Basics of Economics: Markets

Instructor: Dr. Satarupa Mitra

 Revision Pointers
• Goods and Services
• Factors of Production: Land, Labour, Capital,
entrepreneurship
• Consumption Good vs. Investment good
• Scarcity
• What we do as economist?
• What makes economics so valuable?
• Why economics is a scientific subject?
• What is the Role of assumptions?
• Why do we need models? E.g. Circular flow diagram,
PPF
• Graphs – Single Variable, Two Variables, Slope
WHAT IS A MARKET?
 What Is a Market?
• Business-people, journalists, politicians, and
ordinary consumers talk about markets all
the time
• for example?
• oil markets, housing markets, bond markets,
labor markets, and markets for all kinds of goods
and services
• What kind of news we hear?
• But often what they mean by the word
“market” is vague or misleading.
 What Is a Market?
In economics, markets are a central focus
of analysis, so economists try to be as clear
as possible about what they mean when
they refer to a market!
WHAT ARE THE TWO MAIN
COMPONENTS OF MARKET?
 Components of market
• As per function:
• Buyers
• Sellers
 Who are buyers?
• Buyers include consumers who purchase
goods and services.
• Can Firms be buyers?
• Firms buy labor, capital, and raw materials
that they use to produce goods and services
 Who are sellers?
• Sellers include firms, which sell their goods and
services.
• Can workers be sellers?
• Workers sell their labor services; and resource
owners, who rent land or sell mineral resources to
firms.
• Clearly, most people and most firms act as both
buyers and sellers.
• We will find it helpful to think of them as simply
buyers when they are buying something and
sellers when they are selling something.
 What Is a Market?
• For example, take market for Personal
Computers.
• Who are the buyers?
• business firms, households, and students
• Who are the Sellers?
• Hewlett-Packard, Lenovo, Dell, Apple, and a
number of other firms.
 Activity
• Divide in groups of max. 8 by combining
students sitting on 2 rows.
• Each group need to represent a business (do
not disclose it to other groups!)
• Each group should define their market. (e.g.
in terms of Geography, Customer base,
Product substitutes etc).
• Competitor Identification.
 Activity
• Strategic Decisions: Each group decides:
• Pricing strategy: What prices will they set
based on their competitors and market scope?
• Investment decisions: Will they invest in
innovation, expansion, or cost-cutting?
• Public policy stance: How might they react if
a new policy (like a tax or regulation) is
proposed in their market? How would they
argue their case?
Market Definition—The Extent of a
Market
• How do we determine the extent of a
market?
• Geographical
• Range of products to be included in it.
Market Definition—The Extent of a
Market
• Give example of markets where
understanding market extent- geographically
is extremely important?
• Housing
• Give example of markets where
understanding market extent- range is
extremely important?
• Cameras/Lens/Cars/Cellphones
Why we need to understand market?
• Market definition is important for:
• Understanding competition.
• Developing strategies: price, determine
advertising budgets, capital investment
• Public policy: Merger-acquisition, subsidies,
surcharges.
Why we need to understand market?
• Understand level of competition.
• Are consumers necessarily better off if there
are many firms or less firms?
• When should government Intervene?
• Why have prices in some markets risen or
fallen rapidly, while in other markets prices
have hardly changed at all?
• Which markets offer the best opportunities for
an entrepreneur thinking of going into
business?
Which car?
 Corporate Decision Making: The
Toyota Prius
• In 1997, Toyota Motor Corporation introduced the
Prius in Japan, and started selling it worldwide in
2001. The Prius, the first hybrid car to be sold in
the United States, can run off both a gasoline
engine and a battery, and the momentum of the
car charges the battery.
• Hybrid cars are more energy efficient than cars
with just a gasoline engine.
• The Prius was a big success, and within a few
years other manufacturers began introducing
hybrid versions of some of their cars.
 Corporate Decision Making: The
Toyota Prius
• The design and efficient production of the Prius involved not
only some impressive engineering, but a lot of economics as
well.
• How?
• First, Toyota had to think carefully about how the public
would react to the design and performance of this new
product.
• How strong would demand be initially, and how fast would it
grow?
• How would demand depend on the prices that Toyota
charged?
• Understanding consumer preferences and trade-offs and
predicting demand and its responsiveness to price are
essential to Toyota and every other automobile
manufacturer.
 Corporate Decision Making: The
Toyota Prius
• Next, Toyota had to be concerned with the cost of
manufacturing these cars —whether produced in
Japan or, starting in 2010, in the United States
• How would the cost of each car depend on the
total number of cars produced each year?
• How would the cost of labor and the prices of
steel and other raw materials affect costs?
• How much and how fast would costs decline as
managers and workers gained experience with the
production
 Competitive Market
• Who sets the price in market?
• Competitive Market: Many Buyers and
Sellers – each has negligible impact on
market price.
• Example?
• Pen/Stationery
Such a market is known as Perfectly Competitive
Market
 Competitive Market: Perfect
Competition
• To reach this highest form of competition, a
market must have two characteristics:
I. Homogeneous Goods
II. Buyers and sellers are Price Takers.
• At the market price, buyers can buy all they want, and
sellers can sell all they want. Example?
• Wheat
• The degree of competition varies from Perfect to
Monopoly.
• However, for demand and supply analysis we will
assume perfect competition.
 Few Concepts

