ECN113 Principles of Economics

2015-16
Lecture notes/workbook

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Principles of Economics:

Economics is about

magic word:

The Economics view of reality:

Relative scarcity
"unlimited wants, limited resources" ??

Economics is about

to consider:
1)
2)
3)
4)

The Science of Economics

A production possibility curve

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7
6
Units of food Units of clothing
(millions)
(millions)

5
4

8m
7m
6m
5m
4m
3m
2m
1m
0

3
2
1

0.0
2.2m
4.0m
5.0m
5.6m
6.0m
6.4m
6.7m
7.0m

0
0

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Why does price elasticity

matter?

Some economic effects of making drugs illegal

Positive:
1)
2)
Negative:
1)
2)
3)
4)
5)

Darrens utility from consuming crisps (daily)



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Effect of an increase in income on the budget line



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asymmetric information:
one side knows more than other side

example 1:

Market for lemons

suppose: second-hand cars in range 0 - 10,000

o expected value:

Supply
essential story:
deriving individual supply from cost function
background, variations, etc.:
1) background to cost function:
- production function
2) market-power:
- downward-sloping demand curve faced
3) long run:
- switch production method
- entry, exit, sunk costs
4) choice production factors:
- isoquants, iso-cost curves

Total revenue for a price-taking firm

TR



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Wheat production per year from a particular farm

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Slope = TPP / L
= APP



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Sunk costs
Suppose: concert, it rains

Would a rational individual go?

Should the price of the ticket matter?

AR and MR curves for a firm facing a downward-sloping D curve

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why monopoly?
1)
2)

oligopoly
- collusion:

- models of 'not-so-strategic' interaction:

- strategic interaction:

case study: NYC stereo wars

Crazy Eddie: "We will not be undersold.
Our prices are the lowest - guaranteed.
Our prices are insane"
Newmark & Lewis: "lifetime low-price
guarantee" : if lower price found
elsewhere: refund 200% difference
tough competition, good for consumers !

 suppose:
now: Crazy Eddie lowers price to
Where should you buy?
You pay
thus
effectively

 but what about Crazy Eddie?

'price guarantee' solves some problems

for cartel:
Are lowest price guarantees good for
consumers?

game theory
forget:
- compromise strategy
- maximin strategy
- maximax strategy
focus on:
- best-responses
- dominant strategies
- simultaneous-move vs. sequential-move games
- Nash equilibrium
- subgame perfect Nash equilibrium

efficiency:
- Pareto efficiency:

2
3

analysis perfectly competitive markets:

wonderful result, because:
....
-

1)
2)

some conditions Pareto efficiency:

-

what to do with externalities?

1)

2)
3)

public goods:

two characteristics:
1)

2)

more examples of public goods:

Monty Python's Life of Brian:

"What have the Romans ever done for us?"
1
2
3
4
5
6
7
8
9
10

aqueduct

why might firms not maximise profits?

1)
2)

3)

question:
if firms . . . .

1)
2)
3)

How do UK companies determine their prices?

1st

2nd

3rd

Market level

257

39

140

21

78

12

Competitors prices

161

25

229

35

100

15

Direct cost plus variable mark-up

131

20

115

18

88

14

Direct cost plus fixed mark-up

108

17

49

42

Customer set

33

52

47

Regulatory agency

Factors leading to a rise or fall in price

Rise

Number %

Fall

Number

Rise in material costs

421

64

Fall in material costs

186

28

Rival price increase

105

16

Rival price reduction

235

36

Rise in demand

101

15

Fall in demand

146

22

Prices never rise

26

Prices never fall

75

12

Rise in interest rates

18

Fall in interest rates

Higher market share

14

Lower market share

69

11

Rise in productivity

22

Fall in productivity