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Presentation Plus! Economics: Today and Tomorrow Copyright © by The McGraw-Hill Companies, Inc. Developed by FSCreations, Inc., Cincinnati, Ohio 45202 Send all inquiries to: GLENCOE DIVISION Glencoe/McGraw-Hill 8787 Orion Place Columbus, Ohio 43240 CHAPTER FOCUS SECTION 1 Demand SECTION 2 The Demand Curve and Elasticity of Demand SECTION 3 The Law of Supply and the Supply Curve SECTION 4 Putting Supply and Demand Together CHAPTER SUMMARY CHAPTER ASSESSMENT 3 Click a hyperlink to go to the corresponding section. Press the ESC key at any time to exit the presentation. Why It’s Important Why do some CDs cost more than others? Why does the price of video rentals go down when another video store opens in the neighborhood? This chapter will explain the relationship between demand and supply –and how this relationship determines the prices you pay. Click the Speaker button to listen to Why It’s Important. 4 Chapter Overview Consumers base their decisions to buy goods and services on anticipated satisfaction, price, and their incomes. Businesses set prices according to the profit desired, the demand anticipated, and the competition expected. Chapter 7 discusses the laws of supply and demand and the ways in which a voluntary market affects them. 5 Click the mouse button to return to the Contents slide. Reader’s Guide Section Overview Section 1 explains or describes the principle of voluntary exchange as it applies to a market economy and how the real income effect, the substitution effect, and diminishing marginal utility each alter quantity demanded. Objectives – How does the principle of voluntary exchange operate in a market economy? – What does the law of demand state? – How do the real income effect, the substitution effect, and diminishing marginal utility relate to the law of demand? 7 Click the mouse button or press the Space Bar to display the information. Section 1 begins on page 169 of your textbook. Reader’s Guide (cont.) Terms to Know – demand – utility – supply – marginal utility – market – law of diminishing marginal utility – voluntary exchange – law of demand – quantity demanded – real income effect – substitution effect Click the Speaker button to listen to the Cover Story. 8 Click the mouse button or press the Space Bar to display the information. Section 1 begins on page 169 of your textbook. Introduction • The word demand has a special meaning in economics. • As you read this section, you’ll learn that demand includes only those people who are willing and able to pay for product or service. 9 Lecture Launcher • Procter & Gamble introduced disposable diapers to the marketplace in 1961. At first parents only used Pampers for special occasions. Today, 95% of American parents use disposable diapers at a cost of about $2,100 a child. • Why do you think the change took place gradually? • How are the concepts of marketplace and voluntary exchange linked to the Laws of Demand? 10 The “Marketplace” • Consumers influence the price of goods in a market economy. • Demand is how people decide what to buy and at what price. • Supply is how sellers decide how much to sell and what to charge. • A market represents actions between buyers and sellers. 11 Click the mouse button or press the Space Bar to display the information. Discussion Question Describe two different types of marketplaces in which you shop. Possible response: I buy things at the mall where the seller and the buyer meet face to face. I also order products on the Internet—the buyer and seller only communicate via computer. 12 Click the mouse button or press the Space Bar to display the answer. Voluntary Exchange • The seller sets the price. • The buyer agrees to the product and price through the act of purchasing product. • Supply and demand analysis is a model of how buyers and sellers behave in the marketplace. 13 Click the mouse button or press the Space Bar to display the information. Discussion Question Suppose that the buyer does not agree to the product and price. Other than change the price, how can the seller convince the buyer to agree to the price? The seller can change the product a little so that customer is more satisfied. The seller can market the product in such a way as to create a perceived need that the customer did not see before. 14 Click the mouse button or press the Space Bar to display the answer. The Law of Demand • Demand is created only when the customer is both willing and able to buy product. • As price goes up, quantity demanded goes down. As price goes down, quantity demanded goes up. • Real income effect is when people are limited by their income as to what they can purchase. 15 Click the mouse button or press the Space Bar to display the information. The Law of Demand • Substitution effect is when people can replace one product with another if it satisfies the same need. • Utility is the ability of any good or service to satisfy consumer wants. • People will purchase additional items until the satisfaction from the last unit is equal to the price. • The lessening of this satisfaction with each additional purchase is called diminishing marginal unity. 16 Click the mouse button or press the Space Bar to display the information. Discussion Question What are some reasons that people substitute one product for another? What are some reasons that people continue to buy a product despite its price? 17 Click the mouse button or press the Space Bar to display the answer. Discussion Question They substitute because the price of one product rises and it doesn’t seem worth the rise in price or the person’s income decreases and they can’t afford the product. The continue buying the product because their income is high enough that they can still afford it, or the product has a quality that the person is unwilling to give up regardless of the price. 18 Click the mouse button or press the Space Bar to display the answer. Section Assessment How does the principle of voluntary exchange operate in a market economy? Buyers and sellers work out their own terms of exchange. 19 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) What is the law of demand? The law of demand states that there is an inverse relationship between quantity demanded and price. 