Econ mics at Bath John G. Sessions Professor of Economics

Biography BSc (Southampton), MSc (LSE), PhD (LSE) Joined Bath 2003 Visiting Professor:Cornell (USA), Dartmouth (USA), Paris II (France), Trier (Germany) External Examiner: LSE, Royal Holloway, UEA, Swansea, Loughborough, Aberdeen, Birbeck, Hull, Dundee

Outline  Part 1: What is Economics and is it for me?  Part 2: Why Study Economics at Bath?

What is Economics?  Economics as the ‘science of choice’ studies how agents (i.e. people, firms, governments) make choices when:

What is Economics?  Economics as the ‘science of choice’ studies how agents (i.e. people, firms, governments) make choices when:  wants are insatiable

What is Economics?  Economics as the ‘science of choice’ studies how agents (i.e. people, firms, governments) make choices when:  wants are insatiable  resources are limited

? e.g. Spend today or spend tomorrow?

What is Economics?  Economics as the ‘science of choice’ studies how agents (i.e. people, firms, governments) make choices when:  resources are limited  wants are insatiable

What is Economics?  Economics as the ‘science of choice’ studies how agents (i.e. people, firms, governments) make choices when:  resources are limited  wants are insatiable  interests often clash with those of other decision makers

Economic Methodology

 Real word economic issues are incredibly complex and many factors are at work simultaneously

Economic Methodology  Real word economic issues are incredibly complex and many factors are at work simultaneously  Unlike in physics or chemistry, difficult for economists to conduct controlled (i.e. laboratory) experiments

Economic Methodology  Real word economic issues are incredibly complex and many factors are at work simultaneously  Unlike in physics or chemistry, difficult for economists to conduct controlled (i.e. laboratory) experiments  Therefore, to study and understand a particular real world phenomenon, economists construct models

Economic Methodology  Economic models are simplified abstract constructs designed to shed light on a particular phenomenon observed in the real world

Economic Methodology  Economic models are simplified abstract constructs designed to shed light on a particular phenomenon observed in the real world  Models may be graphical …

p 0 q

Economic Methodology  Economic models are simplified abstract constructs designed to shed light on a particular phenomenon observed in the real world  Models may be graphical …

Economic Methodology  Economic models are simplified abstract constructs designed to shed light on a particular phenomenon observed in the real world  Models may be graphical …  … but are usually formulated using mathematical concepts

Economic Methodology  Demand:  Supply:  Equilibrium:

Economic Models in Action  Imagine that a government wishes to raise some tax revenue  Two schemes are being considered: (i) Sales Tax; (ii) Purchase Tax

Sales Tax £t imposed on the seller of the good Seller responsible for forwarding tax to government Purchase Tax £t imposed on the buyer of the good Buyer responsible for forwarding tax to government

Which scheme would you prefer? Depends on whether buying or selling? To understand, we need to examine how markets work i.e. we need to understand demand and supply

p q 0 Demand Supply q*q* p*p*

Demand Formally q d = q d (p) Quantity demanded depends upon price ‘Normal’ Demand Function

q p 0

Demand We can equivalently think of price depending upon the quantity consumed p d = p d (q) ‘Inverse’ Demand Function

p q 0

p q … quantity demanded at a particular price

p q … buyer’s reservation price (i.e. maximum price buyer wiling to pay price per unit)

Demand Usually, we presume that q d depends negatively on (own) price, but this is not always the case (Giffen goods) Note: ‘Movements Along’: Arise as a result of changes in own price. ‘Shifts In’: Arise when anything else changes. Consider the latter …

Demand Tax Consider unit purchase tax Consumer liable for £t per unit purchased Thus, imposition of tax will reduce consumer’s reservation price for the good

p 0 q (Unit) Purchase Tax

p 0 q tax (Unit) Purchase Tax

p 0 10 q 5 3 t = £2 (Unit) Purchase Tax

Supply The Supply Curve Shows the relationship between price and quantity supplied ceteris paribus That is: q s at particular price per unit (minimum) price per unit suppliers willing to accept for particular quantity.

