Economics An Introduction & Review of Some Basic Economic Principles for Joules To Dollars J2$

Frederick Soddy Nobel Prize in Chemistry in 1921 for his work on radioactivity Inspired the field of ecological economics Became dismayed with the Chemistry as a discipline about the time of WWI and turned to economics, specifically political economy Ideas were generally discredited at that time, but in fact he was an early proponent of abandoning the gold standard, market-determined foreign exchange rates, fiscal policy as a tool for stabilizing the macroeconomy, and government agencies responsible for collecting and reporting economic statistics. Also argued against fractional-reserve banking.

Circular Flow Chart of the Macroeconomy A Traditional View Households GovernmentFirms Markets for Factors of Production Market for Goods & Services Financial Markets Rest of the World Private Saving & Borrowing Taxes Net of Transfer Pmts Consumption Govt Purchases Factor Pmts Govt Borrowing Imports Exports Borrowing & Saving Taxes Net of Subsidies J2$ Factor Payments Income Revenue Investment Borrowing & Saving

Households GovernmentFirms Markets for Factors of Production Market for Goods & Services Financial Markets Rest of the World Private Saving & Borrowing Taxes Net of Transfer Pmts Consumption Govt Purchases Factor Pmts Govt Borrowing Imports Exports Borrowing & Saving Taxes Net of Subsidies J2$ Factor Payments Income Revenue Investment Borrowing & Saving Circular Flow Chart of the Macroeconomy A Traditional View

Households GovernmentFirms Markets for Factors of Production Market for Goods & Services Financial Markets Rest of the World Private Saving & Borrowing Taxes Net of Transfer Pmts Consumption Govt Purchases Factor Pmts Govt Borrowing Imports Exports Borrowing & Saving Taxes Net of Subsidies J2$ Factor Payments Income Revenue Investment Borrowing & Saving Circular Flow Chart of the Macroeconomy A Traditional View

Households GovernmentFirms Markets for Factors of Production Market for Goods & Services Financial Markets Rest of the World Private Saving & Borrowing Taxes Net of Transfer Pmts Consumption Govt Purchases Factor Pmts Govt Borrowing Imports Exports Borrowing & Saving Taxes Net of Subsidies J2$ Factor Payments Income Revenue Investment Borrowing & Saving Circular Flow Chart of the Macroeconomy A Traditional View

Households GovernmentFirms Markets for Factors of Production Market for Goods & Services Financial Markets Rest of the World Private Saving & Borrowing Taxes Net of Transfer Pmts Consumption Govt Purchases Factor Pmts Govt Borrowing Imports Exports Borrowing & Saving Taxes Net of Subsidies J2$ Factor Payments Income Revenue Investment Borrowing & Saving Circular Flow Chart of the Macroeconomy A Traditional View

Households GovernmentFirms Markets for Factors of Production Market for Goods & Services Financial Markets Rest of the World Private Saving & Borrowing Taxes Net of Transfer Pmts Consumption Govt Purchases Factor Pmts Govt Borrowing Imports Exports Borrowing & Saving Taxes Net of Subsidies J2$ Factor Payments Income Revenue Investment Borrowing & Saving Circular Flow Chart of the Macroeconomy A Traditional View

Households GovernmentFirms Markets for Factors of Production Market for Goods & Services Financial Markets Rest of the World Private Saving & Borrowing Taxes Net of Transfer Pmts Consumption Govt Purchases Factor Pmts Govt Borrowing Imports Exports Borrowing & Saving Taxes Net of Subsidies J2$ Factor Payments Income Revenue Investment Borrowing & Saving Circular Flow Chart of the Macroeconomy A Traditional View

Households GovernmentFirms Markets for Factors of Production Market for Goods & Services Financial Markets Rest of the World Private Saving & Borrowing Taxes Net of Transfer Pmts Consumption Govt Purchases Factor Pmts Govt Borrowing Imports Exports Borrowing & Saving Taxes Net of Subsidies J2$ Factor Payments Income Revenue Investment Borrowing & Saving Circular Flow Chart of the Macroeconomy A Traditional View

Households GovernmentFirms Markets for Factors of Production Market for Goods & Services Financial Markets Rest of the World Private Saving & Borrowing Taxes Net of Transfer Pmts Consumption Govt Purchases Factor Pmts Govt Borrowing Imports Exports Borrowing & Saving Taxes Net of Subsidies J2$ Factor Payments Income Revenue Investment Borrowing & Saving Circular Flow Chart of the Macroeconomy A Traditional View

