1a The Economy and the Environment

• What is economics?

  • How and why decisions are made on the use and distribution of human and non-human inputs or resources.
  • Especially scarce resources, including natural resources and ecosystem services
• Decision-makers: households, individual, firms, governments, NGOs, institutions
• Microeconomics: producers and consumers as primary decision-makers
• Macroeconomics: environmental issues and the behavior of the macroeconomy
• Environmental economics is the application of economic principles to the study of how environmental resources are developed and managed.
• Positive economics: What is?

  Characterize, understand what is happening or what had happened.
• Normative economics: What ought to be?
• Demand

  • additional willingness to pay for more of a good or service (G/S)
  • marginal willingness to pay (MWTP)
  • value of the good/service to the consumer
• Demand is motivated by satisfaction; depends on preferences, income
• Demand = downward sloping, usually
• Consumption = amount bought at a given market price
• Supply = additional amount produced incurring additional cost
• Supply = Marginal cost of production (MC)
• Supply depends on mix of fixed and variable inputs
• Opportunity cost = maximum value of foregone inputs foregone due to current use
• Supply = motivated, mostly, by profit; upward sloping, usually
• Production – amount supplied at a given market price
• Efficiency: equilibrium between supply and demand
• What is the MC and MWTP?

  A) Supply

  B) Demand

  
• What is the producer's surplus? Consumer's surplus?

  A) PIE

  B) PEH

  
• Producers maximize net revenue
• Formula to maximize net revenue:

  Total Revenue (Product price X quantity sold)

  − Input costs (Land, Labor, Capital, Production Time, Climate)

  − Margin for Normal Profit and Risk
• Producers’ ability to adjust to changes in product price p depends on the availability of inputs
• Producers’ ability to adjust to changes in product price p depends on the availability of inputs

  • no adjustments beyond amount of fixed inputs
  • adjustments in quantities & mix of variable inputs
  • trade-offs exist among level inputs and consequent costs
• Elasticity of supply:

  (% change in supply)/(% change in specific determinant of supply):
• if 0, perfectly inelastic
• if 0<Se<1, some elasticity
• if = 1 perfectly elastic
• Aggregate supply shifters:

  • changes in resource prices
  • changes in resource productivity
  • business taxes and subsidies
  • government regulations
• Choose a good and provide factors affecting supply

  COCONUT OIL

  
  

  Production Time: few days to several weeks, depending on the processing method and scale of production.

  Fixed Inputs:

  • Coconut plantation or access to coconuts.
  • Oil extraction equipment (presses, expellers).
  • Processing facilities (mills, refineries).
• OIL PRODUCTION

  Variable Inputs:

  • Labor for harvesting, processing, and packaging.
  • Utilities (electricity, water).
  • Packaging materials.
• OIL PRODUCTION

  Supply Elasticity vs. Price:

  • Relatively inelastic in the short term due to natural constraints on coconut production and processing capacity.
  • Long-term elasticity may increase with investments in coconut cultivation and processing technology.
• OIL PRODUCTION

  Factors Affecting Supply Elasticity:

  • Weather conditions affecting coconut yields.
  • Availability and condition of coconut plantations.
  • Technological advancements in oil extraction.
  • Government policies on coconut farming and exports.
• COCONUT OIL PRODUCTION

  Factors Shifting Aggregate Supply Curve:

  • Investments in coconut plantation management and cultivation techniques.
  • Technological innovations in oil extraction methods.
  • Market demand and price fluctuations.
  • Environmental factors impacting coconut production.
  • Changes in government regulations affecting the coconut industry.
• Consumers maximize utility
• Formula to maximize consumer surplus:

  MWTP for a quantity at various price level - cost of consumption [(actual price paid X quantity consumed) + opportunity costs]
• Consumer’s ability to adjust to changes in

  1. Prices
  2. budget, income
  3. taste/ preferences
• Elasticity of demand formula:

  % change in demand/% change in specific determinant of demand
• Aggregate demand shifters:

  • consumption spending
  • investment spending
  • government spending
  • net imports and export
• Exercise 1. Fill in columns (2) to (7) - Factors affecting supply