Transcript Extrernalties - Liberty Union High School District

Key Terms
• Externality: An economic side effect of the
production of a good or service that generates
benefits or costs to another person.
• Positive externality: The positive benefit
generated to another person as a side effect of
the production of a good or service
• .Negative externality: The negative cost
generated to another person by the production
of a good or service
What are externalities?
• We call these
benefits or costs,
externalities.
• If they are benefits
we say they are
positive externalities
• If they are costs we
say they are negative
externalities.
Externalities
• The production of
goods and services
can sometimes result
in benefits or costs to
other people.
Your neighbor paints his house
• He loves it but you
have to look at his
idea of art every day.
• What happens to the
value of every house
on that street?
Do Neighborhoods suffer
• Foreclosures
• Bad Taste
Your new beachfront vacation
home
• Airport decides to
divert air traffic
away from one
neighborhood
• Planes now land
every five minutes
over your house
Benefits?
• The crazy lady in the
old unpainted house
with the 100 cats
dies
• The house is sold
• The new owners
restore the house
• What happens to the
value of your house
Key Terms
• Demand: The desire to own something
• Law of Demand: If the price decreases the
quantity demanded will increase
• Income/Wealth effect: If a person feels
poorer they will spend less.
• Individual demand schedule: A table that
lists the quantity demanded of a good by a
person at different prices
• Market demand schedule: A table that lists
the quantity demanded of a good by all the
consumers in a market.
A Few More Key Terms
• Elasticity of demand: A measure of how
consumers will react to a change in price.
• Inelastic: Demand that is not very senstive
to changes in price.
• Elastic: Demand that is very sensitive to
changes in price.
Key Terms
• Demand curve: A graphic representation of a
demand schedule
• Substitution effect: Consumers will react to an
increase in the price of a good by purchasing
less of that good and more of another.
• Complements: Two goods that are purchased
and used together.
• Substitutes: Goods used in place of another
Demand
and
Elasticity of Demand
Examples of Demand
• As we look at overheads note the
examples given.
Lopez in High School
What was in demand when Lopez
was in High School?
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Billy Joel and Elton John records
Short shorts for guys
Roller skates
Star Wars Toys ……Remember the force
…………ECONOMICS
Snow in New York
What is “demanded” in winter
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Anti-freeze for your car
Heating fuel for your home
Warm clothing
Rock salt and shovels
Sledges
Boots for skitching
Demand
(Text pages 79 to 99)
Law of Demand: If the price of
a product increases than the
quantity demanded will
decrease and the inverse.
Nature of Demand
• The most obvious cost a person bears in buying a
product is the price of that product.
• Price is important because people have limited funds
that they can spend.
• Purchasing one product has an opportunity costs in
not purchasing another.
• If the price of one product increases then purchasing
that product means giving up more of other
products.
• Therefore we expect more people to purchase a
product at a price of $1.00 per unit than if it were
$2.00 per unit.
Demand and Income
• The income a person receives also
affects the costs of purchasing a
product. A person living on a low
income may have give up purchasing
clothing, shelter, needs in order to take
a vacation while a person with a higher
income may have to cut back on a
totally different set of options.
Additional Key Terms
• Normal goods: Goods that you would
purchase more of if you had more money.
• Inferior goods: Goods that you would
purchase less of if you had more money.
• Complements: Two goods that are
purchased and used together.
• Substitutes: Goods used in place of
another.
Income Affect
• Consumers sometimes feel that their
income increases or decreases if the level
of prices change.
• We sometimes feel “poorer” because our
money does not “go as far” as it once did
when we shop.
• This can influence consumer spending
• Do you think the increase is gas prices
has made some people feel poorer? Why?
The current Housing market
• What happens to the price of every house
on the block when a few are reduced in
price?
• How do you feel if your house decreaes in
value?
During the last recession
consumers borrowed $800 billion
• Will consumers even have equity to
borrow against this time
Normal versus Inferior Goods
• When a person’s income increases, they
typically increase their purchase of certain
products. These products are called
“normal” goods.
• What might you purchase if you received a
raise at work?
How would your spending
change?
• More expensive
clothing?
• Go to better
restaurants?
• Buy those fancy
eyeglasses?
• Or perhaps new
swimsuit?
Inferior Goods
• As our income increases as we purchase
more normal goods we cut back on other
goods.
