Transcript Unit 2 Power Point

Economics
Unit 2
Why Did Communism Collapse?
Capstone Lesson 6
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The Collapse of communism in the USSR
was one of the most important events in the
20th Century
We want to apply economic reasoning to try
to explain why
Visual 1
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What was the position of the former Soviet Union
for much of the 20th century?
The Soviet Union was regarded as one of the two
superpowers.
How was the Soviet Union Opposed?
In the Cold War and certain “proxy wars,” including
the war in Vietnam, the US and other nations
opposed the expansion of communism
What is the Mystery?
Why did the Soviet Union collapse?
Visual 2
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Speculate as to whether or not these questions are true or
false
Now Read Activity 1
Now Let’s look back at visual 2 and answer the questions
A. True For much of the twentieth century, nearly one-third of
the world’s population lived under communism or socialism
B. True The USSR worked form the premise that only
government planners could provide for the overall economic
well being of Soviet Society
C. True In a market economy, prices send important
information to producers and consumers regarding the
relative value of goods and services
D. True In command economies, prices are controlled by the
government
Solve the Mystery
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Soviet authorities assumed that government planners had
superior information, enabling them to make better economic
decisions that those made by individuals acting on their own
behalf. But it was nearly impossible for government planners
to understand local circumstances related to the production
and consumption of goods and services. Principle 4.
The Rules of the soviet economic system abolished the
incentives that ordinarily encourage producers to respond to
consumers. First, most private ownership was abolished.
Individuals were no longer allowed to benefit economically
from the property they owned or worked. Second, under
communism, the government owned businesses, and
government managers managed businesses to meet
government goals, not to make profits. This discouraged
managers from responding to the interests of consumers.
Principles 3 and 4
Solve the Mystery continued
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In any economic system, prices send valuable
messages to individuals and business owners.
In a communist system, prices set by the
government distorted the information sent to
individuals and businesses. As a result, people
often made poor decisions, causing waste and
environmental damage. Principles 3 and 4
Visual 3
Visual 4
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Basic characteristics of a market economy
Private Property- Private individuals and groups are
the owners of the means of production including
factories, farms, and their own labor.
Freedom of Choice- Businesses are free to decide
what products to produce, and they may purchase
what they need from suppliers of their choice.
Consumers are free to spend or save their income in
ways they choose.
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Self Interest- People make choices they judge
to be in their own interest. Adam Smith
argued that in making such decisions people
are led by an “invisible hand” to promote the
good of society as a whole
Profit Motive- Businesses are free to earn
profits. Profits are viewed as rewards earned
by those who take the risks involved in
producing goods and services for consumers
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Markets and Prices- Most exchanges are
handled through markets-local, regional,
national or international. Market prices are
established through the interaction of buyers
and sellers. Prices are used to allocate goods
and services in the economy.
Competition- Market systems depend on
competition to restrain participants as they
engage in self-interested behavior. In
competitive systems, no one business can
control market prices.
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Limited Government- Market systems require
a limited role for government. The
government’s regulatory role is restricted by
constitutional or other legal limits. Defining
and enacting property rights, however is an
important obligation of government in a
market system.
Visual 5
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Basic characteristics of a command economy
Public Ownership- The government is the
owner of the means of production, including
factories, farms and so forth.
Centralized Decision Making- A central
authority such as a bureau, legislature, or
government official makes the fundamental
decisions about what and how much will be
produced.
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Economic Planning- National economic goals
are often an important focus. Objectives are
established for each sector of the economy.
Objectives are fine tuned to provide
instructions for each farm, factory or mine.
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Allocation by Command- A central authority
such as a bureau, legislature or government
official makes the fundamental decisions
about how goods and services are distributed.
Raw materials and labor are assigned to
factories, farms and other units of production
according to priorities established by
government.
Why did communism collapse?
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Under communism, government was thought to have
superior information, enabling it to make better
economic decisions than individuals might make
acting on their own behalf. The rules of the
economic system abolished the incentives (including
private ownership and the profit motive) that
encourage producers to respond to consumers. Prices
and quantities set by the government distorted the
information sent to individuals and businesses.
