MT Econ Notes PDF

Lecture one: INTRODUCTION Video at the beginning video from 1950 where he predicted that people would have computers and that people could talk to them, predicting the internet. People living in cities increased from 29.6 million to now 56.2 and is estimated to be 68.8 in...

Lecture one: INTRODUCTION Video at the beginning video from 1950 where he predicted that people would have computers and that people could talk to them, predicting the internet. People living in cities increased from 29.6 million to now 56.2 and is estimated to be 68.8 in 2050. Edward Gleaser: “why is it that in an era in which transportation and communication costs have virtually vanished, clusters have become more important than ever?” Lecture 2: The State and winning and loosing in the global economy Ricardo: Low transaction costs and consequent higher levels of trade stimulate the global economy ->world trade organization ->Aim: increase trade by lowering trade barriers Barriers to trade / imports Non tariff barriers Tarifs Aims WTO Change non-tariff barriers into tariff barriers Lower tariff barriers Two principles on non discrimination Most favored nation rule: Similar products from different countries need to be treated the same National treatment rule: Foreign goods once in the country need to be treated the same as domestic goods Transaction costs: All costs incurred in trading a productor service. Globalization is the extension of economic activities across national boundaries and the functional integration of such internationally dispersed activities. They reflect the qualitative changes is the way economic activities are organized (dickens 2015) Who are the winners and who are the losers? It is a contested topic Three drivers of globalization: ○ Technology ○ Multinational cooperations ○ The state The people Globalizing forces: people, firms, cultures, easily move across the globe Lecture 3: Supply and demand part 1 Economics: Economics is the study of how economic agents choose to allocate scarce resources, and how those choices affect societies. What is an economic agent? What are scarce resources? ➔ Economic agents are entities that are different and make decisions such as consumers, families, workers (choose which job to do), firms #8decide what product or service, and governments (tax, services they provide) ➔ Economics analysis how the behave and why ➔ Scarcity arises in a situation where there are unlimited wants but limited needs Economics divided in two types of analysis: Positive economic analysis : what people do Normative economics analysis: suggesting what people should or shouldn’t do Two key topics in economics: Microeconomics: the study of how individuals, families, firms, and governments make choices and how those choices affect prices, the allocation of resources, and the well being of other agents Macroeconomics: the study of the economy as a whole to analyze phenomena as the economic growth rate of a country, a country’s total economic output, inflation, or the unemployment rate. Economics is based on three key principles: Optimization: describes choosing the best feasible option, given the (limited) information, knowledge, experience, and training the economic agents to have. To optimize, an economic agent needs to consider many issues, including: Trade-offs: a situation in which an agent needs to give up one thing to get something else. Opportunity costs is the cost of the most highly valued alternative that the economic agent could have chosen instead of her/his choice. Equilibrium: is the specific situation, in which everyone is simultaneously optimizing, so nobody would benefit personally by changing her/his own behavior, given the choices of others Empiricism: is the analysis that uses data - evidence-based analysis. Economics use data to develop theories, to test theories, to evaluate the success of different government policies, and to determine what is causing things to happen in the world. A market: is a group of economic agents (buyers and sellers) who are trading a good or service plus the rules and arrangements for trading If buyers and sellers face the same price, it is referred to as the market price. In a perfectly competitive market, sellers all sell an identical good or service, and any individual buyer or any individual seller cannot affect the market price of that good or service on her/his own. ○ Buyers and sellers are therefore price-takers. Overview of Economics Markets Although very few markets are perfectly competitive in the real world, many markets are nearly perfectly competitive and it is therefore important to understand the properties of these markets. Hence, we will try to answer the following three questions ○ How do buyers behave? ○ How do sellers behave? ○ How does the behavior of buyers and sellers jointly determine the market price and the quantity of goods transacted? How Do Buyers Behave? Preferences, utility, and indifference curves To understand the behavior of the buyers (e.g., which products and how much of those products consumers choose to buy) we need to understand the following: ○ Preferences (what products does the consumer like?) ○ Income/Budget and Prices (How much can the consumer afford to buy?) To understand the concept of consumer’s preference, we start with a simplified example of two goods: Apples and Bananas ○ The consumer can combine the two goods in different quantities (consumption bundles) ○ Different