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Agenda
-
Economic News and Warm-Up (10 Min)
Lecture on “Circular Flow of Economics” (10 Min)
Activity: “Circular Flow of Economics” (15 Min)
Video on Law of Supply and Demand (5 Min)
Lecture: “Law of Demand/Demand Shifters” (20 Min)
Activity: “Demand Headlines” (15 Min)
Work on Vocabulary Terms (10 Min)
Review (5 Min)
Warm-Up
Take a few minutes and think of the
terms “supply” and “demand.” What do
those terms mean to you? Also, how do
you think these terms impact your daily
lives? Be prepared to explain when we
discuss.
Unit 4
Supply, Demand, &
The Role of Price
in a
Market Economy
Circular Flow of Economic Activity
Factor Market
Households Sell. Firms Buy.
Households
Government
Product Market
Firms Sell. Households Buy.
Firms
Circular Flow of Economic Activity
Factor Market
Households Sell. Firms Buy.
Firms demand and pay for the factors of production.
Households supply and sell the factors of production (land, labor, capital).
Households
Government
Product Market
Firms Sell. Households Buy.
Firms
Circular Flow of Economic Activity
Factor Market
Households Sell. Firms Buy.
Firms demand and pay for the factors of production.
Households supply and sell the factors of production (land, labor, capital).
Households
Government
Firms supply and sell goods & services.
Consumers buy goods & services.
Product Market
Firms Sell. Households Buy.
Firms
Circular Flow of Economic Activity
Factor Market
Households Sell. Firms Buy.
Firms demand and pay for the factors of production.
Households supply and sell the factors of production (land, labor, capital).
Payments
Payments
Labor
Products
Taxes
Taxes
Households
Goods & Services
Goods & Services
Government
Firms supply and sell goods & services.
Consumers buy goods & services.
Product Market
Firms Sell. Households Buy.
Firms
In-Class Assignment
“The Circular Flow of
Economics & You”
Video on the Law of
Supply & Demand
http://www.youtube.com/watch?v=0yWsOZgsTSY
Price
•The dollar amount someone must pay in order
to purchase a product
•How price results in a mutually beneficial
transaction
•To the purchaser, the product being
purchased is of greater value to him/her than
the money
•To the seller, the money is of greater value
than the product being sold
•Both sides of the transaction feel that they
are getting more than they are giving up
Demand
•The quantity of a specific good or
service consumers are
willing
and
able
to purchase at various prices at a
specific time
• Specific elements to definition
• Quantity Demanded: how much of a good or
service consumers would want at a specific price
• Willingness To Buy: only concerned with consumers
who actually would want to buy the product
• Ability To Buy: only concerned with consumers who
actually have the money to buy the product
• At a Specific Time: demand continually changes, so
this is a snapshot for a specific time (or period of
time)
• Overall (Market) Demand = the sum total of all
quantities sold at all the various prices at which it is
sold
Law of Demand
•The lower the price, the more the product
will be demanded
•As price goes down, the quantity
demanded goes up
• The higher the price, the less the product
will be demanded
•As price goes up, the quantity
demanded goes down
Typical Demand Curve Graph
Price
1. Generally downward
sloping
2. Not necessarily a
straight line
3. Slope (rate of change)
may be shallow or
steep (or both)
Quantity
Factors That Affect Consumers’
Spending Behavior
1. Law of Diminishing Marginal Utility
• Consumers receive less additional satisfaction from each
additional unit purchased
2. Income Effect
• Because of scarcity, income is limited
• If the price of a product goes up, you can’t buy as much of that
product as you could at the original price
3. Substitution Effect
• Often, two (or more) different products can satisfy the same want
• Called substitute goods
• If the price of a product goes up, some consumers may shift their
demand to the substitute product
Price
• All 3 factors cause
consumers to react in
predictable ways to a
change in the price of a
good or service.
• As consumers buy
more in response to a
decrease in price (or
P1
less in response to an
increase in price),
quantity demanded is
P2
said to “move along the
demand curve.”
• Only a change in price
causes a change in
quantity demanded.
