dr. humam al-jazaeri10

7/23/2019 Dr. Humam Al-jazaeri10

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5/7/201

INTRODUCTION TO CONTEMPORARY

ECONOMICS

THE NATIONAL INSTITUTE OF PUBLIC ADMINISTRATION

(INA)

DR. HUMAM AL-JAZAERI

2012

1

AN INTRODUCTION!

Session One

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WHAT IS THE IMPACT OF RISING FOOD PRICES?

In the United States, when world wheat prices rise by 75 percent, as

they have over the last year, it means the difference between a $2

loaf of bread and a loaf costing maybe $2.10.

IF, however, you live in New Delhi, those skyrocketing costs really

matter.

PRICES ARE CLIMBING, BUT THE IMPACT IS NOT AT ALL BEING FELT EQUALLY!

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NEW TRENDS IN FOOD PRICES!

Historically, price spikes tended to be almost exclusively driven byunusual weather -- a monsoon failure in India, a drought in theformer Soviet Union, a heat wave in the U.S. Midwest. Such eventswere always disruptive, but thankfully infrequent.

Today's price hikes are driven by trends that are both elevatingdemand and making it more difficult to increase production:

A rapidly expanding population,

Crop-withering temperature increases, and

Irrigation wells running dry.

Each night, there are 219,000 additional people to feed at the globaldinner table.

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CRITICAL CHANGE

The world is losing its ability to soften the effect of shortages.

In response to previous price surges, the United States, the world's

largest grain producer, was effectively able to steer the world away

from potential catastrophe.

From the mid-20th century until 1995, the United States had either

grain surpluses or idle cropland that could be planted to rescue

countries in trouble.

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Grain for fuel!

The United States, which once was able to act as a global buffer of

sorts against poor harvests elsewhere, is now converting massive

quantities of grain into fuel for cars (converting grain into ethanol),

even as world grain consumption, which is already up to roughly 2.2

billion metric tons per year, is growing at an accelerating rate.

In 2010, the United States harvested nearly 400 million tons of grain,

of which 126 million tons went to ethanol fuel distilleries (up from 16

million tons in 2000).

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WHAT DOES IT MEAN TO CONVERT GRAIN TO FUEL?

This massive capacity to convert grain into fuel means that the price

of grain is now tied to the price of oil.

So if oil goes to $150 per barrel or more, the price of grain will follow

it upward as it becomes ever more profitable to convert grain into oil

substitutes.

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IT’S A GLOBAL PHENOMENON!

It's not just a U.S. phenomenon: Brazil, which distills ethanol from

sugar cane, ranks second in production after the United States, while

the European Union's goal of getting 10 percent of its transport

energy from renewables, mostly biofuels, by 2020 is also diverting

land from food crops.

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THE BOTTOM LINE!

This is not merely a story about the booming demand for food.

Everything from falling water tables to eroding soils and the

consequences of global warming means that the world's food supply

is unlikely to keep up with our collectively growing appetites.

Take climate change: The rule of thumb among crop ecologists is that

for every 1 degree Celsius rise in temperature above the growingseason optimum, farmers can expect a 10 percent decline in grain

yields.

This relationship was borne out all too dramatically during the

2010 heat wave in Russia, which reduced the country's grain

harvest by nearly 40 percent.12



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IT’S ALSO ABOUT MANAGEMENT!

Even as we are running our wells dry, we are also mismanaging our

soils, creating new deserts.

Soil erosion as a result of over-plowing and landmismanagement is undermining the productivity of one-third of the world's cropland.

Technology!

Decade after decade, advancing technology underpinned steadygains in raising land productivity.

World grain yield per acre has tripled since 1950. But now thatera is coming to an end in some of the more agriculturallyadvanced countries, where farmers are already using allavailable technologies to raise yields.

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WHAT COMES NEXT?

Many exporting countries tried to control the rise of domestic foodprices by restricting exports. Among them were Russia and Argentina,two leading wheat exporters. Vietnam, the No. 2 rice exporter,banned exports entirely for several months in early 2008. So didseveral other smaller exporters of grain.

Should countries/ firms negotiate long-term grain-supply agreements

with exporting countries?

Buying or leasing land in other countries on which to grow grain forthemselves?

What about water rights?

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INFRASTRUCTURE MATTERS!

The public infrastructure for modern market-oriented agriculture does notyet exist in most of Africa.

In some countries it will take years just to build the roads and ports neededto bring in agricultural inputs such as fertilizer and to export farm products.

What for?

Most of the land bought up so far will be used to produce biofuels and otherindustrial crops.

How it is made?

Even if some of these projects do eventually boost land productivity, whowill benefit? If virtually all the inputs -- the farm equipment, the fertilizer,the pesticides, the seeds -- are brought in from abroad and if all the outputis shipped out of the country, it will contribute little to the host country'seconomy.

