PROPERTY ECONOMICS - INTRODUCTION

PROPERTY ECONOMICS - INTRODUCTION
Prescribed Reading: Jackson J et. al Economic Principles, 2nd Ed. McGraw-Hill, Chs. 1-2, Appendix to Ch 1. Property Economics (Introduction)

Learning Objectives Understand the nature and methodology of economics. Explain specific problems, limitations and pitfalls encountered in studying economics. Discuss the two fundamental facts that form the basis of the economizing problem. Discuss the meaning of economic efficiency and examine the importance of specialization to its achievement. Introduce the concept of opportunity cost and the law of increasing opportunity costs. Use the production possibilities curve model to examine the trade-off between current and future consumption. Provide an introduction of graphical concepts widely employed in economics Illustrate, extend and modify the definition of economics through the use of production possibilities tables and curves. Introduce students to a demand/supply model of price determination. Property Economics (Introduction)

Economics - A Brief Preliminary Definition
Economics is concerned with the efficient use of scarce finite resources for the attainment of the maximum possible satisfaction of society’s collective needs The Methodology of Economics When addressing economic problems or issues Economists: - engage in descriptive or empirical economics (alias economic analysis) - develop economic theory, principles and laws and - formulate economic policies Property Economics (Introduction)

The Role and Methodology of Economics
1. Facts Descriptive or empirical economics is concerned with gathering facts relevant to an economic problem & testing hypotheses 3. Policies Policy economics is concerned with controlling or influencing economic behaviour or its consequences 2. Principles or Theories Theoretical economics involves generalising about economic behaviour induction deduction Induction and Deduction: Induction is a method of reasoning that proceeds from facts to generalisations Deduction is a method of reasoning that proceeds from assumptions to conclusions by testing an hypothesis Property Economics (Introduction)

Economic Theory Facts on their own are fairly meaningless. They must be systematically arranged, interpreted and generalised to derive an appropriate economic theory Theories or principles may be regarded as the end result of economic analysis. In other words, they are informed by facts which have been subjected to intense objective scrutiny, interpretation and generalisation Induction 2 Principles & Theories 1 Facts Deduction Property Economics (Introduction)

Models and Abstractions
The Need for Models and Abstractions Across many disciplines including economics there is a need to engage in abstraction and to work with models (or simplified representations) of the real world. Types of Models Iconic Models Analogue Models Symbolic (or Mathematical) Models Property Economics (Introduction)

Models and Abstractions Continued
Example 1 of an Iconic Model Iconic Models are ones that look like what they represent. e.g. a scaled replica of a city as in the one depicted below for Shanghai. Property Economics (Introduction)

Models and Abstractions Continued
Example 2 of an Iconic Model Another example of an Iconic Model would be the computerised simulation of a structure as depicted at the following url: which represents what Gaudi’s Holy Temple (La Sagrada Famila) will eventually look like when it is eventually completed several decades from now. Property Economics (Introduction)

Models & Abstractions Cont.
Analogue Models. An analogue model does not look like the real object or system, rather it measures or highlights the key attributes of reality under consideration Example 1 of an Analogue Model A map of RMIT is analogue model of the university in that it does not actually look like RMIT yet it provides useful spatial guidance. Property Economics (Introduction)

Example 2 of an Analogue Model: Gaudi’s Catenary Arch Model The Analogue Model The Evolving Reality Mirror Image of Analogue Model Property Economics (Introduction)

Example 3 of an Analogue Model: A Chart of dwelling Commencement Activity DWELLING COMMENCEMENT ACTIVITY, ORIGINAL Source Australian Bureau of Statistics, Commonwealth of Australia Dwelling Commencements, Original, Cat. No Australia, March 2011 Property Economics (Introduction)

Example 4 of an Analogue Model: The MONIAC MONIAC stands for Monetary National Income Analogue Computer which used hydraulics to model the workings of the British Economy. Example 4 of an Analogue Model: The MONIAC A fourth example of an analogue model is the MONIAC that stands for the Monetary National Income Analogue Computer developed in 1949 developed by an electrical engineer Alban William (Bill) Honsego Phillips. The computer used hydraulics to model the workings of the British economy. There still about 8 of these in the world with one still on display at Melbourne Uni’s Faculty of Commerce. By the way it would take about $50,000 to get it in working order again. The picture presented here is really an iconic model of the actual analogue model that I shall provide a link to in my next global Source “The Moniac: Economics in Thirty Fascinating Minutes”. Fortune, March, 1952 p. 101 Property Economics (Introduction)

A Symbolic or Mathematical Model: provides a symbolic or mathematical representation of a real world phenomenon. A good example of such a model taken from Physics would be Newton’s Law of Universal Gravitation Models like this one are also used by transport economists and urban economists trying to predict traffic flow throughout the city or how many retail customers are attracted to one city from another. Source: Cardall & Daunt n.d, Lecture 6 of Astronomy 161 Lecture Note Series, Department of Physics and Astronomy, University of Tennessee viewed: July < Property Economics (Introduction)

Terminology of Economic Theory
Models and Abstractions in Economics Economists use the terms economic ‘laws’, ‘theories’ and ‘models’ and ‘relationships’ to represent generalisations, or statements of regularity, concerning the economic behaviour of individuals and institutions. Example: JM Keynes’ Fundamental Psychological Law states that: Men are disposed as a rule and on an average to increase their consumption as their income increases but not by as much as their income increases. (JM Keynes, 1936 The General Theory of Employment, Interest and Money, Macmillan Cambridge University Press) Property Economics (Introduction)

The Nature of Economic Relationships
Relationships (among economic variables) may be expressed: Tabularly Graphically (when we are dealing with only 2 variables) Algebraically Property Economics (Introduction)

Tabular Representation of the Economic Relationship Between Consumption (C) and Income (Y)
Below find a tabular relationship between C (the dependent variable) and Y (the independent or explanatory variable) along the lines posited by Keynes in his Fundamental Psychological Law. C: Consumption Y: Income 50 100 150 200 300 250 400 Algebraic or Symbolic Model Representation of the Economic Relationship Between Weekly Consumption (C) and Income (Y) The relationship may be expressed algebraically as: C = Y When, Y = 0, C = 50 and when DY =100 then DC=50 Note: D means “change in”. Property Economics (Introduction)

Graphical (or analogue) Model Representation of the Economic Relationship Between Weekly Consumption (C) and Income (Y) Point on Graph C: Consumption Y: Income a 50 100 c 150 200 d 300 e 250 400 The Relationship between Consumption C and Income Y expressed graphically Property Economics (Introduction)

The Nature of Economic Relationships
Economic Relationships may be direct or indirect where: direct = “positive” indirect = “negative” = “inverse” A relationship is direct (indirect) if the: - the coefficient of the independent or explanatory variable is +ve (-ve) - one variable’s value rises (falls) in the table as the other variable’s value rises (falls) - the graph of the variables slopes upward (downward) from left to right NOTE: Students are asked to gain further insights on the nature of economic relationships by carefully reading and digesting material appearing in the Appendix to Chapter 1 of the two reference cited on the first slide of this lecture handout. Property Economics (Introduction)

The ‘Other Things Being Equal’ (or Ceteris Paribus) Assumption
This refers to the methodological practice of describing the influence that one variable may exert on a second variable under the assumption that all other potentially influencing variables are (conceptually) held constant. It is equivalent to performing a “controlled laboratory experiment” in one’s mind rather than a real laboratory. Property Economics (Introduction)

Are there parallels between Economics and Astronomy. Yes and No
Are there parallels between Economics and Astronomy? Yes and No. With some exceptions*, economists like astronomers are not able to conduct controlled laboratory experiments – in other words the laboratory of the astronomer and the economist is often limited to observations undertaken in an uncontrolled real world setting. * In a sub-discipline of economics known as experimental economics there is some ability to conduct controlled experiments Property Economics (Introduction)

Microeconomics and Macroeconomics
Microeconomics is concerned with specific economic units and a detailed consideration of the behaviour of these individuals units Macroeconomics deals with the economy as a whole, or with the basic subdivisions or aggregates that make up the economy Mesoeconomics Mesoeconomics pursues a level of analysis that falls mid-way between macro-economic and micro-economics by analysing industry sectors (e.g. mining, agriculture, transport, communication) or regional economies (e.g. Victoria rather than Australia). Property Economics (Introduction)

Positive and Normative Economics as well as Policy Economics
Positive economics is based upon facts without value judgements Normative economics is based upon subjective beliefs or value judgments. As such, it is concerned with: what ought to be rather than what is or what ought to happen rather than what will happen or what ought to have happened rather than what happened Note normative economic statements come into play at the level of policy economics Property Economics (Introduction)

Towards Valid Economic Reasoning
Sound economic reasoning may be attained by avoiding: Bias The Fallacy of Composition (i.e. falsely concluding what is true of a part is true for the whole) The Fallacy of Division (i.e. falsely concluding what is true of a whole is true for a part) The post hoc ergo propter hoc fallacy (translated as: The before this therefore because of this fallacy) Note: The fallacy of division is not discussed in the prescribed text Property Economics (Introduction)

The Economic Perspective
Scarcity and Choice Choice must be exercised because resources have multiple uses but their supply is finite or scarce. Rational behaviour behaviour that involves decisions and actions in order to achieve the greatest satisfaction or maximum fulfilment of goals Property Economics (Introduction)

The Economic Perspective (cont.)
Marginalism: benefits and costs When considering whether it is worthwhile altering the status quo one must compare the incremental (or marginal) benefits arising from the change with the incremental (or marginal) cost of making the change Property Economics (Introduction)

The Foundation of Economics
Two fundamental observations underpin the focus of economic inquiry: On the one hand society possesses unlimited or insatiable wants for goods and services which generate utility (i.e. pleasure or satisfaction) On the other hand the economic resources with which these goods and services are produced are limited or scarce Property Economics (Introduction)

Scarce Resources There are 2 broad categories of resources:
Property resources Land Raw materials Capital Human resources Labour Entrepreneurial ability Property Economics (Introduction)

Income received by land is rent
Broader than commonly understood; land is an economic resource which includes all the natural resources that go into the production of goods and services Income received by land is rent Property Economics (Introduction)

Capital Capital refers to all the manufactured aids to production used to produce goods and services and distribute them to the final consumer without directly satisfying human wants The process of producing and accumulating these capital goods is known as investment Payment for capital is interest Property Economics (Introduction)

Labour Broader than commonly understood the labour resource refers to all human physical and mental talents (excluding entrepreneurial talent) that can be used in producing goods and services Income accruing to labour is wage Property Economics (Introduction)

Entrepreneurial Ability
A specialised form of human resource Involves the combining of the other resources to produce a product, make non-routine decisions, innovate, and bear risk Profit is the reward for entrepreneurship Property Economics (Introduction)

Five Fundamental Questions or Economic Problems
How much total output is to be produced? What combination of outputs is to be produced? How are these outputs to be produced? Who is to receive/consume these outputs? How can change be accommodated? Property Economics (Introduction)

Economic Efficiency Economic efficiency is attained when the economy produces that mix of goods and services that maximizes society’s satisfaction levels subject to the constraints imposed by the economy’s finite stock of productive resources. Property Economics (Introduction)

Economic Efficiency (cont.)
Economic efficiency requires the attainment of: Full employment: all available resources are Employed Full production: all resources are fully employed to produce a mix of output that is most desired by society. Property Economics (Introduction)

Economic Efficiency (cont.)
In turn, full-production subsumes the attainment of 2 types of efficiency: Allocative efficiency Occurs when all available resources are devoted to the combination of goods most wanted by society Productive efficiency Occurs when goods or services are produced using the lowest cost production methods Property Economics (Introduction)

