Economics Issues: An
Introduction
Liu Xianqing
xianqing03@163.com
1
Session 1
Unit Introduction
2
Unit purpose:
• This Unit introduces candidates to some basic
issues in economics with a particular emphasis
on the business environment. The Unit
introduces candidates to the basic economic
problem (i.e. the allocation of resources) and
how the consumer and other economic agents
address this problem. It also looks at how
markets operate and what can be done when
the operation of these markets fail. National
Income is also considered.
3
Learning outcomes:
On completion of this Unit, the candidate
should be able to:
• 1. Explain the allocation of resources
within the economy.
• 2. Explain the theory of National Income.
• 3. Explain and evaluate the role of
government policy in the UK market.
4
• Credit points and level: 1 HN Credit at
SCQF level 7
5
Assessment:
• The Unit will be assessed by two
Instruments of Assessment under
controlled conditions. Each assessment
should last no more than one and half
hours and will involve a written piece in
response to specific questions which may
be based on stimulus materials. One
assingnment must be produced with the
word limits 800---1000.
6
Scheme of work:
7
Essential Reading:
• Sloman, J. 2001. Essentials of Economics,
London: Prentice Hall.
• SQA, Economic Issues—An Introduction
8
Recommended Reading:
• Curwen, P. 1998.The UK Economy, 3rd
edition; London: McMillan.
• Sloman J. (2002), Economics (5th Edition),
F.T./ Prentice Hall
• Stanlake, G.F. and Grant, S.J.,
2000.Introductory Economics, 6th edition,
London: Longman.
• Various journals, e.g. Marketing Week,
CIM Marketing
9
• Lectures deal with the formal input of the
module and will be held during the first three
hours of each session.
• Seminars will be held after the lecture and will
deal with
• Matters arising from the formal input
• Student-led input and discussion based on
directed research
• Group and individual preparation of assessed
coursework
10
• Instant Essays: From time to time, I will
give you a few minutes - a very few
minutes - to write a paragraph on a
concept or answer several short respond
questions we have just covered in class.
These are not graded. This is feedback
so that I can see what is and is not
working in this class.
11
• Classroom Decorum: Please mute all beepers
and cell phones while in class. I agree that they
are useful, but the noise is distracting. I usually
start class on-time! I also understand that
nature's calls can be insistent, but with foresight,
they should be infrequent. If you must enter or
leave the class while we are in session, please
do so with minimum disturbance. I also
understand that some of you will bring munchies
to class. Please keep it quiet and pick up any
mess.
12
PLAGIARISM
• You are warned that plagiarism is forbidden. A
plagiarized assignment will be given ‘0’ and may
be reported to the University authorities. Do not
attempt to pass off someone else’s work as your
own. All quotations must be accompanied by
their source. Assignments need to have a
bibliography, which gives full details of the
publications used. If you have any doubts or
queries about this matter, please ask your tutor
for guidance.
13
• Learning Outcomes:
a. Explain the allocation of resources within
the economy.
 Scarcity of resources and the choices of
what to produce, how to produce it and
for whom;
 Opportunity cost;
 The determinants of demand and supply;
 Interaction within the market;
 Price and income elasticity
14
b. Explain the theory of National Income.






Circular flow of income;
Injections and withdrawals;
Measuring national income;
Difficulties of measurement;
Comparison of national income globally;
National income growth both monetary
and real;
 Multiplier
15
c. Explain and evaluate the role of
government policy in the United Kingdom
market.
 The role of government in market failure,
i.e., missing markets, externalities and
imperfect competition;
 Government policy instruments:
regulation, taxes, and public ownership;
 Current government welfare policy;
 Current Government competition policy.
16
Session 2
Origin of Economics
• Philosophy and other social
science have existed for
thousands of years
• Economics originated in recent
200 years.(as an subject)
• Need no economics for the
individual household economy
An Invisible Hand
• Classical Economist: Adam Smith --(1723-1790), considered the father of
modern economic
• Story of Adam Smith
• Wealth of Nations《国富论》（1776）
The full title of Adam Smith‘s most famous
book is ：An Inquiry into the Nature and
Causes of the Wealth of Nations. 《国民财
富的性质和原因的研究》
Wealth of Nations
• The Essence of the Theory: Only to a very limited extent
should the state interfere with economic life;. The
invisible hand at work within the market mechanism will
ascertain that all the needs in society will be covered.
a form of laissez-faire自由放任（经济）, although Smith
never uses this expression in his magnum opus
• Preface: persuade the Queen to go home and relax
• Under the guidance of the Smith’s theory U,.K economy
developed---Europe---America
Lasted for 150 years
J.M. Keynes
• 1929 Crash---Stock Market---enterprise
bankrupted---bank closed---unemployment---the
Great Depression
• Story of a banker
• Doubt on Smith
• 1936. John Maynard Keynes(1852-1949)
General Theory of Employment, Interest and
Money《就业利息和货币通论》
------Considered landmark of Economics
• Story of J.M.Keynes
General Theory of Employment,
Interest and Money
• Visible Hand----Government Interference
• Example of digging hole
Digging Hole---Tools---Steel---Employ--Wages---Consume
• Landmark from Microeconomics to
Macroeconomics
Individual analysis ---Aggregate analysis
• With the guidance of Keynes theory, the
world economy boost for 30 years
Challenges for Microeconomics
• U.S., President Roosevelt adopted Keynes’
theory---70’s
• 70’s new problems
• Challenges for Macroeconomics
Monetarists(货币学派）
Supply-side Economics（供给学派）
Institutional Economics（制度学派）
New Classical Macroeconomics（新古典新凯恩斯学派
）
• One Theory, different aspects
What is economics?
•
Economics is the study of how
individuals and societies choose to use
the scarce resources that nature and
previous generations have provided.
 What products do we produce?
 How do we produce these products?
 Who consumes the products?
Economics is composed of two branches:
• Microeconomics
• Macroeconomics
3. The Scope of Economics
• Microeconomics is the
branch of economics that
examines the behavior of
individual decisionmaking units—that is,
business firms and
households.
