Bio-economics: Lecture 2
1. The circular flow of economic activity
• Firms: produce goods/services by transforming inputs into outputs
• Households: consume goods/services and supply inputs
• Output markets: goods & services are exchanged
• Input markets: labor, capital, and land are exchanged
2. Demand in output markets
2.1. Quantity demanded
• Quantity demanded = the quantity of a product that a household would buy in a given period at the current
market price
➢ changes with the market price, ceteris paribus (all else equal)
Price ↑ → Quantity demanded ↓
➢ Price ↓ → Quantity demanded ↑
• 𝑄𝑑 = 𝑓 (𝑝 | 𝑎𝑙𝑙 𝑜𝑡ℎ𝑒𝑟 𝑓𝑎𝑐𝑡𝑜𝑟𝑠)
2.2. Demand curve
• Graphical representation of the relationship between price (p) and quantity demanded (q)
• Law of demand: the negative relation between price and quantity demanded
➢ demand curve is almost always downward sloping
➢ quantity demanded is lower at higher prices, and higher at lower prices, ceteris paribus
• The shape of a household’s demand curve depends on the taste and preferences of that
household
• Two types of changes of the demand curve:
➢ Movement along the curve: caused by a change in price
➢ Shift of the curve: caused by other factors:
↑ Income → demand curve shifts outward (right)
↓ Income → demand curve shifts inward (left)
2.3. Demand & quantity demanded
• A household’s demand decision depends on:
➢ Price of the product
Changes the quantity demanded – move along the demand curve
➢ Household income
➢ The household’s amount of accumulated wealth
➢ The prices of other products available
➢ The household’s taste & preferences
➢ The household’s expectations about future income, wealth, and prices
Changes the demand – inward or outward shift of the demand curve
2.4. Substitutes and complements
• Substitutes: goods that can serve as replacement for one another
➢ when the price of one ↑, the demand for the other ↑
Eg. Beer & wine / pork & beef
➢ Perfect substitutes → identical products
• Complements: goods that go together
➢ when the price of one ↑, the demand for the other ↓
eg. Cars & gasoline / hardware & software
➢ Perfect complements: one good cannot be consumed without the other
, 2.5. Inferior versus normal goods
• Normal goods: goods for which demand ↑ when income ↑
Eg; Organic food, electronics
• Inferior goods: goods for which demand ↓ when income ↑
Eg; bus rides
➢ substituted by other (more expensive) goods when income ↑
➢ Giffen goods: demand ↑ as price ↑ (exception to law of demand)
Eg; bread
2.6. Expectations
• Consumer choices today depend on current prices, income & wealth
• Expectations about the future are increasingly recognized as crucial in economic theory
• Demand is influenced not just by present conditions, but also by what people anticipate will happen
2.7. Market demand
• Sum of individual demand curves of all households
3. Supply in output markets
3.1. Supply in output (product) markets
• Firms produce to sell goods at a price higher than production costs → revenue
• Profit = Revenue – Costs
➢ Costs: building factories, hire workers, buying raw materials
3.2. Quantity supplied
• The amount of firms that are willing and able to produce and sell at a given price
• Law of supply:
➢ Price ↑ → Quantity supplied ↑
➢ Price ↓ → Quantity supplied ↓
• 𝑄𝑠 = 𝑓 (𝑝 | 𝑎𝑙𝑙 𝑜𝑡ℎ𝑒𝑟 𝑓𝑎𝑐𝑡𝑜𝑟𝑠)
3.3. Supply curve
• Relation between the quantity supplied (𝑞) and the price (𝑝)
• Law of supply = a positive relation between price and quantity supplied
➢ supply curve is upward sloping (positive slope)
➢ quantity supplied is lower at lower prices, and higher at higher prices, ceteris paribus
• Shifts of the curve caused by:
➢ Changes in production costs, input prices
➢ Technological improvements
➢ Prices of related products
3.4. Market supply
• Sum of all individual supply curves of firms in a market
3.5. Supply & quantity supplied
• A firm’s supply decision depends on:
➢ The price of the product in question
Changes the quantity supplied – move along the supply curve
➢ The costs of production, input prices and technology
➢ The prices of related products
Changes the supply – inward or outward shift of the supply curve
