Download Price of Ice-Cream Cone - Class Notes for Mr.Guerriero

Entrepreneurship
(Economics)
Montreal Gazette
• When we make decisions, we must
make certain tradeoffs
• Rational people make decisions by
comparing marginal costs and marginal
benefits.
• People change their behavior in
response to the incentives they face.
• The cost of any action is measured in
terms of foregone opportunities
What is Economics?
• A social science concerned with choices in
the allocation of scarce resources to unlimited
human wants.
• Economics is broken down into:
1. Micro Economics: deals with the behaviour
on individual basis (one person)
2. Macro Economics concerns itself with the
economic situation as a whole, rather than
the individual units (country)
• Basically economics is the study of how
human beings use resources to produce
various goods and how these goods are
distributed for consumption among
people in society.
• How does our system work?
• How are products distributed for
consumption in our society?
Unit 1
Economic Organization
Human Needs
and Wants
(1.1.1)
• You have 5 minutes to get with
a partner and generate a list of
10 “Needs”.
Needs
• Basic needs are things we require for our survival
• There are three basics needs:
1. FOOD (WATER)
2. SHELTER
3. CLOTHING
• Everyone’s basic needs are identical, but relative.
• Ex: Amount of clothing needed in the tropics is less
than that needed in the arctic
• Relative: depending on one’s situation
Choose 20 items from this list that you
think you'll need to survive in the wild
and list them in order of importance.
Both of you MUST agree on the items
AND their order.
1.
2.
3.
4.
5.
6.
7.
toilet paper
first aid kit
flash light
ice chisel
snare wire
clothes
powdered
milk
8. Ipod
1. Flour
2. Magazines
3. Knife
4. Axe
5. batteries
6. cell phone
7. Soap
8. Tea /
Coffee
1. Lard
2. Gun
3. fish hooks
4. BBQ sauce
5. 6 cans of
tomatoes
6. Bait
7. Towels
8. sugar
1. baking
powder
2. Bullets
3. Matches
4. Radio
5. compass
6. Deodorant
7. Shampoo
8. Watch
Wants
• They are not necessarily essential but,
are relative and desirable. They are not
needed for survival.
• Human wants are unlimited or
insatiable.
• The more we are able to satisfy our
wants the higher our standard of living.
Priority of wants
• Classify the following list according
to your personal priorities
Playing / Watching Sports
Listening to Music / Watching
Movies
Academic Success
Money/working
Hanging out with friends
How are they
relative?
Decide which item in the list would be most
wanted by each of the persons described below
 Barbie Doll/Cosmetics/Golf Clubs/Hearing
Aid/ Bicycle
A.3 year old girl
B.12 year old boy
C.18 year old woman
D.Tiger Woods
E. 80 year old man
i. Doll
ii. Bicycle
iii.Cosmetics
iv.Golf Clubs
v. Hearing Aid
Goods, services, resources,
scarcity, and choice
(1.1.2)
Goods
• A good is something physical that
satisfies our wants.
• We classify goods into two categories
Durable and Non-Durable
• Durable goods are used over a long
period of time
• Non-durable goods get used up quickly
Free Goods
• A good that is found in unlimited
quantity, it is a commodity for which
the supply exceeds the quantity
demanded to such a degree that it
does not have a positive cost.
Services
• A service is an economic activity
that satisfies our needs or wants
• Where a good is tangible a
service is an intangible activity.
• Ex. Plumber, delivery of pizza,
teachers, lawyers.
Resources
• Society uses resources to produce
other goods and services.
• Production is the act of combining
resources in the production of other
goods.
• The act of using goods is called
consumption.
• Resources are categorized as:
1. Natural: Includes land and
anything on or inside of it in a
natural state.
2. Human: The specific portion of the
population that is active and
productive, part of the Labour
force.
– Quantity (Age and amount of
people in the labour force)
– Quality (Education and training)
3. Capital: A resource that is neither
Natural nor human, in fact any
good used in the production of
goods and services.