The Scope of Economics
• Macroeconomics is the
branch of economics that
examines the behavior of
economic aggregates—
income, output,
employment, and so on—
on a national scale.
Defining Microeconomics (1)
• Microeconomics deals with:
•
Behavior of individual units——Consumers
•
When Consuming
Maximizing Utility （效用最大化）
How we choose what to buy
•
•
Behavior of individual units——Firms
When Producing
Maximizing Profit （利润最大化）
How we choose what to produce
Defining Microeconomics (2)
• Microeconomics deals with:
• Markets: The interaction of consumers
and producers
•
Output Market (Product Market)
（产品市场）
•
Input Market (Factor Market)
（要素市场）
Defining Macroeconomics(1)
• Macroeconomics deals with:
• Analysis of aggregate issues（总量的问
题）:
Economic growth（经济增长）
Inflation（通货膨胀）
Unemployment（失业）
etc.
• The Linkage(关系) Between Micro and
Macro-economics
• Microeconomics is the foundation of
macroeconomic analysis
The Scope of Economics
Production
Prices
Micro Production/Output Price of
Individual
econo in Individual
Industries and
Goods and
mics
Businesses
How much steel
How many offices
How many cars
Employment
Distribution of
Income and
Wealth
Employment by
Individual
Businesses &
Industries
Jobs in the
steel industry
Number of
employees in a
firm
Services
Wages in the
Price of medical auto
care
industry
Price of gasoline Minimum wages
Food prices
Executive
Apartment rents salaries
Poverty
Aggregate Price
Macro National
econo Production/Output Level
mics
Total Industrial
Output
Gross Domestic
Product
Growth of Output
Income
Consumer
prices
Producer Prices
Rate of Inflation
National Income
Total wages and
salaries
Total corporate
profits
Employment
and
Unemployment
in the Economy
Total number of
jobs
Unemployment
rate
Quiz
Which of the following are macroeconomic issues,
which are microeconomic ones and which could
be either depending on the context?
(a) Inflation.
(b) Low wages in certain service industries.
(c) The rate of exchange between the pound
and the euro.
(d) Why the price of cabbages fluctuates
more than that of cars.
(e) The rate of economic growth this year
compared with last year.
(f)
The decline of traditional manufacturing
industries.
Why Study Economics?
• An important reason for
studying economics is to
learn a way of thinking.
• Three fundamental
concepts:
– Opportunity cost
– Marginalism, and
– Efficient markets
More Reasons to Study
Economics
• The study of economics is an
essential part of the study of
society.
• Economic decisions often have
enormous consequences.
– During the Industrial Revolution,
new manufacturing technologies
and improved transportation gave
rise to the modern factory system.
More Reasons to Study
Economics
• An understanding of economics is
essential to an understanding of
global affairs.
• Voting decisions also require a
basic understanding of economics.
Session 3
Some Basic Economic Concepts
Opportunity Cost
• Opportunity cost is the best
alternative that we forgo, or give
up, when we make a choice or a
decision.
• PRINCIPLE of Opportunity Cost
The opportunity cost of
something is what you sacrifice
to get it.
Application: The Opportunity Cost of a
College Degree
Tuition and books
(4 years at $10,000 per year)
$40,000
Opportunity cost of college
time
(4 years at $20,000 per year
$80,000
Total opportunity cost
$120,000
• Rational choices
• Choices that involve weighing up the
benefit of any activity against its
opportunity cost.
• Coming to classes
• Choosing to study at university or college
• Revising for an economics exam
Marginalism
In weighing the costs and
benefits of a decision, it is
important to weigh only the
costs and benefits that arise
from the decision.
Marginalism
• For example, when a firm decides
whether to produce additional
output, it considers only the
additional (or marginal cost), not
the sunk cost.
– Sunk costs are costs that cannot be
avoided, regardless of what is done
in the future, because they have
already been incurred.
Marginal Benefit and
Marginal Cost
• Marginal benefit: The extra benefit
resulting from a small increase in some
activity.
• Marginal cost: The additional cost
resulting from a small increase in some
activity.
• e.g. What time to get up in the morning.
Rational decision making
• The decision is based on the costs and the
benefits of extra sleep, not on the total costs and
benefits of a whole night’s sleep.
• Same principle applies to the rational decisions
made by consumers, workers and firms. (e.g.
car producing)
• Rational decision making involves weighing up
the marginal benefit and marginal cost of any
activity. If the marginal benefit exceeds the
marginal cost, it is rational to do the activity (or
to do more of it). If the marginal cost exceeds
the marginal benefit, it is rational not to do it (or
The Marginal Principle and TV
Time
• If the opportunity
cost of TV time is
$0.35 per hour and
pedaling is not
required for TV
time, the marginal
principle is
satisfied at point n,
and the child will
watch 20 hours of
TV per week.
The Diminishing of Marginal Utility
• Economic objectives of the consumer
• Marginal Utility
Eg. Eating the pancakes
Try to do the Activity5 on P42
• Indifference Curve
Figure on P45
The basic economic problem
:Scarcity
Human wants are unlimited,
but resources are not.
• Scarcity is a situation in which resources
are limited but can be used in different
ways; so one good or service must be
sacrificed for another.
• Constrained choice and scarcity are the
basic concepts that apply to every
society.
Scarcity
• Every society has some system or mechanism
that transforms that society’s scarce
resources into useful goods and services.
Scarcity
• Production is the process that transforms
scarce resources into useful goods and
services.
• Resources or factors of production are the
inputs into the process of production;
goods and services of value to households
are the outputs of the process of
production.
Scarcity
• The basic resources that are available to
a society are factors of production:
–Land
–Labor
–Capital
–Enterprise
Factors of Production
1. Natural resources:
The things created by acts of
nature such as land, water,
mineral, oil and gas deposits,
renewable and nonrenewable
resources.
Factors of Production
2. Labor:
The human effort, physical and
mental, used by workers in the
production of goods and services.
Factors of Production
3. Capital
Physical capital.
All the machines, buildings,
equipment, roads and other
objects made by human beings to
produce goods and services.
