1. Part I: Introduction to Business economics
Lecture 2
Part I: Introduction to Business economics
Part II: Market forces of supply and demand
Instructor: Sana Ullah Khan
Course code: BA 5408

2. Part I: Introduction to Business economics
Lecture 2
Part I: Introduction to Business economics

3. Thinking Like an Economist
Economics trains you to
Think in terms of alternatives.
Evaluate the cost of individual and social choices.
Examine and understand how certain events and issues are related.
The economic way of thinking . . .
Involves thinking analytically and objectively.
Makes use of the scientific method.
The Scientific Method: Observation, Theory, and More Observation
Uses abstract models to help explain how a complex, real world operates.
Develops theories, collects, and analyzes data to evaluate the theories.
The Role of Assumptions
Economists make assumptions in order to make the world easier to understand.
The art in scientific thinking is deciding which assumptions to make.
Economists use different assumptions to answer different questions.

4. Thinking Like an Economist
Economic Models
Economists use models to simplify reality in order to improve our understanding of the world
Two of the most basic economic models include:
The Circular Flow Diagram
The Production Possibilities Frontier
Our First Model: The Circular-Flow Diagram
The circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms.

5. Thinking Like an Economist

6. Thinking Like an Economist
Firms
Produce and sell goods and services
Hire and use factors of production
Households
Buy and consume goods and services
Own and sell factors of production
Markets for Goods and Services
Firms sell
Households buy
Markets for Factors of Production
Households sell
Firms buy
Factors of Production
Inputs used to produce goods and services
Land, labor, and capital

7. Thinking Like an Economist
Our Second Model: The Production Possibilities Frontier
The production possibilities frontier is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.

8. Thinking Like an Economist
The Economist As Policy Advisor
When economists are trying to explain the world, they are scientists.
When economists are trying to change the world, they are policy advisor.
Positive Versus Normative Analysis
Positive statements are statements that attempt to describe the world as it is.
Called descriptive analysis
Normative statements are statements about how the world should be.
Called prescriptive analysis
Positive or Normative Statements?
An increase in the minimum wage will cause a decrease in employment among the least-skilled.
POSITIVE
Higher federal budget deficits (Shortfalls) will cause interest rates to increase.

9. Thinking Like an Economist
Positive or Normative Statements?
The income gains from a higher minimum wage are worth more than any slight reductions in employment.
NORMATIVE
State governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor.
Why Economists Disagree?
They may disagree about the validity of alternative positive theories about how the world works.
They may have different values and, therefore, different normative views about what policy should try to accomplish.

10. Common Research Cycle Knowledge Construct Analysis Data Collection
Sensation/
Perception
Knowledge
Individual Conception (Concept)
Finding/
Conclusion
Construct
Common Research Cycle
Variables & Their Dimensions
Analysis
Data Collection
Theory/ Theoretical Framework/ Model
Research Design

11. Assumptions Ideologies
Practice Knowledge Production
Abstract Common
Theory
Theories Models
Perspectives
Concepts
Assumptions Ideologies
Hypothesis
Observation
Confirmation
Deductive Approach
In-depth Specific
11:05 AM
Tools For Thinkind & Knowledge Production

12. Assumptions Ideologies
Theory Knowledge Production
Thinking
In-Depth Specific
Observation
Pattern
Hypothesis
Assumptions Ideologies
Concepts
Perspectives
Theories Models
Theory
Inductive Approach
Abstract Common
11:05 AM
Tools For Thinkind & Knowledge Production

13. Part II- Market forces of supply and demand
Lecture 2
Part II- Market forces of supply and demand

14. Lecture Outline Markets and competition Demand curve
Market demand vs. individual demand
Shifts in demand curve

15. Introduction Markets and competition Competitive Markets
Supply and demand are the two words that economists use most often.
Supply and demand are the forces that make market economies work.
Modern microeconomics is about supply, demand, and market equilibrium.
Markets and competition
A market is a group of buyers and sellers of a particular good or service.
The terms supply and demand refer to the behavior of people as they interact with one another in markets.
Buyers determine demand
Sellers determine supply
Competitive Markets
A competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price.

16. Introduction Competition: Perfect and Otherwise Perfect Competition
Products are the same
Numerous buyers and sellers so that each has no influence over price
Buyers and Sellers are price takers
Monopoly
One seller, and seller controls price
Oligopoly
Few sellers
Not always aggressive competition
Monopolistic Competition
Many sellers
Slightly differentiated products
Each seller may set price for its own product

17. Demand
Quantity demanded is the amount of a good that buyers are willing and able to purchase.
Law of Demand
The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises.
The Demand Curve: The Relationship between Price and Quantity Demanded
Demand Schedule
The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded. E.g. Ahmad’s demand schedule is following

18. Demand
Demand Curve
The demand curve is a graph of the relationship between the price of a good and the quantity demanded. E.g. Ahmad’s demand curve is following

19. Demand Market Demand versus Individual Demand
Market demand refers to the sum of all individual demands for a particular good or service.
Graphically, individual demand curves are summed horizontally to obtain the market demand curve.
Shifts in the Demand Curve
Change in Quantity Demanded
Movement along the demand curve.
Caused by a change in the price of the product.
Changes in Quantity Demanded

20. Shifts in the Demand Curve
Variables That Influence Buyers
Consumer income
Prices of related goods
Tastes
Expectations
Number of buyers
Change in Demand
A shift in the demand curve, either to the left or right.
Caused by any change that alters the quantity demanded at every price.

21. Shifts in the Demand Curve
Consumer Income
As income increases the demand for a normal good will increase.
As income increases the demand for an inferior good will decrease.
Consumer Income (Normal Good)
Consumer Income (Inferior Good)

22. Shifts in the Demand Curve
Prices of Related Goods
When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes.
When a fall in the price of one good increases the demand for another good, the two goods are called complements.
Variables That Influence Buyers