Economics Introduction: Supply and Demand - IE University PDF

Economics Introduction; Supply and Demand Prof. Liliana Gelabert [email protected] Economics is the study of how society manages its scarce resources. To get one thing, we usually have to give up another thing. To get one thing, we usually have to give up another t...

Economics Introduction; Supply and Demand Prof. Liliana Gelabert [email protected] Economics is the study of how society manages its scarce resources. To get one thing, we usually have to give up another thing. To get one thing, we usually have to give up another thing. Food versus clothing Leisure time versus work Clean environment versus high profits Efficiency versus equity Making decisions requires trading off one goal against another. Principle #1: People Face trade-offs ◼ Efficiencyv. Equity Efficiency means society gets the most that it can from its scarce resources. Equity means the benefits of those resources are distributed fairly among the members of society. Economics is the study of how society manages its scarce resources.  Given that there are tradeoffs in any allocation decision, how should a country allocate its scarce resources to maximize efficiency? ◼ What goods and services should be produced? ◼ How to produce these goods and services? ◼ Who gets these goods and services? What should be the role of the government in deciding “what”, “how” and “who”? In other words… How much government intervention do we need to get efficiency?  Market economy vs central planning ◼ Capitalism is characterized by  Private ownership of means of production and  Decentralized decision-making (in market economy, through price system) ◼ The socialist or command economies are/were characterized by  Publicownership of means of production  Centralized decision-making through government planning boards ◼ Most economies are mixed  Index of “Economic Freedom” Source: Heritage Foundation (www.heritage.org) ESTRUCTURAS Regulation DE MERCADO ◼ Property rights/public ownership industries ◼ Taxes ◼ Price or quantity controls ◼ Other regulations (labor market, environmental, financial, trade, etc). ESTRUCTURAS DE Market structures MERCADO ◼ Perfect competition ◼ Monopoly ◼ Oligopoly ◼ Monopolistic competition ESTRUCTURAS DE Market structures MERCADO ◼ Perfect competition ◼ Monopoly ◼ Oligopoly ◼ Monopolistic competition ESTRUCTURAS DE Market structures MERCADO ◼ Perfect competition  High number of firms and consumers  Homogenous goods  Perfect information  Other assumptions (that we will understand later during the course). No public goods, no externalities. MARKET ¿Is this graphSTRUCTURES familiar to you? Y 0 X MARKET STRUCTURES Demand, supply and equilibrium Price Supply Equilibrium Demand 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity Individual demand ◼ The individual demand curve, shows the relationship between price and quantity demanded by the consumer. ◼ The Law of demand says that “ceteris paribus” demand decreases in response of an increase in the prices. Individual Demand Price Quantity Demanda de Mercado vs Demanda Individual From individual demand to market demand ◼ The market demand curves is the sum of the individual demand curves. From individual demand to market demand 5 Price 4 3 2 1 D1 D2 D3 D 0 5 10 15 20 25 30 Quantity Demanda de Mercado vs Demanda Individual Two types of changes ◼ Changes along the curve (due to changes in prices). ◼ Curve shifts. Changes along the curve Price B €2.00 A €1.00 D 0 4 8 Qnantity Demand shifts Price D3 D1 D2 0 Quantity Factors that shift the Desplazamientos market de la Curvademand de Demanda ◼ Consumer Income ◼ Prices of related goods ◼ Expectations ◼ Tastes ◼ Number of buyers Desplazamientos de la Curva de Demanda Factors that shift the market demand ◼ Consumer Income  Higher income increases the demand for normal goods.  Higher income decreases the demand for inferior goods. Desplazamientos de la Curva de Demanda Factors that shift the market demand ◼ Prices of related goods  Higher prices increase the demand for substitute goods.  Higher prices decrease the demand for complementary goods. Factors that shift the Desplazamientos market de la Curvademand de Demanda ◼ Consumer Income ◼ Prices of related goods ◼ Expectations ◼ Tastes ◼ Number of buyers Individual supply ◼ The individual supply curve shows the relationship between price and quantity supplied by a company. ◼ The Law of supply says that “ceteris paribus” supply increases in response of an increase in the price. Demanda de Mercado vs Demanda Individual From individual supply to market supply ◼ The market supply is the sum of the individual firm supply curves. Demanda de Mercado vs Demanda Individual Two types of changes ◼ Changes along the curve (due to changes in prices). ◼ Curve shifts. Factors that shift the market supply ◼ Input prices ◼ Technological change ◼ Expectations ◼ Quantity of sellers Market equilibrium ◼ A market is in equilibrium when demand equals supply. ◼ The equilibrium price is the prices such that demand equals supply (intersection of both curves). MARKET STRUCTURES Demand, supply and equilibrium Price Supply Equilibrium Demand 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity MARKET STRUCTURES Demand, supply and equilibrium Price Supply Equilibrium 1.50 Excess of demand Demand 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity MARKET STRUCTURES Demand, supply and equilibrium Price Supply Excess of supply € 2.50 Equilibrium Demand 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity  ¿HowSteps Three should to we analyseChanges Analyzing changesinin Equilibrium equilibrium prices and quantitites? ◼ Determine which curve/s is/are shifting (right or left). ◼ Use the supply and demand diagram to determine the final changes in equilibrium. Exercise : Oil prices game (Session 2).  Why do we need to study Economics ? “The science of economics is still very inexact, but it is nevertheless an important pillar of peace and democracy. Without it, it would be difficult for the government to have a constructive dialogue with its citizens. Economic policy would be subject to no intellectual discipline. At the end of the day, only violence and dictatorship would remain to unravel such matters. This has always been the practical reason for my interest in this discipline.” Guillermo Calvo, 2000.  Why do we need to study Economics ? “The science of economics is still very inexact, but it is nevertheless an important pillar of peace and democracy. Without it, it would be difficult for the government to have a constructive dialogue with its citizens. Economic policy would be subject to no intellectual discipline. At the end of the day, only violence and dictatorship would remain to unravel such matters. This has always been the practical reason for my interest in this discipline.” Guillermo Calvo, 2000.