Summary

This document provides a general overview of economic concepts, from the basic principles of scarcity and the dynamic environment, moving towards the analysis of market structures, macroeconomic policies and analysis of demand and supply relationships. The material is presented in a concise, conceptual manner, suitable for an introductory or undergraduate-level economics course.

Full Transcript

Dynamic Economic and Business Environment An introduction Who analyses the business environment? Economists, political scientists, sociologists, and anthropologists Government and policy makers Firms – Multinationals & Domestic Investors International lenders Business Environment Analysis Microec...

Dynamic Economic and Business Environment An introduction Who analyses the business environment? Economists, political scientists, sociologists, and anthropologists Government and policy makers Firms – Multinationals & Domestic Investors International lenders Business Environment Analysis Microeconomic policy ✓Market competition ✓Regulation Public interest theory Public choice theory ▪ Theory of regulatory capture ▪ Tollbooth view  Macroeconomic policy ✓Controlling inflation ✓Maintaining a stable and competitive exchange rate ✓Exercising fiscal prudence ✓Stable financial markets What is economics? Scarcity – a basic human dilemma Limited resources vs. unlimited wants The human condition requires making choices Definitions of Economics Mankiw’s definition Economics is the study of how society manages its scarce resources Hirshleifer’s definition Economics concerns decisions – choices among actions Alternative definitions Economics is how society chooses to allocate its scarce resources among competing demands to improve human welfare What is economics? microeconomics Branch of economics that deals with the behavior of individual economic units—consumers, firms, workers, and investors—as well as the markets that these units comprise. macroeconomics Branch of economics that deals with aggregate economic variables, such as the level and growth rate of national output, interest rates, unemployment, and inflation. Themes of economics Prices and Markets Microeconomics describes how prices are determined. In a centrally planned economy, prices are set by the government. In a market economy, prices are determined by the interactions of consumers, workers, and firms. These interactions occur in markets—collections of buyers and sellers that together determine the price of a good. What is a market? Market A market is an institutional arrangement under which buyers and sellers can voluntarily exchange some quantity of a good or service at a mutually agreeable price. It can, but need not be a specific place or location where buyers and sellers actually come face to face for the purpose of transacting their business – e.g. market for professors has no physical location Law of one price Arbitrage Practice of buying at a low price at one location and selling at a higher price in another. What is a market? Market Definition—The Extent of a Market extent of a market Boundaries of a market, both geographical and in terms of range of products produced and sold within it. Market definition is important for two reasons: A company must understand who its actual and potential competitors are for the various products that it sells or might sell in the future. Market definition can be important for public policy decisions. Why managers to study business environment? Corporate Decision Making: Before launching ETIOS in Indian Market The design and efficient production of ETIOS involved not only some