Producer Theory

Lecture 15: Elasticity — Demand Recap & Supply Elasticity

Paulo Fagandini

2026

Welcome to Economics! 👋

Why study Economics? 🤔

🏛️ Understand government policies

🌐 Navigate global markets

💼 Achieve business success

📈 📉 Master supply & demand

⚖️ Understand inequality

Introduction 👨‍🏫

👨‍🏫 Paulo Fagandini

📧 paulo.fagandini@ext.universidadeeuropeia.pt

🎓 In Canvas: Syllabus, Calendar, Group Project

📆 Schedule: Thursdays & Fridays

What is Economics? 💡

Economics studies how societies use scarce resources to produce valuable goods and distribute them among individuals.

Economics as a social science uses simplified hypotheses and relates variables to understand economic phenomena.

What Does Economics Study? 🔍

🏦 Institutions & Markets

How technology influences prices and resource allocation

💸 Finance

Behavior of financial markets and capital flows

👥 Society

Income redistribution and social welfare

📉 Cycles

Unemployment, inflation, growth

The Two (main) Branches of Economics

Macroeconomics 🔭

The Big Picture — Studies the economy as a whole

📈 GDP & Economic Growth

💼 Unemployment rates

💰 Inflation trends

🏦 Monetary policy

🌐 International trade

🧾 Government budgets

Example: “Why did Portugal’s tourism revenue fall 50% in 2020?”

Microeconomics 🔬

Individual Decisions — Studies specific agents and markets

🛒 Consumer behavior

🏭 Firm decisions

🏷️ Pricing strategies

⚔️ Competition analysis

🤝 Market interactions

💹 Supply & Demand

Example: “How should a hotel set its room prices?”

Macroeconomics in Tourism ✈️

Source: Eurostat (tour_occ_arnraw, bop_its6_det)

Microeconomics in Tourism 🏨

Source: Eurostat (tour_occ_arnraw)

The Fundamental Economic Problem ⚠️

Scarcity

Human wants are unlimited, but resources are limited

This leads to:

👉 Trade-offs — Choices involve compromises

👉 Cost-Benefit Analysis — Act only if benefits exceed costs

👉 Efficiency — Most effective use of resources

Scarcity in Tourism: Lisbon Airport 🛫

Capacity Constraints (2024)

⚠️ Design capacity: ~31M passengers/year

✈️ Actual 2024: ~35M passengers

📈 Growing demand, limited slots

Trade-off: More flights vs. congestion & delays

Hypothetical illustration based on news reports

Efficiency 🎯

Economic Efficiency

Situation where the economy produces and consumes goods at socially optimal levels:

✅ Getting the most out of available resources

✅ Using the least for current consumption level

Pareto Efficiency ⚖️

Cannot increase one person’s welfare without harming another

✔️ Efficient allocation

  • Resources fully utilized
  • No waste in production
  • Optimal distribution

❌ Inefficient allocation

  • Resources underutilized
  • Production waste exists
  • Room for improvement

Efficiency in Tourism 🏨

Dynamic Pricing Example

The Three Economic Questions ❓

Every economy must answer:

Question Description Tourism Example
WHAT? What goods to produce? More hotels or museums?
HOW? How to produce them? Automated or human agents?
FOR WHOM? Who gets the output? Luxury or mass tourism?

These require decisions based on: resources, technology, preferences, markets

Positive vs. Normative Economics 🔎

Positive Economics 📊

Describes facts — Can be tested

  • Why do managers earn more than cleaners?
  • Does tourism increase local incomes?
  • What happens to prices in high season?

👉 Answered with data and analysis

Normative Economics 💭

Value judgments — Opinions

  • Should government limit Airbnb?
  • Should tourism revenue be redistributed?
  • Should airlines reduce emissions?

👉 Requires ethical/political debate

Key Concepts Summary 📋

Concept Definition
Economics Study of scarce resource allocation
Macroeconomics Whole economy (GDP, inflation)
Microeconomics Individual decisions (firms, consumers)
Scarcity Unlimited wants, limited resources
Efficiency Optimal resource use (no waste)
Trade-off Giving up one thing for another

Exercises 📝

Time for practice!

Let’s test your understanding.

Exercise 1: Multiple Choice

Which of the following is a MACROECONOMIC question?

A. How should a hotel set its room prices?

B. Why did Portugal’s tourism revenue fall in 2020?

C. Should a restaurant hire more waiters?

D. How do travelers choose between two airlines?

Answer: B — Portugal’s tourism revenue is an aggregate measure affecting the entire economy.

Exercise 2: Multiple Choice

A museum has limited exhibition space. Choosing between a modern art or historical exhibition illustrates:

A. Efficiency

B. Scarcity

C. Positive economics

D. Macroeconomics

Answer: B — Limited space (scarce resource) forces a choice between alternatives.

Exercise 3: Open Question

Scenario: A low-cost airline charges €50/ticket, sells 150 tickets (capacity: 180).

Questions:

  1. Calculate current revenue per flight

  2. If price increases to €60, demand falls to 120 tickets. Calculate new revenue.

  3. Which pricing is more efficient? Why?

  4. Is this microeconomic or macroeconomic analysis?

Exercise 3: Solution

a) Current revenue: \[\text{Revenue} = 50 \times 150 = €7,500\]

b) New revenue: \[\text{Revenue} = 60 \times 120 = €7,200\]

c) Efficiency:

  • €50 price: Revenue €7,500, occupancy 83%
  • €60 price: Revenue €7,200, occupancy 67%

👉 First is more efficient: higher revenue AND better utilization

d) This is microeconomic analysis (individual firm’s decision)

Next Lecture 📚

Lecture 2 (February 6, 2026):

  • Three Fundamental Economic Problems (detailed)
  • Market, Centralized, and Mixed Economies
  • Economic Systems Comparison

💡 Preparation: Think about how tourism businesses make decisions in different economic systems!

Thank You! 👋

Questions?

📧 paulo.fagandini@ext.universidadeeuropeia.pt

Next class: Friday, February 6, 2026