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Transcript users.kgcs.k12.va.us

Agenda

- Economic News and Warm-Up (10 Min) - Lecture on “Circular Flow of Economics” (10 Min) - Activity: “Circular Flow of Economics” (15 Min) - Video on Law of Supply and Demand (5 Min) - Lecture: “Law of Demand/Demand Shifters” (20 Min) - Activity: “Demand Headlines” (15 Min) - Work on Vocabulary Terms (10 Min) - Review (5 Min)

Warm-Up

Take a few minutes and think of the terms “supply” and “demand.” What do those terms mean to you? Also, how do you think these terms impact your daily lives? Be prepared to explain when we discuss.

Unit 4

Supply, Demand, & The Role of Price in a Market Economy

Circular Flow of Economic Activity

Factor Market

Households Sell. Firms Buy.

Households Government

Product Market

Firms Sell. Households Buy.

Firms

Circular Flow of Economic Activity

Factor Market

Households Sell. Firms Buy.

Firms demand and pay for the factors of production.

Households supply and sell the factors of production (land, labor, capital).

Households Government

Product Market

Firms Sell. Households Buy.

Firms

Circular Flow of Economic Activity

Factor Market

Households Sell. Firms Buy.

Firms demand and pay for the factors of production.

Households supply and sell the factors of production (land, labor, capital).

Households Government

Firms supply and sell goods & services.

Consumers buy goods & services.

Product Market

Firms Sell. Households Buy.

Firms

Circular Flow of Economic Activity

Factor Market

Households Sell. Firms Buy.

Firms demand and pay for the factors of production.

Households supply and sell the factors of production (land, labor, capital).

Households

Payments Labor Payments Products Taxes Taxes Goods & Services

Government

Goods & Services Firms supply and sell goods & services.

Consumers buy goods & services.

Product Market

Firms Sell. Households Buy.

Firms

In-Class Assignment “The Circular Flow of Economics & You”

Video on the Law of Supply & Demand

http://www.youtube.com/watch?v=0yWsOZgsTSY

Price

• The dollar amount someone must pay in order to purchase a product • How price results in a mutually beneficial transaction • To the purchaser, the product being purchased is of greater value to him/her than the money • To the seller, the money is of greater value than the product being sold • Both sides of the transaction feel that they are getting more than they are giving up

Demand

•

The quantity of a specific good or service consumers are

willing

and

able

to purchase at various prices at a specific time

• Specific elements to definition • Quantity Demanded: how much of a good or service consumers would want at a specific price • Willingness To Buy: only concerned with consumers who actually would want to buy the product • Ability To Buy: only concerned with consumers who actually have the money to buy the product • At a Specific Time: demand continually changes, so this is a snapshot for a specific time (or period of time) • Overall (Market) Demand = the sum total of all quantities sold at all the various prices at which it is sold

Law of Demand

• The lower the price, the more the product will be demanded • As price goes down, the quantity demanded goes up • The higher the price, the less the product will be demanded • As price goes up, the quantity demanded goes down

Typical Demand Curve Graph

1. Generally downward sloping 2. Not necessarily a straight line 3. Slope (rate of change) may be shallow or steep (or both) Quantity

Factors That Affect Consumers’ Spending Behavior

1. Law of Diminishing Marginal Utility

• Consumers receive less additional satisfaction from each additional unit purchased

2. Income Effect

• Because of scarcity, income is limited • If the price of a product goes up, you can’t buy as much of that product as you could at the original price

3. Substitution Effect

• Often, two (or more) different products can satisfy the same want • Called substitute goods • If the price of a product goes up, some consumers may shift their demand to the substitute product

• All 3 factors cause consumers to react in predictable ways to a change in the price of a good or service.

• As consumers buy more in response to a decrease in price (or less in response to an increase in price), quantity demanded is said to “move along the demand curve.” • Only a change in price causes a change in quantity demanded.

