Objectives:

Economics for Business Studies I

1. Basics of Microeconomics
 Demand, Supply and Markets
2. Principles and Theories of Microeconomics
 Firm Behaviour & Market Structure
 The Public Sector

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Investment Ratings
Standard & Poor’s
 Very High Performance
 S&P AAA – capacity is extremely strong
 High Performance
 S&PBBB – capacity is adequate, adverse
conditions will have more impact on the outcome
 Low Performance
 S&P C – no interest being paid
 Very Low Performance
 S&P D – principal and interest in default

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Textbook
Principles of Economics, 4th Edition (2006)
 Thomson South-Western: Mankiw, N.G.

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 H o w th e w o r l

E c o n P o s m y ci c hS s o o l c o i go myl o o g r y e

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 Ch.1
10 PRINCIPLES OF
ECONOMICS

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Introduction
 Definition of scarcity: the limited nature of
society’s resources.
 Definition of economics: the study of how
society manages its scarce resources.
faces
Wants > Resources

Society
to resolve

adopts Economics System

(e.g. Market Economy)

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The 10 Principles
 Principle #1: When individuals make decisions, they face
tradeoffs among alternative goals.
 Principle #2: The cost of any action is measured in terms
of foregone opportunities. Definition of opportunity cost:
whatever must be given up to obtain some item.
 Principle #3: Rational people make decisions by
comparing marginal costs and marginal benefits.
 Principle #4: People change their behavior in response to
the costs and benefits they face.

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The 10 Principles
 Principle #5: Trade can be mutually beneficial.
 Principle #6: Markets are usually a good way of
coordinating trade among people.
 Principle #7: Government can potentially

improve market outcomes if there is some

market failure or if the market outcome is
inequitable.

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The 10 Principles
 Principle #8: Productivity is the ultimate source
of living standards.
 Principle #9: Money growth is the ultimate

source of inflation.
 Principle #10: Society faces a short-run tradeoff

between inflation and unemployment.

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 Ch 4
THE MARKET FORCES OF
SUPPLY AND DEMAND

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Markets and Competition
 Definition of market: a group of buyers and
sellers of a particular good or service.
 Definition of competitive market: a market
in which there are many buyers and many
sellers so that each has a negligible
impact on the market price.

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Markets and Competition
 Competition: Perfect and Otherwise
 Characteristics of a perfectly competitive market:
 The goods being offered for sale are all the same.
 The buyers and sellers are so numerous that none can
influence the market price.
 Because buyers and sellers must accept the market price
as given, they are often called "price takers."
 Not all goods are sold in a perfectly competitive market.
 A market with only one seller is called a monopoly market.
 A market with only a few sellers is called an oligopoly.
 A market with a large number of sellers, each selling a
product that is slightly different from its competitors’
products, is called monopolistic competition.
 We will start by studying perfect competition.
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Demand
 TheDemand Curve: The Relationship
between Price and Quantity Demanded
 Definition of quantity demanded: the amount of
a good that buyers are willing and able to
purchase.
 One important determinant of quantity demanded
is the price of the product.
 Quantity demanded is negatively related to price. This implies
that the demand curve is downward sloping.
 Definition of law of demand: the claim that, other things
equal, the quantity demanded of a good falls when the
price of the good rises.
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Demand
 The Demand Curve: The Relationship between Price and Quantity
Demanded
 Definition of demand schedule: a table that shows the relationship
between the price of a good and the quantity demanded.

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Demand
 TheDemand Curve: The Relationship
between Price and Quantity Demanded
 Definition of demand curve: a graph of the
relationship between the price of a good and
the quantity demanded.
 Price is generally drawn on the vertical axis.
 Quantity demanded is represented on the horizontal
axis.

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Figure 1 Catherine’s Demand Schedule and Demand Curve

Price of
Ice-Cream Cone
$3.00

2.50

1. A decrease
2.00
in price ...

1.50

1.00

0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded. 16
Demand
 Market Demand Versus Individual Demand
 The market demand is the sum of all of the
individual demands for a particular good or
service.
 The demand curves are summed horizontally—
meaning that the quantities demanded are added
up for each level of price.
 The market demand curve shows how the total
quantity demanded of a good varies with the price
of the good, holding constant all other factors that
affect how much consumers want to buy.
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Changes in Quantity
Demanded
Price of Ice-
Cream A tax that raises the
Cones
price of ice-cream
B cones results in a
$2.0
0 movement along the
demand curve.

1.00 A

D
0 4 8Quantity of Ice-Cream Cones
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Demand
 Shifts in the Demand Curve
 The demand curve shows how much consumers
want to buy at any price, holding constant the
many other factors that influence buying
decisions.
 If any of these other factors change, the demand
curve will shift.
 An increase in demand can be represented by a shift
of the demand curve to the right.
 A decrease in demand can be represented by a shift
of the demand curve to the left.

