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Chapter 4
Coordinating
Smart Choices
Chapter 4 - 1 © 2010 Pearson Education Canada
© 2010 Pearson Education Canada
Coordinating Smart Choices
Demand & Supply
Chapter 4 - 2 © 2010 Pearson Education Canada
LEARNING OBJECTIVES
4.1
Describe how buyers and sellers compete
and cooperate in markets
4.2
Explain how shortages and surpluses affect prices
4.3
Identify how market-clearing prices coordinate
the smart choices of consumers and businesses
4.4
Illustrate how changes in demand and supply
affect market-clearing prices and quantities
Chapter 4 - 3 © 2010 Pearson Education Canada
WHAT’S A MARKET?
Markets connect competition between buyers,
competition between sellers, and
cooperation between buyers and sellers.
Government guarantees of property rights allow
markets to function.
Chapter 4 - 4 © 2010 Pearson Education Canada
WHAT’S A MARKET?
• Market
the interactions of buyers and sellers
–
competition between buyers
–
competition between sellers
–
cooperation and voluntary exchange
between buyers and sellers
continued…
Chapter 4 - 5 © 2010 Pearson Education Canada
• Property rights
legally enforceable guarantees of ownership
of physical, financial, and intellectual property
• Government sets the rules of the game,
defining and enforcing property rights necessary
for free and voluntary exchange
Chapter 4 - 6 © 2010 Pearson Education Canada
WHERE DO PRICES COME FROM?
PRICE SIGNALS FROM
COMBINING DEMAND AND SUPPLY
When there are shortages, competition
between buyers drives prices up.
When there are surpluses, competition
between sellers drives prices down.
Chapter 4 - 7 © 2010 Pearson Education Canada
Figure 4.1 Market Demand & Supply for Piercings
Price
Quantity
Quantity
Demanded
Supplied
$ 20
1200
200
$ 40
900
400
$ 60
600
600
$ 80
300
800
$ 100
0
1000
Chapter 4 - 8 © 2010 Pearson Education Canada
PRICE SIGNALS FROM COMBINING DEMAND & SUPPLY
• Frustrated Buyers
market price too low
–
shortage or excess demand
quantity demanded exceeds quantity supplied
–
shortages create pressure for prices to rise
–
rising prices provide signals and incentives
for businesses to increase quantity supplied
and for consumers to decrease quantity
demanded, eliminating the shortage
Chapter 4 - 9 © 2010 Pearson Education Canada
continued…
Figure 4.1 Market Demand & Supply for Piercings
Price
Quantity
Quantity
Demanded
Supplied
$ 20
1200
200
$ 40
900
400
$ 60
600
600
$ 80
300
800
$ 100
0
1000
Chapter 4 - 10 © 2010 Pearson Education Canada
• Frustrated Sellers
market price too high
–
surplus or excess supply
quantity supplied exceeds quantity demanded
–
surplus create pressure for prices to fall
–
falling prices provide signals and incentives
for businesses to decrease quantity supplied and
for consumers to increase quantity demanded,
eliminating the surplus
Chapter 4 - 11 © 2010 Pearson Education Canada
WHEN PRICES SIT STILL
MARKET-CLEARING PRICES BALANCING
QUANTITY DEMANDED & QUANTITY SUPPLIED
Market-clearing prices coordinate
the smart choices of consumers and businesses,
balancing quantity demanded and quantity supplied.
Chapter 4 - 12 © 2010 Pearson Education Canada
MARKET-CLEARING PRICES BALANCING
QUANTITY DEMANDED & QUANTITY SUPPLIED
• The price that coordinates the smart choices of
consumers and businesses has two names
–
market-clearing price
price when quantity demanded equals
quantity supplied
–
equilibrium price
price balancing forces of competition
and cooperation
Chapter 4 - 13 © 2010 Pearson Education Canada
continued…
Figure 4.1 Market Demand & Supply for Piercings
Price
Quantity
Quantity
Demanded
Supplied
$ 20
1200
200
$ 40
900
400
$ 60
600
600
$ 80
300
800
$ 100
0
1000
Chapter 4 - 14 © 2010 Pearson Education Canada
• Price signals in markets create incentives,
so that each person acts only in self-interest
–
interactions coordinated through Adam Smith’s
invisible hand of competition
–
result is the miracle of markets —
continuous ever-changing production of
products/services we want
Chapter 4 - 15 © 2010 Pearson Education Canada
THE INVISIBLE HAND
• When an individual makes choices
“…he intends only his own gain, and he is in this...
led by an invisible hand to promote an end which
was no part of his intention.... By pursuing his own
interest he frequently promotes that of the
society more effectually than when he really
intends to promote it.”