bundles will provide the consumer with different levels of happiness (utility) What is ”utility”? A measure of satisfaction or happiness that comes from consuming a good or service. It assigns a numerical value to each element of a consumption bundle, ranking the consumption bundles in accordance with the individuals’ preferences. ○ The same consumption bundle can give different consumers different levels of utility. ○ Different consumption bundles can give the same consumer different or equal levels of utility A set of bundles providing an equal level of satisfaction for the consumer is known as an indifference curve. What is Prices and Budget Constraints  To identify the set of consumption bundles that the consumer can afford, information on the prices of the goods and the consumer’s income are required. ○ A budget set is the set of all possible bundles of goods and services that can be purchased with a consumer’s income. ○ The budget constraint represents the goods or activities that a consumer can choose that exactly exhausts the entire budget. The budget constraint also provides information on the opportunity costs and the financial trade-off that the consumer has to make with the given prices and income; ○ if the price of each apple is 2 euro and the price of each banana is 1 euro, then for every apple the consumer has to give up 2 bananas. For every apple that you decide to purchase you have to give up 2 bananas. F This follows from the fact that the price of apples is twice the price of bananas. Putting It All Together We have seen the main ingredients allowing us to understand the behavior of the buyers: Preferences: indifference curves tell us what the consumer likes. Income/Budget and prices: the budget constraint tells us what the consumer can afford. Combining these two elements, we can identify the optimal bundle, yielding the maximum possible utility given the available financial means. This is represented by the tangency point between the budget constraint and an indifference curve. The optimal bundle is an equilibrium: there is no incentive for the consumer to choose an alternative bundle. At the optimal bundle, the ratio of marginal benefits to price must be identical across goods:  If this is not the case, the consumer could be happier by shifting consumption toward the good that has higher marginal benefits per dollar spent. ➔ An optimizing buyer makes decisions at the margin. What happens to the buyer’s problem if prices change? A change in prices affects the budget constraint ○ An increase in the price of either good will cause the budget constraint to pivot inwards. ○ A decrease in the price of either good will cause the budget constraint to pivot outwards. What happens to the buyer’s problem if her/his income changes? A change in the income shifts the budget constraint: ○ An increase in the income will cause the budget constraint to shift to the right. ○ A decrease in the income will cause the budget constraint to shift to the left. The Demand Curve With an understanding of how to spend optimally, we can begin to construct demand curves A demand curve plots the amount of a good that buyers are willing to purchase at different prices, ceteris paribus (i.e., holding all else equal). The willingness to pay is the marginal highest price that a buyer is willing to pay for a unit of a good. ○ An individual’s willingness to pay measured over different quantities of the same good makes up the individual’s demand curve.  ➔ Law of Demand: in almost all cases, the quantity demanded rises when the price falls, ceteris paribus So far we have talked about a single consumer. But we can easily extend the ideas that we have discussed to all buyers The market demand curve is the sum of the individual demand curves of all the buyers ○ Aggregating quantity demanded means fixing the price and adding up the quantities that each buyer demands. Moving along the demand curve allows us understanding how the quantity demanded changes when the price changes, holding all else equal. What happens if this ”all else” varies? And what is this ”all else”? A change in one of these major factors causes a shift in the demand curve (i.e., the quantity demanded at a given price will change): ○ Tastes and preferences ○ Income and wealth Normal goods: an increase in income causes the demand curve to shift to the right. Inferior goods: an increase in income causes the demand curve to shift to the left. ○ I Availability and prices of related goods Complement goods are goods that are consumed together. Substitute Goods are goods that are consumed alternatively to one another. ○ Number and scale of buyers ○ Buyers’ beliefs about the future Consumer Surplus An important concept that allows deriving a monetary measure of the gains and losses of the consumers when prices change is the consumer surplus. The consumer surplus is the difference between what a buyer is willing to pay for a good and what the buyer actually pays. ○ The consumer surplus is the vertical distance between the maximum willingness to pay and the market price, for each unit of the good. ○ This should not be confused with the total benefit of the consumer, which is the whole vertical line below the maximum willingness to pay. From the demand curve, it is possible to graphically visualize and numerically compute these elements: ○ The total benefit is represented by the entire area below the demand curve. This can be split into two parts: the consumer surplus, represented by the triangle area below the demand curve and above the market price line (marked in light-red). the total cost of purchasing all the goods at the market price, represented by the rectangular area below the market price line (marked in light-blue). What happens to the consumer surplus if the price increases? When the price increases, the consumer surplus decreases: ○ the higher the price, the smaller the difference between the willingness to pay and the market price. ○ the higher the price, the lower the quantity demanded. Demand Elasticities The size of the elasticity is important: if |εD| > 1, the demand is elastic (the relative change in quantity is larger than the relative change in price). if |εD| < 1, the demand is inelastic (the relative change in quantity is smaller than the relative change in price). if |εD| = 1, the demand is unit elastic (the relative change in quantity is exactly equivalent to the relative change in price). The price elasticity of demand depends not only on the slope of the demand curve but also on the price and quantity (the same demand curve with constant slope has different price elasticities). The demand elasticity can be affected by different factors: The closeness of substitutes (if there exist substitute goods, then |εD| will be higher). Budget share spent on the good (if relatively large amounts of income are spent on the good, then |εD| will be higher).  Available time to adjust demand (consumers respond much less to price changes in the short run than in the long run; so, in the long run, |εD| will be higher). Cross-Price Elasticity of Demand The cross-price elasticity measures the percentage change in quantity demanded of a good due to a 1% change in another good’s price. The cross-price elasticity is smaller than 0 for complement goods and larger than 0 for substitute goods. Imagine that you observe an increase in the price of good y from 2 euro to 8 euro, causing the quantity demanded good x to rise from 100 to 400 units;. Income Elasticity of Demand The income elasticity of demand measures the percentage change in quantity demanded of a good due to a 1% change in income. For normal goods, the income elasticity is positive, while for inferior goods the income elasticity is negative. Imagine that you observe an increase in the income of a consumer from 1’800 euro to 2’000 euro, causing the quantity demanded for a good to rise from 50 to 80 units; The second lecture on supply and demand. To understand the sellers’ behavior and how much they decide to produce, we need to understand the following: Production function: how does a firm produce a good? Input and production costs: how much does it cost to produce a good? Output prices and profits: what is the reward of the firm for producing and selling a good? The Production Function The production function relates the quantity of input used in a production process to the quantity of output produced. ○ The inputs that a firm buys and uses in its production processes can be categorized as follows: Fixed factors of production: inputs that cannot be changed in the short run (e.g., physical capital - machines, buildings). Variable factors of production: inputs that can be changed in the short run (e.g., labor). ⇒ In the long run, all inputs can be varied. An important concept is the marginal product (MP), which is the change in total output associated with using one additional unit of an input. The Law of Diminishing Returns states that, at a certain point, the successive increases in inputs eventually lead to less additional output. ○ Adding too many workers can actually decrease overall production. Firm Costs The total cost of production is what a firm must pay for its inputs, and it is the sum of variable and fixed costs. ○ Variable costs are associated with variable factors of production, which change along with a firm’s output.  ○ Fixed costs area associated with fixed factors of production, which a firm must pay even if it produces zero output. Average costs: Average total cost is the total cost divided by the total output. ○ Average variable costs are the total variable costs divided by the total output. ○ Average fixed costs are the total fixed costs divided by the total output. Marginal cost: the change in total cost associated with producing one additional unit of output Revenue and reward: The third component of the seller’s problem is related to the rewards of producing and selling a good or a service. The revenue of a firm is the amount of money it brings in from the sale of its outputs, which is determined by the price of goods sold times the number of units sold: Marginal revenue: the change in total revenue associated with producing one additional unit of output. We have seen the main ingredients allowing us to understand the behavior of the sellers: Production function: how firms combine inputs to produce a good or a service. Firm costs: what firms need to pay to produce a good or a service. Firm revenue: what firms obtain from selling a good or a service. ⇒ Combining these three elements, we can show how a firm maximizes its profits. The Marginal Output Rule: The firm identifies the profit maximizing level of output at the intersection of the marginal cost and marginal revenue curves. How can we visualize and compute the level of profits at this point? Because profits are total revenues minus total costs, we can write total profits as: The Supply