Download Introduction to Economics

E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
INTERNATIONAL
ECONOMICS 2004 / 2005
Southwestern University of Finance
& Economics
Mr. Stephan Schoop
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Welcome !
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
What is this course about
Why do countries trade?
• What determines the pattern of production
and trade?
• Why does a country:
+ Export certain goods?
+ Import certain goods?
+ Export and import certain goods?
• Who trades with whom and why?
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
What is this course about? (2)
• Open / Closed Economy?
• What are barriers to trade?
– Why?
– Useful?
• What are the international financial
relations ?
• How do exchange rates work?
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
China and Selected Countries Export Shares
World Trade in Manufactures
20.0%
15.0%
10.0%
5.0%
0.0%
1990
China
1995
United States
2002
Japan
EU*
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
• Have a look at the worldbank
summary CHINA.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
How to be successful in this
class
• Prepare for the class by reading the
chapter in ADVANCE
• Take notes in class (!)
• Participate in class, BE ACTIVE !`
• Do your homework and the
assignments I will give you
• Download the power point presentation
from the FTP server.
• No phones, newspapers, talking,etc..
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Classroom agreement
• If you can’t understand me, raise your
hand and tell me.
• If I can’t understand you, I will tell you
as well.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
How to reach me
• Office Hours, Office #130
– Mondays 4 – 6 pm
– You may also email me to set up an
appointment if these times are not
convenient.
• Email: [email protected]
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Goal of today’s class
• Getting familiar with the English
Economics Terms
• Review some basic Economic terms
• Start with international economics
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Organization
• I will give you various assignments
during the semester.
• Some you have to do individually
• Others you will do in your
“study-team”
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
“study-team”
• A study-team is a group of 6
students who will work together
throughout the semester.
• The goal is to support & motivate
each other
• Form YOUR team until next week
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
Assessments
http://www.bized.ac.uk
Attendance
Class Activities, i.e. group project and homework
Mid Term
Final Exam
Total
5%
15%
20%
60%
100%
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Introduction to Economics
The Economic Problem
Production Possibility Frontiers
Opportunity Cost
Supply and Demand
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
The Economic Problem
• What goods and services should an
economy produce? Should the emphasis
be on agriculture, manufacturing, services,
sports, leisure or housing?
• How should goods and services be
produced? Is it labor intensive, land
intensive and/or capital intensive?
Efficiency?
• Who should get the goods and services
produced? Equal or unequal distribution?
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Why do we have to ask these questions at all?
• What goods and services should an economy
produce?
• Wouldn’t it be easier to just produce all goods we
want?
• Fact is, we can’t. Why?
• Because we don’t have enough resources to
produce whatever we want.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
The world is limited
“ There are not enough factories (capital) to
produce a car and a plane and motorbike for
everyone.”
• “There is not enough land to build a big
house with tennis court, swimming pool,
private lake and huge garden,etc..for
everyone.”
• “It’s impossible that everybody has his or
her own cook, driver and football team to
practice, because there are not enough
workers.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
• But almost everybody would like to
have a car and a private plane and
a motorbike...
– We see: we want more than we can
have.
Our wants are unlimited, our
resources are limited.
• This is the economic Problem
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Economic Terms
• Goods that are limited in supply are called
scarce goods.
• The noun is scarcity
• Therefore we must make sure we make the
best use of our scarce resources.
– We must use them efficiently.
• The noun is efficiency.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
->Implications for INTERNATIONAL
TRADE?
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
So many decisions to make..
• Economics is a lot about making
decisions.
• To help us make these decisions we
may use models that help us
understand the reality.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
What are the decisions you as a
student have to make?
• What is your scarce resource?
• ..probably time.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
You are an economy..
• You have to decide what knowledge
you produce.
For example: Do you use your homework
time to study Marketing or Economics?
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Production Possibility Frontiers
Marketing
Knowledge
Assume you only
havetotouse
study
Ifwould
you decide
two subjects;
every
minute you have
toMarketing
study Marketing
and you
devote
all your time to
Economics.
Mmax
Mo
A
Marketing (Mmax).
B
M1
Eo
E1
If you decide to use
every minute you have
to study Economics
you devote all your
time to Economics
(Emax).
Emax
Economics
Knowledge
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Every company has to make a
similar decision.
What does the
company have to decide?
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
What goods shall we produce?
COMPANY
Mobile Phones
COMPANY,
For Example NOKIA
Or / And:
TV’s
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Production Possibility Frontier
company
Mobile Phones
Mmax
A
Mo
B
M1
To
T1Emax
TV’s
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Production Possibility
Frontiers
• Show the different combinations of goods and
services that can be produced with a given
amount of resources
• No ‘ideal’ point on the curve
• Any point inside the curve – suggests resources
are not being utilised efficiently
• Any point outside the curve – not attainable with
the current level of resources
• Useful to demonstrate economic growth and
opportunity cost
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
PPF
• For individual businesses
• But also for entire national
economies
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Production Possibility Frontier
Guns
(thousands)
Economy
15
A
11
B
5
3
4.5
5
Butter (millions of
pounds)
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Production Possibility
Frontiers Production inside
Capital Goods
(e.g.machines)
the PPF – e.g.
point B means the
5
4
.
3
A
country is not
using all its
resources
B
5
Consumer Goods
(e.g.food in tons)
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
What does this mean?
• For your case as a student:
– If you have perfect conditions to study
(motivation, time, quiet, interest, etc),
then you will be on the blue line.
– If not you will be inside the blue line.
• Let’s have a look!
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Production Possibility Frontiers
Study Marketing
(minutes)
Mmax
A
Mo
B
M1
Eo
E1
Study Economics
Emax
(minutes)
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Efficiency
• If you find yourself on the blue line,
• If a company produces on the blue line,
• If a whole economy produces on the blue
line,
then this is called efficient use of
resources
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Efficiency
• To know whether a process is
efficient or not is one of the most
important questions in business as
well as personally.
– Examples:
– In a restaurant, is the process of
ordering food efficient?
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Efficiency
• In a factory, how should you setup
your production for best efficiency?
• Is it more efficient for you to shower
before you get dressed in the
morning or the other way around?
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
What is the cost of studying
Economics?
Not studying Marketing
Studying one hour of Economics is a benefit for
your Economics knowledge, but a cost to your
Marketing knowledge. (You could have used this
hour to study Marketing).
These costs we call OPPORTUNITY COSTS.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Opportunity Cost
• Definition – the cost expressed in terms of
the next best alternative sacrificed. In
other words, what you give up to do
something else.
• Helps us view the true cost of decision
making
• Implies the value of different choices
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Production Possibility Frontier
Guns
(thousands)
Economy
15
Opp.costs A-B?
A
11
B
5
3
4.5
5
Butter (millions of
pounds)
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Have a look at this PPF of NOKIA
What happened?
Mobile Phones
For Example:
100
75
B
A
•Invention of a new
technology to produce micro
chips.
= increase in productivity
75
100
Emax
•Or: The discovery of more
silicon.
TV’s
= increased access to
. resources
.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Markets


