Download Principles of Economics I week 2 – chapters 4 and 5

Principles of Economics I
week 2 – chapters 4 and 5
Hana Džmuráňová
[email protected]
Outline
• Intro
• PPF – example from the last seminar
• The Market Forces of Supply and Demand
(chapter 4)
• Elasticity and its Application (chapter 5)
Info – outline of seminars
Week (Winter)
1
Day (2016)
5 th October
2
Lecturer: Hana Džmuráňová
12 th October
Lecturer: Hana Džmuráňová
3
19 th October
Lecturer: Hana Moravcová
4
26 th October
5
Lecturer: Vědunka Kopečná
2 nd November
6
Lecturer: Hana Džmuráňová
9 th November
7
Lecturer: Hana Džmuráňová
16 th November
8
Lecturer: Vědunka Kopečná
23 th November
9
Lecturer: Vědunka Kopečná
30 th November
Lecturer: Hana Moravcová
10
7 th December
11
Lecturer: Hana Moravcová
14 th December
Lecturer: Hana Moravcová
12
21 st December
Lecturer: Vědunka Kopečná
Themes
Book chapters
Ten Principles o f Economics; 1 + 2
Thinking Like an Economist
The Market Forc es o f Supply 4 + 5
and D emand; El asticity and Its
Application
Supply,
Dem and
and 6 + 21
Governm ent
Policies;
The
Theory of Consumer Choice
Consumer s, Produc ers, and the 7 + 8
Efficiency of Markets;
The Co sts of Tax ation; The 8 + 12
Design of the Tax System
Extern alities; Public Goods and 10 + 11 + 12
Common Resources
The Co sts o f Production; Firms 13 + 14
in Competitive Markets
Monopoly;
Oligopoly; 15 + 16 + 17
Monopolistic Competition
The Markets for th e Factors of 18 + 19
Production;
Earnings
and
Discrimination
Income Inequality and Poverty
20
Interdep end ence and the Gains 3 + 9
from Trade; International Trade
Frontiers of Microeconomics
22
Production possibilites frontier (PPF) –
example (1/2 point)
A small country produces two goods: corn (measured in bushels) and trucks:
a) Draw PPF
b) Calculate the opportunity cost of increasing the number of trucks produced by ten: • between 10 and 20 • Between 30 and 40
Production possibilites frontier (PPF) –
example cont.
c)
Is production within PPF (from 0 to PPF) efficient?
At PPF, how do we call production?
Outside of PPF, how do we call production?
The market forces of supply and demand
• Market
– „a group of buyers and sellers of a particular good
or service“
• Competitive Market
– Market with so many participants that they
cannot affect the price = price is given for all
participants = participants are price takers
Competition – ½ point for a) and b) and ½ point for c) and d) Can you define basic difference between following
forms of markets? Focus at goods that are on offer
and prices of those goods.
Give also some examples of a) and b) types of
markets.
a)
b)
c)
d)
Perfectly competitive markets
Monopoly
Oligopoly
Monopolistic competition
True x False – ½ point
Suppose that a large dairy farmer is able to
raise the market price of milk by withholding
milk supply from the market. In this instance:
a)
b)
c)
d)
the milk market is perfectly competitive.
buyers will decrease their demand for milk.
buyers will increase their demand for milk.
the milk market is imperfectly competitive.
Demand
• Quantity demanded (D)
– „The amount of a good that buyers are willing and able to purchase“
• Law of demand (D)
– „the claim that, other things equal, the quantity
demanded of a good falls when the price of the
good rises“ – What slope would you than expect
demand curve to have?
– Economists say: Ceteris Paribus = „other things
equal“ = you change only one variable and nothing else
Demand curve
Demand
• What determines the quantity demanded?
• Price
– Law of demand (D) = price
= quantity
• Income
– Normal good (D) = if income goes up, quantity of
this good demanded goes up
– Inferior good (D) = if income goes up, quantity of
this good demanded goes down
• i.e. bus rides (the more wealthy you are, the less likely
you are to take a bus)
Demand
• What determines the quantity demanded?
• Prices of Related Goods
– Substitutes (D) = satisfy similar desire
• Increase in the price of one leads to increase in the
demand for the other
• Ice-­‐cream and frozen yogurt
– Complements (D) = pair of goods that are used
together
• Increase in the price of one leads to decrease in the
demand for the other
• Bicycle and helmet
Question
Substitute or complement?
a) personal computers and computer software programs
b) milk and cookies
c) Dell and Hewlett Packard personal computers
d) hot dogs and mustard
e) Cinema and popcorn
f) Porsche and Jeep
Demand
• What else determines the quantity demanded?
• Tastes
– If you like it, you buy more of it
• Expectations
– Your expectation about the future may affect your
demand for a good or service today
– If you expect higher income next month -­‐> you might
increase your expenditures this month J It really
works J
• Number of buyers
– more buyers = more demand
Shifts of demand curve
Movement along demand curve
• Demand curve shifts for many reasons
• We move along the demand curve only with the price
change
Summary – shift or move J, think about it
• Shift or Movement along?
–
–
–
–
–
Increase in your income?
Decrease of price of substitute?
Decrease of price of complement?
Increase in price?
Increase in your salary from the next month?
Exercise -­‐ ½ if both answered correctly
The shift from D to D1 is called
a. an increase in demand.
b. a decrease in demand.
c. a decrease in quantity demanded.
d. an increase in quantity demanded.
The shift from D to D1 could be caused by
a. an increase in price.
b. a decrease in the price of a complement.
c. a technological advance.
d. a decrease in the price of a substitute.