P 1 P 2 Change In Price Q 1 “Movement along the Demand Curve” Change In Quantity

Quantity

Q 2

Demand Shifters

• Factors that cause a change in overall demand • Quantity demanded is increased (or decreased) at all prices • Not just movement along the demand curve • Results in a need to redraw the demand curve to reflect the new overall demand • Increases in demand are shown as a shifting of the demand curve to the right • Decreases in demand are shown as a shifting of the demand curve to the left

Increase In Demand Decrease In Demand

Quantity

D 2 D 1

Quantity

D 1 D 2

Demand Shifter:

Changes In Income

• Increases in income generally lead to increases in peoples’ demand for goods & services • Decreases in income generally lead to decreases in peoples’ demand for goods & services • Individuals whose incomes increase are willing to buy more of a given product at a given price

Demand Shifter: “

Changes In Number of Consumers”

• Increases in the number of consumers generally lead to increases in market demand for goods & services • Decreases in the number of consumers generally lead to decreases in market demand for goods & services

Demand Shifter: “

Changes In Consumer Tastes & Preferences”

• When consumers view a specific product more favorably, this leads to an increase in demand for that product • When consumers view a specific product less favorably, this leads to a decrease in demand for that product

Demand Shifter: “

Changes In Consumer Expectations”

• Prices don’t actually have to rise or fall to cause consumers to change their behavior • The expectation that the price may rise or fall may be enough • If you expect the price of a product you use to go up, you may increase your demand for the product now so you get it before the price goes up • If you expect the price to go down, you may decrease your demand now and wait for the price goes down

Demand Shifter:

“

Changes In The Price of Substitute Goods”

• When two products are substitute goods, consumers consider them identical enough to use either to satisfy the same want • If the price of a product that people use instead of yours goes up, consumers generally will purchase more of your product • If the price of the substitute product goes down, consumers using your product may start wanting the substitute instead

Demand Shifter: “

Changes In The Price of Complementary Goods”

• Complementary Goods = goods that are used together Example: Hot Dogs & Hot Dog Buns • When the price of that complimentary good goes up, demand for it will go down; so will demand for the other product • If the price of the complementary good goes down, demand for it will go up; and so will demand for the other product

In-Class Activity “Analyzing Demand Headlines”

Demand Headlines

A. Average Wages Decline for Workers Around the Country

How will this information likely affect the demand curve for movie tickets?

B. 1970s Styles Popular with High School & College Students

How will this information likely affect the demand curve for CDs of disco music?

C. Fast Food Chain Raises Prices on All Menu Items

How will this information likely affect the demand curve for the chain’s burgers?

D. Analysts Predict Video Game Prices to Increase Next Year

How will this information likely affect the current demand curve for video games?

E. Gas Prices Increase 200% Since Last Year

How will this information likely affect the demand curve for new sport utility vehicles (which get relatively poor gas mileage)?

F. Price for Fresh Blueberries Skyrockets – Cold Weather to Blame

How will this information likely affect the demand curve for fresh strawberries?

G. Hospitals Report Dramatic Decrease in Births

How will this information likely affect the demand curve for baby strollers?

H. Computer Maker Announces 20% Price Cut

How will this information likely affect the demand curve for the company’s laptops?

Critical Thinking

• Is a rapid increase in income and consumer spending a good thing or a bad thing for the economy?

• Can anyone explain how consumer prices are established?

• Explain how prices and quantity directly impact supply & demand • Can anyone provide additional examples of a complementary good?

Agenda

Day #2 - Economic News and Warm-Up (10 Min) - Review on Law of Demand and Demand Shifters (5 Min) - Lecture on “Supply and Supply Shifters” (20 Min) - Video on Law of Supply (5 Min) - Activity: “Analyzing Supply Headlines” (15 Min) - Work on Vocabulary Terms (15 Min) - Critical Thinking (5 Min) - Review (10 Min)

Warm-Up

What are some examples of current products that are considered to be in “high demand?” Are these products readily available, or are they difficult to purchase? Be prepared to explain.

Review Questions

Which of the following is NOT an example illustrating the government's participation in a market economy?

a. Tim pays income taxes from his paycheck that are used to fund the military, roads, welfare, etc.

b. Tim pays property taxes on his home, and those taxes are used to pay for police, fire, teachers, etc. in his community.

c. Tim's private security firm purchases guns from the U.S. Bureau of Alcohol, Tobacco, & Firearms.

d. Tim works as a teacher in Frederick County Public Schools and is paid a salary.