Human capital:
The knowledge and skills acquired by
a worker through education and
experience.
Factors of Production
4. Entrepreneurship:
The effort to coordinate the
production and sale of goods
and services. Entrepreneurs take
risk and commit time and money
to a business without any
guarantee of profit.
Concept: Production Possibility Curve
(生产可能性曲线）
A curve showing all the possible
combinations of two goods that a country
can produce within a specified time period
with all its resources fully and efficiently
employed.
Example
• Assume that some imaginary nation devotes all its
resources---land, labour and capital ---to producing just
two goods, Butter and Guns.Various possible
combinations that could be produced over a given period
of time(e.g.a year)are shown in the table.
type
A
B
C
D
E
butter
0
1
2
3
4
Guns
10
9
7
4
0
The Production Possibilities Frontier
(PPF) Curve
• The PPF curve
shows the possible
combinations of
goods and services
available to an
economy, given that
all productive
resources are fully
and efficiently
employed.
The Production Possibilities Frontier
(PPF) Curve
• When the
economy is at
point i,
resources are
not fully
employed and/or
they are not
used efficiently.
The Production Possibilities
Frontier (PPF) Curve
• Point g is
desirable because
it yields more of
both goods, but
not attainable
given the amount
of resources
available.
The Production Possibilities
Frontier (PPF) Curve
• Point d is one
of the possible
combinations
of goods
produced when
resources are
fully and
efficiently
employed.
Scarcity and the Production
Possibilities Curve
• To increase
the amount of
farm goods by
10 tons, we
must sacrifice
100 tons of
factory goods.
The Production Possibilities
Frontier (PPF) Curve
• The PPF curve is
bowed out because
resources are not
perfectly adaptable
to the production of
the two goods.
• As we increase the
production of one
good, we sacrifice
progressively more
of the other.
Production Possibility Frontier
(PPF)
生产可能性边界
Increasing Opportunity Cost
.G
.
.F
Shifting the Production
Possibilities Frontier Curve
• To increase the
production of
one good
without
decreasing the
production of the
other, the PPF
curve must shift
outward.
Shifting the Production
Possibilities Frontier Curve
• The PPF curve shifts
outward as a result of:
1. An increase in the
economy’s
resources, or
2. A technological
innovation that
increases the output
obtained from a
given amount of
resources.
Shifting the Production
Possibilities Frontier Curve
• From point d, an
additional 200
tons of factory
goods or 20
tons of farm
goods are now
possible (or any
combination in
between).
Economic Growth
• Economic growth is an increase in
the total output of the economy. It
occurs when a society acquires
new resources, or when it learns to
produce more using existing
resources.
• The main sources of economic
growth are capital accumulation
and technological advances.
Economic Growth
• Outward shifts of
the curve represent
economic growth.
• An outward shift
means that it is
possible to increase
the production of
one good without
decreasing the
production of the
other.
Economic Growth
• From point D,
the economy can
choose any
combination of
output between
F and G.
Capital Goods and Growth
in Poor and Rich Countries
• Rich countries
devote more
resources to capital
production than
poor countries.
• As more resources
flow into capital
production, the rate
of economic growth
in rich countries
increases, and so
does the gap
between rich and
poor countries.
If we would all like more money, why does the government not print a lot
more? Could it not thereby solve the problem of scarcity ‘at a stroke’?
Topics for discussion (1)
If we would all like more money, why
does the government not print a lot
more? Could it not thereby solve the
problem of scarcity ‘at a stroke’?
Topics for discussion (2)
• Imagine that, as a student, you are short
of money and that your are offered
employment working in the student union
shop. You can choose the number of
hours each week that you work. How
would you make a ‘rational’ decision about
the number of hours to work in any given
week?
Topics for discussion (3)
• Will economic growth necessarily involve a
parallel outward shift in the production
possibility curve? Explain.
Session 4
Demand, Supply, and
Equilibrium
Learning Objectives
• Economic Systems
• Demand, Demand Curve, the Law of Demand,
Determinants of Demand, Changes in Quantity
Demanded vs Changes in Demand
• Supply, Supply Curve, the Law of Supply,
Determinants of Supply, Shift of Supply vs
Movement Along a Supply Curve
• Market Equilibrium
Economic Systems
• Centrally planned economy: An
economy in which a government
bureaucracy decides how much of each
good to produce, how to produce the
goods, and how to allocate the products
among consumers.
Economic Systems
• Transition: The process of shifting from
a centrally planned economy toward a
mixed economic system, with markets
playing a greater role in the economy.
• Privatizing: The process of selling state
firms to individuals.
Economic Systems
• Market Economy: There is no
government intervention in the market.
Consumers and producers have
complete freedom of choice, i.e., the
decision to produce is guided by the
consumers’ wants and the producerss
willingness to produce as they pursue
profits. Only market forces determine
price.
Economic Systems
• Mixed economy: A market-based
economic system in which
government plays an important role,
including the regulation of markets,
where most economic decisions are
made.
• Compare the difference among the three
economic systems
• Look at the details on P37--39
Firms and Households:
The Basic Decision-Making Units
• A firm is an organization that transforms
resources (inputs) into products (outputs). Firms
are the primary producing units in a market
economy.
• An entrepreneur is a person who organizes,
manages, and assumes the risks of a firm, taking a
new idea or a new product and turning it into a
successful business.
• Households are the consuming units in an
economy.
Input Markets and Output Markets:
The Circular Flow
• The circular flow of economic
activity shows how firms and
households interact in input
and output markets.
Input Markets and Output Markets:
The Circular Flow
• Product or output markets are the
markets in which goods and services
are exchanged.
• Input markets are the markets in
which resources—labor, capital, and
land—used to produce products, are
exchanged.
Input Markets and Output Markets:
The Circular Flow
– The labor market, in which households
supply work for wages to firms that
demand labor.
Input Markets and Output Markets:
The Circular Flow
• The capital market, in which households
supply their savings, for interest or for
claims to future profits, to firms that
demand funds to buy capital goods.