“Movement along the
Demand Curve”
Change
In Price
Change In Quantity
Q1
Quantity
Q2
Demand Shifters
•Factors that cause a change in overall demand
•Quantity demanded is increased (or
decreased) at all prices
•Not just movement along the demand curve
•Results in a need to redraw the demand curve
to reflect the new overall demand
•Increases in demand are shown as a shifting
of the demand curve to the right
•Decreases in demand are shown as a shifting
of the demand curve to the left
Decrease In Demand
Price
Price
Increase In Demand
Quantity
D2
D1
D1
D2
Quantity
Demand Shifter:
Changes In Income
•Increases in income generally lead to
increases in peoples’ demand for goods &
services
•Decreases in income generally lead to
decreases in peoples’ demand for goods &
services
•Individuals whose incomes increase are
willing to buy more of a given product at a
given price
Demand Shifter:
“Changes In Number of Consumers”
•Increases in the number of consumers
generally lead to increases in market
demand for goods & services
•Decreases in the number of consumers
generally lead to decreases in market
demand for goods & services
Demand Shifter:
“Changes In Consumer Tastes &
Preferences”
• When consumers view a specific product
more favorably, this leads to an increase in
demand for that product
• When consumers view a specific product
less favorably, this leads to a decrease in
demand for that product
Demand Shifter:
“Changes In Consumer Expectations”
• Prices don’t actually have to rise or fall to cause
consumers to change their behavior
• The expectation that the price may rise or fall may be
enough
• If you expect the price of a product you use to go up, you
may increase your demand for the product now so you
get it before the price goes up
• If you expect the price to go down, you may decrease
your demand now and wait for the price goes down
Demand Shifter:
“Changes In The Price of Substitute Goods”
• When two products are substitute goods, consumers
consider them identical enough to use either to satisfy
the same want
• If the price of a product that people use instead of
yours goes up, consumers generally will purchase
more of your product
• If the price of the substitute product goes down,
consumers using your product may start wanting the
substitute instead
Demand Shifter:
“Changes In The Price of Complementary
Goods”
•Complementary Goods = goods that are used
together Example: Hot Dogs & Hot Dog Buns
•When the price of that complimentary good goes
up, demand for it will go down; so will demand for
the other product
•If the price of the complementary good goes down,
demand for it will go up; and so will demand for
the other product
In-Class Activity
“Analyzing Demand
Headlines”
Demand Headlines
A. Average Wages Decline for Workers
Around the Country
How will this information likely affect the
demand curve for movie tickets?
B. 1970s Styles Popular with High School &
College Students
How will this information likely affect the
demand curve for CDs of disco music?
C. Fast Food Chain Raises Prices on All Menu Items
How will this information likely affect the demand
curve for the chain’s burgers?
D. Analysts Predict Video Game Prices to Increase
Next Year
How will this information likely affect the current
demand curve for video games?
E. Gas Prices Increase 200% Since Last Year
How will this information likely affect the demand
curve for new sport utility vehicles (which get
relatively poor gas mileage)?
F. Price for Fresh Blueberries Skyrockets – Cold
Weather to Blame
How will this information likely affect the
demand curve for fresh strawberries?
G. Hospitals Report Dramatic Decrease in Births
How will this information likely affect the
demand curve for baby strollers?
H. Computer Maker Announces 20% Price Cut
How will this information likely affect the
demand curve for the company’s laptops?
Critical Thinking
• Is a rapid increase in income and consumer
spending a good thing or a bad thing for the
economy?
•Can anyone explain how consumer prices are
established?
• Explain how prices and quantity directly impact
supply & demand
• Can anyone provide additional examples of a
complementary good?
Agenda
Day #2
-
Economic News and Warm-Up (10 Min)
Review on Law of Demand and Demand Shifters (5 Min)
Lecture on “Supply and Supply Shifters” (20 Min)
Video on Law of Supply (5 Min)
Activity: “Analyzing Supply Headlines” (15 Min)
Work on Vocabulary Terms (15 Min)
Critical Thinking (5 Min)
Review (10 Min)
Warm-Up
What are some examples of current
products that are considered to be in
“high demand?” Are these products
readily available, or are they difficult to
purchase? Be prepared to explain.
Review Questions
Which of the following is NOT an example
illustrating the government's participation in a
market economy?
a. Tim pays income taxes from his paycheck that are used to
fund the military, roads, welfare, etc.
b. Tim pays property taxes on his home, and those taxes are
used to pay for police, fire, teachers, etc. in his community.
c. Tim's private security firm purchases guns from the U.S.
Bureau of Alcohol, Tobacco, & Firearms.
d. Tim works as a teacher in Frederick County Public Schools
and is paid a salary.
Which of the following is NOT an example
illustrating the government's participation in a
market economy?
a. Tim pays income taxes from his paycheck that are used
to fund the military, roads, welfare, etc.
b. Tim pays property taxes on his home, and those taxes
are used to pay for police, fire, teachers, etc. in his
community.
c. Tim's private security firm purchases guns from the U.S.
Bureau of Alcohol, Tobacco, & Firearms.
d. Tim works as a teacher in Frederick County Public
Schools and is paid a salary.
