nm0775: let me begin by [1.3] resuming where we finished yesterday [1.7] we're 
talking about the concept of elasticity [0.6] in particular we were looking at 
the price elasticity of demand [0.6] we've looked at a number of applications 
[0.3] and seen the empirical relevance of this [0.6] but everything we've done 
before last time [0.4] was to talk [0.3] ra-, in rather vague imprecise terms 
[0.4] about [0.2] the elasticity being a measure of the responsiveness [0.4] of 
for example demand to change in price [0.7] towards the end of last time [0.4] 
we started making this [0.3] concept of ena-, [0.2] elasticity [0.2] a more 
precise quantitative measure [1.2] and where we got to at the end of last time 
[0.5] was to this point here [1.1] we said [0.4] we can define the price 
elasticity of demand [1.4] as being the proportional change in quantity 
demanded [0.4] divided by the prop-, proportional change in price [0.8] and we 
can see that easily [0.2] in terms of the [0.9] demand curve [1.3] we start off 
at some point A we said [0.8] initial price is P-zero [0.4] price falls to P-
one so delta-P is the change in 
price [0.9] and that induces a movement down the demand curve to point B [0.8] 
the quantity demanded increasing from Q-zero to Q-one [1.2] so delta-Q measures 
the increase in quantity [1.3] and we're saying the elasticity is measured by 
this [0.3] change in quantity [0.4] divided by the original quantity [0.5] 
which is the proportional change [1.0] all divided by this change in price [1.
5] itself divided by [0.4] the initial price level which gives us the 
proportional change in price [0.6] and i said that [1.3] therefore that gives 
us a formula [0.3] for calculating [0.2] the elasticity [0.3] between two 
points which i said can be defined as the arc [0.2] or the interval [0.3] 
elasticity of demand [1.8] and what i want to show now [0.3] are two properties 
[0.4] of this elasticity [2.0] the first property [0.3] is that clearly [0.2] 
the elasticity is negative [2.6] if the elasticity is negative quite obviously 
[0.5] because the demand curve is downward sloping [1.9] and so [0.7] if delta-
Q is [0.5] positive [0.5] because the [0.4] demand has increased [1.0] that 
must be because the price has fallen [1.0] so if delta-Q is positive [1.0] 
that's because delta-P the 
change in price is negative [2.0] Q and P themselves are positive numbers we 
assume if we're starting with a positive price [0.8] and a positive quantity [0.
3] being demanded [0.9] and so [0.2] delta-Q is positive Q is positive P is 
positive [1.0] and delta-P is negative so the whole thing [0.4] is negative [0.
2] the elasticity demand [0.2] is negative [2.7] let me ask you to tell me [0.
8] when [0.5] that might not be the case can you think of a case [1.5] not 
necessarily thinking of an example of any particular commodity [0.5] what would 
the demand curve have to look like [0.7] for the elasticity not to be a 
negative number [2.5] point here 
sm0776: when the demand is constant [0.4] 
nm0775: when demand is constant so let's look at that in the diagram [2.3] if 
the demand is a horizontal straight line [0.2] is the answer [0.4] that we're 
given here [1.7] then imagine a horizontal straight line [1.1] that would mean 
that [0.4] this change in quantity could be very big [0.6] even if effectively 
[0.4] the change in price [1.0] was close to zero or essentially zero it 
approximated zero [2.0] so that 
would be saying that delta-P would be zero [3.2] er [0.5] let's think about 
that answer is that is that a good answer [1.3] well the demand curve being 
completely flat [0.3] would mean that demand is [0.7] completely responsive to 
small changes in price [0.5] so it's [0.3] infinitely elastic [2.5] delta-P if 
delta-P is zero [2.7] this whole thing is zero [0.7] so if delta if delta-P is 
[0.7] is zero [0.5] this whole thing is infinite [1.4] and it's actually [0.2] 
minus-infinite [0.4] so it doesn't give us the answer it's not negative it 
gives us the answer it's infinity [0.4] albeit minus-infinity [0.8] okay so 
what would be another possible response a hand up at the back here 
sf0777: demand curve [0.2] 
nm0775: okay i'm being told to draw demand curve not as a straight line [0.5] 
but as a hyperbola using very technical words [1.7] that's the case i'm going 
to go on to in a minute i started looking at two properties i've said notice A 
[0.3] in a moment i'm going to say [0.2] notice B [0.2] and that's going to be 
to do with exactly the case you mentioned so i'll come on to that in a moment 
[0.6] any other 
thoughts on this A point here [0.4] 
sm0778: if er the demand curve is upward sloping 
nm0775: okay [0.6] well if the demand curve is upward sloping then clearly 
everything i've said here is wrong [0.7] if the demand curve is upward sloping 
then we can have that [0.9] when the price [0.9] if the price increases the 
quantity demanded will increase and so this will be a positive number [0.7] so 
to get a positive elasticity we need an upward sloping demand curve which we're 
going to say is rather unusual [0.7] less unusual [0.4] would be the case where 
the demand curve is [0.3] perfectly vertical [1.8] if the demand curve is 
perfectly vertical [0.8] then we're saying that demand is [0.2] inelastic [0.2] 
perfectly inelastic [0.9] and that would give us [0.2] an elasticity of zero [1.
