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