ped = ¸ mid Q mid P 10-2 15 7 ¸ = = 10/15 x -7/2 = -70/30 = -7/3 = -2.33 P (£) Demand Q (000s)

30. Point Elasticity Calculation The point elasticity of demand is defined as: PED = [dQ/dP][P/Q] For example if QD =12 - 2P If P=3 then QD =6; dQD/dP = -2 the point elasticity is -2(3/6) = -1 Notice that for linear demand, PED = slope x (P/Q)

31. Why Use Elasticity? Why not just measure changes in price for a change in quantity with slope? (For example, by how many units does output change when price changes by £1?) Elasticity is “unit-less” so we can compare how much the price of one good responds to the price of another across products, time periods and countries.

32. Inelastic demand Demand is INELASTIC when the price elasticity lies between -1 and 0 i.e., when the % change in quantity demanded is smaller than the change in price e.g., if quantity demanded falls by 3.5% in response to a 5% increase in price elasticity is -3.5  5 = - 0.7

33. Unit elastic demand Demand is UNIT ELASTIC when the price elasticity is exactly -1 i.e., when the % change in quantity demanded is equal to the change in price e.g., if quantity demanded falls by 5% in response to a 5% increase in price elasticity is -5  5 = -1

34. Elastic demand Demand is ELASTIC when the price elasticity (ignoring the negative sign) is greater than -1 i.e., when the % change in quantity demanded exceeds the change in price e.g., if quantity demanded falls by 7% in response to a 5% increase in price elasticity is -7  5 = -1.4

35. Elasticity and revenue • When price is changed, the impact on a firm’s total revenue (TR) will depend upon the price elasticity of demand. Demand is elastic Demand is unit elastic Demand is inelastic For a price increase TR decreases TR does not change TR increases For a price decrease TR increases TR does not change TR decreases

36. The cross price elasticity of demand • The cross price elasticity of demand for good i • with respect to the price of good j is: • % change in quantity demanded of good i • % change in the price of good j

37. The cross price elasticity of demand • Interpretation: • This may be positive or negative • The cross price elasticity tends to be positive • if two goods are substitutes: e.g., tea and coffee • The cross price elasticity tends to be negative • if two goods are complements e.g., tea and milk.

38. The income elasticity of demand The income elasticity of demand measures The sensitivity of quantity demanded to a Change in income: % change in quantity demanded of a good % change in consumer income

39. Income Elasticity: Interpretation A NORMAL GOOD has a positive income elasticity of demand an increase in income leads to an increase in the quantity demanded e.g., food An INFERIOR GOOD has a negative income elasticity of demand an increase in income leads to a fall in quantity demanded e.g., margarine A LUXURY GOOD has an income elasticity of demand greater than 1 e.g., wine

40. Income and the demand curve For an increase in income: NORMAL GOOD INFERIOR GOOD Price Price D0 D0 D1 D1 Quantity Quantity Demand curve moves to the right Demand curve moves to the left

41. Uses of Elasticities • Elasticity measures responsiveness of “anything” to a change in “something” • %X / %Y • Uses of elasticities • How will a recession that reduces incomes affect sales? • How will a price cut of a substitute affect me? • How will a complementary good price cut affect me? • How much will a price control affect sales? • How much will a bad harvest affect farmers’ earnings? • Who bears the burden of a tax?

42. What determines the price elasticity? The ease with which consumers can substitute another good. Hence, the breadth of categories matters. EXAMPLE: Consumers can readily substitute one brand of detergent for another if the price rises, so we expect brand-level demand to be elastic, but if all detergent prices rise, the consumer cannot switch, so we expect category-level demand to be inelastic.

43. Elasticity is higher in the long run In the short run, consumers may not be able (or ready) to adjust their pattern of expenditure. If price changes persist, consumers are more likely to adjust. So ability to adjust/time period matters… Demand thus tends to be more elastic in the long run but relatively inelastic in the short run.

44. Price elasticity for a linear demand curve Price Elastic D Unit elasticity  Inelastic D Quantity The price elasticity varies along the length of a straight-line demand curve…recall that PED = slope x P/Q so current position matters… …All else equal, a steeper inverse demand will be less elastic than a flatter inverse demand.

45. What, how and for whom Market behaviour determines: how much of a good should be produced by finding the price at which the quantity demanded equals the quantity supplied we estimate this for whom the goods are produced those consumers willing to pay the equilibrium price what goods are being produced there may be goods for which no consumer is prepared to pay a price at which firms would be willing to supply. the amount and allocation of well-being (surplus) among the traders