Input Markets and Output Markets:
The Circular Flow
• The land market, in which
households supply land or other
real property in exchange for rent.
Input Markets and Output Markets:
The Circular Flow
• Goods and services
flow clockwise. Firms
provide goods and
services; households
supply labor services.
• Payments (usually
money) flow in the
opposite direction
(counterclockwise) as
the flow of labor
services, goods, and
services.
• Try to do the Activity 6 on P50
Demand in Product/Output Markets
• A household’s decision about the
quantity of a particular output to demand
depends on:
•
•
•
•
The price of the product in question.
The income available to the household.
The household’s amount of accumulated wealth.
The prices of other products (substitutes and
complements) available to the household.
• Substitutes are goods that can serve as
replacements for one another; when the
price of one increases, demand for the
other goes up.
• Perfect substitutes are identical
products.
• Complements are goods that “go
together”; a decrease in the price of
one results in an increase in demand
for the other, and vice versa.
Demand in Product/Output Markets
• The household’s tastes and preferences.
• The household’s expectations about
future income, wealth, and prices.
Demand in Product/Output Markets
• Quantity demanded is the amount
(number of units) of a product that a
household would buy in a given time
period if it could buy all it wanted at
the current market price.
Changes in Quantity Demanded
Versus Changes in Demand
• The most important relationship in
individual markets is that between
market price and quantity demanded.
Changes in Quantity Demanded
Versus Changes in Demand
• We use the ceteris paribus or “all else
equal” device, to examine the relationship
between the quantity demanded of a good
per period of time and the price of that
good, while holding income, wealth, other
prices, tastes, and expectations constant.
Changes in Quantity Demanded
Versus Changes in Demand
• Changes in price affect the quantity
demanded per period.
• Changes in income, wealth, other
prices, tastes, or expectations affect
demand.
Price and Quantity Demanded:
The Law of Demand
ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS
PRICE
(PER CALL)
$
0
0.50
3.50
7.00
10.00
15.00
QUANTITY
DEMANDED
(CALLS PER
MONTH)
30
25
7
3
1
0
• A demand schedule
is a table showing
how much of a given
product a household
would be willing to
buy at different prices.
• Demand curves are
usually derived from
demand schedules.
Price and Quantity Demanded:
The Law of Demand
ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS
PRICE
(PER
CALL)
$
0
0.50
3.50
7.00
10.00
15.00
QUANTITY
DEMANDED
(CALLS PER
MONTH)
30
25
7
3
1
0
• The demand
curve is a graph
illustrating how
much of a given
product a
household would
be willing to buy
at different prices.
Price and Quantity Demanded:
The Law of Demand
• The law of demand
states that there is a
negative, or inverse,
relationship between
price and the quantity
of a good demanded
and its price.
• This means that
demand curves slope
downward.
Other Determinants
of Household Demand
• Income is the sum of all households
wages, salaries, profits, interest
payments, rents, and other forms of
earnings in a given period of time. It is a
flow measure.
• Wealth, or net worth, is the total value
of what a household owns minus what it
owes. It is a stock measure.
Other Determinants
of Household Demand
• Normal Goods are goods for which
demand goes up when income is higher
and for which demand goes down when
income is lower.
• Inferior Goods are goods for which
demand falls when income rises.
Shift of Demand Versus
Movement Along a Demand Curve
• A change in demand is not
the same as a change in
quantity demanded.
• A higher price causes lower
quantity demanded and a
move along the demand
curve DA.
• Changes in determinants of
demand, other than price,
cause a change in demand,
or a shift of the entire
demand curve, from DA to DB.
A Change in Demand Versus
a Change in Quantity Demanded
To summarize:
Change in price of a good or service
leads to
Change in quantity demanded
(Movement along the curve).
Change in income, preferences, or
prices of other goods or services
leads to
Change in demand
(Shift of curve).
The Impact of a Change in Income
• Higher income
decreases the demand
for an inferior good
• Higher income
increases the demand
for a normal good
The Impact of a Change
in the Price of Related Goods
• Demand for
complement
good
(ketchup)
shifts left
• Demand for
substitute
good
(chicken)
• Price of hamburger rises shifts right
• Quantity of hamburger
demanded per month falls
From Household
Demand to Market Demand
• Demand for a good or service can be
defined for an individual household, or
for a group of households that make up a
market.
• Market demand is the sum of all the
quantities of a good or service
demanded per period by all the
households buying in the market for that
good or service.
From Household
Demand to Market Demand
• Assuming there are only two households in the
market, market demand is derived as follows:
• Try to do the Activity 7 on P66, Activity 8
on P68 and the SAQ 2 on P69
Session 5
Supply
Supply in Product/Output
Markets
• Supply decisions depend on
profit potential.
• Profit is the difference
between revenues and costs.
Supply in Product/Output
Markets
CLARENCE BROWN'S
SUPPLY SCHEDULE
FOR SOYBEANS
PRICE
(PER
BUSHEL)
$
2
1.75
2.25
3.00
4.00
5.00
QUANTITY
SUPPLIED
(THOUSANDS
OF BUSHELS
PER YEAR)
0
10
20
30
45
45
• Quantity supplied
represents the number of
units of a product that a firm
would be willing and able to
offer for sale at a particular
price during a given time
period.
• A supply schedule is a table
showing how much of a
product firms will supply at
different prices.
Price and Quantity Supplied:
The Law of Supply
CLARENCE BROWN'S
SUPPLY SCHEDULE
FOR SOYBEANS
PRICE
(PER
BUSHEL)
$
2
1.75
2.25
3.00
4.00
5.00
QUANTITY
SUPPLIED
(THOUSANDS
OF BUSHELS
PER YEAR)
0
10
20
30
45
45
Price of soybeans per bushel ($)
• A supply curve is a graph illustrating how much of a product
a firm will supply per period of time at different prices.
6
5
4
3
2
1
0
0
10
20
30
40
Thousands of bushels of soybeans produced
per year
50
Price of soybeans per bushel ($)
Price and Quantity Supplied:
The Law of Supply
6
5
4
3
2
1
0
0
10
20
30
40
Thousands of bushels of soybeans
produced per year
50
• The law of supply
states that there is a
positive relationship
between price and
quantity of a good
supplied.