20 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) Making Predictions Imagine that you sell popcorn at the local football stadium. Knowing about diminishing marginal utility, how would you price your popcorn after half-time? The price of popcorn could be reduced after half-time. 21 Click the mouse button or press the Space Bar to display the answer. Section Close Write an example from personal experience of how price, real income, or the substitution effect changed your decision to buy a good or service. 22 Click the mouse button to return to the Contents slide. Reader’s Guide Section Overview Section 2 explains or describes graphing the demand curve, what factors determine demand, and elastic and inelastic demand. Objectives – What does a demand curve show? – What are the determinants of demand? – How does the elasticity of demand affect the price of a given product? 24 Click the mouse button or press the Space Bar to display the information. Section 2 begins on page 177 of your textbook. Reader’s Guide (cont.) Terms to Know – demand schedule – demand curve – complementary good – elasticity – price elasticity of demand – elastic demand – inelastic demand Click the Speaker button to listen to the Cover Story. 25 Click the mouse button or press the Space Bar to display the information. Section 2 begins on page 177 of your textbook. Introduction • Quantity demanded is based on price. • When demand is low, usually prices are lower. • Then as more people want a particular product or service (increased demand) prices generally rise. • This section explains or describes graphing the demand curve, what factors determine demand, and elastic and inelastic demand. 26 Click the mouse button or press the Space Bar to display the information. Lecture Launcher • Vending machines of the future will have variable pricing. On a winter day, a soda may cost only 50 cents, but on a summer day it may cost $1.00. • What other variables might increase, or decrease, the demand for soda? 27 Click the mouse button or press the Space Bar to display the information. Graphing the Demand Curve • A demand schedule is a table of prices and the quantity demanded at each price. • List quantity demanded at different prices • A demand curve graphs the quantity demanded of a good or service at each possible price. 28 Click the mouse button or press the Space Bar to display the information. Discussion Question Why do you think graphing the demand curve would be useful to businesses? By having a graph that expresses all the possible prices and quantity demanded, a business can better predict its financial future. 29 Click the mouse button or press the Space Bar to display the answer. Graphing the Demand Curve (cont.) Figure 7.4 Part A Demand Schedule The numbers in the demand schedule to the right show that as the price per CD decreases, the quantity demanded increases. Note that at $16 each, a quantity of 500 million CDs will be demanded. Graphing the Demand Curve (cont.) Figure 7.4 Part B Plotting the Price– Quantity Pairs Note how the price and quantity demanded numbers in the demand schedule have been transferred to the graph on the right. Find letter E. Note that it represents a number of CDs demanded (500 million) at a specific price ($16). Graphing the Demand Curve (cont.) Figure 7.4 Part C Demand Curve for CDs The points in the previous graph have been connected with a line in the chart to the right. This line is the demand curve, which always falls from left to right. How many CDs will be demanded at a price of $12 each? Quantity Demanded vs. Demand • A change in quantity demanded is caused by a change in the price of a good. • If something other than price causes demand to increase or decrease, this is known as a change in demand and shifts the demand curve. 33 Click the mouse button or press the Space Bar to display the information. Discussion Question Think of some factors or events other than price that can cause demand as a whole to increase or decrease? Give examples of such a factor or event. 34 Click the mouse button or press the Space Bar to display the answer. Discussion Question Changes in the environment or political climate can cause demand to increase. For example, if there is a blizzard the overall demand for snow shovels will probably increase. If a large scale war suddenly ends, the demand for weapons will decrease. 35 Click the mouse button or press the Space Bar to display the answer. Determinants of Demand • Population • When population Figure 7.5 Part A increases, Change in Demand if Population opportunities to buy Increases and sell increase. The demand curve labeled D1 represents demand before the population increased. The demand curve labeled D2 represents demand after the population increased. 36 Click the mouse button or press the Space Bar to display the information. Determinants of Demand (cont.) • Income • The demand curve D1 represents CD demand before income decreased. The demand curve D2 represents CD demand after income decreased. If your income goes up, however, you may buy more CDs at all possible prices, which would shift the demand curve to the right. 37 Figure 7.5 Part B Change in Demand if Your Income Decreases Click the mouse button or press the Space Bar to display the information. Determinants of Demand (cont.) • Tastes and preferences, including fads • When a product becomes a fad, more of it is demanded at all prices, and the entire demand curve shifts to the right. Notice how D1– representing demand for Beanie Babies™ before they became popular– becomes D2– demand after they became a fad. 38 Figure 7.5 Part C Change in Demand if an Item Becomes a Fad Click the mouse button or press the Space Bar to display the information. Determinants of Demand (cont.) • Substitutes are when a new competitor is added or an old competitor leaves the Figure 7.5 Part D market. Change in Demand for Substitutes • As the price of the substitute (margarine) decreases, the demand for the item under study (butter) also decreases. If, in contrast, the price of the substitute (margarine) increases, the demand for the item under study (butter) also increases. 