Which of the following is NOT an example illustrating the government's participation in a market economy?

a. Tim pays income taxes from his paycheck that are used to fund the military, roads, welfare, etc.

b. Tim pays property taxes on his home, and those taxes are used to pay for police, fire, teachers, etc. in his community.

c. Tim's private security firm purchases guns from the U.S. Bureau of Alcohol, Tobacco, & Firearms.

d. Tim works as a teacher in Frederick County Public Schools and is paid a salary.

Which of the following describes the LAW OF DEMAND?

a. When the price goes UP, the quantity demanded goes UP.

b. When the price goes DOWN, the quantity demanded goes UP.

c. When supply goes UP, demand goes UP.

d. When supply goes DOWN, demand goes UP.

Which of the following describes the LAW OF DEMAND?

a. When the price goes UP, the quantity demanded goes UP.

b. When the price goes DOWN, the quantity demanded goes UP.

c. When supply goes UP, demand goes UP.

d. When supply goes DOWN, demand goes UP.

Pam likes chocolate and enjoys eating mini chocolate candy bars as a snack during the day. When she eats that first mini candy bar, she gets a great deal of satisfaction out of it. However, as she eats more of those mini candy bars, she gets less additional satisfaction for each additional candy bar she eats, eventually not wanting any more. This illustrates which of the following economic concepts?

a. Capital Gains b. The Law of Demand c.

Inputs d. Diminishing Marginal Utility

a. Capital Gains b. The Law of Demand c.

Inputs d.

Diminishing Marginal Utility

What is meant by something being a DEMAND SHIFTER?

a. As price goes up, quantity demanded moves down along the demand curve.

b. As price goes up, quantity demanded moves up along the demand curve.

c. Variables in supply can shift the variables in demand.

d. At every possible price, there is an increase or decrease in the quantity demanded at that price (complete movement of the demand curve).

What is meant by something being a DEMAND SHIFTER?

a. As price goes up, quantity demanded moves down along the demand curve.

b. As price goes up, quantity demanded moves up along the demand curve.

c. Variables in supply can shift the variables in demand.

At every possible price, there is an increase or decrease in the quantity demanded at that price (complete movement of the demand curve).

The population of Winchester/Frederick County has increased by 5% in the last year. What effect will this have on the demand for apartments in the local area?

a. This will have no effect on market demand; only the quantity demanded will change.

b. Market demand will go UP.

c. Market demand will go DOWN.

d. Not enough information to determine what will happen.

The population of Winchester/Frederick County has increased by 5% in the last year. What effect will this have on the demand for apartments in the local area?

a. This will have no effect on market demand; only the quantity demanded will change.

Market demand will go UP.

c. Market demand will go DOWN.

d. Not enough information to determine what will happen.

Apple is dropping the price of their iPhones. What effect will this have on the demand for OtterBox protective cases for the iPhone?

a. This will have no effect on market demand; only the quantity demanded will change.

b. Market demand will go UP.

c. Market demand will go DOWN.

d. Not enough information to determine what will happen.

Apple is dropping the price of their iPhones. What effect will this have on the demand for OtterBox protective cases for the iPhone?

a. This will have no effect on market demand; only the quantity demanded will change.

Market demand will go UP.

c. Market demand will go DOWN.

d. Not enough information to determine what will happen.

It is July 4th. Consumers are expecting all the clothing retailers to put their clothes on sale for back-to-school starting the first week of August. What effect will this have on current demand for Hollister's clothes?

a. This will have no effect on market demand; only the quantity demanded will change.

b. Market demand will go UP.

c. Market demand will go DOWN.

d. Not enough information to determine what will happen.

a. This will have no effect on market demand; only the quantity demanded will change.

b. Market demand will go UP.

Market demand will go DOWN.

d. Not enough information to determine what will happen.