impressive engineering, but also understanding of the following; First, Toyota had to think carefully about how the public would react to the design and performance of its new products. Second, Who are the existing players in the segment? Next, Toyota had to be concerned with the cost of manufacturing these cars – choice of production locations Finally, Toyota had to think about its relationship to the government and the effects of regulatory policies as Automobile Emission Standards Demand and Supply Topics to cover Demand and Supply Market Equilibrium Producer Surplus & Consumer Surplus Price Control and Deadweight Price elasticity of demand Impact of a tax Impact of a tax – a numerical example Demand and Supply Understanding and predicting how changing world economic conditions affect market price and production Evaluating the impact of taxes, government price controls, and production incentives Determining how taxes, subsidies, tariffs, and import quotas affect consumers and producers The Demand curve Relationship between the quantity of a good that consumers are willing to buy and the price of the good. The demand curve is thus a relationship between the quantity demanded and the price. We can write this relationship as an equation: QD = QD(P) The Linear Demand curve Price ($) $40 $30 $20 $10 Demand 0 20 40 60 80 Other variables that affect Demand The quantity that buyers are willing to buy depends not only on the price but also on the following: Income Price of the related goods Substitutes Two goods for which an increase in the price of one leads to an increase in the demand of the other. Complements Two goods for which an increase in the price of one leads to a decrease in the demand of the other. Taste and preferences Change in demand refers to shifts in the demand curve Change in the quantity demanded refers to movements along the demand curve Shifting of Demand curve Price of clothing $50 $40 D2 D1 0 50,00060,000 Quantity of clothing The Supply curve Relationship between the quantity of a good that producers are willing to sell and the price of the good. The supply curve is thus a relationship between the quantity supplied and the price. We can write this relationship as an equation: QS = QS(P) The Linear Supply curve Pri ce S 0 B P2 A P1 0 Q1 Q2 Quant ity Other variables that affect Supply The quantity that producers are willing to sell depends not only on the price they receive but also on their production costs, including wages, interest charges, and the costs of raw materials. Change in supply refers to shifts in the supply curve Change in the quantity supplied refers to movements along the supply curve Shifting of Supply curve Pri ce S S 1 0 S Decre 2 ase in Increa supply se in suppl y Quant ity Market equilibrium Competitive market equilibrium ◦ Price of a good is determined by the interactions of the market demand and market supply for the good. ◦ A price and quantity such that there is no shortage or surplus in the market. ◦ Forces that drive market demand and market supply are balanced, and there is no pressure on prices or quantities to change. Market equilibrium Price Supply Surplus 𝑃𝐻 𝑃𝑒 𝑃𝐿 Shortage Demand 0 𝑄0 𝑄𝑒 𝑄1 Quantity Market equilibrium Consider a market with demand and supply functions, respectively, as 𝑄𝑑 = 10 − 2𝑃 and 𝑄 𝑠 = 2 + 2𝑃 Find the equilibrium price and quantity. Market equilibrium A competitive market equilibrium exists at a price, 𝑃𝑒 , such that 𝑄𝑑 𝑃𝑒 = 𝑄 𝑠 𝑃𝑒. That is, 10 − 2𝑃 = 2 + 2𝑃 8 = 4𝑃 𝑃𝑒 = $2 𝑄𝑒 = 10 − 2 $2 = 6 and 𝑄𝑒 = 2 + 2 $2 = 6 𝑄𝑒 = 6 units Consumer surplus ◦ Total consumer value is the sum of the maximum amount a consumer