IB#Economics#SL# Unit1:#Microeconomics#

IB Economics SL Unit 1: Microeconomics

Mr. R.S. Pyszczek, Jr. City Honors School

IB Economics SL: City Honors School

Unit 1: Microeconomics Scarcity*

The basic economic problem that arises because people have unlimited wants but resources are limited. Because of scarcity, various economic decisions must be made to allocate resources efficiently.


Unit 1: Microeconomics Scarcity

§  When we talk of scarcity within an economic context, it refers to limited resources, not a lack of riches. These resources are the inputs of producLon: land, labor and capital.

§  People must make choices between different items because the resources necessary to fulfill their wants are limited. These decisions are made by giving up (trading off) one want to saLsfy another.


Unit 1: Microeconomics 4 Factors of Produc2on*

§  Land: real estate, property, factories

§  Labor: workers, hourly and salary

§  Capital: money and capital goods

§  Entrepreneur: Who is starLng up the company?


Unit 1: Microeconomics 3 Basic Economic Ques2ons We All Must Answer. *

1.   What to Produce?

2.   How to Produce?

3.   For Whom to Produce?


Unit 1: Microeconomics 3 Basic Economic Ques2ons We All Must Answer.

What to Produce?*

§  Consumer Goods: i.e. Pickup Trucks

§  Capital Goods: i.e. Garbage Trucks



How to Produce?*

§  In a factory? Quicker & less expensive

§  HandcraVed or Handmade? Longer and more expensive



For whom to Produce?*

§  High end or niche clientele i.e Ferrari, Maybach,

§  Middle Class-‐Upper Middle class i.e. Cadillac, BMW, Benz

§  Entry level-‐Middle class i.e Chevy, Honda, Toyota



For whom to Produce?*

§  Nissan make InfiniL or Toyota make Lexus or Honda makes Acura

§  GM makes Cadillac and Chevy

§  Ford also make Lincoln brand autos.


Unit 1: Microeconomics 1.1 Compe22ve Markets: Demand and Supply

Markets

The Nature of Markets

§  Outline the meaning of the term market. What is a market? Cite Examples. How have markets changed in the last 10 years?


Unit 1: Microeconomics Demand

The Law of Demand

The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quanLty demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumpLon of something else they value more. The chart below shows that the curve is a downward slope.


Unit 1: Microeconomics Demand

The Law of Demand* (2.2 pgs 27-‐30)

§  Explain the nega8ve causal rela8onship between price and quan8ty demanded.

Price goes Up, Demand goes Down

Demand goes Up, Price goes Down

§  Describe the rela8onship between an individual consumer’s demand and market demand.


Unit 1: Microeconomics The Demand Curve

§  Explain that a demand curve represents the rela8onship between the price and the quan8ty demanded of a product, ceteris paribus.

§  Draw a demand curve.


Unit 1: Microeconomics The Demand Curve*

What kind of slope does it have?

Why is that so?



The Non-‐Price Determinants of Demand (Factors that Change Demand or ShiV the Demand Curve) 2.3 pgs 30-‐34

§  Explain how factors including changes in income (in the cases of normal and inferior goods), preferences, prices of related goods (in the cases of subs8tutes and complements) and demographic changes may change demand.



The Non-‐Price Determinants of Demand (Factors that Change Demand or ShiV the Demand Curve)*

Subs2tute: A product or service that saLsfies the need of a consumer that another product or service fulfills. A subsLtute can be perfect or imperfect depending on whether the subsLtute completely or parLally saLsfies the consumer. A consumer might consider Pepsi to be a perfect subsLtute for Coke, or Land O'Lakes bueer to be a perfect subsLtute for Kerrygold Irish Bueer. However, if a consumer sees a difference in these brands, he may see Pepsi and Land O'Lakes as imperfect subsLtutes, even if economists might consider them perfect subsLtutes.



The Non-‐Price Determinants of Demand (Factors that Change Demand or ShiV the Demand Curve)*

Compliment: A good or service that is used in conjuncLon with another good or service. Usually, the complementary good has liele to no value when consumed alone but, when combined with another good or service, it adds to the overall value of the offering. Also, good tends to have more value when paired with a complement than it does by itself.

§  Complimentary Goods: i.e. Milk & Cereal, Hot Dogs & Buns, Soda and Chips



Movements Along and ShiVs of the Demand Curve

§  Dis8nguish between movements along the demand curve and shiGs of the demand curve.

§  Draw diagrams to show the difference between movements along the demand curve and shiGs of the demand curve.



What do these movements show?

Why is that so?



What do these shiVs show?

Why is that so?


Unit 1: Microeconomics ShiMs vs. Movement

For economics, the "movements" and "shiVs" in relaLon to the supply and demand curves represent very different market phenomena:



Movements

A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quanLty demanded from one point to another on the curve. The movement implies that the demand relaLonship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quanLty demanded changes in accordance to the original demand relaLonship. In other words, a movement occurs when a change in the quanLty demanded is caused only by a change in price, and vice versa.



ShiVs

A shiV in a demand or supply curve occurs when a good's quanLty demanded or supplied changes even though price remains the same. For instance, if the price for a boele of beer was $2 and the quanLty of beer demanded increased from Q1 to Q2, then there would be a shiV in the demand for beer. ShiVs in the demand curve imply that the original demand relaLonship has changed, meaning that quanLty demand is affected by a factor other than price. A shiV in the demand relaLonship would occur if, for instance, beer suddenly became the only type of alcohol available for consumpLon.


Unit 1: Microeconomics Supply

The Law of Supply (2.5 pgs 40-‐42)

Like the law of demand, the law of supply demonstrates the quanLLes that will be sold at a certain price. But unlike the law of demand, the supply relaLonship shows an upward slope. This means that the higher the price, the higher the quanLty supplied. Producers supply more at a higher price because selling a higher quanLty at a higher price increases revenue..


Unit 1: Microeconomics Supply

The Law of Supply*

§  Explain the posi8ve causal rela8onship between price and quan8ty supplied.

Price goes Up, Supply stays Up

Price goes Down, Supply goes Down

§  Describe the rela8onship between an individual producer’s supply and market supply.


Unit 1: Microeconomics The Supply Curve

§  Explain that a supply curve represents the rela8onship between the price and the quan8ty supplied of a product, ceteris paribus.