39 Click the mouse button or press the Space Bar to display the information. Determinants of Demand (cont.) • Complementary goods are products that rely upon one another, demand for one affects demand for the other. Figure 7.5 Part E Change in Demand for Complementary Goods 40 Click the mouse button or press the Space Bar to display the information. Discussion Question For products that fill the three basic needs (food, clothing, and shelter), which determinant(s) of demand would be the most significant and why? Substitutes and/or income should be the most significant determinants. Income will affect how much a person can afford to spend on any one item of clothing or meal. Substitutes make it possible for the consumer to choose a different item to meet the need. 41 Click the mouse button or press the Space Bar to display the answer. The Price Elasticity of Demand • How much consumers respond to a given change in price is elasticity. • Elastic demand occurs when the demand for some goods is greatly affected by the price. • Inelastic demand occurs when the demand for some goods is less affected by price. 42 Click the mouse button or press the Space Bar to display the information. The Price Elasticity of Demand (cont.) • How many substitutes exist and how closely they provide the same quality and service affects elasticity of demand (fewer or no substitutes make demand inelastic). • Percent of a personal budget spent on that item affects elasticity of demand (the higher the percent of budget, the more elastic the demand. • How much time consumers have to adjust to the new price affects elasticity of demand (more time makes for greater elasticity). 43 Click the mouse button or press the Space Bar to display the information. The Price Elasticity of Demand (cont.) Figure 7.6 Elasticity of Demand Curve A at the price of $5.50 could represent the inelastic demand for pepper. Even if the price of pepper dropped dramatically, you would not purchase much more of it. Curve B at $5.50 could represent the elastic demand for steaks. If the price drops just a little, many people will buy much more steak. Discussion Question Do you think it is in a company’s best interest to drastically change the price of a popular product and give consumers months to buy the product at the new price? Why or why not? 45 Click the mouse button or press the Space Bar to display the answer. Discussion Question It depends upon the type of product and whether or not the price was increased or decreased. If it is a product with elastic demand and the price is decreased then the longer time at the lower price will mean more buyers. However, if the price is increased, the longer time period will give people time to find other optionssubstitutes, doing without, etc. 46 Click the mouse button or press the Space Bar to display the answer. Section Assessment What does a demand curve show? A demand curve shows the number of items that will be demanded at every given price. 47 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) How does the elasticity of demand affect the price for a given product? A product with elastic demand is likely to be priced lower because consumers can switch among the various substitutes. 48 Click the mouse button or press the Space Bar to display the answer. Section Close List goods and services that have elastic, moderately elastic, and inelastic demands in your household. Create a chart, noting whether the demand for each item responds to changes in price, income, quality, need, available substitutes, time adjustments, or taste. 49 Click the mouse button to return to the Contents slide. Reader’s Guide Section Overview Section 3 explains or describes how the incentive of greater profit–including the law of diminishing returns–affects supply and what the supply curve shows. Objectives – What is the law of supply? – How does the incentive of greater profits affect quantity supplied? – What do a supply schedule and supply curve show? – What are the four determinants of supply? 51 Click the mouse button or press the Space Bar to display the information. Section 3 begins on page 186 of your textbook. Reader’s Guide (cont.) Terms to Know – law of supply – quantity supplied – supply schedule – supply curve – technology – law of diminishing returns Click the Speaker button to listen to the Cover Story. 52 Click the mouse button or press the Space Bar to display the information. Section 3 begins on page 186 of your textbook. Introduction • Consumers demand products and services at the lowest possible prices. • In contrast, suppliers exist to make a profit. • As you read this section, you’ll learn about the law of supply and how it is geared toward making profits. 53 Click the mouse button or press the Space Bar to display the information. Lecture Launcher • In the early days of the telephone, human operators had to physically connect each call. The phone companies thought that they would always have enough operators to do the job. As the telephone became increasingly popular, what happened to the cost of labor for operations? • About what percentage of your calls involves contact with a telephone operator? 54 Click the mouse button or press the Space Bar to display the information. Lecture Launcher (cont.) • Why were telephone companies willing to supply more automated methods of connecting telephone calls? 55 Click the mouse button or press the Space Bar to display the information. The Law of Supply • Supply is the willingness and ability of producers to provide goods to the consumer. • As prices rise, the quantity supplied generally rises. • As prices fall, the quantity supplied falls. • A direct relationship exists between price and quantity supplied. 56 Click the mouse button or press the Space Bar to display the information. Section Assessment What would happen to the price of computer chips if a company opened a new chip manufacturing plant that produced billions of chips? The price of chips would fall because the supply would exceed demand. 57 Click the mouse button or press the Space Bar to display the answer. The Incentive of Greater Profits • Increase in price and increase in production leads to an increase in profits. • Higher prices encourage more competitors to join the market. • Higher prices turn potential suppliers into actual suppliers, adding to the total output. 58 Click the mouse button or press the Space Bar to display the information. Discussion Question Why do higher prices encourage more competitors to enter an industry? Explain your answer in terms of risk and profit. If the prices go up, possible competitors now see that there is more money to be made than before. The gain seems more worth the risk than it did before. 