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 Figure 3 Shifts in the Demand Curve

Price of
Ice-Cream
Cone

Increase
in demand

Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0 Quantity of20
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning
Demand
 Shifts in the Demand Curve
 Income
 The relationship between income and quantity
demanded depends on what type of good the product
is.
 Definition of normal good: a good for which, other
things equal, an increase in income leads to an
increase in demand.
 Definition of inferior good: a good for which, other
things equal, an increase in income leads to a
decrease in demand.
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Consumer Income
Normal Good
Price of Ice-
Cream Cone
$3.0 An increase
0
2.5 in income...
0 Increase
2.0 in demand
0
1.5
0
1.0
0
0.5
0
D2
D1 Quantity
of Ice-
0 1 2 3 4 5 6 7 8 9 10 11 12 Cream
22

Cones
Consumer Income
Inferior Good
Price of Ice-
Cream Cone
$3.0
0
2.5 An increase
0
2.0
in income...
0 Decrease
1.5 in demand
0
1.0
0
0.5
0
D2 D1 Quantity of
Ice-Cream
0 1 2 3 4 5 6 7 8 9 10 11 12 23
Cones
Demand
 Shifts in the Demand Curve
 Prices of Related Goods
 Definition of substitutes: two goods for which an
increase in the price of one good leads to an
increase in the demand for the other.
 Definition of complements: two goods for which an
increase in the price of one good leads to a
decrease in the demand for the other.

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Demand
 Shifts in the Demand Curve
 Tastes
 Expectations
 Future Income
 Future Prices
 Number of Buyers

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Demand
 Variables That Influence Buyers

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Question Time!

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Supply
 The Supply Curve: The Relationship between
Price and Quantity Supplied
 Definition of quantity supplied: the amount of a
good that sellers are willing and able to sell.
 Quantity supplied is positively related to price.
 Definition of law of supply: the claim that, other
things equal, the quantity supplied of a good rises
when the price of the good rises.

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Supply
 The Supply Curve: The Relationship between Price
and Quantity Supplied
 Definition of supply schedule: a table that shows the
relationship between the price of a good and the
quantity supplied.

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 Figure 5 Ben’s Supply Schedule and Supply Curve

Price of
Ice-Cream
Cone
$3.00

2.50
1. An
increase
in price ... 2.00

1.50

1.00

0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
30
2. ... increases quantity of cones supplied.
Copyright©2003 Southwestern/Thomson Learning
Supply
 TheSupply Curve: The Relationship between
Price and Quantity Supplied
 Definition of supply curve: a graph of the
relationship between the price of a good and
the quantity supplied.
 Price is generally drawn on the vertical axis.
 Quantity demanded is represented on the horizontal
axis.

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Supply
 Market Supply Versus Individual Supply
 The market supply curve can be found by
summing individual supply curves.
 Individual supply curves are summed horizontally
at every price.
 The market supply curve shows how the total
quantity supplied varies as the price of the good
varies.

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Change in Quantity Supplied
Price of Ice-
Cream S
Cone
C
$3.0
0 A rise in the price
of ice cream
cones results in a
movement along
A the supply curve.
1.00

Quantity of
Ice-Cream
0 1 5 Cones 33
Supply
 Shifts in the Supply Curve
 The supply curve shows how much producers
offer for sale at any given price, holding constant
all other factors that may influence producers’
decisions about how much to sell.
 When any of these other factors change, the
supply curve will shift.
 An increase in supply can be represented by a shift of
the supply curve to the right.
 A decrease in supply can be represented by a shift of
the supply curve to the left.

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 Figure 7 Shifts in the Supply Curve

Price of
Ice-Cream Supply curve, S3
Supply
Cone
curve, S1
Supply
Decrease curve, S2
in supply

Increase
in supply

0 Quantity of
35
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning
Supply
 Shifts in the Supply Curve
 Input Prices
 Technology
 Expectations
 Number of Sellers

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Supply
 Variables That Influence Sellers

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Supply and Demand Together
 Equilibrium
 The point where the supply and demand curves
intersect is called the market’s equilibrium.
 Definition of equilibrium: a situation in which
the price has reached the level where quantity
supplied equals quantity demanded.

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Supply and Demand Together
Demand Supply
Schedule Schedule

At $2.00, the quantity demanded

is equal to the quantity supplied!
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Supply and Demand Together
 Equilibrium
 Definition of equilibrium price: the price that
balances quantity supplied and quantity demanded.
 The equilibrium price is often called the "market-
clearing" price because both buyers and sellers are
satisfied at this price.
 Definition of equilibrium quantity: the quantity
supplied and the quantity demanded at the
equilibrium price.

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 Figure 8 The Equilibrium of Supply and Demand

Price of
Ice-Cream
Cone Supply

Equilibrium price Equilibrium

$2.00

Equilibrium Demand
quantity

0 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of Ice-Cream Cones41
Copyright©2003 Southwestern/Thomson Learning
Supply and Demand Together
 Equilibrium
 If the actual market price is higher than the
equilibrium price, there will be a surplus of the
good.
 Definition of surplus: a situation in which quantity
supplied is greater than quantity demanded.
 To eliminate the surplus, producers will lower the price
until the market reaches equilibrium.