Curve: construct supply curves: A supply curve plots the amount of a good that sellers are willing to sell at different prices, ceteris paribus. The willingness to accept is the marginal lowest price that a seller is willing to get paid to sell an extra unit of a good. ○ Willingness to accept is the same as the marginal cost of production. ⇒ Law of Supply: in almost all cases, the quantity supplied rises when the price rises, ceteris paribus. So far we have talked about a single seller. But we can easily extend the ideas that we have discussed to all sellers ○ The market supply curve is the sum of the individual supply curves of all the sellers. Aggregating quantity supplied means fixing the price and adding up the quantities that each seller is willing to sell. A change in one of these major factors, causes a shift in the supply curve (i.e., the quantity supplied at a given price will change): Prices of inputs used to produce the good Technology to produce the good Number and scale of sellers Sellers’ beliefs about the future When prices are so low that the firm does not even bring in enough money to cover its average variable costs, the firm should shut-down. Shutdown: a short-run decision to not produce anything during a specific period. Should the firm produce in the short run if total costs exceed total revenues? ○ Yes, because fixed costs are sunk costs: costs that, once committed, can never be recovered and should not affect current and future production decisions. ⇒ The short-run supply curve is the portion of the marginal cost curve that lies above average variable costs. In the long run, even machines and buildings can be purchased, expanded or sold. Hence, in the long run, a firm is able to shift to different cost curves associated with different levels of all its inputs. ⇒ The long run supply curve is the part of the MC curve that is above the long run average variable costs curve. Producer Surplus  The producer surplus is the difference between the market price and the marginal cost curve (i.e., the seller’s willingness to accept). ○ From the supply curve, it is possible to graphically visualize and numerically compute the producer surplus, represented by the triangle area below the market price and above the supply curve (marked in light-red). When the price increases; the producer surplus increases ○ the higher the price, the larger the difference between the marginal cost to produce the good and the market price. ○ the higher the price, the higher the quantity supplied. Price Elasticity of Supply The price elasticity of supply measures the percentage change in quantity supplied of a good due to a 1% change in its price I Imagine that you observe an increase in the price of a good from 5 euro to 10 euro, causing the quantity supplied to rise from 200 to 600 units; As for demand elasticities, the size of the elasticity is important: if εS > 1, the supply is elastic (the relative change in quantity is larger than the relative change in price). if εS < 1, the supply is inelastic (the relative change in quantity is smaller than the relative change in price). if εS = 1, the supply is unit elastic (the relative change in quantity is exactly equivalent to the relative change in price) Market Equilibrium: To understand how the behavior of buyers and sellers jointly determine the market price and the quantity of goods transacted Competitive markets converge to the price at which quantity supplied and quantity demanded are the same. ○ The competitive equilibrium is the crossing point of the supply curve and the demand curve. ○ The competitive equilibrium price equals quantity supplied and quantity demanded. ○ The competitive equilibrium quantity is the quantity corresponding to the competitive equilibrium price When the market price is above the competitive equilibrium price, quantity supplied exceeds quantity demanded, creating excess supply. This situation induces all the sellers to lower the price until it reaches the competitive equilibrium price. When the market price is below the competitive equilibrium price, quantity demanded exceeds quantity supplied, creating excess demand. This situation induces all the sellers to increase the price until it reaches the competitive equilibrium price. Transnational corporations Transnational cooperations definition: 1. Is a firm with the power to coordinate and control operations in more than one country, even if it does not own them 2. Is a cooperation or enterprise that manages production establishments or delivers services in at least two countries 3. Are enterprises including parent companies and their foreign affiliations, a parent enterprise is one that controls assets of other entities in countries other than their own. Usually by owning a certain equity capital stake of the company. More than 10% of the stake owns voting power Theory of spatial development of multinational Hakanson = MNE en growth Vernon= MNE location pattern and life cycle Dunning= MNE and OIL and intangible capital Gereffi= MNE and global value chains Different modes of foreign expansion for TNC The spatial development model of Hakason Raymond Vernon Product life cycle Standardization and important of low-cost production increases through time -> Modernizing this scheme would change america to EU and EU to China  Firms will separate by location, according to the stage of the life cycle R&D high level decision making will be done in dominant central cities More mature products in peripheral areas ○ Often standardized large scale products OIL Paradigm Dunning Three aspects influence the decision whether or not to operate abroad 1. Ownership specific advantages a. Offering protectable company specific competition abroad 2. Location specific factors a. Market costs in the production of a country. 