İktisada Giriş INTRODUCTION TO ECONOMICS - 1 fatihbook.com (ahmet çalışkan) econ101 - 1 - A B C D E F 0 5 10 15 0 1 2 3 4 5 ECON-101 INTRODUCTION TO ECONOMICS Economics is the study of how a society decides. 1. What goods and services to produce 2. How to produce these goods and services 3. For whom to produce these goods and services 1.1. Scarcity People can’t buy what they want (kıtlık) • Human beings have unlimited wants. But we can’t obtain all of our wants because the economy’s resources are limited • Economics considers how prices and markets allocate scare to unlimited wants of society example of trade off: If your income is 1000YTL per month and you pay 700YTL for rent and bills. You have 300YTL left to decide what to buy. Assume a nice cell phone and a textbook is 50YTL. You have to choice between the textbook and the cell phone. This is a trade off. Opportunity cost of one cell phone is 6 textbooks. 1.2. Opportunity Cost The opportunity cost of an action is the value of the next-best alternative action. 1.3. Production Possibilities Frontier Resources are limited PPF shows the boundary between economies can and can’t produce. Possibility Pizzas Cds A 0 15 B 1 14 C 2 12 D 3 9 E 4 5 F 5 0 Market: Piyasa Efficiency: Verimlilik Demand: Talep Supply: Arz Expected: Ummak Income: What you earn (gelir) Insurance: Sigorta Allocate: Ödenek ayırmak VOCABULARY ex: Government wants to put computer all schools but government need to built nuclear central. Government has to choice one of them. Resources Land, Capital, Labor, Technology 26 september 27 september ?Z ?W ?G (Unattainable Point) fatihbook.com (ahmet çalışkan) econ101 - 2 - Idea: As we want to produce more pizzas, we must produce less Cds because our resources are limited. Attainable points (W and Z) inside on the PPF cure. • They show points that this economy can produce. Unattainable points are points beyond the cure and are impossible to produce. • Points on the cure are called efficient because the economy is using all of its resources. • Increasing opportunity cost of 1 pizza increases as we produce more and more pizzas. • Opportunity costs increase because we want to produce more pizzas; we force the resources that are more suited for CD production to pizza production. 1.4. Role of markets and prices in resource allocation Prices govern the behavior of sellers and buyers in a market. If prices are higher, buyers want to buy less, Sellers want to sell more. Both buyers and sellers are trying to maximize their profit from trade. They are following their own self-interest in a free market economy. (invisible hand of the market) In a free market economy by follow their self-interest buyers and sellers help the economy. (become efficient) 1.5. Microeconomics and Macroeconomics Microeconomics studies the decisions of a consumer or a firm ex: 1. Why are people buying more DVDs and less movie tickets? 2. How would a tax on internet shopping influence e-Bay? 3. What are the effects of the strike in Turkish Airlines on the tourism industry? Macroeconomics studies the economy as a whole 1. Gross Domestic Product (Gayrisafi Milli Hasıla) is the total value of goods and services produced in a year. 2. Consumer Price Index (Tüketici Fiyat Endeksi: TÜFE): Average price goods and services that a consumer. Inflation is the rate of change of CPI. 3. Can the Central Bank of Turkey make everyone richer by printing money and dropping from helicopter? Basics of Supply Demand 2.1. Market (Producers sell their produces consumers) A market is an arrangement where buyers and sellers of a good or service meet. B,C,D are attainable and efficient W and Z are attainable but inefficient • Between points C&D opportunity cost of 1 pizza costs 3 CDs • Equivalently opportunity cost of 1 CD is 1/3 pizza between CD&Pizzas CENTRAL PLANNED ECONOMY (No private ownership) Government has to decide what the produce and how much produce each good and who will be able to buy the good produced. Narrow Market for milk Market for cars Wide Market for food Market for motor vehicles 03 october fatihbook.com (ahmet çalışkan) econ101 - 3 - 2.2. Demand (How much buyers want to buy) Demand is the total quantity of a good that buyers want to buy at every price during a given time period. Demand explains behavior of buyers in a market. (If demand increase = every price of quantity demand increase) Demand for Chocolate Bar A E D C B A' B' C' D' E' 0 0,5 1 1,5 2 2,5 0 5 10 15 20 25 30 35 Quantity