Download Chapter 3 Overview

6 degrees of separation…
• Facebook application “6 Degrees”
• Group page showed 5.2 million users (as of July
31, 2009)
– Average separation for all users 5.73 degrees
– Maximum degree of separation is 12
• Turn & Talk:
– Is this plausible?
– What is the oddest connection you found with
another person?
“No man is an island.”
Examining the Circular Flow in the
Economy.
Economic Interdependence
• What does ‘interdependence’ mean?
• Economic Interdependence:
the actions of one part of the country (world)
has an impact on what happens elsewhere
Understanding how all parts fit
together
Circular Flow of Economic Activity
 Represents a market economy
 2 main “markets”
Product Market:
where goods and services
are bought and sold

Factor Market:
where the 4 factors of
production are bought/sold
 Shows interdependence between
businesses and individuals
Human
Circular Flow Model…
ECONO FACTORY
• Attention Business Owners:
– To produce 1 ECONO, you must turn in
• 1 unit human resources (beads)
• 1 unit natural resources (bean)
• 1 unit capital goods (paper clip)
ALL SALES ARE FINAL
NO SUBSTITUTIONS OR RETURNS ACCEPTED
TRADING GOALS
• HOUSEHOLDS: sell your resources for the
highest price for money to firms to buy as
many ECONOS as possible with money earned
• FIRMS: buy your resources with money for
the best price to create ECONOS and sell to
households for as much money as possible
Simulation Debriefing
• Which household obtained the most ECONOS
(goods and services)?
• Which business firm accumulated the most
money?
• Did this feel realistic? Where do you
experience trading like this in your life?
The Circular Flow
Goods and services
demanded
Consumers
Product
markets
Governments
Factors of
production supplied
International
participants
Factor
markets
International
participants
Goods and services
supplied
Business
Firms
Factors of
production demanded
Closing Simulation Discussion
Think of your own experiences as
worker or consumer. How might
government play a role in the circular
flow we examined today? What role
would they play in factor markets?
In product markets?
Supply and Demand
Chapter 3
Market Participants Goals?
Maximizing
• Consumers maximize their utility
(satisfaction) given limited resources.
• Businesses try to maximize profits by using
resources efficiently in producing goods.
• Government maximizes general welfare of
society.
The Two Markets
• Factor markets are any place where factors of
production (e.g., land, labor, capital) are
bought and sold.
• Product Markets are any place where finished
goods and services (products) are bought and
sold.
Locating Markets
• A market exists wherever and whenever an
exchange takes place.
The Circular Flow
Goods and services
demanded
Consumers
Product
markets
Governments
Factors of
production supplied
International
participants
Factor
markets
International
participants
Goods and services
supplied
Business
Firms
Factors of
production demanded
Dollars and Exchange
• Every market transaction involves an exchange
of dollars for goods (in product markets) or
resources (in factor markets).
Supply and Demand
• There must be a buyer and a seller in every
market transaction.
– The seller is on the supply side of the market.
– The buyer is on the demand side of the market.
LO1
Supply and Demand
• Demand is the ability and willingness to buy
specific quantities of a good at alternative
prices in a given time period, ceteris paribus.
LO1
Law of Demand
 Quantity demanded (Q-d) of a product
varies inversely with price (P), other things
equal.