Adam Smith, The Wealth of Nations, 1776
Chapter 4 - 16 © 2010 Pearson Education Canada
MOVING TARGETS
WHAT HAPPENS WHEN DEMAND & SUPPLY CHANGE?
When demand or supply change, market-clearing
prices and quantities change. The price changes
cause businesses and consumers to adjust their
smart choices. Well-functioning markets supply
the changed products and services demanded.
Chapter 4 - 17 © 2010 Pearson Education Canada
WHAT HAPPENS WHEN DEMAND & SUPPLY CHANGE?
• Demand changes due to a change in
–
preferences
–
prices of related products
–
income
–
expected future prices
–
number of consumers
Chapter 4 - 18 © 2010 Pearson Education Canada
continued…
• Increase in demand causes
–
rise in market-clearing price
–
increase in quantity supplied
• Decrease in demand causes
–
fall in market-clearing price
–
decrease in quantity supplied
Chapter 4 - 19 © 2010 Pearson Education Canada
continued…
• Supply changes due to changes in
–
technology
–
prices of inputs
–
prices of related products produced
–
expected future prices
–
number of businesses
Chapter 4 - 20 © 2010 Pearson Education Canada
continued…
• Increase in supply causes
–
fall in market-clearing price
–
increase in quantity demanded
• Decrease in supply causes
–
rise in market-clearing price
–
decrease in quantity demanded
Chapter 4 - 21 © 2010 Pearson Education Canada
Chapter 4
Refresh Slides
Chapter 4 - 22 © 2010 Pearson Education Canada
WHAT’S A MARKET?
1. What is a market?
2. You are negotiating with a car dealer over the
price of a new car. Explain where competition
enters the process, and where cooperation
enters.
Chapter 4 - 23 © 2010 Pearson Education Canada
continued…
3. The Recording Industry Association of America’s
(RIAA) mission is “to foster a business and legal
climate that supports and promotes our
members’ . . . intellectual property rights
worldwide.” Have you ever downloaded music?
If so, what arguments do you use to counter the
RIAA’s defence of property rights?
Chapter 4 - 24 © 2010 Pearson Education Canada
PRICE SIGNALS FROM COMBINING
DEMAND & SUPPLY
1. Define a shortage, and explain who competes
and what happens to prices.
2. Old Navy decides to price a new line of jeans
at $75, which covers all marginal opportunity
costs as well as a healthy profit margin. If Old
Navy has priced the jeans too high, what signals
does the company receive? What actions might
Old Navy take next?
Chapter 4 - 25 © 2010 Pearson Education Canada
continued…
3. Most provincial parks charge a fixed price for
a camping permit, and allow you to reserve
specific campsites well in advance. By the
time a summer holiday weekend arrives, all
the permits are taken. There is excess demand,
and no price adjustment. If you want to reserve
your favourite campsite for next year, how do
you compete, and who do you compete against?
Chapter 4 - 26 © 2010 Pearson Education Canada
MARKET-CLEARING PRICES BALANCING
QUANTITY DEMANDED & QUANTITY SUPPLIED
1. Name and define the two other names for
“prices that sit still”?
2. Explain the balance between the forces of
competition and cooperation at “prices that
sit still.” (I can’t give away the answer to
question 1, can I?)
Chapter 4 - 27 © 2010 Pearson Education Canada
continued…
3. In an attempt to promote the social good of
energy conservation, Toronto Hydro introduced
the Peaksaver Program. Participating households
received a $25 reward for allowing a
“peaksaver” switch to be installed on their
central air conditioners, which briefly turns off
the air conditioner during peak demand times on
hot summer days. Do you think the program
would work without the $25 reward? How does
this illustrate the “invisible hand”?
Chapter 4 - 28 © 2010 Pearson Education Canada
WHAT HAPPENS WHEN DEMAND & SUPPLY
CHANGE?
1. What happens to the market-clearing price and
quantity when demand increases? When demand
decreases? When supply increases? When supply
decreases?
Chapter 4 - 29 © 2010 Pearson Education Canada
continued…
WHAT HAPPENS WHEN DEMAND & SUPPLY
CHANGE?
2. Predicting changes in market-clearing prices and
quantities is harder when both demand and
supply change at the same time. You run a halal
butcher shop in Ottawa and expect an increase
in the number of Muslims in Ottawa. Rents for
retail space are falling all over town. What do
you think will happen to the market-clearing
price for halal meat? What will happen to the
quantity sold?
Chapter 4 - 30 © 2010 Pearson Education Canada
continued…
3. In response to the business boom in Alberta,
the city of Edmonton offered $200 per month
rent subsidies to low-income families so they
could afford to live and work in the city. What
impact would this effective increase in income
have on rents? What was the intention of the
subsidies?
Chapter 4 - 31 © 2010 Pearson Education Canada