– There are two types: Financial
Capital and Real Capital
4. Intangible: Difficult to measure, still
play an important part in the
factors of production, such as the
productivity of a certain group of
people.
– Ex: Knowledge, Environment of the
enterprise, Teambuilding, etc.
In economics, when we combine these
three resources together we produce
goods and services, collectively we call
these resources the factors of
production.
To coordinate all resources is the role
of management.
Classify each term from
the list below
Taxi cab
Ability to sell
Store owner
Factory
Apple pie for your
Dessert
Savings bond
Natural
CEO of GM
Teacher
School bus
Personal
Computer
Air
Tires
Human
River
Slave
Flowers for your
s/o
a $10 bill
Forest
Wild boar
Capital
Intangible
Scarcity
• Society has limited resources it
cannot produce all the goods and
services people desire.
• The measurement of scarcity of a good
is its economic value of price.
• When a person wants a particular
good he or she agrees to pay its price.
• Economic goods and services have
cost because they have some degree
of scarcity.
• The higher the degree of scarcity the
higher the price.
• Any economic good is scarce when
you cannot obtain as much as you
desire without making a choice,
trade off or sacrifice.
Choice
 Remember people’s
wants are unlimited
while goods and
services are scarce and
limited
So we must make
choices pertaining on
their availability and
one’s ability to pay for
them
Opportunity Cost
• Every time you decide to satisfy a
want you must give up the prospect
of satisfying others
• OC is the next best alternative use
of a resource that is given up when
we make a choice.
1000 Dollar Question
Buy an Ipad
Take a trip
Buy a new wardrobe
Buy a used car
 You can only pick one!!! The ones you leave
out is the opportunity cost of your choice
Stretching Every Penny
Given 500$ per month fulfill your basic needs
•
•
•
•
•
•
•
•
•
•
•
• Brown Rice, long grain, 2 lbs: $5.00
Rent: 300$
• Strawberry Fruit Spread, 235 ml: $4.00
Medicine for Timmy: 120$
• Peanut Buddy Granola Bars, 6 x 35 g:
Groceries:
$5.00
Baked Beans: $3.00
• Mustard, 330 ml: $4.00
Tomato Soup, 1 L: $6.00
• Ketchup, 575 ml: $4.00
Orange Juice, 1.89 L: $6.00
• Canned Whole Tomatoes, 796 ml: $3.00
Apple Juice, 946 ml: $3.00
• Macaroni and White Cheddar Cheese,
170 g: $4.00
Raisin Bran Cereal, 400 g: $5.00
Hot oatmeal cereal, maple nut, 400 • Spaghetti, 454 g: $3.00
g: $5.00
• Medium Maple Syrup, 1 L: $30.00
Dozen brown eggs, large size,
• Sugar 2 lbs., 907 g: $7.00
Canada A Grade, Organic Meadow: • Hot oatmeal cereal, apple cinnamon, 400
$7.00
g: $5.00
Peanut Butter, 500 g: $5.00
• Lemonade, 946 ml: $4.00
•
•
•
•
•
•
•
•
•
•
•
Pay off all of your debts: 20, 000 dollars
Put a down payment a house: 50, 000 dollars
Buy a Porsche: 85, 000 dollars
Add to your savings account: 40, 000 dollars
Take a 4 week European vacation with a friend: 20,000
dollars
Go on a shopping spree: 10, 000 dollars
Weekend spa treatment: 5, 000 dollars
Open up/start that dream business you always wanted: 80,000
dollars
Buy everyone in your family an Ipad: 10,000 dollars
Send your parents on a European Vacation: 20,000 dollars
Donation to the Church: 15,000 dollars
Who is making the
choice?