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RATIONALITY, EQUILIBRIUM &MARKET SYSTEM

SCARCITY & CHOICE

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The Economic Problem: Scarcity & Choice

The concepts of constrained choice and scarcity are central tothe discipline of economics.

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Scarcity, Choice, And Opportunity Cost

All points below and to the left of

the curve (the shaded area)

represent combinations of capitaland consumer goods that are

possible for the society given the

resources available and existing

technology.

Points above and to the right of

the curve, such as point G ,

represent combinations thatcannot be reached.If an economy were to end up at

point A on the graph, it would be

producing no consumer goods at

all; all resources would be usedfor the production of capital. If an

economy were to end up at point

B , it would produce only

consumer goods.

The Production Possibility Frontier

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The ppf illustrates a number of economicconcepts. One of the most important is

opportunity cost. The opportunity cost of producing more capital goods is fewer

consumer goods.

Moving from E to F, the number of capital goods increases from 550 to 800,

but the number of consumer goods

decreases from 1,300 to 1,100.

‘D’ may illustrate lack of efficiency

(mismanagement) OR a downturn: During

economic downturns or recessions,

industrial plants run at less than their total capacity. When there is

unemployment of labor and capital, we

are not producing all that we can.


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Production Possibility Schedule for TotalCorn and Wheat Production

Pointon ppf

TotalCorn Production

(Millions ofBushels Per Year)

Total

Wheat Production(Millions of Bushels

Per Year)

A 700 100

B 650 200

C 510 380

D 400 500

E 300 550

The Law of Increasing Opportunity Cost

Moving from point B to A, we get only 50 million bushels of corn at

a cost of 100 million bushels of wheat. The cost per bushel of

corn— measured in lost wheat— has increased.20



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Productivity increases

have enhanced the ability of

the United States to

produce both corn and

wheat.

Productivity increases

were more dramatic for corn

than for wheat. Thus, the

shifts in the ppf were not

parallel.

Economic Growth


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THE LAW OF DEMAND & SUPPLY

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Anna’s Demand Schedule for Telephone Calls

Price(Per Call)

Quantity Demanded(Calls Per Month)

$ 0 30

.50 25

3.50 7

7.00 3

10.00 1

15.00 0

Price and Quantity Demanded: The Law of Demand

The relationship between price (P ) and quantitydemanded (q ) presented graphically is called ademand curve. Demand curves have a negativeslope, indicating that lower prices cause quantity

demanded to increase.

Law of DemandThe negative relationshipbetween price and quantitydemanded:

As price rises, quantity

demanded decreases; as

price falls, quantity

demanded increases.

Does this apply to all

products?

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Shift of Demand VS. Movement Along a Demand Curve

Shift of Demand Schedule Due to increase in Income

Schedule D0 Schedule D1

Price(Per Call)

Quantity Demanded(Calls Per Month at an

Income of $300 PerMonth)

Quantity Demanded(Calls Per Month at an

Income of $600 PerMonth)

$ 0.00 30 35

0.50 25 33

3.50 7 18

7.00 3 12

10.00 1 715.00 0 2

20.00 0 0

When the price of a good changes, we movealong the demand curve for that good.When any other factor (determinant) that influences

demand changes (wealth/ income, tastes, price of other

products and so on), the relationship between price and

quantity is different; there is a shift of the demand curve,

in this case from D 0 to D 1.

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Inferior VS. Normal Goods

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Clarence Brown’s Supply Schedule for Soybeans

Price (Per Bushel)Quantity Supplied(Bushels Per Year)

$1.50 0

1.75 10,000

2.25 20,000

3.00 30,000

4.00 45,000

5.00 45,000

Price and Quantity Supplied: The Law of Supply

Law of Supply A producer will supply more when theprice of output is higher. The slope of asupply curve is positive.

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Shift of Supply Schedule for Soybeans FollowingDevelopment of a NewDisease-Resistant Seed Strain

SCHEDULE D0 SCHEDULE D1

Price(per Bushel)

Quantity Supplied(Bushels per YearUsing Old Seed)

Quantity Supplied(Bushels per YearUsing New Seed)

$1.50 0 5,000

1.75 10,000 23,000

2.25 20,000 33,000

3.00 30,000 40,000

4.00 45,000 54,000

5.00 45,000 54,000

Shift of Supply versus Movement Along a Supply Curve

When the price of a product changes, we movealong the supply curve for that product; the quantitysupplied rises or falls.When any other factor (determinant) affectingsupply changes, the supply curve shifts. Think of

factors of production

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THE ANALYTICAL ARCHITECTURE OF THE ECONOMIC MODEL

THE FREE MARKET MODEL

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Rationality, Perfectly Working Markets &Equilibrium

Rationality is strictly defined in terms of individuals maximizingtheir own utility (Max Profit/ Min Costs)

Perfect Information Firms/ Individuals ALL information of the qualitiesand prices of everything available in the market and that firms have allavailable information concerning wage rates, capital costs, and outputprices.