• Can you think of any goods you would
reduce your consumption of if your income
increased?
Inferior
Substitute Goods
• As income or prices change
consumer spending changes
the quantity demanded of a
substitute product changes.
• For example, if the price of
steak increases a family may
purchase more lower priced
chicken or if a store is having a
sale on Pepsi Cola the family
may substitute Pepsi for Coke.
• What might happen if Liberty HS increased
the price of pizza?
• What other alternatives are there for
purchasing pizza for lunch at school?
Complements
• The quantity demanded of
one product by consumers
can affect the quantity
demanded of a second.
• These products which are
purchased together are
called complements.
• Can you think of any
examples?
Individual and Market Demand
Schedules
• It is possible to create a schedule (table)
showing the quantity demanded of a
product by an individual or by a market.
Individual Demand Schedule
for Pizza
Price of a slice
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Quantity Demanded
5
4
3
2
1
0
Market Demand Schedule
for Pizza
Price of a slice
Quantity Demanded
$0.50
$1.00
300
250
$1.50
$2.00
$2.50
$3.00
200
150
100
50
Demand Curves
• The quantities demanded by an
individual or a market can be graphed.
These graphs are called individual or
market demand curves.
Lets look at Widgets
Price of Widgets
$1.00
Number of People who
Want to buy
100
$2.00
90
$3.00
70
$4.00
40
Demand Curve for Widgets
Now draw an Individual Demand
Curve for Pizza
Price of a slice
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Quantity Demanded
5
4
3
2
1
0
Now draw a Market Demand
Curve for Pizza
Price of a slice
$0.50
$1.00
Quantity Demanded
300
250
$1.50
$2.00
$2.50
$3.00
200
150
100
50
Shifts in Demand Curves
• A demand curve is accurate only so long
as there are no changes other than price
that could affect a consumer’s decision.
• What factors in addition to the price of
good “A” might change the quantity
demanded for this good?
What can cause a Shift?
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Changes in income
Consumer Expectations
Population
Consumer Tastes and advertising
Price of related goods
Changes in Income
• Remember normal versus inferior
goods? If a person’s income increases
they demand increased quantities of
normal goods and lower quantities of
inferior goods.
Consumer Expectations
• If you were to believe that a store would
be discounting goods in a week, how
might this affect your spending plans?
• What if you thought you might lose you
job?
• If you think the price of gas will
continue to increase could this affect
your spending plans? How?
Population
• The population of Contra Costa is
expected to increase by 25% over the
next 10 to 15 years.
• How will this affect the quantity
demanded for certain goods in this
area?
• Housing, Cars, restaurants,
entertainment?
Consumer Tastes & Advertising
• What ever happened
to bell bottom pants,
pet rocks, and
beanie babies?
Your parent’s college fashions
• The 60’s look
How Successful is Advertising?
• How does
advertising
influence consumer
spending?
Paying extra for the “faded” jeans
What about Atkins?
• How has the low
carb trend in eating
affected the quantity
demanded by
consumers of
certain products?
Winners
Losers
Price of related goods
• What might be the
affects of a significant
increase in the cost of
ski lift tickets?
• How might an increase
in gas prices affect the
sale of SUVs?
• Can you think of any
other examples?
Lets look at the Widgets again
• If the price of getwids, a substitute good
for widgets significantly decreases what
would happen to the quantity demanded
for widgets?
A New Market Demand Schedule
for Widgets
Price of Widgets
$1.00
Number of People who
Want to buy
80 instead of 100
$2.00
70 instead of 90
$3.00
50 instead of 70
$4.00
10 instead of 40
New Demand Curve for Widgets
One Last thing….
• How did a decrease in the quantity
demanded for widgets shift the demand
curve?
• If a decrease caused a shift to the left,
what shift would result from an
increase in the quantity demanded of a
product?
IMPORTANT WARNING!!!
• A change in the price of an item does not
cause a shift in the demand curve…it
simply moves the demand to another
place on the curve!
Elasticity of Demand
How will consumers increase or
decrease the quantity
demanded for a good when its
price increases or decreases.
Additional Key Terms
• Elasticity of demand: A measure of how
consumers will react to a change in price.
• Inelastic: Demand that is not very senstive
to changes in price.
• Elastic: Demand that is very sensitive to
changes in price.
How do you react to changes in
price?