§  Draw a supply curve.


Unit 1: Microeconomics The Supply Curve*

What kind of slope does it have?

Why is that so?


Unit 1: Microeconomics The Non-‐Price Determinants of Supply (factors that change supply or shiM the supply curve) 2.6 pgs 42-‐47

§  Explain how factors including changes in costs of factors of produc8on (land, labour, capital and entrepreneurship), technology, prices of related goods (joint/compe88ve supply), expecta8ons, indirect taxes and subsidies and the number of firms in the market can change supply.


Unit 1: Microeconomics The Non-‐Price Determinants of Supply (factors that change supply or shiM the supply curve)*

§  Will Apple sLll supply as many iphone 5’s as before?

§  Will Sony sLll produce VCRs?

§  Will new cars come with Casseee Tape decks?

So what is the biggest manipulator of Supply?


Unit 1: Microeconomics Movements Along and ShiMs of the Supply Curve

§  Dis8nguish between movements along the supply curve and shiGs of the supply curve.

§  Construct diagrams to show the difference between movements along the supply curve and shiGs of the supply curve.



What do these movements show?

Why is that so?



What do these shiVs show?

Why is that so?



For economics, the "movements" and "shiVs" in relaLon to the supply and demand curves represent very different market phenomena:



Movements

A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quanLty demanded from one point to another on the curve. The movement implies that the demand relaLonship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quanLty demanded changes in accordance to the original demand relaLonship. In other words, a movement occurs when a change in the quanLty demanded is caused only by a change in price, and vice versa.



ShiVs

A shiV in a demand or supply curve occurs when a good's quanLty demanded or supplied changes even though price remains the same. For instance, if the price for a boele of beer was $2 and the quanLty of beer demanded increased from Q1 to Q2, then there would be a shiV in the demand for beer. ShiVs in the demand curve imply that the original demand relaLonship has changed, meaning that quanLty demand is affected by a factor other than price. A shiV in the demand relaLonship would occur if, for instance, beer suddenly became the only type of alcohol available for consumpLon.


Unit 1: Microeconomics Market Equilibrium

Equilibrium and Changes to Equilibrium (3.1 pgs 53-‐57)

§  Explain, using diagrams, how demand and supply interact to produce market equilibrium.

§  Analyze, using diagrams and with reference to excess demand or excess supply, how changes in the determinants of demand and/or supply result in a new market equilibrium.


Unit 1: Microeconomics Equilibrium*

When supply and demand are equal (i.e. when the supply funcLon and demand funcLon intersect) the economy is said to be at Equilibrium. At this point, the allocaLon of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is saLsfied with the current economic condiLon. At the given price, suppliers are selling all the goods that they have produced and consumers are gemng all the goods that they are demanding.


Unit 1: Microeconomics l  What do you noLce about this Graph?*


Unit 1: Microeconomics As you can see on the chart, equilibrium occurs at the intersecLon of the demand and supply curve, which indicates no allocaLve inefficiency. At this point, the price of the goods will be P* and the quanLty will be Q*. These figures are referred to as equilibrium price and quanLty.

In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relaLon to fluctuaLons in demand and supply.


Unit 1: Microeconomics The Role of the Price Mechanism

Resource AllocaLon (3.3 pgs 64-‐66)

§  Explain why scarcity necessitates choices that answer the “What to produce?” ques8on.

§  Explain why choice results in an opportunity cost.

§  Explain, using diagrams, that price has a signaling func8on and an incen8ve func8on, which result in a realloca8on of resources when prices change as a result of a change in demand or supply condi8ons.



Opportunity Cost*

§  1. The cost of an alternaLve that must be forgone in order to pursue a certain acLon. Put another way, the benefits you could have received by taking an alternaLve acLon.

§  2. The difference in return between a chosen investment and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment -‐ say, a risk-‐free government bond yielding 6%. In this situaLon, your opportunity costs are 4% (6% -‐ 2%).



Opportunity Cost

§  The opportunity cost of going to college is the money you would have earned if you worked instead. On the one hand, you lose four years of salary while gemng your degree; on the other hand, you hope to earn more during your career, thanks to your educaLon, to offset the lost wages.

§  Here's another example: if a gardener decides to grow carrots, his or her opportunity cost is the alternaLve crop that might have been grown instead (potatoes, tomatoes, pumpkins, etc.).

§  In both cases, a choice between two opLons must be made. It would be an easy decision if you knew the end outcome; however, the risk that you could achieve greater "benefits" (be they monetary or otherwise) with another opLon is the opportunity cost.


Unit 1: Microeconomics Market Efficiency

Consumer Surplus

§  Explain the concept of consumer surplus.

§  Iden8fy consumer surplus on a demand and supply diagram.



Consumer Surplus*

An economic measure of consumer saLsfacLon, which is calculated by analyzing the difference between what consumers are willing to pay for a good or service relaLve to its market price. A consumer surplus occurs when the consumer is willing to pay more for a given product than the current market price.



Consumer Surplus

Consumers always like to feel like they are gemng a good deal on the goods and services they buy and consumer surplus is simply an economic measure of this saLsfacLon. For example, assume a consumer goes out shopping for an MP3 player and he or she is willing to spend $250. When this individual finds that the player is on sale for $150, economists would say that this person has a consumer surplus of $100.



Consumer Surplus

§  Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay (i.e. the market price).

§  Consumer surplus is shown by the area under the demand curve and above the equilibrium price as in the diagram below..



Consumer Surplus

Consumer surplus and price elasLcity of demand

§  When the demand for a good or service is perfectly elasLc, consumer surplus is zero because the price that people pay matches what they are willing to pay.

§  In contrast, when demand is perfectly inelasLc, consumer surplus is infinite. Demand does not respond to a price change. Whatever the price, the quanLty demanded remains the same. Are there any examples of products that have such zero price elasLcity of demand?

§  The majority of demand curves are downward sloping. When demand is inelasLc, there is a greater potenLal consumer surplus because there are some buyers willing to pay a high price to conLnue consuming the product. This is shown in the next diagram.



Producer Surplus

§  Explain the concept of producer surplus.

§  Iden8fy producer surplus on a demand and supply diagram.