Which of the following describes the LAW OF
DEMAND?
a. When the price goes UP, the quantity demanded
goes UP.
b. When the price goes DOWN, the quantity
demanded goes UP.
c. When supply goes UP, demand goes UP.
d. When supply goes DOWN, demand goes UP.
Which of the following describes the LAW OF
DEMAND?
a. When the price goes UP, the quantity demanded
goes UP.
b. When the price goes DOWN, the quantity
demanded goes UP.
c. When supply goes UP, demand goes UP.
d. When supply goes DOWN, demand goes UP.
Pam likes chocolate and enjoys eating mini chocolate candy bars as
a snack during the day. When she eats that first mini candy bar, she
gets a great deal of satisfaction out of it. However, as she eats more
of those mini candy bars, she gets less additional satisfaction for
each additional candy bar she eats, eventually not wanting any
more. This illustrates which of the following economic concepts?
a. Capital Gains
b. The Law of Demand
c.
Inputs
d. Diminishing Marginal Utility
Pam likes chocolate and enjoys eating mini chocolate candy bars as
a snack during the day. When she eats that first mini candy bar, she
gets a great deal of satisfaction out of it. However, as she eats more
of those mini candy bars, she gets less additional satisfaction for
each additional candy bar she eats, eventually not wanting any
more. This illustrates which of the following economic concepts?
a. Capital Gains
b. The Law of Demand
c.
Inputs
d. Diminishing Marginal Utility
What is meant by something being a DEMAND SHIFTER?
a. As price goes up, quantity demanded moves down
along the demand curve.
b. As price goes up, quantity demanded moves up along
the demand curve.
c. Variables in supply can shift the variables in demand.
d. At every possible price, there is an increase or decrease
in the quantity demanded at that price (complete
movement of the demand curve).
What is meant by something being a DEMAND SHIFTER?
a. As price goes up, quantity demanded moves down
along the demand curve.
b. As price goes up, quantity demanded moves up along
the demand curve.
c. Variables in supply can shift the variables in demand.
d. At every possible price, there is an increase or decrease
in the quantity demanded at that price (complete
movement of the demand curve).
The population of Winchester/Frederick County has
increased by 5% in the last year. What effect will this have
on the demand for apartments in the local area?
a. This will have no effect on market demand; only the
quantity demanded will change.
b. Market demand will go UP.
c. Market demand will go DOWN.
d. Not enough information to determine what will happen.
The population of Winchester/Frederick County has
increased by 5% in the last year. What effect will this have
on the demand for apartments in the local area?
a. This will have no effect on market demand; only the
quantity demanded will change.
b. Market demand will go UP.
c. Market demand will go DOWN.
d. Not enough information to determine what will happen.
Apple is dropping the price of their iPhones. What
effect will this have on the demand for OtterBox
protective cases for the iPhone?
a. This will have no effect on market demand; only
the quantity demanded will change.
b. Market demand will go UP.
c. Market demand will go DOWN.
d. Not enough information to determine what will
happen.
Apple is dropping the price of their iPhones. What
effect will this have on the demand for OtterBox
protective cases for the iPhone?
a. This will have no effect on market demand; only
the quantity demanded will change.
b. Market demand will go UP.
c. Market demand will go DOWN.
d. Not enough information to determine what will
happen.
It is July 4th. Consumers are expecting all the clothing
retailers to put their clothes on sale for back-to-school
starting the first week of August. What effect will this
have on current demand for Hollister's clothes?
a. This will have no effect on market demand; only the
quantity demanded will change.
b. Market demand will go UP.
c. Market demand will go DOWN.
d. Not enough information to determine what will happen.
It is July 4th. Consumers are expecting all the clothing
retailers to put their clothes on sale for back-to-school
starting the first week of August. What effect will this
have on current demand for Hollister's clothes?
a. This will have no effect on market demand; only the
quantity demanded will change.
b. Market demand will go UP.
c. Market demand will go DOWN.
d. Not enough information to determine what will happen.