Government
What they
Choose
Opportunity cost
Debt
Reduction
Education
Military
New roads
Health care
Business
Individuals
Computers
Pay raise
Office party
New van
New staff
Advertising
New DVD
CD
Aero Bar
Kit-kat
Dinner at a
restaurant
Pair of shoes
The Production Possibility Curve
Beer (L)
3000
2400
1800
1000
0
100
200
300 350
400
1000
Maple Syrup (L)
Determination of price: supply and
demand & types of markets
(1.1.3)
Answer the following:
1. What is a sale? Why do stores have
them?
2. Have you ever bought anything on sale?
If so what was your discount? (One
example)
3. Why do some products cost more than
others?
4. Why does the same product have a
different price in other cities/countries?
Two sides of the
Same Coin
• The Supply and Demand
Relationship
Supply and Demand
• Refer to the behavior of people as they interact
with one another in markets.
But What is a Market?
• Any place where sellers of a particular good or
service can meet with the buyers of that good or
service.
• The buyer also has to offer something in
exchange for the good or service.
• A transaction must be able to take place
But what about the Price?
• Prices are determined by the market.
• It is determined by the demand for the
commodity and the supply available.
• Demand: is the ability and the willingness to
make a purchase
Equilibrium
•When supply and demand meet we
have equilibrium.
•We’ve got a sale!!
Supply and Demand Curve
Demand and Price
•Price and the quantity demanded are
negatively related
•Which means:
•If the price then quantity demanded
•If the price then quantity demanded
Price
Demand
Curve
Quantity Demanded
Why is this so?
•There is always more than one
commodity for sale at a given time
•If the price increases, you will buy less of
it.
Ice Cream Cone Demand Schedule and Demand Curve
Price of
Ice-Cream Cone
$3.00
Want less,
higher price
2.50
1. A decrease
in price ...
2.00
1.50
1.00
0.50
Want more,
lower price
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
Changes in Quantity Demanded
Price of IceCream
Cones
B
$2.00
A tax that raises the
PRICE of ice-cream
cones results in a
movement along the
demand curve.
A
1.00
D
0
4
8
Quantity of Ice-Cream Cones
Factors that Influence
Demand
 The amount of a good demanded depends on
many factors
• Whether customers like the good
• The price of the good
• The income of consumers (income effect)
• The demand for alternative goods which could be
used (substitutes)
• The demand for goods used at the same time
(complements)
Substitution
Effect
Complementary
Effect
• A fall in the price of one
good reduces the
demand for another
good.
• A fall in the price of one
good increases the
demand for another
good.
• Ex: Price of train travel
goes up, more people
use their car
• Ex: Hot dogs go on sale,
more people buy hot
dog buns.
Is a change in
Demand and a
Change in Quantity
Demanded the Same
thing?
Illustrating
Demand
The curve only shifts if there is a change in the
amount of people who demand a given good
or service
 Hint: We move along the curve ONLY
WHEN there is a shift in PRICE.
•
•
An increase in demand will shift the curve to
the right
A decrease will shift it to the left
Price
Demand
Curve
Quantity Demanded
Shifts in the Demand Curve
Price of
Ice-Cream
Cone
Increase
in demand
Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0
Quantity of
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning
Elasticity of Demand
How much of a change in quantity demanded
will result from a given change in price?
• If a change in price results in a massive change in
the demand of the product
• The product is Price Elastic
• If a change in price has little or no effect in the
quantity demanded
• The product is Price Inelastic
Principle of Diminishing
Marginal Utility
Supply
Supply
Is the amount of a good producers are willing
and able to sell at a given price.
 Supply depends on:
 The price of the good or service
 The cost of production
 The supply of alternative goods that
another producer could manufacture with
the same resources
 Unexpected events that affect supply
Price
Supply
Curve
Quantity Demanded
Quantity supplied depends on the
price of the good and other
Price of Icecommodities
Cream Cone
S
C
$3.00
A rise in the price
of ice cream cones
results in a
movement along
the supply curve.
A
1.00
0
1
5
Quantity of
Ice-Cream
Cones
Ice Cream Cone Supply Schedule and Supply Curve
Price of
Ice-Cream
Cone
$3.00
1. An
increase
in price ...