Producer Surplus*

An economic measure of the difference between the amount that a producer of a good receives and the minimum amount that he or she would be willing to accept for the good. The difference, or surplus amount, is the benefit that the producer receives for selling the good in the market.



Producer Surplus

For example, say a producer is willing to sell 500 widgets at $5 a piece and consumers are willing to purchase these widgets for $8 per widget. If the producer sells all of the widgets to consumers for $8, it will receive $4,000. To calculate the producer surplus, you subtract the amount the producer received by the amount it was willing to accept, (in this case $2,500), and you find a producer surplus of $1,500 ($4,000 -‐ $2,500).



Producer Surplus*

Shown here graphically is the area (Producer Surplus) above the producer's supply curve that it receives at the price point (P(i)). The size of this area increases as the price for the good increases.



Producer Surplus

§  The level of producer surplus is shown by the area above the supply curve and below the market price and is illustrated in the diagram below

§  Pm is the minimum price that this producer requires to supply the product to the market

§  As the price rises, there is a great incenLve to supply – producLon will expand as a business moves up their supply curve

§  Assuming the the market has reached an equilibrium at quanLty Q1 and price P1, then the level of producer surplus is shown by the shaded/labeled area.

§  Total revenue = price per unit x quanLty sold = P1 x Q1



AllocaLve Efficiency

§  Explain that the best alloca8on of resources from society’s point of view is at compe88ve market equilibrium, where social (community) surplus (consumer surplus and producer surplus) is maximized (marginal benefit = marginal cost).


Unit 1: Microeconomics Theory of Knowledge: Poten2al Connec2ons

§  To what extent is it true to say that a demand curve is a fic8onal en8ty?

§  What assump8ons underlie the law of demand? Are these assump8ons likely to be true? Does it maUer if these assump8ons are actually false?


Unit 1: Microeconomics 1.2 Elas2city

Price Elas2city of Demand (PED) (4.1 pgs 72-‐73)

Price ElasLcity of Demand and its Determinants

§  Explain the concept of price elas8city of demand, understanding that it involves responsiveness of quan8ty demanded to a change in price, along a given demand curve.


Unit 1: Microeconomics Price Elas2city of Demand (PED)

The degree to which a demand or supply curve reacts to a change in price is the curve's elasLcity. ElasLcity varies among products because some products may be more essenLal to the consumer. Products that are necessiLes are more insensiLve to price changes because consumers would conLnue buying these products despite price increases. Conversely, a price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high.



Price ElasLcity of Demand and its Determinants* (4.2 pgs 73-‐75)

§  Calculate PED using the following equa8on:

PED = percentage change in quan8ty demanded

percentage change in price .

If elas8city is greater than or equal to one, the curve is considered to be elas8c. If it is less than one, the curve is said to be inelas8c.



Values for price elasLcity of demand

§  If Ped = 0 demand is perfectly inelasLc -‐ demand does not change at all when the price changes – the demand curve will be verLcal.

§  If Ped is between 0 and 1 (i.e. the % change in demand from A to B is smaller than the percentage change in price), then demand is inelasLc.

§  If Ped = 1 (i.e. the % change in demand is exactly the same as the % change in price), then demand is unit elasLc. A 15% rise in price would lead to a 15% contracLon in demand leaving total spending the same at each price level.

§  If Ped > 1, then demand responds more than proporLonately to a change in price i.e. demand is elasLc. For example if a 10% increase in the price of a good leads to a 30% drop in demand. The price elasLcity of demand for this price change is –3




§  State that the PED value is treated as if it were posi8ve although its mathema8cal value is usually nega8ve.

§  Explain, using diagrams and PED values, the concepts of price elas8c demand, price inelas8c demand, unit elas8c demand, perfectly elas8c demand and perfectly inelas8c demand.



Price ElasLcity of Demand and its Determinants*

A good or service is considered to be highly elasLc if a slight change in price leads to a sharp change in the quanLty demanded or supplied. Usually these kinds of products are readily available in the market and a person may not necessarily need them in his or her daily life. On the other hand, an inelasLc good or service is one in which changes in price witness only modest changes in the quanLty demanded or supplied, if any at all. These goods tend to be things that are more of a necessity to the consumer in his or her daily life.




§  Explain the determinants of PED, including the number and closeness of subs8tutes, the degree of necessity, 8me and the propor8on of income spent on the good.

§  Calculate PED between two designated points on a demand curve using the PED equa8on above.

§  Explain why PED varies along a straight line demand curve and is not represented by the slope of the demand curve.



Factors affecLng price elasLcity of demand

§  The number of close subsLtutes – the more close subsLtutes there are in the market, the more elasLc is demand because consumers find it easy to switch

§  The cost of switching between products – there may be costs involved in switching. In this case, demand tends to be inelasLc. For example, mobile phone service providers may insist on a12 month contract.

§  The degree of necessity or whether the good is a luxury – necessiLes tend to have an inelasLc demand whereas luxuries tend to have a more elasLc demand.




§  The proporLon of a consumer’s income allocated to spending on the good – products that take up a high % of income will have a more elasLc demand

§  The Lme period allowed following a price change – demand is more price elasLc, the longer that consumers have to respond to a price change. They have more Lme to search for cheaper subsLtutes and switch their spending.




§  Whether the good is subject to habitual consumpLon – consumers become less sensiLve to the price of the good of they buy something out of habit (it has become the default choice).

§  Peak and off-‐peak demand -‐ demand is price inelasLc at peak Lmes and more elasLc at off-‐peak Lmes – this is parLcularly the case for transport services.

§  The breadth of definiLon of a good or service – if a good is broadly defined, i.e. the demand for petrol or meat, demand is oVen inelasLc. But specific brands of petrol or beef are likely to be more elasLc following a price change.




§  As we menLoned previously, the demand curve is a negaLve slope, and if there is a large decrease in the quanLty demanded with a small increase in price, the demand curve looks flaeer, or more horizontal. This flaeer curve means that the good or service in quesLon is elasLc.




§  Meanwhile, inelasLc demand is represented with a much more upright curve as quanLty changes liele with a large movement in price.



Values for price elasLcity of demand

§  If Ped = 0 demand is perfectly inelasLc -‐ demand does not change at all when the price changes – the demand curve will be verLcal.

