E-Commerce School Southwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005...

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

INTERNATIONAL

ECONOMICS 2004 / 2005 Southwestern University of Finance & Economics

Mr. Stephan Schoop

http://www.bized.ac.uk

E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Welcome !

http://www.bized.ac.uk

E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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?

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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?

http://www.bized.ac.uk

E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

http://www.bized.ac.uk

E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

http://www.bized.ac.uk

E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

0.0%

5.0%

10.0%

15.0%

20.0%

1990 1995 2002

China United States Japan EU*

China and Selected Countries Export Shares World Trade in Manufactures

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

• Have a look at the worldbank summary CHINA.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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..

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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: stephan.schoop@gmail.com

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Goal of today’s class

• Getting familiar with the English Economics Terms

• Review some basic Economic terms

• Start with international economics

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Organization

• I will give you various assignments during the semester.

• Some you have to do individually

• Others you will do in your

“study-team”

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

“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

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Assessments

Attendance 5%Class Activities, i.e. group project and homework

15%Mid Term 20%Final Exam 60%

Total 100%

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Introduction to Economics

The Economic Problem

Production Possibility Frontiers Opportunity Cost

Supply and Demand

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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?

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

• 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

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

->Implications for INTERNATIONAL TRADE?

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

What are the decisions you as a student have to make?

• What is your scarce resource?

• ..probably time.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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?

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Production Possibility FrontiersMarketing Knowledge

Economics Knowledge

Mo

Eo

A

BM1

E1

Assume you only would have to study two subjects; Marketing and Economics.

If you decide to use every minute you have to study Marketing you devote all your time to Marketing (Mmax).

If you decide to use every minute you have to study Economics you devote all your time to Economics (Emax).

Mmax

Emax

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Every company has to make a similar decision.

What does the company have to decide?

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

What goods shall we produce?

COMPANY,

For Example NOKIATV’s

COMPANY

Mobile Phones

Or / And:

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Production Possibility Frontiercompany

Mobile Phones

TV’s

Mo

To

A

BM1

T1

Mmax

Emax

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

PPF

• For individual businesses

• But also for entire national economies

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Production Possibility FrontierEconomyGuns

(thousands)

Butter (millions of pounds)

3

A

B

4.5

15

5

11

5

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Production Possibility FrontiersCapital Goods

(e.g.machines)

Consumer Goods(e.g.food in tons)

5

5

A

.B

Production inside the PPF – e.g. point B means the

country is not using all its

resources

3

4

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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!

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Production Possibility FrontiersStudy Marketing(minutes)

Study Economics (minutes)

Mo

Eo

A

BM1

E1

Mmax

Emax

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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?

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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?

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Production Possibility FrontierEconomy

Guns(thousands)

Butter (millions of pounds)3

A

B

4.5

15

5

11

5

Opp.costs A-B?

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Have a look at this PPF of NOKIA

Mobile Phones

TV’sEmax

What happened?

For Example:

•Invention of a new technology to produce micro chips.

= increase in productivity

•Or: The discovery of more silicon.

= increased access to . . resources

AB

75

100

100

75

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Buyers determine demand.

Sellers determine supply.

Markets

N-mart

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Demand

Quantity demanded = the amount of a good that buyers are willing and able to purchase.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Demand Schedule

The demand schedule

= a table that shows the relationship between the price of the good and the quantity demanded.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Price Quantity$0.00 120.50 101.00 81.50 62.00 42.50 23.00 0

Demand Schedule

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Determinants of Demand

Market price Consumer income Prices of related goods Tastes Expectations

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Demand Curve

The demand curve is the downward-sloping line relating price to quantity

demanded.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Demand Curve

$3.002.50

2.001.501.00

0.50

21 3 4 5 6 7 8 9 10 1211

Quantity of Ice-Cream Cones

0

Price Quantity$0.00 120.50 101.00 81.50 62.00 42.50 23.00 0

Price of Ice-Cream Cone

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Determinants of Demand

Market price Consumer income Prices of related goods Tastes Expectations

Skip the demand side

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Determinants of Demand

Market price Consumer income Prices of related goods Tastes Expectations

Change in Quantity demanded

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Changes in Quantity Demanded

0

D1

Price of Cigarettes per Pack

Number of Cigarettes Smoked per Day

A tax that raises the price of cigarettes

results in a movement along the

demand curve.

A

C

20

2.00

$4.00

12

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Determinants of Demand

Market price Consumer income Prices of related goods Tastes Expectations

Change in Change in DemandDemand

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

0

D1

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones

D3

D2

Increase in demand

Decrease in demand

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Consumer IncomeNormal Good

$3.002.50

2.001.501.00

0.50

21 3 4 5 6 7 8 9 10

12

11

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones

0

Increasein demand

An increase in income...

D1

D2

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Consumer IncomeInferior Good

$3.002.50

2.001.501.00

0.50

21 3 4 5 6 7 8 9 10

12

11

Price of potatoes

Quantity of potatoes

0

Decreasein demand

An increase in income...

D1D2

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

SupplyQuantity supplied is the amount of

a good that sellers are willing and able to sell.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

SupplyQuantity supplied is the amount of a good that sellers are willing and able

to sell.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Law of Supply

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

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Determinants of Supply

Market price Input prices Technology Expectations Number of producers

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Supply Schedule

The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Supply Schedule

Price Quantity$0.00 00.50 01.00 11.50 22.00 32.50 43.00 5

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Supply Curve

The supply curve is the upward-sloping line relating price to quantity supplied.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Supply Curve

$3.002.502.00

1.501.00

0.50

21 3 4 5 6 7 8 9 10

12

11

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones

0

Price Quantity$0.00 00.50 01.00 11.50 22.00 32.50 43.00 5

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Determinants of Supply

Market price Input prices Technology Expectations Number of producers

skip the supply side details

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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.

http://www.bized.ac.uk

E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Determinants of Supply

Market price Input prices Technology Expectations Number of producers

Change in Quantity demanded

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Change in Quantity Supplied

1 5

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones

0

S

1.00A

C$3.00

A rise in the price of ice cream cones

results in a movement along the supply curve.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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.

http://www.bized.ac.uk

E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Determinants of Supply

Market price Input prices Technology Expectations Number of producers

Change in Supply

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Change in SupplyPrice of Ice-Cream Cone

Quantity of Ice-Cream Cones

0

S1 S2

S3

Increase in Supply

Decrease in Supply

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Price Quantity$0.00 00.50 01.00 11.50 42.00 72.50 103.00 13

Price Quantity$0.00 190.50 161.00 131.50 102.00 72.50 43.00 1

Demand Schedule

Supply Schedule

At $2.00, the quantity demanded is equal to the quantity supplied!

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Quantity of Ice-Cream Cones

Supply

Demand

Price of Ice-Cream Cone

Equilibrium of Supply and Demand

21 3 4 5 6 7 8 9 10

12

11

0

$3.002.502.001.501.000.50

Equilibrium

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones

21 3 4 5 6 7 8 9 10

12

11

0

$3.002.502.001.501.000.50

Supply

Demand

Surplus

Excess Supply

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Supply and Demand

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.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Excess Demand

Quantity ofIce-Cream Cones

Price ofIce-Cream

Cone

$2.00

0 1 2 3 4 5 6 7 8 9 10 11 12 13

Supply

Demand

$1.50

Shortage

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

Products are the same Numerous buyers and sellers so that

each has no influence over price Buyers and Sellers are price takers

Perfect Competition

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

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.

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E-Commerce SchoolSouthwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005

HOMEWORK FOR NEXT WEEK

• READ CHAPTER 1 OF THE BOOK.