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Principles of Economics
Session 1
Topics To Be Covered
IntroductionDefinition of EconomicsMarket DefinitionDemand Schedule, Curve, and FunctionsSupply Schedule, Curve, and Functions
Topics To Be Covered
Change in Quantity Demanded versus Change in Demand
Change in Quantity Supplied versus Change in Supply
Equilibrium of Supply and DemandPrice CeilingPrice Floor
Objectives
Objectives of bilingual education ：To learn useful and practical knowledge of e
conomics.To improve English proficiency
Advantages of Samuelson and Nordhaus’ Economics
Arrangement
Revision of the previous sessionWeekly quizStudents’ presentation on the
knowledge learned in the previous session
New contentsSummaryAssignment
Requirements
AttendanceParticipationCuriosity and Practice
Grading
Attendance (20%)Class performance (10%)Quiz (20% ）Final Examination (50%)
Definition of Economics
Economics is the study of how societies choose to use scarce productive resources that have alternative uses, to produce commodities of various kinds, and to distribute them among different groups.
Scarcity vs. Efficiency
Economic goods are scarce or limited in supply.Free goods like air exist in such large
quantities. Thus, their market price is zero. Scarcity means that an economic good is not
freely available for the taking. Efficiency refers to the use of economic
resources to maximize satisfaction with the given inputs and technology.
Microeconomics vs. Macroeconomics
Microeconomics is the study of how individual households and firms make decisions and how they interact with one another in markets.
Macroeconomics is the study of the economy as a whole with respect to output, price level, employment, and other aggregate economic variables.
Adam Smith & John Maynard Keynes
Smith authored The Wealth of Nations in 1776.Founder of modern economics.Research into pricing of land, labor, and
capital.Invisible hand.
Keynes authored General Theory of Employment, Interest and Money in 1936.
What, How, and For Whom
What is the problem of decision to produce possible goods or services.
How is the choice of the particular technique by which each good of the what shall be produced.
For whom refers to the distribution of consumption goods among the members of that society.
Normative vs. Positive Economics
Normative economics considers “what ought to be”—value judgments, or goals, of public policy.
Positive economics, by contrast, is the analysis of facts and behavior in an economy, or “the way things are.”
Market Definition
A market is an arrangement whereby buyers and sellers interact to determine the prices and quantities of a commodity.
Demand and Supply Cycle
Firms Households
Market for Factors
of Production
Market for Goods
and ServicesGoods & Services
sold
Goods & Services bought
Labor, land, and capital
Inputs for production
Supply
SupplyDemand
Demand
Demand
Quantity demanded is the amount
of a good that buyers are willing and able
to purchase.
The Law of Diminishing Demand
The law of demand states that there is an inverse
relationship between price and quantity demanded.
Demand Schedule
Price Quantity$0.00 120.50 101.00 81.50 62.00 42.50 23.00 0
Demand Curve
$3.00
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
P
Qd0
Price Quantity$0.00 120.50 101.00 81.50 62.00 42.50 23.00 0
Qd=12 – 4P
Determinants of Demand
Market price (P)Consumer income (M)Prices of related goods (Pr)Tastes (T)Expectations (Pe)Number of consumers (N)
Demand Functions
Qd = f (P, M, Pr, T, Pe, N)
Qd = a + bP + cM + dPr+ eT + fPe + gN
Qd = f (P, M’, Pr’, T’, Pe’, N’)
Qd = f (P)
Qd = a + bP
Ceteris Paribus
Ceteris paribus is a Latin phrase that means all variables other than the
ones being studied are assumed to be constant. Literally, ceteris paribus means “other things being equal.”
The demand curve slopes downward because, ceteris paribus, lower prices
imply a greater quantity demanded!
Market Demand
Market demand refers to the sum of all individual demands for a particular good or service.
Graphically, individual demand curves are summed horizontally to obtain the market demand curve.
Change in Quantity Demanded versus Change in Demand
Change in Quantity Demanded Movement along the demand curve. Caused by a change in the price of
the product.