Markets
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A place or service that enables buyers and
sellers to exchange goods and services
Farmer’s Market, Supermarket, Flea Market
Barter
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Direct exchange of goods and services
without the use of money
In order for barter to work you have to have
what the other wants.
If I have an item that I want to trade to you for
another item, you must want what I have
Double coincidence of wants
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The situation that exists when A has what B
wants and B has what A wants
Transaction Costs
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The costs involved in making an exchange
If we just were to concentrate on making
exchanges through barter without money, we
would have very high transaction costs
Relative Price
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The price of one good expressed in terms of the
price of another good.
When people agree to trade or exchange, they must
establish a rate of exchange or a price
For example, if a plumber and a doctor agreed to
exchange services they would have to establish the
value of one compared to the other. In this case they
might agree that one hour of the doctor’s services are
equal to three hours of the plumber’s services
Demand
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The amount of a product that people are
willing and able to purchase at each
possible price during a given period of
time, everything else held constant
This is what people are willing and able to
buy.
Quantity Demanded
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The amount of a product that people are
willing and able to purchase at a specific
price
Key difference demand refers to every price,
quantity demanded refers to specific price
Law of Demand
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The quantity of a well-defined good or service
that people are willing and able to purchase
during a particular period of time decreases as
the price of that good or service rises and
increases as the price falls, everything else held
constant.
This states that people are going to demand more at a
lower price and demand less at a higher price as long
as everything else stays constant.
Demand Schedule
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A table or list of the
prices and the
corresponding
quantities demanded
of a particular good
or service
Price
Quantity
Demanded
5
10
4
17
3
26
2
38
1
53
Demand Curve
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A graph of a demand schedule that
measures price on the vertical axis and
quantity demanded on the horizontal axis
Demand Curve
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All demand curves slope down because of the
law of demand: as price falls, quantity
demanded increases vice versa. Everything
held constant (with this statement we are
assuming that tastes don’t change)
Market Demand
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Is the sum total of all individual demands
for a particular product.
We add together the quantity demanded at
each price not the dollars to determine market
demand
Changes in Demand
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A number of factors may influence the
demand for a product, and changes in one or
more of those factors may cause a shift in the
demand curve
An increase in demand is shown by a shift of
the demand curve up and to the right
A decrease in demand is down by a shift of
the demand curve down and to the left.
Increase
Decrease
Determinants of Demand
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Factors other than the price of the good
that influence demand-income, tastes,
prices of related goods and services,
expectations, and number of buyers.
Income
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Demand for any good or service depends
on income
Normal Good
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Goods for which demand increases as income
increases.
Inferior Goods
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Goods for which demand decreases as income
increases,
Ex. Bankruptcy Services, Inexpensive Goods
and Services
Tastes
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Individual Tastes and preferences have an
effect on demand.
Price of Related Goods
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If goods that are similar to the ones you sell
go up or down in price, quality etc. that will
have an effect on the demand for your goods.
Example. Taco Bell finds that it’s lettuce has e
coli poisoning. More people eat at McDonalds
Substitute Goods
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Goods that can be used in place of each
other; as the price of one rises, the demand
for the other rises.
Ex. Fords and Chevy’s, Coal and Oil, Steak
and Chicken etc.
Complementary Goods
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- Goods that are used together as the price
of one rises, the demand for the other falls.
Ex. CD players and CDs, DVD players and
DVD’s etc
Future Expectations
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Future expectations can have an effect on
demand today. What you think you might
earn at a later date or if you think an item’s
price will rise in the future
Number of Buyers
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When there are more buyers in a market
place- demand will rise
Changes in Quantity Demanded
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When the price of a good is the only thing
that changes the quantity demanded
changes but the demand curve does not
shift.
Supply
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The amount of a good or service that
producers are willing and able to offer for
sale at each possible price during a period
of time, everything else held constant.
Quantity Supplied
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The amount sellers are willing and able to
offer at a given price during a particular
period of time, everything else held
constant.
Law of Supply
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The quantity of a well-defined good or
service that producers are willing and able
to offer for sale during a particular period
of time increases as the price of that good
or service increases and decreases as the
price decreases, everything else held
constant.
