1. Introduction to Economics

2. Demand
Supply
Market equilibrium

3. Demand
the certain quantity of goods the consumers are ready to buy at the moment at the certain price. Note: Demand will be “economic demand” only in case the consumers have enough money to buy the goods needed.
Preferences
Resourses
Decision 3

4. Law of downward-sloping demand: 2 reasons for it
When the price of commodity raises (ceteris paribus) buyers tend to buy less of the commodity.
Substitution effect: consumer substitutes the more expensive good by less expensive and therefore decreases his demand for it.
Income effect: when all the prices go up the consumer feels himself relatively poorer than before (i.e. real income goes down). In this respect he decreases his consumption.

5. Demand function
Given other things being equal (e.g. tastes, income, preferences, etc. do not change) the certain relation between price (P) and quantity demanded (Q) exists.
This relation is called a demand function Q=f(P), that can be visualized by a demand curve. 2 1 25 3 5 4 20 15 10 6 30
Q (pieces)
P (price, thous. USD) P Q
40 000
30 000 1
10 000 3
Given: If the demand curve is ►, the demand function is:
Q = 4 – 0,1xP D

6. Moving the curve vs. moving along the curve2 1 25 3 5 4 20 15 10 6 30 Q P
◄ Change of quantity demanded: If no other factor, except the price, change – the movement is observed only along the curve 2 1 25 3 5 4 20 15 10 6 30 Q P
Change of demand►
When the non-price factors change (e.g. our budget increases) we observe the movement of the curve itself. .

7. What factors determine demand?
Consumer income
We tend to buy more as the income grows
Market size
E.g. measured by population
Preferences and tastes
Culture, history, psychological and physical needs. …

8. What factors determine demand?
Price and accessibility of related goods
Substitute goods: goods that can be consumed or used in place of one another.
Complement goods: goods which can be consumed only with another good.

9. Price Elasticity of Demand
Price elasticity of demand =
Percentage change in Qd
Percentage change in P
Price elasticity of demand measures how much Qd responds to a change in P.
Loosely speaking, it measures the price-sensitivity of buyers’ demand.
CHAPTER 5 ELASTICITY AND ITS APPLICATION

10. Price Elasticity of Demand
Price elasticity of demand =
Percentage change in Qd
Percentage change in P P Q
Example: D
P rises by 10%
Price elasticity of demand equals P2 Q2 P1 Q1
15%
10%
= 1.5
Q falls by 15%
CHAPTER 5 ELASTICITY AND ITS APPLICATION

11. The Determinants of Price Elasticity: A Summary
The price elasticity of demand depends on:
the extent to which close substitutes are available
whether the good is a necessity or a luxury
how broadly or narrowly the good is defined
the time horizon: elasticity is higher in the long run than the short run.
This slide is a convenience for your students, and replicates a similar table from the text.
If you’re pressed for time, it is probably safe to omit this slide from your presentation.
CHAPTER 5 ELASTICITY AND ITS APPLICATION

12. Price elasticity of demand
“Inelastic demand”
Price elasticity of demand =
% change in Q
% change in P
< 10%
< 1
10% D
D curve: P Q
relatively steep Q1 P1
Consumers’ price sensitivity: P2 Q2
relatively low
An example: student demand for textbooks that their professors have required for their courses.
Here, it’s a little more clear that elasticity would be small, but not zero. At a high enough price, some students will not buy their books, but instead will share with a friend, or try to find them in the library, or just take copious notes in class.
Another example: gasoline in the short run.
P falls by 10%
Elasticity:
< 1
Q rises less than 10%
CHAPTER 5 ELASTICITY AND ITS APPLICATION

13. Price elasticity of demand
“Elastic demand”
Price elasticity of demand =
% change in Q
% change in P
> 10%
> 1
10% D
D curve: P Q
relatively flat Q1 P1
Consumers’ price sensitivity: P2 Q2
relatively high
A good example here would be Rice Krispies, or nearly anything with readily available substitutes.
An elastic demand curve is flatter than a unit elastic demand curve (which itself is flatter than an inelastic demand curve).
P falls by 10%
Elasticity:
> 1
Q rises more than 10%
CHAPTER 5 ELASTICITY AND ITS APPLICATION

14. “Perfectly inelastic demand” (one extreme case)
Price elasticity of demand =
% change in Q
% change in P 0%
= 0
10%
D curve: P Q D
vertical Q1 P1
Consumers’ price sensitivity: P2
If Q doesn’t change, then the percentage change in Q equals zero, and thus elasticity equals zero.
It is hard to think of a good for which the price elasticity of demand is literally zero. Take insulin, for example. A sufficiently large price increase would probably reduce demand for insulin a little, particularly among people with very low incomes and no health insurance.
However, if elasticity is very close to zero, then the demand curve is almost vertical. In such cases, the convenience of modeling demand as perfectly inelastic probably outweighs the cost of being slightly inaccurate.
P falls by 10%
Elasticity:
Q changes by 0%
CHAPTER 5 ELASTICITY AND ITS APPLICATION