• Can it determine what you eat for
lunch?
• What magazines or books you read?
• What clothing you buy?
• How much driving that you do?
Elasticity Simply Stated
• Elasticity is a measure of
responsiveness.
• What is the extent to which consumers
will respond to a change in price.
• Why is this important?
The Definition of Economics
• Remember that Economics is how people
seek to satisfy their needs and wants and
• That that most people have limited resources
(funds) to do this with.
• Therefore they are forced to make choices,
choices that have an opportunity cost in
what they do not buy.
• If a price increases, the opportunity cost of a
decision increases.
Think about it…
• You run a company that produces
toothpaste.
• You want to generate additional
revenue to cover increased labor and
other costs.
• So you plan to increase your cost by
5% or 35cents.
• What could go wrong?
BART
• When BART
increased its fare
recently they failed
to generate the
additional revenue
that they needed.
Why?
The Result
• BART is intended to
reduce traffic
congestion and
pollution. When the
price increased many
commuters simply
started driving to work.
Was the resulting costs
in traffic and pollution
worth the minimal
increase in revenue.
The Village Voice
• In New York City, the Village Voice
increased their purchase price to $1.00
but the drop off in readership resulted
in a loss of advertising. Why?
• The paper lost so many readers and
advertising revenue that rather than
reduce the price it started giving its
paper away free in the city.
Inelastic goods
• Sometimes consumers will continue to
purchase a good regardless of
increases in price. We call these goods
inelastic.
• Can you think of any inelastic goods?
• Inelastic goods frequently are needs
such as food, water, and heating fuel.
Unknown variable
• Sometimes a good can become “inelastic”
because of an “irrational” desire on the
part of consumers to continue purchasing
an item that increases in value but that
they could find a substitute for or do
without.
Importance of Price
• Elasticity varies at
every price level.
• If I publish a
newspaper that sells
for 25 cents, a 20%
increase to 30cents
might not result in
any loss in sales.
Importance of Price
• A magazine that sells for
$3.50 a copy might find
that only a 10% increase
to $3.85 will result in a
decline in sales.
Factors Affecting Elasticity
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Availability of substitutes
Relative importance
Necessities versus luxuries
Change over time
Availability of substitutes
• Every morning
you eat a bowl of
your favorite
cereal.
• Unfortunately,
when you go to
Safeway to find
the price has
increased.
Sugar Pops and Price
• If the increase is only
25 cents you might
still purchase a box.
• How would you react
if the increase is
$1.00?
• What choices do you
have?
Other substitutes
• Sometimes it is easy
to find a substitute
good when prices
increase.
• Instead of buying
diet Coke you might
buy….
Albertson’s Diet Cola
Relative importance
• If the price increase is for a good that
you already spend a significant amount
on, the increase will force you to make
some difficult choices.
• An increases in the
price of shoe laces,
paperclips, pencils
will have little
impact on a family’s
economics (seeking
to satisfy their
needs and wants)
• But as the price of gas
continues to increase,
families are being forced
to reconsider their
economics (how they
satisfy their needs and
wants)
Necessity versus Luxuries
• While this varies from person to
person, how important this good is to
an individual will determine its
elasticity.
Senior Citizens
• Why is the issue of
free prescription
drugs so important
to senior citizens?
• Seniors frequently
take several
different types of
prescriptions
A difficult choice
• Many retired
individuals also live
on a fixed income
• Increases in the cost
of prescriptions
force them to
choose between
their health and
other needs or
wants.
The result….
• In the end they will purchase the
medication they need at a cost of
things that that might only have
“wanted”.
• Or they might try to stretch their
medication reducing the
frequency of how often they take
it.
AZT
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What is AZT
AZT can easily cost $1,000 per month
Why is demand for this good inelastic?
Is it moral to change so much for this
good?
• The estimated annual profit from sales
of AZT exceed $100 million
Change over time
• Sometimes consumers
are unable to react
quickly to price
changes.
• Think about it, if you
own a SUV, the price of
that SUV includes the
cost of operating it.
• What has happened to
the price?
• How might this affect
your future spending?
You might rethink your next car
purchase
Elasticity and Revenue
• The law of demand states that increases
in price decrease the quantity demanded.
• Before increasing prices a firm must
consider what the result will be.
DLS
• Last year DLS
increased its
tuition
significantly.
