Introduction to Economics

1. Introduction to Economics Egor Sidorov

2. Demand Supply Market equilibrium

3. 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. Preferences Resourses Decision 23. 9. 2014 3

4. 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.

5. 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. P (price, thous. USD) 30 25 20 Given: If the demand curve is ►, the demand function is: Q = 4 – 0,1xP 15 10 5 Q (pieces) D 2 3 1 4 5 6

6. 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 P P 30 30 25 25 20 20 Change of demand► When the non-price factors change (e.g. our budget increases) we observe the movement of the curve itself. . 15 15 10 10 5 5 Q Q 2 2 3 3 1 1 4 4 5 5 6 6

7. 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. • …

8. 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.

9. Price elasticity of demand • It indicates sensitivity of quantity demanded to price changes (i.e., shows how consumers respond to price changes) E>1 P 30 25 20 E<1 15 10 5 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. Q 2 3 1 4 5 6

10. 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). P D1 D2 Q

11. 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). P D3 D2 D1 2 ▼50 % ▼50 % ▼50 % 1 Q Q Q ▲200 % ▲50 % ▲25 %

12. 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

13. Price strategies • If the demand is elastic it is sensible to decrease price, since it will be compensated by the growth of sales► Loss P P Additional income 30 30 25 25 20 20 15 15 If the demand is non-elastic it is sensible to increase the price ◄ 10 10 5 5 Q Q 2 2 3 3 1 1 4 4 5 5 6 6

14. 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. 90 120 10 800 110 80 8 800

15. 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. 90 105 9 450 110 95 10 450

16. Demand Supply Market equilibrium

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

18. 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 supplycurve. P 30 25 20 The positive slope reflects that higher prices mean higher profits and attract more producers►, supply function is: Q =0,2xP – 2 S 15 10 5 Q 2 3 1 4 5 6 18 18

19. 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 P P 30 30 25 25 20 20 Change of supply► When the non-price factors change (e.g. technology) we observe the movement of the curve itself. . 15 15 10 10 5 5 Q (ks) Q (ks) 2 2 3 3 1 1 4 4 5 5 6 6

20. 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

21. 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

22. 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. vs. vs.

23. Demand Supply Market equilibrium

24. 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 P (cena, tis. Kč) 30 A B A B 25 20 E E 15 10 5 Q C D C D 2 3 1 4 5 6 24 24 24

25. 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. P 30 25 E’’ 20 15 E 10 5 Q 2 3 1 4 5 6

26. 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. P 30 25 E 20 15 E’’ 10 5 Q 2 3 1 4 5 6

27. Achieving equilibrium: dynamic model • Converging case P 30 A 25 20 15 10 5 Q 2 3 1 4 5 6

28. Achieving equilibrium: dynamic model • Diverging case P 30 25 A 20 15 10 5 Q 2 3 1 4 5 6

29. 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

30. „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.

31. State interventions • Taxes and subsidies • Minimum prices • E.g. minimum wages► • Price ceilings • Bus tickets W Wmin Wtrh Q

32. 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.