Transcript Lecture_Ch06 - Princeton High School

Explorations in Economics
Alan B. Krueger & David A. Anderson
Chapter 6: Exploring Economics
- Module 16: Supply and Demand
- Module 17: Changes in Supply and Demand
- Module 18: Shortages, Surpluses, and the Role of Prices
MODULE 16:
SUPPLY AND DEMAND
KEY IDEA:
The interaction of supply and demand determines the price at
which a good is sold in the market and the quantity of the good
that is exchanged between buyers and sellers.
OBJECTIVES:
• To demonstrate how supply and demand work together to
determine the price and quantity of a good.
• To explain why market equilibrium occurs when the quantity
supplied equals the quantity demanded.
• To recognize how market forces cause the market price and
quantity to adjust to equilibrium.
PUTTING SUPPLY AND DEMAND
TOGETHER: MARKET EQUILIBRIUM
The market equilibrium is the point at which the
quantity supplied equals the quantity demanded.
PUTTING SUPPLY AND DEMAND
TOGETHER: MARKET EQUILIBRIUM
The equilibrium price
is the price that
equates the quantity
supplied and the
quantity demanded.
The equilibrium
quantity is the quantity
that is supplied and
demanded at the
equilibrium price.
PUTTING SUPPLY AND DEMAND
TOGETHER: MARKET EQUILIBRIUM
When the quantity
demanded is larger
than the quantity
supplied, the
difference between
them is called
excess demand.
This creates a
SHORTAGE.
SHORTAGE
• What is the quantity demanded for pairs of shorts when the price falls to $20?
• What is the quantity supplied of pairs of shorts when the price falls to $20?
• 5 millions pairs of shorts is the excess demand. Many unhappy buyers!
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GREEN ARROWS
• Rather than going without, buyers would gladly pay more to get what they want. At
the same time, firms will see shorts disappearing from store shelves, lines forming,
and consumers willing to pay higher prices. In response, firms will raise the price of
shorts above $20 per pair.
• As the price of shorts rises, the quantity of shorts demanded will decrease. This
follows the law of demand that you learned about in Chapter 4.
• The result is a leftward movement along the demand curve, away from point A and
toward point E. At the same time, the rising price causes the quantity supplied to
increase.
• This follows the law of supply, which you learned about in Chapter 5. The increase
in the quantity supplied is seen as a rightward movement along the supply curve,
from point B toward point E. These movements along the two curves shrink the
gap between them. So as the price rises, the excess demand for shorts gets smaller.
• This can happen after a natural disaster when stores run out of generators.
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Chapter 6-Modules 16-18
PUTTING SUPPLY AND DEMAND
TOGETHER: MARKET EQUILIBRIUM
When the quantity
supplied is larger
than the quantity
demanded, the
difference between
them is called
excess supply.
This creates a
SURPLUS.
SURPLUS: EXCESS SUPPLY
What is the quantity demanded for pairs of shorts when the price falls to $40?
What is the quantity supplied of pairs of shorts when the price falls to $40?
5 millions pairs of shorts is the excess supply. Many unhappy firms!
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BRINGING SURPLUS DOWN TO
EQUALIBRIUM
• As firms compete with each other to find customers, they will offer shorts
at lower and lower prices. So the market price of shorts—which started at
$40 per pair—will fall. As the price falls, the quantity demanded rises,
causing a movement along the demand curve from point F toward point E.
At the same time, the quantity supplied falls, resulting in a movement
along the supply curve from point G toward point E.
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Chapter 6-Modules 16-18
PUTTING SUPPLY AND DEMAND TOGETHER:
MARKET EQUILIBRIUM
Module 16 Review
What is…
A. Equilibrium?
B. Equilibrium price?
C. Equilibrium quantity?
D. Excess demand?
E. Excess supply?
MODULE 17:
CHANGES IN SUPPLY & DEMAND
KEY IDEA:
A change in supply or demand, as shown by a shift of the
supply or demand curve, causes the equilibrium price and
quantity to change in a predictable way.
OBJECTIVES:
• To explain how a change in supply affects the equilibrium
price and quantity.
• To explain how a change in demand affects the equilibrium
price and quantity.
• To explain what is known and what is unknown about the
effect of a simultaneous change in both supply and
demand.
REVIEW OF DEMAND AND
SUPPLY SHIFTERS
CHANGES IN DEMAND
An increase in
demand =
increase in PRICE
and QUANTITY.
CHANGES IN DEMAND
A decrease in
demand =
decrease in PRICE
and QUANTITY.
A DECREASE IN SUPPLY
A decrease in supply =
increase in PRICE and a decrease in QUANTITY.
AN INCREASE IN SUPPLY
An increase in supply =
decrease in PRICE and an increase in QUANTITY.
CHANGES IN BOTH SUPPLY
AND DEMAND
If supply and
demand decrease
by the same
amount, price will
be unchanged and
the quantity will
decrease.
