A Presentation on Applied Economic Analysis (TPM 517M)

1. A Presentation on Applied Economic Analysis (TPM 517M) Presenter: Cyril A. Ogbokor Polytechnic of Namibia, Namibia.

2. The Division between Microeconomics and Macroeconomics • Microeconomics deals with the study of smaller economic units such as the firm, household. • On the other hand, Macroeconomics is concerned with the behaviour of the economy as a whole. Alternatively, it focuses on larger economic aggregates such as total exports, total imports, total savings etc. Exercise 1 Is Microeconomics more important than Macroeconomics?

3. Basic Economic Concepts • The foundation of Economics as a discipline requires an appreciation of the following concepts. In this section an attempt is made to explain the following key concepts: *Choice *Scarcity *Scale of Preference *Opportunity Cost *Production Possibility Frontier Exercise 2 Prepare a Scale of Preference using any five items. • Macroeconomic data used runs from 1991 to 2003. The results of the study confirm the existence of the export-led growth model in Zimbabwe. • In the face of continual instability in its export receipts, we recommend that fundamental economic and political restructuring be embarked upon in order to address and subsequently reverse the current situation that Zimbabwe finds itself.

4. Economic Systems • Economists recognizes three main types of economic systems: • The Market System: Individuals are the main drivers. • The Command System: The government is the key driver. • The Mixed Economy: Individuals and the government operates side by side in order to keep the national economy operational. Exercise 3 Is Namibia a Command economy? Elaborate

5. Demand and Supply Analysis • In a pure market economy, the allocation of economic resources are determined purely by demand and supply factors. An attempt is made in this section to elaborate upon the demand and supply sides of the market beginning with Demand Analysis. • Demand refers to the quantity of a product that is purchased in the market place at a given time period and at a particular price. • Effective demand imply the demand backed by the ability to pay. • We expect the quantity purchased to increase as the price of a product goes down and vice versa-The law of demand. • The study will also provide information on how economic growth reacts to changes in the explanatory variables used in the study.

6. Demand Analysis *In exceptional cases, the contrary may be applicable. *An example of a demand schedule is the following: Price per Bushel Quantity demanded per Week 4 20 3 35 2 55 1 80 The above hypothetical schedule shows that the price of the item under consideration is negatively related to its demand implying the law of demand.

7. Demand Analysis • Graphical Representations of the following: *Individual Demand Curve *Market Demand Curve *Factors influencing demand *A Change in the quantity demanded *A Shift in demand *The Market equilibrium position

8. Demand Analysis The following is a summary picture of factors influencing demand: *Price *Consumers Income *The number of buyers *Expectations *Taste and Fashion *Government policy *Climatic factors

9. Demand Analysis • What is the difference between a substitute good and a complementary good?

10. Supply Analysis • The following should be considered under supply analysis *The definition of supply *The law of supply *The Individual and the Market supply curves *A change in quantity supplied and a shift in supply *Factors influencing supply

11. Integrating Demand with Supply • It is possible to obtain the equilibrium for the market graphically by superimposing the market demand curve over the market supply curve and vice versa.

12. Elasticity of Demand & Supply Price elasticity of demand refers to the responsiveness of demand to price changes. Alternatively, it represents a quantitative responsiveness of demand to price changes. The formula for calculating price elasticity of demand is: Ed=% change in quantity demanded/% change in price

13. Elasticity of Demand & Supply It is important to note that it is the percentage changes that are relevant, not the absolute changes. Also, when we measure elasticity, we find that its value may be anywhere between zero and infinity. Furthermore, an increase in revenue always occurs when elasticity is greater than 1. For example, using the information below, calculate the price elasticity of demand for sugar

14. Elasticity of Demand & Supply Hypothetical change in demand for sugar at a single retail shop Price (N$) Quantity per week (kg) 5 400 3 1000

15. Elasticity of Demand & Supply Ed= 150/40 Ed= 3.75 i.e. Demand is elastic Different types of price elasticity are shown below:

16. Inelastic Demand

17. Elastic Demand

18. Unitary Elasticity

19. Perfectly Elastic Demand

20. Perfectly Inelastic Demand

21. Determinants of Price Elasticity of Demand These are: *Availability of substitutes *Consumers income *Luxuries versus Necessities *Time Factor

22. Cross Elasticity & Income Elasticity of Demand Cross elasticity of demand measures how the demand for a good (say, good X) respond to a change in the price of some other product (say, Y). It is measured as Percentage change in qty dd of product X/percentage change in price of product Y

23. Cross Elasticity & Income Elasticity of Demand Cross elasticity is either positive, negative or zero. It is positive if goods X and Y are substitutes. It is negative if goods X and Y are complementary goods. It is zero if goods X and Y are independent goods.

24. Cross Elasticity & Income Elasticity of Demand Income elasticity of demand measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good. Alternatively, Ei=% change in quantity demanded /% change in income

25. Elasticity of Demand & Supply For most goods, the income-elasticity coefficient is positive, implying that more of them are demanded as consumers income rises. Such goods are called normal or superior goods. Automobiles and Farm products are examples of normal goods. Inferior goods.

