PDF-Ch3 - Chapter 3 – Supply& Demand Chapter 3 —...

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Unformatted text preview: Chapter 3 – Supply & Demand Chapter 3 — Demand & Supply • Demand – a schedule of all the various • Law of Demand — there is an inverse relationship between price and quantity demanded of a good or service. quantities of a good or service that consumers are willing and able to buy, at at various prices and at a specified time, time, place and population. population. Why? Substitutes Demand Schedule Is there a good substitute for gasoline? Insulin to a diabetic? Demand Graph Height of Demand curve: MB Implies: Consumer Surplus (D = MB) Elasticity Change in D v. Change in Qd • Change in Qd — price • Change in D — anything BUT price Demand curves are downward sloping because of: 1. 2. 3. 4. Complementary goods Excess supply Substitution The inverse relationship between income and consumption. 1. Why are D curves downward sloping? No. of substitutes 2. Why is the demand for one good elastic but for another, inelastic No. of substitutes 1 Activity 3.1: Draw 2 demand graphs, completely labeled. On the left graph, show a change in quantity demanded. On the right demanded. graph, show a change in Demand. Demand. Change in D v. Change in Qd Which Which one does PRICE change? An INCREASE in D (shift to the ____) LABEL COMPLETELY, all axes, curves, shifts, arrows, etc. Consumers’ surplus is 1. The difference between what a producer HAS to pay for 2. 3. 4. resources and what he wants to pay. The difference between what the consumer wants to pay for a good and what the producer wants him to pay. The difference between the producer’s cost and the market price. The difference between what the consumer is WILLING & ABLE to pay and what he actually has to pay given the market price. • Change in Qd — price anything BUT price • Change in D — DECREASE in D (shift to the ____) Change in D v. Change in Qd • Change in Qd — price • Change in D — anything BUT price • income (normal v. inferior) •Number of Buyers in the Market: • Innovation – consumers think of ways to use products like they’ve never been used before. If entrepreneurs pick up on it…so much the better: 2 Change in D v. Change in Qd • Change in Qd — price anything BUT price • Change in D — • Price of a related product •Substitutes •Complements • Expectations – Johnny Carson, toilet paper http://thelongestlistofthelongeststuffatthelongestdomainnameatlonglast.com/trivia74.html Change in D v. Change in Qd • Change in Qd — December 19, 1973 price • Change in D — anything BUT price • Expectations – Johnny Carson, toilet paper By noon on December 20, 1973, practically every store in America was out of stock. Change Change in D v. Change in Qd Change in D v. Change in Qd • Change in Qd — • Change in Qd — price • Change in D — anything BUT price •Expectations – Johnny Carson, toilet paper •GASOLINE fall ’08!!! price • Change in D — anything BUT price •Income •Normal goods •Inferior goods •Tastes & Preferences – 3 After last year’s VMA awards, what would you have expected to happen to the P & Q of: A: Kanye West albums albums B: Taylor Swift albums Activity 3.1: On left graph, show what you would expect to happen to the P&Q of Kanye West sales (CDs & downloads). On the right graph, show what you would graph, show what you would expect expect to happen to the P&Q of Taylor Swift sales (CDs & Make downloads). Make sure both are completely and correctly labeled. Things that cause Demand to shift: 1. Income (normal v. inferior) 2. No of buyers in the market 3. Price of related products (substitutes v. complements) 4. Innovation 5. Expectations 6. ANYTHING but price... (PMA) Ceteris Paribus, if the price of gasoline increases and continues to rise over time, what would you expect to happen in the market for large, less fuel efficient cars? 1. Demand for cars will decrease 2. Demand for cars will increase 3. Quantity demanded for cars will 4. (PMA) Ceteris Paribus, if the demand for automobiles increases, what would you expect to happen in the tire market? 1. Demand for tires will decrease 2. Demand for tires will increase 3. Quantity demanded for tires will increase 4. Quantity demanded for tires will decrease What is Supply? Supply – a schedule of all the various quantities of a good or service that a producer is willing and able to sell at various various prices and at a specified time, time, place and population. population. increase Quantity demanded for cars will decrease 4 Chapter 3 con’t — Demand & Supply • Law of Supply — there is a positive relationship between price and quantity supplied • WHY? PPC…..as you produce more COTTON, you give up more and more in terms of corn, at the margin. Let’s call that a supply curve. Change in S v. change in Qs • Change in Qs (price) V. Change in Supply – (anything BUT Price) Chapter 3 con’t con’t — Demand & Supply • Law of Supply — there is a positive relationship between price and quantity supplied — Supply graph (height = OC at the margin, or marginal cost) — Producer surplus (MC) — Elasticity of supply (SR vs. LR) — Change in Qs V. Change in Supply – (price) (PMA): A change in price will cause a change in 1. 2. 3. 4. 5. supply demand Income elasticity elasticity quantity demanded quantity supplied Anything but price……for example: cost of production, natural disaster, tax policy, etc. (PMA): A change in _________ will cause a change in price. 1. 2. 3. 