2.50
2.00
1.50
1.00
0.50
0
1 2
3
4
5
6
7
8
9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity of cones supplied.
Changes in Supply
(Movement along the curve)
At each price a different quantity will be supplied
then before
 As price supply
(Larger profit margin)
 As price supply
(Smaller profit margin)
Any shift must be as a result of a
change of one of the factors other
then the commodity’s own price.
Important note
 Anything that changes the
production cost of a good will
cause the supply curve to
shift.
An increase of supply
shifts the curve to the
right
A decrease of
supply shifts the
curve to the left
Shifts in the Supply Curve
Price of
Ice-Cream
Cone
Supply curve, S3
Decrease
in supply
Supply
curve, S1
Supply
curve, S2
Increase
in supply
0
Quantity of
Ice-Cream Cones
Producers
Customers
Law of Demand
Law of Supply
P = QD
P = QS
P
P
p1
p1
p2
p2
S
D
qd1
qd2
QD
qs1
qs2
QS
Equilibrium
This is the point where supply and demand
intersect.
 This is where buyers and sellers agree to
make an exchange.
The Equilibrium of Supply and Demand
Price of
Ice-Cream
Cone
Supply
Equilibrium
Equilibrium price
$2.00
Equilibrium
quantity
0
1
2
3
4
5
6
7
8
Demand
9 10 11 12 13
Quantity of Ice-Cream Cones
Supply and Demand Curve
Recap
 As the price of a good changes so does the
quantity demanded. This results in a shift
along the demand curve.
 Price goes up demand goes down
 Price goes down demand goes up
 Shifts occur with a:
• Change in income
• Price change in complements and
substitutes
• Change in tastes and expectations
Recap
The supply curve shows how the quantity of a
good supplied depends on price
As the price of a good changes so does the
quantity demanded.
The supply curve moves when one of these
factors change:
• Input prices, technology, expectations and the
number of sellers.
Recap
Market Equilibrium is the meeting point of the
supply and demand curves
At the equilibrium price, the quantity demanded
equals quantity supplied
Consumers behaviour naturally drives markets
towards equilibrium
Different types of Markets
1. Monopoly (3 types)
• Only one supplier exists in the
market.
A) National
 Easier for everyone to be plugged into
one system. Ex: Canada Post
B) Legal
 When governments outlaw the ability
for more than one company to
provide a good or service. Ex: Hydro
Quebec, SAQ
C) Patent
An inventor of a new product has
exclusive rights for 17 years or until he/she
sells its rights. Ex: Apple (touch screen)
Why?
Encourages innovation by allowing an
innovator exclusivity to the market to
compensate for R & D
2. Oligopoly
Few sellers, many buyers
Considerable conditions must be met to enter
market
They are price makers, decide what to charge for
their goods/services
Compete in areas other than price
Very easy to collude (Illegal)
Ex: Gas stations
3. Monopolistic Competition (Free Market)
Many sellers, Many buyers
Easy entrance in to the market, easy exit
Non-price competition
More worried about location, décor, atmosphere,
selection, advertising
Similar products and services
Ex: Clothing stores, Bars,
Restaurants, Clubs, Music
Shops, Shoe Stores
4. Pure Competition (Perfect Competition)
Many sellers
Easy entrance, easy exit
Price Competition
No true examples
Other ways of setting prices
A)Bargaining
B) Reserved prices (Think eBay)
C) Cartels
Such as OPEC may limit the supply of a given good
or service in order to increase price.
Illegal in North America
D) Government intervention
Government may intervene and set prices Ex: Crown
corporations, minimum wage, price floors.
More
Competitive
Pure
Competition
Less
Competitive
Monopolistic
Competition
Oligopoly
Monopoly
Economic Factors and
Division of Labor
(1.2.1&1.2.2)
Business Firms
Use capital resources, natural resources, and
human resources to supply goods and
services
Owned by risk takers called Entrepreneurs
Exist to make profit
Employ workers
Companies pay taxes
Consumers
They represent the demand side in the
exchange
 They demand goods and services (they buy)
 They decide the price, quality and style of
commodities
 Changes in their habits can lead to bankruptcy,
inflation, unemployment, and recession.