Perfect Competition An industry structure in which there are manyfirms, each small relative to the industry and producing virtually identicalproducts, and in which no firm is large enough to have any control over prices.

Core Assumptions:

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The Free Competitive model is a reasonablyaccurate description of reality?

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Although perfect competition ‘never existed, nor ever could exist,

as all the textbooks agree’, yet in neoclassical economics the ‘real

world is said to be approximately like, not far from, or even very

close to the idealised world of perfect competition’.

Blaug (1997, p. 70-1; 2003)

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Ronald Coase (1994, p. 5):

‘[w]hat is studied is a system which lives in the minds of

economists but not on earth’ . He then calls it ‘blackboard

economics’, only to argue that ‘there is limited application of

blackboard economics other than for its own idealised world of

zero transaction costs’.

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Core Question:

IS IT POSSIBLE FOR THE OPTIMAL ALLOCATION OF RESOURCES BE ATTAINED

BY MEANS OF A PERFECTLY COMPETITIVE EQUILIBRIUM?

WHY IT ISN’T?

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Because the formal model leaves out all disequilibrium forces (i.e.

forces that disrupt or do not lead to equilibrium).

All the non-price forms of competition assigned to a low degree of

significance or remaining outside the scope of the analysis:

What about favourable locations?

Product innovation?

Marketing battles?

Logistics?

Quicker deliveries?

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When quantity demanded exceeds quantity supplied, price tendsto rise. When the price in a market rises, quantity demanded fallsand quantity supplied rises until an equilibrium is reached atwhich quantity demanded and quantity supplied are equal.

Market Equilibrium

Excess Demand

At a price of $1.75 perbushel, quantity demandedexceeds quantity supplied.When excess demandexists, there is a tendencyfor price to rise.When quantity demandedequals quantity supplied,excess demand iseliminated and the market isin equilibrium. Here theequilibrium price is $2.50and the equilibrium quantityis 35,000 bushels.

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Market Equilibrium

What about Quick Fashion Industry?

Turkey sells Europeanretailer (Zara) at a priceof $2. 50 per unit, andChina sells it at $1.75.What determines thechoice of the Europeanretailer?

Think of proximity factor!

Also, why do we buy Apple ipod at a muchhigher price its qualityequivalent from aTaiwanese firm?

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Market Equilibrium

What about the Fashion Industry?

Turkey sells Europeanretailer (Zara) at a priceof $2. 50 per unit, andChina sells it at $1.75.What determines thechoice of the Europeanretailer?

Think of proximity factor!The Quick Fashion

Industry

Also, why do we buy

Apple ipod at a muchhigher price its qualityequivalent from aTaiwanese firm?

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Supply and Demand Analysis: An Oil Import Fee

At a world price of $18, domestic

production is 7.7 million barrels per day

and the total quantity of oil demanded in

the United States is 13.6 million barrels

per day. The difference is total imports

(5.9 million barrels per day).

If the government levies a 33 1/3 percent tax on

imports, the price of a barrel of oil rises to $24. The

quantity demanded falls to 12.2 million barrels per

day. At the same time, the quantity supplied by

domestic producers increases to 9.0 million barrels

per day and the quantity imported falls to 3.2 million

barrels per day.38



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2

Why then the U.S. Government is NOTapplying such tax?

Why not alternative energies takeover? Are they?

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REVIEW TERMS AND CONCEPTS

capital market

complements, complementary goods

demand curve

demand schedule

entrepreneur

equilibrium

excess demand or shortage

excess supply or surplus

factors of production

firm

householdsincome

inferior goods

input or factor markets

labor market

land market

price rationing

law of demand

law of supply

market demand

market supply

movement along a demand curve

movement along a supply curve

normal goods

perfect substitutes

product or output markets

profit

quantity demandedquantity supplied

shift of a demand curve

shift of a supply curve

substitutes

supply curve

supply schedule

wealth or net worth

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IMPORTANT LINKS

UNCTAD: www.unctad.org

World Bank: www.worldbank.org

IMF: www.imf.org

OECD: www.oecd.org

Additional Business Links

Wall Street Journal: www.wsjonline.com

Bloomberg: www.Bloomberg.com

Business Week: www.businessweek.com

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End of Session One

Take Care..!

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http://www.unctad.org/

http://www.worldbank.org/

http://www.imf.org/

http://www.oecd.org/

http://www.wsjonline.com/

http://www.bloomberg.com/

http://www.businessweek.com/





















http://www.imf.org/

http://www.imf.org/

http://www.imf.org/

http://www.imf.org/

http://www.imf.org/











dr. humam al-jazaeri10

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