Demand. Supply. Equilibrium.

Demand. Supply. Equilibrium.

Demand (D) – the amount of a particular economic good and service that a consumer or group of consumers want to purchase during a specified period of time.

• If there is only one consumer in market, this is individual demand.

• By adding the quantities demanded by all consumers at each of the various possible prices, we can get to market demand.

The level of demand

There is a negative or inverse relationship between price and quantity demand. Economists call this the inverse relationship – the low of demand.

The inverse relationship is explained by:

1. Diminishing marginal utility (снижающаяся предельная полезность): in any time period, each buyer of a product will derive less satisfaction (utility) from each successive unit of the good consumed. So, consumer will buy additional units only if the price of those units is reduced.

2. The income effect (эффект дохода): it indicates that a lower price increases the purchasing power of the buyer`s money income, enabling the buyer to purchase more of the product than she or he could buy before, A higher price has an opposite effect.

3. The substitution effect (эффект замещения): consumers tend to substitute cheap products for more expensive products.

A Giffen good (товар Гиффена) is one which people consumer more as price rises, violating the law of demand.

In the Giffen good situation, cheaper close substitution are not available. Because of the lack of substitutes, the income effect dominates, leading people to buy more of the good, even as the price rises.

A demand curve (D) slopes downward and to the right because the relationship between price and quantity demanded is inverse (the law of demand).

Q1 Q2

Determinants of demand

1. Consumers` tastes and preferences.

2. Number of buyers.

3. Prices of related good. (цены на другие товары)

a) substitute good (товары заменители) фанта-миринда

b) a complementary good (дополняющие товары) камера-фильм

c) unrelated good (независимые товары) машины-фрукты

4. Income. A rise in income cause an increase in demand. Inferior goods-товары высшей категории

5. Expectations (ожидания по поводу роста цен)

Supply

Supply (S) - is the amount of a product a producer if willing and able to produce and available for sale at each of a series of possible prices during a specific period.

The law of supply

A positive or direct relationship between price and quantity supplied is the law of supply, as price rises, the corresponding quantity supplied rises, as price falls, the quantity supplied falls.

Price is the most significant influence on the quantity supplied of any product.

P S

30 B

10 30 Q

The basic determinates of supply are:

1. Recourses price.

2. Technology.

3. Taxes and subsidies.

4. Prices of other goods.

5. Expectation.

6. Number of sellers.

Market equilibrium

ME – the buying decision of households and the selling decisions of businesses interact to determine the price of a product and the quantity actually bought and sold.

The intersection of the supply curve and demand curve for a product indicates the market equilibrium.

P1 E

Q Q

Surplus and shortages

- At any above-equilibrium price, quantity supplied exceeds quantity demanded. This is a surplus or excess supply.

- The surplus cause price reduction by sellers, that encourages consumers to buy more. The market moves to its equilibrium.

•Any pricebelow the equilibrium price creates a shortage; quanty demanded now exceeds quantity supplied.

•Buyerstry to obtain the product by offering to pay more for it; this drivers the price upward toward its equilibrium level. Again the market moves to its equilibrium.

Economizing problem

1) Society wants are unlimited

2) Economic resources are limited and scares

Specific group of resources

1. Land

2. Capital

3. Labor

The types of economic system:

Рыночная - A market economy is an economy in which decisions regarding investment, production and distribution are based on supply and demand and the prices of goods and services are determined in a free price system.

Традиционная - A traditional economy as an economy based on custom and tradition/command.

Плановая - A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency.

Смешанная - Mixed economy is an economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies.

27.02.2012

Demand and supply: Elasticity and Applications.

1. Elasticity of demand

2. Elasticity of supply

Elasticity – the sensitivity of consumers to any change.

Types of elasticity:

• price elasticity of demand (ценовая эластичность)

•cross elasticity of demand (перекрестная эластичность)

•income elasticity of demand (эластичность спроса по доходу)

Price elasticity of demand

The sensitivity of consumers to a change in the price of a product.

Types of price elasticity

• Relatively inelastic or simply elastic
Demand for some products is such that consumers are highly responsive to price changes – modest price changes lead to very large changes in the quantity purchased.