26. Elasticity of Demand & Supply Inferior goods: A negative income-elasticity coefficient implies an inferior good. Consumers decrease their purchases of inferior goods as incomes rise.

27. Price Ceilings and Price Floors *Price ceilings are maximum prices fixed by the government. Examples are rent controls and usury laws. *Price floors are minimum prices fixed by the government. Supported prices for agricultural products and minimum wages are likely candidates.

28. Internal Economies of Scale As a firm grows, it is possible for it to enjoy certain benefits. Such benefit could arise from the actual process of production, while others are related to the organisation of production. Both kinds of economies are known as internal economies of scale since they benefit a single firm.

29. Internal Economies of Scale There are six basic types distinguished here: • Technical economies: These are found primarily in plants. Neither the capital costs nor the running costs of plants increase in proportion to their size. • Managerial or administrative economies: The cost of processing large orders is not likely to increase in proportion to the size of those orders.

30. Internal Economies of Scale • Research and development: Large firms could use R & D to increase and sustain their competitive advantage over their smaller rivals.

31. Internal Economies of Scale • Financial economies: In most cases, large firms do have large turnover as well as large assets. In view of this, they find it much easier to raise capital for investment purpose. Similarly, investors in shares or debentures are likely to be more attracted by the success story of a large company in relation to a small company.

32. Internal Economies of Scale • Marketing economies: A large firm may receive normal discounts for bulk purchases, and in addition be able to dictate very advantageous terms if it constitutes a larger proportion of the supplier’s market. • Social economies: This arise from the firm’s social responsibility. For example, the sponsorship of football or tennis competitions.

33. Internal Economies of Scale • Also, recreational activities, housing, Christmas bonuses are used to win the loyalty of the firm’s employees.

34. External Economies of Scale • This occurs mainly from the general advancement of industrialisation. Several firms do benefit from this process simultaneously. They may be divided into the following groups: • Economies related to a particular industry. • Economies related to industrialisation. • Economies related to society.

35. The Limits to Growth -Diseconomies of Scale • As a firm expands its activities and takes advantage of economies of scale it is able to reduce the unit or average cost of production . Beyond a certain size the unit cost may begin to rise again owing to the effects of diseconomies of scale. There are of two types, internal and external. • Internal diseconomies are of two types, namely, technical diseconomies and administrative diseconomies. • External diseconomies result from the overcrowding of industrial areas and the consequent increase in the price of land, labour and services.

36. Exercise • Identify the various constraints in the production process.

37. Market Models • Economists have a premonition for classifying relationships. In the light of this, Economists recognises four major types of market structures, namely: • Pure competition • Monopoly • Monopolistic competition • Oligopoly

38. Reading Assignment on Market Structure • For an elaborate discussion of Market structures, read McConnell & Brue, chapters 23, 24 & 25. • Pay special attention to theoretical and graphical issues.

39. Reading Assignment on the Theory of Costs • For an elaborate discussion of the theory of costs, read McConnell & Brue, chapter 22.

40. Additional Reading Assignment • Read all the discussions relating to your lectures and in addition all the research publications that were given to you.

41. Macroeconomics • Macroeconomics is concerned with the behaviour of the economy as a whole. Alternatively, it focuses on larger economic aggregates such as total exports, total imports, total savings, total consumption, total investments etc. It is also concerned with the relationship existing between these economic aggregates.

42. Macroeconomics • On the basis of these relationships appropriate policies are formulated for the national economies. • In fact, Macroeconomics deals with the major economic issues of the day. • Y=C+I+G (Closed economy) • Y=C+I+G+F (Open economy)

43. Macroeconomics Objectives of Macroeconomics • Price stability • Full employment • Reduction in income inequality • Healthy BoP position • Steady economic growth

44. Macroeconomics The Consumption Function • Different theories have been used in the literature to explain consumption. Some of these theories are: • The Keynesian current income hypothesis • Absolute income hypothesis • Relative income hypothesis

45. Macroeconomics • Permanent income hypothesis • The basic consumption function is implicitly written as: • C=f(Y) Explicitly, it is written as: • C=a+bY where: • C=Consumption expenditure • a=autonomous consumption

46. Macroeconomics • b=mpc ie marginal propensity to consume • Y=income level • It is possible to complicate the above consumption function by accommodating more explanatory variables that could be used to explain the behaviour of a consumption model.

47. Macroeconomics • General factors determining aggregate consumption • Taste • Population • General price level • Income distribution • Age factor

48. Macroeconomics • Aggregate income • Level of education • Price expectations • Interest rate • Credit availability • Gender • Etc

49. Macroeconomics EXERCISES Given a simple two-sector economy in which Y=C+I, C=a+bY I= I0 a=85 b=0.9 I=55 *Using the general parameters show that Y=a + Io/ I-b

50. Macroeconomics *Using the specific values assigned to the parameters, prove that the reduced form equals Y= 1400 *Calculate 1-b and interpret