0] okay so to have [0.3] elasticity as not being negative either we have an 
unusual case that it's positive [0.4] or we or we have [0.5] a less unusual 
case [0.3] that it's simply vertical so the elasticity is [0.4] zero [0.8] so 
let's [0.2] but in general we're going to assume demand curves are downward 
sloping [0.4] and so 
we're going to have this property [1.5] consider now the second property [2.6] 
the second property [0.7] of the [0.6] elasticity of this demand curve [1.7] is 
that the elasticity [0.5] changes [0.8] as we move along the demand curve [2.6] 
and i want to see how [8.4] let me just give you a reminder [0.3] everything 
i'm saying here [0.4] relates to this demand curve that i've drawn in the 
diagram [1.2] it's a linear demand curve it's a downward sloping straight line 
[0.4] or linear demand curve [1.7] i haven't yet got onto the case i was 
invited to think about [0.3] by the contribution at the back the case where [0.
5] the demand curve is not [0.2] a straight line [0.2] we'll look at that in a 
moment [1.0] for now we assume the demand curve is a straight line [1.9] and we 
can show [0.6] that in that case the elasticity changes as we move along the 
demand curve [2.8] okay i'm just [0.8] i can't always be sure of having two 
overheads so sometimes i repeat things there's no reason why you should [0.4] 
here i just repeat what 
we've already seen [0.2] in this first line [0.7] and then i rearrange this 
first line [1.4] 'cause a fraction [0.8] divided by [0.5] a fraction is a 
rather awkward thing to deal with [1.6] and so we can rearrange it [0.2] to get 
a fraction multiplied by [0.4] a different fraction which is less awkward to 
deal with [0.4] if you're not happy with the step going from here to here [0.2] 
check it out afterwards [2.2] okay so i've re-, rewritten or rearranged this 
expression in the following way [0.7] when we do that [0.3] we can now think of 
these two terms [0.5] separately [0.9] think first of all about this first term 
[0.5] delta-Q divided by delta-P [2.0] what can you tell me [0.2] about this 
first term [0.5] as we move along [0.6] the demand curve [1.9] what happens to 
delta-Q over delta-P [0.3] as we move along the demand curve [2.6] does it rise 
does it fall does it stay unchanged what happens [0.7] any thoughts someone 
said me an answer here 
sm0779: it remains constant 
nm0775: it remains constant absolutely [2.9] delta-Q [1.1] over delta-P [0.5] 
stays 
constant [1.0] along the straight line demand curve [0.4] we can see that 
easily [0.5] in this diagram here [5.5] the slope [0.2] of this line [0.2] 
slope of this demand curve [1.0] is given by [2.4] the gradient of course [0.9] 
if you think about point B for a moment it's easiest to th-, [0.2] to see 
things in terms of point B [0.9] address point B and think well what is the 
slope of this line [0.8] well in going from B to A [0.5] the rise is the change 
in price [0.5] and the tread the distance travelled [0.5] is the change in 
quantity [0.3] so delta-P [0.2] over delta-Q [0.8] is the slope [1.2] of this 
straight line demand curve [0.7] measured against the vertical axis [2.9] and 
of course the slope of a straight line demand curve doesn't change [0.2] so 
delta-P over delta-Q [0.3] doesn't change as you move along the demand curve [1.
5] and hence [0.4] delta-Q over delta-P which is the inverse of the slope [0.8] 
or if you like it's the slope [0.5] of the demand curve measured against the 
horizontal axis [0.6] that doesn't change as you move along the demand curve [0.
9] so the first term [0.5] in this expression for inelasticity [0.3] is a 
constant [1.0] what 
about the second term [3.6] what can you tell me about [0.5] P-over-Q the 
second [0.8] term in that expression of elasticity [0.3] as we move along the 
demand curve any thoughts or suggestions [5.0] okay [0.8] 
sm0780: as P rises Q falls 
nm0775: okay [0.5] 
sm0780: [0.6] 
nm0775: well as we're moving down let's think about moving down the demand 
curve so moving from A to B to C to D [2.3] of course what we know is happening 
is the price is falling and quantity is rising [0.6] so moving down the demand 
curve [0.7] from A down in the direction of D [1.9] this thing P-over-Q [0.3] 
is falling [1.9] in other words [0.5] as i've written here [2.2] so in terms of 
our expressions being er for the elasticity [0.8] along the straight line 
demand curve [0.5] the first term is constant [0.8] the second term is falling 
[5.5] and so [0.2] the elasticity [0.7] is falling [2.8] as we move down the 
demand curve [7.8] if you [0.2] wanted a further way of seeing this i invite [0.
