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1 T-I-M-E-R • Non-Price Determinants of Demand TASTES & PREFERENCES (tickle me elmo, furbies) • • Key words: like, love, fashionable, preferred, voted Students at CyFalls High School vote to have Chik-fil-A for lunch instead of What-a-Burger. What will happen to the demand for Chik-fil-A? INCOME • • Key words: Bonus, gift card, salary, wages The stores in the mall decide to give their employees a raise. What will happen to the demand for clothes? MARKET SIZE • • Key words: immigration, more students, more housing, population movement A new sub division opens up north of 290. What happens to the demand for groceries? EXPECTATIONS OF CONSUMERS • • Key words: Future outcomes, sales, ticket purchases, time stamps After Thanksgiving TV’s go on sale. What happens to the demand for TV’s on black Friday? RELATED GOODS: SUBSTITUTES (lobster instead of steak) – The news reports that cows in the United States are infected with Mad Cow disease. What happens to the demand of chicken? COMPLIMENTS (peanut butter and jelly) – A drought causes this years peanut crop to decrease drastically. What happens to the demand for grape jelly? 1 S-T-O-N-E-R • Non-price determinants for Supply • S=Subsidy & Taxes • T=Technology • O=Other Related products • N=Number of Sellers • E=Expectations of Sellers • R = Resource Price 2 Change in supply – PICK ONE 2 2 Change in Demand – PICK ONE 2 3 & 4 Government Intervention Government intervention: gov’t regulations are imposed to keep the market from reaching equilibrium. Price ceilings: government sets a maximum price that can be legally charged. Price floor: minimum price you can charge 1. Established on “essential” goods. 2. 3. 4. Tends to result in shortages because consumers demand more of the product at the ceiling, but producers do not want to supply it. Occurs below equilibrium because they work to keep prices low and NOT achieve equilibrium. Benefits consumers. Example: Rent Control. At a price ceiling of $1.00, QD = 250 and QS = 150. As a result, there is a shortage of 100. $ Pizzas $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 D S 3 Price Ceiling 0 100 200 QD/QS 300 400 $ Pizzas $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 D 0 4 Price Floor 100 200 QD/QS 300 S 400 5 Tracking the Business Cycle TIME/INCREMENTS 5 PEAK Raise Reserve Requirement Raise Discount Rate Sell Bonds EXPANSION Raise Taxes Cut Spending TROUGH You want to: Put money INTO the Government/Fed Lower Reserve Requirement Lower Discount Rate Buy Bonds CONTRACTION Lower Taxes Increase Spending You want to: Take money OUT OF the Government/Fed 5 The Phases of the Business Cycle • Expansion:($ are flowing) – period of economic growth – plentiful jobs and falling unemployment – businesses invest in NEW plants, equipment, salaries ect….. – Inflation (higher prices) can occur. • Peak: – real GDP stops rising – high production, high employment and stable prices. – height of expansion 5 The Phases of the Business Cycle • Contraction:( going down hill) – – – – • Deflation (lower prices) can occur falling output low levels of investment Two types: • Recession: real GDP falls for 2 consecutive quarters, lasts 6-18 months and • Depression: high unemployment and low factory output Trough: – lowest point of economic activity – economy has “bottom-out” 6. Consumer Price Index an index of the variation in prices paid by typical consumers for retail goods and other items. • • • Leading: stock market prices, interest rates, orders of capital goods Coincident: change with the business cycle; personal income, sales Lagging: change after downturn or upturn; use of installment credit (cars, homes) 7 GDP • Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period. • Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis as well. 8 What is a Production Possibility Frontier or Curve is a graph that shows the combination of goods and services that can be produced when the Factors of Production (LLCE) are utilized to their full potential. production possibilities frontier? (PPF or PPC) C A P I T A l G O O D s Consumer Goods Shows what a country/business can produce for any given amount of the other. PPF illustrates the basic economic problem of guns or butter – which to produce? 8 Analyzing PPF • Any point above the PPF (H) = currently Future – never realizedgoal unattainable, however it is a FURTURE H – We always want our economy to be growing – To reach point H, increase the following: • technology • debt • investment G Economies are all somewhere in here: 8 Analyzing PPF • Any point above the PPF (H) = currently unattainable, however it is a FUTURE goal – We always want our economy to be growing – To reach point H, increase the following: • technology • debt • investment 9 • When the economy grows and all other things remain constant, we can produce more, so this will cause a shift in the production possibilities curve outward, or to the right. • If the economy were to shrink, then, of course, the curve would shift to the left. When the curve shifts outward, or to the right, • • • • • that means output is increasing. When the curve shifts inward, or to the left, that means output is decreasing. Shifts in the production possibilities curve are caused by changes in these things: • Advances in technology • Changes in resources • More education or training (that's what we call human capital) • Changes in the labor force 10 10 10 11 scarcity • Scarcity