MPOT MESTRADO em PLANEAMENTO e OPERAÇÃO de TRANSPORTES. Sessão 1. Basic concepts of Economics. (Professora responsável)

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1 MPOT MESTRADO em PLANEAMENTO e OPERAÇÃO de TRANSPORTES Economia de Transportes Sessão 1 Basic concepts of Economics (Professora responsável) Departmento de Engenharia Civil e Arquitectura Instituto Superior Técnico Universidade Técnica de Lisboa 1

2 Why do we need so many things? 2

3 Why is this important? 3

4 Looking outside Why do you buy Lacoste Polo? Or, MontBlanc pens? What do you have to do to sell these products? Or what do you have to do to establish a restaurant? Can t you wear always the same polo? Write with the same pen? Or go to the same restaurant? WHY??? 4

5 Micro vs Macro Economics Microeconomics: Branch of economics that deals with the behavior of individual economics agents consumers, firms, workers, investors and also of its aggregate expression, that is the markets that these units comprise Macroeconomics: Branch of economics that deals with the performance, structure, and behavior of a national or regional economy as a whole What is the relation between these two concepts? The circular flow of income Injections Services and products (Ultrasimplified concept) FIRMS Households Labour and capital resources Leakages 5

6 Need to know basis Know yourself Your strengths Your costs Your culture Your structure Your capacity to change Your people Your prices Policy and regulatory constraints Know your competitors: Products Costs Prices Know your market: Products Costs Prices Socio-economic and cultural constraints Technological constraints 6

7 Problems of economics arise out of basic facts of life The production that can be obtained by fully utilizing all of a nation s resources is insufficient to satisfy all the wants of the nations inabitants; because resourses are scarse, it is necessary to choose among the alternative uses to which they could put The concept of opportunity costs emphasises the problem of choices by measuring the cost of obtaining a quantity of one commodity in terms of the quantity of other commodity that could have been obtained instead. Lipsey,

8 Economic systems: making choices good 2 (guns) inefficient Production possibilities frontier (all production factors are used) not possible good 1 (cars) 8

9 Production possibility Frontier Three concepts: Scarcity implied by unattainable combinations beyond the boundary Choice need to choose among the attainable points on the boundary; Opportunity costs negative slope of the boundary 9

10 Economic systems: making choices good 2 (guns) Shifting the PPF: - technology - organisation - productivity - trade good 1 (cars) 10

11 Economy = a dismal science (joke) If you laid all the world s economists from end to end they still wouldn t reach a conclusion There s no such thing as a one - handed economist it s always on the one hand this...and on the other hand that... Two economists are walking together and one spots a 500 euro bill in the road: Isn t that a 500 euro bill? Says one; No it can t be says the other, otherwise logically somebody would already have picked it up (Nellis and Parker, 2002, Principles of Business Economics) 11

12 Economy = interactive science (serious) Interactions between buyers and sellers: Outcome of million of independent decisions made by consumers and producers, all acting through markets Producers and consumers control the market through mechanism of supplydemand Economy is about behaviour individual, firms and nations Free market economy versus centrally controlled Today, most economies are mixed 12

13 Market An area where buyers and sellers negotiate the exchange of a well defined commodity Physical place Virtual place Individual Sectorial Goods, Services 13

14 Individual markets (I) Separated by: Type of product (clothes: man vs women) Natural economic barriers (transport cost of cement USA vs PT) Regulation (taxes, import shares, etc) Interlinked by All products and services compete for consumer s income Geographical separation of markets depends on transport costs Policy induced barriers 14

15 The market mechanism price equilibrium price quantity traded quantity Supply: what profit-maximising firms are willing to produce and sell for each price level Demand: what utility maximising consumers are willing to buy at each price level Hilde Meersman (MBA ) 15

16 Perfect competition: supply and demand in the short run price p* Supply Demand MC Additional profits AC q* quantity company i Hilde Meersman (MBA ) 16

17 Perfect competition: supply and demand in the long run price p* S 1 New entrants MC Smaller additional profits AC q* quantity company i Hilde Meersman (MBA ) 17

18 Perfect competition: Market equilibrium price p* S 1 New entrants MC No additional profits AC q* quantity company i Hilde Meersman (MBA ) 18

19 Perfect competition or monopoly? case1: the same MC MR P M P PC MC ( supply) Demand function for the product Hilde Meersman (MBA ) Q M Q PC quantity 19

20 Perfect competition or monopoly? case2: economies of scale P PC P M MC PC ( supply) MC M ( economies of scale) Demand Hilde Meersman (MBA ) Q P C Q M quantity 20

21 Market structures Type of market Perfect competition Monopolistic competition # firms freedom of entry very many Many/ several nature of product examples unrestricted homogeneous carrots, cabbages Unrestricted differentiated Oligopoly Few Restricted undifferentiated differentiated Monopoly One Restricted or completely blocked Unique plumbers, restaurants, cement cars Local bus service, electricity Hilde Meersman (MBA ) 21

to pay p Supply: price firms need to recover costs producers

22 The impact of market inefficiencies: Consumers and producers surplus price p Consumers surplus price Demand: willingness to pay p Supply: price firms need to recover costs producers surplus Hilde Meersman (MBA ) q quantity q quantity 22

23 Perfect competition or monopoly? case1: the same MC P MC ( supply) D P M MR MC ( supply) efficiency loss D Q quantity Q M quantity Hilde Meersman (MBA ) 23

24 Price and/or quantity adjustment: supply shock general price level supply shocks ex. productivity aggregate demand Hilde Meersman (MBA ) production, income, employment 24

25 Cold turkey... AS AS inflation production AD inflation AD production RECESSION Hilde Meersman (MBA ) 25

Market structures Perfect competition

Market structures Perfect competition Market Structures Market structure refers to the number and size of buyers and sellers in the market for a good or service. A market can be defined as a group of firms