The coefficient E(d)

• it`s calculated by dividing the change in price by the original price and the consequent change in quantity demanded by the original quantity demanded.

• E(d)=дельтаQ/Q: дельтаР/P

•E(d)=дельтаQ(%)/дельтаP(%)

E(d) will always be a negative number.

Using percentage

• we could obtain a more sensible comparison of consumer sensivity to price changes.

•EX.-

- Price of car $10000

- Price of a bottle of water $1

If we increased the price of both products by 1% - $100 for the car, 1 c for the battle.

Interpretation of E(d)

• Elastic demand.

Demand is said to elastic if a specific percentage change in price results in a larger percentage change in quantity demanded then E(d) will be greater than 1.

• Inelastic demand.

Demand is said to inelastic if a specific percentage change in price results in a smaller percentage change in quantity demanded. Then E(d) will be less than 1.

•Unit elasticity.

A percentage change in price and the accompanying change in quantity demanded are equal. Then E(d) is exactly 1.

•Perfectly elastic demand.

In that extreme situation, a small price reduction will cause buyers to increase their purchases from zero to all they can obtain. Perfectly elastic demand is shown by a parallel to the horizontal axis.

E(d)=бесконечность

Q(p)

•Perfectly inelastic demand.

A price change results in no change whatsoever in the quantity demanded.

E(d)=0

Cross elasticity of demand.

It shows

- How the consumption of a good is affected by a change in the price of a related product

- How sensitive consumer purchases of one product (say, X) are to a change in the price of some other product (say, Y)

The coefficient of cross elasticity is E(xy)

E(xy)=дельтаQ(x)/дельтаP(x)

Interpretation of E(xy)

If cross elasticity of demand is positive – the quantity demanded of X moves in another direction as a change in the price of Y – then X and Y

•a zero of near-zero cross elasticity suggests that two products are unrelated or indepented good.

Income elasticity of demand

It shows how the consumption of a good is affected by a chahge in income.

• the coefficient of income elasticity of demand E(i) is determined with the formula:

E(i)=дельтаQ(%)/дельтаI(%)

Interpretation of E(i)

• inferior goods.

For these goods the income elasticity coefficient is negative, meaning that the consumers decrease their purchases of such products as incomes increase.

• normal goods.

For these goods the income elasticity coefficient is positive.

Price elasticity of supply

• if producers are relatively responsive to price changes, supply is if producers are relatively responsive to price changes, supply is elastic.

• if they are relatively insensitive to price changes, supply is inelastic.

the degree of elasticity is measured with the coefficient E(s):

E(s)=дельтаQ(s)/дельтаP

- Percentage change in quantity supplied of product (say, X)

- Percentage change in price of product

• Interpretation of E(s):

- E(s) < 1, supply is inelastic

- E(s) > 1, supply is elastic

- E(s)=1, supply is unit elastic

Utility

- Is want-satisfying power.

• it is satisfaction or pleasure one gets from consuming it.

Characteristic of utility:

• “utility” and “usefulness” are not synonymous. Works of art may be useless functionally.

• utility is subjective. The utility of a specific product will vary widely from person to person.

• utility is difficult to quantify. We assume that people can measure satisfaction with utils – units of utility.

Total utility (TU)

• is the total amount of satisfaction or pleasure a person derives from consuming some specific quantity of goods or services.

Marginal utility (MU)

• is the changes in total utility resulting from consumption of one more unit of product.

MU=дельтаTU/дельтаQ

Marginal utility is extra satisfaction a consumer realize from an additional unit of that product.

Consumer behavior

• the idea of diminishing marginal utility explains also how consumers allocate…

The typical consumer`s situation has four dimension:

•Rational behavior. Consumers wants to maximize their total utility, trying to use income to derive the great amount of satisfaction – utility - from it.

• Preferences. We assume buyers have a good idea of how much MU they will get from units of various products.

• Budget restraint. At any point in time the consumer has a limited amount of money income. Thus, all consumers face a budget restraint.

• Prices. We assume that the product price are not affected by the amounts of goods which consumer buys.