CHANGES IN BOTH SUPPLY AND
DEMAND
If supply
decreases less
than demand,
price will
decrease and
quantity will
decrease.
CHANGES IN BOTH SUPPLY
AND DEMAND
If supply
decreases more
than demand,
price will increase
and quantity will
decrease.
CHANGES IN BOTH SUPPLY
AND DEMAND
If supply increases
and demand
decreases, the
price will decrease
and the quantity
will not change.
SHIFTS IN DEMAND AND SUPPLY
AND UNCERTAIN OUTCOMES
When both demand and supply curves shift to the left,
to the right or in opposite directions, there will be
uncertainty in knowing the change on the market
equilibrium. This table shows these changes.
Shifts
Supply
Demand
Decrease
Increase
Increase
Decrease
Decrease
Decrease
Increase
Increase
Changes in Market
Equilibrium
Price
Quantity
MODULE 17 REVIEW
What happens to price and quantity when there is…
A. An increase in demand?
B. A decrease in demand?
C. An increase in supply?
D. A decrease in supply?
E. A decrease in demand and in supply?
F. A decrease in demand and an increase in supply?
G. An increase in demand and a decrease in supply?
H. An increase in both demand and supply?
MODULE 18:
SHORTAGES, SURPLUSES,
& THE ROLE OF PRICES
KEY IDEA:
Equilibrium prices provide benefits that are lost when forces
prevent markets from reaching their equilibrium price.
OBJECTIVES:
• To show how price ceilings and floors cause shortages and
surpluses.
• To explain the important incentives prices create.
• To identify problems with rationing as a way of allocating
goods and services.
SHORTAGES AND
SURPLUSES
A shortage exists when an excess demand for a
product persists for a significant period of time.
A SHORTAGE will cause price to INCREASE.
SHORTAGES AND
SURPLUSES
A surplus exists when an excess supply
persists for a significant period of time.
A SURPLUS will cause price to DECREASE.
PRICE CEILINGS
A price ceiling is a government- imposed limit on the highest
price firms can charge in a market.
A price ceiling will cause a SHORTAGE.
Price Ceiling
Rent Control
When a ceiling price holds
the price below the
equilibrium price, what
happens? Quantity
demanded is greater than
quantity supplied.
Using labels on the
horizontal axis, describe
the shortage when the
price is at the ceiling price.
Distance between Q2 — Q 1
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Problems with Price Ceilings:
Rent Control
• Although they are usually designed to help the poor,
the beneficiaries are sometimes the rich.
• Rent control, everyone pays lower rent, including
those who are well off.
• Another problem with price ceilings is that—because
they create shortages– some people who want a
good at the current price cannot get it.
• Leads to black market__ because an item becomes
scarce, in the black market the item could be higher
than the equilibrium price
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PRICE FLOORS
A price floor is a government- imposed limit below which
prices cannot fall.
Price floors tend to cause a SURPLUS.
Price Floor: Minimum Wage
When a price floor holds the price
above the equilibrium price,
what happens? Quantity
demanded is less than quantity
supplied.
Distance: Q1-Q2
Surplus
minimum wage.
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Problems with Price Floors
• An effective price floor either creates a surplus or
necessitates government spending of tax dollars to
buy up the excess supply of a good.
• Price support programs like those for agriculture
products benefits all farmers who produce the
supported products (even if they are wealthy)
• Consumers have to pay more for products like milk,
peanut butter, and sugar
• Price floors are not favored as a way to help farmers.
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Chapter 6-Modules 16-18
STICKY PRICES
Sticky prices are
prices that move to
their equilibrium
values very slowly.
Can you think of examples of
sticky prices? menus in
restaurant, housing prices,
pressure from blue jeans
manufactures like Levi Strauss,
other high end products
What are the conditions that
might cause sticky prices?
habits, customs and traditional
arrangements; costly to change;
stubbornness and disbelief
THE IMPORTANCE OF
PRICES
Rationing: of a good is to give a fixed quantity to each person.
(During WWII, the U.S. government wanted to free up resources to use
for military production by decreasing production of consumer goods.
Rationing and the achievement of goals:
Rationing produces a way to allocate goods when the price is below
equilibrium (price ceiling)
Rationing does a poor job of the following:
Finding the best level of production
Keeping costs low (for example: government would have to set
up new agencies to buy and distribute items)
Achieving consumer satisfaction (if clothing were rationed, it
would be poorly allocated among households) people who really
love clothes would want to consumer more than allotted.
What Prices Accomplish
• Prices guide the economy to the best
level of production
• Prices help keep costs low
• Prices help achieve consumer satisfaction
• Prices help prevent shortages
Module 18 Review
What is…
A. Shortage?
B. Black market?
C. Price ceiling?
D. Price floor?
E. Sticky prices?
F. Rationing?
G. Market failure?
H. Surplus?