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<title>Economics 1</title></titleStmt>

<publicationStmt><distributor>BASE and Oxford Text Archive</distributor>


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The recordings and transcriptions used in this study come from the British

Academic Spoken English (BASE) corpus, which was developed at the

Universities of Warwick and Reading under the directorship of Hilary Nesi

(Warwick) and Paul Thompson (Reading). Corpus development was assisted by

funding from the Universities of Warwick and Reading, BALEAP, EURALEX, the

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<item n="speechevent">Lecture</item>

<item n="acaddept">Economics</item>

<item n="acaddiv">ps</item>

<item n="partlevel">UG</item>

<item n="module">Economics 1</item>





<u who="nm0775"> <event desc="overhead projector is on showing covered transparency" iterated="n"/> let me begin by <pause dur="1.3"/> resuming where we finished yesterday <pause dur="1.7"/> we're talking about the concept of elasticity <pause dur="0.6"/> in particular we were looking at the price elasticity of demand <pause dur="0.6"/> we've looked at a number of applications <pause dur="0.3"/> and seen the empirical relevance of this <pause dur="0.6"/> but everything we've done before last time <pause dur="0.4"/> was to talk <pause dur="0.3"/> <trunc>ra</trunc> in rather vague imprecise terms <pause dur="0.4"/> about <pause dur="0.2"/> the elasticity being a measure of the responsiveness <pause dur="0.4"/> of for example demand to change in price <pause dur="0.7"/> towards the end of last time <pause dur="0.4"/> we started making this <pause dur="0.3"/> concept of <trunc>ena</trunc> <pause dur="0.2"/> elasticity <pause dur="0.2"/> a more precise quantitative measure <pause dur="1.2"/> and where we got to at the end of last time <pause dur="0.5"/> was to this point here <pause dur="1.1"/> we said <pause dur="0.4"/> we can define the price elasticity of demand <pause dur="1.4"/><kinesic desc="reveals covered part of transparency" iterated="n"/> as being the proportional change in quantity demanded <pause dur="0.4"/> divided by the <trunc>prop</trunc> proportional change in price <pause dur="0.8"/> and we can see that easily <pause dur="0.2"/> in terms of the <pause dur="0.9"/> demand curve <pause dur="1.3"/> we start off at some point A we said <pause dur="0.8"/> initial price is P-zero <pause dur="0.4"/> price falls to P-one so delta-P is the change in

price <pause dur="0.9"/> and that induces a movement down the demand curve to point B <pause dur="0.8"/> the quantity demanded increasing from Q-zero to Q-one <pause dur="1.2"/> so delta-Q measures the increase in quantity <pause dur="1.3"/> and we're saying the elasticity is measured by this <pause dur="0.3"/> change in quantity <pause dur="0.4"/> divided by the original quantity <pause dur="0.5"/> which is the proportional change <pause dur="1.0"/> all divided by this change in price <pause dur="1.5"/> itself divided by <pause dur="0.4"/> the initial price level which gives us the proportional change in price <pause dur="0.6"/> and i said that <pause dur="1.3"/><kinesic desc="reveals covered part of transparency" iterated="n"/> therefore that gives us a formula <pause dur="0.3"/> for calculating <pause dur="0.2"/> the elasticity <pause dur="0.3"/> between two points which i said can be defined as the arc <pause dur="0.2"/> or the interval <pause dur="0.3"/> elasticity of demand <pause dur="1.8"/> and what i want to show now <pause dur="0.3"/> are two properties <pause dur="0.4"/> of this elasticity <pause dur="2.0"/><kinesic desc="reveals covered part of transparency" iterated="n"/> the first property <pause dur="0.3"/> is that clearly <pause dur="0.2"/> the elasticity is negative <pause dur="2.6"/> if the elasticity is negative quite obviously <pause dur="0.5"/> because the demand curve is downward sloping <pause dur="1.9"/> and so <pause dur="0.7"/> if delta-Q is <pause dur="0.5"/> positive <pause dur="0.5"/> because the <pause dur="0.4"/> demand has increased <pause dur="1.0"/> that must be because the price has fallen <pause dur="1.0"/> so if delta-Q is positive <pause dur="1.0"/> that's because delta-P the

change in price is negative <pause dur="2.0"/> Q and P themselves are positive numbers we assume if we're starting with a positive price <pause dur="0.8"/> and a positive quantity <pause dur="0.3"/> being demanded <pause dur="0.9"/> and so <pause dur="0.2"/> delta-Q is positive Q is positive P is positive <pause dur="1.0"/> and delta-P is negative so the whole thing <pause dur="0.4"/> is negative <pause dur="0.2"/> the elasticity demand <pause dur="0.2"/> is negative <pause dur="2.7"/> let me ask you to tell me <pause dur="0.8"/> when <pause dur="0.5"/> that might not be the case can you think of a case <pause dur="1.5"/> not necessarily thinking of an example of any particular commodity <pause dur="0.5"/> what would the demand curve have to look like <pause dur="0.7"/> for the elasticity not to be a negative number <pause dur="2.5"/><kinesic desc="indicates member of audience" iterated="n"/> point here </u><u who="sm0776" trans="latching"> when the demand is constant </u><pause dur="0.4"/> <u who="nm0775" trans="pause"> when demand is constant so let's look at that in the diagram <pause dur="2.3"/> if the demand is a horizontal straight line <pause dur="0.2"/> is the answer <pause dur="0.4"/> that we're given here <pause dur="1.7"/> then imagine a horizontal straight line <pause dur="1.1"/> that would mean that <pause dur="0.4"/> this change in quantity could be very big <pause dur="0.6"/> even if effectively <pause dur="0.4"/> the change in price <pause dur="1.0"/> was close to zero or essentially zero it approximated zero <pause dur="2.0"/> so that

would be saying that delta-P would be zero <pause dur="3.2"/> # <pause dur="0.5"/> let's think about that answer is that is that a good answer <pause dur="1.3"/> well the demand curve being completely flat <pause dur="0.3"/> would mean that demand is <pause dur="0.7"/> completely responsive to small changes in price <pause dur="0.5"/> so it's <pause dur="0.3"/> infinitely elastic <pause dur="2.5"/> delta-P if delta-P is zero <pause dur="2.7"/><kinesic desc="indicates point on transparency" iterated="n"/> this whole thing is zero <pause dur="0.7"/> so if delta if delta-P is <pause dur="0.7"/> is zero <pause dur="0.5"/><kinesic desc="indicates point on transparency" iterated="n"/> this whole thing is infinite <pause dur="1.4"/> and it's actually <pause dur="0.2"/> minus-infinite <pause dur="0.4"/> so it doesn't give us the answer it's not negative it gives us the answer it's infinity <pause dur="0.4"/> albeit minus-infinity <pause dur="0.8"/> okay so what would be another possible response <kinesic desc="indicates member of audience" iterated="n"/> a hand up at the back here </u><u who="sf0777" trans="overlap"> <gap reason="inaudible" extent="1 sec"/> demand curve <gap reason="inaudible" extent="3 secs"/> </u><pause dur="0.2"/> <u who="nm0775" trans="pause"> okay i'm being told to draw demand curve not as a straight line <pause dur="0.5"/> but as a hyperbola using very technical words <pause dur="1.7"/> that's the case i'm going to go on to in a minute i <unclear>started</unclear> looking at two properties i've said notice A <pause dur="0.3"/> in a moment i'm going to say <pause dur="0.2"/> notice B <pause dur="0.2"/> and that's going to be to do with exactly the case you mentioned so i'll come on to that in a moment <pause dur="0.6"/> any other

thoughts on this A <kinesic desc="indicates member of audience" iterated="n"/> point here </u><pause dur="0.4"/> <u who="sm0778" trans="pause"> if # the demand curve is upward sloping <gap reason="inaudible" extent="1 sec"/> </u><u who="nm0775" trans="overlap"> okay <pause dur="0.6"/> well if the demand curve is upward sloping then clearly everything i've said here is wrong <pause dur="0.7"/> if the demand curve is upward sloping then we can have that <pause dur="0.9"/> when the price <pause dur="0.9"/> if the price increases the quantity demanded will increase and so <kinesic desc="indicates point on transparency" iterated="n"/> this will be a positive number <pause dur="0.7"/> so to get a positive elasticity we need an upward sloping demand curve which we're going to say is rather unusual <pause dur="0.7"/> less unusual <pause dur="0.4"/> would be the case where the demand curve is <pause dur="0.3"/> perfectly vertical <pause dur="1.8"/> if the demand curve is perfectly vertical <pause dur="0.8"/> then we're saying that demand is <pause dur="0.2"/> inelastic <pause dur="0.2"/> perfectly inelastic <pause dur="0.9"/> and that would give us <pause dur="0.2"/> an elasticity of zero <pause dur="1.0"/> okay so to have <pause dur="0.3"/> elasticity as not being negative either we have an unusual case that it's positive <pause dur="0.4"/> or we or we have <pause dur="0.5"/> a less unusual case <pause dur="0.3"/> that it's simply vertical so the elasticity is <pause dur="0.4"/> zero <pause dur="0.8"/> so let's <pause dur="0.2"/> but in general we're going to assume demand curves are downward sloping <pause dur="0.4"/> and so