12.13.12

The marginal utility theory

• assumers that utility is numerically measurable

• the consumer is assumed to be able to say how much utility he/she derives from each extra unit of product

•the consumer needs this information to realize the utility – maximizing or equilibrium position

• this position (suppose, for goods, a, b, c) is indicated as:

MUa/Pa=MUb/Pb=MUc/Pc

Budget line

• shows all combinations of any two products which can be purchased, given the prices of the products and the consumer’s money income.

Indifference curve

•each point represents some combination of products of a and b, these combinations are equally satisfactory to the consumer and yield the same total utility.

The equilibrium

• where the budget line is tangent to indifference curve.

The costs of production

Издержки производства

Types of costs

Types of profit

Costs of production

• production costs in economics arise from forgoing the opportunity to produce other goods or services

Types of costs:

• accounting costs (бух.)

• economic costs

Accounting costs – explicit costs –

Cash expenditures a firm makes to “outsiders” who supply labor services, materials, fuel, transportation.

Economic costs –

All the costs required to attract and retain resources in a specific line of productin.

- Consist of:

Explicit costs (внешние издржки) бух. Явные

Implicit costs (неявные)

Normal profit

Implicit costs –

• in addition to “out-resources’, a firm may use resources itself owns.

• the costs of such self-owned, self-employed resources are called implicit costs.

• Implicit costs – money payment the self-employed resources could have earned in their best alternative use.

Normal profit –

Payment you could receive for performing entrepreneurial functions.

So normal profit – is an implicit cost.

Accounting profit

• the firm’s total revenue less its explicit costs.

Economic profit

• total revenue less all costs (explicit, implicit, including normal profit)

• economic profit=total revenue-economic costs

• if a firm’s total revenue exceed all its economic costs, any residual to the entrepreneur.

Short-run and long –run

• the capacity(производственная мощность) of a manufacturing plant can be varied only over considerable period of time.

• it may take months or years

Short-run: fixed plant.

• a period too brief for a firm to alter its plant capacity

P-60p Q-60

P-100p Q100

P-30p Q-?

12.03.12

Q	TU	MU

Qb	TUb MUb Qba	TUba MUba
	10 10 10	7 0.7
	18 8 20	13 0.6
	24 6 30	18 0.5
	28 4 40	22 0.4
	31 3 50	25 0.3
	3 2 60	27 0.2

Pbeer-10

Pbanana-0.5

Доход потребителя который тратит на бананы и пива – 25.

MUa/Pa=MUb/Pb=MUc/Pc

10/10=1 1кружка

0.5/0.5=1 30 бананов

ОТВЕТ: так как у него 25 рублей.

8/10=0, 8 2 кружки

0, 4/0, 5=40 бананов

6/10=0, 6 3 кружки

0, 3/0, 5=0, 6 50 бананов

4/10=0, 4 4пива

0, 2/0, 5=0, 4 60 бананов

26.03.12

Short – run: fixed plant

• a period too brief for a firm to alter its plant capacity, yet long enough to vary firm` output by applying larger or smaller amounts of labor, materials, any other resources.

• existing capacity can be used more or less intensively to the short – run.

Long – run: variable plant

• period long enough for the firm to adjust the quantities of all resources it employs, including capacity.

Example

• if firm hires 100 extra workers, we are speaking of the short run.

• if it adds a new production facility and installs more equipment, we are referring to the long run.

Short-run production costs

• fixed costs (FC) постоянные издержки

• variable costs (VC) переменные издержки

• total costs (TC) общие, совокупные издержки

• average costs (AC) средние издержки

• marginal costs (MC)

• fixed costs (FC) are costs which in total do not vary with changes in output

FC must be paid even plant`s output is zero

• variable costs (VC) are costs that changes with the level of output

• total costs (TC) is the sum of FC and VC at each level of output

Average, or per-unit, costs

• AVC = FC /Q

•AVC = VC / Q

• ATC = TC / Q

• marginal costs (MC) is the extra, or additional, costs of producing 1 more unit of output

MC = дельта TC / дельта Q

Long- run production costs

• individual firms

- Can changes plant capacity

- Can build a larger plant or revert to a smaller one

- Can leave an industry

• yje long-run ATC curve is made up

Владелец работнику выплатил 40 000 руб. плата процентов за кредит 10 000 руб. первоначальная стоимость основного капитала 100 000 руб. настоящее время 80 000 руб. норма амортизации 20 %. Затраты на сырье 40 000 руб. выручка от продажи продукции 60 000. Если бы работал в другом месте 30 000руб. его жена в этой де, в другой 10 000. Вернуть ссуду 50 000 банку.