3. Internalization of owner specific advantages a. Keeping specific know-how in hands, (not giving licensing away and still producing yourself) Stakeholder Capitalism: Traditional view on a firm: inputs by investors, employees, and suppliers lead to output for the customer. Gereffi: 5 global value chain governance Understanding supply chains Three factors that determine the type of governance in a global value chain The complexity of information and knowledge transfer required to sustain a particular transaction, particularly with respect to produce and process specifications The extent to which this information and knowledge can be codified/standardized and there for transmitted efficiently and without transaction specific investments between the parties to the transactions The capabilities of actual and potential suppliers in relation to the requirements of a transaction Market and hierarchy as the two governance extremes; Markets: Do not have to be completely transitory Typical for there to be spot markets ○ Persist over time with repeating transactions The cost of switching are low for both parties Von Thunen and Alonso the classics Von thunen: 1820 Understanding agricultural land use The bid rent concept Urban economics zoning models from sociologist and geographers of the university of chicago Urban economics: zoning models from the UC William Alonso 1939-1999 Location and land use Location equilibrium for firms and house holds  Also alonso is more refined in the it's not about mear distance as it is time to get from one place to another ○ Grid like zigzag layered on top of the map to represent blocks found in most cities Brueckner, JK, Thisse, JF, ZENOUT, Y 1999 Hoover Agglomeration economies Internal returns to scale ○ Firm specific Economies of localization ○ Industry specific Economies of urbanization ○ City specific, across different sectors, large local market possibilities Criticism: don't forget importance of the internal return to scale Alfred marshal: Principles of economics (1890) Skeptic of the urbanization of london england, but says is one of the most striking movements and that it is heading towards the country's specialization, which history records as the increase of non agricultural population. Specialization = division of labour = Larger scale production In the middle ages; to be accepted into the city and work in the walls of the city you had to have a certain level of specialization to trade or sell your products, or to travel to different countries to trade Specialization that goes together with larger scale of production is one of the major drivers of change in our economic system Live music, cd, digital platforms eg (process of standardization) Large scale production for more impressive numbers Economies of scale (internal): lower cost per unit so cheaper products Alfred Weber: 1909 Cost of materials Transport costs of resources and finished products D.M. SMITH Location theory Classical location theory Central place theory: Christaller & Lösch Christaller: 1893-1969 The theory of christaller (central place theory) Only distance is a variable All other influences are forgotten (made the same everywhere) 1) the surface of the earth ○ Assumption : tspace is isotropic Transport is uniform; cost only determined by distance Resources are present anywhere 2) its inhabitants ○ Assumptions: people/small settlemesnt spread evenly everywhere Same characteristics and incomes Humans are omnipotent (are able to know and do everything that is relevant) Definition The range: The maximum distance the customer is willing to travel to buy the product The threshold Are the minimal sales necessary for the producer to make soem profit In the isotrope space with consumers everywhere that is with a circle radius (bigger the radius the more consumers) Hierarchy of places: Chicago August Losch: Hotelling: Ice Cream Experiment Regional policies: technology and innovation: Product innovation Process innovation (how we make stuff not what we’re selling) Four degrees of innovation:  1. Incremental (improving the product from one version to another better version) 2. Radical (a new idea, a new solution to a problem, flip to touch screen phones) 3. Change of the technology system (impacts different sector, eg space crafts, NASA technology reaching our daily use) 4. Change in the techno-economic paradigm (internet, digitalization, computers) Joseph Schumpeter Creative destruction The introduction of new ideas, that come up at the expense of the existing status quo New combinations Inspirer of evolutionary economic geography Old feeling pressure to reinvent themselves 1. A new product, there would be other products doing the same thing and 1 would be most attractive. Competing with one another, with a winner. Technological change -> lower transaction costs and transportation costs Time-space convergence Transportation is not a transaction cost ○ In a more complex system, coordination costs may go up There is more to it than technology ○ Triple convergence The availability/effect of technology is asymmetric across space Triple convergence: Technological