2] you afterwards to [1.2] to draw [0.2] the horizontal lines from the axis the 
P axis [0.2] to C and to D [0.7] and to call that the 
change in price [1.6] then drop down the vertical lines and that's the new 
change in quantity [0.8] necessarily [0.7] comparing [0.3] this move from A to 
B [0.4] with this move from C to D [0.6] delta-P over delta-Q won't have 
changed [0.5] but P-over-Q [0.2] will have changed and so will have a different 
elasticity [8.6] okay so with this the conclusion is with a straight line 
demand curve the elasticity is falling as we move down the demand curve [3.7] 
then we might ask a question [1.8] so what would the demand curve have to look 
like [0.3] for this elasticity [0.2] not to be changing [2.4] well we know that 
P-over-Q must be falling [0.9] as we move down the demand curve P-over-Q must 
be falling [2.2] so we need delta-Q over delta-P to be rising [3.3] okay [0.3] 
it's no good if delta er delta-Q stays constant [0.4] so one thing you might 
think about doing afterwards is doing what the suggestion was at the back [0.5] 
drawing the demand curve not as a straight line [0.4] but as a hyperbola [7.0] 
drawing 
it like this [2.9] where [0.3] if you carried on it asymptotically [0.5] 
approaches in other words gets closer and closer to each axis [3.6] do the same 
[0.6] experiment here that we did over here [0.7] draw points A and B [0.3] C 
and D [0.7] well these two points [0.5] are having [0.3] an interval between 
them the same as those two points [1.1] of course P-over-Q is fall-, [0.6] i'm 
using Q aren't i [1.3] P-over-Q is [1.0] falling [0.7] think what's happening 
to delta-Q over delta-P [0.9] and see if that's given you [0.5] an elasticity 
[0.2] which doesn't change so that's the thing to think about afterwards [7.6] 
okay [1.1] for the conclusion i'm giving you is [2.2] is the following [5.9] 
okay so this now is going to conclude [0.2] my discussion of e-, of 
elasticities for now [2.7] we know that so long as the demand curve [1.1] is 
downward sloping this th-, this is going to be true [0.4] whether it's linear 
or a hyperbola or [0.6] it doesn't matter as long as 
it's downward sloping [1.7] we're assuming that the elasticities are not 
positive [0.3] they are less than or equal to zero [3.5] think about [3.2] all 
points between all negative points [0.9] less than [1.0] or all points less 
than or equal to zero [1.6] okay so start off at zero [1.0] and think about all 
the points going down to minus-infinity which was one of the points that was 
raised [0.7] earlier in this lecture [2.9] then [0.4] if the elasticity is 
exactly equal to zero [3.4] we can of course talk about [0.9] zero elasticity 
[1.0] going to make that a bit sharper [5.8] we can talk about [0.5] zero 
elasticity [2.7] a point further down this [0.4] scale [2.4] would be where [0.
4] the elasticity of demand [0.2] price elasticity of demand is exactly equal 
to minus-one [1.3] we talk about that as being [0.2] unit elasticity [14.3] 
think about unit elasticity [0.7] in our example here [1.7] i'm just going to 
put this 
slide [0.2] underneath the continuous sheet [6.2] think about this being equal 
to minus-one [6.8] if you then rearranged this expression [1.5] we get [0.6] 
delta-Q [1.9] over Q [1.6] equal to [1.3] minus- [0.8] delta-P [0.8] over P [2.
9] so if the [0.4] elasticity is equal to minus-one [1.3] in other words if 
we're dealing with unit elasticity [1.3] then that's just the same thing as 
saying that [2.0] the proportional increase in quantity demanded will be 
exactly equal to the proportional [0.6] change in price [0.6] okay so in other 
words if for example [0.2] prices go up by ten per cent [0.7] and quantity 
demanded falls by ten per cent [0.5] then we're talking about unit elasticity 
[0.8] so that's what [0.6] this means [4.5] as we move down towards minus-
infinity [0.3] we talk about demand being perfectly elastic with respect to 
changes in price [6.3] and we distinguished between [0.6] 
these two ranges either side of minus-one [0.8] in the following way [3.2] any 
elasticity between zero and minus-one [0.4] we talk about as being relatively 
inelastic [0.4] demand is relatively inelastic [2.6] and if elasticity is 
greater than minus-one we talk about it being relatively elastic [0.4] or [0.2] 
elastic for shorthand [10.7] okay [0.8] i just want to finish this topic with 
one [0.2] small [0.8] er [0.3] note of caution [1.0] in interpreting [0.5] 
inelasticity [5.2] think about this range where demand is inelastic [1.8] if 
demand is in this r-, [0.2] in this range here demand elasticity is in this 
range here [0.5] then we say that [0.2] elasticity is less than nought [0.3] 
and greater than minus-one [5.7] so it's a number like [1.1] minus-a-half or 
minus-a-quarter or minus-point-one [0.2] or minus-comma-one [0.7] depending on 
[2.5] how you [0.2] denote these things [2.3] we often talk about the absolute 
size of elasticity [0.6] we often [0.2] think [0.2] well we know that demand 
elasticity's a negative number [0.6] let's not keep referring to it as a 
negative number 
let's think about it just as [0.3] the absolute number [1.5] to do that we 
denote it as [0.6] the elasticity with these two vertical lines either side of 
it [0.3] to remind us that we're just dealing with the [0.3] the absolute 
number [1.0] whether it's a half or a quarter or point-one [0.3] dropping the 
minus sign [3.1] and we say that the absolute size of this elasticity [0.3] is 
a number which is less than one [0.3] it's a half or a quarter et cetera [1.6] 
and of course when you do that when you cha-, when you drop the minus sign [1.