Supply Schedule
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A table or list of
prices and
corresponding
quantities supplied of
a particular good or
service
Price
Quantity
Supplied
1
12
2
28
3
42
4
52
5
60
Supply Curve
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A graph of a supply schedule that measures
price on the vertical axis and quantity
supplied on the horizontal axis
Market Supply
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The quantities that each producer supplies at
each price are added together to determine
market supply.
Changes in Supply
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A number of factors may influence the supply
for a product, and changes in one or more of
those factors may cause a shift in the supply
curve
An increase in supply is shown by a shift of
the supply curve down and to the right
A decrease in supply is shown by a shift of the
supply curve up and to the left.
Increase
Decrease
Determinants of Supply
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Factors other than the price of the good
that influence supply-prices of resources,
technology and productivity, expectations
of producers, number of producers, and the
prices of related goods and services.
Prices of Resources
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If labor decreases, one of the resources used
in producing goods, then supply will decrease
and vice versa.
Technology and Productivity
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If resources are used more efficiently in
production, then more of that good can be
supplied for the same cost.
Productivity- The quantity of output
produced per unit of resource.
Number of Producers
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When more people produce the supply
increases (supply curve shifts to the right)
Prices of Related Goods and Services
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If goods that are similar to the ones you
produce change their price your supply will be
affected.
McDonalds
Burger King
Changes in Quantity Supplied
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When the price of a good is the only thing
that changes the quantity supplied changes
but the supply curve does not shift.
Equilibrium
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The price where quantity demanded and
quantity supplied are equal.
Disequilibrium
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A point at which quantity demanded and
quantity supplied are not equal at a
particular price
Surplus
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A quantity supplied that is larger than the quantity
demanded at a given price; it occurs whenever the price is
greater than the equilibrium price.
Whenever the price is greater than the equilibrium price,
a surplus arises.
Shortage
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A quantity supplied that is smaller than the quantity demanded at a
given price; it occurs whenever the price is less than the equilibrium
price.
Whenever the price is below the equilibrium price, the quantity
demanded is greater than the quantity supplied and there is a
shortage
Changes in the Equilibrium Price:
Demand Shifts
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This occurs only when the determinants of demand change.
If say taste results in a increase in demand, the demand curve will shift to
the right, resulting in a higher equilibrium price and quantity.
The opposite could occur as well, an decrease in demand would result in a
lower equilibrium price and quantity.
Changes in Equilibrium Price:
Supply Shifts
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Again focused on changes in the Determinants of Supply
The decrease in supply is represented by the leftward shift of the supply
curve. A decrease in supply with no change in demand results in a higher
price and a lower quantity. Conversely, an increase in supply would be
represented as a rightward shift of the supply curve. An increase in supply
with no change in demand would result in a lower price and a higher
quantity.
Equilibrium in Reality
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If not in equilibrium the price and quantities
demanded and supplied change until
equilibrium is established.
All items may not reach equilibrium. Ex. Sale
items in a store
Price Floor
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is a situation in which the price is not
allowed to decrease below a certain level.
A price floor keeps the price from falling not
rising.
Price Ceiling
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A situation in which the price is not allowed to rise above a certain
level.
Whenever a price ceiling exists a shortage results. A price ceiling is only
effective if it is set below equilibrium price.
Round 1, 2, 3
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Visual 1 will help you
Sellers must report the price to me
Make as many deals as you can in the time
permitted.
You can take a loss in order to get a new
transaction card
Visual 1 contains useful information
Post Simulation
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At what price was the silver most frequently sold at
each round? Look at your class tally sheet
In which round did the greatest spread in prices
occur?
Why did the prices become more clustered in later
rounds?
Did Buyers or Sellers determine the final market
price for silver?
How did competition within both buyers and sellers
influence price?
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Consumer surplus and producer surplus are
the main reasons why market economies work
better than command economies. In a
voluntary market, both buyers and sellers
gain.
Complete Activity 3
Use the graph provided to plot your points
and answer the questions provided
Visual 2
Review Answers to Activity 3
Answers to Activity 3
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A. The lower the price, the more silver people want to buy.
