Transcript An increase in supply

Master Teacher in Economics
Fundamentals Module
James B. Wilcox
Resources provided by:
The University of Southern Mississippi
Center for Economic and Entrepreneurship Education,
Mississippi State University, & Virtual Economics
MTE Course Overview
 Five In-Person Modules
 Fundamental Economics
 Microeconomics
 Macroeconomics
 International Economics
 Personal Finance Economics
 Class Format
 Lecture & Discussion
 Sample Lessons
 Assessment
MTE Class #1 - Fundamentals
Lesson Plans for Today
Kidney Transplant Case Study
Virtual Economics, v. 2.0.2
Unit 1, Lesson 2 Activity 2
Scarcity, Opportunity Cost and Production
Possibilities Curves
Advanced Placement Economics:
Microeconomics, p. 7-8, 10-11
Unit 2, Lesson 10, Activity 1
Equilibrium Prices and Equilibrium
Quantities
Capstone: Exemplary Lessons for High
School Economics: Student Activities, p.
26-27
Unit 2, Lesson 1, Activity 9
Demand Curves, Movements Along
Demand Curves and Shifts in Demand
Curves
Advanced Placement Economics:
Microeconomics, p. 51-53
MTE Class #1 - Fundamentals
Economics…
is the study of how individuals and society choose, with or without
the use of money, to employ scarce productive resources to
produce various commodities over time and distribute them for
consumption, now and in the future, among various people and
groups in a society.
Guide to Economic Reasoning
 People choose.
 The choices people make involve costs.
 People respond to incentives in predictable ways.
 People create economic systems that influence
individual choices and incentives.
 People gain when they trade voluntarily.
 People’s choices have consequences that lie in the
future.
MTE Class #1 - Fundamentals
Kidney Transplant
TASK

You have one kidney to distribute.

You have to select one patient to receive a kidney transplant.

All suffer from urgent need.

The patients not chosen will die within the year

Be prepared to discuss the merits of your decision–


Why did you choose the person your group decided upon
Why did you pass up each of the others (to die)
CRITERIA
1)
Person’s merit
2)
Contribution to society (past or potential)
3)
Ability to pay
4)
Their need
5)
Their age
Patient Profile
 Patient #1: Dr. M.
 45 year old physician with large inner-city practice
 Had mild heart attack 3 years ago, but made good
recovery and heart seems sound
 No wife or children
 Present yearly income: $70,000
 Potential lifetime earnings: $994,095
 Has health insurance
Patient Profile
 Patient #2: Bonnie T.
 24 year old mother of two children
 Active in community work, Red Cross, and church
 Plans to resume nursing career when children reach
school age (4 years)
 Present yearly income: $32,000 (husband’s income)
 Potential lifetime earnings: $327,003
 Has health insurance
Patient Profile
 Patient #3: Fred S.
 3rd year medical student, doing well and considered “of
great promise” by his advisors
 Plans to specialize in neurology
 Father of one child and another on the way
 Present yearly income: $10,000
 Potential lifetime earnings: $1,149,812
 Has health insurance
Patient Profile
 Patient #4: Agnes M.
 26 year old mother of two children, abandoned by husband
 Unable to work because of lack of affordable daycare facilities in