we're going to have this property <pause dur="1.5"/> consider now the second property <pause dur="2.6"/> the second property <pause dur="0.7"/> of the <pause dur="0.6"/> elasticity of <kinesic desc="indicates point on transparency" iterated="n"/> this demand curve <pause dur="1.7"/> is that the elasticity <pause dur="0.5"/> changes <pause dur="0.8"/> as we move along the demand curve <pause dur="2.6"/> and i want to see how <pause dur="8.4"/><kinesic desc="puts on transparency" iterated="n"/> let me just give you a reminder <pause dur="0.3"/> everything i'm saying here <pause dur="0.4"/> relates to this demand curve that i've drawn in the diagram <pause dur="1.2"/> it's a linear demand curve it's a downward sloping straight line <pause dur="0.4"/> or linear demand curve <pause dur="1.7"/> i haven't yet got onto the case i was invited to think about <pause dur="0.3"/> by the contribution at the back the case where <pause dur="0.5"/> the demand curve is not <pause dur="0.2"/> a straight line <pause dur="0.2"/> we'll look at that in a moment <pause dur="1.0"/> for now we assume the demand curve is a straight line <pause dur="1.9"/> and we can show <pause dur="0.6"/> that in that case the elasticity changes as we move along the demand curve <pause dur="2.8"/> okay i'm just <pause dur="0.8"/> i can't always be sure of having two overheads so sometimes i repeat things there's no reason why you should <pause dur="0.4"/> here i just repeat what

we've already seen <pause dur="0.2"/> in this first line <pause dur="0.7"/> and then i rearrange this first line <pause dur="1.4"/> 'cause a fraction <pause dur="0.8"/> divided by <pause dur="0.5"/> a fraction is a rather awkward thing to deal with <pause dur="1.6"/> and so we can rearrange it <pause dur="0.2"/> to get a fraction multiplied by <pause dur="0.4"/> a different fraction which is less awkward to deal with <pause dur="0.4"/> if you're not happy with the step going from <kinesic desc="indicates point on transparency" iterated="n"/> here to <kinesic desc="indicates point on transparency" iterated="n"/> here <pause dur="0.2"/> check it out afterwards <pause dur="2.2"/> okay so i've <trunc>re</trunc> rewritten or rearranged this expression in the following way <pause dur="0.7"/> when we do that <pause dur="0.3"/> we can now think of these two terms <kinesic desc="indicates point on transparency" iterated="n"/> <pause dur="0.5"/> separately <pause dur="0.9"/> think first of all about <kinesic desc="indicates point on transparency" iterated="n"/> this first term <pause dur="0.5"/> delta-Q divided by delta-P <pause dur="2.0"/> what can you tell me <pause dur="0.2"/> about this first term <pause dur="0.5"/> as we move along <pause dur="0.6"/> the demand curve <pause dur="1.9"/> what happens to delta-Q over delta-P <pause dur="0.3"/> as we move along the demand curve <pause dur="2.6"/> does it rise does it fall does it stay unchanged what happens <pause dur="0.7"/> any thoughts someone said me an answer here <kinesic desc="indicates member of audience" iterated="n"/> </u><u who="sm0779" trans="latching"> it remains constant </u><u who="nm0775" trans="latching"> it remains constant absolutely <pause dur="2.9"/> delta-Q <pause dur="1.1"/> over delta-P <pause dur="0.5"/> stays

constant <pause dur="1.0"/> along the straight line demand curve <pause dur="0.4"/> we can see that easily <pause dur="0.5"/> in this diagram here <pause dur="5.5"/><kinesic desc="indicates point on transparency" iterated="n"/> the slope <pause dur="0.2"/> of this line <pause dur="0.2"/> slope of this demand curve <pause dur="1.0"/> is given by <pause dur="2.4"/> the gradient of course <pause dur="0.9"/> if you think about point B for a moment it's easiest to <trunc>th</trunc> <pause dur="0.2"/> to see things in terms of point B <pause dur="0.9"/> address point B and think well what is the slope of this line <pause dur="0.8"/> well in going from B to A <pause dur="0.5"/> the rise is the change in price <pause dur="0.5"/> and the tread the distance travelled <pause dur="0.5"/> is the change in quantity <pause dur="0.3"/> so delta-P <pause dur="0.2"/> over delta-Q <pause dur="0.8"/> is the slope <pause dur="1.2"/> of this straight line demand curve <pause dur="0.7"/> measured against the vertical axis <pause dur="2.9"/> and of course the slope of a straight line demand curve doesn't change <pause dur="0.2"/> so delta-P over delta-Q <pause dur="0.3"/> doesn't change as you move along the demand curve <pause dur="1.5"/> and hence <pause dur="0.4"/> delta-Q over delta-P which is the inverse of the slope <pause dur="0.8"/> or if you like it's the slope <pause dur="0.5"/> of the demand curve measured against the horizontal axis <pause dur="0.6"/> that doesn't change as you move along the demand curve <pause dur="0.9"/> so the first term <pause dur="0.5"/> in this expression for inelasticity <pause dur="0.3"/> is a constant <pause dur="1.0"/> what

about the second term <pause dur="3.6"/> what can you tell me about <pause dur="0.5"/> P-over-Q the second <pause dur="0.8"/> term in that expression of elasticity <pause dur="0.3"/> as we move along the demand curve any thoughts or suggestions <pause dur="5.0"/> okay <kinesic desc="indicates member of audience" iterated="n"/> </u><pause dur="0.8"/> <u who="sm0780" trans="pause"> as P rises Q falls </u><u who="nm0775" trans="latching"> okay </u><pause dur="0.5"/> <u who="sm0780" trans="pause"> <gap reason="inaudible" extent="1 sec"/></u><pause dur="0.6"/> <u who="nm0775" trans="pause"> well as we're moving down let's think about moving down the demand curve so moving from A to B to C to D <pause dur="2.3"/> of course what we know is happening is the price is falling and quantity is rising <pause dur="0.6"/> so moving down the demand curve <pause dur="0.7"/> from A down in the direction of D <pause dur="1.9"/><kinesic desc="indicates point on transparency" iterated="n"/> this thing P-over-Q <pause dur="0.3"/> is falling <pause dur="1.9"/> in other words <pause dur="0.5"/><kinesic desc="reveals covered part of transparency" iterated="n"/> as i've written here <pause dur="2.2"/> so in terms of our expressions being # for the elasticity <pause dur="0.8"/> along the straight line demand curve <pause dur="0.5"/> the first term is constant <pause dur="0.8"/> the second term is falling <pause dur="5.5"/> and so <pause dur="0.2"/> the elasticity <pause dur="0.7"/> is falling <pause dur="2.8"/> as we <kinesic desc="reveals covered part of transparency" iterated="n"/> move down the demand curve <pause dur="7.8"/> if you <pause dur="0.2"/> wanted a further way of seeing this i invite <pause dur="0.2"/> you afterwards to <pause dur="1.2"/> to draw <pause dur="0.2"/> the horizontal lines from the axis the P axis <pause dur="0.2"/> to C and to D <pause dur="0.7"/> and to call that the

change in price <pause dur="1.6"/> then drop down the vertical lines and that's the new change in quantity <pause dur="0.8"/> necessarily <pause dur="0.7"/> comparing <pause dur="0.3"/><kinesic desc="indicates point on transparency" iterated="n"/> this move from A to B <pause dur="0.4"/> with <kinesic desc="indicates point on transparency" iterated="n"/> this move from C to D <pause dur="0.6"/> delta-P over delta-Q won't have changed <pause dur="0.5"/> but P-over-Q <pause dur="0.2"/> will have changed and so will have a different elasticity <pause dur="8.6"/> okay so with this the conclusion is with a straight line demand curve the elasticity is falling as we move down the demand curve <pause dur="3.7"/> then we might ask a question <pause dur="1.8"/> so what would the demand curve have to look like <pause dur="0.3"/> for this elasticity <pause dur="0.2"/> not to be changing <pause dur="2.4"/> well we know that P-over-Q must be falling <pause dur="0.9"/> as we move down the demand curve P-over-Q must be falling <pause dur="2.2"/> so we need delta-Q over delta-P to be rising <pause dur="3.3"/> okay <pause dur="0.3"/> it's no good if delta # delta-Q stays constant <pause dur="0.4"/> so one thing you might think about doing afterwards is doing what the suggestion was at the back <pause dur="0.5"/> drawing the demand curve not as a straight line <pause dur="0.4"/> but as a hyperbola <pause dur="7.0"/> drawing