p q 0

p q … quantity supplied at a particular price

p q … seller’s reservation price (i.e. minimum price seller wiling to accept per unit)

Supply Tax Consider unit sales tax Seller liable for £t per unit purchased Thus, imposition of tax will increase seller’s reservation price for the good

p 0 q (Unit) Sales Tax

p 0 q tax (Unit) Sales Tax

p 0 q t = £ (Unit) Sales Tax

How do the two types of tax impact upon buyers and sellers? Assume first a sales tax – i.e. a tax is imposed upon sellers per unit sold How does this affect market equilibrium?

p 0 q (Unit) Sales Tax

p 0 q t

Thus, a unit sales tax: (i) Reduces the quantity traded; (ii) Raises the equilibrium price

Now, consider a unit purchase tax …

p 0 q (Unit) Purchase Tax

p 0 q

5.Comparison Thus, a unit purchase tax: (i) Reduces the quantity traded (ii) Reduces the equilibrium price

So, which alternative, as a buyer, would you prefer? Must consider gross and net price Unit tax drives a wedge between price paid and received

Unit Sales Tax … Seller is responsible for paying the tax Net price seller receives is equilibrium price less tax

p 0 q t (Unit) Sales Tax

p 0 q t Buyer Pays Seller Receives (Unit) Sales Tax

Unit Purchase Tax Buyers is responsible for tax Net price buyer pays is equilibrium price plus tax

p 0 q (Unit) Purchase Tax

p 0 q t

p 0 q t Buyer Pays Seller Receives (Unit) Purchase Tax

It can be shown that the burden of the tax is independent of upon whom it is imposed Buyer and seller share the burden depending upon slopes of demand and supply curves Slopes affect ability of buyers and seller to ‘pass on’ the burden of the tax to one another

p 0 q (Unit) Sales Tax

p 0 q t

p 0 q t Buyer Pays Seller Receives (Unit) Sales Tax

p 0 q t A B Buyer Pays Seller Receives (Unit) Sales Tax

p 0 q t A B Buyer’s Burden Seller’s Burden Buyer Pays Seller Receives (Unit) Sales Tax

p 0 q t (Unit) Purchase Tax

p 0 q t Buyer Pays Seller Receives (Unit) Purchase Tax

p 0 q t C D Buyer Pays Seller Receives (Unit) Purchase Tax

p 0 q t C D Buyer’s Burden Seller’s Burden (Unit) Purchase Tax

Thus:A + B = t = C + D A = Buyer’s Burden = C B = Seller’s Burden = D The relative tax burden does not depend upon whom the tax is imposed The buyer and seller will share the burden depending upon the slopes of their demand and supply curves

Try to prove this using the following linear (normal) demand and supply equations: Solve for the pre- and post-tax equilibria under both a sales and purchase tax and show that the relative burdens are the same

It can be shown that … … under both a unit sales tax and a unit purchase tax

It can be shown, for example, that a seller is able to pass on more of the burden of a sales tax the steeper (i.e. less elastic) is the buyer’s demand curve …

p 0 q t Figure 15: (Unit) Sales Tax A B A = Buyer’s Burden B = Seller’s Burden

p 0 q t A B A 1 B1B1 A = Buyer’s Burden B = Seller’s Burden Figure 15: (Unit) Sales Tax

In the limit, if the demand curve is vertical (i.e. perfectly inelastic) then the seller is able to pass on all of the burden of a sales tax to the buyer …

p 0 q t A B A = Buyer’s Burden B = Sellers Burden A2A2 Figure 15: (Unit) SalesTax

Note, vertical demand curve implies b = 0 such that: Buyer (Seller) bears all (none) of the burden

The relative burden of a unit tax is determined by the relative slopes of the demand and supply curves These slopes determine extent to which buyers and sellers can ‘pass on’ the burden of the tax to one another Who is legally liable for the tax is not important

But … … the tax does impact on ‘social welfare’