15. “Perfectly elastic demand” (the other extreme)
Price elasticity of demand =
% change in Q
% change in P
any %
= infinity 0%
D curve: P Q
horizontal
P2 = P1 D
Consumers’ price sensitivity: Q1 Q2
extreme
“Extreme price sensitivity” means the tiniest price increase causes demand to fall to zero.
“Q changes by any %” – when the D curve is horizontal, the quantity is indeterminant. Consumers might demand Q1 units one month, Q2 units another month, and some other quantity later. Q can change by any amount, but P always “changes by 0%” (i.e. doesn’t change).
If perfectly inelastic is one extreme, this (perfectly elastic) is the other.
Here’s a good real-world example of a perfectly elastic demand curve, which foreshadows an upcoming chapter on firms in competitive markets. Suppose you run a small family farm in Iowa. Your main crop is wheat. The demand curve in this market is downward-sloping, and the market demand and supply curves determine the price of wheat. Suppose that price is $5/bushel.
Now consider the demand curve facing you, the individual wheat farmer. If you charge a price of $5, you can sell as much or as little as you want. If you charge a price even just a little higher than $5, demand for YOUR wheat will fall to zero: Buyers would not be willing to pay you more than $5 when they could get the same wheat elsewhere for $5. Similarly, if you drop your price below $5, then demand for YOUR wheat will become enormous (not literally infinite, but “almost infinite”): if other wheat farmers are charging $5 and you charge less, then EVERY buyer will want to buy wheat from you.
Why is the demand curve facing an individual producer perfectly elastic? Recall that elasticity is greater when lots of close substitutes are available. In this case, you are selling a product that has many perfect substitutes: the wheat sold by every other farmer is a perfect substitute for the wheat you sell.
P changes by 0%
Elasticity:
infinity
Q changes by any %
CHAPTER 5 ELASTICITY AND ITS APPLICATION

16. What do we need price elasticity indicator for?
Company price policy before all:
Price discrimination: e.g. flight companies determine customer groups with different price elastic ties
Sales in the supermarkets

17. Price strategies
If the demand is elastic it is sensible to decrease price, since it will be compensated by the growth of sales► 2 1 25 3 5 4 20 15 10 6 30 Q P
Loss
Additional income 2 1 25 3 5 4 20 15 10 6 30 Q P
If the demand is non-elastic it is sensible to increase the price ◄

18. Elasticity of demand Q P (Kč) Income1 = 80 Kč D Income2 = 120 Kč 20
Loss due to price fall : Kč
Income1 = 80 Kč Q
P (Kč) 10
Gain due to higher sales :
+80 Kč D 20
Loss due to price fall: Kč
4 ks
12 ks
Income2 = 60 Kč 10
Gain due to higher sales: +20 Kč
4 ks
6 ks

19. Price strategy choice Say we are selling tomatoes (100 USD per box).
Say we have read in the Financial Times that the price elasticity of demand for tomatoes is E = 2.
Case
Price, USD
Quantity demanded
Sales USD
As is
100
10 000
10 % discount
10 % increase 90
120
10 800
110 80
8 800

20. Price strategy choice PSay we are selling aspirin (100 USD per box).
Say we have read in the Economist magazine that the price elasticity of demand for aspirin is E = 0,5.
Case
Price, USD
Quantity demanded
Sales USD
As is
100
10 000
10 % discount
10 % increase 90
105
9 450
110 95
10 450

21. Demand
Supply
Market equilibrium

22. Supply
the quantities of any particular good which the firms are willing to make available at the variety of prices.

23. Supply function
Given other things being equal (e.g. technology, taxes, number of sellers, etc. do not change) the certain relation between price (P) and quantity supplied (Q) exists.
This relation is called a supply function Q=f(P), that can be visualized by a supply curve. 2 1 25 3 5 4 20 15 10 6 30 Q P P Q
10 000
20 000 2
30 000 4
The positive slope reflects that higher prices mean higher profits and attract more producers►, supply function is:
Q = 0,2xP – 2 S 23 23

24. Moving the curve vs. moving along the curve2 1 25 3 5 4 20 15 10 6 30
Q (ks) P
◄ Change of quantity supplied: If no other factor, except the price, change – the movement is observed only along the curve 2 1 25 3 5 4 20 15 10 6 30
Q (ks) P
Change of supply►
When the non-price factors change (e.g. technology) we observe the movement of the curve itself. .