Law of Supply
Supply
•The quantity of a specific good or service
that producers are
willing
and
able
to sell at various prices at a given time
• Specific elements to definition:
• Quantity Supplied: how much of a good or service
producers would provide at a specific price
• Willingness To Sell: only concerned with producers
who actually would want to sell the product
• Ability To Sell: only concerned with producers who
actually have the resources to sell the product
• At a Specific Time: supply continually changes, so this is
a snapshot for a specific time (or period of time)
• Overall (Market) Supply = the sum total of all quantities
supplied at all the various prices at which it could be sold
Law of Supply
•The lower the price, the less willing
producers are to sell the product
•As price goes down, the quantity supplied
goes down
• The higher the price, the more willing
producers are to sell the product
•As price goes up, the quantity supplied
goes up
Typical Supply Curve
Graph
Price
1. Generally upward
sloping
2. Not necessarily a
straight line
3. Slope (rate of
change) may be
shallow or steep (or
both)
Quantity
Reasons Price & Quantity Move In
The Same Direction for Supply
•Production Decisions by Existing Producers
•Producers seek to maximize profits & minimize
losses
•They will increase their production of a good or
service if they expect the profits on that item
to increase
•They will decrease their production of a good
or service if they expect the profits on that
item to decrease or result in a loss
•Market Entries & Exits
•When the price of a good or service increases,
new firms may enter the market because they
see potential for a profit
•When the price of a good or service decreases,
some firms may exit the market because they
want to avoid losses
•The cost to them may exceed what the
decreased selling price is
•Firms all have scarce resources that have
alternative uses
•They will generally allocate their resources
toward those activities that are the most
efficient use (profit motive)
Price
• Both factors cause
producers to react in
predictable ways to a
change in the price of a
good or service
P2
Change in
Price
P1
• As producers provide more
in response to an increase
in price (or less in response
to a decrease in price),
quantity supplied is said to
“move along the supply
curve.”
“Movement
Along The
Supply Curve”
Change in Quantity
Q1
Q2
Quantity
• Only a change in price
causes a change in quantity
supplied.
Supply Shifters
•Factors that cause a change in overall supply
•Quantity supplied is increased (or decreased)
at all prices
•Not just movement along the supply curve
•Results in a need to redraw the supply curve to
reflect the new overall supply
•Increases in supply are shown as a shifting of
the supply curve to the right
•Decreases in supply are shown as a shifting of
the supply curve to the left
Increase in Supply
Decrease in Supply
S1
S1
Price
Price
S2
Quantity
S2
Quantity
Supply Shifter:
Change in the Cost of Inputs
• When the cost of an input (factor of
production) goes down , the product
becomes more profitable at any given
price, so supply goes up
• If the cost of an input goes up, the
product becomes less profitable and
supply goes down
Supply Shifter:
Change in the Number of Producers
• When new producers enter a market,
their production is added to the existing
production, so supply goes up
• When producers exit a market, their
production is no longer being added to
the market, so supply goes down
Supply Shifter:
Change in Conditions Due To Natural
Disasters or International Events
• Natural disasters (like drought, crop freezes,
hurricanes, etc.) can destroy crops or other
resources needed for production, so supply
goes down
• International events (wars, threat of wars,
etc.) can destroy resources or make them
unavailable, so supply goes down
Supply Shifter:
Change in Technology
• Technological advances can reduce the
amount of labor needed to produce a
good, thereby lowering costs and
increasing productivity
• Technological advances that lower costs
generally lead to supply going up
Supply Shifter:
Change in Producer Expectations
•
Producers often make supply decisions based on the expectation
that prices will rise or fall
• The price doesn’t actually have to change; just the expectation
that it might is enough for some producers
•
If producers expect the future price of a product to fall, they may
decide to increase production now to take advantage of the
current higher price
• This will cause supply of that product to go up
•
If producers expect the future price of a product to rise, they may
hold off on production now (or produce now but store the
product in warehouses instead of selling it) so they might take
advantage of the higher future price
• This will cause supply of that product to go down
Supply Shifter:
Change in Government Policy
• Government actions can influence
decisions by producers
• Government often provides loans, grants,
tax credits or subsidies (direct cash
payments) to producers in order to entice
them to produce a product
• This will increase the supply of that
product
• Government may increase taxes on a
product (or producers of a product),
making it less profitable to produce that
product
• Taxes are another “cost of doing
business” for companies, and increasing
that cost can lead to some producers’
efforts becoming less profitable and an
inefficient use of their scarce resources
(time, capital, etc.)
• This will decrease the supply of that
product
In-Class Activity
“Analyzing Supply Headlines”
Supply Headlines
I. Record Peach Harvest – Price Lowest in Decade
How will this information likely affect the supply
curve for frozen peach pies?
J. U.S. Car Company To Close Six Factories
How will this information likely affect the supply
curve for the company’s minivans?
K. Shoe Manufacturer Increases Prices on All
Styles
How will this information likely affect the supply
curve for the company’s sneakers?
L. Gas Prices Stay Low This Year – Rise
Dramatically Next Year
How will this information likely affect the
current supply curve for gasoline?
M. Robots Make Automobile Assembly Faster,
Cheaper
How will this information likely affect the
supply curve for cars?
N. Congress Passes New “Sugar Tax”
How will this information likely affect the
supply for sugar?