progress -> lower transport costs Tradability of products Organization of systems (standardization) Tradability: tradable and non-trandable Improved organization of a system through standardization (trains) upstream = the process going into producing a product Downstream= selling the product The box: how the world became smaller and the economy bigger Transaction costs go down David Ricardo (1772-1823) Comparative advantage  Builds the idea of absolute advantage introduced by adam smith Countries specialize in the product in which they have a competitive advantage Barrier: transaction costs Expectation: if transaction costs decline, regions specialize Lecture 4: Spiky world clustering in a globalized world Part 1: Agglomeration benefits and clusters Cluster: “a business cluster is a geographic concentration of interconnected businesses, suppliers, And associated institutions in a particular field” Hoover: Three types of agglomeration benefits ○ Internal returns to scale At the firm level ○ Urbanization economies For all actors and firms ○ Localization economies For specific firms Clusters in the global shift book ○ Generalized clusters Urbanization benefits ○ Specialized clusters Localization benefits Marshal- Arrow- Römer Localization benefits ○ As a result of input and output relations ○ As a result of a skilled labor market  ○ As a result of knowledge spillovers/externalities Externality: “ A side effect on others following from the actions of an individual or group” Eg pollution, health effects on someone living nearby, ruined environment, less air quality Positive externality; a bridge to the station cause of the Groninger museum Interdependencies Trader interdependencies ○ Transactions ○ Input-output relationships Untraded interdependencies ○ Culture ○ Labourpools ○ Institutions ○ Knowledge Knowledge Implicit knowledge Tacit knowledge Hard to transfer Codified knowledge Easy to transfer So tacit knowledge is key in innovations and it is difficult to transfer (transaction costs are still high, room tiger, close together in order to share the knowledge) Cognitive distance: the distance that between your set of knowledge (experience, ideas) and knowledge of someone else, can be high and low Jane jacobs: Externalities benefit from diversity Stressing the learning new things from different people Marshal arrow romer Externalities benefit from specialization More about 1 or 2 clusters of sectors that work well together Part 2: what in the world is going on? The central place theory Christaller: Two main theories: ○ Range ○ Threshold With decreasing transaction cost, what happens to the range of products? ○ It increases Situation 2 has less transaction costs Situation 3, transaction costs are 0, all are working in the same market Marginal costs Costs of producing virtually zero (music on spotify for example) Technological progress leads to … 1) Decreasing transaction costs for many products, which increases their ranges and it increases competition between suppliers a) The market s quickly saturated b) Competitive edges are short-lived c) Product life cycle tend to become shorter 2) The production processes of many products change so that innovation becomes more important Part 3: The implications of the premium on being smart Lecture 4: NEW ECONOMIC GEOGRAPHY The world is spiky Paul Krugman Born in 1953 NEW YORK, ○ works also new york times ○ won Nobel prize One of the founding fathers NEG New Trade Theory NEG Liberal (suspicious) NEG Who what why is produced or produces it Von thunen, hotelling and weber NEG’s offers a new way of answering his question Clustering is a part of the model itself (it is endogenous) Assumption of increasing returns to scale Exogenous: having an external cause or origin. "technological changes exogenous to the oil industry Endogenous: having an internal cause or origin. "the expected rate of infection is endogenous to the system Increasing returns to scale Economies of scale is average cost decreasing as it has more and more outputs ○ Per unit output the average price, cost of input is relatively low. When you increase the output workers/consumers Love of variety More options on the labor market People may settle for a lower wage to enjoy the options Without transport costs, there is no geography Very intimately connected Understanding the difference The core model NEG: Two regions, two sectors Manufacturing: mobile, increase returns to scale, many variations of the product Agriculture: immobile (fixed), constant returns to scale and one product Labour in manufacturing is also mobile No transport cost for food but iceberg transportation NEG Agriculture: There is always a demand for food The price (and therefore also wage) is the same in both regions ○ The transportation costs are zero so in effect, they are the same market. NEG The result is a trade-off between ○ Increasing returns to scale as a result of agglomeration-> clustering ○ Transportation costing and diseconomies of scale ->spreading If transportation costs are low total clustering of manufacturing production and workers will occur in the sector Home Market Effect Centrifugal and centripetal Criticism: Negative effects of agglomeration and not factored into the model If used as the basis of social-economic policies, it results in social-spatial inequalities Institutions may not play a role Transaction period not taken into account Exam prep: Solow Growth Model Cobb-Douglas production function: