J2$ J2$ J2$ J2$ J2$ Economics 2/10/2015. Frederick Soddy. An Introduction & Review of Some Basic Economic Principles for Joules To Dollars

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1 Frederick Soddy Economics An Introduction & Review of Some Basic Economic Principles for Joules To Dollars Nobel Prize in Chemistry in 92 for his work on radioactivity Inspired the field of ecological economics Became dismayed with the Chemistry as a discipline about the time of WWI and turned to economics, specifically political economy Ideas were generally discredited at that time, but in fact he was an early proponent of abandoning the gold standard, market-determined foreign exchange rates, fiscal policy as a tool for stabilizing the macroeconomy, and government agencies responsible for collecting and reporting economic statistics. Also argued against fractional-reserve banking. Private Saving & Subsidies Private Saving & Subsidies Private Saving & Subsidies Private Saving & Subsidies

2 Private Saving & Subsidies Private Saving & Subsidies Private Saving & Subsidies Private Saving & Subsidies Private Saving & Subsidies Private Saving & Subsidies 2

3 Private Saving & Subsidies Private Saving & Subsidies Private Saving & Subsidies Private Saving & Subsidies Private Saving & Subsidies Costanza, R., June 200. Bioscience, Vol. 5, No. 6 Solar Energy Restoration, Conservation Education, Training, Research Institutional Rules, Norms, etc. Building Model of An Ecological Economic System Positive Impacts on Human Capital Capacity Complex Property Rights Regimes Individual Common Public Natural Capital Human Capital Social Capital Manufactured Capital Limited Substitutability Between Capital Forms Ecological Services / Amenities Economic Production Process Well Being (Individual & Community) GNP Negative Impacts on All Forms of Capital Wastes Goods & Services Consu mption (Based on Changing, Adapting Preferences) Evolving Cultural Norms & Policy Inves tment Decisions about taxes, community spending, education, science and technology, etc., based on complex property rights regimes Waste Heat 3

4 Soddy & Energy Economics Interpretive questions? Why were Soddy s ideas dismissed by academics, policy makers, and financiers? Is debt a bad thing when it s tied to energy efficiency or improvements in ecosystem services? Energy and the U.S. Economy was written at a time of energy crises; how might the relationships between energy and the economic performance be different today? Review of Microeconomics Glossary of terms, concepts, and solution methods Comparing Benefits & Costs Total Benefits Assume a linear world Typically, people will purchase less of a good or service (including ecosystem services) the higher the price Suppose at $5/bag You d buy 0 bags But if the price were $25/bag you wouldn t buy any coal $25 $5 Consider buying nut coal to use in your wood stove Demand Economists typically use your total willingness to pay to define total benefits We add up the amount you re willing to pay for the first, second,, ninth and tenth bags of coal We calculate the area under the demand curve $25 $5 (½ x 0 x 20) + (5 x 0) = $ Market Demand Total Costs Market demand curves for consumer goods and services are simply the sum of individual demand curves Note that while our theory tells us that demand depends on price: Q = f(p) We graph the inverse form of the demand curve: P = g(q) We do this because of an assumption that price adjusts in order to equilibrate demand with supply, i.e., price determines quantity Suppose the cost of producing a bag of nut coal looks like this In general, total cost will be equal to variable costs plus fixed costs Total variable cost is the sum of the marginal costs Let s assume zero fixed cost So total cost will be the sum of the marginal costs $5 0 4

5 Net Benefits Cost-Benefit Analysis Net benefit is the amount by which benefits exceed costs The area under the demand curve that lies above the cost (supply) curve Net Benefit Most of the decisions you make involve weighting costs against benefits Opportunity Cost plays an important role in these calculations Defn: that which we forgo, or give up, when we make a choice or a decision Costs and Benefits generally accrue over time Dynamic, rather than a static, decision Examples: Colby s bioimass plant, new solar array on the top of the alumini/development building, purchasing a new car, insulating your home. Dynamic Analysis Present Value Which is worth more: $00 today or $00 tomorrow? Why? Inflation erodes the purchasing power of money Plus, $00 today represents an opportunity to invest earning a rate of return [e.g., interest on savings] and thus increasing your purchasing power in the future Suppose you put your $00 in a bank account earning 0% interest annually One year from now you d have $0 in your account: 00 (+.0) The value today of the $0 you d realize a year from now is $00 [0/(.0)] Suppose you left the money in your bank account for two years, earning 0% interest in each year After two years you would have $2 [00.0.0] The present value of the $2 you d realize in two years is $00. Net Present Value Discounting the future The present value of a one-time net benefit received years from now is: The present value of a stream of net benefits,,, is:,, Where is the appropriate interest rate The process of calculating the present value of a future [net] benefit is also known as discounting In this context, is the discount rate What about inflation? is the real interest rate: nominal minus inflation 5

6 Colby s Biomass Facility Scenario A: Base Case FY20 FY202 FY204 Utility Relocations $ 550,000 General Site and Utilities $ 373,000 Building $ 2,779,000 $ 2,779,000 Equipment $,698,500 $,698,500 Soft Costs $,367,000 Grant $ (750,000) Debt Proceeds $ (0,495,000) Debt Service Expenses (5.5%, 30 year) $ 737,000 $ 737,000 Return to Supply & Demand Analysis Equilibrium Total Payments $ 6,07,500 $ (5,280,500) $ 737, % $ 0,450,32 Static Equilibrium Elasticity Notice that no one is willing to supply coal at $5 per bag At $5/bag there exists excess demand In most situations this will cause an increase in the price of coal Similarly, at $25/bag there is an excess supply of coal In most situations this will cause a decrease in the price of coal will adjust to resolve excess demand and supply $25 $5 We measure the responsiveness of demand to changes in price using the elasticity We say that a good is inelastic if a change in price has very little effect on demand Elastic goods and services are those for which small changes in price have a large impact on the quantity demanded %Δ %Δ Inelastic vs Elastic How do you remember the difference? P Inelastic P Elastic nelastic lastic Q Q 6

7 Modeling Supply & Demand Moving along a curve vs shifts in a curve Demand function determinants of the good or service of substitutes & compliments Preferences (stochastic term) Supply side of the good or service Factor prices (wages, energy costs) Advertising/Marketing Unanticipated events (stochastic term) ;,!," Changes in the quantity demanded of a good or service that result from a change in its price are reflected by reequilibrating movements along a demand curve Similarly, changes in the quantity supplied resulting from changes in the price of a good or service are reflected by movements along the supply curve ;,!," Exogenous changes Equilibrium adjustment Changes in factors determined outside our model will redefine the (P, Q) relationship resulting in a new demand or supply curve We draw our demand/supply relationships for pre-determined values of our explanatory variables Consider a ceteris paribus increase in income from Y 0 to Y ;, ;,!,"!," At the prevailing price,, there exists excess demand for this good This will put upward pressure on the price Higher prices attracts more supply And reduces demand The price will continue to rise until the excess demand is gone and the market reaches a new equilibrium P new ;,!," ;,!," Q new xd 7