it like this <pause dur="2.9"/><kinesic desc="writes on transparency" iterated="y" dur="3"/> where <pause dur="0.3"/> if you carried on it asymptotically <pause dur="0.5"/> approaches in other words gets closer and closer to each axis <pause dur="3.6"/><kinesic desc="writes on transparency" iterated="y" dur="1"/> do the same <pause dur="0.6"/> experiment here that we did over here <pause dur="0.7"/> draw points A and B <pause dur="0.3"/> C and D <pause dur="0.7"/> well <kinesic desc="indicates point on transparency" iterated="n"/> these two points <pause dur="0.5"/> are having <pause dur="0.3"/> an interval between them the same as <kinesic desc="indicates point on transparency" iterated="n"/> those two points <pause dur="1.1"/> of course P-over-Q is <trunc>fall</trunc> <pause dur="0.6"/> i'm using Q aren't i <pause dur="1.3"/><kinesic desc="writes on transparency" iterated="y" dur="1"/> P-over-Q is <pause dur="1.0"/> falling <pause dur="0.7"/> think what's happening to delta-Q over delta-P <pause dur="0.9"/> and see if that's given you <pause dur="0.5"/> an elasticity <pause dur="0.2"/> which doesn't change so that's the thing to think about afterwards <pause dur="7.6"/> okay <pause dur="1.1"/><kinesic desc="changes transparency" iterated="y" dur="8"/> for the conclusion i'm giving you is <pause dur="2.2"/> is the following <pause dur="5.9"/> okay so this now is going to conclude <pause dur="0.2"/> my discussion of <trunc>e</trunc> of elasticities for now <pause dur="2.7"/> we know that so long as the demand curve <pause dur="1.1"/> is downward sloping this <trunc>th</trunc> this is going to be true <pause dur="0.4"/> whether it's linear or a hyperbola or <pause dur="0.6"/> it doesn't matter as long as

it's downward sloping <pause dur="1.7"/> we're assuming that the elasticities are not positive <pause dur="0.3"/> they are less than or equal to zero <pause dur="3.5"/><kinesic desc="reveals covered part of transparency" iterated="n"/> think about <pause dur="3.2"/> all points between all negative points <pause dur="0.9"/> less than <pause dur="1.0"/> or all points less than or equal to zero <pause dur="1.6"/> okay so start off at zero <pause dur="1.0"/> and think about all the points going down to minus-infinity which was one of the points that was raised <pause dur="0.7"/> earlier in this lecture <pause dur="2.9"/> then <pause dur="0.4"/> if the elasticity is exactly equal to zero <pause dur="3.4"/> we can of course talk about <pause dur="0.9"/><kinesic desc="reveals covered part of transparency" iterated="n"/> zero elasticity <pause dur="1.0"/> going to make that a bit sharper <pause dur="5.8"/><kinesic desc="writes on transparency" iterated="y" dur="3"/> we can talk about <pause dur="0.5"/> zero elasticity <pause dur="2.7"/> a point further down this <pause dur="0.4"/> scale <pause dur="2.4"/> would be where <pause dur="0.4"/> the elasticity of demand <pause dur="0.2"/> price elasticity of demand is exactly equal to minus-one <pause dur="1.3"/> we talk about that as being <pause dur="0.2"/> unit elasticity <pause dur="14.3"/> think about unit elasticity <pause dur="0.7"/> in our example here <pause dur="1.7"/><kinesic desc="indicates point on transparency" iterated="n"/> i'm just going to put this

slide <pause dur="0.2"/><kinesic desc="adjusts transparency" iterated="y" dur="7"/> underneath the continuous sheet <pause dur="6.2"/><kinesic desc="indicates point on transparency" iterated="n"/> think about this being equal to minus-one <pause dur="6.8"/><kinesic desc="writes on transparency" iterated="y" dur="1"/> if you then rearranged this expression <pause dur="1.5"/> we get <pause dur="0.6"/><kinesic desc="writes on transparency" iterated="y" dur="9"/> delta-Q <pause dur="1.9"/> over Q <pause dur="1.6"/> equal to <pause dur="1.3"/> minus-<pause dur="0.8"/>delta-P <pause dur="0.8"/> over P <pause dur="2.9"/> so if the <pause dur="0.4"/> elasticity is equal to minus-one <pause dur="1.3"/> in other words if we're dealing with unit elasticity <pause dur="1.3"/> then that's just the same thing as saying that <pause dur="2.0"/> the proportional increase in quantity demanded will be exactly equal to the proportional <pause dur="0.6"/> change in price <pause dur="0.6"/> okay so in other words if for example <pause dur="0.2"/> prices go up by ten per cent <pause dur="0.7"/> and quantity demanded falls by ten per cent <pause dur="0.5"/> then we're talking about unit elasticity <pause dur="0.8"/> so that's what <pause dur="0.6"/><kinesic desc="indicates point on transparency" iterated="n"/> this means <pause dur="4.5"/> as we move down towards minus-infinity <pause dur="0.3"/> we talk about demand being perfectly elastic with respect to changes in price <pause dur="6.3"/> and we distinguished between <pause dur="0.6"/><kinesic desc="indicates point on transparency" iterated="n"/>

these two ranges either side of minus-one <pause dur="0.8"/><kinesic desc="puts transparency on top of current transparency" iterated="n"/> in the following way <pause dur="3.2"/> any elasticity between zero and minus-one <pause dur="0.4"/> we talk about as being relatively inelastic <pause dur="0.4"/> demand is relatively inelastic <pause dur="2.6"/> and if elasticity is greater than minus-one we talk about it being relatively elastic <pause dur="0.4"/> or <pause dur="0.2"/> elastic for shorthand <pause dur="10.7"/> okay <pause dur="0.8"/> i just want to finish this topic with one <pause dur="0.2"/> small <pause dur="0.8"/> # <pause dur="0.3"/> note of caution <pause dur="1.0"/> in interpreting <pause dur="0.5"/> inelasticity <pause dur="5.2"/><kinesic desc="reveals covered part of transparency" iterated="n"/> think about this range where demand is inelastic <pause dur="1.8"/> if demand is in this <trunc>r</trunc> <pause dur="0.2"/> in <kinesic desc="indicates point on transparency" iterated="n"/> this range here demand elasticity is in this range here <pause dur="0.5"/> then we say that <pause dur="0.2"/> elasticity is less than nought <pause dur="0.3"/> and greater than minus-one <pause dur="5.7"/> so it's a number like <pause dur="1.1"/> minus-a-half or minus-a-quarter or minus-point-one <pause dur="0.2"/> or minus-comma-one <pause dur="0.7"/> depending on <pause dur="2.5"/> how you <pause dur="0.2"/> denote these things <pause dur="2.3"/> we often talk about the absolute size of elasticity <pause dur="0.6"/> we often <pause dur="0.2"/> think <pause dur="0.2"/> well we know that demand elasticity's a negative number <pause dur="0.6"/> let's not keep referring to it as a negative number

let's think about it just as <pause dur="0.3"/> the absolute number <pause dur="1.5"/> to do that we denote it as <pause dur="0.6"/> the elasticity with these two vertical lines either side of it <pause dur="0.3"/> to remind us that we're just dealing with the <pause dur="0.3"/> the absolute number <pause dur="1.0"/> whether it's a half or a quarter or point-one <pause dur="0.3"/> dropping the minus sign <pause dur="3.1"/> and we say that the absolute size of this elasticity <pause dur="0.3"/> is a number which is less than one <pause dur="0.3"/> it's a half or a quarter et cetera <pause dur="1.6"/> and of course when you do that when you <trunc>cha</trunc> when you drop the minus sign <pause dur="1.5"/> you then talk about <trunc>a</trunc> <pause dur="0.6"/> demand being <pause dur="2.9"/> more elastic <pause dur="2.1"/> as we're moving in <kinesic desc="indicates left" iterated="n"/> this direction <pause dur="0.4"/> so it's more elastic as the as the number's going from a half from nought <pause dur="0.5"/> through a quarter to a half <pause dur="0.2"/> three-quarters et cetera <pause dur="0.3"/> so the absolute size of the elasticity <pause dur="0.3"/> is getting bigger <pause dur="0.7"/> as we're moving in <kinesic desc="indicates left" iterated="n"/> this direction <pause dur="3.7"/> so there's a slight <pause dur="0.2"/> confusion <pause dur="0.2"/> which i'd <unclear>usually</unclear> like to go away and think about <pause dur="2.8"/> be aware that when we talk about demand becoming <pause dur="0.2"/> more elastic <pause dur="0.2"/> it