Law of Supply

Supply

• The quantity of a specific good or service that producers are

willing

and

able

to sell at various prices at a given time

• Specific elements to definition: • Quantity Supplied: how much of a good or service producers would provide at a specific price • Willingness To Sell: only concerned with producers who actually would want to sell the product • Ability To Sell: only concerned with producers who actually have the resources to sell the product • At a Specific Time: supply continually changes, so this is a snapshot for a specific time (or period of time) • Overall (Market) Supply = the sum total of all quantities supplied at all the various prices at which it could be sold

Law of Supply

• The lower the price, the less willing producers are to sell the product • As price goes down, the quantity supplied goes down • The higher the price, the more willing producers are to sell the product • As price goes up, the quantity supplied goes up

Typical Supply Curve Graph

1. Generally upward sloping 2. Not necessarily a straight line 3. Slope (rate of change) may be shallow or steep (or both) Quantity

Reasons Price & Quantity Move In The Same Direction for Supply

•

Production Decisions by Existing Producers

• Producers seek to maximize profits & minimize losses • They will increase their production of a good or service if they expect the profits on that item to increase • They will decrease their production of a good or service if they expect the profits on that item to decrease or result in a loss

•

Market Entries & Exits

• When the price of a good or service increases, new firms may enter the market because they see potential for a profit • When the price of a good or service decreases, some firms may exit the market because they want to avoid losses • The cost to them may exceed what the decreased selling price is • Firms all have scarce resources that have alternative uses • They will generally allocate their resources toward those activities that are the most efficient use (profit motive)

P 2 P 1 Change in Price “Movement Along The Supply Curve” Change in Quantity Q 1 Q 2

• Both factors cause producers to react in predictable ways to a change in the price of a good or service • As producers provide more in response to an increase in price (or less in response to a decrease in price), quantity supplied is said to “move along the supply curve.” Quantity • Only a change in price causes a change in quantity supplied.

Supply Shifters

• Factors that cause a change in overall supply • Quantity supplied is increased (or decreased) at all prices • Not just movement along the supply curve • Results in a need to redraw the supply curve to reflect the new overall supply • Increases in supply are shown as a shifting of the supply curve to the right • Decreases in supply are shown as a shifting of the supply curve to the left

Increase in Supply S 1 S 2 Decrease in Supply S 2 S 1

Quantity Quantity

•

Supply Shifter:

Change in the Cost of Inputs

When the cost of an input (factor of production) goes down , the product becomes more profitable at any given price, so supply goes up • If the cost of an input goes up, the product becomes less profitable and supply goes down

Supply Shifter:

Change in the Number of Producers

• When new producers enter a market, their production is added to the existing production, so supply goes up • When producers exit a market, their production is no longer being added to the market, so supply goes down

Supply Shifter:

Change in Conditions Due To Natural Disasters or International Events

• Natural disasters (like drought, crop freezes, hurricanes, etc.) can destroy crops or other resources needed for production, so supply goes down • International events (wars, threat of wars, etc.) can destroy resources or make them unavailable, so supply goes down

•

Supply Shifter:

Change in Technology

Technological advances can reduce the amount of labor needed to produce a good, thereby lowering costs and increasing productivity • Technological advances that lower costs generally lead to supply going up

Supply Shifter:

Change in Producer Expectations

• • Producers often make supply decisions based on the expectation that prices will rise or fall The price doesn’t actually have to change; just the expectation that it might is enough for some producers • • If producers expect the future price of a product to fall, they may decide to increase production now to take advantage of the current higher price This will cause supply of that product to go up • • If producers expect the future price of a product to rise, they may hold off on production now (or produce now but store the product in warehouses instead of selling it) so they might take advantage of the higher future price This will cause supply of that product to go down

•

Supply Shifter:

Change in Government Policy

Government actions can influence decisions by producers • • Government often provides loans, grants, tax credits or subsidies (direct cash payments) to producers in order to entice them to produce a product This will increase the supply of that product

• • • Government may increase taxes on a product (or producers of a product), making it less profitable to produce that product Taxes are another “cost of doing business” for companies, and increasing that cost can lead to some producers’ efforts becoming less profitable and an inefficient use of their scarce resources (time, capital, etc.) This will decrease the supply of that product

In-Class Activity

“Analyzing Supply Headlines”

Supply Headlines

I. Record Peach Harvest – Price Lowest in Decade

How will this information likely affect the supply curve for frozen peach pies?

J. U.S. Car Company To Close Six Factories

How will this information likely affect the supply curve for the company’s minivans?

K. Shoe Manufacturer Increases Prices on All Styles

How will this information likely affect the supply curve for the company’s sneakers?