• Why didn’t
enrollment at DLS
decrease?
DLS
• Since DLS typically
receives an excess in
applications, there was
no problem in taking in
260 new freshmen.
• Sometimes if there is
excess demand for a
good or service, a price
increase will result in
the increase in revenue
desired.
Tuition is in fact Elastic
• The school
recognized that for
some families
already enrolled the
increase could be a
problem so financial
aid was increased
by almost $200,000.
• How significant is
the tuition paid to
DLS to your family?
The Magic Formula
• The elasticity of any good is measured
by the percentage change in the
quantity demanded divided by the
percentage increase in price.
Transportation
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Tickets & Fares
From Port Jefferson To Penn Station
Ticket TypesAmount
Peak One-Way$12.25
Off-Peak One Way$8.25
Weekly$81.00
Monthly$252.00
Sr. Cit./Disabled One Way$6.00
Off-Peak 10-trip$70.50
Ten Trip Senior/Disabled$60.00
Ten Trip Peak$122.50
On-Board One Way Peak$15.00
On-Board One Way Off Peak$11.00
CityTicket - Weekends OnlyN/A
• A 20% increase in the cost of a monthly
ticket will cost you over $50.00.
• If you make $50,000 a year, this might
not be a major consideration but if you
make only $20,000 the additional $600
per year in transportation cost will
impact you greatly.
How “fast” is elasticity of demand?
• Think about it, you are at Safeway and notice apples
are on sale so you place some in you cart.
• Next you go to purchase ketchup but you do not
want to pay the added “cost” of supporting Kerry so
you buy Hunts instead of Heinz.
• Finally you go you go to the meat dept to purchase
steak. You see that there are “no specials” on steak
so you buy chicken.
• You buy some Dannon which costs the same as
usual but you realize the container looks a little
smaller.
• On you way to the check out you place a pack of Tic
Tacs in you cart without even checking the price.
Property Rights and
Endangered Species
How can we use Capitalism and
the concept of Property Rights to
preserve endangered species and
the environment?
The Tragedy of the Commons
• When the Plymouth colony was first established
in the early 1600s land was held “in common” as
was labor.
• Half of the first English settlers in Plymouth have
died after the first winter in large part due to a
food shortage
• In 1623 “private property was established and
“excess” food stared to be produced.
• Why?
Extinct is forever!
• Whatever happened to the wooly
mammoth or the Sable toothed tiger?
Why will we never run out of
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Chickens
Turkeys
Salmon
Christmas trees
Pumpkins
In Spain
• Over 10,000 bulls are
killed during bull fights
• Yet bull fighting helps
to preserve this
species
• Why?
In Africa two attempts are being
made to save the elephant
population
• While in Zimbabwe,
the elephants were
given to the villages
where they live and
the villages are
permitted to sell
hunting licenses.
• In Kenya they are a
protected species and
their grazing lands
are national parks
Which has been more
successful?
• In Zimbabwe the
overall elephant
population has
increased.
• In Kenya most of the
elephants have
disappeared due to
poaching and the
population has
declined drastically
In Kenya
Since the elephants are protected and
live in parks they belong to “everyone”
which means no one has a direct
interest in “watching” or managing this
asset. Poachers therefore are the only
one who profit.
While in Zimbabwe
The villages that sell the hunting
permits profit and the people in these
villages take care and manage their
elephants to prevent poaching or over
hunting. They are an income producing
asset of the community.
Do you know that some
people now are breeding
strange birds…why?
What about Pandas
• Since I have started advocating eating
Pandas to save them their rate of
reproduction has increased.
• Not directly because of me but still
based on the same principle.
• While I would farm them as a food
source China finds it more efficient (and
profitable) to farm them to “rent” to zoos
around the world.
Why eating Pandas will save
them
• Pumpkins…we carve them so we grow them
• Bulls…Spain kills them as art…people breed
them
• Christmas trees…we decorate them indoors so
they are grown on farms to be cut down
• Turkeys…Thanksgiving, need I say more there
are turkey farms all over America today counting
down the last minute of these bird’s lives.
Therefore...
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We could state “carving” them
Fighting them
Decorating them indoors
Substituting them for our thanksgiving
turkey
• Or using them to celebrate a new “meat
centered” feast day… Jan 21st
The important thing is to make
them the next “trend”