Rationality
Trade-off and Read more
opportunity Cost
Example: Click here

Ceteris Paribus
Formal Definition Ex:
Mahabharat S20,E10
(Hotstar)
Demand Analysis

Instructor: Dr. Satarupa Mitra

 Revision Pointers
• Components of market
• Factor affecting market
• Perfect Competition
• Trade-off, Opportunity cost, Rationality and
ceteris paribus
What affects your decision of
purchasing a tomato?
 Demand function
Demand for good x is given by:

Literal translation: Demand for good x is a function of:

• Price per unit of commodity x
• Amount consumer Intends to spend
• Price of related commodity
• Taste of the consumer
 Demand Schedule: Who likes a
Pizza?
• How many pizza you will buy in a month if
they are priced at:
Sl no. Price Quantity

1 Rs. 0
2 Rs. 50
3 Rs. 100
4 Rs. 200
5 Rs. 500
6 Rs. 1000

How do you represent info in a graph?

 Demand Function: Price
• Law of Demand : The
claim that other things Price Quantity of Books
being equal, the quantity $10 5 novels
demanded of a good falls
9 9
when the price of the
8 13
good rises.
7 17
• Draw the demand 6 21
curve for following 5 25
demand schedule:
Demand Function: Price

What is the slope of this demand curve?

 Demand Function: Price

Can you represent this in the form of equation of straight

line? y = mx + c
Ans: x+4y=45
Demand curve
 Revision Pointers
• Components of market
• Factor affecting market
• Perfect Competition
• Trade-off, Opportunity cost, Rationality and
ceteris paribus
• Demand Function
• Law of demand
• Demand schedule, Demand curve - Equation
 Question for slope
1. (Price, Quantity) : (4,20) and (6,10)
Equation: Q= - 5P+40
2. (Price, Quantity) : (3, 50) and (6, 35)
Equation: Q= - 5P+65
 Demand and Income
• How does demand of 𝑥 change when the price of 𝑦 changes?

• A normal good is one for which the demand increases as income rises and
decreases as income falls.
• Examples?
• An inferior good is one whose quantity demanded decreases when
consumer income rises (or quantity demanded rises when consumer income
decreases), unlike normal goods
• Examples?
• How normal and inferior goods will change the demand curve?
Demand and Price of related goods
• How does demand of 𝑥 change when the price of 𝑦 changes?

• Goods are substitutes when an increase in the price of one leads to an

increase in the quantity demanded of the other.
• Examples?
• Goods are complements when an increase in the price of one leads to a
decrease in the quantity demanded of the other
• Examples?
What changes that will bring to the demand curve?
 Demand and Taste & Preference

• All markets are shaped by collective and individual tastes and Preferences
• These patterns are partly shaped by culture and partly implanted by
information and knowledge of products and services
• Example?
• What changes that will bring to the demand curve?
Practice Problem : Demand
Practice Problems : Demand
Changes in demand Curve
 Changes in demand Curve
• Movement along the curve
• Prices
• Shift in the Curve
• Income
• Price of related Goods
• Taste and Preference
 Market demand

• Sum of all individual demands for a good or

service
• Market demand curve: sum the individual
demand curves horizontally
• To find the total quantity demanded at any price, we
add the individual quantities

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For queries and discussion contact: satarupa.mitra@manipal.edu

THANK YOU !