L. Gas Prices Stay Low This Year – Rise Dramatically Next Year

How will this information likely affect the current supply curve for gasoline?

M. Robots Make Automobile Assembly Faster, Cheaper

How will this information likely affect the supply curve for cars?

N. Congress Passes New “Sugar Tax”

How will this information likely affect the supply for sugar?

O. Fire Destroys Thousands of Acres of Forest in Pacific Northwest

How will this information likely affect the supply curve for lumber from Oregon?

P. President Approves Subsidy for Solar Energy Industry

How will this information likely affect the supply curve for solar energy panels?

Critical Thinking

• Insert Questions here • Insert Questions here • Insert Questions here

Review

• Supply • Law of Supply • Supply Shifters • Changes in the Cost of Inputs • Changes in the Number of Producers • Changes in Conditions Due to Natural Disasters or International Events • Changes in Technology • Changes in Producer Expectations • Changes in Government Policy

Agenda

Day #3 - Economic News and Warm-Up (10 Min) - Review Questions on Law of Supply (5 Min) - Lecture on “Market Equilibrium” (20 Min) - Activity: Changes in Market Equilibrium (20 Min) - Lecture on Price Floors/Ceilings and Elasticity vs

Inelasticity (25 Min)

- Review (10 Min)

Warm-Up

What are some examples of current products that are considered to be in “high supply?” Are these products typically cheaper, or relatively costly? How does the oil supply impact current gas prices…and what other factors are involved? Be prepared to explain.

Review Questions

Which of the following describes the LAW OF SUPPLY?

a. When the price goes UP, the quantity supplied goes UP.

b. When the price goes DOWN, the quantity supplied goes UP.

c. When demand goes UP, supply goes UP.

d. When demand goes DOWN, supply goes UP .

Which of the following describes the LAW OF SUPPLY?

a. When the price goes UP, the quantity supplied goes UP.

b. When the price goes DOWN, the quantity supplied goes UP.

c. When demand goes UP, supply goes UP.

d. When demand goes DOWN, supply goes UP.

An early-winter freeze in Florida & Georgia destroys 30% of the tomato crop. What effect will this have on the supply of tomato sauce?

a. This will have no effect on market supply; only the quantity supplied will change.

b. Market supply will go UP.

c. Market supply will go DOWN.

d. Not enough information to determine what will happen.

An early-winter freeze in Florida & Georgia destroys 30% of the tomato crop. What effect will this have on the supply of tomato sauce?

a. This will have no effect on market supply; only the quantity supplied will change.

b. Market supply will go UP.

Market supply will go DOWN.

d. Not enough information to determine what will happen.

Tablet computers are becoming very popular. As a result, new companies are getting into the tablet computer market to try to take advantage of the computers' popularity. What effect will this have on the supply of tablet computers?

a. This will have no effect on market supply; only the quantity supplied will change.

b. Market supply will go UP.

c. Market supply will go DOWN.

d. Not enough information to determine what will happen.

a. This will have no effect on market supply; only the quantity supplied will change.

b. Market supply will go UP.

c. Market supply will go DOWN.

d. Not enough information to determine what will happen.

A hurricane hits the Gulf Coast, temporarily closing or damaging off-shore oil drilling platforms and coastal refineries. What effect will this have on the supply of gasoline?

a. This will have no effect on market supply; only the quantity supplied will change.

b. Market supply will go UP.

c. Market supply will go DOWN.

d. Not enough information to determine what will happen.

A hurricane hits the Gulf Coast, temporarily closing or damaging off-shore oil drilling platforms and coastal refineries. What effect will this have on the supply of gasoline?

a. This will have no effect on market supply; only the quantity supplied will change.

b. Market supply will go UP.

c. Market supply will go DOWN.

d. Not enough information to determine what will happen.

DuPont has developed a new chemical additive for automotive paint that will cut the amount of time it takes for paint to dry by half. This will allow automobile manufacturers to speed up their assembly lines, since they won't have to wait as long for their painted parts. What effect will this have on the supply of automobiles?

a. This will have no effect on market supply; only the quantity supplied will change.

b. Market supply will go UP.

c. Market supply will go DOWN.

d. Not enough information to determine what will happen.

a. This will have no effect on market supply; only the quantity supplied will change.

b. Market supply will go UP.

c. Market supply will go DOWN.

d. Not enough information to determine what will happen.