59 Click the mouse button or press the Space Bar to display the answer. The Supply Curve • Graphs and tables can explain the law of supply. Figure 7.8 Part A Supply Schedule • A supply schedule shows the quantity supplied at each given price. 60 Click the mouse button or press the Space Bar to display the information. The Supply Curve (cont.) • A supply curve graphs the quantities supplied at each possible price. Figure 7.8 Part B Plotting Quantity Supplied 61 Click the mouse button or press the Space Bar to display the information. The Supply Curve (cont.) • The relationship between quantity and price is direct and always moving in the same direction. Figure 7.8 Part C Supply Curve 62 Click the mouse button or press the Space Bar to display the information. Discussion Question Do you think graphs and tables are good visual indicators of supply? Answers will vary. Students should discuss how by visually measuring supply in a graph, it is easier to see how the supply curve moves and affects the economy. 63 Click the mouse button or press the Space Bar to display the answer. Quantity Supplied vs. Supply • A change in quantity supplied is caused by a change in price. • Something other than price can cause a change in supply as a whole to increase or decrease. 64 Click the mouse button or press the Space Bar to display the information. Discussion Question When something other than price causes the supply to increase, what do you think happens to price? Explain why? The price will decrease because the supply will be too great. 65 Click the mouse button or press the Space Bar to display the answer. The Determinants of Supply • The price of inputs, or the cost of production— raw materials, wages, insurance, utilities, etc. —can cause increase in supply. 66 Figure 7.9 Part A Change in Supply if Price of Inputs Drops Click the mouse button or press the Space Bar to display the information. The Determinants of Supply (cont.) • Competition, or the number of companies in an industry, can cause an increase in supply. Figure 7.9 Part B Change in Supply if Number of Firms Increases 67 Click the mouse button or press the Space Bar to display the information. The Determinants of Supply (cont.) • An increase in taxes can cause a decrease in supply. Figure 7.9 Part C Change in Supply if Taxes Increase 68 Click the mouse button or press the Space Bar to display the information. The Determinants of Supply (cont.) • An improvement in technology, or the science used to develop new products or methods of production and distribution, can cause an increase in supply. 69 Figure 7.9 Part D Change in Supply if Technology Reduces Costs of Production Click the mouse button or press the Space Bar to display the information. Discussion Question Give specific examples of inputs (production costs) for a video store. Cost of videos; wages for employees; insurance for building and workers; phones, electricity, heat, and air conditioning for the building; cost of candy and soda to sell 70 Click the mouse button or press the Space Bar to display the answer. The Law of Diminishing Returns • Adding units to increase production increases total output for a limited time period. • The extra output for each additional unit will eventually decrease. • Businesses will continue to add units of a factor of production until doing so no longer increases revenue. 71 Click the mouse button or press the Space Bar to display the information. Discussion Question What are some different ways that factors of production can be increased? Choose one of you examples to explain the law of diminishing returns. 72 Click the mouse button or press the Space Bar to display the answer. Discussion Question More employees can be hired, more raw materials can be purchased, more machines can be bought to make the product, more stores can be built, etc. If a company continues to build toy stores, they will increase profits. However, at some point the amount of money spent to build and maintain the new stores will not bring in enough extra profit to warrant the increased expenditure. 73 Click the mouse button or press the Space Bar to display the answer. Section Assessment What does the law of supply state? The law of supply states that as the price of a product rises, the quantity supplied rises. As the price falls, the quantity supplied also falls. 74 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) How does the incentive of greater profits affect supply? Higher profits cause suppliers to produce more. 75 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) Supply List at least 10 costs of production if you were to produce and distribute baseball caps to local stores. Costs of production may include: price of machines to make baseball caps, price of materials used in baseball caps, price of packaging materials, price of transportation to distribute baseball caps, rent payments for offices and factories, advertising costs, employee wages, taxes, and insurance. 76 Click the mouse button or press the Space Bar to display the answer. Section Close Discuss how supply helps to shape profits and employment in a market economy. 77 Click the mouse button to return to the Contents slide. Reader’s Guide Section Overview Section 4 explains or describes equilibrium price, shifts in equilibrium price, and how surpluses and shortages affect price. Objectives – How is the equilibrium price determined? – How do shifts in equilibrium price occur? – How do shortages and surpluses affect price? – How do price ceilings and price floors restrict the free exchange of prices? 79 Click the mouse button or press the Space Bar to display the information. Section 4 begins on page 194 of your textbook. Reader’s Guide (cont.) Terms to Know – equilibrium price – shortage – surplus – price ceiling – rationing – black market – price floor Click the Speaker button to listen to the Cover Story. 80 Click the mouse button or press the Space Bar to display the information. Section 4 begins on page 194 of your textbook. Introduction • Shortages occur when the quantity demanded is larger than the quantity supplied at the current price. • This section explains or describes equilibrium price, shifts in equilibrium price, and how surpluses and shortages affect price. 