means that the elasticity's becoming more negative it's <trunc>go</trunc> it's going from a half to a quarter to a half to three-quarters <pause dur="0.5"/> to <trunc>s</trunc> to six to eight et cetera <pause dur="0.2"/> all on <kinesic desc="indicates point on transparency" iterated="n"/> this negative scale <pause dur="0.7"/> so the absolute size grows <pause dur="0.4"/> as it becomes a bigger negative number <pause dur="3.1"/> so that's a point to go away and and reflect on and be sure you've you've # followed <pause dur="1.7"/><kinesic desc="reveals covered part of transparency" iterated="n"/> and then we can do the same thing for <trunc>el</trunc> for a for an elastic for the elastic range as well of course <pause dur="6.3"/> and that concludes all i want to say <pause dur="0.8"/> about this topic and i now want to move on to a whole new topic <pause dur="0.4"/> which is topic three of the lecture course </u><gap reason="break in recording" extent="uncertain"/><u who="nm0775" trans="pause"> <kinesic desc="overhead projector is on showing transparency" iterated="n"/> okay i want us to go for another <pause dur="1.3"/> sorry there's one question <pause dur="0.3"/> can we can everyone be quiet so i can hear the question please </u><pause dur="0.4"/> <u who="sf0781" trans="pause"> <gap reason="inaudible" extent="1 sec"/> what's the point of the elasticity what what what do we use all this for </u><pause dur="0.6"/> <u who="nm0775" trans="pause"> what do we use it all for we use it for two things one is <pause dur="0.3"/> all those things we've already looked at it's <pause dur="0.4"/> for <pause dur="0.6"/> which is

looking at # <pause dur="0.3"/> how for example the impact of minimum wage on the <trunc>la</trunc> on the labour market <pause dur="0.6"/> okay <pause dur="0.2"/> very topical issue in British <pause dur="0.5"/> political economy at the moment <pause dur="0.4"/> is that there's a new government <pause dur="0.3"/> which is bringing in <pause dur="0.5"/> # minimum wage legislation <pause dur="1.0"/> okay let's just remind ourselves <pause dur="1.3"/> of # <pause dur="0.7"/> of the of this <pause dur="0.3"/> of the diagram for this case <pause dur="5.7"/><kinesic desc="changes transparency" iterated="y" dur="7"/> let's have a look at a model of the labour market <pause dur="0.8"/> we've got wages and employment <pause dur="1.3"/><kinesic desc="writes on transparency" iterated="y" dur="15"/> our demand curve is demand for labour by firms <pause dur="0.6"/> and there's some supply of labour by workers <pause dur="2.8"/> that would be the equilibrium wage <pause dur="4.4"/> this would be the equilibrium employment level <pause dur="0.6"/> assume <pause dur="0.6"/> that this is <pause dur="0.2"/> what's happening in the British labour market at the moment <pause dur="0.2"/> there is an equilibrium wage <pause dur="0.3"/> there's an equilibrium level of employment <pause dur="0.6"/> and the government is introducing a minimum wage legislation <pause dur="1.7"/> suppose that <pause dur="0.4"/> the <trunc>w</trunc> <pause dur="0.2"/> the wage legislation will be sufficiently high <pause dur="2.7"/><kinesic desc="writes on transparency" iterated="y" dur="2"/>

that's the minimum wage W-lower-bar <pause dur="2.3"/> a floor wage <pause dur="0.9"/> assume it's higher than the equilibrium wage <pause dur="3.3"/><kinesic desc="writes on transparency" iterated="y" dur="1"/> then what will be the effect of this on the labour market very important point in British political economy at the moment <pause dur="0.5"/> and a number of critics of <pause dur="0.3"/> the minimum wage policy <pause dur="0.3"/> are saying that such an action by the government <pause dur="0.5"/> will reduce <pause dur="0.2"/> employment <pause dur="0.5"/> because the equilibrium will go <kinesic desc="writes on transparency" iterated="y" dur="14"/> from the market equilibrium A <pause dur="0.7"/> to the regulated equilibrium of point B <pause dur="2.0"/> where demand <pause dur="0.8"/> which is the short side of the market <pause dur="0.6"/> rations the outcome rations the number of jobs down to L-bar <pause dur="0.6"/> the employment level <pause dur="0.6"/> after the impact of the minimum wage <pause dur="0.9"/> okay so <pause dur="1.4"/><kinesic desc="indicates point on transparency" iterated="n"/> this looks like <pause dur="0.4"/> the minimum wage causes a big reduction in the number of jobs <pause dur="0.2"/> causes a lot of unemployment <pause dur="0.3"/> and that's what a lot of critics of the minimum wage <pause dur="0.2"/> are saying will happen <pause dur="1.4"/> one thing we're going to look at through this term <pause dur="0.3"/> is developing <pause dur="0.6"/> an economic analysis which enables us to

look at more and more aspects of the minimum wage <pause dur="0.6"/> but in <kinesic desc="indicates transparency" iterated="n"/> this simple model <pause dur="0.2"/> the effects look as if potentially <pause dur="0.3"/> they might be disastrous for jobs <pause dur="0.9"/> one question we can address within this framework is <pause dur="0.3"/> well <pause dur="0.2"/> how big will be <pause dur="0.3"/> this reduction in the number of jobs <pause dur="1.3"/> my question to you is <pause dur="0.2"/> well what does it depend on we've already seen it <pause dur="0.3"/> someone like to remind us <pause dur="0.7"/> okay what does the magnitude of job loss depend upon <pause dur="0.4"/> within this analysis </u><u who="sm0782" trans="latching"> the demand <gap reason="inaudible" extent="1 sec"/> </u><pause dur="0.4"/> <u who="nm0775" trans="pause"> the demand </u><pause dur="0.3"/> <u who="sm0782" trans="pause"> <gap reason="inaudible" extent="2 secs"/></u><u who="nm0775" trans="overlap"> is <trunc>depe</trunc> # on # <trunc>a</trunc> and on what in particular of the demand curve </u><u who="sm0782" trans="latching"> slope </u><pause dur="0.3"/> <u who="nm0775" trans="pause"> the slope and I-E the thing we've been looking at the elasticity of demand <pause dur="0.7"/> okay <pause dur="2.3"/> so <pause dur="0.4"/> we've seen how <pause dur="1.3"/> the slope of the demand curve <pause dur="0.5"/> is related to <pause dur="0.3"/> this concept of elasticity <pause dur="0.6"/> we've said how if demand is very elastic <pause dur="1.0"/><kinesic desc="indicates point on transparency" iterated="n"/> this demand curve is flat <pause dur="1.6"/> and so point B <pause dur="0.4"/> would be <pause dur="0.2"/> further to the left along W-bar <pause dur="0.3"/>

okay do you understand that <pause dur="0.3"/> am i going to draw it yes i'm going to draw it <pause dur="1.9"/> <kinesic desc="writes on transparency" iterated="y" dur="8"/> suppose in other words that <pause dur="0.5"/> the demand were more elastic <pause dur="0.2"/> not <pause dur="1.0"/> inelastic where <pause dur="2.9"/> let's say <trunc>mo</trunc> suppose the demand were more elastic <pause dur="0.4"/> then point B would have been here <pause dur="1.9"/><kinesic desc="writes on transparency" iterated="y" dur="1"/> call it B-dash <pause dur="0.6"/> and the job loss <pause dur="1.6"/><kinesic desc="writes on transparency" iterated="y" dur="2"/> would have been <pause dur="1.1"/> greater <pause dur="0.7"/> so the <trunc>ela</trunc> the <pause dur="0.4"/> the price elasticity of demand <pause dur="0.3"/> which in the labour market means <pause dur="0.3"/> the wage elasticity of demand for labour <pause dur="0.7"/> is a crucial <pause dur="1.1"/> parameter <pause dur="1.1"/> in determining <pause dur="0.3"/> the impact of this important policy on the labour market <pause dur="0.2"/> that's why it's important <pause dur="1.9"/> and but <pause dur="0.2"/> but just in passing we've said that that's just one application <pause dur="0.4"/> we've been looking at a number of applications <pause dur="0.3"/> and that the important one was for the impact of taxation <pause dur="0.7"/> on commodities and indeed we looked at a case of taxation on the labour market <pause dur="1.7"/> okay <pause dur="0.8"/> so let me now <pause dur="0.3"/> go on to the third topic <pause dur="0.4"/> and let me link <pause dur="0.3"/> this third topic with what we've been doing so far <pause dur="2.6"/> topic

