Introduction to microeconomics Vladan Hodulak This powerpoint serves as a study material for the students of the course Introduction to economics (MEB435) at FSS MU in Fall 2018. Using this presentation for other purposes without consent of the author is prohibited. Markets •Market Exchange – transfer of property rights •Monetary •Barter •Characteristics of market exchange •Market •All the selling and buying activities of those persons wishing to trade •Suppliers and demanders •Neoclassical definition •Location •Market as an institution – set of rules •Competitive markets Supply and demand •Demand curve – indicates for each possible price, how much of the good or service demanders are willing to pay •Characteristics of the demand curve •Downward sloping •Represents what people want and are able to purchase, given the price and their incomes •Deriving the demand curve – consumer theory •Theories of marginal utility (cardinal and ordinal) •Complements and substitutes •The demand curve allows us to say how a change in the price will affect quantity demanded if nothing else changes (ceteris paribus) • Supply and demand •Supply curve – indicates, for each possible price how much of the good or service suppliers wish to sell •Characteristics of the supply curve •Upward sloping •Represents how much of goods and services firms want to supply, given the price and their costs •Deriving the supply curve – theory of the firm •Marginal cost vs average cost •Increasing returns to scale •The supply curve allows us to say how a change in the price will affect quantity supplied if nothing else changes (ceteris paribus) • • Supply and demand Source: The Core Team (2015) The Economy Supply and demand interacting •S and D interaction determines both the price (P) of a good and its quantity (Q) •Excess supply – at a particular price more of some good or service is supplied than is demanded •Excess demand – at a particular price more of some good or service is demanded than is supplied •The market clearing price – the price at which buyers want to purchase exactly the quantity that sellers want to sell •Equilibrium – a situation (price and quantity) in which there are no forces internal to the situation pushing it to change Supply and demand interacting •Exogenous × endogenous source of change •Market clearing price and equilibrium •Homogenous product •RESULT OF COMPETITIVE MARKETS •When a competitive market is in equilibrium, the price of the good will be equal to its marginal cost •P = MC •Competitive markets are an efficient means of economic interaction (the best way to allocate limited resources among unlimited wants) Shifts in demand and supply •Moving along the curves •Functional relationship between the quantity and the price •Ceteris paribus •Shifting the demand curve •Changes in preferences •Changes in the prices of substitutes or complements •Other forces •Shifting the supply curve •Technological advance •Changes in the costs of inputs •Other forces Shift in supply Source: The Core Team (2015) The Economy Economic coordination •Markets are only one of many ways people can coordinate •Various way of economic coordination in history •Types of coordination •Coordination by rules – interactions are governed by general principles of behavior •Coordination by command – interactions are governed by rules specifying precise behavior •The importance of information and motivation • Invisible hand •Invisible hand is a coordination by these specific rules •Market competition •Private property •Markets transmit economically important information and they provide the motivation to act on the information •Information - the price (rather than quantity) of a good measures its scarcity •Motivation •Motivation for the consumers •Motivation for the producers • Efficiency of the market Zdroj: The Core Team (2015) The Economy Market interventions Zdroj: The Core Team (2015) The Economy Coordination failure •Coordination failure – when the pursuit of self-interest does not produce desirable outcomes, even when accompanied by rules •Under certain conditions competition based on self interest but coordinated by markets will bring about a desirable allocation of economic resources •Under other conditions lack of cooperation results in coordination failure •Prisoners dilemma •Self interested behavior leads to suboptimal overall outcome • The Prisoner’s Dilemma Original game Prisoner B Confesses Denies Prisoner A Confesses 3;3 1;4 Denies 4;1 2;2 Incentives for FDI Country B Tax Tax break Country A Tax 3;3 1;4 Tax break 4;1 2;2 Coordination failure •The tragedy of the commons •Possibility that environmental destruction will result from the uncoordinated pursuit of individual self-interest •Here again, what is rational for one is not beneficial for all •Atmosphere, oceans •Solutions •Social regulation •Private property Market failure •Market failure occurs when the spontaneous interactions of self-interested buyers and sellers in markets results in generally undesirable outcome •Market prices often fail to take into account all the effects of our actions on others •Examples – pollution, software, voluntary work •Externalities •Positive •Negative • Reasons for market failure •Prices inadequately measure the scarcity of the goods in question •Discrepancy between private and social costs and benefits •Incomplete contract •Market power •Monopoly (oligopoly) •Barriers to entry •Increasing returns to scale •In general: P ≠ MC • Final remarks •Markets, pareto efficiency and just distribution of resources •Government failure •Private property solution to market failures •Narrow the gap between the private and the social costs or benefits •Market with pollution permits •Special interests and market failures