Download Econ -Unit 2 PowerPoint

Economics
Unit 2
Chapters 4-6
Time: 2.5 Weeks
Materials: Unit 2
Packet and Chapter
Problem Sets
UCA: Banana Market
1
Economics
Unit 2 Part I
-Gains from TradeTopic: Unit 2 Part 1 –
Specialization and Gains
From Trade
EQ: How does
comparative and
absolute advantage lead
to supply and demand?
CSS: 12.1.1 Scarcity/choices, 12.1.2 Marginal benefit/cost, 12.1.3 Incentives
2
• Specialization
– Individuals become highly skilled
in specific tasks
• I teach economics and government,
I don’t milk a cow  why not, well
b/c it is a waste of my time.
– Allows for Division of Labor
• Do one job and do it well
• Creates trade among individuals for
items they have no skill to produce
• Trade
– Always a voluntary exchange of:
• Goods  I want ______(enter what
is important to you)
• Services  my hard work (service)
provides you with the means (good
grade = higher paying job) to
purchase said good
3
• Trade is needed to exploit
advantages
– Found in economies:
• Traditional: the use of coincidence of
wants = barter for goods that are
NEEDED
• Market: the use of fiat (fake) money
• Economic Interdependence
– Require the removal of trade barriers
to work efficiently
– Found in U.S. Constitution’s
“Commerce Clause”
• Article I Section 8 > “Congress shall have
Power…to regulate Commerce with
foreign Nations, and among the several
States.”
• Question = why was the Constitution set
up this way?
4
• Self-Sufficiency or
Interdependence?
– Absolute Advantage
• Use fewer resources to produce
same good/service
• You’re just better at everything . .
. Kinda’ like Kanye West.
• Benefits of Comparative
Advantage
– Theory developed by David
Ricardo in 1817
• Perform a task AT A LOWER
OPPORTUNITY COST
– in other words, if your OC is lower
than another persons, you will
perform that task because it
benefits you more (profit motive)
– This allows you to specialize in
something and trade for
something else
– This theory applies to COUNTRIES
as well as INDIVIDUALS
5
Opportunity Costs
6
• Specialization Benefits us in
three ways:
– Puts goods in the hands of
those who value them
• You’re only going to buy it if you
value the item
– Increases the quantity/variety of
goods
• Due to specialization of tasks/skills
– Lowers costs of goods
• Open trade to areas of less
expensive production -> China and
cheap manufactured goods
• Expanding markets for goods
increase the sale of goods
7
Specialization Quick Review
1. The term “specialization"
A.
B.
C.
D.
describes a person who has a lower opportunity cost to create something
better than someone else
describes a person who has a higher opportunity cost to create something
better than someone else
describes has nothing to do with opportunity cost
Squirrels make me laugh.
2. Trade makes us:
A.
B.
C.
D.
Better off
Worse off
Neutral, kinda’ like Switzerland
Better off if we have a lower opportunity cost for the good that we are
trading for
3. Comparative advantage
A.
B.
C.
D.
Puts goods in the hands of those who values them
Means you have a lower opportunity cost to produce a good
Lowers the costs of goods
All above are correct
8
Gains from Trade Review
1. Explain why I don’t milk cows  yes, that is
a real question with a real answer.
2. What is absolute advantage?
3. What is comparative advantage?
•
•
Give an example of each of the terms above.
What is the difference between the two?
4. Name the three ways in which trade
benefits all of us. Give an example of each.
5. Now answer the EQ with your partner (this
is your summary).
9
Economics
Topic: Unit 2 Part 2
-DemandEQ: Who creates
demand and
what causes
demand for a
good/service to
change (shift)?
MMM, Donuts
10
Indiana Jones!!!
11
MARKETS AND COMPETITION
One thing is very important
for the next few weeks: we
are always talking about the
SHORT RUN and we are only
looking at the specific market
conditions that I give you.
• Buyers determine demand.
• Demand will always,
always, go down to the
ground when we graph it
– Think: “D”emand = “D”own
12
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.
13
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.