Changes in Quantity Demanded
0
D1
P
Qd
A
C
20
2.00
$4.00
12
Change in Quantity Demanded versus Change in Demand
Change in Demand A shift in the demand curve, either to
the left or right. Caused by a change in a
determinant other than the price.
Changes in Demand
0
D1
P
Qd
D3
D2
Increase in demand
Decrease in demand2.00 A
20 30
B
Consumer Income
As income increases the demand for a normal good will increase.
As income increases the demand for an inferior good will decrease.
Consumer IncomeNormal Good
$3.00
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price
Quantity0
Increasein demand
An increase
in income...
D1
D2
Consumer IncomeInferior Good
$3.00
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price
Quantity0
Decreasein demand
An increase
in income...
D1D2
Prices of Related Goods
When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes.
When a fall in the price of one good increases the demand for another good, the two goods are called complements.
Change in Quantity Demanded versus Change in Demand
Variables that Affect Quantity
Demanded
A Change in This Variable . . .
Price Represents a movementalong the demand curve
Income Shifts the demand curve
Prices of relatedgoods
Shifts the demand curve
Tastes Shifts the demand curve
Expectations Shifts the demand curve
Number ofbuyers
Shifts the demand curve
Supply
Quantity suppliedis the amount of a good
that sellers are willing and able
to sell.
Law of Supply
The law of supply states that there is a direct (positive) relationship between price
and quantity supplied.
Supply Schedule
Price Quantity$0.00 00.50 01.00 11.50 22.00 32.50 43.00 5
Supply Curve
$3.00
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
P
Qs0
Price Quantity$0.00 00.50 01.00 11.50 22.00 32.50 43.00 5
Qs = - 1 + 2P
Determinants of Supply
Market price (P) Input prices (PI)Related goods prices (Pr)Technology (T)Expectations (Pe)Number of firms (F)
Supply Functions
Qs = g (P, PI, Pr, T, Pe, F)
Qs = h + kP + l PI + mPr+ nT + rPe + sF
Qs = g (P, PI’, Pr’, T’, Pe’, F’)
Qs = g (P)
Qs = h + kP
Market Supply
Market supply refers to the sum of all individual supplies for all sellers of a particular good or service.
Graphically, individual supply curves are summed horizontally to obtain the market supply curve.
Change in Quantity Supplied versus Change in Supply
Change in Quantity Supplied Movement along the supply curve. Caused by a change in the market price
of the product.
Change in Quantity Supplied
1 5
P
Qs
0
S
1.00 A
C$3.00 A rise in the price
results in a movement along the supply curve.
Change in Quantity Supplied versus Change in Supply
Change in Supply A shift in the supply curve, either to the
left or right. Caused by a change in a determinant
other than price.
Change in SupplyP
Qs0
S1 S2
S3
Increase in Supply
Decrease in Supply
Change in Quantity Supplied versus Change in Supply
Variables that Affect Quantity Supplied
A Change in This Variable . . .
Price Represents a movement along the supply curve
Input prices Shifts the supply curve
Technology Shifts the supply curve
Expectations Shifts the supply curve
Number of sellers Shifts the supply curve
Supply and Demand Together
Equilibrium Price The price that balances supply and
demand. On a graph, it is the price at which the supply and demand curves intersect.
Equilibrium Quantity The quantity that balances supply and
demand. On a graph it is the quantity at which the supply and demand curves intersect.
Supply and Demand Together
Price Quantity$0.00 00.50 01.00 11.50 42.00 72.50 103.00 13
Price Quantity $0.00 19 0.50 16 1.00 13 1.50 10 2.00 7 2.50 4 3.00 1
Demand Schedule
Supply Schedule
At $2.00, the quantity demanded is equal to the quantity supplied!
Supply
Demand
P
Q
Equilibrium of Supply and Demand
21 3 4 5 6 7 8 9 10 12110
$3.00
2.50
2.00
1.50
1.00
0.50
Equilibrium
Qd=19 – 6P
Qs = - 5 + 6P
Qd= Qs
Three Steps To Analyzing Changes in Equilibrium
Decide whether the event shifts the supply or demand curve (or both).
