7/23/2019 Dr. Humam Al-jazaeri10 http://slidepdf.com/reader/full/dr-humam-al-jazaeri10 1/21 5/7/201 I NTRODUCTION TO C ONTEMPORARY ECONOMICS THE NATIONAL I NSTITUTE OF PUBLIC ADMINISTRATION (INA) DR. HUMAM AL-J AZAERI 2012 1 AN INTRODUCTION! Session One 2
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Historically, price spikes tended to be almost exclusively driven byunusual weather -- a monsoon failure in India, a drought in theformer Soviet Union, a heat wave in the U.S. Midwest. Such eventswere always disruptive, but thankfully infrequent.
Today's price hikes are driven by trends that are both elevatingdemand and making it more difficult to increase production:
A rapidly expanding population,
Crop-withering temperature increases, and
Irrigation wells running dry.
Each night, there are 219,000 additional people to feed at the globaldinner table.
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CRITICAL CHANGE
The world is losing its ability to soften the effect of shortages.
In response to previous price surges, the United States, the world's
largest grain producer, was effectively able to steer the world away
from potential catastrophe.
From the mid-20th century until 1995, the United States had either
grain surpluses or idle cropland that could be planted to rescue
Even as we are running our wells dry, we are also mismanaging our
soils, creating new deserts.
Soil erosion as a result of over-plowing and landmismanagement is undermining the productivity of one-third of the world's cropland.
Technology!
Decade after decade, advancing technology underpinned steadygains in raising land productivity.
World grain yield per acre has tripled since 1950. But now thatera is coming to an end in some of the more agriculturallyadvanced countries, where farmers are already using allavailable technologies to raise yields.
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WHAT COMES NEXT?
Many exporting countries tried to control the rise of domestic foodprices by restricting exports. Among them were Russia and Argentina,two leading wheat exporters. Vietnam, the No. 2 rice exporter,banned exports entirely for several months in early 2008. So didseveral other smaller exporters of grain.
Should countries/ firms negotiate long-term grain-supply agreements
with exporting countries?
Buying or leasing land in other countries on which to grow grain forthemselves?
The public infrastructure for modern market-oriented agriculture does notyet exist in most of Africa.
In some countries it will take years just to build the roads and ports neededto bring in agricultural inputs such as fertilizer and to export farm products.
What for?
Most of the land bought up so far will be used to produce biofuels and otherindustrial crops.
How it is made?
Even if some of these projects do eventually boost land productivity, whowill benefit? If virtually all the inputs -- the farm equipment, the fertilizer,the pesticides, the seeds -- are brought in from abroad and if all the outputis shipped out of the country, it will contribute little to the host country'seconomy.
The relationship between price (P ) and quantitydemanded (q ) presented graphically is called ademand curve. Demand curves have a negativeslope, indicating that lower prices cause quantity
demanded to increase.
Law of DemandThe negative relationshipbetween price and quantitydemanded:
As price rises, quantity
demanded decreases; as
price falls, quantity
demanded increases.
Does this apply to all
products?
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Shift of Demand VS. Movement Along a Demand Curve
Shift of Demand Schedule Due to increase in Income
Schedule D0 Schedule D1
Price(Per Call)
Quantity Demanded(Calls Per Month at an
Income of $300 PerMonth)
Quantity Demanded(Calls Per Month at an
Income of $600 PerMonth)
$ 0.00 30 35
0.50 25 33
3.50 7 18
7.00 3 12
10.00 1 715.00 0 2
20.00 0 0
When the price of a good changes, we movealong the demand curve for that good.When any other factor (determinant) that influences
demand changes (wealth/ income, tastes, price of other
products and so on), the relationship between price and
quantity is different; there is a shift of the demand curve,
Shift of Supply Schedule for Soybeans FollowingDevelopment of a NewDisease-Resistant Seed Strain
SCHEDULE D0 SCHEDULE D1
Price(per Bushel)
Quantity Supplied(Bushels per YearUsing Old Seed)
Quantity Supplied(Bushels per YearUsing New Seed)
$1.50 0 5,000
1.75 10,000 23,000
2.25 20,000 33,000
3.00 30,000 40,000
4.00 45,000 54,000
5.00 45,000 54,000
Shift of Supply versus Movement Along a Supply Curve
When the price of a product changes, we movealong the supply curve for that product; the quantitysupplied rises or falls.When any other factor (determinant) affectingsupply changes, the supply curve shifts. Think of
Rationality, Perfectly Working Markets &Equilibrium
Rationality is strictly defined in terms of individuals maximizingtheir own utility (Max Profit/ Min Costs)
Perfect Information Firms/ Individuals ALL information of the qualitiesand prices of everything available in the market and that firms have allavailable information concerning wage rates, capital costs, and outputprices.
Perfect Competition An industry structure in which there are manyfirms, each small relative to the industry and producing virtually identicalproducts, and in which no firm is large enough to have any control over prices.
Core Assumptions:
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The Free Competitive model is a reasonablyaccurate description of reality?
When quantity demanded exceeds quantity supplied, price tendsto rise. When the price in a market rises, quantity demanded fallsand quantity supplied rises until an equilibrium is reached atwhich quantity demanded and quantity supplied are equal.
Market Equilibrium
Excess Demand
At a price of $1.75 perbushel, quantity demandedexceeds quantity supplied.When excess demandexists, there is a tendencyfor price to rise.When quantity demandedequals quantity supplied,excess demand iseliminated and the market isin equilibrium. Here theequilibrium price is $2.50and the equilibrium quantityis 35,000 bushels.
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Market Equilibrium
What about Quick Fashion Industry?
Turkey sells Europeanretailer (Zara) at a priceof $2. 50 per unit, andChina sells it at $1.75.What determines thechoice of the Europeanretailer?
Think of proximity factor!
Also, why do we buy Apple ipod at a muchhigher price its qualityequivalent from aTaiwanese firm?