O. Fire Destroys Thousands of Acres of Forest in
Pacific Northwest
How will this information likely affect the
supply curve for lumber from Oregon?
P. President Approves Subsidy for Solar Energy
Industry
How will this information likely affect the
supply curve for solar energy panels?
Critical Thinking
• Insert Questions here
• Insert Questions here
• Insert Questions here
Review
•Supply
•Law of Supply
•Supply Shifters
•Changes in the Cost of Inputs
•Changes in the Number of Producers
•Changes in Conditions Due to Natural Disasters
or International Events
•Changes in Technology
•Changes in Producer Expectations
•Changes in Government Policy
Agenda
Day #3
-
Economic News and Warm-Up (10 Min)
Review Questions on Law of Supply (5 Min)
Lecture on “Market Equilibrium” (20 Min)
Activity: Changes in Market Equilibrium (20 Min)
Lecture on Price Floors/Ceilings and Elasticity vs
Inelasticity (25 Min)
- Review (10 Min)
Warm-Up
What are some examples of current
products that are considered to be in
“high supply?” Are these products
typically cheaper, or relatively costly?
How does the oil supply impact current
gas prices…and what other factors are
involved? Be prepared to explain.
Review Questions
Which of the following describes the
LAW OF SUPPLY?
a. When the price goes UP, the quantity supplied goes UP.
b. When the price goes DOWN, the quantity supplied goes
UP.
c. When demand goes UP, supply goes UP.
d. When demand goes DOWN, supply goes UP.
Which of the following describes the
LAW OF SUPPLY?
a. When the price goes UP, the quantity supplied goes UP.
b. When the price goes DOWN, the quantity supplied goes
UP.
c. When demand goes UP, supply goes UP.
d. When demand goes DOWN, supply goes UP.
An early-winter freeze in Florida & Georgia
destroys 30% of the tomato crop. What effect
will this have on the supply of tomato sauce?
a. This will have no effect on market supply; only the
quantity supplied will change.
b. Market supply will go UP.
c. Market supply will go DOWN.
d. Not enough information to determine what will happen.
An early-winter freeze in Florida & Georgia
destroys 30% of the tomato crop. What effect
will this have on the supply of tomato sauce?
a. This will have no effect on market supply; only the
quantity supplied will change.
b. Market supply will go UP.
c. Market supply will go DOWN.
d. Not enough information to determine what will happen.
Tablet computers are becoming very popular. As a
result, new companies are getting into the tablet
computer market to try to take advantage of the
computers' popularity. What effect will this have on
the supply of tablet computers?
a. This will have no effect on market supply; only the
quantity supplied will change.
b. Market supply will go UP.
c. Market supply will go DOWN.
d. Not enough information to determine what will
happen.
Tablet computers are becoming very popular. As a
result, new companies are getting into the tablet
computer market to try to take advantage of the
computers' popularity. What effect will this have on
the supply of tablet computers?
a. This will have no effect on market supply; only the
quantity supplied will change.
b. Market supply will go UP.
c. Market supply will go DOWN.
d. Not enough information to determine what will
happen.
A hurricane hits the Gulf Coast, temporarily closing or
damaging off-shore oil drilling platforms and coastal
refineries. What effect will this have on the supply of
gasoline?
a. This will have no effect on market supply; only the
quantity supplied will change.
b. Market supply will go UP.
c. Market supply will go DOWN.
d. Not enough information to determine what will happen.
A hurricane hits the Gulf Coast, temporarily closing or
damaging off-shore oil drilling platforms and coastal
refineries. What effect will this have on the supply of
gasoline?
a. This will have no effect on market supply; only the
quantity supplied will change.
b. Market supply will go UP.
c. Market supply will go DOWN.
d. Not enough information to determine what will happen.
DuPont has developed a new chemical additive for automotive paint
that will cut the amount of time it takes for paint to dry by half. This
will allow automobile manufacturers to speed up their assembly
lines, since they won't have to wait as long for their painted parts.
What effect will this have on the supply of automobiles?
a. This will have no effect on market supply; only the quantity
supplied will change.
b. Market supply will go UP.
c. Market supply will go DOWN.
d. Not enough information to determine what will happen.
DuPont has developed a new chemical additive for automotive paint
that will cut the amount of time it takes for paint to dry by half. This
will allow automobile manufacturers to speed up their assembly
lines, since they won't have to wait as long for their painted parts.
What effect will this have on the supply of automobiles?
a. This will have no effect on market supply; only the quantity
supplied will change.
b. Market supply will go UP.
c. Market supply will go DOWN.
d. Not enough information to determine what will happen.
