Download 2. UoL Intro to econ

Introduction to Economics:
Microeconomic Theory
Tutorial on Chapter 2 Tools of economic analysis
Textbook
• Begg, D., G. Vernasca, S. Fischer and R. Dornbusch Economics.
(London: McGraw Hill, 2020)
• Study guide
Learning Outcomes
• By the end of this chapter, you should be able to:
• 11 recognize why theories deliberately simplify reality
• 12 understand time-series, cross-section and panel data
• 13 construct index numbers
• 14 differentiate between nominal and real variables
• 15 build a simple theoretical model
• 16 understand how to plot data and interpret scatter diagrams
• 17 use ‘other things equal’ to ignore, but not forget, important
influences
What is …?
1. a deliberate simplification of reality
2. pieces of evidence about economic behaviour and
2. Data
can be used to test economic models
3. Behavioural law 3. a sensible theoretical relationship not rejected by
evidence over a long period
4. Time series data 4. values of a given variable at different points in time
5. observations at a point in time that differs across
5. Cross-section
different individuals or groups of individuals
data
6. observations over multiple time periods for the
6. Panel data
same individuals or groups of individuals. Mix
between time-series and cross-section data
1. Model
What is …?
1. Data expressed relative to a given base value.
Used to compare numbers without
emphasizing units of measurement
2. Nominal values
2. are measured in the prices ruling at the time of
3. Real values
measurement.
4. purchasing
3. adjust nominal values for changes in the price
power of money
level.
4. an index of the quantity of goods that can be
bought for 1 unit of currency
1. index number
What is …?
1. the absolute change divided by the original
number, then multiplied by 100.
2. Growth rate
2. the percentage change per period (usually a
year).
3. Ceteris paribus
3. Way for looking at the relationship between
4. Econometrics
two variables under assumption that Other
things are equal, but remembering that other
variables also matter
4. Statistics used to measure relationships in
economic data
1. % change
Review Questions
• The police research department wants to study
whether the level of crime is affected by the
unemployment rate.
• (a) How would you test this idea ? What data would
you want ?
• (b) What ‘other things equal’ problems would you
bear in mind ?
Review Questions
• The police research
department wants to study
whether the level of crime
is affected by the
unemployment rate.
• (a) How would you test this
idea ? What data would you
want ?
• (b) What ‘other things
equal’ problems would you
bear in mind ?
• Step 1. Gather Data
• What data?
• Unemployment rates and crime
rates over a certain period of time
• From a variety of different
locations to account for regional
differences
• The data could be obtained from
government databases or other
reliable sources.
• In KZ BUREAU OF NATIONAL
STATISTICS
Review Questions
• The police research
department wants to study
whether the level of crime
is affected by the
unemployment rate.
• (a) How would you test this
idea ? What data would you
want ?
• (b) What ‘other things
equal’ problems would you
bear in mind ?
• Step 2. perform a statistical
analysis
• What analysis?
• Any statistical methods that will
help to determine if there is a
correlation between the
unemployment rate and the crime
rate
• For example, regression analysis or
correlation coefficients.
Review Questions
• The police research
department wants to study
whether the level of crime
is affected by the
unemployment rate.
• (a) How would you test this
idea ? What data would you
want ?
• (b) What ‘other things
equal’ problems would you
bear in mind ?
•
•
•
•
•
•
•
Step 3. Control other variables
education levels
poverty rates
social inequality
etc
Step 4. Interpret the results
Step 5. Present our findings
Review Questions
• Suppose the relationship
between income and
consumption is such that higher
incomes are associated with
higher consumption of a similar
amount.
• How can the relationship be
represented on a graph ?
• What is relationship between
income and consumption?
• Normal goods are those goods
whose consumption increases
with an increase in income.
• Inferior goods are those goods
whose consumption decreases
with an increase in income.
Income and consumption curve
• So, the relationship between
income and consumption can
be represented on a graph
using an income-consumption
curve.
• The shape of the curve
depends on whether the
goods are normal or inferior.
Income and consumption curve
• The point where the incomeconsumption curve intersects
the budget line is called the
equilibrium point.
• This point represents the level
of consumption that
maximizes the consumer's
utility given their income.
Review Questions
• Which of the following graphs
shows a negative linear
relationship ?
• Option A is a linear function.
However, as the x-axis increases,
the y-axis decreases
• Option B is a linear function.
However, as the x-axis increases,
the y-axis also increases.
• Option C is a parabolic function,
not a linear one.
Review Questions
• Suppose the relationship between the price of a car
and its quantity demanded, other things equal, is
graphed as a downward-sloping straight line.
• Suppose the income of consumers increases and the
demand for cars increases.
• What happens to the downward-sloping straight line
when demand for cars increases owing to an increase
in consumers’ income ?
Review Questions
• Suppose the relationship
between the price of a car and
its quantity demanded, other
things equal, is graphed as a
downward-sloping straight line.
• Suppose the income of
consumers increases and the
demand for cars increases.
• What happens to the
downward-sloping straight line
when demand for cars increases
owing to an increase in
consumers’ income ?