one was a general introduction to <pause dur="0.4"/> economic phenomena <pause dur="0.5"/> economic methodology et cetera <pause dur="0.8"/> topic in topic two we said <pause dur="2.3"/> let's <pause dur="0.6"/> <trunc>deri</trunc> let's # assume something called a demand curve <pause dur="0.3"/><kinesic desc="writes on transparency" iterated="y" dur="16"/> don't bother drawing this for the umpteenth time <pause dur="0.5"/> if you just let me put it for you <pause dur="0.7"/> i vary between whether i use Q or X for quantity <pause dur="0.3"/> forgive me but it's the same thing <pause dur="1.8"/> we add we then added a supply curve <pause dur="0.6"/> and we said look <pause dur="0.6"/> where those intersect <pause dur="1.4"/> we have a market equilibrium <pause dur="0.7"/> potentially <pause dur="0.5"/> and we looked at the possible properties of market equilibria <pause dur="0.5"/> in terms of existence uniqueness stability <pause dur="0.7"/> and we looked at comparative static properties of the equilibrium <pause dur="0.4"/> meaning <pause dur="0.3"/> we shifted one of the curves <pause dur="0.2"/> and looked at what happened <pause dur="0.7"/> for price and quantity outcomes <pause dur="1.3"/> but all we did was <pause dur="0.4"/> assume <pause dur="0.9"/> that in a market economy <pause dur="0.3"/> there are such things as demand and supply curves <pause dur="1.3"/> we said their slopes matter because their elasticities matter <pause dur="0.3"/> we didn't <pause dur="0.3"/> address the issue of <pause dur="0.2"/> where these

demand and supply curves come from <pause dur="1.6"/> and what we're going to do in topic three <pause dur="1.4"/><kinesic desc="writes on transparency" iterated="y" dur="3"/> is say <pause dur="2.3"/> well <pause dur="0.4"/> where does this demand curve come from <pause dur="0.2"/> how do we derive this demand curve <pause dur="1.0"/> and from that what are its likely properties <pause dur="3.2"/> then in topic four <pause dur="0.8"/><kinesic desc="writes on transparency" iterated="y" dur="5"/> and beyond <pause dur="3.2"/> we're going to say <pause dur="0.3"/> well what about this concept of a supply curve <pause dur="1.5"/> where does that come from <pause dur="0.3"/> what assumption does that make <pause dur="0.4"/> about supplying agents <pause dur="1.1"/> about the motivations of firms and the decisions of firms <pause dur="2.9"/> having <pause dur="0.5"/> gone through <pause dur="0.3"/> the analyses of deriving demand and supply <pause dur="0.5"/> we'll then further address this issue <pause dur="0.6"/> of <pause dur="0.2"/> how these two things interact <pause dur="0.6"/><kinesic desc="writes on transparency" iterated="y" dur="2"/> to give us a market equilibrium <pause dur="0.7"/> because we'll say <pause dur="1.3"/> how does the <pause dur="0.2"/> nature of the market place in which these agents <pause dur="0.4"/> trade <pause dur="0.3"/> how does that determine <pause dur="0.2"/> the nature of the outcome <pause dur="0.8"/> so we'll ask questions about <pause dur="1.4"/><kinesic desc="writes on transparency" iterated="y" dur="4"/> the nature <pause dur="0.7"/> of markets <pause dur="1.9"/> in particular we'll

focus on issues of <pause dur="0.6"/> does the outcome depend upon <pause dur="0.4"/> how many agents there are demanding this commodity <pause dur="0.2"/> and or supplying this commodity <pause dur="3.0"/> so that's a <kinesic desc="indicates point on transparency" iterated="n"/> scheme of <pause dur="0.5"/> of <pause dur="0.3"/> how we <pause dur="0.2"/> what we've been doing so far <pause dur="1.7"/> links in with what we're going to be doing from now onwards <pause dur="0.9"/> and there's one more thing i <pause dur="0.2"/> i might say before going on into topic three <pause dur="1.3"/> and it's the following <pause dur="2.7"/><kinesic desc="writes on transparency" iterated="y" dur="10"/> we're assuming that <pause dur="0.5"/> the two most important groups of agents in the economy <pause dur="1.0"/> for our initial purposes of analysis <pause dur="0.6"/> are <pause dur="1.7"/> households <pause dur="3.1"/> and firms <pause dur="2.7"/> what we're going to be doing <pause dur="1.0"/> in the in topic three <pause dur="0.2"/> is addressing the question <pause dur="1.4"/><kinesic desc="writes on transparency" iterated="y" dur="4"/> of <pause dur="1.8"/> what determines the demand <pause dur="0.6"/> for the commodities X <pause dur="1.7"/> bought by households from firms <pause dur="3.9"/> then in topic four and beyond we're going to <pause dur="0.4"/> address the # other <kinesic desc="writes on transparency" iterated="y" dur="4"/> aspect of that which is <pause dur="0.5"/> well what do we know about <pause dur="1.6"/> firms' decisions concerning the supply of X <pause dur="0.4"/> to households <pause dur="0.3"/> all within some market context <pause dur="0.4"/> that later on we'll also be analysing <pause dur="2.7"/>

X of course <pause dur="0.6"/> is just one commodity <pause dur="0.5"/> that is traded between <kinesic desc="indicates point on transparency" iterated="n"/> these two broad groups <pause dur="2.1"/> what's an what's another <pause dur="0.2"/> commodity <pause dur="1.8"/> that's traded between these two groups </u><u who="sf0783" trans="latching"> labour </u><pause dur="0.3"/> <u who="nm0775" trans="pause"> labour good <pause dur="1.9"/> just as households are demanding <pause dur="1.0"/> commodities <pause dur="0.5"/> from firms <pause dur="1.9"/><kinesic desc="writes on transparency" iterated="y" dur="4"/> they're supplying <pause dur="0.6"/> labour <pause dur="1.1"/> to firms <pause dur="1.3"/> and the other side of that <kinesic desc="writes on transparency" iterated="y" dur="5"/> coin <pause dur="2.7"/> is that firms are demanding labour from households <pause dur="4.0"/> okay <pause dur="0.9"/> so topic three <pause dur="1.6"/> is going to be analysing this <pause dur="1.0"/><kinesic desc="indicates point on transparency" iterated="n"/> topic four onwards is going to be <kinesic desc="indicates point on transparency" iterated="n"/> analysing supply <pause dur="0.9"/> and later on in the course we'll look at <pause dur="0.6"/> what determines <pause dur="1.2"/><kinesic desc="indicates point on transparency" iterated="n"/> households' supply of <pause dur="0.6"/> labour <pause dur="0.7"/><kinesic desc="indicates point on transparency" iterated="n"/> and firms' demand for labour <pause dur="2.4"/> those are just two agents of course in the economy <pause dur="2.1"/> a third agent which we've already touched upon <pause dur="0.3"/> earlier in the course would be government for example <pause dur="2.0"/> how does government come into <kinesic desc="indicates point on transparency" iterated="n"/> this analysis <pause dur="0.5"/> well <pause dur="1.5"/> you might <pause dur="0.2"/> say that <pause dur="0.7"/>