Wheat producers anticipate the price of wheat going up 6
months from now. What will happen to the current supply
of wheat being sold in the market?
a. This will have no effect on market supply; only the
quantity supplied will change.
b. Market supply will go UP.
c. Market supply will go DOWN.
d. Not enough information to determine what will happen.
Wheat producers anticipate the price of wheat going up 6
months from now. What will happen to the current supply
of wheat being sold in the market?
a. This will have no effect on market supply; only the
quantity supplied will change.
b. Market supply will go UP.
c. Market supply will go DOWN.
d. Not enough information to determine what will happen.
Market Equilibrium
Market Equilibrium
• The point where buyers & sellers agree
• Equilibrium Price
• The price at which the quantity demanded by
consumers is equal to the quantity producers are
willing to supply
• Also called market-clearing price
• All consumers willing to purchase at that price are
able to satisfy their want for that product
• All producers who produce the product at that price
are able to sell all of their products
• Equilibrium Quantity
• The quantity that is both demanded and supplied at
that price
Price
Graph of Equilibrium
S
Equilibrium
Price
D
Equilibrium
Quantity
Quantity
Surplus
Price
• Results when price is too high
• Producer sets price at which
the amount he/she is willing
to produce is more than the
amount consumers are
willing to buy at that price
• Inefficient use of resources
• Resources that could be used
in more productive ways is
instead tied up in inventory
sitting on a shelf that no one
wants to buy at that price
S
P
D
QD
QS
Quantity
Shortage
S
Price
• Results when price is too low
• Producer sets price at
which the amount he/she
is willing to produce is less
than the amount
consumers are willing to
buy at that price
• Results in:
• Unsatisfied consumer
demand
• Lost sales & profits for
producer
P
D
QS
QD
Quantity
Prices Move To Bring
Markets Into Balance
• Producers set price
• Producers know what quantity they
are willing to provide at that price
• Producers are hoping that the
quantity demanded for the product at
that price will equal what they
produced
•If producers set price too high, surpluses will
occur
•Producers will have excess quantities of the
product that consumers are unwilling to buy
at that price
•Producers will lower price
•The lower price will create an incentive for:
1. Some existing producers to reduce
production
2. Other existing producers to exit the
market
3. More consumers to enter the market to
take advantage of the lower price
•If producers set price too low, shortages will
occur
• Consumers will have unsatisfied demand
•Consumers will start to bid higher prices for
the product, driving the price up
•The higher price will create an incentive for:
1. Existing producers to increase
production
2. Lure new producers into the market
3. Convince some consumers to exit the
market because they are unwilling to
pay higher price
• Pressure to avoid surpluses and shortages
results in price moving toward equilibrium
• The Laws of Supply & Law of Demand
work together to push the price of a
good or service to a level where the
quantity demanded and the quantity
supplied are equal
• This is why markets are said to be
governed by the laws of supply &
demand
How Do Shifts in Demand or
Supply Affect Markets?
•Shifts in Demand or Supply change the
market’s equilibrium point
•Shifts in market demand & market supply
make changes to equilibrium that are
predictable
•These changes to equilibrium are easily
visualized on a graph of supply & demand
An Event Increases
Market Demand
• There is a larger
quantity demanded at
all prices
• This is illustrated by a
shift of the demand
curve to the right
• Results:
• Equilibrium Price
increases
• Equilibrium Quantity
increases
S
P
P2
P1
D2
D1
Q1 Q2
Q
•Why does an increase in demand result in an
increase in equilibrium price and equilibrium
quantity?
•An increase in demand means that, at any
price, more consumers are willing and able to
make that purchase.
•Those consumers will start to outbid each
other for the item (price increase).
•Producers, seeing that it will be more
profitable to provide that product, will begin
to produce more of that product.
•Existing producers will increase production,
and some new producers may enter the
market (quantity increase).
An Event Decreases
Market Demand
• There is a smaller quantity
demanded at all prices
• This is illustrated by a
shift of the demand
curve to the left
• Results:
• Equilibrium Price
decreases
• Equilibrium Quantity
decreases
S
P
P1
P2
D1
D2
Q2 Q1
Q
• Why does a decrease in demand result in a decrease in
equilibrium price and equilibrium quantity?
• A decrease in demand means that, at any price,
fewer consumers are willing and able to make that
purchase.
• Producers will start to underbid each other for the
item to try to get customers to buy their product
(price decrease).
• Producers, seeing that it will be less profitable to
provide that product, will begin to produce less of
that product.
• Existing producers will decrease production, and
some producers may exit the market (quantity
decrease).
