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(ECEN 4503)
Engineering Economics
Lecture #4:
Homework #2
Ex4. American and Japanese workers can each produce 4 cars a year. An American
worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5
tons of grain a year. To keep things simple, assume that each country has 100 million
workers.
a.
b.
c.
d.
e.
f.
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Homework #2
Ex5. Suppose that there are 10 million workers in Canada and that each of
these workers can produce either 2 cars or 30 bushels of wheat in a year.
a.
b.
c.
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Reviewing
Ten
principles
of
economics
- How people
make
decision
- How they
interact
- How they
organized
Think like
an
economist
- Scientists
- Policymakers
Interdepend
ence and
the gains
from trade
Supply and
Demand:
How
market
works
- Specialize
and trade
- Absolute
advantage
- Comparative
advantage
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services
The buyers as a group determine the demand for the product.
The sellers as a group determine the supply of the product.
The market forces of supply and demand
How the buyers and sellers behave and interact?
How supply and demand determine the price in market?
How price allocate the economys resources?
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each buyer knows several ice cream shop to choose, and each seller
is aware that his/her product is somehow similar to what offered by
other sellers.
If sellers sell ice cream at price lower than market price, they loose profit
If higher than market price, buyers will buy ice cream somewhere else.
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1. Market ad Competition
Competition: Perfect and otherwise
Perfectly competitive market has two primary characteristics:
The goods being offered for sale are all the same
The buyers and sellers are so numerous that no single buyer or seller
Example:
Wheat markets
Thousands of farmers selling wheat
Millions of consumers using wheat and wheat product
Take the price as given, i.e., price-takers
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1. Market ad Competition
Competition: Perfect and otherwise
Monopoly:
Only one sellers who is able to set the market price
Example:
Electric or water utility in a specific area
Oligopoly
Few sellers they do not compete aggressively
Example:
Airline industry:
Few airlines in the same route do not compete rigorously
To keep the price high
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1. Market ad Competition
Competition: Perfect and otherwise
Monopolistically competitive
Many sellers
Offer slightly different products
Example:
Software industry
Word processing program
MS Word
Latex
Etc.
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more yogurt.
Law of demand the quantity demanded of a good falls when the price
of the good rises.
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2. Demand
What determines the quantity an individual demand?
Determinant #2: Income
Low income means you have less to spend in total, so you have to
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2. Demand
What determines the quantity an individual demand?
Determinant #3: Prices of related goods
Suppose the price of frozen yogurt falls, you may consume it more,
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2. Demand
What determines the quantity an individual demand?
Determinant #4: Expectation
Your expectation about future may affect your demand for a good or
service today.
Example,
Higher income next month, we are willing to spend more today.
The price is expected to rise in future, we may decide to buy it now.
A new technology comes soon, waiting to buy the product:
I
13
phone 6, etc.
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2. Demand
The demand schedule and the demand curve
How the quantity demanded varies with the price, holding other
factors constant.
Demand schedule a table that shows the relationship between the
2. Demand
The demand schedule and the demand curve
Demand curve a graph of the relationship between the price of a
Example:
The quantity of ice cream demanded according to the price of ice
cream.
Horizontal axis:
o The quantity
Vertical axis
o The price
15
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2. Demand
Market demand versus individual demand
The market demand of a particular good or service is the sum of
16
Catherine
+ Nicholas
= Market
0.00
0.50
1.00
1.50
2.00
2.50
3.00
12
10
8
6
4
2
0
7
6
5
4
3
2
1
19
16
13
10
7
4
1
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2. Demand
Market demand versus individual demand
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2. Demand
Shift of the demand curve
Suppose that
A new discovery of government health center: People who eat ice
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2. Demand
Summary
19
Income
Tastes
Expectations
Number of buyers
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Case study:
How to reduce the quantity of smoking demand?
Shift the demand curve
Health warning in on the cigarette package
Cigarette advertising is prohibited on TV.
Argument:
How the price of cigarette affect the demand of illicit drug:
marijuana?
Cigarette and marijuana are substitutes?
20
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3. Supply
What determines the quantity an individual supplies?
Determinant #2: Input price
To produce ice cream, various inputs needed: Ice cream machine,
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3. Supply
What determines the quantity an individual supplies?
Determinant #3: Technology
Technology can reduce the amount of inputs needed.
For example:
Labor
future.
If you expect the price rises in future, you may produce more today
and put them in storage.
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3. Supply
Supply schedule and supply curve
How the quantity supplied varies with the price, holding other
factors constant.
Supply schedule a table that shows the relationship between the price
3. Supply
Supply demand and supply curve
Supply curve a graph of the relationship between the price of a good
and the quantity supplied.
Example:
The quantity that Ben supplies according to the price
Horizontal axis
o Quantity of ice cream
Vertical axis
o Price of ice cream
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3. Supply
Market supply versus individual supply
Market supply is the sum of the supplies of all sellers
Example:
Market for ice cream consists of two sellers
Price of Ice-cream Cone
($/unit)
0.00
0.50
1.00
1.50
2.00
2.50
3.00
26
Ben
+ Jerry
= Market
0
0
1
2
3
4
5
0
0
0
2
4
6
8
0
0
1
4
7
10
13
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3. Supply
Market supply versus individual supply
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3. Supply
Shift in the supply curve
Suppose that
The price of sugar falls
Cost
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3. Supply
Summary,
Variables that affect quantity supplied A change in this variable
Price
A movement along the supply curve
29
Input prices
Technology
Expectation
Number of buyers
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Reviewing
Market
Types of markets
Demand
Quantity demanded of a good
goods, expectation.
Demand schedule and demand
curve
Individual demand and market
demand
30
Supply
technology, expectation.
Supply schedule and supply
curve
Individual supply and
market supply
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Equilibrium
Equilibrium a situation in which supply and demand has been brought
into balance.
Equilibrium price the price that
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equilibrium price
Supply is unable to sell all they
want
Applying law of demand, sellers
need to reduce the price
If the price is below the
equilibrium price
Demand is unable to buy all they
Invisible hand!!!
want
Applying law of supply, buyers
offer to buy at higher price
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Case study
A change in demand
Suppose that one summer is very hot, how does this event affect
demand/supply?
How the demand/supply curve
shifts?
The new market equilibrium?
35
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Case study
A change in supply
Suppose that an earthquake that destroy several ice cream
factories, how does this event affect the market for ice cream?
Three steps:
How the event affect the
demand/supply?
How the demand/supply curve
shifts?
The new market equilibrium?
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Case Study
Changes in both supply and demand
Suppose that two events occur at the same time
Three steps:
How the event affect the
demand/supply?
How the demand/supply curve
shifts?
The new market equilibrium?
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No change in
demand
An increase in
demand
An decrease in
demand
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No change in
supply
P same
An increase in
supply
P down
A decrease in
supply
P up
Q same
P up
Q up
P ambiguous
Q down
P up
Q up
P down
Q up
P down
Q ambiguous
P ambiguous
Q down
Q ambiguous
Q down
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Summary
Market
Demand
Supply
Determinants
Market vs. individual
Equilibrium
Equilibrium price
Equilibrium quantity
Shortage
Surplus
Determine the new equilibrium with changes
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Quiz #1
Ex1. What are the demand schedule and
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Quiz #1
Ex6. The market for pizza has the
b.
c.
41
Price
Quantity
Quantity
demanded
supplied
$4
135 pizzas
26 pizzas
104
53
81
81
68
98
53
110
39
121
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