Basic Economic ConceptsLecture 1

Amrit NakarmiEnergy Planning & Management

30 Nov 2011

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What Is Economics?Scarcity

All economic questions arise from a single and inescapable fact: you can't always get what you want. We live in a world of scarcity.Scarcity means that wants always exceed resources available to satisfy them.

People get involved in Economic Activity to cope with Scarcity.

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What Is Economics?Economics is the study of how people use

their limited resources to try to satisfy unlimited wants.

Faced with scarcity, we have to make choices because we can't have all what we want. Balancing the wants and the resources available is called economizing or optimizing.

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What Is Energy Economics?What is competition ?

Competition is the contest for command over scarce resources.

For human life and the production processes, a sufficiently available of energy is the highest priority. Human beings can live without other things, but not without energy resources. Energy resources are also scarce and hence, needs its optimization and it is dealt by energy economics.

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Difference between micro-economics and macro-economicsMicro-economics is the economics dealing

in individual human beings, individual firms, agents etc.

Macro-economics is the economics dealing in the whole economics of the country and in questions such as unemployment, inflation Gross, Domestic Product (GDP) etc.

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Demand CurveThe demand curve shows what quantities of a

good buyers are willing to buy at different prices.

The factors influencing demand are:Consumers’ incomePrice and price changes in other goods

(complementary and substitute goods)Preferences ( consumer demand is based on

taste)

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Demand CurveThe relation between

price and quantity of goods demanded is given by demand curve

At p1, the qty demanded is Q1

At p2, the qty demanded is Q2

If income rises, consumption increases and At p1, the qty demanded is Q3

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Supply CurveThe supply curve shows how producers

are willing to sell quantities of goods at different prices

Factors influencing supply are:Factor prices i.e. wages, prices of machine

and changes in cost of productionLaws and regulations relating to pricesPrices of other goods the co. is producing

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Supply CurveThe relation between the

cost of production and quantity supplied is given by the supply curveAt p1, the qty supplied is Q1

At p2, the qty supplied is Q2

If the cost of production increases, the supply curve shifts from s1 to s2, then the quantity supplied changes to Q3 from Q1

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Market EquilibriumA market will be in equilibrium if:

No agent wants to change the decision or strategy The decisions of all the agents are compatible,

hence all the decisions can be carried simultaneously• When the demand and supply

curves intersect, the point is called equilibrium point . The price and quantities are called equilibrium prices and quantity.

•If the prices are higher than the equilibrium such as p2, then producers will be willing to produce Q1 but consumers wants only Q2, so prices comes to equilibrium

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Price & Quantity regulationsEnergy Markets especially in the developing

countries are regulated for a number reasons. Such regulations benefit certain groups but have negative side effects.

Minimum prices are called Floor PricesMaximum prices are called Ceiling Prices

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Effect of Minimum PricesMinimum Prices are

set usually chosen above equilibrium prices.

If the prices are set above it, there will be surplus supply and hence price will come down.

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Effect of Maximum PricesMaximum prices are

set in some countries for apartments rentals, and they are set below the equilibrium prices, and this increases the search for limited products

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Quantity RegulationsSuppose there is a

restriction on sales, producers are willing to supply quantity Qmax at ps price, but the consumers are willing to buy at pD price. Since the Qty is not allowed to increase, then there is excess demand, and hence consumers will have to pay more due to qty regulation.