Wheat producers anticipate the price of wheat going up 6 months from now. What will happen to the current supply of wheat being sold in the market?

a. This will have no effect on market supply; only the quantity supplied will change.

b. Market supply will go UP.

c. Market supply will go DOWN.

d. Not enough information to determine what will happen.

Wheat producers anticipate the price of wheat going up 6 months from now. What will happen to the current supply of wheat being sold in the market?

a. This will have no effect on market supply; only the quantity supplied will change.

b. Market supply will go UP.

c. Market supply will go DOWN.

d. Not enough information to determine what will happen.

Market Equilibrium

• The point where buyers & sellers agree •

Equilibrium Price

• The price at which the quantity demanded by consumers is equal to the quantity producers are willing to supply • Also called market-clearing price • All consumers willing to purchase at that price are able to satisfy their want for that product • All producers who produce the product at that price are able to sell all of their products •

Equilibrium Quantity

• The quantity that is both demanded and supplied at that price

Graph of Equilibrium

S Equilibrium Price Equilibrium Quantity D

Quantity

Surplus

• Results when price is too high • Producer sets price at which the amount he/she is willing to produce is more than the amount consumers are willing to buy at that price • Inefficient use of resources • Resources that could be used in more productive ways is instead tied up in inventory sitting on a shelf that no one wants to buy at that price

P Q D D Q S

Quantity

Shortage

• Results when price is too low • Producer sets price at which the amount he/she is willing to produce is less than the amount consumers are willing to buy at that price • Results in: • Unsatisfied consumer demand • Lost sales & profits for producer

P Q S D Q D

Quantity

Prices Move To Bring Markets Into Balance

• Producers set price • Producers know what quantity they are willing to provide at that price • Producers are hoping that the quantity demanded for the product at that price will equal what they produced

• If producers set price too high, surpluses will occur • Producers will have excess quantities of the product that consumers are unwilling to buy at that price • Producers will lower price • The lower price will create an incentive for: 1. Some existing producers to reduce production 2. Other existing producers to exit the market 3. More consumers to enter the market to take advantage of the lower price

• If producers set price too low, shortages will occur • Consumers will have unsatisfied demand • Consumers will start to bid higher prices for the product, driving the price up • The higher price will create an incentive for: 1. Existing producers to increase production 2. Lure new producers into the market 3. Convince some consumers to exit the market because they are unwilling to pay higher price

• Pressure to avoid surpluses and shortages results in price moving toward equilibrium • The Laws of Supply & Law of Demand work together to push the price of a good or service to a level where the quantity demanded and the quantity supplied are equal • This is why markets are said to be governed by the laws of supply & demand

How Do Shifts in Demand or Supply Affect Markets?

• Shifts in Demand or Supply change the market’s equilibrium point • Shifts in market demand & market supply make changes to equilibrium that are predictable • These changes to equilibrium are easily visualized on a graph of supply & demand

An Event Increases Market Demand

• There is a larger quantity demanded at all prices • This is illustrated by a shift of the demand curve to the right • Results: • Equilibrium Price increases • Equilibrium Quantity increases

P 2 P 1 Q 1 Q 2 S D 1

D 2

• Why does an increase in demand result in an increase in equilibrium price and equilibrium quantity?

• An increase in demand means that, at any price, more consumers are willing and able to make that purchase.

• Those consumers will start to outbid each other for the item (price increase).

• Producers, seeing that it will be more profitable to provide that product, will begin to produce more of that product.

• Existing producers will increase production, and some new producers may enter the market (quantity increase).

An Event Decreases Market Demand

• There is a smaller quantity demanded at all prices • This is illustrated by a shift of the demand curve to the left • Results: • Equilibrium Price decreases • Equilibrium Quantity decreases

P 1 P 2 Q 1 Q 2 S D 2 D 1

• Why does a decrease in demand result in a decrease in equilibrium price and equilibrium quantity?

• A decrease in demand means that, at any price, fewer consumers are willing and able to make that purchase.

• Producers will start to underbid each other for the item to try to get customers to buy their product (price decrease).

• Producers, seeing that it will be less profitable to provide that product, will begin to produce less of that product.