5] you then talk about a-, [0.6] demand being [2.9] more elastic [2.1] as we're 
moving in this direction [0.4] so it's more elastic as the as the number's 
going from a half from nought [0.5] through a quarter to a half [0.2] three-
quarters et cetera [0.3] so the absolute size of the elasticity [0.3] is 
getting bigger [0.7] as we're moving in this direction [3.7] so there's a 
slight [0.2] confusion [0.2] which i'd usually like to go away and think about 
[2.8] be aware that when we talk about demand becoming [0.2] more elastic [0.2] 
it 
means that the elasticity's becoming more negative it's go-, it's going from a 
half to a quarter to a half to three-quarters [0.5] to s-, to six to eight et 
cetera [0.2] all on this negative scale [0.7] so the absolute size grows [0.4] 
as it becomes a bigger negative number [3.1] so that's a point to go away and 
and reflect on and be sure you've you've er followed [1.7] and then we can do 
the same thing for el-, for a for an elastic for the elastic range as well of 
course [6.3] and that concludes all i want to say [0.8] about this topic and i 
now want to move on to a whole new topic [0.4] which is topic three of the 
lecture course 
nm0775: okay i want us to go for another [1.3] sorry there's one question [0.3] 
can we can everyone be quiet so i can hear the question please [0.4] 
sf0781: what's the point of the elasticity what what what do we use all this 
for [0.6] 
nm0775: what do we use it all for we use it for two things one is [0.3] all 
those things we've already looked at it's [0.4] for [0.6] which is 
looking at er [0.3] how for example the impact of minimum wage on the la-, on 
the labour market [0.6] okay [0.2] very topical issue in British [0.5] 
political economy at the moment [0.4] is that there's a new government [0.3] 
which is bringing in [0.5] er minimum wage legislation [1.0] okay let's just 
remind ourselves [1.3] of er [0.7] of the of this [0.3] of the diagram for this 
case [5.7] let's have a look at a model of the labour market [0.8] we've got 
wages and employment [1.3] our demand curve is demand for labour by firms [0.6] 
and there's some supply of labour by workers [2.8] that would be the 
equilibrium wage [4.4] this would be the equilibrium employment level [0.6] 
assume [0.6] that this is [0.2] what's happening in the British labour market 
at the moment [0.2] there is an equilibrium wage [0.3] there's an equilibrium 
level of employment [0.6] and the government is introducing a minimum wage 
legislation [1.7] suppose that [0.4] the w-, [0.2] the wage legislation will be 
sufficiently high [2.7] 
that's the minimum wage W-lower-bar [2.3] a floor wage [0.9] assume it's higher 
than the equilibrium wage [3.3] then what will be the effect of this on the 
labour market very important point in British political economy at the moment 
[0.5] and a number of critics of [0.3] the minimum wage policy [0.3] are saying 
that such an action by the government [0.5] will reduce [0.2] employment [0.5] 
because the equilibrium will go from the market equilibrium A [0.7] to the 
regulated equilibrium of point B [2.0] where demand [0.8] which is the short 
side of the market [0.6] rations the outcome rations the number of jobs down to 
L-bar [0.6] the employment level [0.6] after the impact of the minimum wage [0.
9] okay so [1.4] this looks like [0.4] the minimum wage causes a big reduction 
in the number of jobs [0.2] causes a lot of unemployment [0.3] and that's what 
a lot of critics of the minimum wage [0.2] are saying will happen [1.4] one 
thing we're going to look at through this term [0.3] is developing [0.6] an 
economic analysis which enables us to 
look at more and more aspects of the minimum wage [0.6] but in this simple 
model [0.2] the effects look as if potentially [0.3] they might be disastrous 
for jobs [0.9] one question we can address within this framework is [0.3] well 
[0.2] how big will be [0.3] this reduction in the number of jobs [1.3] my 
question to you is [0.2] well what does it depend on we've already seen it [0.
3] someone like to remind us [0.7] okay what does the magnitude of job loss 
depend upon [0.4] within this analysis 
sm0782: the demand [0.4] 
nm0775: the demand [0.3] 
sm0782: 
nm0775: is depe-, er on er a-, and on what in particular of the demand curve 
sm0782: slope [0.3] 
nm0775: the slope and I-E the thing we've been looking at the elasticity of 
demand [0.7] okay [2.3] so [0.4] we've seen how [1.3] the slope of the demand 
curve [0.5] is related to [0.3] this concept of elasticity [0.6] we've said how 
if demand is very elastic [1.0] this demand curve is flat [1.6] and so point B 
[0.4] would be [0.2] further to the left along W-bar [0.3] 
okay do you understand that [0.3] am i going to draw it yes i'm going to draw 
it [1.9] suppose in other words that [0.5] the demand were more elastic [0.2] 
not [1.0] inelastic where [2.9] let's say mo-, suppose the demand were more 
elastic [0.4] then point B would have been here [1.9] call it B-dash [0.6] and 
the job loss [1.6] would have been [1.1] greater [0.7] so the ela-, the [0.4] 
the price elasticity of demand [0.3] which in the labour market means [0.3] the 
wage elasticity of demand for labour [0.7] is a crucial [1.1] parameter [1.1] 
in determining [0.3] the impact of this important policy on the labour market 
[0.2] that's why it's important [1.9] and but [0.2] but just in passing we've 
said that that's just one application [0.4] we've been looking at a number of 
applications [0.3] and that the important one was for the impact of taxation [0.
7] on commodities and indeed we looked at a case of taxation on the labour 
market [1.7] okay [0.8] so let me now [0.3] go on to the third topic [0.4] and 
let me link [0.3] this third topic with what we've been doing so far [2.6] 
topic 
one was a general introduction to [0.4] economic phenomena [0.5] economic 
methodology et cetera [0.8] topic in topic two we said [2.3] let's [0.6] deri-, 
let's er assume something called a demand curve [0.3] don't bother drawing this 
for the umpteenth time [0.5] if you just let me put it for you [0.7] i vary 
between whether i use Q or X for quantity [0.3] forgive me but it's the same 
thing [1.8] we add we then added a supply curve [0.6] and we said look [0.6] 
where those intersect [1.4] we have a market equilibrium [0.7] potentially [0.