households are demanding <pause dur="0.4"/> goods not only from firms but also from governments so this box <pause dur="2.4"/><kinesic desc="indicates point on transparency" iterated="n"/> might consist not only of firms but also of government <pause dur="0.8"/><kinesic desc="writes on transparency" iterated="y" dur="2"/> 'cause government provides things just as firms do <pause dur="1.0"/> sometimes in a market place sometimes outside of a market place <pause dur="1.9"/> another way in which government <pause dur="0.2"/> would influence this <pause dur="1.7"/><kinesic desc="indicates transparency" iterated="n"/> scheme <pause dur="0.3"/> of things <pause dur="0.4"/> would be <pause dur="0.2"/> that the way in which these <pause dur="0.3"/> relationships are determined <pause dur="0.6"/> the <trunc>relation</trunc> <pause dur="0.2"/> the the nature of the supply and demand relationships <pause dur="0.3"/> and how they interact within a market place <pause dur="0.5"/> itself is regulated or governed by <pause dur="0.6"/> government <pause dur="1.0"/> okay so the very nature in which these things occur <pause dur="0.7"/> we could argue <pause dur="0.4"/> is determined by <pause dur="0.2"/> to some extent at least <pause dur="0.4"/> the nature and role of governments <pause dur="0.4"/> # within the market <pause dur="1.6"/> okay so that's what we're going to go on to <pause dur="0.2"/> to consider <pause dur="1.4"/> let's immediately make a start <pause dur="0.7"/> on topic three <pause dur="3.7"/> which is that as the demand <pause dur="0.8"/> theory <pause dur="0.3"/> or consumer

theory <pause dur="8.1"/><kinesic desc="reveals covered part of transparency" iterated="n"/> in particular <pause dur="0.2"/> we're going to be looking at <pause dur="0.6"/> what determines <pause dur="0.3"/> the <pause dur="1.8"/> properties <pause dur="0.6"/> of demand curves <pause dur="3.8"/> and how those properties follow <pause dur="0.3"/> from assumptions about the behaviour <pause dur="0.6"/> of rational economic agents <pause dur="1.8"/> okay you remember in the very first lecture <pause dur="0.4"/> i touched upon a little bit <pause dur="0.3"/> the concept of rationality <pause dur="0.4"/> what we mean by rationality <pause dur="0.6"/> we're going to use some of that now <pause dur="0.4"/> and develop that <pause dur="2.0"/> and we're going to proceed with this for fifteen minutes <pause dur="0.2"/> and then have <pause dur="0.3"/> a break <pause dur="2.6"/> okay <pause dur="0.5"/> so what are our <pause dur="1.0"/> assumptions about rationality <pause dur="0.3"/> for these purposes <pause dur="1.1"/> well we suppose that individuals <pause dur="1.3"/> who we're going to refer to more generally as rational economic agents <pause dur="2.4"/> for the purposes of their <pause dur="0.7"/> economic activity <pause dur="2.0"/> we assume that they have preferences <pause dur="4.3"/> and we further assume that these preferences <pause dur="0.2"/> have certain properties <pause dur="6.1"/> and what i want us to do is to consider <pause dur="0.9"/> what those properties are <pause dur="17.2"/> first question we should say is <pause dur="0.7"/> first question we should ask is <pause dur="0.5"/> well preferences over what <pause dur="3.4"/> and if you think about yourself you have preferences over

a very wide range of different things commodities activities et cetera <pause dur="1.4"/> we're going to be <pause dur="0.5"/> pretty tight in defining <pause dur="0.9"/> our preferences to just lie over <pause dur="0.2"/> two possible commodities <pause dur="0.6"/> so we're going to be talking about preferences <pause dur="0.9"/> by individuals <pause dur="0.7"/> over different combinations <pause dur="0.5"/> of two commodities <pause dur="3.5"/> and those commodities are going to be two goods X and Y <pause dur="0.7"/> you can think about X and Y as being anything you like <pause dur="2.7"/> okay it could be # it could be that <pause dur="0.3"/> the two things which you think of as <trunc>giv</trunc> <pause dur="0.2"/> as giving you <pause dur="0.3"/> a lot of happiness <pause dur="0.2"/> over which you have preferences <pause dur="0.4"/> are <pause dur="0.4"/> # <pause dur="0.3"/> new clothes and C-Ds <pause dur="0.7"/> or it might be <pause dur="0.6"/> economics lectures and accountancy lectures <pause dur="0.7"/><vocal desc="laughter" iterated="y" n="ss" dur="1"/> anything you like <pause dur="4.4"/> so <pause dur="3.9"/><kinesic desc="reveals covered part of transparency" iterated="n"/> i'm going to call those combinations of these two goods X and Y <pause dur="0.3"/> as being bundles <pause dur="0.4"/> you can think of them as baskets of goods think about someone with a basket <pause dur="0.3"/> in which they've got <pause dur="0.5"/> some <pause dur="0.4"/> C-Ds and some new clothes <pause dur="0.4"/> and they're comparing that basket <pause dur="0.3"/> with another basket with different combinations of those

two things <pause dur="0.5"/> i'm not going to use the word baskets i'm going to use the word bundles <pause dur="2.0"/> meaning a collection of or a combination of <pause dur="1.7"/> two commodities or two goods <pause dur="0.2"/> which i'll call X and Y <pause dur="5.1"/> we can represent <pause dur="0.3"/> these bundles <pause dur="0.2"/> in a diagram <pause dur="3.9"/><kinesic desc="reveals covered part of transparency" iterated="n"/> where on the <pause dur="0.8"/> axes we have the amount of X <pause dur="1.0"/> in this bundle <pause dur="0.7"/> and on the vertical axis the amount of Y <pause dur="0.3"/> in this bundle <pause dur="6.5"/> and i've drawn on here two possible points two possible bundles of goods <pause dur="1.5"/> the bundle at A and the bundle at B <pause dur="1.5"/> and i'm saying suppose <pause dur="0.6"/> A is the bundle of goods in which there are two units of Y <pause dur="0.4"/> and two units of X <pause dur="0.8"/> whilst at point B <pause dur="2.0"/> the bundle represented <pause dur="0.4"/> has one unit of Y <pause dur="0.5"/> and four units of X <pause dur="9.9"/> okay so those are two bundles of goods that you <trunc>m</trunc> as an individual <pause dur="1.8"/> might confront <pause dur="3.3"/><kinesic desc="reveals covered part of transparency" iterated="n"/> and let's suppose that this individual <pause dur="1.3"/> is asked <pause dur="1.4"/> to <pause dur="0.2"/> state a preference between these two bundles of goods <pause dur="6.1"/> and asked to say which <pause dur="0.4"/> he or she prefers <pause dur="11.7"/> okay now <pause dur="1.3"/> without knowing this person's preferences <pause dur="0.2"/> and without knowing what these commodities are <pause dur="0.4"/>

course <pause dur="0.3"/> we can't easily answer it <pause dur="0.9"/> but what <pause dur="0.4"/> what i can do now is to say <pause dur="0.3"/> well <pause dur="0.2"/> what assumptions are we making about the kind of answers that people might give <pause dur="0.5"/> what properties <pause dur="0.9"/> might their answers satisfy <pause dur="4.0"/><kinesic desc="puts on transparency" iterated="n"/> and the first property <pause dur="1.3"/> is the property <pause dur="0.6"/> that their preferences <pause dur="0.2"/> are ordinal <pause dur="1.1"/> we'll just discuss this here <pause dur="0.8"/> and then be a little bit more precise about it <pause dur="5.5"/> i'm assuming <pause dur="0.9"/> that when asked this question <pause dur="2.7"/> people can rank their preferences ordinally <pause dur="5.7"/> I-E that we're assuming that the individual is able to answer <pause dur="0.5"/> this question <pause dur="3.4"/> about which bundle A or B he or she prefers <pause dur="0.8"/> in one of the following ways <pause dur="4.4"/> that they might say <pause dur="0.9"/> i prefer B <pause dur="0.2"/> to A <pause dur="3.6"/> sorry <pause dur="0.3"/> i might <pause dur="0.2"/> i <pause dur="1.0"/> i they might say i prefer A to B <pause dur="0.8"/> alternatively they might say i prefer <pause dur="0.6"/> B to A <pause dur="2.8"/> what would be a third possible response </u><pause dur="1.1"/> <u who="sf0784" trans="pause"> <gap reason="inaudible" extent="2 secs"/></u><pause dur="0.3"/> <u who="nm0775" trans="pause"> sorry </u><u who="sf0784" trans="latching"> if you like them equally </u><u who="nm0775" trans="overlap"> okay <pause dur="0.3"/> that i like them equally <pause dur="2.8"/> my terminology for that is <pause dur="0.8"/><kinesic desc="reveals covered part of transparency" iterated="n"/> they might say i'm indifferent between the two <pause dur="0.8"/> i'm equally happy with A <pause dur="0.5"/> as with B <pause dur="3.7"/> okay so <pause dur="0.7"/>