The higher the price, the less silver people want to buy. This
is called the law of demand.
B. The lower the price, the less silver people want to sell. The
higher the price, the more silver people want to sell. This is
called the law of supply.
C. $4.30, 24 ounces
D. Hopefully, yes
E. Markets don’t work that way. Equilibrium is a tendency.
When there is a temporary surplus, prices fall, when there is a
temporary shortage, prices rise. Buyers and sellers are
constantly interacting as prices constantly change.
F. Prices were closer to equilibrium as buyers and sellers
reacted to their experiences and the information displayed
Review
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In a market who or what determines the
equilibrium price?
The interaction of buyers and sellers
Who gains and who loses when people trade
in a market?
Both buyers and sellers gain. There are
consumer surpluses and producer surpluses
Demand
Capstone Lesson 8
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DO NOT COPY JUST LISTEN
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One day you are shopping with your friends, and you walk
into a small greeting card shop close to school to buy a
birthday card for one of your relatives. While you are
checking out the cards, you overhear the owner complaining
that a certain style of card is not selling, and the display of
that card is taking up precious space in the small store.
“Unfortunately, I bought these cards up front and they cannot
be returned,” he says. “I guess I will just throw them away
and use the space for something that has a better chance of
selling.” As the store owner looks over to you and your
friends, he continues: “I learned in my economics class in
high school that a person shouldn’t cry over spilt milk or let
costs incurred in the past influence future choices, right?” It
becomes obvious that the owner is soliciting a response from
you.
Do you support the owner’s view or do
you suggest an alternative course of
action
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Possible Answers: The owner is right
Lower the price of the cards
Put them in a better place in the store
Donate the cards to charity
Advertise
Recycle them
SALE
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Why do businesses put items on sale?
To sell more merchandise
To reduce surplus merchandise
Avoid throwing items away that may still
have value
Increase consumer demand*
*Remember a change in price does not
change demand
If the owner puts the cards that weren’t
selling on sale, will that be a good way
for him to begin solving his problem?
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Yes, Although the owner can’t change his
decision to buy the cards in the first place,
getting something for the cards now is better
than getting nothing, so at the very least the
decision minimizes loses
SALE
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When business people put products on sale, they are
attempting to predict consumer behavior. They are
predicting that the number of products bought will
increase at lower prices. That is not the only possible
way to increase sales, of course. If the owner could
change his customers’ perception of value for the
cards, the customers also would buy more. Changing
customers’ perceptions is one of the purposes of
marketing through advertising.
Experiment
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I want to conduct an experiment to see whether these
predictions of consumer behavior are correct.
I have a candy bar that I put in my lunch today but
I’ve decided to cut out sugar from my diet starting
today.
I don’t want to waste it and think that somebody in
here might find some value in consuming it.
I only have one so I want to make sure that the
consumer who values it the most gets it, so I am
going to conduct an auction
Visual 1
Results
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Did anyone choose not to bid on the candy bar?
Some may see no value others that might not want the candy may just bid
low to sell it.
What goes through your mind before a bid is made?
A calculation of the value of ownership in comparison to the cost of
buying it-my opportunity cost.
Why does a higher price reduce the number of items demanded?
Higher prices increase the number and value of alternative uses for the
money. The alternatives may provide more satisfaction for some, and they
will stop bidding. Higher prices also reduce an individual’s total
purchasing power.
Once a price is established in the market, do you think it stays the same
for long periods?
Generally not, because consumer preferences as well as other key
variables change, and such changes influence demand. These changing
variables actually shift the demand schedule and create a new price
quantity relationship.
Graph
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We can graph this information
Visual 2 (Everybody gets a copy)
Write Price near the Vertical Axis
Write Quantity near the Horizontal axis
Enter the quantities demanded
Use the demand schedule to plot the points on the
chart
Connect the dots
Compare yours to mine
Summary of Graph
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As the price rose, the quantity people were
willing and able to buy declined.
As the price fell, the quantity people were
willing and able to buy increased
Demand
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Sometimes demand for products actually
changes when certain variables change
Consumers are influenced by outside factors
such as income, tastes and preferences, price
of related products, expectations, and number
of buyers
These are the determinants of demand
Change in Demand
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To show this we are going to have a second auction.