• Price is always on the “Y”
Axis
• Quantity is always on the
“X” Axis
Demand for
a donut
Price for a
donut
$2.50
$2.00
$1.50
$1.00
$.50
14
Basic Demand Graph
Y = Price
Demand Curve
The demand curve (D)
is a graph of the
relationship between
the price of a good
and the quantity
demanded (think
QD=Price).
X = Quantity
15
Variable that influence a MOVEMENT along
the demand curve is called a change in the
quantity demanded
A TAX is the most common reason for
the change of price.
Think: If the price of donuts goes up, I
will buy less of them b/c I will buy
some other breakfast food instead . . .
Thus b/c of the price I will have a
change in the quantity demanded for
donuts (as a consumer, I want to
16
maximize my profit).
Copyright©2004 South-Western
Basic Demand Graph –Class Results
Period 2
Demand for
a Donut
8
11
FOR DONUTS
21
26
29
Market Demand
Period 3for Donuts Period 4
Price for a
Donut
Demand for
a Donut
Price of Donuts
Period 5
Demand
Price for
for a Donut a Donut
71
7
$2.50
96
10
$2.00
14
$1.50
106
22
$1.00
25
$0.50
106, 0.5
150
f Donuts
Demand for
a Donut
Market
Market
Price
$2.50
12
$2.50
2
Demand for
for a Donut
$2.00
11 a
$2.00
5
$1.50 Donut19
$1.50
17
$1.00
25
$1.00
23
29 28
$0.50
$0.50 $2.50 24
37
6, 1
Price for a
Donut
Price for a
Donut
$2.50
$2.00
$1.50
$1.00
$0.50
$2.00
$1.50
$1.00
$0.50
17
Demand Quick Review Short Answer #1
Governor Brown just passed A.B. (Assembly Bill)
1388 which decrease the taxes on gas. What is
going to happen to the demand for gas?
Demonstrate by using a graph.
18
Demand Quick Review Short Answer #2
The price of sugar increases due to a tax. What will
happen to demand for Soda? Demonstrate by using
a graph.
19
The Shifting Demand Curve
• Demand Curve
shifts when:
– There is a change in
the amount of a
good demanded
regardless of price
– This is called a
change in the
amount demanded
– There are five
variables that cause
a demand curve to
shift
– Shifts are based on
quantity
Shift in Demand for Donuts
Vader
Video #2
Demand
Curve Shifters
20
Variables that influence a SHIFT of the
whole demand curve. Remember, only a
change in one is needed to cause a shift
21
Copyright©2004 South-Western
Shifts in the Demand Curve
• Consumer Income
– As income increases the
demand for a normal
good will increase.
LEXUS
• People might even buy a
superior good
– As income increases the
demand for an inferior
good will decrease.
TOYOTA
SCION
C
O
N
S
U
M
E
R
I
N
C
O
M
E
22
Complements and Substitutes
• Prices of Related Goods
23
Demand Quick Review
If the government announces today that a tax
increase of 50 cents per pack of cigarettes is to take
place in two weeks, what would you expect to
happen today to the current market for cigarettes?
a. The demand for cigarettes would increase.
b. The demand for cigarettes would decrease.
c. The price of cigarettes would increase.
d. Both a) and c) are correct.
e. Both b) and c) are correct.
24
Demand Quick Review
If a loaf of bread is an inferior good, then what will
happen in the market for the loaf of bread as the
consumer income increases?
a. The market quantity will increase.
b. The market quantity will decrease.
c. There will be no change in market quantity
demanded.
d. What does inferior mean?
25
Demand Quick Review Short Answer #3
If consumers expect a new version of Nike Michael
Jordan shoes to be introduced next week, how is
that going to change the demand curve for the
shoes THIS WEEK? Demonstrate by using a graph.
26
Demand Quick Review Short Answer #4
Mr. Maino makes the following statement in class, “you
should take advantage of the college courses offered at
THS, it’s good for your educational knowledge (and
future income).” What is going to happen to the
demand for college classes offered at THS?
Demonstrate by using a graph.
27
Demand Quick Review Short Answer #5
Governor Brown just passed A.B. (Assembly Bill)
1388 which decrease the taxes on gas. What is
going to happen to the demand for SUV’s?
Demonstrate by using a graph.
28
Demand Quick Review Short Answer #6
The price of Coke increases. What will happen to
demand for Pepsi? Demonstrate by using a graph.