is willing to pay at different quantities. ◦ Total expenditure is the per-unit market price times the number of units consumed. ◦ Consumer surplus is the extra value that consumers derive from a good but do not pay for. Alternatively, the difference between the reservation price and the price consumers actually pay is consumer surplus. Consumer surplus Price per liter Consumer Surplus: $5 0.5($5 - $3)x(2-0) = $2 Total Consumer Value: $4 0.5($5 - $3)x2+(3-0)(2-0) = $8 $3 Expenditures: $(3-0) x (2-0) = $6 $2 $1 Demand 0 1 2 3 4 5 Quantity in liters Producer surplus The amount producers receive in excess of the amount necessary to induce them to produce the good. Producer surplus Price 𝑃𝑋 Supply 400 1 𝑆 = + 𝑄𝑋 $400 3 3 Producer surplus $400 3 0 800 Quantity Price controls In a competitive market equilibrium, price and quantity freely adjust to the forces of demand and supply. Sometimes the government controls how much prices are permitted to fall or rise. ◦ Price floor ◦ Price ceiling Price floor Price Supply Surplus 𝑃𝑓 Pricefloor 𝑃𝑒 Cost of purchasing excess supply Demand 0 𝑄𝑑 𝑄𝑒 𝑄𝑠 Quantity Price floor Consider a market with demand and supply functions, respectively, as 𝑄𝑑 = 10 − 2𝑃 and 𝑄 𝑠 = 2 + 2𝑃 Find the equilibrium price and quantity Suppose a $4 price floor is imposed on the market. Find the surplus and the cost to the government of purchasing the surplus. Price floor Answer ◦ 𝑄𝑑 = 10 − 2 $4 = 2 units ◦ 𝑄 𝑠 = 2 + 2($4) = 10 units ◦ Since 𝑄 𝑠 > 𝑄𝑑 a surplus of 10 − 2 = 8 units exists ◦ The cost to the government of purchasing the surplus is $4 × 8 = $32. Price ceiling Price Supply 𝑃𝐹 𝑃𝑒 𝑃𝑐 Priceceiling Shortage Demand 0 𝑄𝑠 𝑄𝑒 𝑄𝑑 Quantity Price ceiling Consider a market with demand and supply functions, respectively, as 𝑄𝑑 = 10 − 2𝑃 and 𝑄 𝑠 = 2 + 2𝑃 Find the equilibrium price and quantity Suppose a $1.50 price ceiling is imposed on the market. Find the full price and the nonpecuniary price Price ceiling Answer ◦ 𝑄𝑑 = 10 − 2 $1.50 = 7 units. ◦ 𝑄 𝑠 = 2 + 2($1.50) = 5 units. ◦ Since 𝑄𝑑 > 𝑄 𝑠 a shortage of 7 − 5 = 2 units exists. ◦ Full economic price of 5𝑡ℎ unit is 5 = 10 − 2𝑃𝑓𝑢𝑙𝑙 , or 𝑃𝑓𝑢𝑙𝑙 = $2.50. ◦ Of this, ◦ $1.50 is the dollar price ◦ $1 is the nonpecuniary price Dead weight loss Simultaneous Shifts in Supply and Demand Suppose that simultaneously the following two events occur: ◦ worldwide demand for automobiles is projected to decrease by 30% next year. ◦ war breaks out in a major oil-producing country in the Middle East. What is the combined impact on the international crude oil market? Simultaneous Shifts in Supply and Demand International Oil Market Price Supplyoil2 Supplyoil1 (Dollars per Barrel) $140 The equilibrium price increases Pe1 = $80 or decreases depending on the Pe2 = $65 magnitude of the demand and supply changes. $20 Demandoil2 Demandoil1 Qe2 = 10 Qe1 = 120 280 Elasticity Measures the responsiveness of a percentage change in one variable resulting from a percentage change in another variable. 𝑄𝑋 𝑑 = 𝛼0 + 𝛼𝑋 𝑃𝑋 + 𝛼𝑌 𝑃𝑌 + 𝛼𝑀 𝑀 + 𝛼𝐻 𝐻 For 𝑄 = 𝑓 𝑃 , the elasticity is: %Δ𝑄 Δ𝑄/𝑄 Δ𝑄 𝑃 𝐸𝑄,𝑃 = = = %Δ𝑃 Δ𝑃/𝑃 Δ𝑃 𝑄 Own price elasticity Own price elasticity of demand ◦ Measures the responsiveness of a percentage change in the quantity demanded of good X to a percentage change in its price. %Δ𝑄𝑋 𝑑 Δ𝑄𝑋 𝑑 /𝑄𝑋 𝑑 Δ𝑄𝑋 𝑑 𝑃𝑋 𝐸𝑄 𝑑 = = = Δ𝑃 𝑑 𝑋 ,𝑃𝑋 %Δ𝑃𝑋 Δ𝑃𝑋 /𝑃𝑋 𝑋 𝑄𝑋 ◦ Sign: negative by law of demand. ◦ Magnitude of absolute value relative to unity: ◦ 𝐸𝑄 𝑑 ,𝑃𝑋 > 1: Elastic. 𝑋 ◦ 𝐸𝑄 𝑑 ,𝑃𝑋 < 1: Inelastic. 𝑋 ◦ 𝐸𝑄 𝑑 ,𝑃𝑋 = 1: Unitary elastic. 