Download Chapter 3 PP

Interdependent Choice &
Market Coordination
SUPA Economics
Chapter 3
The Division of Labor
• Interdependence
▫ “No man is an island”
• Specialization
▫ Leads to:
 New innovations
 Increased productivity & dexterity
 A surplus of goods, but many unmet needs
 Trade
▫ Limits
 Demand?
Surplus, Exchange, and Gains from
trade
If we all produce 1 good,
we will have a surplus of that good,
but many unmet needs
This leads to the need for exchange
Through exchange, the benefits of division of
labor are realized
Surplus, Exchange & Gains from
Trade
If Jim & Ed both spend an
hour a day on making gun
racks and hockey nets,
these would be the results.
Gun
Racks
Hockey
Nets
Jim
10
7
Ed
6
10
Total
If Jim & Ed spend two
hours a day at what they
do best, we will see net
gains of how many gun
racks? Hockey nets?
Gun
Racks
Hockey
Nets
Jim
20
0
Ed
0
20
Total
Absolute & Comparative Advantage
• Absolute Advantage
Jim is better at producing gun racks
Garth is better at producing street hockey nets
Each has an absolute advantage in that activity which they do best
• Comparative Advantage
Produce a good at a lower opportunity costs.
Comparative Advantage
Acres of Land Needed to Produce Wine & OJ
1.
2.
3.
4.
5.
Wine
OJ
Alpha
1
3
Beta
1
4
What is the opportunity cost of Alpha producing wine?
What is the opportunity cost of Beta producing wine?
What is the opportunity cost of Alpha producing OJ?
What is the opportunity cost of Beta producing OJ?
Who should use land to produce wine? OJ? Explain!
Comparative Advantage
Goods Produced by Countries Alpha & Beta
1.
2.
3.
4.
5.
Wine
OJ
Alpha
9
3
Beta
8
4
What is the opportunity cost of Alpha producing wine?
What is the opportunity cost of Beta producing wine?
What is the opportunity cost of Alpha producing OJ?
What is the opportunity cost of Beta producing OJ?
Who should produce wine? OJ? Explain!
Economic Systems
• Traditional
• Command
• Free Market
The magic of markets
The premise- each person gets a share of social
endowment as your own private property
You can use that share as you please
Under ideal conditions known as perfect
competition,
pursuing self-interest will also serve others
The more the market values what you bring to it,
the more you will be rewarded
The Role of Money in Markets
Money is financial capital
Production capital is a “produced means of
production” like machines
Whenever you hear the word capital, you need to
figure out which way it is used
Money
• Barter to money exchange
• The Roles of Money
▫ Unit of Account
▫ Medium of Exchange
▫ Store of Value
• Types of Money
▫ Commodity
▫ Fiat
Characteristics of good
money:
• Relatively fixed in supply
• Portable
• Continuously dividisble
• Storable
Demand, Supply, Equilibrium
The Market Picture
p
Q
Figure 3.3.1 - A Generic Market Picture
Demand
• The desire, ability & willingness of a consumer to
purchase a good/service at a specific price
• Law of Demand
6
Quantity
Demanded
(Q)
$1
10
$2
7
$3
3
$4
2
$5
0
5
4
Price
Price (P)
Cameron’s Demand for Mittens
D
3
2
1
0
0
5
10
Quantity
15
Practice With Demand
Christopher’s Demand for
Peanut Butter & Jelly
Sandwiches
Diana’s Demand for Oreo
Cheesecake
Price (P)
Price (P)
Quantity
Demanded
(Q)
$0.50
1.00
$10
1.50
8
2.00
6
2.50
4
2
Quantity
Demanded
(Q)
Demand vs. Quantity Demanded
• Demand
▫ Not a number
▫ An attitude
• Quantity Demanded
▫ A specific number at a specific price at a specific time
• A change in demand is different from a change in
quantity demanded
A Change in Demand
• Represented by a shift of the entire curve to the
right or left
16
• Result of a change in:
14
12
10
Price
Personal Preferences
Number of Buyers
Income
Prices of Related Goods
 Substitutes
 Complements
▫ Expectations
▫
▫
▫
▫
Tom’s Demand for Shampoo Before
and After Growing His Hair Out
8
D2
D1
6
4
2
0
0
2
4
6
Quantity
8
10
A Change in Quantity Demanded
• Represented by a movement from one point to
another along a demand curve
Tom’s Demand for Shampoo
• Result of a change in:
16
▫ Price
14
12
Price
10
8
D
6
4
2
0
0
1
2
3
4
Quantity
5
6
7
8
Market Demand
• Studying the demand of a group of
people for a certain good/service at
various prices