An Event Increases Market Supply
•There is a larger
quantity supplied at all
prices
•This is illustrated by
a shift of the supply
curve to the right
•Results:
•Equilibrium Price
decreases
•Equilibrium Quantity
increases
S1
P
S2
P1
P2
D
Q1 Q2
Q
•Why does an increase in supply result in a
decrease in equilibrium price and increase in
equilibrium quantity?
•An increase in supply means that, at any
price, more producers are willing and able to
provide that product.
•Producers will start to underbid each other
for the item to try to get customers to buy
their product (price decrease).
•Consumers will see that it is more affordable
to buy that product
•Consumers will begin to buy more of the
product (quantity increase).
An Event Decreases Market Supply
• There is a smaller
quantity supplied at all
prices
• This is illustrated by a
shift of the supply
curve to the left
• Results:
• Equilibrium Price
increases
• Equilibrium Quantity
decreases
S2
P
S1
P2
P1
D
Q2 Q1
Q
In Class Activity:
“Changes in Market
Equilibrium””
Elasticity
•The degree to which a quantity demanded
or quantity supplied changes in response to
a change in price
•Quantity demanded or supplied for some
products is highly sensitive to changes in
price
•Quantity demanded or supplied for some
products is not sensitive to changes in
price
Elasticity of Demand
• A product for which the quantity
demanded changes significantly
for a given change in price is
referred to as having elastic
demand
• A small change in price results in
a large change in the quantity
demanded
• Graph of demand curve is
relatively flat
P
P2
P1
D
Q2
Q1
Q
• A product for which the
quantity demanded
changes minimally for a
given change in price is
referred to as having
inelastic demand
• Any change in price
results in a small
change in the quantity
demanded
• Graph of demand curve
is relatively steep
P
P2
P1
D
Q2 Q1
Q
Factors that Influence
Elasticity of Demand
•Availability of Substitutes
•The quantity demanded for a product tends to
be elastic when it has more close substitutes
•Consumers start buying the substitutes
•The quantity demanded for a product tends to
be inelastic when it has few substitutes
•Consumers don’t have other options for
purchase
•Price Relative to Income
•“Big ticket” items whose price will take a
larger portion of a consumer’s income tend
to be elastic
•Price increase will tend to take a large
additional chunk of the consumer’s income
•Price decrease will allow the consumer to
save a much larger portion of his/her
income
•Inexpensive items tend to be inelastic
•Price increase will tend to take very little
additional income
•Price decrease will allow the consumer to
save a very small portion of his/her income
•Necessities versus Luxuries
•A product that is very needed by the
consumer will have inelastic demand
•Consumer must have the product, so
he/she is willing to pay whatever is
necessary
•A product that is a “nice to have” luxury
that is not critical for day-to-day living
will have more elastic demand
•Consumer can easily do without the
product, so he/she just stops buying it
•Time Needed to Adjust to Price Change
•A product for which a lot of time is
needed to adjust to price changes has
inelastic demand
•Consumer may need time to adjust
lifestyle & purchasing habits to
compensate for the price change
•A product for which little time is needed
to adjust to price changes has elastic
demand
•Consumer can adjust lifestyle &
purchasing habits quickly
Elasticity of Supply
• A product for which the
quantity supplied changes
significantly for a given
change in price is referred
to as having elastic supply
• A small change in price
results in a large change
in the quantity supplied
• Graph of supply curve is
relatively flat
P
S
P2
P1
Q1
Q2
Q
•A product for which the
quantity supplied
changes minimally for a
given change in price is
referred to as having
inelastic supply
•A small change in
price results in a small
change in the
quantity supplied
•Graph of supply curve
is relatively steep
S
P
P2
P1
Q1 Q2
Q
Factors That Influence
Elasticity of Supply
•Availability of Inputs
•If factors of production are readily available to
respond to an increase in price, the product has
elastic supply
•Can more easily get the resources needed to
increase production if the price increases
•If factors of production are not readily available
to respond to an increase in price, the product
has inelastic supply
•Mobility of Inputs
•How quickly a producer can get the inputs
from their source to where he/she needs
them for production
•A product for which the producer can quickly
get the inputs from their source has elastic
supply
•Can more quickly get the inputs needed to
increase production
•A product that will take a while to get the
inputs from their source has inelastic supply
•Cannot quickly get the inputs needed to
increase production
•Storage Capacity
•How easily can the product be stored as it
moves from producer to consumer
•A product that can be stored more easily if
the price goes down or up has elastic supply
•Can be warehoused and saved until price
goes back up
•A product that is perishable and therefore
not stored easily for long periods of time has
inelastic supply
•Product will go bad before it can be sold if