29
Unit 2 Part 3
Topic: Chapter 4
Demand Elasticity
EQ: Explain how
demand reacts to a
change in price . . .
In other words, how
far will your dollar
stretch
Think about it this way: The degree to which demand for a good
or service varies with its price. That degree is “elasticity”.
CSS: 12.1.1 Scarcity/choices, 12.1.2 Marginal benefit/cost, 12.1.3 Incentives
30
Gas Prices in California
Why is there such a
huge swing in
prices?
Are these prices
“fair” for the
consumer?
31
Determinants of Elasticity
1. Number of Substitutes Available
– More substitutes means more elasticity
• You will not pay a lot for something when you can get a
substitute for cheaper
– Less substitutes means less elasticity
2. Luxury vs. Necessity
– Luxuries tend to be more elastic—you can wait
– Necessities, well, you need them, hence inelastic
• I must have heart medication regardless of the price
3. How Much of your Income the Good Costs
– More of your pay: elastic
• When you make more money, it usually goes to luxuries
– Less of your pay: inelastic
32
How to tell…
• Unlike demand variables, where only
one is needed to shift the curve, all
elasticity determinates must be looked
at; then 2 out of 3 determines
elasticity.
*Keep in mind your determinates of
elasticity:
• Lets try some:
• Number of Substitutes
Available
– Gas
• Luxury vs. Necessity
• How Much of your Income the
– Car
Good Costs
– Rolex watches
– Blood Pressure Medication
33
Demand & Elasticity= a married
couple
• The Law of Demand shows us that people
buy more of a product at a lower price
• Demand Elasticity: indicates the extent to
which changes in price cause changes in
the quantity demanded
Ask yourself this question: How much more
will be purchased at that lower/higher
price?
34
Determining Elasticity via Math
Step 1: Percentage of Change in Quantity
and Price
Formula:
Original number (Q1 or P1) – new number (Q2 or P2)
Original number (Q1 or P1)
X 100 = % of
change
– This formula is used once to find percentage
change for quantity (Q1 and Q2)
– This formula is used once to find percentage
change for price (P1 and P2)
– These two results are then used in the next
step
35
Determining Elasticity via Math
Step 2: Type of Elasticity
Formula:
Percentage change in quantity demanded (Q)
Percentage change in price
(P)
= type of elasticity
This number will determine if the product is:
– Elastic: the number is greater than one (>1)
– Unitary: the number is exactly equal to one (= 1)
– Inelastic: the number is less than one (<1)
The slope of the demand curve is determined by the
elasticity for that good
36
Step 1: Find % of
change
Q1 = 3
Q2 = 2
P1= 4
P2 = 3
Lets practice this idea . . .
Q1-Q2
Q1
x100
P1-P2 x 100
P1
= % of change in
quantity
Step 2: Find elasticity
% in Q
% in P
= % of change in price
= type of
elasticity
1. Use the formulas to find the demand elasticity
for this product.
2. What would this look like on a graph?
– Think slope
37
Elastic Demand
When a relatively small
change in price causes
a relatively large
change in the quantity
demanded
– Example: steaks on sale at the
market. The lower the price, the
more steaks will be bought.
– Brain Pop: Think “E”asy slope to
walk up is “E”lastic
3−9
𝑥100 = 200𝑄
3
1.00 − .75
𝑥100 = 25𝑃
1.00
200𝑄
= 𝟖 𝑬𝒍𝒂𝒔𝒕𝒊𝒄
25𝑃
38
Inelastic Demand
When a relatively large
change in price
causes a relatively
small change in
quantity demanded
– Example: Gas. The price of
gas has a limited effect on
the consumption of gas
– Brain Pop: Think an
“I”nclined slope is “I”nelastic
3−5
𝑥100 = 6𝑄
3
1.50 − .50
𝑥100 = 67𝑃
1.50
6𝑄
=. 𝟎𝟖 𝑰𝒏𝒆𝒍𝒂𝒔𝒕𝒊𝒄
67𝑃
39
Unitary Elastic Demand
When a increase/decrease in price
will be met by an equal
percentage increase/decrease.