• Existing producers will decrease production, and some producers may exit the market (quantity decrease).

An Event Increases Market Supply

• There is a larger quantity supplied at all prices • This is illustrated by a shift of the supply curve to the right • Results: • Equilibrium Price decreases • Equilibrium Quantity increases

P 1 P 2 S 1 S 2 D Q 1 Q 2

• Why does an increase in supply result in a decrease in equilibrium price and increase in equilibrium quantity?

• An increase in supply means that, at any price, more producers are willing and able to provide that product.

• Producers will start to underbid each other for the item to try to get customers to buy their product (price decrease).

• Consumers will see that it is more affordable to buy that product • Consumers will begin to buy more of the product (quantity increase).

An Event Decreases Market Supply

• There is a smaller quantity supplied at all prices • This is illustrated by a shift of the supply curve to the left • Results: • Equilibrium Price increases • Equilibrium Quantity decreases P 2 P 1

Q 2 Q 1 S 2 S 1 D

In Class Activity:

“

Changes in Market Equilibrium””

Elasticity

• The degree to which a quantity demanded or quantity supplied changes in response to a change in price • Quantity demanded or supplied for some products is highly sensitive to changes in price • Quantity demanded or supplied for some products is not sensitive to changes in price

Elasticity of Demand

• A product for which the quantity demanded changes significantly for a given change in price is referred to as having elastic

demand

• A small change in price results in a large change in the quantity demanded • Graph of demand curve is relatively flat

P 2 P 1 D Q 2 Q 1

• A product for which the quantity demanded changes minimally for a given change in price is referred to as having

inelastic demand

• Any change in price results in a small change in the quantity demanded • Graph of demand curve is relatively steep P 2 P 1

Q 2 Q 1 D

Factors that Influence Elasticity of Demand

•

Availability of Substitutes

• The quantity demanded for a product tends to be elastic when it has more close substitutes • Consumers start buying the substitutes • The quantity demanded for a product tends to be inelastic when it has few substitutes • Consumers don’t have other options for purchase

•

Price Relative to Income

• “Big ticket” items whose price will take a larger portion of a consumer’s income tend to be elastic • Price increase will tend to take a large additional chunk of the consumer’s income • Price decrease will allow the consumer to save a much larger portion of his/her income • Inexpensive items tend to be inelastic • Price increase will tend to take very little additional income • Price decrease will allow the consumer to save a very small portion of his/her income

•

Necessities versus Luxuries

• A product that is very needed by the consumer will have inelastic demand • Consumer must have the product, so he/she is willing to pay whatever is necessary • A product that is a “nice to have” luxury that is not critical for day-to-day living will have more elastic demand • Consumer can easily do without the product, so he/she just stops buying it

•

Time Needed to Adjust to Price Change

• A product for which a lot of time is needed to adjust to price changes has inelastic demand • Consumer may need time to adjust lifestyle & purchasing habits to compensate for the price change • A product for which little time is needed to adjust to price changes has elastic demand • Consumer can adjust lifestyle & purchasing habits quickly

Elasticity of Supply

• A product for which the quantity supplied changes significantly for a given change in price is referred to as having elastic supply • A small change in price results in a large change in the quantity supplied • Graph of supply curve is relatively flat

P 2 P 1 Q 1 Q 2

• A product for which the quantity supplied changes minimally for a given change in price is referred to as having

inelastic supply

• A small change in price results in a small change in the quantity supplied • Graph of supply curve is relatively steep P 2 P 1

Q 1 Q 2 S

Factors That Influence Elasticity of Supply

•

Availability of Inputs

• If factors of production are readily available to respond to an increase in price, the product has elastic supply • Can more easily get the resources needed to increase production if the price increases • If factors of production are not readily available to respond to an increase in price, the product has inelastic supply

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Mobility of Inputs

• How quickly a producer can get the inputs from their source to where he/she needs them for production • A product for which the producer can quickly get the inputs from their source has elastic supply • Can more quickly get the inputs needed to increase production • A product that will take a while to get the inputs from their source has inelastic supply • Cannot quickly get the inputs needed to increase production