Decide whether the curve(s) shift(s) to the left or to the right.
Examine how the shift affects equilibrium price and quantity.
How an Increase in Demand Affects the Equilibrium
Price
2.00
0 7 Quantity
Supply
Initialequilibrium
D1
1. Hot weather increasesthe demand for ice cream...
D2
2. ...resultingin a higherprice...
$2.50
103. ...and a higherquantity sold.
New equilibrium
Shifts in Curves versus Movements along Curves
A shift in the supply curve is called a change in supply.
A movement along a fixed supply curve is called a change in quantity supplied.
A shift in the demand curve is called a change in demand.
A movement along a fixed demand curve is called a change in quantity demanded.
S2
How a Decrease in Supply Affects the Equilibrium
Price
2.00
0 1 2 3 4 7 8 9 11 12 Quantity13
Demand
Initial equilibrium
S1
10
1. An earthquake reducesthe supply of ice cream...
Newequilibrium
2. ...resultingin a higherprice...
$2.50
3. ...and a lowerquantity sold.
What Happens to Price and Quantity When Supply or
Demand Shifts?
No Change In Supply
An Increase In Supply
A Decrease In Supply
No Change In Demand
P same Q same
P down Q up
P up Q down
An Increase In Demand
P up Q up
P ambiguous Q up
P up Q ambiguous
A Decrease In Demand
P down Q down
P down Q ambiguous
P ambiguous Q down
P
Q21 3 4 5 6 7 8 9 10 12110
$3.00
2.50
2.00
1.50
1.00
0.50
Supply
Demand
Surplus
Excess Supply
Surplus
When the price is above the equilibrium price, the quantity supplied exceeds the quantity demanded. There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium.
Excess Demand
Quantity
Price
$2.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Supply
Demand
$1.50
Shortage
Shortage
When the price is below the equilibrium price, the quantity demanded exceeds the quantity supplied. There is excess demand or a shortage. Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.
Price Ceilings & Price Floors
Price Ceiling A legally established maximum price at
which a good can be sold.
Price Floor A legally established minimum price at
which a good can be sold.
A Price Ceiling That Creates Shortages
$3
Q0
P
2
Demand
Supply
Equilibriumprice
Priceceiling
Shortage
125Quantity
demanded
75Quantitysupplied
Effects of Price Ceilings
Shortages Non-price rationing Black market Corruption
Rent ControlRent controls are ceilings placed on the
rents that landlords may charge their tenants.
The goal of rent control policy is to help the poor by making housing more affordable.
One economist called rent control “the best way to destroy a city, other than bombing.”
Rent Control in the Short Run
Quantity ofApartments
0
Rental Price of
Apartment
Demand
Supply
Controlled rent
Shortage
Supply and demand for apartments
are relatively inelastic
Rent Control in the Long Run
Quantity ofApartments
0
Rental Price of
Apartment
Demand
Supply
Controlled rent
Shortage
Because the supply and demand for
apartments are more elastic...
…rent control causes a
large shortage
A Price Floor That Creates Surplus
$3
Q0
P
Equilibrium
price
Demand
Supply
Price floor$4
120Quantitysupplied
80Quantity
demanded
Surplus
The Minimum Wage
An important example of a price floor is the minimum wage.
Minimum wage laws dictate the lowest price possible for labor that
any employer may pay.
The Minimum Wage
Quantity ofLabor
0
Wage
Equilibrium
wage
Labor demand
Labor supply
A Free Labor Market
Equilibriumemploymen
t
Minimumwage
The Minimum Wage
Quantity of Labor
0
Wage
Labor demand
Labor supply
Quantitysupplied
Quantitydemanded
Labor surplus(unemployment)
A Labor Market with a Minimum Wage
Assignment
Review Part One (P1- 59)Do Exercises on P58-59Preview Chapter 4 (P62-79)
Thanks