Specialisation and Efficiency
Two major forms of specialisation enhance efficiency: The Division of Labour Geographic specialisation Property Economics (Introduction)

Production Possibilities Table
Assumptions Efficiency Full employment and productive efficiency Fixed resources Fixed technology Two products only Property Economics (Introduction)

Production Possibilities Table for Residential Space and Office Space
___________________________________________________________ Type of product Production alternatives A B C D E Residential Space (in mio m2) Office Space (in mio m2) Property Economics (Introduction)

Production Possibilities Curve for Residential Space and Office Space
Property Economics (Introduction)

Choice, Opportunity Cost and the Production Possibilities Curve (PPC)
In the context of the PPC, opportunity cost is the amount of one output (say office space) that is sacrificed or forgone to obtain one additional unit of the second output (say residential space) Property Economics (Introduction)

The Concavity of the PPC and the Law of Increasing Opportunity Costs
The concavity of the PPC is a reflection of an important law in Economics known as The Law of Increasing Opportunity Costs Property Economics (Introduction)

Rationale for the Law of Increasing Opportunity Costs
The concavity of the PPC is attributable to the imperfect adaptability, flexibility and inter-changeability of productive resources as they are shift from one use to another Property Economics (Introduction)

Allocative Efficiency Revisited
From society’s perspective the most desirable mix of office and residential space will be located at that point on the efficiency frontier where the marginal benefit (MB) of residential space equals its marginal opportunity cost (MC). At the point where MB=MC allocative efficiency is attained. Property Economics (Introduction)

Unemployment & Underemployment Revisited
Points inside the production possibility curve illustrate unemployment or productive inefficiency A movement towards full employment and productive efficiency from a point such as U will entail a greater output of at least one, if not both, products Property Economics (Introduction)

The Impact of Growth on the PPC
Economic growth results from expanding resource supplies, improvements in their quality as well as technological advances. In turn, economic growth has the effect of shifting the PPC outwards toward the right. Property Economics (Introduction)

Present Choices and Future Possibilities
The PPC can be used to: illustrate the importance of society’s choice between current and future consumption (read pp of the prescribed text) demonstrate the economic basis for trade between nations (this application will be illustrated in Topic 12 at the end of the course) Property Economics (Introduction)

A MODEL OF A MARKET The economist’s conception of a market is far broader and abstract in meaning than what most people imagine (e.g. a food market). A market need not be geographically fixed nor do the transactions need to involve physical goods or face to face contact between buyers and sellers. For example at people’s adopted avatars transact virtual land and property with real money. And here is your lecturer’s avatar in secondlife. This is a digital snapshot taken in 2007 of Barcelona’s Mercat Boqueria. Listen to this brief documentary of the market at url: Near the end there is an interesting commentary about some of the market’s structural features Property Economics (Introduction)

Perfect Competition - A Demand/Supply Model of Price Determination
Assumptions: large numbers of competing buyers & sellers with negligible unilateral market power Homogeneous product Sole goal of firms (consumers) is to maximize profit (personal utility or satisfaction) Private ownership No barriers to market entry or exit Perfect information Absence of market intervention and government regulation Perfect Mobility of Resources Property Economics (Introduction)

The Law of Demand Price per cartload of bricks This law states that as the price of a product (say bricks), rises/falls the lower/higher will be the quantity demanded per unit of time, all other determinants of demand (say income, population, tastes and preferences, prices of substitutes and complements) held constant. p1 p2 D q1 q2 Quantity of bricks (in cartloads) demanded per month Property Economics (Introduction)

p q’ q q’’ The Law of Demand Cont. D’ D D’’
Quantity of bricks (in cartloads) demanded per month p Price per cartload of bricks D’ D’’ q’ q q’’ Note: Changes in variables influencing demand other than own price (e.g. income, advertising, tastes, population price of complements and substitutes etc.) will shift the demand curve. Movements along a demand curve reflect changes in own price alone. A movement along the demand curve is often referred to as a change in the quantity demanded whereas a shift in the demand curve is referred to as a change in demand. Property Economics (Introduction)

