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

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

3. Go Home … As quickly as possible … And … … see some economics in action!

7. Question … £0.70 toll to cross the bridge … No receipt …
The toll-collectors don’t own the bridge …
Problem?
Solution?

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

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

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

11. 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

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

13. 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

14. 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

15. Suppose the UK wants to exercises self-restraint by fishing responsibly in order to maintain fish stocks. While admirable, this is not strategically sustainable because other countries’ fishing fleets won’t be able to resist the temptation to exceed their fishing quotas at the UK’s expense, because this gives them an advantage in short term competition. So despite the UK’s self-restraint, fish stocks will be depleted anyway. Therefore, the choice of voluntary self-restraint is never optimal from an individual country’s point of view.

16. What is Economics?
Key contribution of Economics has been to show that choices made by agents underpin many real world issues:

17. What is Economics?
Key contribution of Economics has been to show that choices made by agents underpin many real world issues:
the discrepancy between price and value

18. ebay price: $189.97 Price in Anya Hindmarch store in New York: $15.00
Sold out within 3 hours
ebay price: $189.97
(Source: Wednesday 20 June 2007)

19. What is Economics?
Key contribution of Economics has been to explain many real world issues:
the discrepancy between price and value

20. What is Economics?
Key contribution of Economics has been to explain many real world issues:
the discrepancy between price and value
the best strategy for bidding on ebay

21. What is Economics?
Key contribution of Economics has been to explain many real world issues:
the discrepancy between price and value
the best strategy for bidding on ebay
the big drop in the US crime rate in the 1990s

23. Economic Methodology

24. Economic Methodology
Real word economic issues are incredibly complex and many factors are at work simultaneously

25. 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

26. 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

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

28. 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 …

31. p q

32. 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 …

33. 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

34. Economic Methodology
Demand:
Supply:
Equilibrium:

35. 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

36. 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

37. 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

38. p
Supply p*
Demand q q*

39. Demand
Formally
qd = qd(p)
Quantity demanded depends upon price
‘Normal’ Demand Function

40. q p

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

42. p q

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

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

45. Demand
Usually, we presume that qd 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 …

46. 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

47. (Unit) Purchase Tax p q

48. (Unit) Purchase Tax p
tax q

49. (Unit) Purchase Tax p
t = £2 5 3 q

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

51. p q

52. … quantity supplied at a particular price5 q 10

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

54. 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

55. (Unit) Sales Tax p q

56. (Unit) Sales Tax p
tax q

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

58. 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?

59. (Unit) Sales Tax p q

60. (Unit) Sales Tax p t q

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

62. Now, consider a unit purchase tax …

63. (Unit) Purchase Tax p q

64. (Unit) Purchase Tax p q

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

66. 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

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

68. (Unit) Sales Tax p t q

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

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

71. (Unit) Purchase Tax p q

72. (Unit) Purchase Tax p t q

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

74. 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

75. (Unit) Sales Tax p q

76. (Unit) Sales Tax p t q

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

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

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

80. (Unit) Purchase Tax p t q

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

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

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

84. 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

85. 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

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

87. 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 …

88. Figure 15: (Unit) Sales Taxp
A = Buyer’s Burden
B = Seller’s Burden t A B q

89. Figure 15: (Unit) Sales Taxp
A = Buyer’s Burden
B = Seller’s Burden t A1 A B1 B q

90. In the limit, if the demand curve is vertical (i. e
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 …

91. Figure 15: (Unit) SalesTaxp
A = Buyer’s Burden
B = Sellers Burden t A2 A B q

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

93. 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

94. 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

95. Why Bath?
Top 10 Economics Department (8th in The Complete University Guide 2017)
World class research and teaching
Excellent library and computing facilities; state-of-the-art sports centre; new arts centre and student residences
Excellent employment prospects: 91% of our graduates have a grad job within 12 months of graduation, rest choose further study or gap year (2nd after Cambridge, see Guardian Econ League Table)

96. Applications and Acceptances
Year
No. of Applications
No. of Students Accepted (Places)
Applications:
Acceptances
2008
1518
202
7.51
2009
1513
185
8.17
2010
1273
168
7.58
2011
1287
147
8.76
2012
1235
187
6.60
2013
1376
192
7.17
2014
1305
209
6.24
2015
1839
225
2016
2168
227
9.55
2017
2380
235
10.12

97. 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

98. The Department of Economics
40 Academic Staff
Number of Students BSc 700
MSc 160
PhD
Three BSc Degree Programmes
Three MSc Programmes
PhD Programme

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

100. 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.