Households GovernmentFirms Markets for Factors of Production Market for Goods & Services Financial Markets Rest of the World Private Saving & Borrowing Taxes Net of Transfer Pmts Consumption Govt Purchases Factor Pmts Govt Borrowing Imports Exports Borrowing & Saving Taxes Net of Subsidies J2$ Factor Payments Income Revenue Investment Borrowing & Saving Circular Flow Chart of the Macroeconomy A Traditional View

Households GovernmentFirms Markets for Factors of Production Market for Goods & Services Financial Markets Rest of the World Private Saving & Borrowing Taxes Net of Transfer Pmts Consumption Govt Purchases Factor Pmts Govt Borrowing Imports Exports Borrowing & Saving Taxes Net of Subsidies J2$ Factor Payments Income Revenue Investment Borrowing & Saving Circular Flow Chart of the Macroeconomy A Traditional View

Households GovernmentFirms Markets for Factors of Production Market for Goods & Services Financial Markets Rest of the World Private Saving & Borrowing Taxes Net of Transfer Pmts Consumption Govt Purchases Factor Pmts Govt Borrowing Imports Exports Borrowing & Saving Taxes Net of Subsidies J2$ Factor Payments Income Revenue Investment Borrowing & Saving Circular Flow Chart of the Macroeconomy A Traditional View

Households GovernmentFirms Markets for Factors of Production Market for Goods & Services Financial Markets Rest of the World Private Saving & Borrowing Taxes Net of Transfer Pmts Consumption Govt Purchases Factor Pmts Govt Borrowing Imports Exports Borrowing & Saving Taxes Net of Subsidies J2$ Factor Payments Income Revenue Investment Borrowing & Saving Circular Flow Chart of the Macroeconomy A Traditional View

Households GovernmentFirms Markets for Factors of Production Market for Goods & Services Financial Markets Rest of the World Private Saving & Borrowing Taxes Net of Transfer Pmts Consumption Govt Purchases Factor Pmts Govt Borrowing Imports Exports Borrowing & Saving Taxes Net of Subsidies J2$ Factor Payments Income Revenue Investment Borrowing & Saving Circular Flow Chart of the Macroeconomy A Traditional View

Households GovernmentFirms Markets for Factors of Production Market for Goods & Services Financial Markets Rest of the World Private Saving & Borrowing Taxes Net of Transfer Pmts Consumption Govt Purchases Factor Pmts Govt Borrowing Imports Exports Borrowing & Saving Taxes Net of Subsidies J2$ Factor Payments Income Revenue Investment Borrowing & Saving Circular Flow Chart of the Macroeconomy A Traditional View

Model of An Ecological Economic System J2$ Education, Training, Research Restoration, Conservation Institutional Rules, Norms, etc. Building Natural Capital Human Capital Social Capital Manufactured Capital Limited Substitutability Between Capital Forms Solar Energy Economic Production Process Goods & Services GNP Wastes Evolving Cultural Norms & Policy Inves tment Decisions about taxes, community spending, education, science and technology, etc., based on complex property rights regimes Waste Heat Negative Impacts on All Forms of Capital Well Being (Individual & Community) Consu mption (Based on Changing, Adapting Preferences) Individual | Common | Public Complex Property Rights Regimes Ecological Services / Amenities Positive Impacts on Human Capital Capacity Costanza, R., June Bioscience, Vol. 51, No. 6

Soddy & Energy Economics Interpretive questions? Why were Soddy’s ideas dismissed by academics, policy makers, and financiers? Is debt a bad thing when it’s tied to energy efficiency or improvements in ecosystem services? “Energy and the U.S. Economy” was written at a time of energy crises; how might the relationships between energy and the economic performance be different today? J2$

Review of Microeconomics Glossary of terms, concepts, and solution methods J2$

Comparing Benefits & Costs Assume a linear world Typically, people will purchase less of a good or service (including ecosystem services) the higher the price Consider buying “nut” coal to use in your wood stove $ Price Quantity Demand Suppose at $5/bag… You’d buy 10 bags $5 10 But if the price were $25/bag you wouldn’t buy any coal $25 J2$