P 
Q-d

P 
Q-d
The Demand Curve
 Illustrates the quantity that consumers will
demand at each and every price.
 Downward sloping.
Price
Demand Curve
Quantity
Demanded
A Change in Quantity-Demanded
 Movement along the demand curve
 Shows a change in the quantity of the product
purchased in response to
a change in price,
other things equal.
Price
 Example:
If the price of an I-Phone
decreases, the
quantity-demanded of
I-phones would increase.
Quantity
Demanded
Change in Demand
Other things equal, a change in 1 of the factors listed
below will shift the entire demand curve left or right.
This means that at each and every price,
the quantity-demanded will also increase or decrease.
• Tastes — desire for this and other goods.
• Income — of the consumer.
• Other goods — (subs & complements) their availability
and price.
• Expectations — for income, prices, tastes.
• Number of buyers.
Other Goods
• Substitute goods substitute for each other.
– When the price of good x rises, the demand for
good y increases, ceteris paribus.
• Complementary goods are frequently
consumed in combination.
– When the price of good x rises, the demand for
good y falls, ceteris paribus.
LO3
Change in Quantity-Demanded
v. Change in Demandemand
• Caused by a change in the price of the
Change in product, other things equal.
quantitydemanded • Illustrated by a movement along the
current demand curve.
• Caused by a change in one of the four
“non-price” determinants of demand,
Change in other things equal.
demand • Illustrated by a shift of the entire
demand curve left or right.
Market Demand
• Market demand is the total quantities of a
good or service people are willing and able to
buy at alternative prices in a given time
period.
• It is the sum of individual demands.
LO1
The Market Demand Curve
• Market demand represents the combined
demands of all market participants.
• The separate demands of individual
consumers is added up to determine the total
quantity demanded at any given price.
LO1
Construction of the Market Demand
Curve
Quantity of Tutoring Demanded
(hours per semester)
Price
(per hour)
Tom
A
50
1
4
0
0
5
B
45
2
6
0
0
8
C
40
3
8
0
0
11
D
35
5
11
0
0
16
E
30
7
14
1
0
22
F
25
9
18
3
0
30
G
20
12
22
5
0
39
H
15
15
26
6
0
47
I
10
20
30
7
0
57
LO1
+
George
+
Lisa
+
Me
=
Market
Demand
Construction of the Market Demand
Curve
The market demand curve
$50
A
B
=
Price
40
C
D
30
E
F
20
G
H
10
0
LO1
4
12
20
28
36
I
Quantity Demanded
Demand Problem Set Recap
1. Consumer income
falls. Illustrate the
demand curve for
boats.
Demand Problem Set Recap
2. A recent airline crash
has people worried
about air travel.
Illustrate demand for
plane tickets.
Demand Problem Set Recap
3. The price of butter
decreases. Illustrate
the demand curve for
margarine.
Demand Problem Set Recap
4. The price of computers
calls. Illustrate the
demand for printers.
Demand Problem Set Recap
5. The price of DVD
players increases.
What happens to the
demand for DVD
players?
Sneakers for Sale!
• Design a Sneaker
• Conduct Market Research
• What is the market demand for your sneaker
at alternative prices?
Demand Problem Set Recap
1. Price of Jeans falls.
What happens to
demand for khakis?
Demand Problem Set Recap
2. Digital cameras are
easier to use. What
happens to demand
for cameras?
Demand Problem Set Recap
3. The price of coffee
makers rises. What
happens to demand
for ground coffee?
Demand Problem Set Recap
4. If consumer income
increases, what
happens to the
demand for GPS
devices?
Match Up!
• More Umbrellas Sold on
Rainy Days
• Change in Demand (Shift
Curve Right)
• Reduced Phone Rates on
Weekends
• Change in Demand (Shift
Curve Left)
• Long-Stem Roses on 2/14
• Change in Qty Demanded
(Move Left)
• Gas Price Spike
Carpooling Increase
• Change in Qty Demanded
(Move Right)
Unit 1, Chapter 3
SUPPLY
Supply
 What is supply?
–The ability and willingness of producers to
offer products for sale.
› The producers (suppliers) decide how
much to offer for sale at various prices.
› This decision depends on the cost of
producing goods/services.
Law of Supply
 The quantity supplied(Q-s)for a product
varies directly with its price,
other things equal.