I found another candy bar
Also I have read a study that says people’s risk of
getting cancer and having a heart attack gets reduced
by eating this candy bar.
Also if you don’t have the money you can pay with
an IOU
Visual 1
Second Auction
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Everybody gets a new copy of Graph
Look at new schedule and plot your graph
How did your buying decision change after you
learned more about chocolate and had an IOU option
More students interested, both new variables
increased demand
How do the two graphs compare?
Different but the relationship will be the same. This
is because a change in the determinants of demand
tastes and preferences, price of related goods and
income
Shifts in Demand
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Raise your right hand if demand in this scenario will shift to
the right
Raise your left hand if demand in this scenario will shift to
the left
The demand for cars when people get a tax refund
Right
The demand for gasoline today when people expect prices to
fall tomorrow.
Left
The demand for Ice Cream when the price of Ice Cream
drops.
No hands up-this is a change in quantity demanded, not a
demand change
Supply
Capstone Lesson 9
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DO NOT COPY LISTEN
The owner of a local fast food restaurant is having
trouble hiring workers for the closing shift. Although
the closers have a few more responsibilities than
other workers, including cleaning, the closing shift
often fits best with students’ schedules. The owner of
the restaurant doesn’t know what to do. He is angry.
He says that “ Young people today are just plain lazy
and maybe spoiled too.”
Is the owner right?
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Are there other explanations of why young
people might not choose to work as closers in
the fast food restaurant?
The difficulty of the task
Value of other ways to spend time
Hanging out with friends
Holding better jobs
Being a bat boy might be a
better job
Producer
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Why do producers offer goods and services
for sale?
Producers wish to earn money
Take pride in producing a good or service
Price goes up producers want to sell more,
and vice versa
Law of Supply
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To understand this better look at yourself as a
producer
You produce labor
You can sell your labor at the price and to
who you want
You probably would want to sell your labor at
a higher price?
Experiment
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Activity 1
Complete Activity 1
Visual 1 4-5 volunteers
What patterns do you observe in the responses on Visual 1?
At low rates of pay, the quantity supplied is low. As the rates of pay increase, the
quantity of supplied increases
Several students chose not to supply labor at any wage rate. Why?
Low wages turn some away, but some value other alternatives so highly that they
refuse to work even at the $100 pay. Some might choose to work less at the $100
pay because they can earn a considerable amount of money at that rate in a short
time
What influences your decision to work or not to work?
Expected benefits must be equal to or greater than the next best use of my time
Why does a higher wage usually increase the number of hours people are willing
to work?
Higher wages provide positive incentives to work. These positive incentives
generate benefits greater than the expected value of the next-best alternative
Would you predict that a different group of people would fill out the questionnaire
differently
People value things differently and consequently make different choices
Graph
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Record Information on Activity 1 can be
graphed
Visual 2 (Everybody Gets one)
Place Price on the Vertical Axis
Place Quantity on the Horizontal Axis
Graph, plot points, draw line (curve)
Law of supply
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Higher prices higher quantity supplied, lower
prices lower quantity supplied
Determinants of Supply
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Variables other than price that can shift the supply curve which include
input prices, technology, expectations, number of sellers
Activity 2
Why did so many farmers leave farming to go into other
careers?
Better alternatives, low market prices for crops, increased
competition from foreign producers, high equipment costs,
taxes
When many producers leave a market, what is likely to
happen to the quantity produced at any given price?
The quantity will fall, the falling quantity is pictured by a
supply curve that has shifted to the left. The supply curve
moves on the graph. This shift occurs because one of the
determinants of supply has changed. Number of sellers. When
a determinant changes the who supply changes
Shifts in Supply
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Shift to the left raise left hand
Shift to the right raise right hand
The supply of cars when open trade agreements bring in new
producers.