§  If Ped is between 0 and 1 (i.e. the % change in demand from A to B is smaller than the percentage change in price), then demand is inelasLc.

§  If Ped = 1 (i.e. the % change in demand is exactly the same as the % change in price), then demand is unit elasLc. A 15% rise in price would lead to a 15% contracLon in demand leaving total spending the same at each price level.

§  If Ped > 1, then demand responds more than proporLonately to a change in price i.e. demand is elasLc. For example if a 10% increase in the price of a good leads to a 30% drop in demand. The price elasLcity of demand for this price change is –3




§  The number of close subsLtutes – the more close subsLtutes there are in the market, the more elasLc is demand because consumers find it easy to switch

§  The cost of switching between products – there may be costs involved in switching. In this case, demand tends to be inelasLc. For example, mobile phone service providers may insist on a12 month contract.

§  The degree of necessity or whether the good is a luxury – necessiLes tend to have an inelasLc demand whereas luxuries tend to have a more elasLc demand.

§  The proporLon of a consumer’s income allocated to spending on the good – products that take up a high % of income will have a more elasLc demand




§  The Lme period allowed following a price change – demand is more price elasLc, the longer that consumers have to respond to a price change. They have more Lme to search for cheaper subsLtutes and switch their spending.

§  Whether the good is subject to habitual consumpLon – consumers become less sensiLve to the price of the good of they buy something out of habit (it has become the default choice).

§  Peak and off-‐peak demand -‐ demand is price inelasLc at peak Lmes and more elasLc at off-‐peak Lmes – this is parLcularly the case for transport services.

§  The breadth of definiLon of a good or service – if a good is broadly defined, i.e. the demand for petrol or meat, demand is oVen inelasLc. But specific brands of petrol or beef are likely to be more elasLc following a price change.



Demand curves with different price elasLcity of demand


Unit 1: Microeconomics Cross Price Elas2city of Demand (XED)

Cross Price ElasLcity of Demand and its Determinants (4.4 pgs 83-‐87)

§  Outline the concept of cross price elas8city of demand, understanding that it involves responsiveness of demand for one good (and hence a shiGing demand curve) to a change in the price of another good.

§  Calculate XED using the following equa8on:

XED = percentage change in quan8ty demanded of good x

percentage change in price of good y



Cross Price ElasLcity of Demand and its Determinants

§  Show that subs8tute goods have a posi8ve value of XED and complementary goods have a nega8ve value of XED.

§  Explain that the (absolute) value of XED depends on the closeness of the rela8onship between two goods.




§  Show that subs8tute goods have a posi8ve value of XED and complementary goods have a nega8ve value of XED.

§  Explain that the (absolute) value of XED depends on the closeness of the rela8onship between two goods.


Unit 1: Microeconomics

Cross price elasLcity of demand – analysis

diagrams




§  Cross price elas8city (XED) measures the responsiveness of demand for good X following a change in the price of a related good Y.

§  We are looking here at the effect that changes in rela8ve prices within a market have on the paUern of demand.



ApplicaLons of Cross Price ElasLcity of Demand

§  Examine the implica8ons of XED for businesses if prices of subs8tutes or complements change.

Cross price elasLcity (XED) measures the responsiveness of demand for good X following a change in the price of a related good Y.

§  We are looking here at the effect that changes in relaLve prices within a market have on the paeern of demand.

§  With cross elasLcity we make a disLncLon between subsLtute and complementary products.




Subs2tutes:*

§  With subsLtute goods such as brands of cereal, an increase in the price of one good will lead to an increase in demand for the rival product. The cross price elasLcity for two subsLtutes will be posiLve.

§  For example, the iPhone now provides genuine compeLLon for the PC/Computer in providing users with ‘push technology’ to send all emails through to a mobile device.

§  Another good example is the cross price elasLcity of demand for music. Sales of digital music downloads have been soaring with the growth of broadband and falling prices for downloads. As a result, sales of tradiLonal music CD’s are declining at a steep rate.




Complements:*

§  Complements are in joint demand

§  The XED for two complements is negaLve.

§  The stronger the relaLonship between two products, the higher is the co-‐efficient of cross-‐price elasLcity of demand.

§  When there is a strong complementary relaLonship between two products, the cross-‐price elasLcity will be highly negaLve. An example might be games consoles and soVware games




Pricing for complementary goods:*

§  Popcorn, soV drinks and cinema Lckets have a high negaLve value for cross elasLcity– they are strong complements

§  Popcorn has a high markup i.e. pop corn costs pennies to make but sells for more than a pound. If firms have a reliable esLmate for XED they can esLmate the effect, say, of a two-‐for-‐one cinema Lcket offer on the demand for popcorn.

§  The addiLonal profit from extra popcorn sales may more than compensate for the lower cost of entry into the cinema. For some movie theatres, the revenue from concessions stalls selling popcorn; drinks and other refreshments can generate as much as 40 per cent of their annual turnover


Unit 1: Microeconomics Income Elas2city of Demand (YED)

Income ElasLcity of Demand and its Determinants (4.5 Pg 87-‐90)

§  Outline the concept of income elas8city of demand, understanding that it involves responsiveness of demand (and hence a shiGing demand curve) to a change in income.

§  Calculate YED using the following equa8on:

YED = percentage change in quan8ty demanded

percentage change in income



Income ElasLcity of Demand and its Determinants

§  Show that normal goods have a posi8ve value of YED and inferior goods have a nega8ve value of YED.

§  Dis8nguish, with reference to YED, between necessity (income inelas8c) goods and luxury (income elas8c) goods.



Normal Goods*

§  Normal goods have a posiLve income elasLcity of demand so as consumers’ income rises more is demanded at each price i.e. there is an outward shiV of the demand curve

§  Normal necessiLes have an income elasLcity of demand of between 0 and +1 for example, if income increases by 10% and the demand for fresh fruit increases by 4% then the income elasLcity is +0.4. Demand is rising less than proporLonately to income.

§  Luxury goods and services have an income elasLcity of demand > +1 i.e. demand rises more than proporLonate to a change in income – for example a 8% increase in income might lead to a 10% rise in the demand for new kitchens. The income elasLcity of demand in this example is +1.25.



