Principles of Economics

1. Principles of Economics Session 1

2. Topics To Be Covered • Introduction • Definition of Economics • Market Definition • Demand Schedule, Curve, and Functions • Supply Schedule, Curve, and Functions

3. Topics To Be Covered • Change in Quantity Demanded versus Change in Demand • Change in Quantity Supplied versus Change in Supply • Equilibrium of Supply and Demand • Price Ceiling • Price Floor

4. Objectives • Objectives of bilingual education： • To learn useful and practical knowledge of economics. • To improve English proficiency • Advantages of Samuelson and Nordhaus’ Economics

5. Arrangement • Revision of the previous session • Weekly quiz • Students’ presentation on the knowledge learned in the previous session • New contents • Summary • Assignment

6. Requirements • Attendance • Participation • Curiosity and Practice

7. Grading • Attendance (20%) • Class performance (10%) • Quiz (20%） • Final Examination (50%)

8. 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.

9. 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.

10. Microeconomics vs. Macroeconomics • Microeconomics is the study of how individual households and firms make decisions and how they interact with one another in markets. • Macroeconomicsis the study of the economy as a whole with respect to output, price level, employment, and other aggregate economic variables.

11. 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.

12. 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.

13. 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.”

14. Market Definition A market is an arrangement whereby buyers and sellers interact to determine the prices and quantities of a commodity.

15. Goods & Services sold Goods & Services bought Inputs for production Labor, land, and capital Demand and Supply Cycle Market for Goods and Services Supply Demand Firms Households Market for Factors of Production Demand Supply

16. Demand Quantity demandedis the amount of a good that buyers are willing and ableto purchase.

17. The Law of Diminishing Demand The law of demand states that there is an inverse relationship between price and quantity demanded.

18. Demand Schedule

19. Demand Curve P $3.00 Qd=12 – 4P 2.50 2.00 1.50 1.00 0.50 Qd 0 1 2 3 4 5 6 7 8 9 10 11 12

20. Determinants of Demand • Market price (P) • Consumer income (M) • Prices of related goods (Pr) • Tastes (T) • Expectations (Pe) • Number of consumers (N)

21. 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

22. 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!

23. 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.

24. Change in Quantity Demanded versus Change in Demand Change inQuantity Demanded • Movement along the demand curve. • Caused by a change in the price of the product.

25. C $4.00 12 Changes in Quantity Demanded P A 2.00 D1 Qd 0 20

26. 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.

27. B A 2.00 20 30 Changes in Demand P Increase in demand Decrease in demand D2 D1 D3 0 Qd

28. Consumer Income • As income increases the demand for a normal good will increase. • As income increases the demand for an inferior good will decrease.

29. Consumer IncomeNormal Good Price $3.00 An increase in income... 2.50 Increase in demand 2.00 1.50 1.00 0.50 D2 D1 Quantity 0 1 2 3 4 5 6 7 8 9 10 11 12

30. Consumer IncomeInferior Good Price $3.00 2.50 An increase in income... 2.00 Decrease in demand 1.50 1.00 0.50 D2 D1 Quantity 0 1 2 3 4 5 6 7 8 9 10 11 12

31. Prices of Related Goods • When a fall in the price of one good reducesthe demand for another good, the two goods are called substitutes. • When a fall in the price of one good increasesthe demand for another good, the two goods are called complements.

32. Variables that Affect Quantity Demanded A Change in This Variable . . . Price Represents a movement along the demand curve Income Shifts the demand curve Prices of related Shifts the demand curve goods Tastes Shifts the demand curve Expectations Shifts the demand curve Number of Shifts the demand curve buyers Change in Quantity Demanded versus Change in Demand

33. Supply Quantity suppliedis the amount of a good that sellers are willing and able to sell.

34. Law of Supply The law of supply states that there is a direct (positive) relationship between price and quantity supplied.

35. Supply Schedule

36. Supply Curve P Qs = - 1 + 2P $3.00 2.50 2.00 1.50 1.00 0.50 Qs 0 1 2 3 4 5 6 7 8 9 10 11 12

37. Determinants of Supply • Market price (P) • Input prices (PI) • Related goods prices (Pr) • Technology (T) • Expectations (Pe) • Number of firms (F)

38. 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

39. 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.

40. 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.

41. $3.00 Change in Quantity Supplied P S C A rise in the price results in a movement along the supply curve. A 1.00 Qs 0 1 5

42. 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.

43. S3 S2 Decrease in Supply Increase in Supply Change in Supply P S1 Qs 0

44. Change in Quantity Supplied versus Change in Supply

45. 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.

46. Supply and Demand Together Demand Schedule Supply Schedule At $2.00, the quantity demanded is equal to the quantity supplied!

47. Supply Equilibrium Demand Equilibrium of Supply and Demand P Qd=19 – 6P $3.00 2.50 Qd= Qs 2.00 1.50 1.00 0.50 Qs = - 5 + 6P Q 0 1 2 3 4 5 6 7 8 9 10 11 12

48. 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.

49. $2.50 New equilibrium 2. ...resulting in a higher price... D2 10 3. ...and a higher quantity sold. How an Increase in Demand Affects the Equilibrium Price 1. Hot weather increases the demand for ice cream... Supply 2.00 Initial equilibrium D1 0 7 Quantity

50. Shifts in Curves versus Movements along Curves • A shift in the supply curve is called achange in supply. • A movement along a fixed supply curve is called achange in quantity supplied. • A shift in the demand curve is called achange in demand. • A movement along a fixed demand curve is called achange in quantity demanded.