Elasticity of demand is exactly 1
– Perfectly inelastic demand = you buy
regardless of the price
• There are no substitutes
– Perfectly elastic demand = price stays the
same regardless of how many you buy
• There are many substitutes, but people buy
this particular product
This does not exist in the real world
40
Vader
Video #3
Find Demand Elasticity
Demand
Elasticity
Locate this chart in your Demand Problem Set Packet. Find
Demand Elasticity using the formulas from this section of
notes. Label and graph the demand curves correctly.
5.
P
6. P
Q
7.
Q
8.
P
Q
P
41
Q
Vader
Video #3
Find Demand Elasticity
Demand
Elasticity
Locate this chart in your Demand Problem Set Packet. Find
Demand Elasticity using the formulas from this section of
notes. Label and graph the demand curves correctly.
60
25
20
10
P
3 (E)
.33 (IE)
2 (E)
.2 (IE)
20
75
10
50
6. P
7.
p2
p2
p2
p2
p1
p1
p1
p1
5.
q2
q1
Q
q2 q1
Q
8.
P
q2
q1
Q
P
42
q2 q1
Q
Another Way to Measure
Elasticity
• The Total Revenue Test: makes a
mathematical determination about
whether a product is elastic
– Price x Quantity Demanded = Total
Revenue
• Demand is Elastic when price goes up total
revenue goes down (& vice versa)
• Demand is Inelastic when price goes up total
revenue goes up
– This is usually used for businesses to set
prices on items.
43
Class Example: Elasticity of Bottled Water
How many of you would purchase ONE
bottle of water at the following prices:
Price in $
Quantity of water
bottles demanded
Total Revenue
2.00
1.75
1.50
*Keep in mind your
determinates of elasticity:
• Number of Substitutes
Available
• Luxury vs. Necessity
• How Much of your
Income the Good Costs
Price
Total Revenue
1.00
.75
Old Price ___ x
Quantity ___ =
OTR ___
New Price ___ x
Quantity ___ =
NTR ___
Type of Elasticity: ____________________
44
Elasticity Quick Review
1. Explain why price elasticity is important to
you as a consumer. Business owner?
2. What is inelastic demand? Give an example.
3. What is elastic demand? Give an example.
4. Use the correct formulas to find the Elasticity
for: Q1: 9, Q2: 5 – P1: $5, P2: $4 (No TRT!!!)
– Now graph it and label your demand curve
5. With your partner answer the EQ in your
notes
45
Economics
-Chapter 5-
Topic: Unit 2
Part 4 -Supply
EQ: Who creates
supply and what
causes supply for
a good/service to
change (shift)?
MMM, Profit
46
SUPPLY
• Quantity supplied is the amount of a good that sellers
are willing and able to sell at any given price point.
• Law of Supply
– The law of supply states that, other things equal, the
quantity supplied of a good rises when the price of the good
rises.
– Think: If you produce a good, you want to be paid MORE for
the MORE goods you make.
Vader
Video #4
Quantity
Supplied
47
The Supply Curve: The Relationship between
Price and Quantity Supplied
Supply Schedule
– The supply schedule is a
table that shows the
relationship between
the price of the good
and the quantity
supplied.
• Price is always on the
“Y” Axis
• Quantity is always on
the “X” Axis
48
Basic Supply Graph
Y = Price
X = Quantity
Supply Curve (S)
The supply curve is the graph of the
relationship between the price of a good
and the quantity supplied. Think “S”upply
goes up to the “S”ky
49
Variable that influence a Movement along the supply
curve is a change in Price . . .
A movement along a fixed supply curve is called a change
in quantity supplied (price of the item only).
A TAX is the most common
reason for the change of price.
Think: If there is an increase in
taxes on my products, as a
producer I will not pay that tax,
I will pass it onto my
consumers. Remember, I’m all
about profit.
50
Copyright©2004 South-Western
The Shifting Supply Curve
• Supply Curve shifts
when:
– There is a change in
the amount of a
good supplied
regardless of price
– This is called a
change in the
amount supplied
– Four variables can
cause a supply curve
to shift
– Shifts are based on
quantity
Shift in Supply for Donuts
51
Variables that influence a SHIFT of the whole supply
curve. Remember, only a change in one is needed to
cause a shift . . .