Inferior Goods*

§  Inferior goods have a negaLve income elasLcity of demand meaning that demand falls as income rises. Typically inferior goods or services exist where superior goods are available if the consumer has the money to be able to buy it. Examples include the demand for cigareees, low-‐priced own label foods in supermarkets and the demand for council-‐owned properLes.



The income elasLcity of demand is usually strongly posiLve for

§  Fine wines and spirits, high quality chocolates and luxury holidays overseas.

§  Sports cars

§  Consumer durables -‐ audio visual equipment, smart-‐phones

§  Sports and leisure faciliLes (including gym membership and exclusive sports clubs).



In contrast, income elasLcity of demand is lower for

§  Staple food products such as bread, vegetables and frozen foods.

§  Mass transport (bus and rail).

§  Beer and takeaway pizza!

§  Income elasLcity of demand is negaLve (inferior) for cigareees and urban bus services.



Product ranges and longer term trends

§  Income elasLcity of demand will vary within a product range. For example the PED for own-‐label foods in supermarkets is less for the high-‐value “finest” food ranges.

§  There is a general downward trend in the income elasLcity of demand for many basic products, parLcularly foodstuffs. One reason is that as a society becomes richer, there are changes in tastes and preferences. What might have been considered a luxury good several years ago might now be regarded as a necessity? How many of you regard a NFL sports subscripLon or an iPhone, an iPad or a new laptop as a necessity?



ApplicaLons of Income ElasLcity of Demand

§  Examine the implica8ons for producers and for the economy of a rela8vely low YED for primary products, a rela8vely higher YED for manufactured products and an even higher YED for services.


Unit 1: Microeconomics Price Elas2city of Supply (PES)

Price ElasLcity of Supply and its Determinants (4.6 pgs 90-‐94)

§  Explain the concept of price elas8city of supply, understanding that it involves responsiveness of quan8ty supplied to a change in price along a given supply curve.

§  Calculate PES using the following equa8on:

PES = percentage change in quan8ty supplied percentage

change in price



Price ElasLcity of Supply and its Determinants

Price elasLcity of supply (PES) measures the relaLonship between change in quanLty supplied and a change in price.

§  If supply is elas,c, producers can increase output without a rise in cost or a Lme delay

§  If supply is inelas,c, firms find it hard to change producLon in a given Lme period.




§  Explain, using diagrams and PES values, the concepts of elas8c supply, inelas8c supply, unit elas8c supply, perfectly elas8c supply and perfectly inelas8c supply.

§  Explain the determinants of PES, including 8me, mobility of factors of produc8on, unused capacity and ability to store stocks.




The formula for price elasLcity of supply is:

Percentage change in quanLty supplied divided by the percentage change in price

§  When Pes > 1, then supply is price elasLc

§  When Pes < 1, then supply is price inelasLc

§  When Pes = 0, supply is perfectly inelasLc

§  When Pes = infinity, supply is perfectly elasLc following a change in demand



ApplicaLons of Price ElasLcity of Supply

§  Explain why the PES for primary commodi8es is rela8vely low and the PES for manufactured products is rela8vely high.




What factors affect the elasLcity of supply?

§  Spare producLon capacity: If there is plenty of spare capacity then a business can increase output without a rise in costs and supply will be elasLc in response to a change in demand. The supply of goods and services is most elasLc during a recession, when there is plenty of spare labour and capital resources.

§  Stocks of finished products and components: If stocks of raw materials and finished products are at a high level then a firm is able to respond to a change in demand -‐ supply will be elasLc. Conversely when stocks are low, dwindling supplies force prices higher because of scarcity in the market..




What factors affect the elasLcity of supply?

§  The ease and cost of factor subsLtuLon: If both capital and labour are occupaLonally mobile then the elasLcity of supply for a product is higher than if capital and labour cannot easily be switched. A good example might be a prinLng press which can switch easily between prinLng magazines and greeLngs cards.

§  Time period and producLon speed: Supply is more price elasLc the longer the Lme period that a firm is allowed to adjust its producLon levels. In some agricultural markets the momentary supply is fixed and is determined mainly by planLng decisions made months before, and also climaLc condiLons, which affect the producLon yield. In contrast the supply of milk is price elasLc because of a short Lme span from cows producing milk and products reaching the market place.




Unit 1: Microeconomics 1.3 Government Interven2on

Indirect Taxes (5.1 pgs 98-‐100)

Specific (fixed amount) Taxes and Ad Valorem (percentage) Taxes and their Impact on Markets

§  Explain why governments impose indirect (excise) taxes.

§  Dis8nguish between specific and ad valorem taxes.

§  Draw diagrams to show specific and ad valorem taxes, and analyze their impacts on market outcomes.

§  Discuss the consequences of imposing an indirect tax on the stakeholders in a market, including consumers, producers and the government.



Indirect Taxes

Specific (fixed amount) Taxes their Impact on Markets

A tax charged a specific amount to be paid for every unit of a good sold.

Specific state and federal taxes are also known as ”per unit tax".



Indirect Taxes

Specific (fixed amount) Taxes Examples:

§  Gas Taxes (roughly $1.00 a gallon in NYS)

§  Cigareee Taxes (per pack charge)*

§  Alcohol Taxes (Per Boele, Case, Barrel charge)*

*AKA Sin Taxes



Indirect Taxes

Ad Valorem (percentage) Taxes and their Impact on Markets

A tax based on the assessed value of real estate or personal property. Ad valorem taxes can be property tax or even duty on imported items. Property ad valorem taxes are the major source of revenue for state and municipal governments.

Municipal property ad valorem taxes are also known as "property taxes".



Indirect Taxes

Ad Valorem (percentage) Taxes Examples:

§  Suburban Property Taxes in WNY (School Levy)

§  Social Security Taxes/FICA 15% (7.5% Individual & 7.5% Employer)

§  Sales Taxes 8.75% in Erie County (NYS Tax is capped at 7%)

§  Property Transfer Taxes (Funding for NFTA)



Subsidies (5.3 pgs 107-‐112)

Impact on Markets

§  Explain why governments provide subsidies, and describe examples of subsidies.

§  Draw a diagram to show a subsidy, and analyse the impacts of a subsidy on market outcomes.

§  Discuss the consequences of providing a subsidy on the stakeholders in a market, including consumers, producers and the government.