Supply
• Quantity supplied (D)
– „The amount of a good that sellers are willing and able to sell “
• Law of supply (D)
– „the claim that, other things equal, the quantity
supplied of a good rises when the price of the
good rises“
– What slope would you assume supply curve to have?
Supply curve
Supplied
Supply
• What determines the quantity supplied?
• Price
– Law of supply (D) = price
• Input prices
= quantity
– Input prices
= quantity supplied
same), because of the lower profit
(keeping price the
• Technology
– What is the process behind turning inputs into outputs
– Machines, Labour, ….
• Expectations
– i.e. if you expect price to rise in the future, you will put
some of your current production into storage and supply
less to the market today
Shifts of supply curve
Movement along supply curve
Price of Ice-­
Cream Cones
S
C
€3.00
€1.00
0
A rise in the price of ice cream cones results in a movement along the supply curve.
A
1
5
Quantity of Ice-­Cream Cones
Shifts or movement along supply curve?
• Shift or Movement along? (Ceteris paribus)
–
–
–
–
Buying more machines for your factory?
Expectation of price drop in the future?
Decrease in market price for your product?
Increase in price of your inputs?
Supply and Demand – one model
• Equilibrium (S = D)
– Equilibrium: forces of demand and supply result in a situation when quantity demanded equals quantity
supplied
Exercise – ½ point (you muts come to the
table and calculate it)
– Let´s assume following supply and demand
functions of ipads:
• The demand: Q_demanded = 800-­‐150P
• The supply: Q_supplied = 700+350P
– Calculate equilibrium price and equilibrium
quantity of ipads.
– How do we call equilibrium price?
Supply and Demand
• Equilibrium versus surplus and shortage
• Excess supply over demand = Surplus
• Excess demand over supply = Shortage
Exercise -­‐ ½ point (you must come
to the board and draw it)
Graphically illustrate the impact of olympic games in Athens on demand for hotel rooms in Athens during olympic games. Also show how equilibrium price and quantity have changed.
Exercise -­‐ ½ point (you must come
to the board and draw it)
Graphically illustrate the impact of huge fire that damages large amount of olive trees in Spain on price of olives. Also show how equilibrium price and quantity have changed.
Exercise -­‐ ½ point (you must come
to the board and draw it)
Graphically illustrate the impact of technological advances in production of computer chips on computer prices. Also show how equilibrium price and quantity have changed.
Exercise -­‐ ½ point (you must come
to the board and draw it)
Graphically illustrate the impact of decline of leather jackets on demand and price of sweatshirts. Also show how equilibrium price and quantity have changed.
Exercise
Suppose we have the following market supply and demand schedules for bicycles: a) Plot the supply curve and the demand curve for bicycles.
b) What is the equilibrium price of bicycles? c) What is the equilibrium quantity of bicycles? Exercise cont.
d) If the price of bicycles were €100, is there a surplus or a shortage? How many units of surplus or shortage are there? Will this cause the price to rise or fall? e) If the price of bicycles were €400, is there a surplus or a shortage? How many units of surplus or shortage are there? Will this cause the price to rise or fall? Exercise cont.
f) Suppose that the bicycle maker's labour union bargains for an increase in its wages. Further, suppose this event raises the cost of production, makes bicycle manufacturing less profitable, and reduces the quantity supplied of bicycles by 20 units at each price of bicycles. Plot the new supply curve and the original supply and demand curves. What is the new equilibrium price and quantity in the market for bicycles? Elasticity
– A measure of the
responsiveness of
quantity demanded or
supplied to changes in factors that determine
supply and demand
– These factors are: prices, income
Elasticity of demand
Demand and its elasticities
– Price elasticity = %change in quantity demanded/% change in price
• i.e. 5% change of quantity demanded with 2% change in price = 2.5 price elasticity
– Income elasticity = %change in quantity
demanded/% change in income
• How much more you will want to spend on a particular
product with additional 1 EUR
– Cross price elasticity = %change in quantity
demanded of good 1/% change in price of good 2
Elasticity of demand
• Different elasticity à different demand
curve
– Perfectly inelastic … E = 0
– Perfectly elastic demand … E=∞
– Unit elastic demand … E=1
– Less and more than 1 elastic demand
• E<1 … inelastic demand curve = more vertical
• E>1 … elastic demand curve = more horizontal
– Not stable elasticity (any other case)
– i.e.
-­‐ ∞ on vertical axis, decreasing, 0 on horizontal axis
Elasticity of supply
• Supply and its elasticity to price
– Price elasticity = %change in quantity supplied/% change in price
• Change in price by 10% will mean 20% change in quantity
supplied = Price elasticity of supply is 2
• for this example E=2 only in the blue point (elasticity is not stable along the supply curve
P
S
200
180
100
120
Q
Elasticity – Theory (5)
• Different elasticity à different
supply curve
–Perfectly inelastic E=0
–Perfectly elastic supply E=∞
–Unit elastic supply E=1
–Less than 1 elastic supply – more vertical than E=1
–More than 1 elastic suppy – more horizontal than E=1
–Unstable elasticity = any other case
Question – ½ point
Is the price elasticity of supply usually larger in the short run or in the long run? Why?
Exercise – ½ point for both
For each of the following pairs of goods, which
good would you expect to have more elastic
demand and why?
a) required textbooks or mystery novels
b) root beer or water
Exercise
Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston: a) As the price of tickets rises from $200 to $250, what is the price elasticity of demand for (i) business travelers and (ii) vacationers?
b) Why might vacationers have a different elasticity from business travelers? Conclusion
• Supply and Demand intersects = clears the market
• Elasticity shows how much quantity reacts on change in price
– Read about elasticities (chapter 5) to grasp the
concept in more detail
Thank you for
your attention
and see you next
week