5] and we looked at the possible properties of market equilibria [0.5] in terms 
of existence uniqueness stability [0.7] and we looked at comparative static 
properties of the equilibrium [0.4] meaning [0.3] we shifted one of the curves 
[0.2] and looked at what happened [0.7] for price and quantity outcomes [1.3] 
but all we did was [0.4] assume [0.9] that in a market economy [0.3] there are 
such things as demand and supply curves [1.3] we said their slopes matter 
because their elasticities matter [0.3] we didn't [0.3] address the issue of [0.
2] where these 
demand and supply curves come from [1.6] and what we're going to do in topic 
three [1.4] is say [2.3] well [0.4] where does this demand curve come from [0.
2] how do we derive this demand curve [1.0] and from that what are its likely 
properties [3.2] then in topic four [0.8] and beyond [3.2] we're going to say 
[0.3] well what about this concept of a supply curve [1.5] where does that come 
from [0.3] what assumption does that make [0.4] about supplying agents [1.1] 
about the motivations of firms and the decisions of firms [2.9] having [0.5] 
gone through [0.3] the analyses of deriving demand and supply [0.5] we'll then 
further address this issue [0.6] of [0.2] how these two things interact [0.6] 
to give us a market equilibrium [0.7] because we'll say [1.3] how does the [0.
2] nature of the market place in which these agents [0.4] trade [0.3] how does 
that determine [0.2] the nature of the outcome [0.8] so we'll ask questions 
about [1.4] the nature [0.7] of markets [1.9] in particular we'll 
focus on issues of [0.6] does the outcome depend upon [0.4] how many agents 
there are demanding this commodity [0.2] and or supplying this commodity [3.0] 
so that's a scheme of [0.5] of [0.3] how we [0.2] what we've been doing so far 
[1.7] links in with what we're going to be doing from now onwards [0.9] and 
there's one more thing i [0.2] i might say before going on into topic three [1.
3] and it's the following [2.7] we're assuming that [0.5] the two most 
important groups of agents in the economy [1.0] for our initial purposes of 
analysis [0.6] are [1.7] households [3.1] and firms [2.7] what we're going to 
be doing [1.0] in the in topic three [0.2] is addressing the question [1.4] of 
[1.8] what determines the demand [0.6] for the commodities X [1.7] bought by 
households from firms [3.9] then in topic four and beyond we're going to [0.4] 
address the er other aspect of that which is [0.5] well what do we know about 
[1.6] firms' decisions concerning the supply of X [0.4] to households [0.3] all 
within some market context [0.4] that later on we'll also be analysing [2.7] 
X of course [0.6] is just one commodity [0.5] that is traded between these two 
broad groups [2.1] what's an what's another [0.2] commodity [1.8] that's traded 
between these two groups 
sf0783: labour [0.3] 
nm0775: labour good [1.9] just as households are demanding [1.0] commodities [0.
5] from firms [1.9] they're supplying [0.6] labour [1.1] to firms [1.3] and the 
other side of that coin [2.7] is that firms are demanding labour from 
households [4.0] okay [0.9] so topic three [1.6] is going to be analysing this 
[1.0] topic four onwards is going to be analysing supply [0.9] and later on in 
the course we'll look at [0.6] what determines [1.2] households' supply of [0.
6] labour [0.7] and firms' demand for labour [2.4] those are just two agents of 
course in the economy [2.1] a third agent which we've already touched upon [0.
3] earlier in the course would be government for example [2.0] how does 
government come into this analysis [0.5] well [1.5] you might [0.2] say that [0.
7] 
households are demanding [0.4] goods not only from firms but also from 
governments so this box [2.4] might consist not only of firms but also of 
government [0.8] 'cause government provides things just as firms do [1.0] 
sometimes in a market place sometimes outside of a market place [1.9] another 
way in which government [0.2] would influence this [1.7] scheme [0.3] of things 
[0.4] would be [0.2] that the way in which these [0.3] relationships are 
determined [0.6] the relation-, [0.2] the the nature of the supply and demand 
relationships [0.3] and how they interact within a market place [0.5] itself is 
regulated or governed by [0.6] government [1.0] okay so the very nature in 
which these things occur [0.7] we could argue [0.4] is determined by [0.2] to 
some extent at least [0.4] the nature and role of governments [0.4] er within 
the market [1.6] okay so that's what we're going to go on to [0.2] to consider 
[1.4] let's immediately make a start [0.7] on topic three [3.7] which is that 
as the demand [0.8] theory [0.3] or consumer 
theory [8.1] in particular [0.2] we're going to be looking at [0.6] what 
determines [0.3] the [1.8] properties [0.6] of demand curves [3.8] and how 
those properties follow [0.3] from assumptions about the behaviour [0.6] of 
rational economic agents [1.8] okay you remember in the very first lecture [0.