we're going to <trunc>a</trunc> <pause dur="0.3"/> assume that <pause dur="0.9"/> all of those answers are meaningful answers <pause dur="1.7"/> well you might say well that's just that's just kind of obvious <pause dur="2.1"/> but it isn't i hope <pause dur="0.7"/> so obvious <pause dur="0.9"/> because in allowing <kinesic desc="indicates point on transparency" iterated="n"/> these possible answers we're ruling out <pause dur="0.7"/> different possible answers <pause dur="1.7"/> such as the following <pause dur="2.2"/> in particular we're ruling out we're ruling out the possibility <pause dur="0.7"/> that an individual says <pause dur="0.5"/> i don't know which of those two things i prefer <pause dur="4.2"/> there might actually be <pause dur="0.6"/> many situations in the real world where <pause dur="0.2"/> that might be the answer <pause dur="1.1"/> i'm sure you've all been in a situation sometime where you've had to make a <trunc>choo</trunc> a choice between two things <pause dur="1.5"/> and they've either been so similar <pause dur="1.0"/> that <pause dur="0.2"/> it's been hard to choose <pause dur="0.4"/> or they've been so very different from each other <pause dur="0.4"/> it's hard to choose <pause dur="3.0"/> it's most <pause dur="0.2"/> easy i guess to think that if these two goods are so if these two bundles of goods are so very different <pause dur="0.7"/> it it could be hard to make a choice <pause dur="0.6"/> but we're ruling that out we're going to be adopting an assumption <pause dur="0.7"/> that

individual rationality <pause dur="1.0"/> from which we're going to derive demand curves <pause dur="0.7"/> individual rationality <pause dur="0.2"/> is such that people can always state <pause dur="0.5"/> a preference in these ways <pause dur="1.0"/> that they never <pause dur="0.7"/> are unable <pause dur="0.9"/> to <pause dur="0.7"/> rank their preferences <trunc>a</trunc> across bundles <pause dur="0.6"/> no matter how similar or how different those bundles are <pause dur="1.2"/> now <pause dur="0.3"/> i've said here <pause dur="0.8"/> that they're ranking their preferences between those goods <pause dur="0.5"/> ordinally <pause dur="0.3"/> in an ordinal way <pause dur="0.3"/> what do i mean by that <pause dur="5.6"/> well i by ordinal ranking <pause dur="0.9"/> i mean something different from cardinal ranking <pause dur="0.3"/> which i'll define in a second <pause dur="1.2"/> so by assuming that the individuals can rank preferences ordinally <pause dur="0.5"/> we're ruling out the possibility that preferences can be ranked <pause dur="0.2"/> cardinally <pause dur="0.5"/> so what does that mean <pause dur="8.5"/><kinesic desc="changes transparency" iterated="y" dur="7"/> what that means <pause dur="2.4"/> is that <pause dur="3.8"/> we rule out the possibility that people are able to say <pause dur="0.2"/> things like the following <pause dur="1.9"/> that <pause dur="1.4"/> that given the choice between A and B <pause dur="1.0"/> i am twice as happy <pause dur="0.5"/> as A as i am with B <pause dur="1.0"/> we're saying that <pause dur="0.4"/> that's too strong a requirement <pause dur="0.5"/> we merely want people

to say do you prefer A or B <pause dur="0.5"/> we don't want them to say <pause dur="0.2"/> by how much they prefer A to B <pause dur="5.3"/><kinesic desc="reveals covered part of transparency" iterated="n"/> we're also ruling out the possibility that people can say things like <pause dur="0.3"/> <reading>B makes me fifteen units of satisfaction better off than A</reading> <pause dur="1.3"/> okay so <pause dur="1.2"/> back in your room on campus <pause dur="1.0"/> in the privacy of your of your own <pause dur="0.3"/> study room <pause dur="0.7"/> you haven't got some kind of thermometer or barometer of your own level of happiness and you can gauge it each day <pause dur="1.3"/> and give it an actual calibrated number <pause dur="1.4"/> and if someone comes to your door and offers you either a takeaway pizza <pause dur="0.6"/> or a takeaway can of # Boddingtons bitter or <pause dur="0.2"/> Coca-cola or whatever <pause dur="0.7"/> # that you're not able to say <pause dur="0.2"/> <trunc>le</trunc> hang on a minute i'll just measure exactly how much happiness i get from that one and from that one and compare the two <pause dur="1.2"/> so you know which you'd prefer of those two choices <pause dur="0.3"/> but you don't know by how much you don't calibrate <pause dur="0.3"/> cardinally <pause dur="0.7"/> your level of happiness <pause dur="0.4"/> you rank ordinally <pause dur="0.5"/> where things are in a hierarchy <pause dur="0.5"/> but not measured <pause dur="0.3"/> in the way that you measure temperature <pause dur="0.3"/> on a

calibrated scale <pause dur="4.0"/><kinesic desc="reveals covered part of transparency" iterated="n"/> so those are three kinds of <pause dur="1.3"/> of ways of thinking about utility that we're not going to be adopting <pause dur="1.7"/> in our definitions of individual rationality <pause dur="1.3"/> some of you who've done economics before <pause dur="1.8"/> might have come across the idea of <pause dur="0.5"/> # <pause dur="0.3"/> of levels of utility <pause dur="1.4"/> anyway you could even perhaps think of writing an equation which gives you someone's level of utility <pause dur="1.7"/> and when people talk about utility they also sometimes talk about the idea of <pause dur="0.2"/> marginal <pause dur="0.2"/> utility <pause dur="1.9"/> by which they mean <pause dur="0.6"/> if i have an extra unit of X or an extra slice of pizza for example <pause dur="0.3"/> then my utility level for today goes from twenty <pause dur="0.3"/> to twenty-two <pause dur="0.4"/> and so my marginal utility from this extra slice of pizza <pause dur="0.2"/> is two units of utility <pause dur="1.3"/> but we're saying that we don't <pause dur="0.3"/> believe for the purposes of our <pause dur="0.7"/> # analysis of rationality <pause dur="0.2"/> that people <pause dur="0.5"/> can make those kind of judgements <pause dur="0.3"/> so we're ruling out the idea of measuring utility <pause dur="0.3"/> by numbers <pause dur="0.4"/> and that means we're ruling

out the idea of measuring marginal utility <pause dur="1.1"/> okay so for most of this course <pause dur="0.4"/> there might be times in which we say <pause dur="0.2"/> well let's look at what happens if we can do that <pause dur="0.3"/> but on the whole we're going to say <pause dur="0.2"/> we don't believe that marginal utility <pause dur="0.7"/> is a meaningful concept that people don't have that way of thinking about their own utility <pause dur="1.6"/> so if you've <pause dur="0.2"/> if you've heard of marginal utility <pause dur="0.5"/> as you all have now 'cause i've just mentioned it <pause dur="0.3"/> forget it for a while <pause dur="0.8"/> that's not our way of dealing with <pause dur="0.2"/> this <pause dur="0.9"/> notion of <pause dur="0.7"/> of preferences <pause dur="3.0"/><kinesic desc="changes transparency" iterated="y" dur="24"/> okay so <pause dur="0.6"/> the properties we're looking at then <pause dur="0.4"/> the preferences so far <pause dur="2.0"/> are that people can rank their preferences <trunc>o</trunc> over different bundles <pause dur="0.4"/> their ranking <pause dur="0.3"/> is done in an ordinal <pause dur="0.2"/> not a cardinal way <pause dur="9.6"/> to recap the <pause dur="0.2"/> preferences are complete <pause dur="1.2"/> in the sense that <pause dur="0.5"/> you can compare an individual can compare any two bundles of goods <pause dur="0.4"/> so we've got ordinal ranking of preferences <pause dur="0.4"/> completeness of preferences <pause dur="4.6"/> thirdly <pause dur="3.6"/> you've got <pause dur="0.6"/> non-satiation of preferences <pause dur="3.8"/>

we're assuming <pause dur="1.2"/> that individuals' preferences <pause dur="0.7"/> have this property of non-satiation <pause dur="3.1"/> in other words <pause dur="1.4"/> <reading>the consumer always prefers more to less of any commodity</reading> <pause dur="4.2"/> goes by the idea of <reading>you can't have too much of a good thing</reading> <pause dur="0.3"/> if a thing gives you <pause dur="0.3"/> happiness then the more of it the better <pause dur="1.7"/> is that always strictly true <pause dur="2.4"/> someone says yes but we don't # <pause dur="2.1"/> okay well you've <trunc>do</trunc> you've demonstrated by being here <pause dur="1.1"/> that even though there are many other things you could've gone away to do <pause dur="0.6"/> you've decided to come here <pause dur="1.5"/> i don't believe that <gap reason="name" extent="1 word"/> University campus is <pause dur="0.5"/> has nothing else to offer than this you've come here <pause dur="1.8"/> # and that means that on balance it's a good thing okay it might be <pause dur="0.2"/> that might be a dismal experience <pause dur="0.4"/> but you can survive it <pause dur="0.3"/> and maybe see you take away something that will <trunc>hel</trunc> enable you <pause dur="0.3"/> to do better on the course pass the exams and that will mean you've got a summer without having to bother about resits <pause dur="0.4"/> all these calculations might be there <pause dur="1.1"/> but if that's true is it would be the