101. Programme Structure: BSc Economics
Second Year
3 Compulsory (Year Long) Units
Intermediate Macroeconomics
Introduction to Econometrics
3-4 Optional Units
Money & Finance; International Economics, Public Finance; Public Economics; Corporate Finance; Economic Thought and Policy

102. Programme Structure: BSc Economics
Final Year
2 Compulsory Units
Advanced Macroeconomics; Advanced Microeconomics
4-8 Optional Units
Game Theory; Econometrics; Economics of Environmental Regulation; International Trade; Dev Econ; Public Choice; Welfare Economics & Distributive Justice; Economics of Work; Health Economics; Economics of Banking; Environmental & Natural Resource Economics; International Monetary Economics; Economics of Incentives; Growth Theory; Industrial Organisation; Political Economy; Invest & Trading; Dissertation

103. Programme Structure: BSc Economics
Final Year
2 Compulsory Units
Advanced Macroeconomic; Advanced Macroeconomics
4-8 Optional Units
Game Theory; Econometrics; Economics of Environmental Regulation; International Trade; Dev Econ; Public Choice; Welfare Economics & Distributive Justice; Economics of Work; Health Economics; Economics of Banking; Environmental & Natural Resource Economics; International Monetary Economics; Economics of Incentives; Growth Theory; Industrial Organisation; Political Economy; Invest & Trading; Dissertation

104. 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

105. 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

106. 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.

107. Programme Structure Support
Each degree programme has Director of Studies – ‘vertical’
Each year has a Year Tutor - ‘horizontal’
Personal tutor
Work placement tutor
Student buddy system; Staff-Student Liaison Committee; student representation on Departmental Teaching Committee; seminars; social events

108. Programme Structure: BSc Economics
Final Year Dissertation
‘Double-Weighted’ year long project
Can draw from work-placement
Empirical; theoretical; case-study; literature review
Draws together skill and knowledge, experience and interest

109. Jonathan Haynes BSc (2010) Work placement - HM Treasury 2008-09
Graduated with first class honours and joined Government Economic Services Fast Stream (climate change, transport, financial regulation)
October 2013 joined European
Commission in Brussels as a
financial economist

110. Jonathan Haynes BSc (2010)
“I highly recommend pursing a placement. Beyond the short term financial rewards, a good placement puts you ahead of your peers when you graduate in an increasingly competitive labour market. You will learn vital soft skills that you can’t learn from the textbooks.”
“Your final year of economics will become more rewarding. You will better understand how economics interacts with policy and the economy.”
“And one piece of advice, for those who do go down this route. Once you start, actively engage with your line manager to ensure you get the most out of the process. If you can extract expertise and information from the employer to help with your final year dissertation, this is an added bonus.”

112. Sound interesting? Any Questions?
What next…?
Come and visit the Economics stand at the information fair in the Sports Training Village. Pick up a brochure and chat to my colleagues and our students.
Visit our website, which is a great source of up-to-date information: bath.ac.uk/economics
Want to get in touch…?
For questions about entrance requirements and the admissions process
For questions about our Economics programmes

113. Industrial Placement Programme Department of Economics

114. Why do a placement at the University of Bath?
UoB leading Placement University* 20 years +experience * Dedicated Placement Officers * Extensive Support & Guidance *Exclusive placements* Acquire business skills* Apply theory to practice* Dissertation Inspiration* Self-Development and Self-Confidence* Try before you buy * Employment - 91% within 6 months* Networking*…….

116. Investment and retail banking Accountancy, auditing Asset management
Financial research, forecasting
Financial planning and control
Sales, marketing, purchasing and logistics
Political lobbying or working with MPs or MEPs
International development

117. Dedicated Placement Team

118. Undergraduate students Christopher Leaney, Bradley Morely, Steven Newcombe and alumnus Christopher Gynn discuss their experience of the economics placement year
Undergrad Economics 

119. Any questions ????? Contact Economics economics-ug-admin@bath.ac.uk
Contact Kirsten Brown

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

121. 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

122. Consumer Surplus (CS) p 10 8 6 4
p* = 2 pd q
q* = 5

123. Consumer Surplus (CS) p
TWP = = 30
p*q* = 2*5 = 10
CS = 20 10 8 6 4
p* = 2 pd q
q* = 5

124. Consumer Surplus (CS) p CS p*
Expenditure = p*q* pd q q*

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

126. Social Welfare (W) p
Supply
W = CS + PS CS p* PS pd q q*

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

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

129. Social Welfare and Tax p CS t T
DWL PS q

130. 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.

131. The Market for Lemons
If it is impossible to observe quality, then goods will be traded at a price reflecting average quality
Moreover, price will adjust until buyers’ beliefs about this average quality are confirmed ex post
Potential for market failure - sellers of high quality products may withdraw from the market

132. The Market for Lemons
Problem was highlighted by Akerlof (1970) … … second-hand car market … Nobel Laureate (2001)

133. The Market for Lemons Value to (£) Peach (g) Lemon (b) Buyer 3000 2000
Seller
25% (75%) of the cars are Peaches (Lemons)
Sellers have all bargaining power – buyers’ reservation prices hold

134. The Market for Lemons
If quality is known by both buyers & sellers then:
If quality unknown by everybody then buyers & sellers consider average quality in calculation of ‘bid’ prices
Such that

135. The Market for Lemons
If buyers unable to observe quality then all sellers have an incentive to claim their car is a peach …
Thus, buyers offer their expected value
But
Thus, only lemons traded and the market for peaches fails
Or does it … ?