1. Econ mics at Bath John G. Sessions Professor of Economics

2. 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

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

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

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

6. 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

7. ? e.g. Spend today or spend tomorrow?

8. 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

9. 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

10. Economic Methodology

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

12. 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

13. 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

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

15. 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 …

18. p 0 q

19. 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 …

20. 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

21. Economic Methodology  Demand:  Supply:  Equilibrium:

22. 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

23. 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

24. 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

25. p q 0 Demand Supply q*q* p*p*

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

27. q p 0

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

29. p q 0

30. p q 0 5 10 … quantity demanded at a particular price

31. p q 0 5 10 … buyer’s reservation price (i.e. maximum price buyer wiling to pay price per unit)

32. 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 …

33. 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

34. p 0 q (Unit) Purchase Tax

35. p 0 q tax (Unit) Purchase Tax

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

37. 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.

38. p q 0

39. p q 0 5 10 … quantity supplied at a particular price

40. p q 0 5 10 … seller’s reservation price (i.e. minimum price seller wiling to accept per unit)

41. 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

42. p 0 q (Unit) Sales Tax

43. p 0 q tax (Unit) Sales Tax

44. p 0 q t = £2 11 9 10 (Unit) Sales Tax

45. 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?

46. p 0 q (Unit) Sales Tax

47. p 0 q t

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

49. Now, consider a unit purchase tax …

50. p 0 q (Unit) Purchase Tax

51. p 0 q

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

53. 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

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

55. p 0 q t (Unit) Sales Tax

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

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

58. p 0 q (Unit) Purchase Tax

59. p 0 q t

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

61. 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

62. p 0 q (Unit) Sales Tax

63. p 0 q t

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

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

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

67. p 0 q t (Unit) Purchase Tax

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

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

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

71. 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

72. 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

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

74. 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 …

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

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

77. 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 …

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

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

80. 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

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

82. 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

83. p q Consumer Surplus (CS) pdpd 0 1 2 3 4 q * = 5 p* = 2 10 8 6 4

84. p q Consumer Surplus (CS) pdpd 0 1 2 3 4 q * = 5 p* = 2 10 8 6 4 TWP = 10 + 8 + 6 + 4 + 2 = 30 p * q* = 2*5 = 20 CS = 10

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

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

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

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

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

90. p 0 q t CS PS DWLT Social Welfare and Tax

91. 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.

92. 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

93. 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

94. 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

95. 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)

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

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

98. 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.

99. 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

100. 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

101. 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.

102. A ny Q uestions ????? Contact Economics economics-ug-admin@bath.ac.uk economics-ug-admin@bath.ac.uk