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Figure 9 Markets Not in Equilibrium

(a) Excess Supply

Price of
Ice-Cream Supply
Cone Surplus
$2.50

2.00

Demand

0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
demanded supplied Cones 43

Copyright©2003 Southwestern/Thomson Learning

Supply and Demand Together
 Equilibrium
 If the actual price is lower than the equilibrium
price, there will be a shortage of the good.
 Definition of shortage: a situation in which quantity
demanded is greater than quantity supplied.
 Sellers will respond to the shortage by raising the
price of the good until the market reaches equilibrium.

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Figure 9 Markets Not in Equilibrium

(b) Excess Demand

Price of
Ice-Cream Supply
Cone

$2.00

1.50
Shortage

Demand

0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
supplied demanded Cones 45
Supply and Demand Together
 Equilibrium
 Definition of the law of supply and demand: the
claim that the price of any good adjusts to
bring the supply and demand for that good
into balance.

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Supply and Demand Together
 Three Steps to Analyzing Changes in
Equilibrium
 Decide whether the event shifts the supply or
demand curve (or perhaps both).
 Decide in which direction the curve shifts.
 Use the supply-and-demand diagram to see how
the shift changes the equilibrium price and
quantity.

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Supply and Demand Together
 Example: A Change in Demand — the
effect of hot weather on the market for ice
cream.

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 Figure 10 How an Increase in Demand Affects the
Equilibrium

Price of
Ice-Cream 1. Hot weather increases
Cone the demand for ice cream . . .

Supply

$2.50 New equilibrium

2.00
2. . . . resulting Initial
in a higher equilibrium
price . . .
D

0 7 10 Quantity of
3. . . . and a higher Ice-Cream Cones 49
quantity sold.
Supply and Demand Together
 Shifts
in Curves versus Movements Along
Curves
 A shift in the demand curve is called a "change in
demand." A shift in the supply curve is called a
"change in supply.“
 A movement along a fixed demand curve is called
a "change in quantity demanded." A movement
along a fixed supply curve is called a "change in
quantity supplied."

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Supply and Demand Together
 Example: A Change in Supply — the effect
of a hurricane that destroys part of the
sugar-cane crop and drives up the price of
sugar.

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 Figure 11 How a Decrease in Supply Affects the Equilibrium

Price of
Ice-Cream 1. An increase in the
Cone price of sugar reduces
the supply of ice cream. . .
S2
S1

New
$2.50 equilibrium

2.00 Initial equilibrium

2. . . . resulting
in a higher
price of ice
cream . . . Demand

0 4 7 Quantity of
3. . . . and a lower Ice-Cream Cones 52
quantity sold.
Supply and Demand Together
 Example: A Change in Both Supply and Demand—the effect of
both hot weather and an earthquake which destroys several ice
cream factories on the market for ice cream.

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Supply and Demand Together
 How Prices Allocate Resources
 The model of supply and demand is a powerful
tool for analyzing markets.
 Supply and demand together determine the price
of the economy’s goods and services.
 These prices serve as signals that guide the allocation
of scarce resources in the economy.
 Prices determine who produces each good and how
much of each good is produced.

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Summary
 Economists use the model of supply and
demand to analyze competitive markets.
 In a competitive market, there are many
buyers and sellers, each of whom has little or
no influence on the market price.

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Summary
 Thedemand curve shows how the quantity of a
good depends upon the price.
 According to the law of demand, as the price of a good
falls, the quantity demanded rises. Therefore, the
demand curve slopes downward.
 In addition to price, other determinants of how much
consumers want to buy include income, the prices of
complements and substitutes, tastes, expectations, and
the number of buyers.
 If one of these factors changes, the demand curve
shifts.

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Summary
 Thesupply curve shows how the quantity of a
good supplied depends upon the price.
 According to the law of supply, as the price of a good
rises, the quantity supplied rises. Therefore, the supply
curve slopes upward.
 In addition to price, other determinants of how much
producers want to sell include input prices, technology,
expectations, and the number of sellers.
 If one of these factors changes, the supply curve shifts.

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Summary
 Market equilibrium is determined by the
intersection of the supply and demand
curves.
 At the equilibrium price, the quantity
demanded equals the quantity supplied.
 The behavior of buyers and sellers naturally
drives markets toward their equilibrium.

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Summary
 To analyze how any event influences a
market, we use the supply-and-demand
diagram to examine how the even affects the
equilibrium price and quantity.
 In market economies, prices are the signals
that guide economic decisions and thereby
allocate resources.

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Franko’s Viewpoint

Stock Repurchase

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Stock Repurchase
 Company buys back its own shares of
stock
 Open market – buys stock in the
open market
 Tender offer – company privately
states a purchase price and a
desired number of shares
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Information Content of Stock
Repurchases

 Stock repurchases sends a positive signal that

management believes that the current price is low
 Tender offers send a more positive signal than open
market repurchases because the company is stating
a specific price
 The stock price often increases when repurchases
are announced

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