Transcript The market.

Institute of Economic Theories - University of Miskolc
Microeconomics
Lecture 1
Mónika Kis-Orloczki
Assistant lecturer
[email protected]
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Four main reasons to study economics:
• to learn a way of thinking,
• to understand society,
• to understand global affairs, and
• to be an informed voter.
The nature and scope of economics
Economics is a social science which seeks to explain the
economic basis of human societies.
Economics deals with the decision alternatives of
economic actors and with the social consequences of each
decision.
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Cause of decision:
necessity ≠ possibility
• Necessity: need for the consumption and use of goods and
services, which appears as a lack.
• Need: Need and necessity are not the same concepts. Needs
may include desires as well, which cannot be satisfied under
existing economic conditions.
• Possibilities: are resources, which are available for
satisfying needs. Possibilities in economics are determined
by economic resources.
NECESSITY > POSSIBILITY
almost
limited
unlimited
scarce
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Economics = science of choices and
decisions
• Economics is the study of how scarce resources
are allocated among competing uses.
• Basic questions:
– What to produce
– How we produce it
– For whom to produce
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To learn a way of thinking
• Opportunity cost: The best alternative that we
forgo, or give up, when we make a choice or a
decision.
• Marginalism: The process of analyzing the
additional or incremental costs or benefits
arising from a choice or decision.
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Place of economics in the system of
sciences
Main aspects for the classifications of sciences:
According to verification
– logical,
– empirical (e.g. economics).
According to topic
– nature,
– society (e.g. economics).
According to function
– theoretical (e.g. microeconomics, macroeconomics and
international economics),
– applied: - functional (e.g. finance),
- sectorial (e.g. industrial economics).
According to relationship with politics
• normative
• positive economics
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Levels:
• Microeconomics analyses the individual
decision alternatives of the economic actors
(consumers, firms, workers, and investors)
• Macroeconomics analyses the economy as an
aggregate, on national economy level. (the
level and growth rate of national output,
interest rates, unemployment, and inflation.)
• International economics analyses causes and
effects of real and financial relationships
between national economies.
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Most important methods of economics
Measurement: It means the description of processes, drawing
conclusions, generally aimed at quantification.
Modelling: Models show the most typical features and working
mechanisms of economic processes using an analogy in a
different medium. Simplified representations of the real
world. Economic models attempt to focus on what is relevant
to the problem at hand and omit what is not.
– Assumptions: The set of circumstances in which a model is
applicable. Every model, or theory, must be based on a set of
assumptions.
– Ceteris paribus assumption (all else equal) A device used to
analyze the relationship between two variables while the values of
other variables are held unchanged.
Analysis,
testing and evaluation.
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The market
System of exchange relationships between potential
buyers and sellers. The area where buyers and sellers
meet, where the exchange happens.
• Market actors:
– Buyers
– Sellers
• Features of the market
–
–
–
–
A democratic institute,
Measurement by equal standards,
Competition, concurrence,
Participants depend on each other.
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According to market characters
• market of goods,
• market of labour,
• money and capital market.
According to market area
• local,
• national ,
• international or world market.
According to market formations
• free trade where norms are established
• norm-follower market, which is not a perfectly
competitive market
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Modelling the market
• D= demand function: shows the quantities demanded by
the buyers belonging to different prices and a given income.
Formula: D = f / P /
• S= supply function: shows the quantities offered by
producers for selling at different prices. Formula: S = f / P /
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Deducting the market demand curve
Conditions of the model
• Income is given and Price, P
will not change at the
beginning,
• Market price
influences the
demanded quantities;
price and quantity are
in inverse
P1
relationship,
• We examine the
demand of one
product and of one
/ordinary/ consumer, P2
• We assume that the
consumer will raise
his purchases by one
unit as the price falls.
D
Q1
Q2
Quantity, Q
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Deducting the market supply curve
Conditions
• the quantity to
be sold is given,
• the owners are
not willing to
sell their
products at any
price,
• we analyse the
market supply of
one product at
first.
Price, P
S
P2
P1
Q1
Q2
Quantity, Q
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Conclusions
• Market supply can be modelled in the dimension of the quantity of one
product and the price.
• Supply function can be used to model the aggregate market supply as well.
• Between the market price and the quantity to be sold there is a direct
proportionality as far as normal goods are concerned.
• An individual’s demand for a product and the market demand for a group of
products and their relationship with the price can be modelled by the demand
function.
• We assume a continuous change of the price, and that a demanded quantity
belongs to every price, which results in a continuous demand curve,
• The function shows an inverse proportionality between the changing of the
price and the demanded quantities as far as normal goods are concerned.
• If the consumer’s income changes, we will arrive at another demand function.
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Market equilibrium
Model of the market’s working mechanism
• In a market in
the state of
oversupply the
equilibrium will
be established by
a fall in the
market price.
• In a market in
the state of
excess demand
the equilibrium
will be
established by an
increase in the
market price.
Price, P
Excess supply
S
P1
P*
P2
D
Excess demand
Q*
Quantity, Q
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The price’s role in the market’s
working mechanism
• orientation of market actors,
• provides buyers with information about the
price ratios of substituting products,
• inspires market actors to rational decisionmaking,
• keeps the market moving.
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Shifts of the demand and supply
curves
• A variety of other factors may
change the entire price–quantity
relationship:
– Consumers’ income
– Prices of related goods
(Substitutes and
complements)
– Tastes and preferences
– Expectations about future
prices
– The number of consumers in
the market
• Factors that affect the supply of
a good:
– Prices of inputs (such as
wages)
– Technology
– Natural disruptions (such as
bad weather)
– The number of firms in the
market
– Expectations
– Government policies
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• Changes in the market
resulting from an increase
(decrease) of demand by an
unchanged supply function
the equilibrium price will
rise (fall),
• producers’ income will rise
(fall),
• buyers’ expense will rise
(fall) considering the
product.
• By an increase in supply
and an unchanged
demand the new market
equilibrium price will be
established at a lower
price,
• by a decrease in supply
and an unchanged
demand the new market
equilibrium price will be
established at a higher
price.
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Geometry of Consumer Surplus
It measures the amount a
consumer gains from a
purchase by the difference
between the price he actually
pays and the price he would
have been willing to pay.
It can be derived from the
market demand curve.
Price, P
a
P1
P2
b
D
Q1 Q2
Quantity, Q
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