Buyers determine demand.
Sellers determine supply.
N-mart
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Demand
Quantity demanded
= the amount of a good that buyers are
willing and able to purchase.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Demand Schedule
The demand schedule
= a table that shows the
relationship between the price of
the good and the quantity
demanded.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
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
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Determinants of Demand
Market price
 Consumer income
 Prices of related goods
 Tastes
 Expectations

E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Demand Curve
The demand curve is the downwardsloping line relating price to quantity
demanded.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Price of
Ice-Cream
Cone
$3.00
2.50
2.00
1.50
Demand Curve
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
Quantity of
Ice-Cream
2 3 4 5 6 7 8 9 10 11 12 Cones
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Determinants of Demand
Market price
 Consumer income
 Prices of related goods
 Tastes
 Expectations

Skip the demand side
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
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.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Determinants of Demand
Change in Quantity
demanded
Market price
 Consumer income
 Prices of related goods
 Tastes
 Expectations

E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Price of
Cigarettes
per Pack
$4.00
Changes in Quantity Demanded
A tax that raises the
price of cigarettes
results in a movement
along the demand
curve.
C
A
2.00
D1
0
12
20
Number of Cigarettes
Smoked per Day
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
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.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Determinants of Demand
Market price
Change in
Demand
 Consumer income
 Prices of related goods
 Tastes
 Expectations

E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Price of
Ice-Cream
Cone
Increase in
demand
Decrease in
demand
D2
0
D3
D1
Quantity of
Ice-Cream
Cones
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Consumer Income
As income increases the demand for
a normal good will increase.
 As income increases the demand for
an inferior good will decrease.