Subsidies*

Impact on Markets

A Subsidy is a payment from the government to an individual or a firm for the purpose of increasing the purchase or a supply of a good.

See Figure 5.9 Subsidy: Simple Case



Subsidies*

Impact on Markets

§  The Supply Curve ShiVs Right (Downward) by the amount of the Subsidy.

§  Consumers spend less (and get more) than before

§  Increases consumer surplus because it lowers the price paid

§  Producers benefit by receiving much more revenue.



Subsidies*

Different Types of Producer Subsidy

§  A guaranteed payment on the factor cost of a product – e.g. a guaranteed minimum price offered to farmers such as under the old-‐style Common Agricultural Policy (CAP).

§  An input subsidy which subsidises the cost of inputs used in producLon – e.g. an employment subsidy for taking on more workers.



Subsidies*

Different Types of Producer Subsidy

§  Government grants to cover losses made by a business – e.g. a grant given to cover losses in the railway industry or a loss-‐making airline.

§  Bail-‐outs e.g. for financial organisaLons in the wake of the credit crunch

§  Financial assistance (loans and grants) for businesses semng up in areas of high unemployment – e.g. as part of a regional policy designed to boost employment.



Subsidies*

Economic and Social JusLficaLons for Subsidies

Why might the government be jusLfied in providing financial assistance to producers in certain markets and industries? How valid are the arguments for government subsidies?

§  To keep prices down and control inflaLon – in the last couple of years several countries have been offering fuel subsidies to consumers and businesses in the wake of the steep increase in world crude oil prices.

§  To encourage consumpLon of merit goods and services which are said to generate posiLve externaliLes (increased social benefits). Examples might include subsidies for investment in environmental goods and services.



Subsidies*

Economic and Social JusLficaLons for Subsidies

§  Reduce the cost of capital investment projects – which might help to sLmulate economic growth by increasing long-‐run aggregate supply.

§  Subsidies to slow-‐down the process of long term decline in an industry e.g. fishing or mining

§  Subsidies to boost demand for industries during a recession e.g. the car scrappage scheme



Subsidies*

Economic Arguments against Subsidies

§  The economic and social case for a subsidy should be judged carefully on the grounds of efficiency and fairness

§  Might the money used up in subsidy payments be beeer spent elsewhere?

§  Government subsidies inevitably carry an opportunity cost and in the long run there might be beeer ways of providing financial support to producers and workers in specific industries.



Subsidies*

§  Free market economists argue that subsidies distort the working of the free market mechanism and can lead to government failure where intervenLon leads to a worse distribuLon of resources.

§  DistorLon of the Market: Subsidies distort market prices – for example, export subsidies distort the trade in goods and services and can curtail the ability of ELDCs to compete in the markets of rich naLons.

§  Arbitrary Assistance: Decisions about who receives a subsidy can be arbitrary

§  Financial Cost: Subsidies can become expensive – note the opportunity cost!



Subsidies*

Free market economists argue that subsidies distort the working of the free market mechanism and can lead to government failure where intervenLon leads to a worse distribuLon of resources.

§  Who pays and who benefits? The final cost of a subsidy usually falls on consumers (or tax-‐payers) who themselves may have derived no benefit from the subsidy.

§  Encouraging inefficiency: Subsidy can arLficially protect inefficient firms who need to restructure – i.e. it delays much needed reforms.



Subsidies*

Free market economists argue that subsidies distort the working of the free market mechanism and can lead to government failure where intervenLon leads to a worse distribuLon of resources.

§  Risk of Fraud: Ever-‐present risk of fraud when allocaLng subsidy payments.

§  There are alternaLves: It may be possible to achieve the objecLves of subsidies by alternaLve means which have less distorLng effects.



Subsidies

To what extent will a subsidy feed through to lower prices for consumers?

A subsidy has the effect of causing an outward shiV in the market supply curve for a product



Subsidies

A subsidy might be jusLfied if it encourages increased supply and consumpLon of products that yield high external benefits



Subsidies

Governments view of the economy could be summed up in a few short phrases:

If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.

Ronald Reagan, 40th POTUS



Price Controls (5.4 pgs. 113-‐116)

Price Ceilings (maximum prices): RaLonale, Consequences and Examples

§  Explain why governments impose price ceilings, and describe examples of price ceilings, including food price controls and rent controls.

§  Draw a diagram to show a price ceiling, and analyse the impacts of a price ceiling on market outcomes.



Price Controls


§  Examine the possible consequences of a price ceiling, including shortages, inefficient resource allocaLon, welfare impacts, underground parallel markets and non-‐price raLoning mechanisms.

§  Discuss the consequences of imposing a price ceiling on the stakeholders in a market, including consumers, producers and the government.



Price Controls*


Government mandated minimum or maximum prices that can be charged for specified goods. Governments some8mes implement price controls when prices on essen8al items, such as food or oil, are rising rapidly.



Price Controls


History has shown that price controls are, at best, effecLve only on a very short-‐term basis. Over the long term, they can lead to shortages, raLoning, quality deterioraLon and black markets. Consider the price controls placed by the Nixon and Carter administraLons on gasoline, which led to long lines at the pump and restricLons on how much gas could be purchased during the 1970s.



Price Controls




Price Controls


Rent control provides another example of the ineffecLveness of price controls. Rent controls, such as those used in New York City, are intended to keep housing prices affordable. Instead, they decrease the supply of rental housing and thereby raise prices of exisLng rental housing. In a vicious cycle, rent controls discourage new landlords from entering the market and cause exisLng ones to leave, creaLng a supply of housing that is less than the free market would allow and causing further upward pressure on housing rental prices. Rent controls also reduce the financial incenLves for landlords to maintain and improve their properLes, leading to lower quality housing.



Price Controls*


Effects of Price Ceilings

§  Shortages

§  RaLoning

§  Decreased market size

§  EliminaLon of allocaLve efficiency (Society doesn't’t make enough of the desired good)

§  Informal (Black) markets



Price Controls (5.5 pgs 116-‐119)

Price Floors (minimum prices): RaLonale, Consequences and Examples

§  Explain why governments impose price floors, and describe examples of price floors, including price support for agricultural products and minimum wages.

§  Draw a diagram of a price floor, and analyse the impacts of a price floor on market outcomes.