4. How S & D interact supply demand quantity demanded demanded quantity supplied 5 No matter what situation economists try to illustrate using supply and demand conditions, the main underlying assumption is always: 1. 2. 3. 4. Things that cause our supply curve to shift: e pluribus unum ceteris paribus paribus laissezlaissez-faire opportunity costs are objective Cost of Production -- Changes in technology Number of sellers in the market -- Natural disasters -- 6 Tax policy And sometimes….even the professionals get it wrong…… Article from Rock Times, Nov. 1974 http://www.musicforecon.com/ So what does price do? • allocates • encourages conservation • ensures that products go to those who value them most those who value them most highly highly What happens when price is NOT allowed to do it’s job? What do the following photos have in common? Video – Sometimes, even with grave grave shortages, government will not allow price to change. What is the result? 7 • Invisible hand: doing things in your own selfself-interest that also benefit society. – Opera store • Spontaneous Order (Natural Order): Hayek…result of human action, not of human design – Sidewalks at Russ’ college, money, language, Sid highways (deer trails, paths, dirt roads, paved, US1, I-95) I– Walmart lines – do we need central planning? Invisible Hand of Competition • The invisible hand causes NATURAL order NATURAL • • (not central planning) ex. Lines at McDonalds, toll booths Pricing gives information – higher price gives information higher price signals signals change in the market-Tsunami & marketprice of bananas, price of plywood after hurricane What determines Price … is it supply or demand? Alfred Marshall Video— Video—Invisible Hand Price ceilings/Price floors 8 3.3: Draw a graph that shows: End of Chapter 3 of Chapter What you would expect to happen to the market price and quantity of strawberries after a tornado rips through “strawberry country,” central Florida. S & D graph, labeled correctly graph, (axes, curves, arrows, etc.). Show market p & q BEFORE the tornado and then again AFTER the tornado. Class Work 4.2 Class Class Work 3.4 The supply of illegal immigrants to this country continues to grow. These immigrants will often take lower paying jobs that Americans do not want. How would you expect the number of illegal would you expect the number of illegal immigrants immigrants entering this country to affect the market price and quantity of, say, the landscaping business, ceteris paribus? Hurricane Katrina hit the Louisiana coast pretty hard, wiping out homes and businesses such as Home Depot and Lowe’s. How would you expect the hurricane to affect the market the hurricane to affect the market price price and quantity of lumber, ceteris paribus? Draw a graph for your answer. (PMA) (PMA) When economists say the supply of a good or service has increased, they mean: 1. The supply curve has shifted to the right 2. The price of the good or service has increased and as a result, suppliers are producing more of it. 3. The supply curve has shifted to the left 4. The amount of the product that consumers are willing to purchase at various prices has increased. Draw a graph for your answer. The expression “There’s no such thing as a free lunch” means 1. If one person gains, someone else must lose. 2. Each person must pay for exactly what he or she receives. 3. The use of resources to produce a good has an opportunity cost because of scarcity. 4. You cannot have a free lunch at the expense of someone else. 9 In West Abalone, a mythical Central American nation, the government provides free schooling for all students. An economist would say that in West Abalone, education is 1. a free good, having no cost 2. Scarce even though its cost is paid by taxpayers taxpayers rather than by students and parents 3. An example of a good that is no longer scarce 4. All of the above If Matt trades two candy bars to Andy in exchange for one baseball card 1. Matt must have valued the baseball card more than the two candy bars. 2. Andy must have valued the two candy Andy must have valued the two candy bars bars more than the baseball card. 3. Matt must lose an equal amount if Andy gains. 4. Both 1 and 2 are correct, 3 is incorrect. Todd owns a truck that he values at $2,000. Susan, who does a lot of hauling, values the truck at $6,000. If these two get together, which of the following will most likely occur? 1. Todd will sell the truck for $1,500. 2. Susan will buy the truck for $7,000. 3. The truck will be sold at a price greater 4. than than $2,000 but less than $6,000 and both parties will benefit. This is a trick question because the same truck cannot have different values to different people. When economists say the quantity supplied of a good or service has decreased, they mean: 1. The supply curve shifted to the left 2. The supply curve shifted to the right 3. The price of the good or service has increased and as result suppliers are increased and as a result, suppliers are producing producing more of it. 4. The price of the good or service has fallen and as a result, suppliers are producing less of it. Which of the following would most likely increase demand for tickets to major league baseball games? 1. A decrease in consumer income 2. An increase in the price of tickets to professional football games, substitute professional football games, a substitute for for baseball games 3. An increase in the price of refreshments sold at the baseball games 4. None of the above The production possibilities curve illustrates the basic principle that 1.An 1.An economy’s capacity to produce is unrelated to its population. 