P 
Q-s

P 
Q-s
The Supply Curve
 Illustrates the quantity that suppliers will
supply at each and every price.
 Upward sloping.
Price
Supply Curve
Quantity
Supplied
A Change in Quantity-Supplied
 Movement along the supply curve
 Shows a change in the quantity of the product
supplied in response to
a change in price,
other things equal.
Price
 Example:
If the price of an I-phone
increases, the
quantity-supplied of
I-phones would increase.
Quantity
Supplied
Change in Supply
1.
2.
3.
4.
5.
6.
Technology
Factor Cost (Inputs)
Other Goods
Taxes & Subsidies
Expectations
Number of Sellers
Remember:
Suppliers want to sell
more at a higher
price
Change in Quantity-Supplied
v. Change in Supply
Change
in
quantitysupplied
Change
in supply
• Caused by a change in the price of the
product, other things equal.
• Illustrated by a movement along the
current supply curve.
• Caused by a change in one of the eight
“non-price” determinants of supply,
other things equal.
• Illustrated by a shift of the entire supply
curve left or right.
Supply Problem Set Recap
1. The cost of sheet metal
goes up. Illustrate the
supply curve for cars.
Supply Problem Set Recap
2. New technology allows
for more efficient
product of Wiis.
Illustrate the supply
curve for Wiis.
Supply Problem Set Recap
3. Subsidies for computer
producers increase.
Illustrate the supply
curve for computers.
Supply Problem Set Recap
4. The number of tuxedo
producers declines.
Illustrate the supply
curve for tuxedos.
Supply Problem Set Recap
5. The price of DVD
players increases. What
happens to the supply
curve for DVD players?
Essential Question:
How does the market mechanism set prices?
THE MARKET FOR WHEAT
Playing “A Market in Wheat”
Buyer’s Sample
Playing “A Market in Wheat”
Seller’s Sample
Market for Wheat:
Classroom Tally Sheet
Price
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
Round 1
Round 2
Round 3
Market for Wheat:
Graphing Supply & Demand
P
Q
Who determines the price
of a good/service?
Price is determined by both the buyer and
the seller.
The Invisible Hand
• The market mechanism is the use of market
prices and sales to signal desired outputs (or
resource allocations).
• Adam Smith characterized this market
mechanism as the invisible hand.
LO2
Hypothesize…
how do you think the goals of
buyers and sellers differ?
• Buyers
– Buy more at lower prices
• Sellers
– Sell more at higher prices
• Result
– Market Equilibrium
• Quantity supplied = Quantity demanded
– From this, we determine “Ep” and “Eq”
• Most efficient combination of what buyers &
sellers want
Equilibrium
• The equilibrium price is the price at which the
quantity of a good demanded in a given time
period equals the quantity supplied.
LO2
Market Clearing
• The equilibrium price reflects a compromise
between buyers and sellers.
• Everyone is not happy with the prevailing
equilibrium price or quantity.
• The unique outcome at market equilibrium is
efficient.
LO2
Equilibrium Price
Price
$50
45
40
35
30
25
20
15
10
LO2
Quantity Supplied
148
140
130
114
90
62
39
20
10
surplus
surplus
surplus
surplus
surplus
surplus
equilibrium
shortage
shortage
Quantity Demanded
5
8
11
16
22
30
39
47
57
Equilibrium Price
Price
$50
45
40
35
30
25
20
15
10
5
0
LO2
Market demand
Market supply
At equilibrium price, quantity demanded
equals quantity supplied
Equilibrium price
25
39
50
75
100
125 Quantity
Market Equilibrium Problem Set Recap
1. There is an increase in
consumer income,
what happens to the
S&D graph for jeans?
A Social Studies Valentine
Agenda
• Review of S & D
• Shortages and Surpluses
• Study Guide Review
• Review Game
• Application Bonus (get out of 1 short answer!)
Market Equilibrium Problem Set Recap
2. There is a decrease in
the cost of cotton.
What happens to the S
& D graph for T-shirts?
Market Equilibrium Problem Set Recap
3. The auto industry sees
increase in
government
regulations. What
happens to the S & D
graph for cars?
Market Equilibrium Problem Set Recap
4. The price of peanut
butter increases.
What happens to the S
& D graph for jelly?
Shortages v. Surpluses
Disequilibrium in the price system
Market Surplus  Q-s > Q-d
“All who want it, have it”
• Exists when…
– Price is above market equilibrium
• At a higher price…
– Consumers want to buy less
– Producers want to supply more
• Seller’s asking price is too HIGH
• To fix the surplus…
– Producers are forced to lower prices …
and consumers will demand more
Brouda’s Sodas
• A decrease in the cost of
sugar causes us to
increase our supply
• If we hold our price there
is a surplus
• If we lower the price,
consumers increase
quantity demanded & the
market clears
Market Shortage  Q-d > Q-s
“Not enough to go around”
• Exists when…
– Price is below market equilibrium
• At a lower price…
– Consumers want to buy more
– Producers want to supply less
• Seller’s asking price is too LOW
• To fix the shortage…
– Producers realize consumers would be
willing to pay more … they increase price
and offer more for sale
Brouda’s Sodas
• A scientific report shows
soda is good for you and
increases the demand for
soda
• If we hold our price there
is a shortage
• If we raise the price,
consumers decrease
quantity demanded & the
market clears
Surplus and Shortage
Price
$50
45
40
35
30
25
20
15
10
5
0
LO2
Market demand
Market supply
Surplus
x
y
Shortage
25
39
50
75
100
125 Quantity
Self-Adjusting Prices
• A market surplus will emerge when the
market price is above the equilibrium price.
• A market shortage will emerge when the
market price is below the equilibrium price.
LO2
Self-Adjusting Prices
• AS LONG AS NO PRICE CEILINGS OR FLOORS
EXIST…
• Buyers and sellers will change their behavior
to overcome a surplus or shortage.
Only at the equilibrium price will no
further adjustments be required.
LO2
Surplus and Shortage
Price
$50
45
40
35
30
25
20
15
10
5
0
LO2
Market demand
Market supply
Surplus
x
y
Equilibrium price
Shortage
25
39
50
75
100
125 Quantity
Practice Makes Perfect!
• Work with a partner to
create your own
business.
• Imagine something that
would change supply
for your item.
• Imagine something that
would change demand
for your item.