• This means that
supply curves typically
have a positive slope.
Other Determinants of Supply
• The price of the good or service.
• The cost of producing the good, which in
turn depends on:
• The price of required inputs (labor,
capital, and land),
• The technologies that can be used to
produce the product,
• The prices of related products.
Shift of Supply Versus
Movement Along a Supply Curve
• A higher price causes
higher quantity
supplied, and a move
along the demand
curve.
• A change in
determinants of supply
other than price causes
an increase in supply,
or a shift of the entire
supply curve, from SA
to SB.
Shift of Supply Curve for Soybeans
Following Development of a New Seed Strain
• In this example, since the
factor affecting supply is
not the price of soybeans
but a technological
change in soybean
production, there is a shift
of the supply curve rather
than a movement along
the supply curve.
• The technological advance means that
more output can be supplied for at any
given price level.
Shift of Supply Versus
Movement Along a Supply Curve
To summarize:
Change in price of a good or service
leads to
Change in quantity supplied
(Movement along the curve).
Change in costs, input prices, technology, or
prices of related goods and services
leads to
Change in supply
(Shift of curve).
From Individual
Supply to Market Supply
• The supply of a good or service can
be defined for an individual firm, or for
a group of firms that make up a
market or an industry.
• Market supply is the sum of all the
quantities of a good or service
supplied per period by all the firms
selling in the market for that good or
service.
From Individual
Supply to Market Supply
• As with market demand, market supply is
the horizontal summation of individual
firms’ supply curves.
Activity
• Try to do the Activity 9 on P85
Market Equilibrium
• Market equilibrium is the condition
that exists when quantity supplied and
quantity demanded are equal.
• At equilibrium, there is no tendency for
the market price to change.
Market Equilibrium
• Only in equilibrium
is quantity supplied
equal to quantity
demanded.
• At any price level
other than P0, such
as P1, quantity
supplied does not
equal quantity
demanded.
Excess Demand
• Excess demand, or
shortage, is the
condition that exists
when quantity
demanded exceeds
quantity supplied at
the current price.
• When quantity
demanded exceeds
quantity supplied,
price tends to rise
until equilibrium is
restored.
Excess Supply
• Excess supply, or
surplus, is the
condition that exists
when quantity
supplied exceeds
quantity demanded at
the current price.
• When quantity
supplied exceeds
quantity demanded,
price tends to fall until
equilibrium is
restored.
Changes in Equilibrium
• Higher demand leads
to higher equilibrium
price and higher
equilibrium quantity.
• Higher supply leads to
lower equilibrium
price and higher
equilibrium quantity.
Changes in Equilibrium
• Lower demand leads to
lower price and lower
quantity exchanged.
• Lower supply leads to
higher price and lower
quantity exchanged.
Relative Magnitudes of Change
• The relative magnitudes of change in supply and
demand determine the outcome of market
equilibrium.
Relative Magnitudes of Change
• When supply and demand both increase, quantity
will increase, but price may go up or down.
• Price ceiling
• When the price of a good is fixed below
the equilibrium level: a price ceiling is said
to exist in the market for the commodity.
• Price floor
• When the price of a good is fixed above
the equilibrium level, a price floor is said to
exist in the market for the good
Session 6
Elasticity(弹性） of
Demand
Learning Outcomes:
In this chapter you will…
• Learn the meaning of the elasticity of
demand.
• Examine what determines the elasticity of
demand.
THE ELASTICITY OF
DEMAND
(需求弹性）
• … allows us to analyze supply and
demand with greater precision.
• … is a measure of how much buyers
and sellers respond to changes in
market conditions
Price Elasticity of Demand
(需求的价格弹性）
• Price elasticity of demand is a measure of
how much the quantity demanded of a
good responds to a change in the price of
that good.
• Price elasticity of demand is the
percentage change in quantity demanded
given a percent change in the price.
Computing the Price Elasticity of
Demand
• The price elasticity of demand is computed
as the percentage change in the quantity
demanded divided by the percentage
change in price.
Price elasticity of demand =
Percentage change in quantity demanded
Percentage change in price
ε ---epsilon---elasticity
∆ ----delta---change in
Formula for price elasticity of
demand
If:
• P εd----Price elasticity of demand
• P---Price
• ∆ P---Change in the price
• Q--- Quantity of demand
• ∆ Q---Change in quantity of demand
• Putting this in symbols gives:
P εd= % ∆ Q÷% ∆ P
Example
• E.g.1:
• If a 40 per cent rise in the price of oil caused the
quantity demanded to fall by a mere 10 per cent,
the price elasticity of oil over this range would be
:
P εd= % ∆ Q÷% ∆ P=-10%÷40%=-0.25
• E.g.2:
• If a 5 per cent fall in the price of cauliflowers
caused a 15 per cent rise in the quantity
demanded, the price elasticity of demand for
cauliflowers over this range would be:
The Midpoint Method: A Better Way to
Calculate Percentage Changes and
Elasticities
• The midpoint formula is preferable when
calculating the price elasticity of demand
because it gives the same answer
regardless of the direction of the change.
• point Method: A Better Way to Calculate Percentage
Changes and Elasticities
Price elasticity of demand =
(Q2 - Q1) / [(Q2 + Q1) / 2]
(P2 - P1) / [(P2 + P1) / 2]
The Midpoint Method: A Better Way to
Calculate Percentage Changes and
Elasticities
• Point A:
Price = $4
Quantity = 120
• Point B:
Price = $6
Quantity = 80
• From Point A to Point B: Price rise = 50% and Quantity fall = 33%
• From Point B to Point A: Price fall = 33% and Quantity rise = 50%
(80 - 120) / [(80 + 120)/ 2]
Price elasticity of demand =
(6 - 4) / [(6 + 4)/ 2]
Mid point method
=
-1
A Variety of Demand Curves
•
•
•
•
From above we can see:
Sign (negative)
Value (greater or less than 1)
According to the value , the demand
curves can be classified into 5 varieties:
•
•
•
•
•
Inelastic Demand
Elastic Demand
Perfectly Inelastic Demand
Perfectly Elastic Demand
Unit Elastic
A Variety of Demand Curves
• Inelastic Demand (需求缺乏弹性）
– Quantity demanded does not respond
strongly to price changes.