Inferior means goods that we think are
lower in quality or value? E.g. Bus Travel
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Price of
Ice-Cream
Cone
Consumer Income
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 of
Ice-Cream
Cones
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Price of
potatoes
Consumer Income
Inferior Good
$3.00
2.50
An increase
in income...
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 of
potatoes
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Supply
Quantity supplied is the amount of
a good that sellers are willing
and able to sell.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Supply
Quantity supplied is the amount of a
good that sellers are willing and able
to sell.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Law of Supply
The law of supply states that there is a
direct (positive) relationship between
price and quantity supplied.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Determinants of Supply
Market price
 Input prices
 Technology
 Expectations
 Number of producers

E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Supply Schedule
The supply schedule is a table that shows
the relationship between the price of
the good and the quantity supplied.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
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
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Supply Curve
The supply curve is the upwardsloping line relating price to
quantity supplied.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Price of
Ice-Cream
Cone
$3.00
2.50
2.00
1.50
1.00
Supply Curve
Price
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity
0
0
1
2
3
4
5
0.50
0
1 2 3 4 5 6 7 8 9 10 11 12
Quantity of
Ice-Cream
Cones
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
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.

E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Determinants of Supply
Market price
 Input prices
 Technology
 Expectations
 Number of producers

skip the supply side
details
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
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.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Determinants of Supply
Change in Quantity
demanded
Market price
 Input prices
 Technology
 Expectations
 Number of producers

E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Price of
Ice-Cream
Cone
Change in Quantity Supplied
S
C
$3.00
A rise in the price
of ice cream cones
results in a
movement along
the supply curve.
A
1.00
0
1
5
Quantity of
Ice-Cream
Cones
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
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.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Determinants of Supply
Change in Supply
Market price
 Input prices
 Technology
 Expectations
 Number of producers

E-Commerce School
Southwestern University of Finance & Economics
Price of
Ice-Cream
Cone
INTERNATIONAL ECONOMICS 2005
Change in Supply
S3
http://www.bized.ac.uk
S1
S2
Decrease in
Supply
Increase in
Supply
0
Quantity of
Ice-Cream
Cones
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
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
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
What we know now
• We know the demand schedule of the
ice cream or the snickers.
• And we know the ice cream supply.
• Now we need to bring the demand and
the supply together and find the price
that satisfies the customer and the
supplier.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
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.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
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!
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Price of
IceCream
Cone
$3.0
0
2.5
0
2.0
0
1.5
0
1.0
0
0.5
0
Equilibrium of Supply and
Demand
Supply
Equilibrium
Demand
0 1 2 3 4 56 7 8 91 1 1
0 1 2
Quantity of
Ice-Cream
Cones
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Price of
IceCream
Cone
$3.0
0
2.5
0
2.0
0
1.5
0
1.0
0
0.5
0
Excess Supply
Supply
Surplus
Demand
0 1 2 3 4 56 7 891
0
1 1
1 2
Quantity
of IceCream
Cones
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
Supply and Demand
http://www.bized.ac.uk
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.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Excess Demand
Price of
Ice-Cream
Cone
Supply
$2.00
$1.50
Shortage
0
1
2
3
4
5 6
7
Demand
8 9 10 11 12 13
Quantity of
Ice-Cream Cones
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
Perfect Competition



Products are the same
Numerous buyers and sellers so that
each has no influence over price
Buyers and Sellers are price takers
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
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.
E-Commerce School
Southwestern University of Finance & Economics
INTERNATIONAL ECONOMICS 2005
http://www.bized.ac.uk
HOMEWORK FOR NEXT WEEK
• READ CHAPTER 1 OF THE BOOK.