case that you'd be happy to sit here until May or June <pause dur="0.4"/> doing nothing else <pause dur="0.3"/> maybe with a sleeping bag and <pause dur="0.9"/> and some food supplies coming every now and again <pause dur="0.4"/> course it isn't <pause dur="0.2"/> you can certainly have too much <pause dur="0.3"/> even of such a good thing as an economics lecture <pause dur="0.5"/> if that's true of an economics lecture it's certainly very very true <pause dur="0.3"/> of other commodities <pause dur="0.6"/> i happen to have one or two friends who enjoy <pause dur="0.4"/> # consuming substances like alcohol <pause dur="1.5"/><vocal desc="laughter" iterated="y" n="ss" dur="1"/> and i know it's terrible for me to admit that but it's true <pause dur="0.8"/> # <pause dur="0.5"/> and # <pause dur="0.3"/> and pizza <pause dur="0.8"/> okay some of my best friends like pizza <pause dur="1.0"/> # <pause dur="0.6"/> and i have some people who are devoted to pizza and eat and and eat nothing else <pause dur="0.5"/> but even they get to some point where if you offer them an extra slice of pizza <pause dur="0.3"/> they'd have to turn it down <pause dur="0.3"/> because it's no longer giving them <pause dur="0.3"/> positive levels of happiness <pause dur="0.8"/> it's having quite contrary effects <pause dur="0.9"/> on their physiological well-being <pause dur="1.2"/> okay <pause dur="1.0"/> so <pause dur="0.7"/> it certainly is unreasonable <pause dur="1.3"/><kinesic desc="indicates point on transparency" iterated="n"/> to assume that this is always true

but for now we're going to assume it <pause dur="2.3"/><kinesic desc="changes transparency" iterated="y" dur="6"/> one fourth and final <pause dur="0.6"/> property of preferences that i want to introduce before <pause dur="0.4"/> pausing for a break <pause dur="1.8"/> is the property of transitivity <pause dur="2.3"/> we're assuming that peoples' preferences <pause dur="1.4"/> have this property <pause dur="1.0"/> of <pause dur="1.1"/> being transitive <pause dur="7.7"/> now what we mean by this <pause dur="2.4"/><kinesic desc="reveals covered part of transparency" iterated="n"/> let me introduce the following notation <pause dur="0.5"/> this sign here which is a bit like a <pause dur="0.3"/> a greater than sign <pause dur="0.6"/> with a slight twist <pause dur="3.2"/> is to be read as <pause dur="1.4"/> in the <pause dur="0.2"/> to be read in the following way if <pause dur="1.1"/> the individual prefers A <pause dur="0.3"/> to B <pause dur="0.6"/> okay so that's read as <pause dur="3.5"/> if A <pause dur="0.5"/> is preferred to B or if if the individual prefers A to B <pause dur="2.3"/><kinesic desc="reveals covered part of transparency" iterated="n"/> and if the individual prefers B to C <pause dur="2.3"/><kinesic desc="reveals covered part of transparency" iterated="n"/> then by transitivity <pause dur="0.8"/> it follows that the individual must prefer A <pause dur="0.3"/> to C <pause dur="3.8"/> okay so <pause dur="0.5"/> i go along to one individual <pause dur="0.6"/> and i say to him <pause dur="0.9"/> # <pause dur="2.1"/> point A <pause dur="0.3"/> is you have a ticket to go to the next home match of <gap reason="name" extent="2 words"/> <pause dur="2.1"/> # <pause dur="1.8"/> bundle B is <pause dur="0.4"/> you get a free pizza from me <pause dur="1.5"/> and bundle C is you get four tickets for the national lottery <pause dur="1.0"/> there's A B and

C <pause dur="0.8"/> if i offer you the choice between A and B do you want to go to <pause dur="0.7"/> # <pause dur="0.7"/> <gap reason="name" extent="2 words"/> <pause dur="0.2"/> or do you want the pizza <pause dur="0.4"/> and if you say pizza <pause dur="1.3"/> and then i offer you the choice between the pizza and the national lottery tickets <pause dur="0.3"/> and you say the national lottery tickets <pause dur="0.6"/> if i then say to you okay <pause dur="0.2"/> what now about the choice between <gap reason="name" extent="2 words"/> and the national lottery tickets <pause dur="0.2"/> if you said ah well in that case <gap reason="name" extent="2 words"/> <pause dur="0.5"/> i say your your preferences are intransitive <pause dur="0.6"/> they don't satisfy this assumption of transitivity <pause dur="0.4"/> and i regard that as <pause dur="0.5"/> for these purposes <pause dur="0.5"/> not satisfying my conditions for rationality <pause dur="0.5"/> so this element of rationality <pause dur="0.3"/> imposes transitivity <pause dur="0.5"/> let me just say one more thing about transitivity before pausing <pause dur="4.3"/><kinesic desc="reveals covered part of transparency" iterated="n"/> it's true of strict preference it's true in this relationship between <pause dur="0.4"/> preferring one thing to another <pause dur="1.6"/> it's also true <pause dur="0.5"/> of <pause dur="0.2"/> the <pause dur="0.2"/> indifference relationship <pause dur="1.8"/> if asked the same questions the answer was <pause dur="0.4"/> i'm indifferent between A and B <pause dur="0.4"/> okay so

this is this reads as <pause dur="0.4"/> if the individual is indifferent between A and B <pause dur="0.6"/> and if they're indifferent between B and C <pause dur="0.8"/> then again by transitivity <pause dur="1.5"/> upper case T is my shorthand for transitivity <pause dur="0.7"/> the individual must also report being <pause dur="0.9"/> in # having <pause dur="1.5"/> transitive <pause dur="0.5"/> # having indifference between A and C <pause dur="0.3"/> if their preferences are <pause dur="0.5"/> transitive <pause dur="1.8"/> okay think about <pause dur="0.2"/> this property of transitivity which you mostly might not have come across before <pause dur="1.4"/> think about something which is <pause dur="0.6"/> think about some phenomenon in the real world <pause dur="0.2"/> which does have transitivity <pause dur="0.6"/> one example would be people's heights <pause dur="0.4"/> if i compared three people A B and C <pause dur="0.5"/> A is taller than B B is taller than C <pause dur="0.3"/> it follows <pause dur="0.6"/> in a kind of logical way that A is bigger than C <pause dur="0.8"/> think about some different phenomenon <pause dur="0.9"/> think about football matches <pause dur="1.7"/> and the question is are football results <pause dur="0.2"/> transitive do they satisfy the property of transitivity <pause dur="0.5"/> okay well look <pause dur="0.6"/> again i have friends who are interested in football <pause dur="1.5"/> and some of them are interested in some <pause dur="0.2"/>

football competition called the European Champions League or something of the kind <pause dur="0.9"/> # <pause dur="0.4"/> this is a very European arena a global arena so let's think not just about <pause dur="0.2"/> domestic football let's not just think about <gap reason="name" extent="2 words"/> <pause dur="0.7"/> who i believe aren't in the Champions League <pause dur="1.9"/> tomorrow there are some games in the Champions League of European football <pause dur="0.8"/> # in one particular group there is a team which goes by the name of Manchester United <pause dur="1.1"/> and in their first game of that competition they drew with Barcelona <pause dur="1.3"/> in their second game <pause dur="0.3"/> they drew with Bayern Munich <pause dur="0.8"/> tomorrow night Bayern Munich <pause dur="0.3"/> play Barcelona <pause dur="0.8"/> if football results are transitive <pause dur="0.3"/> then Bayern Munich and Barcelona will draw <pause dur="1.4"/> if you believe that that's true you won't be in this lecture theatre you'll be at the bookmakers putting a lot of money on the outcome <pause dur="1.1"/> if you do that you might well be disappointed <pause dur="0.4"/> 'cause football results <pause dur="0.2"/> sadly or mercifully <pause dur="0.2"/> depending on which way you look at it <pause dur="0.4"/> are not transitive <pause dur="0.6"/> okay so that's the phenomenon of transitivity <pause dur="0.4"/> we'll break there and we'll resume in about ten minutes