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Storage Capacity

• How easily can the product be stored as it moves from producer to consumer • A product that can be stored more easily if the price goes down or up has elastic supply • Can be warehoused and saved until price goes back up • A product that is perishable and therefore not stored easily for long periods of time has inelastic supply • Product will go bad before it can be sold if it is taken off the shelves when price goes down

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Time Needed to Adjust to a Price Change

• A product for which production can be adjusted quickly has elastic supply • Can more rapidly adjust production in response to a price change • A product for which production cannot be adjusted quickly has inelastic supply • Difficult to adjust production in response to a price change

Roles of Prices in a Modern Mixed Economy

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Prices Convey Information to Consumers & Producers

• For consumers, price signals the opportunity cost of buying any product • The higher the price, the higher the opportunity cost • For producers, price tells producers what consumers want • Prices above or below equilibrium results in surpluses/shortages, letting the producer know if they overestimated/underestimated demand

• Producers use prices to appeal to the consumers they hope will buy their products • If you want to target customers that have lower incomes, you will sell products at lower prices • If you want to target customers that have higher incomes, you will sell products at higher prices • Consumers use price as a measure of the quality of the product • Products of high quality made with a high degree of skill and/or using expensive materials and technology tend to have higher prices • The consumer need not know the details; the price is a measure of that

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Prices Create Incentives to Work & Produce

• Principle #4: Incentives Matter (people respond to incentives) • For producer, price represents potential for profit • Rising prices motivate existing firms to produce more and new firms to enter the market • Falling prices serve as incentive for firms to cut back on production and avoid losses

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Prices Allow Markets to Respond to Changing Conditions

• Prices go up when unexpected shortages occur due to natural disasters or international events • Higher prices incentivize firms to figure out new ways to get the products to consumers • More costly ways of producing the product that were once unprofitable may now be profitable • Prices give markets the flexibility they need to reach equilibrium even under changing conditions

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Prices Allocate Scarce Resources Efficiently

• Prices guide resources to their most efficient use • Scarce resources have alternative uses • Price will guide those resources to use that has the most value to consumers • Producers “automatically” (due to the incentives created by the price) adjust to produce more of what is making money & less of what is losing money

Price Controls

• Placing limits on how high or low a certain price may be • Illegal if businesses do it • Called price fixing and restrains trade • Legal if government does it • Normally done if they think that the market would set price “unfairly” high for consumers or “unfairly” low for producers

Price Floor

• Minimum price for a product that is above market price • Why government does it: • Want to protect industries who they feel may not survive if price is allowed to drop to market equilibrium price • Want to ensure minimum profitability for businesses in that industry • As with any product whose price is set above equilibrium, surpluses occur for that product • Options for government for dealing with surpluses: 1. Buy surplus (increase market demand for product) • 2. Pay producers not to produce (reduce market supply for product) • • Consumer loses because he/she pays price higher than what he/she would pay without the price floor Inefficient use of consumer’s scarce resource (money) Paying higher taxes to cover government payments to producers

Price Ceiling

• A maximum price that is set below market equilibrium • Why government does it: • To protect consumers from paying what, according to the government, is “too much” for a product • As with any other price set below equilibrium, shortages occur for that product • How government deals with the shortage: • Rationing – government-controlled distribution of the limited supply of the good or service • How the market deals with the shortage: • Black Market – illegal market in which product is traded at higher price or higher quantities than those allowed by law

Critical Thinking

• What are some of the other markets where the government should intervene by establishing a price floor and/or ceiling?

• Can you think of any examples of “price fixing” over recent years?

• As a business owner, would you ever set prices above/below that of where supply and demand intersect?

Review

Agenda

Day 4 - Headline News, Market Watch and Warm-Up (10 Min) - Review for Vocabulary Quiz (5 Min) - Unit 4 Vocabulary Quiz (15 Min) - Review for Unit 4 Test (20 Min) - Activity “Hallway Supply/Demand Headlines” (40 Min)

VOCAB QUIZ

(Insert Quia Quiz) GOOD LUCK!!!!

Test Review

Critical Thinking

• Insert Questions here • Insert Questions here • Insert Questions here

Agenda

Day 5 - Economic News & Test Review (15 Min) - Unit 4 Test (60 Min) - Unit 4 Test Summary of Results & Analysis (10 Min) - Introduction to Unit 5 (5 Min)