Market Demand for I Phones
P
Q
Bob
Q
Lydia
Q
Reese
Q
Keith
$50
4
6
10
12
$100
3
4
8
10
$150
2
2
6
8
$200
1
1
4
6
$250
0
0
2
4
Q
Market
Supply
• The amount of a good/service that producers are
willing and able to make available for sale at
Shop Rite’s Supply of Bottled Water
various prices
$3.00
• Law of Supply
Quantity
Supplied
(Q)
$2.00
Price
P
$2.50
S
$1.50
$0.50
0
$1.00
$1.00
1
$0.50
$1.50
3
$0.00
$2.00
4
$2.50
9
0
2
4
6
Quantity
8
10
Practice With Supply
Cone Zone’s Supply of
Ice Cream Cones
Mobil’s Supply of Gas
Price (P)
$10
8
6
4
2
Quantity
Supplied
(Q)
Price (P)
$1
2
3
4
5
Quantity
Supplied
(Q)
Supply vs. Quantity Supplied
• Supply
▫ Not a number
▫ An attitude
• Quantity Supplied
▫ A specific number at a specific price at a specific time
• A change in supply is different from a change in
quantity supplied
A Change in Supply
• Represented by a shift of the entire curve to the
right or left
• Result of a change in:
▫ Resource Prices
 Variable
 Fixed
▫ Technology
▫ Profit
Ricardo’s Supply of
Pillows Before and After
Decrease in Feather Prices
Price
Q
Before
Q
After
$15
15
17
$12
13
16
$10
12
14
$7
9
11
$5
7
9
A Change in Quantity Supplied
• Represented by a movement from one point to
another along a supply curve
• Result of a change in:
▫ Price
Antonio’s Supply of Pizza
P
Q
5
1
10
2
15
3
20
4
25
5
Market Supply
• Studying the supply of a group of
producers for a certain good/service
at various prices
Market Supply of Gel
P
$.50
$1.00
$1.50
$2.00
$2.50
Q
Herbal
Essences
Q
Suave
Q
Pantene
Q
Garnier
Q
Market
Equilibrium
• The point at which quantity supplied meets quantity
demanded
Supply & Demand of Digital Cameras
• Equilibrium Price
$300
$250
$200
Price
• Equilibrium Quantity
S
E
$150
$100
D
$50
$0
0
2
4
6
8
Quantity
10
12
14
16
Surpluses & Shortages
• Surplus
Market Supply & Demand for Wheat
6
• Shortage
5
S
Price
4
E
3
2
D
1
0
0
5000
10000
Quantity
15000
20000
Analysis Questions
1. At the $3 price in the graph:
a. QS exceeds QD
b. QD exceeds QS
c. The product is abundant & a
surplus exists
d. there is no pressure on price to rise or fall
2. At a price of $4, what is the surplus amount?
3. At a price of $2, what is the shortage amount in the graph?
4. At $5 in this market:
a. There will be a shortage of 10,000 units
b. There will be a surplus of 10,000 units
c. Quantity demanded will be 12,000 units
d. Quantity demanded will equal quantity supplied
Changes in Supply & Demand
Market Supply and Demand of Copy Paper Before & After Invention of Photocopier
P
Q
Supplied
Q
Demanded
Before
Q
Demanded
After
$10
1000
500
600
$8
900
600
700
$6
800
700
800
$4
700
800
900
$2
600
900
1000
1. What was the cause of the change in demand in this problem?
2. How is equilibrium price affected?
3. How is equilibrium quantity affected?
Price Ceilings
P
• Maximum legal
price that can be
charged for a good
or service
• Allows people to
obtain goods or
services that could
not previously be
afforded
D
S
$5
E
4
Q
Price Floors
P
• Minimum price that
can be charged for a
good or service
S
$3
$2
E
• Helps business owners
with low incomes
D
4
Q
Follow-Up Questions
• What is the “invisible hand?”
▫ The idea that the market moves as needed
• Do we ever really reach equilibrium?
▫ No, but we are always adjusting towards it
• How do suppliers know how much to charge?
▫ They consider how much consumers are willing to pay
• Do suppliers and demanders strive for equilibrium?
▫ No, they are just trying to maximize utility
Circular Flow Model
• Main Players
▫ Individuals (Households)
▫ Firms
• Markets
▫ Factor/Resource Markets(individual selling labor to firm…a
nurse)
▫ Product Markets(firms selling g/s to individuals)
• “Web of Connections”
Perfect Competition
• Situation where there is:
▫ No market power (a fair race for everyone)
 Equal access to information (opportunity…violations- ol’boy
network, insider trading)
 Equal access to markets (help wanted ads based on gender,
race)
▫ No market failure (markets do their job)
 Markets function smoothly
 Markets form quickly when needed
• If we assume these things to be true, we will have a
perfectly competitive economy that reaches
Pareto Optimal General Competitive Equilibrium