81 Lecture Launcher • Too manufacturers rarely charge the equilibrium price for the season’s hottest toy. What is the short-term result when demand exceeds supply? 82 Equilibrium Price • In the real world, demand and supply work together. • The price at which the supply meets the demand—where the two curves intersect—is the equilibrium price. 83 Click the mouse button or press the Space Bar to display the information. Equilibrium Price (cont.) Figure 7.11 Equilibrium Price How does the market reach an equilibrium price? We start on Day 1 with sellers thinking that the price for CDs will be $20. If you examine the supply schedule and curve, you see that suppliers will produce 1,100 units. However, buyers will purchase only 100 CDs. The 1,000 unit surplus is shown in column four of the demand and supply schedule as the difference between the quantity supplied and the quantity demanded at $20. To get rid of the surplus, sellers will lower the price. Equilibrium Price (cont.) Figure 7.11 Equilibrium Price Say suppliers lower the price to $10. At that price, they are willing to supply 100 CDs. However, as the schedule shows, this price turns out to be too low because 100 are supplied and 1,100 are demandedleaving a shortage of 1,000 CDs. The price tends to go up and down until it reaches equilibrium price. Discussion Question What is the equilibrium price and why is it important? The price at which supply and demand meet; because it shows how the market works to establish prices. 86 Click the mouse button or press the Space Bar to display the answer. Shifts in Equilibrium Price • If the demand curve shifts due to something other than price, the equilibrium price will change. • If the supply curve shifts due to something other than price, the equilibrium price will change. 87 Click the mouse button or press the Space Bar to display the information. Shifts in Equilibrium Price (cont.) Figure 7.12 Change in Equilibrium Price When the supply or demand curves shift, the equilibrium price also changes. Note that the old equilibrium price was $15. But now the new demand curve intersects the supply curve at a higher price–$17. Discussion Question Suppose that your jeans are at the equilibrium price. There is suddenly a shortage of cotton in the world market. What will happen to the demand curve, the supply curve, and the equilibrium price? 89 Click the mouse button or press the Space Bar to display the answer. Discussion Question The supply curve will shift to the left, meaning that less pairs of jeans will be produced. The demand curve will remain the same. The price will go up. Then the demand will decrease because the price will have increased. Finally the equilibrium price will be higher than before. 90 Click the mouse button or press the Space Bar to display the answer. Prices Serve as Signals • Rising prices signal producers to make more and consumers to purchase less. • Falling prices signal producers to make less and consumers to purchase more. • Shortages occur when the quantity demanded (at equilibrium price) is greater than quantity supplied. • Surpluses occur when the quantity supplied (at equilibrium price) is greater than quantity demanded. • Market forces can cause the prices to rise or fall to correct shortages and surpluses. 91 Click the mouse button or press the Space Bar to display the information. Discussion Question Think of a situation in which it is important that the government prevent market forces from dealing with shortages and surpluses. 92 Click the mouse button or press the Space Bar to display the answer. Discussion Question Possible response: In a natural disaster, such as a flood, many people need water and food. At such a time there is a shortage of clean water for drinking. If government did not intervene, market forces would cause the prices of water (needed for basic human survival) to increase to a point that many people could not afford it, and they would be ill or die. 93 Click the mouse button or press the Space Bar to display the answer. Price Controls • Price ceilings are a maximum price set by the government to prevent prices from going above a certain level. • Items in short supply might be rationed. • Shortages can lead to a black market, or illegal places to purchase such products at exorbitant prices. • Price floors are minimum prices also set by the government to prevent prices from going below a certain level. • Price floors set minimum wage levels and support agricultural prices. 94 Click the mouse button or press the Space Bar to display the information. Price Controls (cont.) Figure 7.13 Part A Price Ceiling More people would like to rent an apartment at the government-controlled price, but apartment owners are unwilling to build more rental units if they cannot charge higher rent. This results in a shortage of apartments to rent. Price Controls (cont.) Figure 7.13 Part B Price Floor The fast-food restaurant business wants to hire students at $4.15 an hour, but the government has set a minimum wage–a price floor–of $5.15 an hour. This results in a surplus of workers. Discussion Question Consider the examples of farmers and price floors from the text. How can these price floors actually hurt the economy? The price floors might encourage farmers to overproduce at times when regular production would still earn them a profit. In this way the consumer does not always get the best product for the best price. 97 Click the mouse button or press the Space Bar to display the answer. Section Assessment How is the equilibrium price determined? Equilibrium price is located where demand and supply curves intersect. 98 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) How do shifts in equilibrium price occur? Equilibrium price changes occur when supply or demand curves shift. 99 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) How do price ceilings and price floors restrict the free exchange of prices? They prevent prices from finding an equilibrium between the quantity demanded and supplied. 100 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) Shortages Explain how a shortage of professional sports tickets determines the general price of those tickets. Shortages cause prices to rise; therefore, a shortage of sports tickets will cause their price to rise. 101 Click the mouse button or press the Space Bar to display the answer. Section Close Create a visual representation that illustrates equilibrium. 