4] i touched upon a little bit [0.3] the concept of rationality [0.4] what we 
mean by rationality [0.6] we're going to use some of that now [0.4] and develop 
that [2.0] and we're going to proceed with this for fifteen minutes [0.2] and 
then have [0.3] a break [2.6] okay [0.5] so what are our [1.0] assumptions 
about rationality [0.3] for these purposes [1.1] well we suppose that 
individuals [1.3] who we're going to refer to more generally as rational 
economic agents [2.4] for the purposes of their [0.7] economic activity [2.0] 
we assume that they have preferences [4.3] and we further assume that these 
preferences [0.2] have certain properties [6.1] and what i want us to do is to 
consider [0.9] what those properties are [17.2] first question we should say is 
[0.7] first question we should ask is [0.5] well preferences over what [3.4] 
and if you think about yourself you have preferences over 
a very wide range of different things commodities activities et cetera [1.4] 
we're going to be [0.5] pretty tight in defining [0.9] our preferences to just 
lie over [0.2] two possible commodities [0.6] so we're going to be talking 
about preferences [0.9] by individuals [0.7] over different combinations [0.5] 
of two commodities [3.5] and those commodities are going to be two goods X and 
Y [0.7] you can think about X and Y as being anything you like [2.7] okay it 
could be er it could be that [0.3] the two things which you think of as giv-, 
[0.2] as giving you [0.3] a lot of happiness [0.2] over which you have 
preferences [0.4] are [0.4] er [0.3] new clothes and C-Ds [0.7] or it might be 
[0.6] economics lectures and accountancy lectures [0.7] [laughter] anything you 
like [4.4] so [3.9] i'm going to call those combinations of these two goods X 
and Y [0.3] as being bundles [0.4] you can think of them as baskets of goods 
think about someone with a basket [0.3] in which they've got [0.5] some [0.4] C-
Ds and some new clothes [0.4] and they're comparing that basket [0.3] with 
another basket with different combinations of those 
two things [0.5] i'm not going to use the word baskets i'm going to use the 
word bundles [2.0] meaning a collection of or a combination of [1.7] two 
commodities or two goods [0.2] which i'll call X and Y [5.1] we can represent 
[0.3] these bundles [0.2] in a diagram [3.9] where on the [0.8] axes we have 
the amount of X [1.0] in this bundle [0.7] and on the vertical axis the amount 
of Y [0.3] in this bundle [6.5] and i've drawn on here two possible points two 
possible bundles of goods [1.5] the bundle at A and the bundle at B [1.5] and 
i'm saying suppose [0.6] A is the bundle of goods in which there are two units 
of Y [0.4] and two units of X [0.8] whilst at point B [2.0] the bundle 
represented [0.4] has one unit of Y [0.5] and four units of X [9.9] okay so 
those are two bundles of goods that you m-, as an individual [1.8] might 
confront [3.3] and let's suppose that this individual [1.3] is asked [1.4] to 
[0.2] state a preference between these two bundles of goods [6.1] and asked to 
say which [0.4] he or she prefers [11.7] okay now [1.3] without knowing this 
person's preferences [0.2] and without knowing what these commodities are [0.4] 
course [0.3] we can't easily answer it [0.9] but what [0.4] what i can do now 
is to say [0.3] well [0.2] what assumptions are we making about the kind of 
answers that people might give [0.5] what properties [0.9] might their answers 
satisfy [4.0] and the first property [1.3] is the property [0.6] that their 
preferences [0.2] are ordinal [1.1] we'll just discuss this here [0.8] and then 
be a little bit more precise about it [5.5] i'm assuming [0.9] that when asked 
this question [2.7] people can rank their preferences ordinally [5.7] I-E that 
we're assuming that the individual is able to answer [0.5] this question [3.4] 
about which bundle A or B he or she prefers [0.8] in one of the following ways 
[4.4] that they might say [0.9] i prefer B [0.2] to A [3.6] sorry [0.3] i might 
[0.2] i [1.0] i they might say i prefer A to B [0.8] alternatively they might 
say i prefer [0.6] B to A [2.8] what would be a third possible response [1.1] 
sf0784: [0.3] 
nm0775: sorry 
sf0784: if you like them equally 
nm0775: okay [0.3] that i like them equally [2.8] my terminology for that is [0.
8] they might say i'm indifferent between the two [0.8] i'm equally happy with 
A [0.5] as with B [3.7] okay so [0.7] 
we're going to a-, [0.3] assume that [0.9] all of those answers are meaningful 
answers [1.7] well you might say well that's just that's just kind of obvious 
[2.1] but it isn't i hope [0.7] so obvious [0.9] because in allowing these 
possible answers we're ruling out [0.7] different possible answers [1.7] such 
as the following [2.2] in particular we're ruling out we're ruling out the 
possibility [0.7] that an individual says [0.5] i don't know which of those two 
things i prefer [4.2] there might actually be [0.6] many situations in the real 
world where [0.2] that might be the answer [1.1] i'm sure you've all been in a 
situation sometime where you've had to make a choo-, a choice between two 
things [1.5] and they've either been so similar [1.0] that [0.2] it's been hard 
to choose [0.4] or they've been so very different from each other [0.4] it's 
hard to choose [3.0] it's most [0.2] easy i guess to think that if these two 
goods are so if these two bundles of goods are so very different [0.7] it it 
could be hard to make a choice [0.6] but we're ruling that out we're going to 
be adopting an assumption [0.7] that 
individual rationality [1.0] from which we're going to derive demand curves [0.
