introduction to economics egor sidorov. 1.demand 2.supply 3.market equilibrium 11.11.20152
TRANSCRIPT
Introduction to Economics
Egor Sidorov
1. Demand
2. Supply
3. Market equilibrium
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Demand
─ the certain quantity of goods the consumers are ready to buy at the moment at the certain price. Note: Demand will be “economic demand” only in case the consumers have enough money to buy the goods needed.
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PreferencesResourses
Decision
Law of downward-sloping demand: 2 reasons for it
─ When the price of commodity raises (ceteris paribus) buyers tend to buy less of the commodity. ─ Substitution effect: consumer substitutes the more
expensive good by less expensive and therefore decreases his demand for it.
─ Income effect: when all the prices go up the consumer feels himself relatively poorer than before (i.e. real income goes down). In this respect he decreases his consumption.
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Demand function─ Given other things being equal (e.g. tastes, income,
preferences, etc. do not change) the certain relation between price (P) and quantity demanded (Q) exists.
─ This relation is called a demand function Q=f(P), that can be visualized by a demand curve.
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Q (pieces)
P (price, thous. USD)
Given: If the demand curve is ►, the demand function is:Q = 4 – 0,1xP
D
P Q
40 000 0
30 000 1
10 000 3
Moving the curve vs. moving along the curve
◄ Change of quantity demanded: If no other factor, except the price, change – the movement is observed only along the curve
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Change of demand►
When the non-price factors change (e.g. our budget increases) we observe the movement of the curve itself.
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What factors determine demand?
─ Consumer income─ We tend to buy more as the income grows
─ Market size─ E.g. measured by population
─ Preferences and tastes─ Culture, history, psychological and physical needs.
─ …
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What factors determine demand?
─ Price and accessibility of related goods─ Substitute goods: goods that can be consumed or used in
place of one another.
─ Complement goods: goods which can be consumed only with another good.
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Price elasticity of demand
─ It indicates sensitivity of quantity demanded to price changes (i.e., shows how consumers respond to price changes)
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It tells us what percent change in the quantity demanded for a good will follow a one percent increase in the price of that good.
E>1
E<1
|6,0|%66
%40
2/)1020(
1020:2/)32(
32
2/)(:2/)(
%
%
2121
PP
P
QP
QED
Price elasticity of demand
─ Factors: fashion, preferences, good necessity, time for consumers’ reaction, etc.
─ Types of demand price elasticity 1/2─ Absolutely elastic demand: E=∞
(small price changes lead to infinite change of the quantity demanded).
─ Elastic: E>1 (e.g., planned flight).
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P
D1
D2
Price elasticity of demand
─ Types of demand price elasticity 2/2─ Unitary elastic: E=1.─ Non-elastic: E<1 (e.g., unplanned flight).─ Absolutely non-elastic: E=0
(quantity demand doesn’t react on price changes).
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P
D1
Q
D2
Q
D3
1
2
▼50 %
▲200 %
▼50 %
▲50 %
▼50 %
▲25 %
What do we need price elasticity indicator for?─Company price policy before all:
─Price discrimination: e.g. flight companies determine customer groups with different price elastic ties
─Sales in the supermarkets
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Price strategies
─ If the demand is elastic it is sensible to decrease price, since it will be compensated by the growth of sales►
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Loss
Additional income
If the demand is non-elastic it is sensible to increase the price◄
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Price strategy choice
─ Say we are selling tomatoes (100 USD per box).─ Say we have read in the Financial Times that the
price elasticity of demand for tomatoes is E = 2.
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Case Price, USD Quantity demanded
Sales USD
As is 100 100 10 000
10 % discount
10 % increase
90
110
120
80
10 800
8 800
Price strategy choice
─ PSay we are selling aspirin (100 USD per box).─ Say we have read in the Economist magazine that
the price elasticity of demand for aspirin is E = 0,5.
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Case Price, USD Quantity demanded
Sales USD
As is 100 100 10 000
10 % discount
10 % increase
90
110
105
95
9 450
10 450
1. Demand
2. Supply
3. Market equilibrium
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Supply
─ the quantities of any particular good which the firms are willing to make available at the variety of prices.
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Supply function
─ Given other things being equal (e.g. technology, taxes, number of sellers, etc. do not change) the certain relation between price (P) and quantity supplied (Q) exists.
─ This relation is called a supply function Q=f(P), that can be visualized by a supply curve.
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Q
P
The positive slope reflects that higher prices mean higher profits and attract more producers►, supply function is:Q = 0,2xP – 2
S
P Q
10 000 0
20 000 2
30 000 4
Moving the curve vs. moving along the curve
◄ Change of quantity supplied: If no other factor, except the price, change – the movement is observed only along the curve
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Q (ks)
P
Change of supply►
When the non-price factors change (e.g. technology) we observe the movement of the curve itself.
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Factors influencing supply
─ Prices of inputs─ Determine the production costs
and therefore profits
─ Technology─ Determines factor productivity and efficiency.
─ Prices of related goods─ Especially those, produced by
the same company
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Factors influencing supply
─ Governmental policy─ Taxes, minimum wages,
environmental policy, etc.
─ Number of sellers─ Higher profits attract competitors
─ Expectations─ E.g. Olympic games attracts businessmen
to the venue site
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Price elasticity of supply
─ It indicates sensitivity of quantity supplied to price changes (i.e., shows how producers respond to price changes)
─ Price elasticity of supply is influenced before all by─ production extension possibilities in reaction to price change
─ and time horizon – the supply is more elastic in the long run.
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vs. vs.
1. Demand
2. Supply
3. Market equilibrium
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Market equilibrium
─ the point, where the amount of goods the consumers are ready to buy at the certain price is equal to the amount the producers are ready to supply.
─ AB – Surplus.─ CD – Deficit
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P (cena, tis. Kč)P QS QD
10 000 0 3
20 000 2 2
30 000 4 1
E
DC
BA
E
DC
BA
Demand change
─ If the demand curve moves to the right, it will lead to deficit at the initial price level. The price will be pushed up until the new equilibrium state.
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E
E’’
Supply change
─ If the supply curve moves to the right, it will lead to surplus at the initial price level. The price will be pushed down until the new equilibrium state.
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Achieving equilibrium: dynamic model
─ Converging case
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Achieving equilibrium: dynamic model
─ Diverging case
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Price mechanism
─ Prices and producers─ Information and motivation signals – higher prices attract
producers ─ Market niche ► deficit ► price growth ► new market
players ► supply increase► surplus► prices go down►producers leave the market
─ Prices and consumers─ Information and motivation signals – low prices and
marketing campaigns stimulate consumers to buy luxury and normal goods; high prices lead to consumption decrease
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„Invisible hand of market“
─ Adam Smith (1723-1790) – has introduced this concept explaining the efficient market mechanism.
─ Given the perfect competition and absence of market failures the market is capable of producing as many goods and services as it is possible with the accessible resources.
─ However, market failures (e.g., monopoles, environmental pollution, etc.) reduce the efficiency of this mechanism.
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State interventions
─ Taxes and subsidies─ Minimum prices
─ E.g. minimum wages►
─ Price ceilings─ Bus tickets
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Wtrh
Wmin
Q
W
Thank you for attention!
Sources:SAMUELSON, P. A., NORDHAUS, W. D. Ekonomie 18. vydání. Praha: Svoboda, 2005.
KRAFT, J., RITSCHELOVÁ, I. Ekonomie pro environmentální management. Ústí n. L.: UJEP, 2003.
MCDOUGAL LITTELL. Economics: Concept and Choices. Canada: McDougal Littell, 2008.