Price per cartload of bricks
The Law of Supply This law states that as the price of a product (say bricks), rises/falls the higher/lower will be the quantity supplied per unit of time, all other determinants of supply (say prices of other productive resources, technology, prices of alternative goods, the number of suppliers and expectations) held constant. S p2 p1 q1 q2 Quantity of bricks supplied (in cartloads) per month Property Economics (Introduction)

The Law of Supply Cont. q q’ q’’ p Price per cartload of bricks S S’
Quantity of bricks supplied (in cartloads) per month Price per cartload of bricks q q’ q’’ p S S’ S’’ Note: Changes in variables influencing supply other than own price (e.g. technology, input prices, substitute output prices, the number of suppliers, business expectations etc.) will shift the supply curve. Movements along a supply curve reflect changes in own price alone. A movement along the supply curve is often referred to as a change in the quantity supplied whereas a shift in the supply curve is referred to as a change in supply. Property Economics (Introduction)

Equilibrium Price and Quantity Determination
S D Price per cartload of bricks Quantity of bricks transacted (in cartloads) per month Pe qe q2 q1 P1 p2 E = (qe, pe) This perfectly competitive model may be used to describe how price and quantity is determined by the impersonal forces of demand and supply. The model predicts that price and quantity will settle or equilibrate at E =(qe,pe) where demand D and supply S are brought into balance. If price is temporarily at P1 (P2) there will be a temporary excess supply (demand) leading to downward (upward) pressure on price as firms (consumers) compete to sell (buy) bricks. As the price falls (rises) toward Pe the excess supply (demand) will gradually diminish but the downward (upward) adjustment in price will continue until the excess supply (demand) vanishes and price finally converges on what is known as the equilibrium price Pe. At this price Supply and Demand are brought into balance. Perpendicularly beneath pt. E =(qe,pe) - where S and D intersect - is to be found the equilibrium level of transacted output qe Property Economics (Introduction)

Equilibrium Price and Quantity Determination Cont.
S D S’ Price per cartload of bricks Quantity of bricks transacted (in cartloads) per month Pe P’e qe q’e D’ E’’’ Suppose equilibrium is initially at equilibrium at E = (qe, pe). Now if S and D shift to S’ and D’ respectively, a temporary excess supply of E’E’’ will emerge at price pe which will soon vanish as sellers compete to sell their unsold bricks at lower prices. Once price falls to P’e, the excess supply will have vanished and a new equilibrium price-quantity combination will be established at E’’’ = (q’e p’e). Property Economics (Introduction)

Economic Efficiency and the Market Cont.
Consider an economy that is populated by perfectly competitive markets for each good and service. With certain qualifications, it may be argued that the equilibrium price-output combinations meted out in each of these markets will permit the economy to attain economic efficiency. Since this is all achieved without government intervention, this then becomes a potent argument for “Laissez Faire” and against well-meaning government intervention. In the words immortalized by the great Scottish economist Adam Smith: Every individual .... neither intends to promote the public interest, nor knows how much he is promoting it.. He intends only his own security, his own gain. And he is led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of society more effectively than when he really intends to promote it (Adam Smith, The Wealth of Nations, 1776) NOTE: It is important to remark that Adam Smith arrived at this insight under the assumption that individuals were pursuing their own interest in a moral fashion. Some of the more realistic amongst us will know that this is not always the case. Property Economics (Introduction)

Economic Efficiency and the Market Cont.
At the following url: find a defence of the market’s virtue by the late Professor Milton Friedman who was an adherent extraordinaire of the market system. As important as it is for students to be well read about what some economists have to say about the market’s capacity to efficiently resolve economic problems, it is also important to appreciate that there are instances where the market does fail to operate efficiently (and for that matter even equitably) and government may have to intervene to correct for such failure. We shall consider the matter of “market failure” in a subsequent topic. Property Economics (Introduction)

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