7] individual rationality [0.2] is such that people can always state [0.5] a 
preference in these ways [1.0] that they never [0.7] are unable [0.9] to [0.7] 
rank their preferences a-, across bundles [0.6] no matter how similar or how 
different those bundles are [1.2] now [0.3] i've said here [0.8] that they're 
ranking their preferences between those goods [0.5] ordinally [0.3] in an 
ordinal way [0.3] what do i mean by that [5.6] well i by ordinal ranking [0.9] 
i mean something different from cardinal ranking [0.3] which i'll define in a 
second [1.2] so by assuming that the individuals can rank preferences ordinally 
[0.5] we're ruling out the possibility that preferences can be ranked [0.2] 
cardinally [0.5] so what does that mean [8.5] what that means [2.4] is that [3.
8] we rule out the possibility that people are able to say [0.2] things like 
the following [1.9] that [1.4] that given the choice between A and B [1.0] i am 
twice as happy [0.5] as A as i am with B [1.0] we're saying that [0.4] that's 
too strong a requirement [0.5] we merely want people 
to say do you prefer A or B [0.5] we don't want them to say [0.2] by how much 
they prefer A to B [5.3] we're also ruling out the possibility that people can 
say things like [0.3] B makes me fifteen units of satisfaction better off than 
A [1.3] okay so [1.2] back in your room on campus [1.0] in the privacy of your 
of your own [0.3] study room [0.7] you haven't got some kind of thermometer or 
barometer of your own level of happiness and you can gauge it each day [1.3] 
and give it an actual calibrated number [1.4] and if someone comes to your door 
and offers you either a takeaway pizza [0.6] or a takeaway can of er 
Boddingtons bitter or [0.2] Coca-cola or whatever [0.7] er that you're not able 
to say [0.2] le-, hang on a minute i'll just measure exactly how much happiness 
i get from that one and from that one and compare the two [1.2] so you know 
which you'd prefer of those two choices [0.3] but you don't know by how much 
you don't calibrate [0.3] cardinally [0.7] your level of happiness [0.4] you 
rank ordinally [0.5] where things are in a hierarchy [0.5] but not measured [0.
3] in the way that you measure temperature [0.3] on a 
calibrated scale [4.0] so those are three kinds of [1.3] of ways of thinking 
about utility that we're not going to be adopting [1.7] in our definitions of 
individual rationality [1.3] some of you who've done economics before [1.8] 
might have come across the idea of [0.5] er [0.3] of levels of utility [1.4] 
anyway you could even perhaps think of writing an equation which gives you 
someone's level of utility [1.7] and when people talk about utility they also 
sometimes talk about the idea of [0.2] marginal [0.2] utility [1.9] by which 
they mean [0.6] if i have an extra unit of X or an extra slice of pizza for 
example [0.3] then my utility level for today goes from twenty [0.3] to twenty-
two [0.4] and so my marginal utility from this extra slice of pizza [0.2] is 
two units of utility [1.3] but we're saying that we don't [0.3] believe for the 
purposes of our [0.7] er analysis of rationality [0.2] that people [0.5] can 
make those kind of judgements [0.3] so we're ruling out the idea of measuring 
utility [0.3] by numbers [0.4] and that means we're ruling 
out the idea of measuring marginal utility [1.1] okay so for most of this 
course [0.4] there might be times in which we say [0.2] well let's look at what 
happens if we can do that [0.3] but on the whole we're going to say [0.2] we 
don't believe that marginal utility [0.7] is a meaningful concept that people 
don't have that way of thinking about their own utility [1.6] so if you've [0.
2] if you've heard of marginal utility [0.5] as you all have now 'cause i've 
just mentioned it [0.3] forget it for a while [0.8] that's not our way of 
dealing with [0.2] this [0.9] notion of [0.7] of preferences [3.0] okay so [0.
6] the properties we're looking at then [0.4] the preferences so far [2.0] are 
that people can rank their preferences o-, over different bundles [0.4] their 
ranking [0.3] is done in an ordinal [0.2] not a cardinal way [9.6] to recap the 
[0.2] preferences are complete [1.2] in the sense that [0.5] you can compare an 
individual can compare any two bundles of goods [0.4] so we've got ordinal 
ranking of preferences [0.4] completeness of preferences [4.6] thirdly [3.6] 
you've got [0.6] non-satiation of preferences [3.8] 
we're assuming [1.2] that individuals' preferences [0.7] have this property of 
non-satiation [3.1] in other words [1.4] the consumer always prefers more to 
less of any commodity [4.2] goes by the idea of you can't have too much of a 
good thing [0.3] if a thing gives you [0.3] happiness then the more of it the 
better [1.7] is that always strictly true [2.4] someone says yes but we don't 
er [2.1] okay well you've do-, you've demonstrated by being here [1.1] that 
even though there are many other things you could've gone away to do [0.6] 
you've decided to come here [1.5] i don't believe that namex University campus 
is [0.5] has nothing else to offer than this you've come here [1.8] er and that 
means that on balance it's a good thing okay it might be [0.2] that might be a 
dismal experience [0.4] but you can survive it [0.3] and maybe see you take 
away something that will hel-, enable you [0.3] to do better on the course pass 
the exams and that will mean you've got a summer without having to bother about 
resits [0.4] all these calculations might be there [1.1] but if that's true is 
it would be the 
case that you'd be happy to sit here until May or June [0.4] doing nothing else 
[0.3] maybe with a sleeping bag and [0.9] and some food supplies coming every 
now and again [0.4] course it isn't [0.2] you can certainly have too much [0.3] 
even of such a good thing as an economics lecture [0.5] if that's true of an 
economics lecture it's certainly very very true [0.3] of other commodities [0.