1. The circular flow of economic activity
• Firms: produce goods/services by transforming inputs into outputs
• Households: consume goods/services and supply inputs
• Output markets: goods & services are exchanged
• Input markets: labor, capital, and land are exchanged
2. Demand in output markets
2.1. Quantity demanded
• Quantity demanded = the quantity of a product that a household would buy in a given period at the current
market price
➢ changes with the market price, ceteris paribus (all else equal)
Price ↑ → Quantity demanded ↓
➢ Price ↓ → Quantity demanded ↑
• 𝑄𝑑 = 𝑓 (𝑝 | 𝑎𝑙𝑙 𝑜𝑡ℎ𝑒𝑟 𝑓𝑎𝑐𝑡𝑜𝑟𝑠)
2.2. Demand curve
• Graphical representation of the relationship between price (p) and quantity demanded (q)
• Law of demand: the negative relation between price and quantity demanded
➢ demand curve is almost always downward sloping
➢ quantity demanded is lower at higher prices, and higher at lower prices, ceteris paribus
• The shape of a household’s demand curve depends on the taste and preferences of that
household
• Two types of changes of the demand curve:
➢ Movement along the curve: caused by a change in price
➢ Shift of the curve: caused by other factors:
↑ Income → demand curve shifts outward (right)
↓ Income → demand curve shifts inward (left)
2.3. Demand & quantity demanded
• A household’s demand decision depends on:
➢ Price of the product
Changes the quantity demanded – move along the demand curve
➢ Household income
➢ The household’s amount of accumulated wealth
➢ The prices of other products available
➢ The household’s taste & preferences
➢ The household’s expectations about future income, wealth, and prices
Changes the demand – inward or outward shift of the demand curve
2.4. Substitutes and complements
• Substitutes: goods that can serve as replacement for one another
➢ when the price of one ↑, the demand for the other ↑
Eg. Beer & wine / pork & beef
➢ Perfect substitutes → identical products
• Complements: goods that go together
➢ when the price of one ↑, the demand for the other ↓
eg. Cars & gasoline / hardware & software
➢ Perfect complements: one good cannot be consumed without the other
, 2.5. Inferior versus normal goods
• Normal goods: goods for which demand ↑ when income ↑
Eg; Organic food, electronics
• Inferior goods: goods for which demand ↓ when income ↑
Eg; bus rides
➢ substituted by other (more expensive) goods when income ↑
➢ Giffen goods: demand ↑ as price ↑ (exception to law of demand)
Eg; bread
2.6. Expectations
• Consumer choices today depend on current prices, income & wealth
• Expectations about the future are increasingly recognized as crucial in economic theory
• Demand is influenced not just by present conditions, but also by what people anticipate will happen
2.7. Market demand
• Sum of individual demand curves of all households
3. Supply in output markets
3.1. Supply in output (product) markets
• Firms produce to sell goods at a price higher than production costs → revenue
• Profit = Revenue – Costs
➢ Costs: building factories, hire workers, buying raw materials
3.2. Quantity supplied
• The amount of firms that are willing and able to produce and sell at a given price
• Law of supply:
➢ Price ↑ → Quantity supplied ↑
➢ Price ↓ → Quantity supplied ↓
• 𝑄𝑠 = 𝑓 (𝑝 | 𝑎𝑙𝑙 𝑜𝑡ℎ𝑒𝑟 𝑓𝑎𝑐𝑡𝑜𝑟𝑠)
3.3. Supply curve
• Relation between the quantity supplied (𝑞) and the price (𝑝)
• Law of supply = a positive relation between price and quantity supplied
➢ supply curve is upward sloping (positive slope)
➢ quantity supplied is lower at lower prices, and higher at higher prices, ceteris paribus
• Shifts of the curve caused by:
➢ Changes in production costs, input prices
➢ Technological improvements
➢ Prices of related products
3.4. Market supply
• Sum of all individual supply curves of firms in a market
3.5. Supply & quantity supplied
• A firm’s supply decision depends on:
➢ The price of the product in question
Changes the quantity supplied – move along the supply curve
➢ The costs of production, input prices and technology
➢ The prices of related products
Changes the supply – inward or outward shift of the supply curve