102 Click the mouse button to return to the Contents slide. Section 1: Demand • Demand represents a consumer’s willingness and ability to pay. • The law of demand states as price goes up, quantity demanded goes down. As price goes down, quantity demanded goes up. • Factors explaining the inverse relationship between quantity demanded and price include the real income effect, the substitution effect, and diminishing marginal utility–or how one’s additional satisfaction for a product lessens with each additional purchase of it. 104 Click the mouse button or press the Space Bar to display the information. Section 2: The Demand Curve and Elasticity of Demand • The downward-sloping demand curve signifies that as the price falls, the quantity demanded increases. • Changes in population, income, tastes and preferences, and the existence of substitutes, or complementary goods, affect demand. • The price elasticity of demand is a measure of how much consumers respond to a price change. 105 Click the mouse button or press the Space Bar to display the information. Section 2: The Demand Curve and Elasticity of Demand (cont.) • If a small change in price causes a large change in quantity demanded, the demand for that good is said to be elastic. • If a price change does not result in much of a change in the quantity demanded, that demand is considered inelastic. 106 Click the mouse button or press the Space Bar to display the information. Section 3: The Law of Supply and the Supply Curve • The law of supply states as the price rises for a good, the quantity supplied also rises. As the price falls, the quantity supplied falls. • The upward-sloping supply curve shows this direct relationship between quantity supplied and price. • Four factors determine supply in a market economy. These include the price of inputs, the number of firms in the industry, taxes, and technology. 107 Click the mouse button or press the Space Bar to display the information. Section 4: Putting Supply and Demand Together • In free enterprise systems, prices serve as signals to producers and consumers. • The point at which the quantity demanded and the quantity supplied meet is called the equilibrium price. • A shortage causes prices to rise, signaling producers to produce more and consumers to purchase less. 108 Click the mouse button or press the Space Bar to display the information. Section 4: Putting Supply and Demand Together (cont.) • A surplus causes prices to drop, signaling producers to produce less and consumers to purchase more. • A price ceiling, which prevents prices from going above a specified amount, often leads to shortages and black market activities. • A price floor prevents prices such as a minimum wage from dropping too low. 109 Click the mouse button or press the Space Bar to display the information. Click the mouse button to return to the Contents slide. Recalling Facts and Ideas What is the basis of most activity in a market economy? Most activity in a market economy is based on voluntary exchange. 111 Click the mouse button or press the Space Bar to display the answer. Recalling Facts and Ideas (cont.) What generally happens to quantity demanded when the price of a good goes up (and other prices stay the same)? When the price of a good goes up, generally quantity demanded falls. 112 Click the mouse button or press the Space Bar to display the answer. Recalling Facts and Ideas (cont.) When the price of a good changes, what effects tend to create the law of demand? When the price of a good changes, the real income effect and the substitution effect create the law of demand. 113 Click the mouse button or press the Space Bar to display the answer. Recalling Facts and Ideas (cont.) How do we show in a graph an increase in the demand for a good? The demand curve moves to the right. 114 Click the mouse button or press the Space Bar to display the answer. Recalling Facts and Ideas (cont.) What is the distinction between elastic and inelastic demand? Elastic demand means consumers are more responsive to price changes. Inelastic means they are less responsive. 115 Click the mouse button or press the Space Bar to display the answer. Recalling Facts and Ideas (cont.) If income and population increase, what tends to happen to demand curves? If income and population increase, the demand curves shift to the right. 116 Click the mouse button or press the Space Bar to display the answer. Recalling Facts and Ideas (cont.) Do suppliers tend to produce less or more when the price goes up? Why? Suppliers tend to produce more when the price goes up to take advantage of increased profits. 117 Click the mouse button or press the Space Bar to display the answer. Recalling Facts and Ideas (cont.) What would an increase in taxes do to the position of the supply curve? An increase in taxes would shift the supply curve to the left. 118 Click the mouse button or press the Space Bar to display the answer. Recalling Facts and Ideas (cont.) If the price of a product is above its equilibrium price, what is the result? If the price of a product is above its equilibrium price, there is a surplus. 119 Click the mouse button or press the Space Bar to display the answer. Recalling Facts and Ideas (cont.) If the price of a product is below its equilibrium price, what is the result? If the price of a product is below its equilibrium price, there is a shortage. 120 Click the mouse button or press the Space Bar to display the answer. Thinking Critically Making Generalizations To what extent do you think the law of demand applies in the world around you? Are there any goods or services that you think do not follow the law of demand? Explain. Answers will vary. 121 Click the mouse button or press the Space Bar to display the answer. Thinking Critically (cont.) Making Comparisons If you had to guess the relative price elasticities of demand for CDs compared to that of insulin needed by diabetics, what would you state? Demand for CDs, a luxury, is elastic. Demand for insulin, a necessity for diabetics, is inelastic. 