Price Controls


§  Examine the possible consequences of a price floor, including surpluses

§  and government measures to dispose of the surpluses, inefficient resource alloca8on and welfare impacts.

§  Discuss the consequences of imposing a price floor on the stakeholders in a market, including consumers, producers and the government.



Price Controls*


When a "price floor" is set, a certain minimum amount must be paid for a good or service. If the price floor is below a market price, no direct effect occurs. If the market price is lower than the price floor, then a surplus will be generated. Minimum wage laws are good examples of price floors.



Price Controls


In many states, the U.S. minimum wage law has no effect, as market wage rates for low-‐skilled workers are above the U.S. minimum wage rate. In states where the minimum wage is above the market wage rate, the law will increase unemployment for low-‐skilled workers. Although some low-‐skilled workers will get higher pay, others will lose their jobs.



Price Controls



Unit 1: Microeconomics 1.4 Market failure

Market Failure (6.1 pgs. 123-‐126)

The Meaning of Market Failure

Market Failure as a Failure to Allocate Resources Efficiently

§  Analyze the concept of market failure as a failure of the market to achieve allocaLve efficiency, resulLng in an over-‐ allocaLon of resources (over-‐ provision of a good) or an under-‐allocaLon of resources (under-‐provision of a good)




The Meaning of Market Failure*

What is market failure?

Market failure occurs when freely-‐func8oning markets, fail to deliver an efficient alloca8on of resources. The result is a loss of economic and social welfare. Market failure exists when the compe88ve outcome of markets is not efficient from the point of view of society as a whole. This is usually because the benefits that the free-‐market confers on individuals or businesses carrying out a par8cular ac8vity diverge from the benefits to society as a whole.



Market Failure (6.1 pgs. 123-‐126)*

Markets can fail because:

§  NegaLve externaliLes (e.g. the effects of environmental polluLon) causing the social cost of producLon to exceed the private cost.

§  PosiLve (or beneficial) externaliLes (e.g. the provision of educaLon and health care) causing the social benefit of consumpLon to exceed the private benefit

§  Imperfect informaLon means merit goods are under-‐produced while demerit goods are over-‐produced or over-‐consumed





§  Market dominance by monopolies can lead to under-‐producLon and higher prices than would exist under condiLons of compeLLon

§  The private sector in a free-‐markets cannot profitably supply to consumers pure public goods and quasi-‐public goods that are needed to meet people’s needs and wants





§  Factor immobility causes unemployment hence producLve inefficiency

§  Equity (fairness) issues. Markets can generate an ‘unacceptable’ distribuLon of income and consequent social exclusion which the government may choose to change




Types of Market Failure

The Meaning of ExternaliLes

§  Describe the concepts of marginal private benefits (MPB), marginal social benefits (MSB), marginal private costs (MPC) and marginal social costs (MSC).

§  Describe the meaning of externaliLes as the failure of the market to achieve a social opLmum where MSB = MSC.




Market failure results in:

§  ProducLve inefficiency: Businesses are not maximising output from given factor inputs. This is a problem because the lost output from inefficient producLon could have been used to saLsfy more wants and needs

§  AllocaLve inefficiency: Resources are misallocated and producing goods and services not wanted by consumers. This is a problem because resources can be put to a beeer use making products that consumers value more highly




NegaLve ExternaliLes of ProducLon and ConsumpLon

§  Explain, using diagrams and examples, the concepts of negaLve externaliLes of producLon and consumpLon, and the welfare loss associated with the producLon or consumpLon of a good or service.

§  Explain that demerit goods are goods whose consumpLon creates external costs.

§  Evaluate, using diagrams, the use of policy responses, including market-‐based policies (taxaLon and tradable permits), and government regulaLons, to the problem of negaLve externaliLes of producLon and consumpLon




“Merit goods” are goods or services that have significant external benefits to society if they are produced and consumed. However, many people in society will not consume merit goods because the private sector charges too high a price that they can afford or are willing to pay. As a result, if it was leV to the private sector, merit goods would be under produced and under consumed. The government will usually intervene and provide merit goods free of charge, or subsidised, so that everyone can consume them. Consequently society will be beeer off as a whole due to the increase in external benefits created by merit goods.




NegaLve ExternaliLes of ProducLon and ConsumpLon

A Merit Good has two characterisLc:

§  People do not realize the true benefit. For example, people underesLmate the benefit of educaLon or vaccinaLons.

§  Usually these goods have posiLve externaliLes.

Therefore in a free market there will be under consumpLon of merit goods.




Examples of Merit Goods:

§  Health Care – people underesLmate the benefits of gemng a vaccinaLon. If people do get a vaccinaLon, then there will be external benefits to the rest of society because it will help reduce disease in the rest of society.

§  Museums – the educaLonal benefit of museums.

§  EducaLon – People may undervalue benefits of studying.




A “Demerit Good” is a good or service whose consumpLon is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negaLve effects on the consumers themselves. It is over-‐consumed if leV to market forces. Examples of demerit goods include tobacco, alcoholic beverages, recreaLonal drugs, gambling, junk food and prosLtuLon. Because of the nature of these goods, governments oVen levy taxes on these goods (specifically, sin taxes), in some cases regulaLng or banning consumpLon or adverLsement of these goods.




A Demerit Good has two characterisLcs:

§  A good which harms the consumer. For example, people don’t realise or ignore the costs of doing something e.g. smoking, drugs.

§  Usually these goods also have negaLve externaliLes.

Therefore in a free market there will be over consumpLon of these goods.




Examples of Demerit Goods include:

§  Smoking

§  Drinking

§  Taking drugs (Illegal and /or Illicit)

Note: Merit and Demerit Goods involve making a value judgment that something is good or bad for you.




Private Costs and Social Costs

The existence of externaliLes creates a divergence between private and social costs of producLon and the private and social benefits of consumpLon.

§  Social Cost = Private Cost + External Cost

§  Social Benefit = Private Benefit + External Benefit

When negaLve producLon externaliLes exist, social costs exceed private cost. This leads to over-‐producLon if producers do not take into account the externaliLes.




External costs from producLon

ProducLon externaliLes are generated and received in supplying goods and services -‐ examples include noise and atmospheric polluLon from factories.

