PowerPoint Presentation

Principles of Economics

First sessionMarket, Demand and Supply

Lecturer: Archil Gogokhiya

Agenda 9.00 10.20 Part one: What is economics? 10.20 10.30 Coffee break10.30 11.50 Part two: Demand and Supply11.50 12.00 Coffee break12.00 13.00 Part three: Case analysis Definition of EconomicsEconomics is a social science that studies the choices that the individuals, businesses, governments and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices

History of economics, its origin, the concept of scarcity as our inability to satisfy all our needs. Whereas an incentive is a reward that encourages an action or a penalty that discourage one.3The Subject of Economics:Microeconomics The study of the choices that individuals and business make, the way these choices interact in markets, and the influence of governmentMacroeconomics The study of the performance of the national economy and the global economy

Examples 4The Scope of Economics:How do choices end up determining what, how and for whom goods and services are produced?

How can choices made in the pursuit of selfinterest also promote the social interest?

Given two main questions cover the whole concept of economics 5Goods and servicesGoods and services are the objects that people value and produce to satisfy human wants.

Goods are physical objects such as cell phones and automobiles.

Services are tasks performed for people such as cell phone service and auto-repair service

How goods and services are produced?By using productive resources called factors of productionFactors of productionLandLaborCapitalEntrepreneurshipFour categories of production factors. 8Land The gifts of nature that we use to produce goods and services, or so-called natural resources.

LaborThe work time and work effort that people devote to producing goods and servicesThe quality of labor depends on Human Capital, that is, the knowledge and skill that people obtain from education, on-the-job training, and work experienceCapitalThe tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services

EntrepreneurshipThe human resource that organizes labor, land, and capitalWho consumes the goods and services?The quantity depends on incomes that people earn

Land earns rentLabor earns wagesCapital earns interestEntrepreneurship earns profit

People earn their incomes by selling the services of factors of production that they own13Resources are used efficiently when goods and services are producedAt the lowest possible costIn the quantities that give the greatest possible benefitSelf-interestSocial interest

How can the pursuit of Self-Interest promote the Social Interest?15Self-Interest and Social interestGlobalizationThe Information-age EconomyGlobal WarmingNatural Resources DepletionEconomic Instability

The Economic Way of ThinkingChoicesTradeoffsTradeoff is an exchange-giving up one thing to get something else. Classic tradeoff is called Guns versus ButterChoices bring changes Each one of us:How much of our income to consume and how much to saveGovernment:How much effort to devote to education and trainingBusinesses:How much effort to devote to research and development of new products and production methodsThe Opportunity CostAll of the choices lead to idea that to get something, we must give up something, or what we give up is the cost of what we get

Something is the highest-valued alternative that we must give up to get it

Choosing at the Margin:MarginMarginal BenefitMarginal Cost

To make decision make sure the marginal benefit exceeds the marginal costWhat is margin and marginal benefits with costs 20Economics as Social ScienceEconomic Model a description of some aspect of the economic world that includes only those features needed for the purpose at handPositive statements and normative statements 21To Test Economic ModelNatural ExperimentStatistical InvestigationEconomic Experiment

Economics Policy ToolsPersonal Economic PolicyBusiness Economic PolicyGovernment Economic Policy

Market and PricesMarket is any arrangement that enables buyers and sellers to get information and to do business with each other.There are two sides of a market:

Buyer Seller.

What can be traded in a market?GoodsServicesResourcesInputMoneyFinancial services

Examples of each type 24Competitive marketProducer offer items for sale only if the price is high enough to cover their opportunity cost.Consumer respond to change opportunity cost by seeking cheaper alternatives to expensive items.

Market vary in the intensity of competition that buyers and sellers face. In this session, we are going to study a competitive market, which is, a market that has many buyers and many sellers, so no single buyer or seller can influence the price.

25Price and opportunity costThe price of an object is the number of a currency that must be given up in exchange for it Economist called this price as Money priceThe opportunity cost of an action is the highest-value alternative forgoneThe ratio of one money price to another is called a Relative priceRelative price is an opportunity cost

DemandI Want it I Cant afford itI Plan to buy it

Wants are the unlimited desires or wishes that people have for goods and services.Scarcity guarantees that many or perhaps most of our wants will never be satisfied. Demand reflects a decision about which wants to satisfy.

27The quantity demanded of a good or service is the amount that consumers plan to buy during a given time period at a particular priceThe quantity demanded is not necessarily the same as the quantity actually boughtThe quantity demanded is measured as an amount per unit of time

PRICE

Many factors influence buying plans, and one of them is the price.