Demanded Price (liras/bar) Negative Relationship Rightword Shift Law of Demand: Other factors constant, the higher the price of a good, the smaller is the quantity demanded; and the lower price of a good, the greater is the quantity demanded. Demand vs. Quantity Demanded The term “demand” refers to the entire relationship between the price of a good and quantity demanded at every price. • Demand is represented by the demand cure • Quantity demand is a (particular) point on the cure Change in demand: If some other factors than price changes the demand behavior of consumers for a good, than the demand cure shifts. Factors that change demand 1. Prices of Related Goods: For example; consider demand for benzene. If the price of LPG decreases, demand for benzene decreases because people will switch their cars to LPG. This kind of good is called “subtitle goods”. - A subtitle is a good that can be used in place of another good. Point Price (Liras) Qty. Demanded (Millions of bars per week) New Qty. Demand A 0,5 22 32 B 1 15 25 C 1,5 10 20 D 2 7 17 E 2,5 5 15 Old Demand Cure New Demand Cure fatihbook.com (ahmet çalışkan) econ101 - 4 - • If the price of cars decreases, demand for benzene increases because cars and benzene are complement goods. A complement is a good that is used together with another good. • For example; Ice & Sugar, Coffee & Sugar 2. Income: If the demand for good increases when income raises this good is called a normal good. If the demand for a good decreases when income rises, this good is an inferior good. For ex: bus tickets 3. Expected Future Prices: If everybody starts to expect the price of benzene to increase next week, current demands for benzene increase. - If everybody starts to expect the price of laptop to decrease next month, then current demand for laptops decrease. 4. Tastes, Fashion 5. Population Growth 6. Season of the Year 2.3. Supply Supply is the total quantity of a good that sellers want to sell at every price during a given time period supply explain us, seller behavior. Quantity supplied of a good service is the amount that sellers want to sell at a particular price. Law of Supply: Other factors constant the higher the price of a good, the greater is the qty. supplied. Point Price Qty. Supplied New Qty. Supplied A 0,5 0 7 B 1 6 15 C 1,5 10 20 D 2 13 25 E 2,5 15 30 A E D C B A' B' C' D' E' 0 0,5 1 1,5 2 2,5 0 5 10 15 20 25 30 Quantity Supplied Price (liras/bar) Pozitive Relationship 04 october fatihbook.com (ahmet çalışkan) econ101 - 5 - Factors That Change Supply 1. Technologic Improvements 2. Price of Inputs: If price of electricity is larger, supply of cars is decrease. 3. Expected Future Prices: If the price of a good is expected to rise next month, than current supply decreases. 4. Number of Suppliers: Air Conditioner price ten years ago is 1000$ but today AC price is 500$ because there are more suppliers of ACs today. 2.4. Market Equilibrium Equilibrium is a situation where opposing forces balance each other. In a free market, price balances demand and supply and brings the market to eqbm. Eqbm. price is the price at which quantity supplied is equal to quantity demanded. Eqbm. quantity is the quantity bought and sold at the eqbm. price. Disequilibrium Case 1: Surplus For example: If the current price of potatoes is 0,5 lira/kg and if the quantity supplied is 100 tons this week, and quantity demand is 80 tons. This market isn’t at eqbm. Only 80 tons will be sold. When sellers can’t sell the remaining 20 tons, they start to cut price. When price is smaller, quantity demanded increases and quantity supply decreases. This process goes on until the surplus amount is sold. So in case of a surplus decreases so that quantity demanded balances quantity supplied. 0 0,5 1 1,5 2 2,5 0 5 10 15 20 25 Quantity (Bars) Price (liras/bar) shortage:9 surplus equilibrium supply demand eqbm price eqbm quantity Price Qty. Demanded Qty. Supplied Shortage (-) or Surplus (+) 0,5 22 0 -22 1 15 6 9 1,5 10 10 0 2 7 13 +6 2,5 5 15 +10 equilibrium fatihbook.com (ahmet çalışkan) econ101 - 6 - Disequilibrium Case 1: Shortage Case • Assume the price of chocolate is 1 lira/bar. At 1 lira, quantity demanded is 15 and quantity supplied is 6 bars. There is a shortage of 9 bars. • This means some buyers are willing to pay more than 1 lira for chocolate but there is no chocolate to buy. Some sellers see this opportunity and increase price and they can still sell it. • So in case of a shortage, price increases to bring the market into equilibrium. Summary: When the market starts not at equilibrium, price increases or decreases (adjusts) to bring the market into equilibrium. 