Total Benefits Economists typically use your total willingness to pay to define total benefits We add up the amount you’re willing to pay for the first, second, …, ninth and tenth bags of coal $ Price Quantity $5 10 $25 We calculate the area under the demand curve (½ x 10 x 20) + (5 x 10) = $150 J2$

Market Demand Market demand curves for consumer goods and services are simply the sum of individual demand curves Note that while our theory tells us that demand depends on price: Q = f(P) We graph the inverse form of the demand curve: P = g(Q) We do this because of an assumption that price adjusts in order to equilibrate demand with supply, i.e., price determines quantity J2$

Total Costs Suppose the cost of producing a bag of nut coal looks like this In general, total cost will be equal to variable costs plus fixed costs Total variable cost is the sum of the marginal costs Let’s assume zero fixed cost So total cost will be the sum of the marginal costs $ Price Quantity 10 $15 J2$

Net Benefits Net benefit is the amount by which benefits exceed costs The area under the demand curve that lies above the cost (supply) curve J2$ $ Price Quantity Net Benefit

Cost-Benefit Analysis Most of the decisions you make involve weighting costs against benefits Opportunity Cost plays an important role in these calculations Defn: that which we forgo, or give up, when we make a choice or a decision Costs and Benefits generally accrue over time Dynamic, rather than a static, decision Examples: Colby’s bioimass plant, new solar array on the top of the alumini/development building, purchasing a new car, insulating your home. J2$

Dynamic Analysis Which is worth more: $100 today or $100 tomorrow? Why? Inflation erodes the purchasing power of money Plus, $100 today represents an opportunity to ‘invest’ … … earning a rate of return [e.g., interest on savings] … … and thus increasing your purchasing power in the future J2$

Present Value J2$

Net Present Value J2$

Discounting the future J2$

Colby’s Biomass Facility Scenario A: Base CaseFY2011FY2012…FY2041 Utility Relocations $ 550,000 General Site and Utilities $ 373,000 Building $ 2,779,000 Equipment $ 1,698,500 Soft Costs $ 1,367,000 Grant $ (750,000) Debt Proceeds $ (10,495,000) Debt Service Expenses (5.5%, 30 year) $ 737,000… Total Payments $ 6,017,500 $ (5,280,500) … $ 737, % $ 10,450,312 J2$

Return to Supply & Demand Analysis Equilibrium J2$

Static Equilibrium Notice that no one is willing to supply coal at $5 per bag At $5/bag there exists excess demand In most situations this will cause an increase in the price of coal Similarly, at $25/bag there is an excess supply of coal In most situations this will cause a decrease in the price of coal Price will adjust to resolve excess demand and supply J2$ $ Price Quantity $5 $25 QeQe PePe

Elasticity We measure the responsiveness of demand to changes in price using the elasticity We say that a good is inelastic if a change in price has very little effect on demand Elastic goods and services are those for which small changes in price have a large impact on the quantity demanded J2$

Inelastic vs Elastic $ Price Quantity $ Price Quantity Inelastic Elastic J2$ PP QQ PP QQ

How do you remember the difference? nelasticlastic J2$

Modeling Supply & Demand Demand function  determinants Price of the good or service Price of substitutes & compliments Income Preferences (stochastic term) Supply side Price of the good or service Factor prices (wages, energy costs) Advertising/Marketing Unanticipated events (stochastic term) J2$ Price Quantity QeQe PePe +    + + 

Moving along a curve vs shifts in a curve Changes in the quantity demanded of a good or service that result from a change in its price are reflected by reequilibrating movements along a demand curve Similarly, changes in the quantity supplied resulting from changes in the price of a good or service are reflected by movements along the supply curve J2$ Price Quantity QeQe PePe

Exogenous changes Changes in factors determined outside our model will redefine the (P, Q) relationship resulting in a new demand or supply curve We draw our demand/supply relationships for pre-determined values of our explanatory variables Consider a ceteris paribus increase in income from Y 0 to Y 1 J2$ Price Quantity QeQe PePe

Equilibrium adjustment At the prevailing price, P e, there exists excess demand for this good This will put upward pressure on the price Higher prices attracts more supply And reduces demand The price will continue to rise until the excess demand is gone and the market reaches a new equilibrium J2$ Price Quantity QeQe PePe Q exd Q new P new