Lecture 1 – Introduction to economics
NB: also relevant for competition law
Overview
❖ Demand function
❖ Suppy function
❖ Market equilibrium
❖ Perfect competition versus monopoly
o Marginal cost and marginal revenue
❖ Private versus social marginal cost (externalities)
❖ Efficiency and social welfare
Demand: quantity demanded
❖ The quantity demanded of a certain product is the function of different factors.
❖ These factors influence the decision of the consumer, whether or not you want to buy a
particular product:
o Price
o Quality: the higher the more demand
o Income
o Needs
o Price and availability of substitutes
o Complementary products
o Expectations for the future
o Number of buyers
❖ This can be captured in the following equation:
Qd = f (price, quality, etc.…)
Substitutes
❖ Substitute = if the products could be used for the same purpose by the consumers. That is, a
consumer perceives both goods as similar or comparable, so that having more of one good
causes the consumer to desire less of the other good. Contrary to complementary goods and
independent goods, substitute goods may replace each other in use due to changing economic
conditions.
o Examples: Coca-Cola and Pepsi; coffee and tea.
❖ Important concept in competition law.
❖ These types of products have a specific influence on the demand. If the price for one substitute
product goes up, we would demand more of the other product in question.
o If the price of Coca-Cola goes up, there will be higher demand for Pepsi.
Complementary goods
❖ A complementary good is a good whose appeal increases with the popularity of its
complement.
o Examples: cereal and milk; DVD and player; printers and ink; badminton and racket.
❖ When two goods are complements, they experience joint demand - the demand of one good is
linked to the demand for another good. Therefore, if a higher quantity is demanded of one
good, a higher quantity will also be demanded of the other, and vice versa. For example, the
demand for razor blades may depend on the number of razors in use; this is why razors have
sometimes been sold as loss leaders, to increase demand for the associated blades.
, Another example is that sometimes a toothbrush is packaged free with toothpaste. The
toothbrush is a complement to the toothpaste; the cost of producing a toothbrush may be
higher than toothpaste, but its sales depends on the demand of toothpaste.
o If price goes up of one product, demand goes down of the other complementary
product.
What do we know? Demand function
❖ Where are the other factors in this picture? They are not ignored, we consider them to be equal
= ceteris paribus.
❖ If something changes in these ceteris paribus factors, the curve changes as well. The curve
changes outwards. For example, when the income in the economy increases. Demand goes
from D to D2:
❖ So if the income increases, or quality increases1, or the need increases2, price of substitutes
goes up, or price of complementary goods goes down. At any given price level there will be
more demand.
❖ The opposite could happen as well. It could be that people have less money to spend in an
economic crisis, or there is less need of face masks (because there is no more Corona). In
those cases the curve would shift to the left (‘downwards’).
1
Because of technological advances, for example.
2
Corona: more need of facemasks.
NB: also relevant for competition law
Overview
❖ Demand function
❖ Suppy function
❖ Market equilibrium
❖ Perfect competition versus monopoly
o Marginal cost and marginal revenue
❖ Private versus social marginal cost (externalities)
❖ Efficiency and social welfare
Demand: quantity demanded
❖ The quantity demanded of a certain product is the function of different factors.
❖ These factors influence the decision of the consumer, whether or not you want to buy a
particular product:
o Price
o Quality: the higher the more demand
o Income
o Needs
o Price and availability of substitutes
o Complementary products
o Expectations for the future
o Number of buyers
❖ This can be captured in the following equation:
Qd = f (price, quality, etc.…)
Substitutes
❖ Substitute = if the products could be used for the same purpose by the consumers. That is, a
consumer perceives both goods as similar or comparable, so that having more of one good
causes the consumer to desire less of the other good. Contrary to complementary goods and
independent goods, substitute goods may replace each other in use due to changing economic
conditions.
o Examples: Coca-Cola and Pepsi; coffee and tea.
❖ Important concept in competition law.
❖ These types of products have a specific influence on the demand. If the price for one substitute
product goes up, we would demand more of the other product in question.
o If the price of Coca-Cola goes up, there will be higher demand for Pepsi.
Complementary goods
❖ A complementary good is a good whose appeal increases with the popularity of its
complement.
o Examples: cereal and milk; DVD and player; printers and ink; badminton and racket.
❖ When two goods are complements, they experience joint demand - the demand of one good is
linked to the demand for another good. Therefore, if a higher quantity is demanded of one
good, a higher quantity will also be demanded of the other, and vice versa. For example, the
demand for razor blades may depend on the number of razors in use; this is why razors have
sometimes been sold as loss leaders, to increase demand for the associated blades.
, Another example is that sometimes a toothbrush is packaged free with toothpaste. The
toothbrush is a complement to the toothpaste; the cost of producing a toothbrush may be
higher than toothpaste, but its sales depends on the demand of toothpaste.
o If price goes up of one product, demand goes down of the other complementary
product.
What do we know? Demand function
❖ Where are the other factors in this picture? They are not ignored, we consider them to be equal
= ceteris paribus.
❖ If something changes in these ceteris paribus factors, the curve changes as well. The curve
changes outwards. For example, when the income in the economy increases. Demand goes
from D to D2:
❖ So if the income increases, or quality increases1, or the need increases2, price of substitutes
goes up, or price of complementary goods goes down. At any given price level there will be
more demand.
❖ The opposite could happen as well. It could be that people have less money to spend in an
economic crisis, or there is less need of face masks (because there is no more Corona). In
those cases the curve would shift to the left (‘downwards’).
1
Because of technological advances, for example.
2
Corona: more need of facemasks.
