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  1. Introduction to Economics

  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 21. 10. 2019 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. Percentage change in Qd Price elasticity of demand = Percentage change in P Price Elasticity of Demand 0 • Price elasticity of demand measures how much Qd responds to a change in P. • Loosely speaking, it measures the price-sensitivity of buyers’ demand. CHAPTER 5 ELASTICITY AND ITS APPLICATION

  10. P Percentage change in Qd Price elasticity of demand P1 = P2 Percentage change in P D Q Q1 Q2 15% = 1.5 10% Price Elasticity of Demand 0 Price elasticity of demand equals Example: P rises by 10% Q falls by 15% CHAPTER 5 ELASTICITY AND ITS APPLICATION

  11. The Determinants of Price Elasticity: A Summary 0 The price elasticity of demand depends on: • the extent to which close substitutes are available • whether the good is a necessity or a luxury • how broadly or narrowly the good is defined • the time horizon: elasticity is higher in the long run than the short run. CHAPTER 5 ELASTICITY AND ITS APPLICATION

  12. % change in Q Price elasticity of demand = = % change in P P P1 P2 Q D Q1 Q2 “Inelastic demand” 0 < 10% < 1 10% D curve: relatively steep Consumers’ price sensitivity: relatively low P falls by 10% Elasticity: < 1 Q rises less than 10% CHAPTER 5 ELASTICITY AND ITS APPLICATION

  13. % change in Q Price elasticity of demand = = % change in P P P1 D P2 Q Q1 Q2 “Elastic demand” 0 > 10% > 1 10% D curve: relatively flat Consumers’ price sensitivity: relatively high P falls by 10% Elasticity: > 1 Q rises more than 10% CHAPTER 5 ELASTICITY AND ITS APPLICATION

  14. % change in Q Price elasticity of demand = = % change in P P D P1 P2 Q Q1 “Perfectly inelastic demand” (one extreme case) 0 0% = 0 10% D curve: vertical Consumers’ price sensitivity: 0 P falls by 10% Elasticity: 0 Q changes by 0% CHAPTER 5 ELASTICITY AND ITS APPLICATION

  15. % change in Q Price elasticity of demand = = % change in P P D Q Q1 Q2 “Perfectly elastic demand”(the other extreme) 0 any % = infinity 0% D curve: horizontal P1 P2 = Consumers’ price sensitivity: extreme P changes by 0% Elasticity: infinity Q changes by any % CHAPTER 5 ELASTICITY AND ITS APPLICATION

  16. 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

  17. 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

  18. P (Kč) P (Kč) Q Q Elasticity of demand Income1 = 80 Kč D Income2 = 120 Kč 20 Lossdue to pricefall: - 40 Kč Income1 = 80 Kč 10 Gaindue to highersales: +80 Kč D 20 Lossdue to pricefall: - 40 Kč 12 ks 4 ks Income2 = 60 Kč 10 Gaindue to highersales: +20 Kč 6 ks 4 ks

  19. 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

  20. 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

  21. Demand Supply Market equilibrium

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

  23. 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 23 23

  24. 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

  25. 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

  26. 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

  27. Percentage change in Qs Price elasticity of supply = Percentage change in P Price Elasticity of Supply 0 • Price elasticity of supply measures how much Qs responds to a change in P. • Loosely speaking, it measures the price-sensitivity of sellers’ supply. CHAPTER 5 ELASTICITY AND ITS APPLICATION

  28. P S Percentage change in Qs Price elasticity of supply = P2 Percentage change in P P1 Q Q1 Q2 16% = 2.0 8% Price Elasticity of Supply 0 Price elasticity of supply equals Example: P rises by 8% Q rises by 16% CHAPTER 5 ELASTICITY AND ITS APPLICATION

  29. % change in Q Price elasticity of supply = = % change in P P S P2 Q Q2 “Inelastic” 0 < 10% < 1 10% S curve: relatively steep Sellers’ price sensitivity: P1 relatively low P rises by 10% Elasticity: Q1 < 1 Q rises less than 10% CHAPTER 5 ELASTICITY AND ITS APPLICATION

  30. % change in Q Price elasticity of supply = = % change in P P S P2 Q Q2 “Elastic” 0 > 10% > 1 10% S curve: relatively flat Sellers’ price sensitivity: P1 relatively high P rises by 10% Elasticity: Q1 > 1 Q rises more than 10% CHAPTER 5 ELASTICITY AND ITS APPLICATION

  31. % change in Q Price elasticity of supply = = % change in P P S P2 Q “Perfectly inelastic” (one extreme) 0 0% = 0 10% S curve: vertical Sellers’ price sensitivity: P1 0 P rises by 10% Elasticity: Q1 0 Q changes by 0% CHAPTER 5 ELASTICITY AND ITS APPLICATION

  32. % change in Q Price elasticity of supply = = % change in P P S Q Q2 Q1 “Perfectly elastic”(the other extreme) 0 any % = infinity 0% S curve: horizontal P1 P2 = Sellers’ price sensitivity: extreme P changes by 0% Elasticity: infinity Q changes by any % CHAPTER 5 ELASTICITY AND ITS APPLICATION

  33. The Determinants of Supply Elasticity • The more easily sellers can change the quantity they produce, the greater the price elasticity of supply. • Example: Supply of beachfront property is harder to vary and thus less elastic than supply of new cars. • For many goods, price elasticity of supply is greater in the long run than in the short run, because firms can build new factories, or new firms may be able to enter the market. CHAPTER 5 ELASTICITY AND ITS APPLICATION

  34. Demand Supply Market equilibrium

  35. P P D S Q Q Další informace dole v poznámce Market equilibrium Unfortunately this balance is a very rare state. Some kind of disbalance is more often seen on the market… … happens when demand equals supply E  PE QE

  36. Surplus P i DS P 1 E P E QD = Q E = QS Q i

  37. Deficit P i DS E P E P 2 Q E QS = = QD Q i

  38. Market mechaism P i DS Surplus P1(180 Kč) P3 (120 Kč) Surplus Surplus E P E (70 Kč) Deficit Deficit Deficit P2 (30 Kč) QD1 QS2 Q E QS3 QS1 Q i

  39. Utility and consumer behaviour

  40. Utilityis a measure of the relative satisfaction from consumption of various goods and service. Utility is a subjective feeling when our needs and wants are being satisfied.

  41. Utility vs. Price Price Utility Utility Price Don‘t buy Buy

  42. Can we measure utility? Smartphone (standard quality) Price 25 000 Kč 15 000 Kč Will you buy it? 7 000 Kč 2 000 Kč 500 Kč

  43. Types of utility • Total utility (TU) is the utility gained from all consumed goods. • Marginal utility(MU) istheincreaseof utility by theconsumptionofanother unit ofgoods („additional“ utility)

  44. TU (Celkový užitek) 1 2 3 4 5 6 7 Q i MU Mezní (dodatečný) užitek 1 2 3 4 5 6 7 Q i Total and marginal utiluty The need is satisfied TU TU2 MU2 TU1 MU1 MU

  45. Summary • We only buy additional unit of the goods when the marginal utility of this unit is higher (or at least at the same level) than its price • When we feel that the MU is higher than P – we buy • When we feel that the MU is lower than P – we don‘t buy

  46. Thank you for attention!