area
Presently on welfare
Active in church, tenant’s organization in her building and welfare
rights organization
Present yearly income: $6,996 (public aid and food stamps)
Potential lifetime earnings: $121,425
Has Medicaid
Patient Profile
 Patient #5: Ellen R.
 20 year old college junior, suffering from hereditary
condition; family fears twin sister has same disease
 Doing excellent work in college; has been accepted to
law school
 Present yearly income: $47,000 (parents’ income)
 Potential lifetime earnings: $928,753
 Has health insurance
Finalize group decision before proceeding
Future: Dr. M
Dies of a massive coronary attack 2 years after receiving the
transplant
Future: Bonnie T.
Goes back to school and becomes an obstetrician.
Future: Fred
Drops out of medical school and leaves his wife
Future: Agnes M
Wins the lottery and volunteers time and money to children’s
hospital programs
Future: Ellen R.
Becomes a lawyer and spends career defending the poor
Kidney Transplant
Opportunity Cost
 Opportunity cost of a chosen activity is the value of
the best alternative that is forgone
Similar to opportunity lost
Focuses on the alternatives associated with making
choices
 Opportunity cost is subjective
Only the individual making the choice can select the
most attractive alternative
Chooser seldom knows the actual value of the “road
not taken”
21
Opportunity Cost
 Time is the ultimate constraint
By pursuing one activity, we cannot at the same time
do something else  each activity undertaken has an
opportunity cost
 May vary with circumstances
Depends on the value of the alternatives
 Monetary cost
May be a reasonable approximation but can omit the
time involved which may be substantial for some
activities
22
Production Possibilities Frontier
 Focus is on how much an economy can produce
with a given set of resources and technology 
What are the economy’s production capabilities?
23
Production Possibilities Frontier
 Identifies the various possible combinations of the
two types of goods that can be produced when all
available resources are employed fully and
efficiently
No change increases the production of one good
without decreasing the production of the other
good
Involves getting the maximum possible output
from available resources
24
Exhibit 1: The Economy’s PPF
25
Factors that can Shift the PPF
 Changes in Resource Availability
Increases / Improvements in Quality  rightward
shift
Decreases /Reductions in Quality  leftward shift
 Increases in the Capital Stock
Increases  rightward shift
Decreases  leftward shift
 Technological Change
Employs available resources more efficiently
26
Exhibit 2a: Shifts in the Economy’s PPF
All of the following would
lead to a rightward shift in the
PPF from A to A‘:
Increase in the size or
health of the labor force
Improvement in the skills of
the labor force
Increases in the amount of
capital
Decreases in any of the
above factors would shift the
PPF from A' to A  shift to the
left
The parallel shift implies the
change that occurred affected
the production of both goods
equally
27
Exhibit 2b: Shifts in the Economy’s PPF
A leftward shift from A to A"
could be caused by any of the
following:
Decrease in the size or
health of the labor force
Decline in the skills of the
labor force
Decreases in the amount of
capital
The parallel shift implies the
change that occurred affected
the production of both goods
equally
28
Lessons of PPF
 Efficiency  PPF represents the combinations of
output that are possible, given the economy’s
resources and technology
 Scarcity  Given the stock of resources and
technology, the economy can produce only so much
 Economic Growth  rightward shift or rotation of
PPF
 Choice
 The PPF does not tell us what we SHOULD produce.
29
Activity
MTE Class #1 - Fundamentals
Law of Demand
Says that quantity demanded varies inversely
with price, other things constant
The higher the price, the smaller the quantity
demanded
The lower the price, the larger the quantity
demanded
31
Substitution Effect
When the price of a good falls, its relative price
makes consumers more willing to purchase this
good
When the price of a good increases, its relative
price makes consumers less willing to purchase
this good
Changes in the relative prices – the price of one
good compared to the prices of other goods –
causes the substitution effect
32
Income Effect
Money income
Number of dollars received per period of time
Real income
Income measured in terms of the goods and services it
can buy
When the price of a good decreases, real income
increases
When the price of a good increases, real income
declines
33
Exhibit 1: Demand Schedule
& Demand Curve for Pizza
(b) Demand Curve
(a) Demand Schedule
34
$18
$15
Price per Pizza
a)
b)
c)
d)
e)
Price per
Quantity
Pizza
Demanded
Millions ($)
per Week
15
8
12
14
9
20
6
26
3
32
The demand schedule lists
possible prices, along with
quantity demanded at each price.
The demand curve at the right
shows each price / quantity
combination listed in the demand
schedule as a point on the
demand curve.
a
$12
b
$9
c
$6
d
$3
e
$0
8
14
20
26
32
Millions of Pizzas per week
Demand and Quantity Demanded
35
a
$15.00
Price per quart
Demand for pizza is not a
specific quantity, but rather the
entire relation between price
and quantity demanded, and is
represented by the entire
demand curve
An individual point on the
demand curve shows the
quantity demanded at a
particular price.
The movement from say, b to
c, is a change in quantity
demanded and is represented
by a movement along the
demand curve and can only be
caused by a change in price
b
12.00
c
9.00
d
6.00
e
3.00
D
0
8
14
20 26
32
Millions of pizzas per week
Shifts of the Demand Curve
Demand curve focuses on the relationship