dictates that economic decisions must be made regularly in order to manage the availability of resources to meet human needs. • Some examples of scarcity include: – The gasoline shortage in the 1970's – After poor weather, corn crops did not grow resulting in a scarcity of food for people and animals and ethanol for fuel. – Over-fishing can result in a scarcity of a type of fish. – Fewer farmers raising cattle can result in a scarcity of milk and cheese. – An embargo on imports from a country can result in a scarcity of the resources that country exports. • Read more at http://examples.yourdictionary.com/examplesof-scarcity.html#sI3B3qAJBcj5yW6a.99 12 Opportunity Costs • Opportunity cost refers to the value forgone in order to make one particular investment instead of another. • How it works/Example: • For example, let's assume you have $15,000 that you could either invest in Company XYZ stock or puttoward a graduate degree. You choose the stock. The opportunity cost in this situation is the increased lifetime earnings that may have resulted from getting the graduate degree -- that is, you choose to forgo the increase in earnings when you use the money to buy stock instead. 13 Free Trade – The unrestricted purchase and sale of goods and services between countries without the constraints of tariffs, duties and quotas. • Comparative Advantage – “When you restrict foreign competition, you remove any incentive for American Industries to improve” • Specialization – • “each nation has its own area of expertise and should concentrate on that” International peace – – “If there are no restrictions on world trade, everyone benefits” “When you limit imports you hurt exports” 13. Free Trade Zone Organizations 14 Protectionism • Reasons to be Protectionist-ish • Protecting jobs – “No wonder there is high unemployment” • Protecting infant (young) industries – “We need tariffs to help new businesses get a start” • National Security issues – “What if we broke out into war and couldn’t get the parts for our missile defense?” 15 Absolute Advantage • Using the same amount of resources, one nation can produce a product at a lower cost and more efficiently than a second nation – Oil Middle East Diamonds South Africa 15 Comparative Advantage The ability to produce the same product at a lower opportunity cost • 16 Types of Unemployment Cyclical: associated with fluctuations in the business cycle – • Structural: caused by fundamental changes in the economy – • ex. Technological advances or discovery of natural resources Seasonal: caused by changes in seasons or weather – • ex. Higher unemployment during recessions/lower in recovery ex. Lifeguards or Santa Clause Frictional: temporary unemployment because of firings, layoffs voluntary searches for new jobs, etc. Always exists 19 Traditional ● Relies on habits, customs or rituals ● Roles are passed from generation to generation Strengths: highly motivated citizens because your work directly provides for your family Weaknesses: no “down time” to create, invent, etc 17 Bonds • DEFINITION of 'Treasury Bond - T-Bond' • A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level. • 18 Liquid Assets • A liquid asset is cash on hand or an asset that can be readily converted to cash such as money in a savings account • . An asset that can readily be converted into cash is similar to cash itself because the asset can be sold with little impact on its value. Traditional ● Property Rights – equally owned by family/tribe ● Incentives – provide basic needs for family ● Economic Freedom – none, no time for creativity/relaxation; won’t survive if each person doesn’t do their part ● Competition – none ● Role of Gov – (chief, tribal leader) - survival P- Based on traditions, available resources, & family/village size. D- Individuals, families, or the village. C- Trade within the village Bedouins (Arabia) Nomadic herders (Sahara Desert) Command ● central government alone decides ● government owns land & capital Strengths: guaranteed jobs & income Weaknesses: no individual freedoms; works in theory – not practice; allows for corruption Command ● Property Rights – government owns property ● Incentives – none (why would you work hard if you can’t advance/get raise, etc) ● Economic Freedom – low ● Competition – discouraged by government ● Role of Gov – dictates what is produced, who produces, how materials are distributed North Korea Cuba China Former USSR Free Market ● Individuals decide Strengths: individual choices, businesses can keep profits Weaknesses: difficult/impossible to achieve equality, some are very rich/poor Free Market ● Property Rights – individuals own property ● Incentives – individuals want best price & product; businesses want profit ● Economic Freedom – high ● Competition – encouraged by government ● Role of Gov – support competition and protect individuals Mixed ● Blends a market economy with government intervention and involvement Mixed: Free Market/US Free Enterprise ● Individuals own and operate the FOP and answer the basic economic questions. Some government regulation mostly for safety of consumer. ○ Examples: Canada, US, Mexico Mixed: Authoritarian Socialism ● Government owns and controls nearly all FOP ● Government officials develop long range plans. ○ Examples: Cuba, China Mixed: Democratic Socialism ● Government owns some FOP (key industries) ● Individuals influence economic planning through elections. ○ Examples: Sweden, Poland, France France Sweden Peru