2.5. Predict Changes in Price and Quantity An increase demands no change in supply. (For example, Valentine’s Day (February 14). We add every quantity demand plus 10) 0 0,5 1 1,5 2 2,5 0 5 10 15 20 25 30 35 Quantity (Bars) Price (liras/bar) Demand (New) Demand (Old) Shortage Summary: When demand increases in a market, both market price and quantity sold increases. • An increases in demand and no change in supply: o When demand for a good increases, its price increases and equilibrium quantity sold increases • An increases in supply and no change in demand: o When supply for a good increases, its price decreases and equilibrium quantity increases 6 Combinations of Supply and Demand Changes 1. Change in demand, no change in supply 2. Change in supply, no change in demand 3. Increase both in demand and supply - Change in price is ambiguous, eqbm quantity increases 4. Decrease both in demand and supply - Effect on price is ambiguous, eqbm quantity decreases 5. Decrease in demand and increase in supply - Eqbm price decreases, eqbm quantity is ambiguous 6. Increase in demand and decrease in supply Market equilibrium is characterized by: 1. Market (Eqbm) Price 2. Eqbm quantity sold 10 october 17 october fatihbook.com (ahmet çalışkan) econ101 - 7 - D D D 1 E 1 E D E 1 E D Ex: Consider market for oranges. If frost happens: Ex: Consider market for cars. If price of oil decreases If price of benzene decrease, demand forces increases Applications of Supply and Demand 3.1. Price Controls Government intervenes into free markets in the form of price ceilings and price floors. Union (Sendika) is an association of producers that tries to defend rights of workers Why does the government have such a policy? 3.1.1. Price Floor A price floor is a minimum price set and enacted by the government for a good. It makes the sale of good below a certain price illegal. Ex: Tobacco, hazelnut, beets, wheat, tea… In order to support farmers of these goods. Table for Hazelnuts For a price floor to have a real effect, it must be above the eqbm price How does the government keep the price high and prevent the market from moving toward eqbm by buying the surplus amount. Another example is Minimum Wage 3.1.2. Price Ceiling Price ceiling is a maximum price set and enocted by the government It makes the sale of a good above a certain price illegal When there is a shortage, it must be rationed with some kinds of mechanism. “First come, first served (*) ” is one rationing mechanism. (* ilk gelen alır) • Short-run is the time period less than one year • Long-run is long term is more than one year LRS: Long Run Supply SRS: Short Run Supply P Q S 1 S P Q S P Q S S 1 Price (lira/kg) Qty S Price Floor 5 3 Surplus Q 1 Q 2 eqbm qty 24 october fatihbook.com (ahmet çalışkan) econ101 - 8 - • In the short-run, supply curve is steep as if it is hard to respond to rent ceiling policy quickly • In the long-run, available housing for rent decreases as house owners use their houses for other more profitable purposes. • Shortage of housing increases in the long run. 3.2. Elasticity of demand: Elasticity measures the sensitivity (responsiveness) of quantity demanded to changes in price and income. 3.2.1 Price Elasticity of Demand Price elasticity of demand (PED) measures the sensitivity of quantity demanded to changes in price. PED is defined as the percentage change in the quantity of a good demanded divided by the corresponding percentage change in its price. price in change % demanded qty in change % = PED Total Revenue (TR) =Price (P) x Quantity tickets sold (Q) Point Price (lira/ticket) Quantity of tickets demanded (1000) Price Elasticity of Demand A 125 0 ¥ - B 100 20 - 4 C 75 40 - 1.5 D 62.5 50 -1 E 50 60 - 0.67 F 25 80 -0.25 G 0 100 0 P (liras/ month) Q (loaves) D eqbm rent 500 LRS rent ceiling 700 LR shortage SRS SR shortage elastic inelastic unit elastic fatihbook.com (ahmet çalışkan) econ101 - 9 - Percentage changes of x›y is callucted by 100 x - y · x B›C Price change : 100›75 100 100 100 - 75 · = -25% Quantity change: 100 20 20 - 40 · = 100% PED : 25 100 - = -4% D›E Price change : 62,5›50 100 60 62,5 - 50 · = -20% Quantity change: 100 50 50 - 60 · = 20% PED : 20 20 - = -1 Why is elasticity important? Consider yourself as a manager of a football club, say Galatasaray. Your