• According to the law of demand, as
the price of a car increases, the
quantity demanded of that car will
decrease.
• Car is normal good. As the income of
consumers rises, they will buy more
cars at the same price. This means
that the demand for cars will shift to
the right.
Consumer Income Normal Good
Price of car (in
thousands)
$3.00
2.50
Increase
in demand
2.00
When the income of consumers
increases and the demand for cars
increases, the downward-sloping
straight line representing the
relationship between the price of a
car and its quantity demanded shifts
to the right.
1.50
1.00
0.50
D1
0 1
2 3 4 5 6 7 8 9 10 11 12
D2
Quantity of
car
Are these statements right or wrong ?
• (a) The purpose of a theory is to
let you ignore the facts.
• (b) Economics cannot be a
science since it cannot conduct
controlled laboratory
experiments.
• (c) People have feelings and act
haphazardly. It is misguided to
reduce their actions to scientific
laws
• Wrong, purpose of a theory is
not to ignore the facts but to
understand them. Facts without
theory are useless and theory
without facts is unsupported.
• In economics, we use both
theory and facts to understand
how the economy works.
Are these statements right or wrong ?
• (a) The purpose of a theory is to let
you ignore the facts.
• (b) Economics cannot be a science
since it cannot conduct controlled
laboratory experiments.
• (c) People have feelings and act
haphazardly. It is misguided to
reduce their actions to scientific
laws
• Wrong, economics is a social
science. It shares a combination of
qualitative and quantitative
elements common to all social
sciences.
• It is a science because it attempts
to use the scientific method in
order to achieve this
understanding.
• The inability to conduct controlled
laboratory experiments does not
disqualify economics as a science
Are these statements right or wrong ?
• (a) The purpose of a theory is to
let you ignore the facts.
• (b) Economics cannot be a
science since it cannot conduct
controlled laboratory
experiments.
• (c) People have feelings and act
haphazardly. It is misguided to
reduce their actions to scientific
laws
• Wrong, In reality, people have
knowledge and direction in what
they are doing and are not
ignorant towards scientific laws.
• Behavioral economics combines
elements of economics and
psychology to understand how
and why people behave the way
they do in the real world.
Review Questions
• Suppose you earn £1200. You purchase only shirts, which are £10
each, with your income every month.
• (a) What is the purchasing power of your income ? 120 shirts
• (b) Now, suppose your income increases to £1500 a month but the
price of shirts remains the same. Does the purchasing power of your
income change ? 150 shirts, PPM increase
• (c) Suppose your income remains £1200 but the price of shirts
increases to £12 each. Does the purchasing power of your income
change
100 shirts, PPM derease
Review Questions
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑃𝑟𝑖𝑐𝑒 ∗ 𝑅𝑃𝐼 𝑜𝑓 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟
𝑅𝑒𝑎𝑙 𝑃𝑟𝑖𝑐𝑒 =
𝑅𝑃𝐼 𝑜𝑓 𝑔𝑖𝑣𝑒𝑛 𝑦𝑒𝑎𝑟
• The table below shows car prices • Real prices of cars in 2000, 2011,
and the retail price index (RPI)
and 2012, expressed in 2012 prices
for the years 2000, 2011, 2012.
• RP2000=6,2*100/9,1=682,42(£000)
• Calculate the real prices of cars
• RP2011=10,4*100/15,4
by expressing them at the 2012
=675,32(£000)
prices.
• RP2011=9,6*100/9,6=9,6(£000)
Review Questions
• The table below shows car prices
and house prices for the years
2011 and 2012. Calculate the
absolute change and the
percentage change in the prices
of cars and houses between the
years 2011 and 2012.
• For car prices:
• Absolute change = £9600 £10000 = -£400
• For house prices:
• Absolute change = £192000 £200000 = -£8000
Review Questions
• The table below shows car prices
and house prices for the years
2011 and 2012. Calculate the
absolute change and the
percentage change in the prices
of cars and houses between the
years 2011 and 2012.
• For car prices:
• %∆ = (-£400 / £10000)*100 =-4%
• For house prices:
• %∆ =(-£8000/£200000)*100=-4%
Review Questions
• Calculate the slope of the straight line
in the graph provided below. Also,
write down the equation of the
straight line.
• First, we identify the points of
intercepts
• From the graph, we can see that
the line passes through the
points (3,0) and (0,-2).
• m = (y₂ - y₁) / (x₂ - x₁)
• m = (-2 - 0) / (3-0)=2/3
• equation of a line
• y − y1 = m(x − x1)
• y − 0 = 0,67*(x − 3)
• y = 0,67x-2
Review Questions
• Calculate the slope of the straight line
in the graph provided below. Also,
write down the equation of the
straight line.
• First, we identify the points of
intercepts
• m = (y₂ - y₁) / (x₂ - x₁)
• equation of a line
• y − y1 = m(x − x1)
Review Questions
• Following the introduction of a congestion charge for driving into
Central London, traffic levels initially fell by 20 per cent. Over the next
few years, traffic reverted almost to its original level. Does this show
that the congestion charge failed to reduce congestion ? Even if it did,
might it still be a good idea ?