– Price elasticity of demand is less than one.
• Elastic Demand （需求富有弹性）
– Quantity demanded responds strongly to
changes in price.
– Price elasticity of demand is greater than
one.
Figure 2-1 b): Inelastic Demand
Price
Demand
E<1
$5.00
$4.00
1. A 22%
increase in
price…
0
90
Quantity
100
2. … Leads to a 11% decrease in quantity demanded.
Return
Figure 2-1 d): Elastic Demand
E>1
Price
Demand
$5.00
$4.00
1. A 22%
increase in
price…
0
50
100
2. … Leads to a 67% decrease in quantity demanded.
Quantity
Return
A Variety of Demand Curves
• Perfectly Inelastic （需求完全无弹性）
– Quantity demanded does not respond to
price changes.
• Perfectly Elastic （需求有无限弹性）
– Quantity demanded changes infinitely with
any change in price.
• Unit Elastic （需求单一弹性）
– Quantity demanded changes by the same
percentage as the price.
144
Figure 2-1 a): Perfectly Inelastic
Demand
Price
E=0
Demand
$5.00
$4.00
1. An increase
in price…
0
100
2. …leaves the quantity demanded unchanged.
Quantity
Return
Figure 2-1 e): Perfectly Elastic Demand
E=
Price
1. At any price above $4, quantity
demanded is zero.
$4.00
Demand
2. At exactly $4, consumers will buy any quantity.
3. At any price below $4, quantity demanded is
infinite.
0
Return
Quantity
Figure 2-1 c): Unit Elastic Demand
E=1
Price
Demand
$5.00
$4.00
1. A 22%
increase in
price…
0
80
100
2. … Leads to a 22% decrease in quantity demanded.
Return
Quantity
A Variety of Demand Curves
• Because the price elasticity of demand
measures how much quantity demanded
responds to the price, it is closely related
to the slope of the demand curve.
•
•
•
•
The Price Elasticity of Demand and Its
Determinants（影响需求价格弹性的因
素）
Availability of Close Substitutes（替代品）
Necessities versus Luxuries
Definition of the Market
Time Horizon
Demand tends to be more elastic:
– the larger the number of close substitutes.
– if the good is a luxury.
– the more narrowly defined the market.
– the longer the time period.
• Activity 14 on P121
Total Revenue and the Price Elasticity
of Demand
• Total revenue is the amount paid by
buyers and received by sellers of a good.
• Computed as the price of the good times
the quantity sold.
TR = P x Q
Figure 2-2: Total Revenue
Price
$4.00
P x Q = $400
(revenue)
Demand
0
100
Quantity
Price
Figure 2-3: How Total Revenue
Changes When Prices Changes:
Inelastic Demand
$3.00
P x Q = $240
(revenue)
$1.00
P x Q = $100
(revenue)
0
Demand
80
100
Quantity
Price
Figure 2-4: How Total Revenue
Changes When Prices Changes:
Elastic
Demand
Change in Total
Revenue when Price Changes
$5.00
$4.00
Demand
Revenue = $200
Revenue = $100
0
20
50
Quantity
Elasticity and Total Revenue along a
Linear Demand Curve
• With an elastic demand curve, an increase
in the price leads to a decrease in quantity
demanded that is proportionately larger.
Thus, total revenue decreases.
Table 2-1. Elasticity and Total Revenue
along a Linear Demand Curve
Figure 2-5: A Linear Demand Curve
Price
Elasticity
is larger
than 1.
7
6
5
4
Elasticity
is smaller
than 1.
3
2
1
0
2
4
6
8
10
12
14
Quantity
Other Demand Elasticities(需求的其它
弹性）
• Income elasticity of demand measures
how much the quantity demanded of a
good responds to a change in consumers’
income.
• It is computed as the percentage change
in the quantity demanded divided by the
percentage change
in income.
Percentage change
Income elasticity of demand =
in quantity demanded
Percentage change
in income
εy=∆Q%/ ∆y%
Other Demand Elasticities
• Types of Goods
– Normal Goods
– Inferior Goods (收入无弹性)
• Higher income raises the quantity
demanded for normal goods but lowers
the quantity demanded for inferior goods.
Other Demand Elasticities
• Goods consumers regard as necessities
tend to be income inelastic (收入缺乏弹性)
– Examples include food, fuel, clothing, utilities,
and medical services.
• Goods consumers regard as luxuries tend
to be income elastic.(收入富有弹性)
– Examples include sports cars, furs, and
expensive foods.
Other Demand Elasticities
I
• Cross-Price elasticity of demand （需求
的交叉弹性）measures how much the
quantity demanded of a good responds
to a change in the price of another
good.
• It is computed as the percentage
change in the quantity demanded
divided by the percentage
change
in the
Percentage
change
price of the second good.
in quantity demanded
elasticity of demand =
Percentage change
in the price of
good 2.
Cross-Price Elasticity of Demand
(需求的交叉弹性）
• Cεdxy=∆Qx/Qx÷ ∆Py/Py
• Sign (either positive or negative)
• Negative: Normally the change of the quantity of
demand and price of non-substitute goods is in
different direction, therefore the sign is negative.
E.g. price of oil and quantity of car
Cεdxy<0
• Positive: Normally the change of the quantity of
demand and price of close substitute goods is in
same direction, therefore the sign is positive.
E.g. Bus and taxi, Cola and ice-cream
Cεdxy>0
If: Cεdxy=0 , shows that two goods have little
Session 7
Elasticity of Supply
Learning Outcomes:
In this chapter you will…
• Learn the meaning of the elasticity of
supply.
• Examine what determines the elasticity of
supply.
• Apply the concept of elasticity in three
different markets.
PRICE ELASTICITY OF
SUPPLY
(供给的价格弹性）
• Price elasticity of supply is a measure of
how much the quantity supplied of a
good responds to a change in the price
of that good.