25. Factors influencing supply
Prices of inputs
Determine the production costs and therefore profits
Technology
Determines factor productivity and efficiency.
Prices of related goods
Especially those, produced by the same company

26. Factors influencing supply
Governmental policy
Taxes, minimum wages, environmental policy, etc.
Number of sellers
Higher profits attract competitors
Expectations
E.g. Olympic games attracts businessmen to the venue site

27. Price Elasticity of Supply
Price elasticity of supply =
Percentage change in Qs
Percentage change in P
Price elasticity of supply measures how much Qs responds to a change in P.
Loosely speaking, it measures the price-sensitivity of sellers’ supply.
Most everything in the “price elasticity of supply” section corresponds to analogous concepts from the “price elasticity of demand” section. So, it is probably safe to move through this section more quickly.
CHAPTER 5 ELASTICITY AND ITS APPLICATION

28. Price Elasticity of Supply
Price elasticity of supply =
Percentage change in Qs
Percentage change in P P Q
Example: S
P rises by 8%
Price elasticity of supply equals P2 Q2 Q1 P1
16% 8%
= 2.0
Q rises by 16%
CHAPTER 5 ELASTICITY AND ITS APPLICATION

29. Price elasticity of supply
“Inelastic”
Price elasticity of supply =
% change in Q
% change in P
< 10% S
< 1
10%
S curve: P Q
relatively steep P2
Sellers’ price sensitivity: Q2 P1
relatively low
P rises by 10%
Elasticity: Q1
< 1
Q rises less than 10%
CHAPTER 5 ELASTICITY AND ITS APPLICATION

30. Price elasticity of supply
Price elasticity of supply =
% change in Q
% change in P
> 10%
> 1
10% S
S curve: P Q
relatively flat P2
Sellers’ price sensitivity: Q2 P1
relatively high
P rises by 10%
Elasticity: Q1
> 1
Q rises more than 10%
CHAPTER 5 ELASTICITY AND ITS APPLICATION

31. “Perfectly inelastic” (one extreme)
Price elasticity of supply =
% change in Q
% change in P 0%
= 0
10%
S curve: P Q S
vertical P2
Sellers’ price sensitivity: P1
P rises by 10%
Elasticity: Q1
Q changes by 0%
CHAPTER 5 ELASTICITY AND ITS APPLICATION

32. “Perfectly elastic” (the other extreme)
Price elasticity of supply =
% change in Q
% change in P
any %
= infinity 0%
S curve: P Q
horizontal
P2 = P1 S
Sellers’ price sensitivity: Q1 Q2
extreme
P changes by 0%
Elasticity:
infinity
Q changes by any %
CHAPTER 5 ELASTICITY AND ITS APPLICATION

33. The Determinants of Supply Elasticity
The more easily sellers can change the quantity they produce, the greater the price elasticity of supply.
Example: Supply of beachfront property is harder to vary and thus less elastic than supply of new cars.
For many goods, price elasticity of supply is greater in the long run than in the short run, because firms can build new factories, or new firms may be able to enter the market.
This section is not perfectly analogous to the section on the determinants of the price elasticity of demand, but it’s similar enough that you can probably cover it more quickly and with less hand-holding.
CHAPTER 5 ELASTICITY AND ITS APPLICATION

34. Demand
Supply
Market equilibrium

35. Market equilibrium Unfortunately this balance is a very rare state.
Další informace dole v poznámce
Market equilibrium
… happens when demand equals supply
Unfortunately this balance is a very rare state.
Some kind of disbalance is more often seen on the market… P Q D S P Q
To, čím je bod rovnováhy důležitý, je na ose x a y (hodnoty, které tento bod udává)!!! E PE  QE

36. Surplus
P i
D S
P 1 E
P E QD =
Q E = QS
Q i

37. Deficit
P i
D S E
P E
P 2 QS =
Q E = QD
Q i

38. Market mechaism P i D S P1 (180 Kč) P3 (120 Kč) P E (70 Kč) P2 (30 Kč)
Surplus
P3 (120 Kč)
Surplus
Surplus E
P E (70 Kč)
Deficit
Deficit
P2 (30 Kč)
Deficit
QD1
QS2
Q E
QS3
QS1
Q i

39. Utility and consumer behaviour

40. Utility is a measure of the relative satisfaction from consumption of various goods and service. Utility is a subjective feeling when our needs and wants are being satisfied. 40

41. Utility vs. Price
Utility
Price
Price
Utility
Buy
Don‘t buy

42. Will you buy it? Can we measure utility? Smartphone Price 25 000 Kč
(standard quality)
Price Kč Kč
Will you buy it?
7 000 Kč
2 000 Kč
500 Kč

43. Types of utility
Total utility (TU) is the utility gained from all consumed goods.
Marginal utility (MU) is the increase of utility by the consumption of another unit of goods („additional“ utility)

44. Total and marginal utiluty
The need
is satisfied TU TU
(Celkový užitek)
Q i
MU2
TU2
TU1
MU1
Q i MU
Mezní (dodatečný) užitek MU

45. Summary
We only buy additional unit of the goods when the marginal utility of this unit is higher (or at least at the same level) than its price
When we feel that the MU is higher than P – we buy
When we feel that the MU is lower than P – we don‘t buy

46. Thank you for attention!