122 Click the mouse button or press the Space Bar to display the answer. Reviewing Skills Understanding Cause and Effect Look at the graph below. Be prepared to answer questions that follow on the next three slides. 123 Reviewing Skills (cont.) How many pounds of beef are supplied at $1.89 per pound? 1,000,000 pounds 124 Click the mouse button or press the Space Bar to display the answer. Reviewing Skills (cont.) How many pounds of beef are supplied at $2.69 per pound? 6,000,000 pounds 125 Click the mouse button or press the Space Bar to display the answer. Reviewing Skills (cont.) What can you infer as the causeand-effect relationship here? Rising prices cause producers to supply more beef. 126 Click the mouse button or press the Space Bar to display the answer. In the American economy, what forces other than supply and demand help to set prices? Government regulations, such as price ceilings and floors, help set prices. 127 Click the mouse button or press the Space Bar to display the answer. Click the mouse button to return to the Contents slide. In 1998 the President of the United States earned a salary of $200,000 plus a $50,000 expense account. That same year Mike Piazza signed a seven-year contract to play baseball for the New York Mets for $13 million per year–more than 50 times the President’s annual salary. Why do major league players get paid higher salaries than the President of the United States? Click the mouse button to return to the Contents slide. Explore online information about the topics introduced in this chapter. Click on the Connect button to launch your browser and go to the Economics: Today and Tomorrow Web site. At this site, you will find interactive activities, current events information, and Web sites correlated with the chapters and units in the textbook. When you finish exploring, exit the browser program to return to this presentation. If you experience difficulty connecting to the Web site, manually launch your Web browser and go to http://glencoe.com/sec/socialstudies/economics/econtoday2005/ index.php Explore online information about the topics introduced in this chapter. Click on the Connect button to launch your browser and go to the BusinessWeek Web site. At this site, you will find up-to-date information dealing with all aspects of economics. When you finish exploring, exit the browser program to return to this presentation. If you experience difficulty connecting to the Web site, manually launch your Web browser and go to http://www.businessweek.com Technology Demand for ice-cold soft drinks is greater during hot weather than in the winter months. The management of the Coca-Cola Company thinks this rather obvious fact should be reflected in prices charged at vending machines, and they have developed technology to do just that. A computer chip in the vending machine responds to temperatures and raises the price of soft drinks as the weather gets warmer. The company is looking at other ways to make vending-machine prices more reflective of demand. One idea is to link price to traffic at a machine. If few people buy from the machine, prices might drop automatically. History: Wage and Price Controls In the early 1970s, stagflation wracked the American economy. To combat this economic slow-down accompanied by high inflation, President Richard Nixon imposed a 90-day wage and price freeze. At the end of this period, he set ceilings on annual wage and price increases–5.5 percent for wages and 2.5 percent for prices. These measures helped to stabilize the economy. However, when the ceilings were lifted in 1973, prices rose sharply. As a result, President Nixon imposed new wage and price controls. These controls, in one form or another, remained in place until 1981, when President Ronald Reagan repealed them. How to Make a Mint To keep customers interested, Hint Mint has debuted a limited edition signed artist series of tins. The first tin in the series was designed by Doug Rogers, art director for the movie Shrek. Read the BusinessWeek Spotlight on the Economy article on page 176 of your textbook. Learn how one entrepreneur created a demand for mints as a “fashion accessory.” Continued on next slide. This feature is found on page 176 of your textbook. How to Make a Mint What makes Hint Mint different from other mints? Hint Mints stand out from other mints because of the arty tins they are packaged in. Continued on next slide. Click the mouse button or press the Space Bar to display the answer. This feature is found on page 176 of your textbook. How to Make a Mint Based on the article, what elements must be considered when developing a new product? When developing a new product the name, concept, and market research are elements that must be considered. Click the mouse button or press the Space Bar to display the answer. This feature is found on page 176 of your textbook. Continued on next slide. Continued on next slide. Continued on next slide. Continued on next slide. What Is Demand? Demand and Supply What Is Supply? Economics and You Video 5: What Is Demand? After viewing What Is Demand?, you should be able to… • explain the law of demand. • differentiate between elastic and inelastic demand. Continued on next slide. Click the mouse button or press the Space Bar to display the information. Economics and You Video 5: What Is Demand? Disc 1, Side 1 Chapter 5 Click the Videodisc button anytime throughout this section to play the complete video if you have a videodisc player attached to your computer. Click the Forward button to view the discussion questions and other related slides. Click inside the box to play the preview. Continued on next slide. Economics and You Video 5: What Is Demand? What is the law of demand? When a product’s price falls, consumers are more likely to buy it. Disc 1, Side 1 Chapter 5 Click the mouse button or press the Space Bar to display the answer. Economics and You Video 7: Demand and Supply After viewing Demand and Supply, you should be able to… • describe the price relationships between demand and supply. • compare elastic and inelastic demand. Continued on next slide. Click the mouse button or press the Space Bar to display the information. Economics and You Video 7: Demand and Supply Disc 1, Side 1 Chapter 7 Click the Videodisc button anytime throughout this section to play the complete video if you have a videodisc player attached to your computer. Click the Forward button