• Price elasticity of supply is the
percentage change in quantity supplied
given a percent change in the price.
Computing the Price Elasticity of
Supply
• The price elasticity of supply is computed
as the percentage change in the quantity
supplied divided by the percentage
change in price.
Percentage change
in quantity supplied
Price elasticity of supply =
Percentage change in price
Pεs=∆Q% / ∆P%
•
Computing the Price Elasticity of
Supply
Suppose an increase in the price of milk from $1.90 to $2.10 a
litre raises the amount that dairy farmers produce from 9000 to
11 000 L per month…
• … using the midpoint method, we calculate the percent change in
the price as (2.10 - 1.90) / 2.00 x 100 = 10%
• Similarly, we calculate the percent change in the quantity supplied
as (11 000 - 9000) / 10 000 x 100 = 20%
20%
Price elasticity of supply =
=
10%
2.0
A vary of supply curves
（供给价格弹性的种类）
• According to the value of the coefficient(
系数），the supply curve can be
classified into 6 types:
–
–
–
–
–
Elastic Supply (Pεs>1)
Unit elastic Supply (Pεs=1)
Inelastic Supply (Pεs<1)
Perfectly Inelastic Supply (Pεs=0)
Perfectly Elastic Supply (Pεs=∞)
Figure 2-6 d): Elastic Supply
E>1
Price
Supply
$5.00
$4.00
1. A 22%
increase in
price…
0
100
200
2. …leads to a 67% increase in quantity
supplied.
Return
Quantity
Figure 2-6 c): Unit Elastic Supply
E=1
Price
Supply
$5.00
$4.00
1. A 22%
increase in
price…
0
100
125
2. …leads to a 22% increase in quantity
supplied.
Return
Quantity
Figure 2-6 b): Inelastic Supply
Price
Supply
E<1
$5.00
$4.00
1. A 22%
increase in
price…
0
100
110
2. …leads to a 10% increase in quantity
supplied.
Quantity
Return
Figure 2-6 a): Perfectly Inelastic Supply
Price
E=0
Supply
$5.00
$4.00
1. An increase
in price…
0
100
2. …leaves the quantity supplied unchanged.
Quantity
Return
Figure 2-6 e): Perfectly Elastic Supply
E=
Price
1. At any price above $4, quantity
supplied is infinite.
$4.00
Supply
2. At exactly $4, producers will supply any quantity.
3. At any price below $4, quantity supplied is zero.
0
Return
Quantity
Figure 2-7: How the price elasticity of
supply can vary
Price
$15
Elasticity is less
than 1
$12
Elasticity is
greater than 1
$4
$3
0
100
200
500
525
Quantity
The Price Elasticity of Supply and Its
Determinants
• Ability of sellers to change the amount of
the good they produce.
– Beach-front land is inelastic.
– Books, cars, or manufactured goods are
elastic.
• Time period.
– Supply is more elastic in the long run.
THREE APPLICATIONS OF
SUPPLY, DEMAND, AND
ELASTICITY
• Good news bad news for farmers
• OPEC
• Drugs and crime
Figure 2-8: An Increase in Supply in the
Market for Wheat
Price of
Wheat
Increase in Supply
1. When demand is inelastic, an
increase in supply…
S2
$3
$2
2. … leads
to a fall in
price…
Demand
100
110
3. …and a proportionately smaller increase in quantity sold. As a result revenue
falls from $300 to $220.
Quantity of Wheat
Figure 2-9: A Reduction in Supply in
the World Market for Oil
(a) Oil Market in the Short Run
Price
of Oil
(b) Oil Market in the Long Run
Price
of Oil
1. In the short run, when supply
and demand are inelastic, a shift
in supply…
S2
1. In the long run, when supply
and demand are elastic, a shift in
supply…
S2
P2
P2
P1
P1
2. … leads
to a large
increase in
price…
2. … leads
to a small
increase in
price…
Demand
Demand
Quantity of Oil
Quantity of Oil
Figure 2-10: Policies to Reduce the
Suppy and Demand of Illegal Drugs
(a) Drug Interdiction
Price of
Drugs
(b) Drug Education
Price of
Drugs
1. Drug interdiction reduces the
supply of drugs…
S2
P2
1. Drug education reduces the
demand for drugs…
P1
P2
P1
D1
2. … which
reduces the
price…
2. … which
raises the
price…
D2
Demand
Q2
Q1
Quantity of Drugs
3. … and reduces the
quantity sold.
Q2
Q1 Quantity of Drugs
3. … and reduces the quantity
sold.
• SAQ5 on P141-143
Summary
• Price elasticity of demand measures how much
the quantity demanded responds to changes in
the price.
• Price elasticity of demand is calculated as the
percentage change in quantity demanded
divided by the percentage change in price.
• If a demand curve is elastic, total revenue falls
when the price rises.
• If it is inelastic, total revenue rises as the price
rises.
Summary
• The income elasticity of demand measures how
much the quantity demanded responds to
changes in consumers’ income.
• The cross-price elasticity of demand measures
how much the quantity demanded of one good
responds to the price of another good.
• The price elasticity of supply measures how
much the quantity supplied responds to changes
in the price.
Summary
• In most markets, supply is more elastic in the
long run than in the short run.
• The price elasticity of supply is calculated as the
percentage change in quantity supplied divided
by the percentage change in price.
• The tools of supply and demand can be applied
in many different types of markets.
