E-Commerce School Southwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005 INTERNATIONAL ECONOMICS 2004 / 2005

http://www.bized.ac.uk

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

INTERNATIONAL

ECONOMICS 2004 / 2005 Southwestern University of Finance & Economics

Mr. Stephan Schoop



Welcome !



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?



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?







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



• Have a look at the worldbank summary CHINA.



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..



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.



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]



Goal of today’s class

• Getting familiar with the English Economics Terms

• Review some basic Economic terms

• Start with international economics



Organization

• I will give you various assignments during the semester.

• Some you have to do individually

• Others you will do in your

“study-team”



“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



Assessments

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

15%Mid Term 20%Final Exam 60%

Total 100%



Introduction to Economics

The Economic Problem

Production Possibility Frontiers Opportunity Cost

Supply and Demand



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?



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.



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.



• 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



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.



->Implications for INTERNATIONAL TRADE?



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.



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

• What is your scarce resource?

• ..probably time.



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?



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



Every company has to make a similar decision.

What does the company have to decide?



What goods shall we produce?

COMPANY,

For Example NOKIATV’s

COMPANY

Mobile Phones

Or / And:



Production Possibility Frontiercompany

Mobile Phones

TV’s

Mo

To

A

BM1

T1

Mmax

Emax



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



PPF

• For individual businesses

• But also for entire national economies



Production Possibility FrontierEconomyGuns

(thousands)

Butter (millions of pounds)

3

A

B

4.5

15

5

11

5



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



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!



Production Possibility FrontiersStudy Marketing(minutes)

Study Economics (minutes)

Mo

Eo

A

BM1

E1

Mmax

Emax



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



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?



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?



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.



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



Production Possibility FrontierEconomy

Guns(thousands)

Butter (millions of pounds)3

A

B

4.5

15

5

11

5

Opp.costs A-B?



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



Buyers determine demand.

Sellers determine supply.

Markets

N-mart



Demand

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



Demand Schedule

The demand schedule

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



Price Quantity$0.00 120.50 101.00 81.50 62.00 42.50 23.00 0

Demand Schedule



Determinants of Demand

Market price Consumer income Prices of related goods Tastes Expectations



Demand Curve

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

demanded.



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





Skip the demand side



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.





Change in Quantity demanded



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



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.





Change in Change in DemandDemand



0

D1



D3

D2

Increase in demand

Decrease in demand



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



Consumer IncomeNormal Good

$3.002.50

2.001.501.00

0.50

21 3 4 5 6 7 8 9 10

12

11



0

Increasein demand

An increase in income...

D1

D2



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



SupplyQuantity supplied is the amount of

a good that sellers are willing and able to sell.



SupplyQuantity 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.



Determinants of Supply

Market price Input prices Technology Expectations Number of producers



Supply Schedule

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



Supply Schedule

Price Quantity$0.00 00.50 01.00 11.50 22.00 32.50 43.00 5



Supply Curve

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



Supply Curve

$3.002.502.00

1.501.00

0.50

21 3 4 5 6 7 8 9 10

12

11



0

Price Quantity$0.00 00.50 01.00 11.50 22.00 32.50 43.00 5



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.





skip the supply side details



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 demanded



Change in Quantity Supplied

1 5



0

S

1.00A

C$3.00

A rise in the price of ice cream cones

results in a movement along the supply curve.




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



Change in SupplyPrice of Ice-Cream Cone


0

S1 S2

S3

Increase in Supply

Decrease 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



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.



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.



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!




Supply

Demand


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





21 3 4 5 6 7 8 9 10

12

11

0

$3.002.502.001.501.000.50

Supply

Demand

Surplus

Excess Supply



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.



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



Products are the same Numerous buyers and sellers so that

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

Perfect Competition



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.



HOMEWORK FOR NEXT WEEK

• READ CHAPTER 1 OF THE BOOK.

Documents

E-Commerce School Southwestern University of Finance & Economics INTERNATIONAL ECONOMICS 2005 INTERNATIONAL ECONOMICS 2004 / 2005