2.If 2.If all the resources of an economy are being used efficiently, more of one good can be produced only if more of another good is produced. more of another good is produced. 3.An 3.An economy will automatically more toward a point at which all of its resources are being used inefficiently. 4.If 4.If all the resources of an economy are being used efficiently, more of one good can be produced only if less of another good is produced. 10 After the terrorist attacks on Sept. 11, 2001, the United States began devoting substantial resources toward the War on Terrorism, homeland security and relief efforts. Assuming our resources were already being employed efficiently, the production possibilities constraint would suggest that 1. We will have to give up the production of other goods that could have been produced with these resources. 2. We will be able to produce the same amount of other We will be able to produce the same amount of other goods goods as before. 3. The military spending will result in an outward shift in the production possibilities curve but that the relief effort will result in an offsetting inward shift. 4. We will be unable to devote the resources necessary toward these efforts unless there is an improvement in technology. Which of the following would lead to an increase in the demand for gasoline in Universityville, a typical college town? 1.The local bus service beginning to offer free bus transportation to students. 2.Homecoming weekend when many former alumni visit the local college visit the local college. 3.A large protest by a campus environmental group urging people to walk or ride their bikes rather than drive. 4.An increase in the tuition charged by the local college, which reduces student enrollment. Ceteris Paribus, an increase in the price of a good will cause the: 1. 2. 3. 4. Demand for the good to decrease Demand for the good to increase Quantity demanded to increase demanded to increase Quantity demanded to decrease John says, “if Company A increases production, that will decrease market price and consumers will buy more. So show that as a movement along the demand curve.” 1. John has confused an increase in supply with an increase in quantity supplied. 2. John has confused an increase in 3. 4. quantity demanded with an increase in quantity demanded with an increase in demand. John is incorrect because if Company A increases it’s production, that is an increase in quantity supplied, not in supply. Nothing is wrong; John’s logic is essentially correct. (PMA) If we observe a decrease in the price of a good and an increase in the amount of the good bought and sold, this could be explained by 1.An 1.An increase in the supply of the good. 2.An increase in the demand for the good. increase in the demand for the good 3.A 3.A decrease in the demand for the good. 4.A 4.A decrease in the supply of the good. Quick review: Ch. 1: 8 guideposts to economic thinking: •incentives matter •Every choice has a cost (opportunity cost) •economic thinking is scientific thinking •people choose purposefully and therefore economically •economic thinking is marginal thinking i •remember the secondary effects, etc. Pitfalls to avoid in economic thinking: •Association is not causation •Fallacy of composition •Good intentions don’t always make good policy, etc. 11 Quick review: Quick review: Ch. 2: Tools of the economist: •Comparative Advantage •Opportunity cost •Property rights •Trade creates value •Production possibilities curves Ch. 3: Law of Supply •difference between change in Qs and S •elasticity of supply •producer surplus •marginal cost Ch. 3: Law of Demand difference between change in Qd and D elasticity of demand consumer surplus marginal utility Law of Supply Put letters A, B, C in correct order to correspond with blanks. • Height of Supply Curve • A change in price will change • Elasticity ___ ___ ___ What determines price? What causes shortages? (excess demand) How do you eliminate a shortage? What causes surpluses? (excess supply) How do you eliminate a surplus? The Invisible Hand principle. Do we need government intervention to set price in a competitive market? Steve values his Honda Accord at $10,000 and Jennifer values it at $14,000. If Jennifer buys it from Steve for $11,000, which of the following is true? 1. Steve gains $1,000 of producer (seller) surplus and Jennifer gains $3,000 of consumer surplus. 2. Steve gains $11,000 of total value and Jennifer loses $11,000 of total value. 3. Steve loses $1,000 of producer (seller) surplus, and Jennifer loses $3,000 of consumer surplus. A. Quantity demanded B. B. Measures degree of responsiveness C. C. Marginal Cost 4. Steve and Jennifer both gain $11,000 of consumer surplus. Price Floors occur: (PMA) What do prices do? 1. When price is artificially held below market 1. allocate 2. Encourage conservation 3. Assure that the one who values a product 2. 3. 4. equilibrium. When price is artificially held above market equilibrium equilibrium. In the absence of government intervention. Whenever the President of the U.S. declares a national state of emergency. MOST is the one who gets it MOST is the one who gets it 4. Give information 12 End of Ch. 3 of Ch. 13 ...
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