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MICROECONOMICS. LAW OF SUPPLY AND DEMAND PRINCIPLES DEMAND COMES FIRST. SUPPLY ADJUSTS TO DEMAND. PRODUCTION REQUIRES TIME. EQUILIBRIUM IS A THEORETICAL.

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Presentation on theme: "MICROECONOMICS. LAW OF SUPPLY AND DEMAND PRINCIPLES DEMAND COMES FIRST. SUPPLY ADJUSTS TO DEMAND. PRODUCTION REQUIRES TIME. EQUILIBRIUM IS A THEORETICAL."— Presentation transcript:

1 MICROECONOMICS

2 LAW OF SUPPLY AND DEMAND PRINCIPLES DEMAND COMES FIRST. SUPPLY ADJUSTS TO DEMAND. PRODUCTION REQUIRES TIME. EQUILIBRIUM IS A THEORETICAL CONSTRUCTION. THE MARKET DETERMINES PRICE AND PRODUCTION.

3 SUPPLY ADJUSTS TO DEMAND: THE ECONOMY IS DEMAND PULL. LAW OF SUPPLY AND DEMAND

4 MATERIAL LEVEL Maslows Hierarchy of Needs

5 THE DEMAND CURVE GIVEN THE INCOME, IF PRICE RISES THEN QUANTITY DEMANDED FALLS. THEREFORE, THE DEMAND IS A RELATION CONNECTING PRICE AND QUANTITY WITH NEGATIVE SLOPE

6 WHAT CAN SHIFT THE DEMAND CURVE? THE EXOGENOUS VARIABLES

7 WHAT CAN CHANGE DEMAND CURVE SLOPE? POOR COUNTRY RICH COUNTRY

8 Maslows Hierarchy of Needs ELASTICI- TIES

9 SUPPLY ADJUSTS TO DEMAND: 1. PROPOSING A PRICE (MARKETING). 2. DECIDING PRODUCTION. WHICH DEPENDS ON COSTS, DEMAND (INVENTORIES) AND COMPETITION. WHICH DEPENDS ON PROFITS, DEMAND (INVENTORIES) AND COMPETITION.

10 SUPPLY ADJUSTS TO DEMAND: WHEN DEMAND RISES (INVENTORIES FALL) THEN PRICE RISES AND PRODUCTION GROWS. SO, THE SUPPLY CURVE IS APOSITIVE RELATION BETWEEN PRICE AND PRODUCTION. THE SUPPLY CURVE IS A THEORETICAL CONSTRUCTION.

11 WHAT CAN SHIFT THE SUPPLY CURVE? THE COST OF PRODUCTION.

12 WHAT CAN CHANGE SUPPLY CURVE SLOPE? LESS CAPITAL PERISHABLES MORE CAPITAL NON-PERISHABLES INELASTIC ELASTIC

13 WHAT CAN CHANGE SUPPLY CURVE SLOPE? LESS CAPITAL PERISHABLES MORE CAPITAL NON- PERISHABLES AGRICULTURE INDUSTRY

14 WHAT CAN CHANGE SUPPLY CURVE SLOPE? LESS CAPITAL PERISHABLES MORE CAPITAL NON- PERISHABLES POOR COUNTRY RICH COUNTRY

15 SUPPLY AND DEMAND: THE MARKET BRAZILIAN CEMENT MARKET

16 LAW OF SUPPLY AND DEMAND THEORETICAL EQUILIBRIUM LEVELS OF PRODUCTION AND PRICE DEPEND ON: 1. BUYERS AND SELLERS INTERACTION 2. DEMAND AND SUPPLY CURVES SHIFTS STEMMING FROM EXOGENOUS FACTORS AND DECISIONS OF ECONOMIC POLICY

17 GOVERNMENT INTERVENTION WHAT SUPPORTS THE PRICE LEVEL IS THE DEMAND

18 ECONOMETRICS CASE STUDY: THE BRAZILIAN CEMENT MARKET

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21 DEMAND CURVE: D* t = P* t F t D1 SUPPLY CURVE: Q* t = P* t W t D1 2SLS METHOD – SECOND STAGE THE BRAZILIAN CEMENT MARKET SUPPLIERS PRICE: P* t = W t E* t D1 SUPPLIERS PRODUCTION DECISION: Q* t = M* t E* t D 1

22 PRICE ELASTICITY OF DEMAND INVESTMENT ELASTICITY OF PRODUCTION BRAZILIAN CEMENT MARKET ANALYSIS

23 REDUCED MODEL – CONTROL PANEL P* t = CONSTANT W t F t Q* t = CONSTANT W t F t BRAZILIAN CEMENT MARKET EXAMPLE: SOURCES OF VARIATIONS P* t = W t F t - INFLATIONP* t = W t F t - INFLATION Q* t = W t F t - GROWTHQ* t = W t F t - GROWTH ANALYSIS

24 A MATHEMATICAL DEMONSTRATION OF WHY NEOCLASSICAL THEORY IS WRONG

25 THE IMPOSSIBLE NEOCLASSICAL SUPPLY CURVE THE PROFIT MAXIMIZATION EQUATION ASSUMPTIONS: PRODUCTION CAPACITY IS GIVEN dP/dQ = ZERO THEREFORE P = dC/dQ IS SAID TO BE A SUPPLY CURVE HOWEVER...

26 THE IMPOSSIBLE NEOCLASSICAL SUPPLY CURVE WHEN DEMAND SHIFTS TO THE RIGHT AND THEN THE SUPPLY CURVE IS SHIFTED TO THE RIGHT. PROFITS RISE AND NEW INVESTMENT EXPANDS PRODUCTION CAPACITY

27 THE MATTER OF COMPETITION

28 DEMAND PRICE ELASTICITY e INDIVIDUAL FIRM DEMAND PRICE ELASTICITY e i

29 MONOPOLY PRICE MP versus ACTUAL PRICE P BRAZILIAN CEMENT MARKET

30 OLIGOPOLY DEGREE Z versus PROFIT MARGIN M BRAZILIAN CEMENT MARKET

31 THE PHILIPS CURVE

32 THE END OF THE NEOCLASSICAL DOMINANCE? TO BE CONTINUED.


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