Могу бы получить 10 процентов дохода. Определить бугх эконом издержки, прибыль, следует ли продолжать

09.04.12

The costs of production.

Long-run production costs.

• individual firms.

- Can change plant capacity

- Can build a larger

Economies of scale: factors

Labor specialization.

- Workers can work full time on those particular tasks for which they have special skills.

- Labor specialization eliminates the loss of time which accompanies each shift of a worker from one task to another.

Managerial specialization.

- Greater efficiency: large firms can use management specialists to best advantage;

- Lower unit costs: the production staff could be doubled with no increase in supervisory costs.

Efficient capital.

- Larger firms can afford the most efficient equipment, which is usually available in extremely expensive units.

- Effective use of this equipment demands a high volume of production.

Other factors.

- Many products entail design and development costs (and other “start-up” costs) which decline per unit as output is increased.

• in time the expansion of a firm may lead to higher average total costs.

• difficulty of efficiently controlling and coordinating a firm`s operations as it becomes a larger-scale producer.

• problems of communication and cooperation, bureaucracy.

• workers may feel alienated from their employers and care about working efficiently.

Constant returns to scale

- Range of output between the output at which economies of scale and the output at which diseconomies of scale begin.

- Over this period long-run average costs don`t change.

Market models

Pure competition

Pure monopoly

• differ to:

- The number of firms in the industry

- Product produced

- How firms enters the industry

• pure competition; совершенная конкуренция

• imperfect competition: несовершенная конкуренция

- pure monopoly

- oligopoly

-monopolistic competition

Pure competitive

• involves a very large numbers of firms

• firms produce standardized product

•firms can enter the industry very easily

Characteristic:

• price takers- individual firms exert no significant control over product price.

• each firm produced such a small fraction of total output that it will not influence total supply or product price.

Pure monopoly

• one firm is the sole seller of product/service

• entry of additional firms is blocked

• produces a unique product

• price-maker – the firm exercises considerable control over price because it is responsible for the total quantity supplied.

Oligopoly

• only a few sellers

• each firm is affected by the decisions into account in determining its own price and output

Monopolistic competition

• relatively large number of sellers

• produce differentiated product

• entry to the industries is quit easy

Pure competition: demand

• if a single producer increases or decreases output, and the output of all other competing firms are constant, the effect on total supply and price is negligible.

• thus, the demand faced the individual firm in a pure competitive economy is perfectly elastic.

But:

- an entire industry – all firms – can affect price by changing industry output.

- So, the market demand is not perfectly elastic.

Pure competition: revenue

• Total revenue (TR)

• Average revenue (AR)

• Marginal revenue (MR)

• The total revenue (TR) for each sales level can be determinate by multiplying price by the quantity the firm can sell.

TR = P*Q

• Average revenue (AR) is revenue per unit.

AR = TR/Q

• marginal revenue (MR) is the extra revenue, which results from selling 1 more unit of output.

MR = дельта TR / дельта Q

• under purely competitive conditions, product price is constant to the individual firm.

• added units of output can be sold without lowering product price – additional units can be sold at the constant price

AR = P = MR

Because a purely competitive firm can sell additional unit at the market price, its MR coincides with its demand. Because price is constant, TR depends on the level of output.

TR-TC approach (short-run)

TR TC

TC TR

Q1, Q3 – break – even points (TR=TC) – all costs are covered by revenues, but there is no economic profit.

Q3 – the profit maximizing output – where the vertical distance between TR and TC is the greatest

MR-MC approach (short-run)

MR MC

P=MR

Qopt

Short-run supply