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MICROECONOMICS. LAW OF SUPPLY AND DEMAND. PRINCIPLES DEMAND COMES FIRST. SUPPLY ADJUSTS TO DEMAND. PRODUCTION REQUIRES TIME. EQUILIBRIUM IS A THEORETICAL CONSTRUCTION. THE MARKET DETERMINES PRICE AND PRODUCTION. LAW OF SUPPLY AND DEMAND. SUPPLY ADJUSTS TO DEMAND : THE ECONOMY IS

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MICROECONOMICS


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Presentation Transcript
law of supply and demand
LAW OF SUPPLY AND DEMAND

PRINCIPLES

DEMAND COMES FIRST.

SUPPLY ADJUSTS TO DEMAND.

PRODUCTION REQUIRES TIME.

EQUILIBRIUM IS A THEORETICAL CONSTRUCTION.

THE MARKET DETERMINES PRICE AND PRODUCTION.

slide3

LAW OF SUPPLY AND DEMAND

SUPPLY ADJUSTS TO DEMAND:

THE ECONOMY IS

DEMAND PULL.

the demand curve
THE DEMAND CURVE

GIVEN THE INCOME,

IF PRICE RISES THEN QUANTITY DEMANDED FALLS.

THEREFORE,

THE DEMAND IS A RELATION CONNECTING PRICE AND QUANTITY WITH

NEGATIVE SLOPE

what can shift the demand curve
WHAT CAN SHIFT THE DEMAND CURVE?

THE EXOGENOUS VARIABLES

slide7

WHAT CAN CHANGE DEMAND CURVE SLOPE?

RICH COUNTRY

POOR COUNTRY

supply adjusts to demand
SUPPLY ADJUSTS TO DEMAND:

1. PROPOSING A PRICE (MARKETING).

2. DECIDING PRODUCTION.

WHICH DEPENDS ON COSTS, DEMAND (INVENTORIES) AND COMPETITION.

WHICH DEPENDS ON PROFITS, DEMAND (INVENTORIES) AND COMPETITION.

supply adjusts to demand1
SUPPLY ADJUSTS TO DEMAND:

(INVENTORIES FALL)

THEN

PRICE RISES AND PRODUCTION GROWS.

WHEN DEMAND RISES

SO,

THE SUPPLY CURVE IS A

POSITIVE

RELATION BETWEEN PRICE AND PRODUCTION.

THE SUPPLY CURVE IS A THEORETICAL CONSTRUCTION.

what can shift the supply curve
WHAT CAN SHIFT THE SUPPLY CURVE?

THE COST OF PRODUCTION.

slide12

WHAT CAN CHANGE SUPPLY CURVE SLOPE?

  • LESS CAPITAL
  • PERISHABLES

INELASTIC

  • MORE CAPITAL
  • NON-PERISHABLES

ELASTIC

slide13

WHAT CAN CHANGE SUPPLY CURVE SLOPE?

LESS CAPITAL

PERISHABLES

AGRICULTURE

INDUSTRY

MORE CAPITAL

NON-PERISHABLES

slide14

WHAT CAN CHANGE SUPPLY CURVE SLOPE?

LESS CAPITAL

PERISHABLES

POOR COUNTRY

MORE CAPITAL

NON-PERISHABLES

RICH COUNTRY

supply and demand the market
SUPPLY AND DEMAND: THE MARKET

BRAZILIAN CEMENT MARKET

law of supply and demand1
LAW OF SUPPLY AND DEMAND

THEORETICAL EQUILIBRIUM LEVELS OF PRODUCTION AND PRICE DEPEND ON:

1. BUYERS AND SELLERS INTERACTION

2. DEMAND AND

SUPPLY CURVES SHIFTS STEMMING FROM EXOGENOUS FACTORS

AND DECISIONS OF

ECONOMIC POLICY

government intervention
GOVERNMENT INTERVENTION

WHAT SUPPORTS THE PRICE LEVEL IS THE DEMAND

slide18

CASE STUDY:

THE BRAZILIAN CEMENT MARKET

ECONOMETRICS

slide21

2SLS METHOD – SECOND STAGE

THE BRAZILIAN CEMENT MARKET

DEMAND CURVE:

D*t = 14.778 - 0.288 P*t + 33.735 Ft- 2.979 D1

SUPPLY CURVE:

Q*t = - 33.868 + 2.579 P*t - 3.140 Wt- 2.982 D1

SUPPLIERS PRICE:

P*t = 32.776 + 5.008 Wt - 51.899 E*t - 20.858 D1

SUPPLIERS PRODUCTION DECISION:

Q*t = - 25.515 + 2.428 M*t - 9.351 E*t - 6.740 D1

slide22

BRAZILIAN CEMENT MARKET

ANALYSIS

PRICE ELASTICITY OF DEMAND

INVESTMENT ELASTICITY OF PRODUCTION

slide23

BRAZILIAN CEMENT MARKET

ANALYSIS

REDUCED MODEL – CONTROL PANEL

P*t = CONSTANT + 1.098 Wt + 12.050 Ft

Q*t = CONSTANT + - 0.308 Wt + 31.083 Ft

EXAMPLE: SOURCES OF VARIATIONS

P*t = 1.098 Wt + 12.050 Ft - INFLATION

Q*t = - 0.308 Wt + 31.083 Ft - GROWTH

the impossible neoclassical supply curve
THE IMPOSSIBLE NEOCLASSICAL SUPPLY CURVE

THE PROFIT MAXIMIZATION EQUATION

  • ASSUMPTIONS:
  • PRODUCTION CAPACITY IS “GIVEN”
  • dP/dQ = ZERO

THEREFORE P = dC/dQ

IS SAID TO BE A SUPPLY CURVE

HOWEVER...

the impossible neoclassical supply curve1
THE IMPOSSIBLE NEOCLASSICAL SUPPLY CURVE

WHEN DEMAND SHIFTS TO THE RIGHT

PROFITS RISE AND NEW INVESTMENT EXPANDS PRODUCTION CAPACITY

AND THEN THE “SUPPLY CURVE” IS SHIFTED TO THE RIGHT.

demand price elasticity e
DEMAND PRICE ELASTICITY e

INDIVIDUAL FIRM

DEMAND PRICE ELASTICITY ei

slide30

BRAZILIAN CEMENT MARKET

OLIGOPOLY DEGREE Z versus PROFIT MARGIN M

slide31

BRAZILIAN CEMENT MARKET

THE PHILIPS CURVE

slide32

THE END

OF THE NEOCLASSICAL DOMINANCE?

TO BE CONTINUED.