52
Copyright©2004 South-Western
Quick Review Questions M/C
• Suppliers produce two goods, cheese and butter.
Suppose the demand for butter increases. What
do we expect to happen to the supply of cheese?
A.
B.
C.
D.
E.
The price will go up and the quantity will drop
The price will go up and the quantity will rise.
The price will go down and the quantity will drop.
The price will go down and the quantity will rise.
None of the above.
53
Basic Supply Graph –Class Results
Period 2
Supply for a
Donut
Price for a
Donut
Period 3 for Donuts Period 4
Market Demand
Supply for a
Donut
Price for a
Donut
Supply for a
Donut
24
Market Supply Market Price
$2.50
25
$2.50
15
for a Donut
for a Donut
$2.00
24
$2.00
19
27
$1.50
24
$1.00
19
9
R DONUTS
16
87, 1.5
Price of Donuts
100
Donuts
24
84 (not shown
$2.5022
8
$1.00
$0.50 on graph)
2
$0.50
1
88 Period 5 $2.00
Supply for
a Donut
Price for
a Donut
25
$2.50
64
21
$2.00
20
$1.50
14
10
$1.00
2
$0.50
87
88, 2
$1.50
Price for a
Donut
$2.50
$2.00
$1.50
$1.00
$0.50
$1.50
$1.00
$0.50
54
Government Influences on Supply
Subsidy
– A government payment that supports a business or activity
• Usually seen in farming
– Used to promote business growth  price control
• Prices decrease but supply increases
55
Government Influences on Supply
Excise Tax
– Tax on the
production/sale of a
good that increases
production costs 
the
producer/consumer
pays this tax, can
decrease supply
leading to higher
prices
– Built into the price
of the product
– Causes the supply
of an item to have
price movement
56
Government Influences on Supply
Regulation
– Effects the price, quantity or quality of a
good
– Example would be regulations on
emission controls on cars starting in the
1970’s.
Vs.
57
Supply Quick Review
1. What is needed to create a supply schedule for a fruit smoothie
shop?
A.
B.
C.
D.
a supply curve and the price other shops are charging
the price charged and the number of smoothies supplied
the number of other shops producing smoothies
all of the above
2. Which of the following will always cause a supply curve to shift to
the right?
A.
B.
C.
D.
advances in technology
future expectations of falling prices
excise taxes
fewer inputs
3. New advances in technology usually
A. cause input costs to drop.
B. increase supply at all price levels.
C. cause the supply curve to shift to the right.
D. all of the above.
58
Supply Quick Review Short Answer #1
If consumers expect a new version of Nike Michael
Jordan shoes to be introduced next week, how is
that going to change the supply curve for the shoes
THIS WEEK? Demonstrate by using a graph.
59
Supply Quick Review Short Answer #2
Mr. Maino takes a turn too quickly on his drive
home. He takes out the local gas station. What will
happen to the supply of gas?
60
Supply Quick Review Short Answer #3
Governor Brown just passed A.B. (Assembly Bill)
1388 which decrease the taxes on gas. What is
going to happen to the supply for SUV’s?
Demonstrate by using a graph.
61
Supply Quick Review Short Answer #4
The price of sugar increases. What will happen to
supply for Pepsi? Demonstrate by using a graph.
62
Economics
-Unit 2Topic: Unit 2 Part 5
–Demand and
Supply
EQ: How do demand
and supply work
with each other to
make the consumer
and producer
happy?
63
MARKETS AND COMPETITION
Remember:
• Buyers determine demand.
• Sellers determine supply
Equilibrium
Law of supply and demand
– The claim that the price of any
good adjusts to bring the quantity
supplied and the quantity
demanded for that good into
balance.
– It’s actually the Invisible Hand at
work . . . The market is self
correcting 24/7.
64
SUPPLY AND DEMAND TOGETHER
Market Equilibrium (E) refers to a
situation in which the price has
reached the level where quantity
supplied equals quantity demanded.
–This is also called:
• Market Price (MP)
• Market Clearing Price (MCP)
65
SUPPLY AND DEMAND TOGETHER
Equilibrium Price (P)
– The price that balances quantity supplied and quantity
demanded.