Government
3 levels (Federal, Provincial, Municipal)
Regulate the economy (Laws)
Collect taxes from consumers and businesses
Provides goods and services (schools, hospitals,
roads, garbage collection)
Gov’t can also own businesses called Crown
Corporations
Workers
They supply the labor needed to produce
goods and services
Supply the knowledge, skills and manpower
They are rewarded with wages, salaries,
pensions, bonuses, shares etc.
Economic Organization and the
Division of Labor
 Traditional Society
• Based on subsistence and self efficiency
• Very little specialization, everyone works to produce
basic necessities.
• Few specialists who made quality products (artisans)
• Use the barter system (cashless society)
• Ex: 1 barrel of apples for 2 days work
Industrialized society
• Production processes are mechanized
• Workers tend to be more specialized
• They usually only do part of job that
contributes to a finished product
• This society embraces “division of labor”
• Cash based
Pros and Cons of Labor
 Advantages Division
• Increases Productivity
• Able to produce standardized products
• Reduces labor costs
• Reduces the cost of goods
• Easy to train workers
• Efficient, machinery constantly in use
Disadvantages
• Tasks are boring and repetitive
• Necessary to keep pace with other workers
• Quality may suffer in light of mass production
• Must find markets to buy an ever increasing supply of
products
• Results in less pride in one’s work (small role in finished
product)
st
21
Century
 High technology
 Robots are taking the place of the worker
 They perform many tasks once done my humans
 Moving towards a cashless society
 More jobs in service sector
Given what we have discussed so
far complete following:
•
You and a friend decide to open up a business (choose
one);
1. Restaurant
2. Boutique/store
3. Service provider (mechanic, salon, construction, cafe, etc)
• Name your business
• What products would you carry?
• Where are you going to set up your business? (Describe
the location)
• Who are you marketing your products to?
• What type of market are you in?
• Your business is booming, but you are
loosing customers because they say wait
times at checkout are too long. What do
you do?
• Be sure to include what types of resources
you are going to need and explain.
• You are about to launch a new product.
Similar products are available in other
businesses. Your market research shows
that demand for this is quite high. Where
would your set your price given that the
average price for the item is sold at 10$?
How do the laws of supply and demand
work in this situation?
• A major business across the street from you
shuts down. What could happen to:
1. Demand and supply of your products? The
price of your products?
2. Your consumers?
3. Your workers?
4. Your resources?
Gross Domestic Product (GDP)
(1.2.4)
The Gross Domestic
Product (GDP)
 How do we stack up against other
nations throughout the world?
Is it even possible to measure?
How can we determine if our economy
is growing?
 GDP is the total value of all goods
and services produced in the country
 Calculated on a yearly basis
Only the values of the final
products and services are included
 Ex: Each computer is counted not
the individual components inside of
it
 A high and quickly growing GDP
is preferable
 Why?
 It demonstrates a growing
economy
How do we calculate it?
 Take into account all consumer spending (C)
 Investments made by industry (I)
 Total value of government expenditures (G)
 The value of exports (E)
 The value of imports (IM)
GDP = C + I + G + E - IM
 It is important to take into account any changes
to the population
Therefore we have to use GDP per capita
 GDP  by nation’s population
What is not included
The value of all goods and services;
produced at home (housework, crafts,)
 Exchanged by bartering
Paid for in the underground economy
Handled illegally
Personal savings that are not invested
Real GDP
• Normal GDP is expressed in current dollars
• The effects of inflation are not taken into account
• If prices have risen throughout the year, there may not
have been much growth
• Therefore, Real GDP must be calculated in constant
dollars
• If we allow for inflation, we can compare our
productivity over a period of time.