𝑋 Own price elasticity on linear demand curve linear demand curve Q = 8 – 2P The price elasticity of demand depends not only on the slope of the demand curve but also on the price and quantity. The elasticity, therefore, varies along the curve as price and quantity change. Slope is constant for this linear demand curve. Near the top, because price is high and quantity is small, the elasticity is large in magnitude. The elasticity becomes smaller as we move down the curve. Elastic Demand Curve Price elastic 𝐸𝑄 𝑑 ,𝑃𝑋 >1 𝑋 Quantity Inelastic Demand Curve Price Inelastic 𝐸𝑄 𝑑 ,𝑃𝑋 1: Elastic (𝑄𝑋 𝑑 ) 𝑋 ,𝑃𝑋 20 100 2000 22 85 1870 Price Quantity Revenue (𝑃𝑋 ) Demanded (𝑄𝑋 𝑑 ) 𝐸𝑄𝑋 𝑑 ,𝑃𝑋 = 0.5 < 1: Inela 100 100 10000 110 95 10450 Elasticities and Revenue Elasticity Price Revenue/consumer expenditure 𝐸𝑄 𝑑 >1 Increase Decrease 𝑋 ,𝑃𝑋 Decrease Increase 𝐸𝑄 𝑑 𝑄𝑑 a surplus of 10 − 2 = 8 units exists ◦ The cost to the government of purchasing the surplus is $4 × 8 = $32. Price ceiling Price Supply 𝑃𝐹 𝑃𝑒 𝑃𝑐 Priceceiling Shortage Demand 0 𝑄𝑠 𝑄𝑒 𝑄𝑑 Quantity Price ceiling Consider a market with demand and supply functions, respectively, as 𝑄𝑑 = 10 − 2𝑃 and 𝑄 𝑠 = 2 + 2𝑃 Find the equilibrium price and quantity Suppose a $1.50 price ceiling is imposed on the market. Find the full price and the nonpecuniary price Price ceiling Answer ◦ 𝑄𝑑 = 10 − 2 $1.50 = 7 units. ◦ 𝑄 𝑠 = 2 + 2($1.50) = 5 units. ◦ Since 𝑄𝑑 > 𝑄 𝑠 a shortage of 7 − 5 = 2 units exists. ◦ Full economic price of 5𝑡ℎ unit is 5 = 10 − 2𝑃𝑓𝑢𝑙𝑙 , or 𝑃𝑓𝑢𝑙𝑙 = $2.50. ◦ Of this, ◦ $1.50 is the dollar price ◦ $1 is the nonpecuniary price Dead weight loss Simultaneous Shifts in Supply and Demand Suppose that simultaneously the following two events occur: ◦ worldwide demand for automobiles is projected to decrease by 30% next year. ◦ war breaks out in a major oil-producing country in the Middle East. What is the combined impact on the international crude oil market? Simultaneous Shifts in Supply and Demand International Oil Market Price Supplyoil2 Supplyoil1 (Dollars per Barrel) $140 The equilibrium price increases Pe1 = $80 or decreases depending on the Pe2 = $65 magnitude of the demand and supply changes. $20 Demandoil2 Demandoil1 Qe2 = 10 Qe1 = 120 280 Elasticity Measures the responsiveness of a percentage change in one variable resulting from a percentage change in another variable. 𝑄𝑋 𝑑 = 𝛼0 + 𝛼𝑋 𝑃𝑋 + 𝛼𝑌 𝑃𝑌 + 𝛼𝑀 𝑀 + 𝛼𝐻 𝐻 For 𝑄 = 𝑓 𝑃 , the elasticity is: %Δ𝑄 Δ𝑄/𝑄 Δ𝑄 𝑃 𝐸𝑄,𝑃 = = = %Δ𝑃 Δ𝑃/𝑃 Δ𝑃 𝑄 Own price elasticity Own price elasticity of demand ◦ Measures the responsiveness of a percentage change in the quantity demanded of good X to a percentage change in its price. %Δ𝑄𝑋 𝑑 Δ𝑄𝑋 𝑑 /𝑄𝑋 𝑑 Δ𝑄𝑋 𝑑 𝑃𝑋 𝐸𝑄 𝑑 = = = Δ𝑃 𝑑 𝑋 ,𝑃𝑋 %Δ𝑃𝑋 Δ𝑃𝑋 /𝑃𝑋 𝑋 𝑄𝑋 ◦ Sign: negative by law of demand. ◦ Magnitude of absolute value relative to unity: ◦ 𝐸𝑄 𝑑 ,𝑃𝑋 > 1: Elastic. 𝑋 ◦ 𝐸𝑄 𝑑 ,𝑃𝑋 < 1: Inelastic. 𝑋 ◦ 𝐸𝑄 𝑑 ,𝑃𝑋 = 1: Unitary elastic. 𝑋 Own price elasticity on linear demand curve linear demand curve Q = 8 – 2P The price elasticity of demand depends not only on the slope of the demand curve but also on the price and quantity. The elasticity, therefore, varies along the curve as price and quantity change. Slope is constant for this linear demand curve. Near the top, because price is high and quantity is small, the elasticity is large in magnitude. The elasticity becomes smaller as we move down the curve. Elastic Demand Curve Price elastic 𝐸𝑄 𝑑 ,𝑃𝑋 >1 𝑋 Quantity Inelastic Demand Curve Price Inelastic 𝐸𝑄 𝑑 ,𝑃𝑋 1: Elastic (𝑄𝑋 𝑑 ) 𝑋 ,𝑃𝑋 20 100 2000 22 85 1870 Price Quantity Revenue (𝑃𝑋 ) Demanded (𝑄𝑋 𝑑 ) 𝐸𝑄𝑋 𝑑 ,𝑃𝑋 = 0.5 < 1: Inela 100 100 10000 110 95 10450 Elasticities and Revenue Elasticity Price Revenue/consumer expenditure 𝐸𝑄 𝑑 >1 Increase Decrease 𝑋 ,𝑃𝑋 Decrease Increase 𝐸𝑄 𝑑

Use Quizgecko on...
Browser
Browser