Introduction to Economics

Egor Sidorov

1. Demand

2. Supply

3. Market equilibrium

20.04.2023 2

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.

20.04.2023 320.04.2023 3

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.

20.04.2023 4

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.

20.04.2023 521

25

3 54

2015

10

5

6

30

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

20.04.2023 6

21

25

3 54

2015

10

5

6

30

Q

P

Change of demand►

When the non-price factors change (e.g. our budget increases) we observe the movement of the curve itself.

. 21

25

3 54

2015

10

5

6

30

Q

P

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.

─ …

20.04.2023 7

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.

20.04.2023 8

Price elasticity of demand

─ It indicates sensitivity of quantity demanded to price changes (i.e., shows how consumers respond to price changes)

20.04.2023 9

21

25

3 54

2015

10

5

6

30

Q

P

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

QQ

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).

20.04.2023 10Q

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).

20.04.2023 11Q

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

20.04.2023 12

Price strategies

─ If the demand is elastic it is sensible to decrease price, since it will be compensated by the growth of sales►

20.04.2023 13

21

25

3 54

2015

10

5

6

30

Q

P

Loss

Additional income

If the demand is non-elastic it is sensible to increase the price◄

21

25

3 54

2015

10

5

6

30

Q

P

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.

20.04.2023 14

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.

20.04.2023 15

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

20.04.2023 16

Supply

─ the quantities of any particular good which the firms are willing to make available at the variety of prices.

20.04.2023 17

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.

20.04.2023 18181821

25

3 54

2015

10

5

6

30

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

20.04.2023 19

21

25

3 54

2015

10

5

6

30

Q (ks)

P

Change of supply►

When the non-price factors change (e.g. technology) we observe the movement of the curve itself.

. 21

25

3 54

2015

10

5

6

30

Q (ks)

P

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

20.04.2023 20

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

20.04.2023 21

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.

20.04.2023 22

vs. vs.

1. Demand

2. Supply

3. Market equilibrium

20.04.2023 23

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

20.04.20232424242421

25

3 54

2015

10

5

6

30

Q

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.

20.04.2023 2521

25

3 54

2015

10

5

6

30

Q

P

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.

20.04.2023 26

21

25

3 54

2015

10

5

6

30

Q

P

E

E’’

Achieving equilibrium: dynamic model

─ Converging case

20.04.2023 27

21

25

3 54

2015

10

5

6

30

Q

P

A

Achieving equilibrium: dynamic model

─ Diverging case

20.04.2023 28

21

25

3 54

2015

10

5

6

30

Q

P

A

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

20.04.2023 29

„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.

20.04.2023 30

State interventions

─ Taxes and subsidies─ Minimum prices

─ E.g. minimum wages►

─ Price ceilings─ Bus tickets

20.04.2023 31

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.