Principles of Economics
Session 1
Topics To Be Covered
Introduction
Definition of Economics
Market Definition
Demand Schedule, Curve, and Functions
Supply 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 Demand
Price Ceiling
Price Floor
Objectives
Objectives of bilingual education：
 To
learn useful and practical knowledge of
economics.
 To improve English proficiency
Advantages of Samuelson and Nordhaus’
Economics
Arrangement
Revision of the previous session
Weekly quiz
Students’ presentation on the
knowledge learned in the previous
session
New contents
Summary
Assignment
Requirements
Attendance
Participation
Curiosity 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
Supply
Goods &
Services sold
Market for
Goods
and Services
Firms
Demand
Goods &
Services
bought
Households
Inputs for
production
Demand
Market for
Factors
of Production
Labor, land,
and capital
Supply
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
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity
12
10
8
6
4
2
0
Demand Curve
P
$3.00
Qd=12 – 4P
2.50
2.00
1.50
Price
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity
12
10
8
6
4
2
0
1.00
0.50
0 1
2 3 4 5 6 7 8 9 10 11 12
Qd
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
P
$4.00
C
A
2.00
D1
0
12
20
Qd
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.
P
Changes in Demand
Increase in
demand
2.00
Decrease in
demand
B
A
D2
0
D3
20
D1
30
Qd
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 Income
Price
Normal Good
$3.00
An increase
in income...
2.50
Increase
in demand
2.00
1.50
1.00
0.50
D1
0 1
2 3 4 5 6 7 8 9 10 11 12
D2
Quantity
Consumer Income
Price
Inferior Good
$3.00
An increase
in income...
2.50
2.00
Decrease
in demand
1.50
1.00
0.50
D2
0 1
D1
2 3 4 5 6 7 8 9 10 11 12
Quantity
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 movement
along the demand curve
Income
Shifts the demand curve
Prices of related
goods
Shifts the demand curve
Tastes
Shifts the demand curve
Expectations
Shifts the demand curve
Number of
buyers
Shifts the demand curve
Supply
Quantity supplied
is 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
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity
0
0
1
2
3
4
5
P
Supply Curve
Qs = - 1 + 2P
$3.00
2.50
Price
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
2.00
1.50
1.00
0.50
0
Quantity
0
0
1
2
3
4
5
1 2 3 4 5 6 7 8 9 10 11 12
Qs
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
P
S
C
$3.00
A rise in the price
results in a
movement along
the supply curve.
A
1.00
0
1
5
Qs
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 Supply
P
S3
S1
S2
Decrease in
Supply
Increase in
Supply
0
Qs
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
Demand Schedule
Price
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity
19
16
13
10
7
4
1
Supply Schedule
Price
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity
0
0
1
4
7
10
13
At $2.00, the quantity demanded is
equal to the quantity supplied!
Equilibrium of
Supply
and
Demand
P
Qd=19 – 6P
Supply
$3.00
Equilibrium
2.50
2.00
Qd= Qs
1.50
1.00
0.50
Qs = - 5 + 6P
0
1 2 3 4 5 6 7 8 9 10 11 12
Demand
Q
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
1. Hot weather increases
the demand for ice cream...
Supply
$2.50
New equilibrium
2.00
2. ...resulting
in a higher
price...
Initial
equilibrium
D2
D1
0
3. ...and a higher
quantity sold.
7
10
Quantity
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.
How a Decrease in Supply
Affects the Equilibrium
Price
S2
1. An earthquake reduces
the supply of ice cream...
S1
New
equilibrium
$2.50
2.00
Initial equilibrium
2. ...resulting
in a higher
price...
Demand
0
1 2 3 4
7 8 9 10 11 12 13
3. ...and a lower
quantity sold.
Quantity
What Happens to Price and
Quantity When Supply or
Demand Shifts?
No Change
In Demand
An Increase
In Demand
A Decrease
In Demand
No Change
In Supply
An Increase
In Supply
A Decrease
In Supply
P
Q
P
Q
P
Q
P
Q
P
Q
P
Q
P
Q
P
Q
P
Q
same
same
up
up
down
down
down
up
ambiguous
up
down
ambiguous
up
down
up
ambiguous
ambiguous
down
P
Excess Supply
Surplus
$3.00
Supply
2.50
2.00
1.50
1.00
Demand
0.50
0
1 2 3 4 5 6 7 8 9 10 11 12
Q
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
Price
Supply
$2.00
$1.50
Shortage
0
1
2
3
4
5 6
7
8 9 10 11 12 13
Demand
Quantity
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
P
Supply
Equilibrium
price
$3
Price
ceiling
2
Shortage
Demand
0
75
Quantity
supplied
125
Quantity
demanded
Q
Effects of Price Ceilings




Shortages
Non-price rationing
Black market
Corruption
Rent Control
Rent 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
Rental
Price of
Apartment
Supply
Supply and
demand for
apartments
are relatively
inelastic
Controlled rent
Shortage
Demand
0
Quantity of
Apartments
Rent Control in the Long Run
Rental
Price of
Apartment
Because the
supply and
demand for
apartments are
more elastic...
Supply
…rent control
causes a large
shortage
Controlled rent
Shortage
Demand
0
Quantity of
Apartments
A Price Floor That
Creates
Surplus
P
Surplus
$4
Supply
Price floor
$3
Equilibrium
price
Demand
0
80
Quantity
demanded
120
Quantity
supplied
Q
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
Wage
A Free Labor Market
Labor
supply
Equilibrium
wage
Labor
demand
0
Equilibrium
employment
Quantity of
Labor
The Minimum Wage
Wage
A Labor Market with a
Minimum Wage
Labor surplus
(unemployment)
Labor
supply
Minimum
wage
Labor
demand
0
Quantity
demanded
Quantity
supplied
Quantity of Labor
Assignment
Review Part One (P1- 59)
Do Exercises on P58-59
Preview Chapter 4 (P62-79)
Thanks