it is taken off the shelves when price goes
down
• Time Needed to Adjust to a Price Change
• A product for which production can be
adjusted quickly has elastic supply
• Can more rapidly adjust production in
response to a price change
• A product for which production cannot
be adjusted quickly has inelastic supply
• Difficult to adjust production in
response to a price change
Roles of Prices in a
Modern Mixed Economy
• Prices Convey Information to Consumers &
Producers
• For consumers, price signals the opportunity cost of
buying any product
• The higher the price, the higher the opportunity
cost
• For producers, price tells producers what
consumers want
• Prices above or below equilibrium results in
surpluses/shortages, letting the producer know if
they overestimated/underestimated demand
• Producers use prices to appeal to the consumers they
hope will buy their products
• If you want to target customers that have lower
incomes, you will sell products at lower prices
• If you want to target customers that have higher
incomes, you will sell products at higher prices
• Consumers use price as a measure of the quality of the
product
• Products of high quality made with a high degree of
skill and/or using expensive materials and technology
tend to have higher prices
• The consumer need not know the details; the price is
a measure of that
•Prices Create Incentives to Work & Produce
•Principle #4: Incentives Matter (people
respond to incentives)
•For producer, price represents potential for
profit
•Rising prices motivate existing firms to
produce more and new firms to enter
the market
•Falling prices serve as incentive for firms
to cut back on production and avoid
losses
•Prices Allow Markets to Respond to Changing
Conditions
•Prices go up when unexpected shortages occur
due to natural disasters or international events
•Higher prices incentivize firms to figure out
new ways to get the products to consumers
•More costly ways of producing the product
that were once unprofitable may now be
profitable
•Prices give markets the flexibility they need to
reach equilibrium even under changing
conditions
• Prices Allocate Scarce Resources Efficiently
• Prices guide resources to their most efficient use
•Scarce resources have alternative uses
•Price will guide those resources to use that has
the most value to consumers
• Producers “automatically” (due to the incentives
created by the price) adjust to produce more of
what is making money & less of what is losing
money
Price Controls
•Placing limits on how high or low a certain
price may be
•Illegal if businesses do it
•Called price fixing and restrains trade
•Legal if government does it
•Normally done if they think that the
market would set price “unfairly” high
for consumers or “unfairly” low for
producers
Price Floor
• Minimum price for a product that is above market price
• Why government does it:
• Want to protect industries who they feel may not survive if
price is allowed to drop to market equilibrium price
• Want to ensure minimum profitability for businesses in that
industry
• As with any product whose price is set above equilibrium,
surpluses occur for that product
• Options for government for dealing with surpluses:
1. Buy surplus (increase market demand for product)
2. Pay producers not to produce (reduce market supply for
product)
• Consumer loses because he/she pays price higher than what
he/she would pay without the price floor
• Inefficient use of consumer’s scarce resource (money)
• Paying higher taxes to cover government payments to
producers
Price Ceiling
• A maximum price that is set below market
equilibrium
• Why government does it:
• To protect consumers from paying what,
according to the government, is “too much” for a
product
• As with any other price set below equilibrium,
shortages occur for that product
• How government deals with the shortage:
• Rationing – government-controlled distribution
of the limited supply of the good or service
• How the market deals with the shortage:
• Black Market – illegal market in which product is
traded at higher price or higher quantities than
those allowed by law
Critical Thinking
• What are some of the other markets where
the government should intervene by
establishing a price floor and/or ceiling?
• Can you think of any examples of “price
fixing” over recent years?
• As a business owner, would you ever set
prices above/below that of where supply
and demand intersect?
Review
•Supply
•Law of Supply
•Supply Shifters
•Changes in the Cost of Inputs
•Changes in the Number of Producers
•Changes in Conditions Due to Natural Disasters
or International Events
•Changes in Technology
•Changes in Producer Expectations
•Changes in Government Policy
Agenda
Day 4
-
Headline News, Market Watch and Warm-Up (10 Min)
Review for Vocabulary Quiz (5 Min)
Unit 4 Vocabulary Quiz (15 Min)
Review for Unit 4 Test (20 Min)
Activity “Hallway Supply/Demand Headlines” (40 Min)
VOCAB QUIZ
(Insert Quia Quiz)
GOOD LUCK!!!!
Test Review
Critical Thinking
• Insert Questions here
• Insert Questions here
• Insert Questions here
Agenda
Day 5
-
Economic News & Test Review (15 Min)
Unit 4 Test (60 Min)
Unit 4 Test Summary of Results & Analysis (10 Min)
Introduction to Unit 5 (5 Min)
Unit 4 Test
(Insert Quia Link)
GOOD LUCK!!!!