6] i happen to have one or two friends who enjoy [0.4] er consuming substances 
like alcohol [1.5] [laughter] and i know it's terrible for me to admit that but 
it's true [0.8] er [0.5] and er [0.3] and pizza [0.8] okay some of my best 
friends like pizza [1.0] er [0.6] and i have some people who are devoted to 
pizza and eat and and eat nothing else [0.5] but even they get to some point 
where if you offer them an extra slice of pizza [0.3] they'd have to turn it 
down [0.3] because it's no longer giving them [0.3] positive levels of 
happiness [0.8] it's having quite contrary effects [0.9] on their physiological 
well-being [1.2] okay [1.0] so [0.7] it certainly is unreasonable [1.3] to 
assume that this is always true 
but for now we're going to assume it [2.3] one fourth and final [0.6] property 
of preferences that i want to introduce before [0.4] pausing for a break [1.8] 
is the property of transitivity [2.3] we're assuming that peoples' preferences 
[1.4] have this property [1.0] of [1.1] being transitive [7.7] now what we mean 
by this [2.4] let me introduce the following notation [0.5] this sign here 
which is a bit like a [0.3] a greater than sign [0.6] with a slight twist [3.2] 
is to be read as [1.4] in the [0.2] to be read in the following way if [1.1] 
the individual prefers A [0.3] to B [0.6] okay so that's read as [3.5] if A [0.
5] is preferred to B or if if the individual prefers A to B [2.3] and if the 
individual prefers B to C [2.3] then by transitivity [0.8] it follows that the 
individual must prefer A [0.3] to C [3.8] okay so [0.5] i go along to one 
individual [0.6] and i say to him [0.9] er [2.1] point A [0.3] is you have a 
ticket to go to the next home match of namex [2.1] er [1.8] bundle B is [0.4] 
you get a free pizza from me [1.5] and bundle C is you get four tickets for the 
national lottery [1.0] there's A B and 
C [0.8] if i offer you the choice between A and B do you want to go to [0.7] er 
[0.7] namex [0.2] or do you want the pizza [0.4] and if you say pizza [1.3] and 
then i offer you the choice between the pizza and the national lottery tickets 
[0.3] and you say the national lottery tickets [0.6] if i then say to you okay 
[0.2] what now about the choice between namex and the national lottery tickets 
[0.2] if you said ah well in that case namex [0.5] i say your your preferences 
are intransitive [0.6] they don't satisfy this assumption of transitivity [0.4] 
and i regard that as [0.5] for these purposes [0.5] not satisfying my 
conditions for rationality [0.5] so this element of rationality [0.3] imposes 
transitivity [0.5] let me just say one more thing about transitivity before 
pausing [4.3] it's true of strict preference it's true in this relationship 
between [0.4] preferring one thing to another [1.6] it's also true [0.5] of [0.
2] the [0.2] indifference relationship [1.8] if asked the same questions the 
answer was [0.4] i'm indifferent between A and B [0.4] okay so 
this is this reads as [0.4] if the individual is indifferent between A and B [0.
6] and if they're indifferent between B and C [0.8] then again by transitivity 
[1.5] upper case T is my shorthand for transitivity [0.7] the individual must 
also report being [0.9] in er having [1.5] transitive [0.5] er having 
indifference between A and C [0.3] if their preferences are [0.5] transitive [1.
8] okay think about [0.2] this property of transitivity which you mostly might 
not have come across before [1.4] think about something which is [0.6] think 
about some phenomenon in the real world [0.2] which does have transitivity [0.
6] one example would be people's heights [0.4] if i compared three people A B 
and C [0.5] A is taller than B B is taller than C [0.3] it follows [0.6] in a 
kind of logical way that A is bigger than C [0.8] think about some different 
phenomenon [0.9] think about football matches [1.7] and the question is are 
football results [0.2] transitive do they satisfy the property of transitivity 
[0.5] okay well look [0.6] again i have friends who are interested in football 
[1.5] and some of them are interested in some [0.2] 
football competition called the European Champions League or something of the 
kind [0.9] er [0.4] this is a very European arena a global arena so let's think 
not just about [0.2] domestic football let's not just think about namex [0.7] 
who i believe aren't in the Champions League [1.9] tomorrow there are some 
games in the Champions League of European football [0.8] er in one particular 
group there is a team which goes by the name of Manchester United [1.1] and in 
their first game of that competition they drew with Barcelona [1.3] in their 
second game [0.3] they drew with Bayern Munich [0.8] tomorrow night Bayern 
Munich [0.3] play Barcelona [0.8] if football results are transitive [0.3] then 
Bayern Munich and Barcelona will draw [1.4] if you believe that that's true you 
won't be in this lecture theatre you'll be at the bookmakers putting a lot of 
money on the outcome [1.1] if you do that you might well be disappointed [0.4] 
'cause football results [0.2] sadly or mercifully [0.2] depending on which way 
you look at it [0.4] are not transitive [0.6] okay so that's the phenomenon of 
transitivity [0.4] we'll break there and we'll resume in about ten minutes