between the price of a good and the quantity
demanded when other factors that could affect
demand remain unchanged
Money income of consumers
Prices of related goods
Consumer expectations
Number and composition of consumers in the market
Consumer tastes
36
Exhibit 2: Increase in the Market Demand
$15
Price
Suppose income
increases: some
consumers will now be
able to buy more pizza
at each price 
market demand
increases  demand
shifts to the right from
D to D'
A decrease in
demand will mean
demand shifts to the
left from D' to D.
b
12
f
9
6
D'
3
D
0
8
37
14
20
26
32
Millions of pizzas per week
Changes in Consumer Income
 Goods can be classified into two broad categories:
Normal goods: the demand increases when income
increases and decreases when income decreases
Inferior goods: the demand decreases when income
increases and increases when income decreases
38
Changes in the Prices of Related Goods
Prices of other goods are another of the factors
assumed constant along a given demand curve
Two general relationships
Two goods are substitutes if an increase in the price of
one shifts the demand for the other rightward and,
conversely, if a decrease in the price of one shifts the
demand for the other good leftward
Two goods are complements if an increase in the price
of one shifts the demand for the other leftward and a
decrease in the price of one shifts the demand for the
other rightward
39
Changes in Consumer Expectations
If individuals expect income to increase in the
future, current demand increases and vice versa
If individuals expect prices to increase in the
future, current demand increases and decreases
if future prices are expected to decrease
40
Activity
MTE Class #1 - Fundamentals
Supply
Supply indicates how much of a good producers
are willing and able to offer for sale per period
at each possible price, other things constant
Law of supply states that the quantity supplied
is usually directly related to its price, other
things constant
The lower the price, the smaller the quantity supplied
The higher the price, the greater the quantity
supplied
42
Exhibit 3: Supply Schedule & Supply Curve
Supply Schedule
Price per
Pizza
Millions ($)
15
12
9
6
3
43
Quantity
Supplied
per Week
28
24
20
16
12
S
Price
$15
The supply curve and the
supply schedule both show
quantities of pizza supplied per
week at various prices by all
the pizza makers in the market
Price and quantity supplied
are directly, or positively,
related: producers offer more
for sale at higher prices than at
lower ones: Supply curve
slopes upward
12
9
6
3
0
12 16 20 24 28
Millions of pizzas per week
Supply and Quantity Supplied
Supply refers to the relation between the price
and quantity supplied as reflected by the supply
schedule or the supply curve
Quantity supplied refers to a particular amount
offered for sale at a particular price, a
particular point on a given supply curve
44
Shifts of the Supply Curve
 Determinants of supply other than the price of the
good
State of technology
Prices of relevant resources
Prices of alternative goods
Producer expectations
Number of producers in the market
45
Exhibit 4: Change in Technology Can Mean
an Increase in Supply
S
S'
$15.00
Price per quart
A more efficient
technology, a hightech oven, is
invented
Production costs
fall  suppliers will
be more willing and
more able to supply
the good 
rightward shift of the
supply curve from S
to S'.
Result: more is
supplied at each
possible price
g
12.00
9.00
6.00
3.00
0
12
46
h
16
20
24
28
Millions of pizzas per week
Changes in the Prices of Relevant
Resources
 Resources that are employed in the production of the
good in question
For example, if the price of mozzarella
cheese falls, the cost of pizza production
declines
Conversely, if the price of some relevant
resource increases, supply decreases
47
Prices of Alternative Goods
Alternative goods are those that use some of
the same resources employed to produce the
good under consideration
For example, as the price of bread increases, so does
the opportunity cost of producing pizza and the
supply of pizza declines
Conversely, a fall in the price of an alternative good
makes pizza production more profitable and supply
increases
48
Changes in Producer Expectations
 When a good can be easily stored, expecting future
prices to be higher may reduce current supply
 More generally, any change expected to affect
future profitability could shift the supply curve
49
Number of Producers
 Since market supply sums the amounts supplied at
each price by all producers, the market supply
depends on the number of producers in the market
If that number increases, supply increases
If the number of producers decreases, supply
decreases
50
Demand and Supply Create a Market
 Demanders and suppliers have different views of
price
Demanders, consumers, pay the price
Suppliers, sellers, receive the price
 As price rises, consumers reduce their quantity
demanded along the demand curve, and producers
increase their quantity supplied along the supply
curve
51
Exhibit 5: The Market
for Pizzas
At initial price $12,
producers supply 24
million pizzas per
week (supply curve)
while consumers
demand only 14
Price
million: excess
quantity supplied (or
$15.00
surplus) of 10 million
pizzas per week
12.00
To eliminate this
surplus, suppliers put
9.00
downward pressure on
prices
6.00
As prices fall,
quantity supplied
3.00
declines and quantity
demanded increases:
0
market moves towards
52
equilibrium
at point c
S
Surplus
c
D
14
20
24
Millions of pizzas per week
Exhibit 5: The Market
for Pizzas
Initial price is $6
per pizza, 26 million
are demanded, but
producers supply
only 16 million: an
excess quantity
demanded (or
shortage) of 10
million pizzas per