Demand and supply curves – reservation price schedules of buyers and sellers That is, the maximum (minimum) price buyers (sellers) are prepared to pay (accept) If we know prices buyers (sellers) actually pay (receive), then we can derive a measure of aggregate surplus and, thus, social welfare

p q Consumer Surplus (CS) pdpd q * = 5 p* =

p q Consumer Surplus (CS) pdpd q * = 5 p* = TWP = = 30 p * q* = 2*5 = 20 CS = 10

p q 0 Consumer Surplus (CS) q*q* p*p* Expenditure = p * q * CS pdpd

p q 0 Producer Surplus (PS) Supply q*q* p*p* PS Revenue = p * q * q*q* p *

p q 0 Social Welfare (W) Supply q*q* p*p* PS CS W = CS + PS pdpd

p 0 q t CS PS Social Welfare and Tax Buyer Pays Seller Receives

p 0 q t CS PS T = tq Social Welfare and Tax

p 0 q t CS PS DWLT Social Welfare and Tax

Relative burden of unit tax is determined by the relative slopes of demand and supply curves Legally liability for tax does not affect relative burden But, both sales and purchase unit taxes lead to the same deadweight loss in social welfare.

Why Bath?  Best campus University 2014 with:  world class research and commitment to excellence in teaching  great library and computing facilities  state-of-the-art sports centre  new arts centre and student residences

Why Bath?  Best Campus University 2014 with:  World class research and commitment to excellence in teaching  Excellent library and computing facilities  State-of-the-art sports centre  New arts centre and student residences

The Bath Philosophy  We emphasise academic depth alongside development of transferable skills through our placement scheme  Course Culture  Enquiry-based learning, learner independence, time management, self motivation  Self-directed study (about 15 contact hours per week)  Key analytical and interview skills developed in year 1 to prepare you for your placement year

Why Bath?  Top 10 Economics Department (6 th in The Complete University Guide 2016) with:  International and dynamic staff who are excited about high quality and research-led teaching  Long-standing industry placement scheme built on excellent contacts with top City firms and Government departments and run by a dedicated placement office  Excellent employment prospects: 91% of our graduates have a grad job within 12 months of graduation, rest choose further study or gap year (2 nd after Cambridge, see Guardian Econ League Table)

The Department of Economics  40 Academic Staff  Number of StudentsBSc700 MSc 160 PhD 30  Three BSc Degree Programmes  Three MSc Programmes  PhD Programme

The Bath Economics Programmes  Single Honours Programme  BSc Economics  Joint Honours Programmes  BSc Economics & Politics  BSc Economics & Mathematics  All programmes with / without placement

Programme Structure: BSc Economics  Eight compulsory Units in Year 1  Intro to Economic Theory: Micro- and Macroeconomics  Intro to Quantitative Methods: Mathematic (2); Statistics; Economics Data Analysis  Institutional Context: Modern World Economy; Economic Policy in the UK  Two Optional Units in Year 1  Can be from outside the department; e.g. accounting, corporate finance, politics; modern language, etc.

Programme Structure: BSc Econ & Maths  Ten Compulsory Units in Year 1 (no options)  From Economics Department  Microeconomics  Macroeconomics  Mathematical Economics  From Mathematics Department  Analysis (2)  Algebra (2)  Probability and Statistics (2)  Methods and Applications

Programme Structure: BSc Econ & Politics  Nine Compulsory Units in Year 1  From Econ Department  Intro to Economic Theory (Micro + Macro), Intro to Quantitative Methods (Maths 1, Stats, Data Analysis), Modern World Economy  From Politics Department  Key Concepts in Politics  Political Ideologies  International Relations & Global Politics  One Optional Unit in Year 1

Programme Structure: BSc Economics  Organisation  Two lectures and one seminar in each unit  Assessment is mix of coursework and final exam (Jan & May)  First Year is ‘pass or fail’ – does not contribute to final degree classification; Second-Final Year is 30:70  But... very important to lay foundation and to signal to prospective work placement employers.

A ny Q uestions ????? Contact Economics