Elasticity Mindmap
Recap:
•
Price Elasticity of Demand
–
–
–
–
•
Cross Price Elasticity of Demand
–
–
–
•
Rleationship between changes in the price of one good and the demand for another related good
Substitutes - Positive relationship
Complements - Negative Relationship
Determinants of Elasticity
–
–
–
–
–
•
Ped = % Change in Qd / % Change in P
If % Change Qd > % change P = Elastic
If % Change Qd < % Change P = Inelastic
If % Change Qd = % Change P = Unit Elasticity
Time Period
Luxury or Necessity
Proportion of Income
Number of substitutes
Addictive nature of good
Income Elasticity of Demand
–
Normal Goods
•
•
–
Inferior Goods
•
•
•
Positive Relationship
Demand rises as incomes rise
Demand Falls as income rises
Inverse relationship
Price Elasticity of Supply
–
–
–
–
Ease with which producers can respond to price changes
Pes = % Change in QS / % Change in P
If % Change in QS > % Change in P = Elastic
If % Change in QS < % Change in P = Inelastic
Tasks
Your task for this part is to do:
the multiple choice for Chapter 2
Case Study : Elasticities of Demand for
Various Foodstuffs
Please see the handout
The End
Session 8
Theory of National Income
5.2.1 Learning Outcome 2
•
•
•
•
•
•
Circular flow of income
Injections and withdrawals
Measuring national income
Difficulties of measurement
Comparison of national income globally
National income growth both monetary
and real
• Multiplier
5.2.2 National Income
• To measure the national income and to
make intelligent decisions regarding
policy, the government must know:
• 1. the value of the nation’s output and how
it is changing over time
• 2. The incomes being generated in the
course of producing that output
• 3. How the output is allocated between
different uses.
•
Definition of National Income
P148
• Calculation of National Income P149
Table
Example: Crisps (P150)
3 types of NI calculation methods
– National Output
– The Income Method
– Expenditure Method
• Activity 18 P161
• Difficulties in collecting National Income
– Production
– Value of Service Rendered by Consumer
Durable Goods
– Inadequate Information
– Danger of Double Counting
– The Black Economy
Uses of National Income Statistics
1. Measurement of the Standard of Living
Definiton: Standard of Living (P164)
Real National Income
Monetary National Income
Three methods of calculating living standards
2. To calculate the rate at which GNP is growing
3. To assist the government in planning the
economy
4. To compare standard of living of different
countries
• SAQ 6 P172
• SAQ 7 P176
5.2.3 Circular Flow of Income
•
•
•
Participants: Households and the firms
Injections and Withdrawals
Injections (J):
– Investment by firms (I)
– Government spending (G)
– Exports (E)
•
Withdrawals (W):
– Savings by households (S)
– Tax paid to the government (T)
– Imports (M)
•
•
•
•
How the income circulate?
The growth and decline in the cirlcular flow
Activity 20
Activity 21
• Income, consumption and saving
Y=C+S
consumption function (P190)
saving function
Activity 22 P193,194
• Marginal Propensities
–
–
–
–
MPC
MPS
MPC+PMS=1
Activity 23 P197
•
•
•
•
The Paradox of Thrift
The multiplier effect
Activity 24 P203,204
SAQ 8 P208,209,210
Session 9
The role of government policy in
the United Kingdom market
5.3.1 Learning outcome 3
• The role of government in market failure,
that is, missing markets, externalities and
imperfect competition
• Government policy instruments, namely:
regulation, taxes, public ownership
• Current government welfare policy
• Current government competition policy
• The role of government in the economy
• The budget
– The functions of the budget
– Budget deficit
– Budget surplus
– Economic objective and government policy
• Nine reasons of the government intervention in
economic activity
– The existence of imperfect markets
– The existence of externalities
– The consumption of certain commodities is bad from
a social point of view
– To provide merit goods
– To provide public goods
– For purpose of strategic spending
– Large-scale investment
– The question of equity
– The need to stabilise the economy
•
Reasons for Non-intervention
– The economy is self-regulating
– Industry would be less efficient if heavily
controlled, for example, nationalised
industries
– The public should have greater choice in
how to spend their money on public and
merit goods
•
SAQ 9 P223
• Government Economic Policy Goals
–
–
–
–
–
–
–
–
–
–
–
Growing level of output
Low and stable rate of inflation
Full employment
Low tax rates
Low interest rates
High level of investment
Satisfactory balance of payments position
Fighting poverty
Little or no government borrowing
Realistic exchange rates
Redistribution of income
• Problems
• Policy goals and policy instruments
5.3.2 Government Economic
Policy Instruments
• Policy Instruments
– Fiscal policy
– Monetary policy
– Supply-side policies
• Fiscal Policy
The main instruments of fiscal policy
– Government/public expenditure
• Three main types
• Recent trends
• Financing ways
Activity 28 P230
– Taxation
• Reasons for taxation
• Criticisms of fiscal policy
• Monetary Policy
– Monetary Policy and Government Objectives
– Monetary Instruments
• Selling or buying securities
• Issuing notes and coins
• Special deposits
• Criticisms of monetary policy
• Functions of Money
• Functions of the Bank of England
– The government’s bank
– The banker’s bank
– Carries out monetary policy
Activity 30 P241
• Supply-side Policies
• Other policy instruments
• Activity 31 P245
5.3.3 Regulating the U.K Economic
Market
•
Competition policy
Shall be looked at in relation to:
– The public interest
– Monopolies
• Definition (scale monopoly, complex monopoly)
• Why do monopolies occur
– Natural
– Size
– contrived
– Mergers
• Defining a merger
• Which mergers qualify for investigation
– The assets test
– The ‘market share’ test
• How to deal with monopolies
– Ban them
– Take them over
– Regulate them
– Restrictive practices
5.3.4 Environmental Policy
• Why the current interest in the economics
of pollution control?
• What is a pollutant?
• Which forms of pollution are governments
most likely “to do something about”?
• Should the government seek to eliminate
pollutants or simply seek to reduce them?
• What are the main instruments of control,
reduction or elimination?
• Transport Policy
• Objectives of transport policy
–
–
–
–
Efficiency
Environment
Accessibility
Public finances
• The issues of road transport
–
–
–
–
–
–
Taxation and subsidies
Park and ride schemes
Deregulation
Road tolls
Congestion charges
Integrated transport systems
5.3.6 Public Ownership of Industry
• The need for government intervention
• Public goods
• Merit goods
5.3.7 Welfare Economics
• The U.K. government believes it has a role
in the redistribution of income and wealth
allowing the increase in economic welfare.
This policy is achieved by:
– Taxation
– Legislation
– Providing system of benefits and support