Right
The supply of coffee when freezing temperatures hit the
major coffee producing regions in Brazil and Costa Rica
Left
The supply of lumber when a new computerized saw reduces
the cost of lumber producers
Right
Equilibrium
Capstone Lesson 10
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Is a state of balance between opposing forces
It occurs because everywhere else there is a state of imbalance or
disequilibrium
Ball in Yankee Stadium
Visual 1
What if the market price were $4
There would be a surplus of 800 yo-yos because the quantity demanded is
600 and the quantity supplied is 1,400
How would sellers get rid of the surplus?
They would lower the price until all the yo-yos offered for sale were sold.
The lower price is an incentive that increases the quantity demanded but
decreases the quantity supplied. All the yo-yos would be sold at $3, the
equilibrium price
What if the market price were $2
There would be a shortage of 800 yo-yos. Buyers would demand 800 more
yo-yos than sellers are willing to offer at that price
Equilibrium
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Which buyers will get the yo-yos?
The ones who will pay more. The higher price is an incentive
that increases the quantity offered for sale. Once Again, at $3
the number of yo-yos offered for sale in a time period is equal
to the number of yo-yos consumers are willing and able to
buy.
Only at a price of $3 is the number of yo-yos sellers are
willing and able to sell equal to the number consumers are
willing and able to buy.
This is why equilibrium price is $3 and equilibrium quantity
is 1,000
This is a process where prices, incentives, shortages and
surpluses determine an equilibrium or resting place
Prices in equilibrium may not remain so for long. Any change
in underlying conditions leads to a new equilibrium
Activity 1
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Complete parts A-E
Visual 2 (Answers)
A. Under these conditions, competitive market forces would tend to establish an
equilibrium price of $3 per Frisbee and an equilibrium quantity of 200 million
Frisbees
B. If the price currently prevailing on the market is $4 per Frisbee, buyers would
want to buy 150 million Frisbees and sellers would want to sell 250 million
Frisbees. Under these conditions, there would be a surplus of 100 million Frisbee.
Competitive market forces would tend to cause the price to decrease to a price of
$3 per Frisbee.
C. At this new price, buyers would now want to buy 200 million Frisbees, and
sellers would now want to sell 200 million Frisbees. Because of this change in
price, the quantity demanded changed by 50 million Frisbees, and the quantity
supplied changed by 50 million Frisbees.
D. If the price currently prevailing on the market is $2 per Frisbee, buyers would
be wiling to buy 250 million Frisbees and sellers would want to sell 150 million
Frisbees. Under these conditions, there would be a shortage of 100 million
Frisbees. Competitive market forces would tend to cause the price to increase to a
price of $3 per Frisbee.
Activity 1
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E. At this new price, buyers would now want to buy 200 million Frisbees,
and sellers would now want to sell 200 million Frisbees. Because of this
change in price, the quantity demanded change by 50 million Frisbees,
and the quantity supplied changed by 50 million Frisbees
F. Under these conditions, competitive market forces would tend to
establish an equilibrium price of $4 per Frisbee and an equilibrium
quantity of 150 million Frisbees. Compared to the equilibrium price in
question A, we say that, because of this change in underlying conditions,
the supply changed, and both the equilibrium price and the equilibrium
quantity changed. The equilibrium price increased and the equilibrium
quantity decreased.
G. Under these conditions, with the supply schedule S1 competitive market
forces would tend to establish an equilibrium price of $3 per Frisbee and
an equilibrium quantity of 100 million Frisbees. Compared to the
equilibrium price in question F, because of this change in underlying
conditions, the demand changed. The equilibrium price decreased and the
equilibrium quantity decreased.
*Underlying conditions = determinants
Review
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Why does the price decrease if it is above equilibrium?
The quantity for sale is greater than the quantity demanded, so sellers
have an incentive to lower the price.
Why does the price increase if it is below equilibrium?
At a price below equilibrium, the quantity demanded exceeds the quantity
supplied. Buyers have an incentive to offer a higher price if they want the
good.
For each of the following predict the change in equilibrium price of
turkeys and explain your prediction
Turkey is called a health food by the US Surgeon General
Price increases for Turkey because demand increases and shifts right
New technology helps turkeys breed faster
Price increases for Turkey because supply increases and shifts right
Thanksgiving is abolished
Price decreases for Turkey because demand decreases and shifts left