28The Law of Demand:The higher the price of a good, the smaller the quantity demanded And the lower the price of a good, the greater is the quantity demandedCeteris Paribus29Higher price reduce the quantity demanded

Substitution EffectIncome EffectWhat is substitution effect and income effect? 30DEFINITIONS DemandThe entire relationship between the price of a good and the quantity demanded of that good Demand is illustrated by the demand curve and the demand schedule

Quantity Demanded is a point on a demand curve

continuedDemand Curve shows the relationship between the quantity demanded of a good and its price when all other influences on consumers planned purchases remain the same

Demand Schedule list the quantities demanded at each price when all the other influences on consumers planned purchases remain the sameCeteris paribus32Demand Schedule and Demand CurvePriceQuantity Demanded0.50221.00151.50102.0072.505Willingness and ability to payDemand curve is a willingness-and-ability-to-pay curve.The-willingness-and-ability to pay is a measure of marginal benefit

Remember Marginal benefit termin34A change in DemandHappen when any factor that influences buying plans other than the price of the good changesChange factorsThe price of related goods (substitute and complement)Expected Future PricesIncome (related to normal goods or inferior goods)Expected Future Income and CreditPopulationPreferences

Briefly about each named factor. 36The demand will: Decrease The price of a substitute fallsThe price of a complement risesThe price is expected to fallIncome fallsExpected income falls or credit becomes harder to getThe population decreasesUnfavorable preferences toward the goods

Increase The price of a substitute risesThe price of a complement fallsThe price is expected to riseIncome risesExpected income rises or credit becomes easier to getThe population increasesFavorable preferences toward the goodsChange in quantity demanded Movement along the demand curve

Change in demandA shift of the demand curve

Example on the board at the same time. 38Supply One has the resources and technology to produceCan profit from producing Plans to produce and sell

Supply reflects a decision about which technologically feasible items to produce

If a firm supplies a good or service, the firm .... the slide

39The quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price

The quantity supplied is not necessarily the same amount as the quantity actually sold

Like the quantity demanded, the quantity supplied is measured as an amount per unit of time

Many factors influence selling plans, and again one of them is the price of the good

The Law of SupplyOther things remaining the same or ceteris paribus, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity suppliedSupply refers to the entire relationship between the price of a good and the quantity supplied of it.

Quantity Supplied refers to a point on a supply curve

DEFINITIONSSupply Curve shows the relationship between the quantity supplied of a good and its price when all other influences on producers planned sales remain the same (ceteris paribus)

Supply Schedule lists the quantities supply at each price when all other influences on producers planned sales remain the same (ceteris paribus)

Supply Schedule and Supply CurvePriceQuantity Supplied0.5001.0061.50102.00132.5015Minimum Supply PriceThe supply curve can be interpreted as a minimum-supply-price curve, which is a curve that shows the lowest price at which someone is willing to sell. This lowest price is the Marginal costA change in supply happen when any factor that influences selling plans other than the price of the good changesSix main factors that bring changes in supplyThe prices of productionThe prices of related goods purchasedExpected future pricesThe number of suppliersTechnologyThe state of nature

The supply will:Decreases if The price of a factor of production risesThe price of a substitute in production risesThe price of a complement in production fallsThe price of the goods is expected to riseThe number of suppliers decreasesA technology change decreases its productionA natural event decreases its productionIncreases ifThe price of a factor of production fallsThe price of substitute in production fallsThe price of a complement in production risesThe price of the goods is expected to fallThe number of suppliers increasesA technology change increases its productionA natural event increases its production

Brief explanations of each situation49A change in the quantity supplied versus a change in supplyA change in the quantity supplied: movement along the supply curveA change in supply: a shift of the supply curve

To back up with 50Market EquilibriumAn equilibrium is a situation in which opposing forces balance each otherEquilibrium in a market occurs when the price balances the plan of buyers and sellers.The equilibrium price is the price at which the quantity demanded equals the quantity supplied

The equilibrium quantity is the quantity bought and sold at the equilibrium price. A market moves toward its equilibrium because:Price regulates buying and selling plansPrice adjusts when plans dont match

51A market moves toward its equilibrium Price regulates buying and selling plansPrice adjusts when plans dont match

Price Adjustments

A shortage forces the prices upA surplus forces the price down

Predicting changes in price and quantityAn increase in demandA decrease in demandAn increase in supplyA decrease in supply

End of the Session