Curso de Sociologia

Introdução à Economia
Capítulo 3
Instrumentos de Análise Económica

3.1 Oferta e Procura

3.2 Equilíbrio de Mercado
3.3 Estruturas de Mercado
3.4 Comércio Internacional e Vantagens Comparativas
Supply and Demand
What determines the price of goods and services?

• The war in Ukraine raises the price of food and energy

• The death of Queen Elizabeth raises the price of hotel rooms
• The cold weather in Andorra raises the price of skis
• The war in Middle East raises the price of gasoline and decreases
the price of electric cars

What do these events have in common? Supply and demand!

Supply and Demand
What are markets?

What is competition?

Assuming perfect competition

1. The goods offered for sale are homogeneous
2. The buyers and sellers are so many that no single agent has
any influence over the market price (price-takers)
Demand

Quantity demanded
Demand curve
Law of demand
Market demand vs individual
Demand schedule demand

Objective of demand
Determinants of Demand
Shifts in the demand curve

• Income • Expectations (prices and income)

• Normal goods
• Inferior goods (Giffen) • Number of buyers (structure of
the population)
• Prices of related goods
• Substitutes
• Income distribution
• Complements • Interest rates
• Tastes and preferences • Seasonal factors
Demand

Conspicuous consumption (Veblen Goods)

Speculative demand (future gains)

Derived demand (printer/ink)

Composite demand (wheat and bread/biofuel/feed)

Demand
Case study – Reduce the quantity of smoking demanded

• Shifting the demand for tobacco products

• Raising the price of tobacco products

What happens?
• Different population effects
• Substitutes and complements
Supply

Quantity supplied
Supply curve
Law of supply
Market supply vs individual supply
Supply schedule
Objective of supply
Determinants of Supply
Shifts in the supply curve

• Input prices
• Technology
• Expectations (prices)
• Number of sellers
• Taxes and subsidies
• Natural and human disasters
• Interest rates
Supply and Demand
Equilibrium
• Where supply and demand are in balance
• Equilibrium price and equilibrium quantity

• When the market price differs from the equilibrium price

• Surplus of the good (excess in supply)
• Shortage of the good (excess in demand)

Law of supply and demand

Supply and Demand
Analyzing changes in equilibrium

1. Decide whether the event shifts the supply or demand curve

(or perhaps both)
2. Decide in which direction the curve shifts
3. Use the supply-and-demand diagram to understand how the
shifts changes the equilibrium prince and quantity

• Shifts in curves vs. movements along curves

Supply and Demand
Analyzing changes in equilibrium

• A change in the markert equilibrium due to a shift in demand

• A change in the market equilibrium due to a shift in supply

• A change in the market equilibrium due to shifts in both supply

and demand
Price Mechanism
The invisible hand at work!

• Supply and demand together determine the prices

• Prices are signals that guide the allocation of resources

• Thus, prices are the mechanism for rationing scarce resources

• Prices guarantee that all sectors function properly

Assuming perfect competition!

*Prices increase in disasters (think about it!)
Elasticities
A measure of the responsiveness of quantity demanded or
quantity supplied to a change in one of its determinants (prices,
income, input costs, taxes and subsidies, etc)

Price elasticity of demand

• How much the quantity demanded of a good responds to a
change in the price of that good
Elasticities
What influences the price elasticity of demand?

• Availability of close substitutes

• Necessities vs luxuries
• Definition of the market
• Time horizon
Elasticities
Computing the price elasticity of demand?

Suppose that a 10% in the price of a good causes the quantity

demanded to fall by 20%, the elasticity of demand is:

Change in qt demanded is twice as large the change in the price

Elasticities
Price elasticities of demand and different demand curves

• Perfectly inelastic demand (0)

• Inelastic demand (<1)
• Unit elastic demand (=1)
• Elastic demand (>1)
• Perfectly elastic demand (=∞)
Elasticities
Price elasticities of demand and total revenue

• Inelastic demand (<1)

• An increase in prices cause an increase in total revenue

• Unit elastic demand (=1)

• An increase in prices does not affect total revenue

• Elastic demand (>1)

• An increase in prices cause a decrease in total revenue
Elasticities
Other demand elasticities

The income elasticity of demand

• How much the quantity demanded of a good responds
to change in consumers’ income

• Normal goods have positive elasticities

• Inferior (Giffen) goods have negative elasticities
• Necessities tend to have small income elasticities
• Luxuries tend to have large income elasticities
Elasticities
Other demand elasticities

The cross-price elasticity of demand

• How much the quantity demanded of a good responds to
change in the price of another good

• Substitute goods have negative elasticities

• Complement goods have positive elasticities
Elasticities in the real world
Elasticities
A measure of the responsiveness of quantity demanded or
quantity supplied to a change in one of its determinants (prices,
income, input costs, taxes and subsidies, etc)

Price elasticity of supply

• How much the quantity supplied of a good responds to a
change in the price of that good
Elasticities
What influences the price elasticity of supply?

• Flexibility of sellers to change the amount of the good produced

• Time horizon considered
• Current and maximum/limited production
Elasticities
Applications of supply, demand, and elasticity

• Technology in the agricultural market

• Supply shock and inelastic demand

• OPEC and the price of oil

• Supply shock and long-term price elasticity of demand

• Drug prohibition and drug-related crime

• Supply shock or demand shock
Digital resources
• Demand theory
https://www.tutor2u.net/economics/reference/how-markets-work-demand-theory
https://www.tutor2u.net/economics/reference/determinants-of-demand-revision-presentation
https://www.tutor2u.net/economics/reference/exceptions-to-the-law-of-demand-explained
https://www.economicshelp.org/blog/167348/economics/law-of-demand/
• Supply theory
https://www.tutor2u.net/economics/reference/determinants-of-supply-revision-presentation
https://www.tutor2u.net/economics/reference/how-markets-work-supply-theory
https://www.economicshelp.org/microessays/equilibrium/supply/
• Demand and supply in action!
https://www.tutor2u.net/business/blog/supply-and-demand-for-butter-in-france
https://www.tutor2u.net/economics/reference/price-mechanism-introduction
https://www.economicshelp.org/blog/160660/economics/explaining-supply-and-demand-2/