objective is to maximize Total Revenue from ticket sales where Start with price=100, If we decrease price to 75 liras, total revenue increases, because number of tickets sold increases faster than the decrease in price Total Revenue (TR) = Price (P) X Number of tickets sold (Q) TR= P x Q Demand is elastic if |PED| > 1. Demand is inelastic if |PED| < 1. Demand is unit elastic if |PED| = 1 25 75 100 50 100 40 20 60 80 125 quantity demanded (1000 tickets) E C B A price (liras/ticket) F G 0 25 october fatihbook.com (ahmet çalışkan) econ101 - 10 - 1- When demand is elastic; |PED| > 1, the manager should decrease the price to increase TR, 2- When demand is inelastic; |PED| < 1, the manager should increase the price to increase TR, 3- TR is maximized when |PED| = 1. At this point, if you increase or decrease price (a small amount), TR is unchanged. Ex: Agricultural products, crude oil… have inelastic demand Tourism expenditure, cars, furniture have elastic demand What Determines Price Elasticity? 1- Ease of substitution: If the price of cigarettes increases by one percent, does the quantity demanded decrease by 5% or 0.5%? Probably by 0.5% because it is hard for smokers to substitute some other good for cigarettes. 2- Width of the market definition: Now consider a particular brand of cigarettes, say Parliament. If the price of Parliament cigarettes increases by one percent, does the quantity demanded decrease by 5% or 0.5%? Probably by 5%. Because it is easier to substitute another cigarette brand for Parliament. As we define a narrower category for a commodity, price elasticity increases. 3- Time Elapsed Since Price Change: Short-run response is inelastic, long-run response is much more elastic. Oil price shock of 1973-74 OAPEC (Organization of Arab Petroleum Exporting Countries) agreed to restrict oil supply to U.S. and Western Europe in response to 1- Western pressures for cheap crude oil, 2- Their support for Israel. 100 quantity demanded (barrels) A price (dollars/barrel) 0 inelastic demand(a) elastic demand(b) D D S S S’ S’ D D S S S’ S’ fatihbook.com (ahmet çalışkan) econ101 - 11 - In the short-run, price of crude oil had quadrupled by 1974. This was because demand for oil was very inelastic, around -0.05 But in the long-run, consumers were better able to substitute away from oil by using smaller cars, public transportation, and alternative energy sources such like natural gas, nuclear power, wind and water Demand is much more elastic in the long-run than in the short-run. Can good news for farming be bad news for farmers? • Like other agricultural product, wheat has inelastic demand suppose Fatih Uni. professors find a new two times productive seed. Also suppose that all farmers use this new seed and are producing two times the old amount of wheat. Market for Wheat - Total Revenue earned by all farmers decreases because price. - Elasticity of Demand for wheat is only 0.24 - When price falls by for example, 50%, - Qty demanded will increases by only 0.24x50=12% Farmers will make less money as a result of technological improvement The inelastic demand for agricultural product explain 2 phenomena 1. Every year per. of population working in agriculture falls 2. EU subsidies on agriculture: EU pays farmers to leave part of their lands unplanted in order to keep supply low and prices high 3.2.2 Income Elasticity of Demand (IED) income in change % demanded qty in change % IED = Examples: Tomatoes Laptops Bus Ticket (Necessity) (Luxury) (Inferior) Consider the case when your income rises from 1000 liras a month to 5000 liras a month - Luxury goods have an IED larger than one - Necessity goods have an IED smaller than one - Normal goods have positive IED (Luxury and necessity) - Inferior goods have negative IED (Bus ticket is an inferior good 3.2.3 Cross-price elasticity of demand (CPED) The Cross-price elasticity of demand for good I with respect to changes in the price of good j is: P 1 D - inelastic D S’ Q 2 Q 1 S P 2 31 october fatihbook.com (ahmet çalışkan) econ101 - 12 - j good of price in change % demanded i good of qty in change % j) (i, CPED = • Substitute goods have positive CPED Example: i= orange juice, j=apple juice - If a price of I increase by 10%, quantity demanded of j increase by 5% 2 1 % 10 5% CPED = + = • Complement goods have negative CPED Example: Pop corn and movie tickets - If movie price increase by 10%, quantity demand of pop corn decrease 5% 2 1 % 10 5% CPED - = - = 01 november