to view the discussion questions and other related slides. Click inside the box to play the preview. Continued on next slide. Economics and You Video 7: Demand and Supply As the price of vacation homes increases, what will happen to the supply of and demand for such properties? The supply of homes will rise, and the demand for such properties will fall. Disc 1, Side 1 Chapter 7 Click the mouse button or press the Space Bar to display the answer. Economics and You Video 6: What is Supply? After viewing What is Supply?, you should be able to… • explain the law of supply. • identify some factors that can cause a change in the supply of a product. • define marginal product. Continued on next slide. Click the mouse button or press the Space Bar to display the information. Economics and You Video 6: What is Supply? Disc 1, Side 1 Chapter 6 Click the Videodisc button anytime throughout this section to play the complete video if you have a videodisc player attached to your computer. Click the Forward button to view the discussion questions and other related slides. Click inside the box to play the preview. Continued on next slide. Economics and You Video 6: What is Supply? What is the law of supply? The law of supply states that when prices of a product are higher, sellers will supply a larger quantity of the product. Disc 1, Side 1 Chapter 6 Click the mouse button or press the Space Bar to display the answer. Understanding Cause and Effect Understanding cause and effect involves considering why an event occured. A cause is the action or situation that produces an event. What happens as a result of a cause is an effect. Continued on next slide. This feature is found on page 193 of your textbook. Understanding Cause and Effect Learning the Skill To identify cause-and-effect relationships, follow the steps listed below: • Identify two or more events or developments. • Decide whether one event caused the other. Look for “clue words” such as because, led to, brought about, produced, as a result of, so that, since, and therefore. Continued on next slide. Click the mouse button or press the Space Bar to display the information. This feature is found on page 193 of your textbook. Understanding Cause and Effect Learning the Skill (cont.) • Look for logical relationships between events, such as “She overslept, and then she missed her bus.” • Identify the outcomes of events. Remember that some effects have more than one cause, and some causes lead to more than one effect. Also, an effect can become the cause of yet another effect. Continued on next slide. This feature is found on page 193 of your textbook. Understanding Cause and Effect Practicing the Skill • The classic cause-and-effect relationship in economics is between price and quantity demanded/quantity supplied. • As the price for a good rises, the quantity demanded goes down and the quantity supplied rises. • Knowing this, answer the questions on the next two slides. Continued on next slide. Click the mouse button or press the Space Bar to display the information. This feature is found on page 193 of your textbook. Understanding Cause and Effect Look at the figure to the right. What caused the big sale? What is the effect on consumers? The store is carrying a large inventory and needs get rid of it to make way for next year’s model. Consumers pay lower prices. Continued on next slide. Click the mouse button or press the Space Bar to display the answer. This feature is found on page 193 of your textbook. Understanding Cause and Effect Look at the demand curve for DVD players to the right. If the price is $5,000, how many will be demanded per year? If the price drops to $1,000, how many will be demanded per year? 1 million at $5,000 5 million at $1,000 Click the mouse button or press the Space Bar to display the answer. This feature is found on page 193 of your textbook. Demand for Oil Americans demand oil for many purposes, but mostly as a fuel for their automobiles. According to the Department of Energy, as of 2002 about 193 million vehicles were burning 122 billion gallons of gasoline a year. Domestic supplies meet about half of the demand for oil. Look at the next slide to see where we get the rest. Continued on next slide. A natural disaster in one part of the world may have an impact on supply elsewhere. An earthquake that hit Taiwan in September 1999 severely disrupted that country’s computer chip industry. The resulting shortage led to increases in chip prices–as much as 25 percent for some types of memory chips. Almost immediately, several American computer makers said that the price increases would have a negative effect on “product availability”–or supply. Hollywood North? American movies and television programs are popular in foreign markets. The bustling “American” city scenes and wide open landscapes, however, most likely were filmed in Canada. A favorable exchange rate for the American dollar and government tax breaks make moviemaking much cheaper in Canada than in the United States. Today, three of the top seven movie and television production centers–Vancouver, Toronto, and Montreal–are in Canada. Alfred Marshall 1842–1924 Click the picture to listen to the selection on page 200 of your textbook to find out more about Alfred Marshall. Be prepared to answer questions that appear on the next two slides. This feature is found on page 200 of your textbook. Alfred Marshall 1842–1924 What does Marshall mean by “equilibrium between desire and effort”? Answers will vary but should indicate the point at which satisfaction created by effort has arrived at its maximum. At this point, additional effort takes away from the pleasure of attaining the desire. Click the mouse button or press the Space Bar to display the answer. This feature is found on page 200 of your textbook. Alfred Marshall 1842–1924 What is an equilibrium price? An equilibrium price is a price that is fixed at the beginning and adhered to throughout marketing. It equates supply and demand. Click the mouse button or press the Space Bar to display the answer. This feature is found on page 200 of your textbook. End of Custom Shows WARNING! Do Not Remove This slide is intentionally blank and is set to auto-advance to end custom shows and return to the main presentation. Click the mouse button to return to the Contents slide.