week
As prices
increase, producers
increase quantity
supplied and
consumers reduce
their quantity
demanded, moving
towards equilibrium
53
at
point c
S
$15.00
12.00
9.00
6.00
c
Shortage
3.00
0
D
16
20
26
Millions of pizzas per week
Equilibrium
 When the quantity consumers are willing and able
to pay equals the quantity producers are willing
and able to sell, the market reaches equilibrium
Independent plans of both buyers and sellers exactly
match
Market forces exert no pressure to change price or
quantity
54
Changes in Equilibrium
Once a market reaches equilibrium, that price
and quantity will prevail until one of the
determinants of demand or supply changes
A change in any one of these determinants will
usually change equilibrium price and quantity
in a predictable way
55
determinants of demand
changes so that demand
increases from D to D'
After the increase, the
amount demanded at $9
is 30 million – which
exceeds the amount
supplied of 20 million
pizzas: shortage and
upward pressure on price
As price increases,
quantity demanded
decreases along the new
demand curve, D'. The
quantity supplied
increases along the
existing supply curve, S,
until the two quantities
56
are in equilibrium.
Price
Exhibit 6: Effects of an
Increase
in
Demand
Assume one of the
S
g
$12
c
9
D'
D
0
20 24
30 Millions of pizzas per week
Shifts of the Demand Curve
Given an upward-sloping demand curve, an
increase in demand leads to a rightward shift of
the demand curve, increasing both the
equilibrium price and quantity
Alternatively, a decrease in demand leads to a
leftward shift of the demand curve, reducing
both the equilibrium price and quantity
57
Exhibit 7: Effects of an
Increase in Supply
S
Suppose supply shifts
from S to S'  increases
After supply increases,
the amount supplied at the
initial price of $9 increases
from 20 to 30 million pizzas
per week  a surplus
exists
Surplus puts downward
pressure on price 
quantity demanded
increases along the existing
demand curve until a new
equilibrium is reached.
58
S'
c
$9
6
d
D
20
26 30
Millions of Pizzas per Week
Shifts of the Supply Curve
An increase in supply: a rightward shift of the
supply curve reduces equilibrium price but
increases equilibrium quantity
A decrease in supply: a leftward shift of the supply
curve increases equilibrium price but decreases
equilibrium quantity
Given a downward-sloping demand curve, a
rightward shift of the supply curve decreases
price, but increases quantity
A leftward shift increases price, but decreases quantity
59
Simultaneous Shifts in Demand and Supply
As long as only one curve shifts, we can say for
sure what will happen to equilibrium price and
quantity
If both curves shift, however, the outcome is less
obvious
60
Exhibit 8: Indeterminate Effect of an
Increase in Both Supply and Demand
a) Shift in demand dominates
S
S'
Price
Suppose supply and
demand both increase
and that demand
increases more than
supply as shown by D'
and S'
Here both price and
quantity increase
If both demand and
supply were to
decrease, for example
from D' S' to D and S,
both equilibrium price
and quantity would
decline.
p'
p
D'
D
0
61
Q
Q'
Units per period
Exhibit 8: Indeterminate Effect of an
Increase in Both Supply and Demand
S
S"
Price
Again, suppose both
supply and demand
increase but supply
shifts by more than
demand: price
decreases from p to p''
and quantity increases
b) Shift in supply dominates
p
Conversely, if both
supply and demand
decrease with the shift
in supply dominating,
price will increase and
quantity will decrease.
p"
D"
D
0
62
Q Q"
Units per period
Exhibit 11: Price Floors and Price Ceilings
63
Exhibit 11a: Effects of a Price Floor
To achieve higher prices,
the federal government
sets a price floor, a
minimum selling price that
is above the equilibrium
price
Suppose it places a
$2.50 per gallon price floor
for milk
At this price, farmers
supply 24 million gallons
per week
Consumers demand only
14 million gallons  a
surplus of 10 million gallons
64
S
Surplus
$2.50
$1.90
D
0
14 19 24
Millions of gallons per month
Exhibit 11b: Effects of a Price Ceiling
S
Monthly rent
A common example of a
price ceiling is rent control in
some cities
Suppose the marketclearing rent is $1,000 per
month with 50,000
apartments being rented
Now suppose the
government decides to set a
maximum rent of $600
At this ceiling price, 60,000
rental units are demanded
However, only 40,000 are
supplied, a shortage
$1000
$600
Shortage
D
0
65
40 50 60
Thousands of rental units per month
Price Floors / Ceilings Summary
 To have an impact, a price floor must be set above
the equilibrium price and a price ceiling must be set
below the equilibrium price
 Effective price floors and ceilings distort markets in
that they create a surplus and a shortage,
respectively
 In these situations, various nonprice allocation
devices emerge to cope with the disequilibrium
resulting from the intervention
66
Real World Example: Zimbabwe
 Zimbabwe’s government, in an effort to fight
inflation, passed a law which forced all sellers to cut
their prices by 50% compared to the market
prices.
 Can you guess what happened?
Activity
MTE Class #1 - Fundamentals
Real World Example: Zimbabwe
 Police forcing people to sell inventory below cost, jailing
offenders.
 Massive shortages due to lower prices.
 Goods only available on the Black Market at prices 7 times
higher than the original market price.
 Sellers closing their stores because the cost is higher than the
prices they are allowed to charge.
Master Teacher in Economics
Fundamentals Module
James B. Wilcox
Resources provided by:
The University of Southern Mississippi
Center for Economic and Entrepreneurship Education,
Mississippi State University, & Virtual Economics