External costs from consumpLon

§  ConsumpLon externaliLes are generated and received in consumpLon -‐ examples include polluLon from driving cars and motorbikes and externaliLes created by smoking and alcohol abuse and also the noise polluLon created by loud music being played in built-‐up areas.

§  NegaLve consumpLon externaliLes lead to a situaLon where the social benefit of consumpLon is less than the private benefit.




§  Figure 6.1 Community Surplus Pg. 124

§  Figure 6.2 Social Benefits and Social Costs Pg. 125

§  Figure 6.3 NegaLve Externality of ProducLon Pg. 127

§  Figure 6.5 NegaLve Externality of ConsumpLon. Pg 129

§  Page 130 “Pink Box QuesLons

§  Page 133 Exercises quesLons #1, 2, 3




PosiLve ExternaliLes of ProducLon and ConsumpLon

§  Explain, using diagrams and examples, the concepts of posiLve externaliLesof producLon and consumpLon, and the welfare loss associated with the producLon or consumpLon of a good or service.

§  Explain that merit goods are goods whose consumpLon creates external benefits.

§  Evaluate, using diagrams, the use of government responses, including subsidies, legislaLon, adverLsing to influence behaviour, and direct provision of goods and services.





§  Figure 6.8 PosiLve Externality of ProducLon Pg. 134

§  Figure 6.10 PosiLve ConsumpLon Externality Pg. 135

§  Figure 6.11 Subsidy of EducaLon Pg. 136





There are many occasions when the producLon and/or consumpLon of a good or a service creates external benefits which boost social welfare.

§  External benefits from development of renewable energy sources such as wind, solar and hydro power

§  Social benefits from the Postal Service.

§  Social benefits to provide free school lunches.





§  PosiLve externaliLes and market failure

§  Where posiLve externaliLes exist, the good or service may be under-‐consumed or under-‐provided since the free market may fail to value them correctly or take them into account when pricing the product. In the diagram above, the normal market equilibrium is at P1 and Q1 – but if there are external benefits, the Q1 is an output below the level that maximises social welfare.




Lack of Public Goods

§  Using the concepts of rivalry and excludability, and providing examples, disLnguish between public goods (non-‐rivalrous and non-‐ excludable) and private goods (rivalrous and excludable).

§  Explain, with reference to the free rider problem, how the lack of public goods indicates market failure.

§  Discuss the implicaLons of the direct provision of public goods by government.




Public Goods*

A public good is oVen (though not always) under-‐provided in a free market because of its characterisLcs of non-‐rivalry and non-‐excludability.

Examples of Public Goods

§  Public Defense; Armed Services

§  Street Lights, Roads, Public Parks, Bridges

§  Police service, Fire Service, Public EducaLon




Public goods have two characterisLcs:*

§  Non-‐rivalry: This means that when a good is consumed, it doesn’t reduce the amount available for others.

– E.g. benefiLng from a street light doesn’t reduce light for others, but eaLng an apple would.




Public goods have two characterisLcs:*

§  Non-‐excludability: This occurs when it is not possible to provide a good without it being possible for others to enjoy.

E.g erecLng a dam to stop flooding, or providing law and order.




Common Access Resources and the Threat to Sustainability

§  Describe, using examples, common access resources.

§  Describe sustainability.

§  Explain that the lack of a pricing mechanism for common access resources means that these goods may be overused/depleted/ degraded as a result of acLviLes of producers and consumers who do not pay for the resources that they use, and that this poses a threat to sustainability .




Common Access Resources and the Threat to Sustainability*

DefiniLon of ’Common Resource'

§  A resource, such as water or pasture, that provides users with tangible benefits. A major concern with common resources is overuse, especially when there are poor social-‐management systems in place to protect the core resource.

§  Common resources that are not owned by anyone are called open-‐access resources.




Common Access Resources and the Threat to Sustainability*

Overuse of common resources oVen leads to economic problems such as the tragedy of the commons, where user self-‐interest leads to the destrucLon of the resource in the long term, to the disadvantage of everyone.

Common Access Resources and Market Failure video clip




To define environmental sustainability we must first define sustainability. *Sustainability is the ability to con,nue a defined behavior indefinitely*

To define what environmental sustainability is we turn to the experts

Herman Daly, one of the early pioneers of ecological sustainability, looked at the problem from a maintenance of natural capital viewpoint. In 1990 he proposed that:




§  1. For renewable resources, the rate of harvest should not exceed the rate of regeneraLon (sustainable yield);

§  2. [For polluLon] The rates of waste generaLon from projects should not exceed the assimilaLve capacity of the environment (sustainable waste disposal); and

§  3. For nonrenewable resources the depleLon of the nonrenewable resources should require comparable development of renewable subsLtutes for that resource.





§  Explain, using negaLve externaliLes diagrams, that economic acLvity requiring the use of fossil fuels to saLsfy demand poses a threat to sustainability.

§  Explain that the existence of poverty in economically less developed countries creates negaLve externaliLes through over-‐exploitaLon of land for agriculture, and that this poses a threat to sustainability





§  Evaluate, using diagrams, possible government responses to threats to sustainability, including legislaLon, carbon taxes, cap and trade schemes, and funding for clean technologies.

§  Explain, using examples, that government responses to threats to sustainability are limited by the global nature of the problems and the lack of ownership of common access resources, and that effecLve responses require internaLonal cooperaLon.



Theory of Knowledge: Poten2al Connec2ons:

§  To what extent is the obliga8on to seek sustainable modes of consump8on a moral one?

§  What knowledge issues are involved in assessing the role of technology in mee8ng future paUerns of consump8on and decreasing the nega8ve externali8es of consump8on associated with fossil fuels?

§  What are the knowledge issues involved in determining what is a ra8onal cost to pay for hal8ng climate change?




§  How could we know if economically more developed countries are morally jus8fied in interfering in the development of economically less developed countries on the grounds of climate change?

§  How can we know when climate change is sufficiently serious to warrant government interfering in the freedom of its ci8zens to consume?




§  How can we calculate the external costs of producing and running items such as light bulbs or motor vehicles? For example, low energy light bulbs consume less energy but they require more energy to produce, and some brands contain materials that are harmful to the environment such as mercury. Hybrid cars consume less energy to run but consume more energy to produce.

§  What are the problems in knowing whether climate change is produced by human ac8vity?


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