– On a graph, it is the price at which the supply and demand
curves intersect on the price axis.
Equilibrium Quantity (Q)
– The quantity supplied and the quantity demanded at the
equilibrium price.
– On a graph it is the quantity at which the supply and
demand curves intersect on the quantity axis.
Partner Q: How do we get these numbers
to plot?
66
Demand and Supply Graph –Class Results
All Class Schedule
Where do you think
Equilibrium Price
Equilibrium Qty.
Market Equilibrium
Supply for a Donut
(X)
Price for a Donut
(Y)
Demand for a
Donut
(X)
84
$2.50
29
88
$2.00
37
87
$1.50
71
64
$1.00
96
14
$0.50
106
Are located?
This is the range
where we know
our Market
Equilibrium will be
 we must graph
it to find-out
exactly where E is
67
Price of Donuts
Demand and Supply Graph –Class Results
Donut Market
3
Supply
2.5
2
Results
Market
Equilibrium: 81,
1.45
Equilibrium Price:
$1.45
Equilibrium
Quantity: 81
1.5
P
E
1
0.5
Demand
0
0
20
40
60
Quantity of Donuts
80
Q
100
120
68
When Markets Are Not in Equilibrium:
Surplus
• Happens when equilibrium
prices are too high, supply
overrides demand.
• Suppliers will lower the
price to increase sales,
thereby moving toward
equilibrium.
– Fire Sales
– Introductory prices
• P and Q are ABOVE E
• Need to get rid of supply
• Hurts producers, good for
consumers
69
When Markets Are Not in Equilibrium:
Shortage
• When equilibrium price is
too low, causes a shortage
of goods
• 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.
• P and Q are BELOW E
• Allows suppliers to
rebuild supply
• Good for producers,
hurts consumers
70
What roles do prices play in a modern
mixed economy?
Price
Control
Why
Enacted
Example
Economic
Result
Price
Floor
Gov. feels
producers are
not receiving
fair price
-Min. wage
-Min. price for
goods/services
-excess supply
-leads to a
surplus of
product/workers
Surplus
Help: Producer
Hurt: Consumer
Price
Ceiling
Gov. feels
consumers are
paying too much
for good/service
-rent control
-gas prices
-excess demand
-Leads to a
shortage of
product/workers
Help: Consumer
Hurt: Producer
Shortage
71
Producer and Consumer Prices as Surplus
• Producer Cost (PC)
– How much does the good/service cost
to make?
• Consumer Utility (CU –also Surplus)
– How much satisfaction does the
consumer get out of the consumption
of the good/service in a monetary
format (how much is it “worth”)
• Producer Revenue (PR –also Surplus)
– How much is earned after costs are
taken out?
Example:
PC =$10.00, PR is $15.00. Find CU with
partner.
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What roles do prices play in a modern
mixed economy?
Four main roles:
1. Prices convey
information to
consumers/producers
2. Prices create
incentives to
work/produce
3. Prices allow markets to
respond to changing
conditions
4. Prices allocate scarce
resources efficiently
73
Steps to Analyzing Changes in Equilibrium
1. Decide whether the event shifts the supply or
demand curve using the variables (nine of
them located in your Unit 2 Packets)
2. Decide whether the curve(s) shift(s) to the
left or to the right (you will also have
movement on one of the curves)
3. Use the new information to redraw your
supply or demand curve.
4. Label the new points correctly and
accordingly.
74
Supply and Demand Together P.S.
1.
2.
3.
We will complete the
example curve as a class
(Question #1).
Complete the following
three curves with your
partner
•
Use your
supply/demand
determinates to
help you along
the way (found
in
Demand/Supply
Problem Set
packets)
What you do not finish is
homework
•
We will review
these as a class
75
Unit 2 To-Do List
• Make sure that you have answered all of the
EQ’s in your notes!
• Make sure all of your Unit packet work is
complete:
– Every term has its own definition and DRAWING
– All questions are answered  we reviewed these
in class, so if you did not write down the
information . . . well . . . enjoy that low grade.
• Every Problem Set has your name on it
• Complete the Unit 2 Review Sheet to better
prep for the Unit 2 Test
76