Transcript Unit 1 Notes - Gilbert Public Schools

®
AP Economics
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Unit 1: Basic
Economic Concepts
I WON THE LOTTERY!
I’ll give you anything you want other than money.
What do you want?
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What is Economics?
• Economics is the science of scarcity.
• Scarcity- we have unlimited wants but
limited resources.
• Since we are unable to have everything
we desire, we must make choices on how
we will use our resources.
Economics is the study of _______.
choices
In economics we will study the choices of
individuals, firms, and governments.
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Examples:
You must choose between buying jeans or buying shoes.
Businesses must choose how many people to hire
Governments must choose how much to spend on
welfare.
Textbook Definition
Economics- Social science concerned with the
efficient use of scarce resources to achieve
maximum satisfaction of economic wants.
(Study of how individuals and societies deal
with ________)
scarcity
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Realized systems of
human activities related
to the production,
distribution, exchange,
and consumption of
goods and services of a
country or other area.
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1. A way of evaluating cost vs.
benefits.
Cost-Benefit Analysis
Is the outcome worth the
price?
Should China feed all of
their people or limit
pollution?
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2.Study of Scarcity
How people use their
scarce resources to
satisfy our unlimited
wants.
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3. A way to predict the future or
explain the past without value
judgments.
A viewpoint.
You do these things and
these things happen.
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Micro vs. Macro
MICROeconomicsStudy of small economic units such as
individuals, firms, and industries (ex: supply
and demand in specific markets, production
costs, labor markets, etc.)
MACROeconomicsStudy of the large economy as a whole or
economic aggregates (ex: economic growth,
government spending, inflation,
unemployment, international trade etc.) 9
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How is Economics used?
• Economists use the scientific method to make
generalizations and abstractions to develop
theories. This is called theoretical economics.
• These theories are then applied to fix problems
or meet economic goals. This is called policy
economics.
Positive vs. Normative
Positive Statements- Based on facts. Avoids value
judgements (what is).
Normative Statements- Includes value judgements
(what ought to be).
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5 Key Economic Assumptions
1. Society has unlimited wants and limited
resources (scarcity).
2. Due to scarcity, choices must be made. Every
choice has a cost (a trade-off).
3. Everyone’s goal is to make choices that
maximize their satisfaction. Everyone acts in their
own “self-interest.”
4. Everyone makes decisions by comparing the
marginal costs and marginal benefits of every
choice.
5. Real-life situations can be explained and
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analyzed through simplified models and graphs.
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Thinking at the Margin
# Times
Watching Movie
Benefit
Cost
1st
2nd
3rd
Total
$30
$15
$5
$50
$10
$10
$10
$30
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Marginal Analysis
In economics the term marginal = additional
Marginal analysis (aka: thinking on the margin)
making decisions based on increments
Example:
• When you decide to go to the mall you consider the
additional benefit and the additional cost (your
opportunity cost).
• Once you get to the mall, you continue to use marginal
analysis when you shop, buy food, and talk to friends.
• Since your marginal benefits and costs can quickly
change your analyzing them every second.
• What if your ex-girlfriend shows up?
The Point: You will continue to do something as long as
the marginal benefit is greater than the marginal cost
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Analyzing Choices
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Given the following assumptions, make a rational
choice in your own self-interest (hold everything
else constant)…
1. You want to visit your friend for a week.
You will return Sunday night.
2. You work every weekday earning $100
per day
3. You have three flights to choose from:
Thursday Night Flight = $275
Friday Early Morning Flight = $300
Friday Night Flight = $325
Which flight should you choose? Why?
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Trade-offs vs. Opportunity Cost
ALL decisions involve trade-offs.
Trade-offs - ALL the alternatives that
we give up when we make a choice
(Examples: going to the movies)
Opportunity cost- most desirable alternative
given up when you make a choice.
.
What are trade-offs of deciding to go to college?
What is the opportunity cost of going to college?
GEICO assumes you understand
opportunity cost. Why? 16
Guns and Butter
"Every gun that is made, every warship launched, every
rocket fired signifies, in the final sense, a theft from those
who hunger and are not fed, those who are cold and are not
clothed. This world in arms is not spending money alone. It
is spending the sweat of its laborers, the genius of its
scientists, the hopes of its children.”
“The cost of one modern heavy bomber is this: a modern
brick school in more than 30 cities. It is two electric power
plants, each serving a town of 60,000 population. It is two
fine, fully equipped hospitals. It is some fifty miles of
concrete pavement.”
“We pay for a single fighter plane with a half million bushels
of wheat. We pay for a single destroyer with new homes
that could have housed more than 8,000 people.”
-Dwight Eisenhower
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Speaking
against
the
military
build
up
of
the
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Economic
Terminology
Utility = Satisfaction!
Marginal = Additional!
Allocate = Distribute!
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Price vs. Cost
What’s the price? vs. How much does that cost?
Price= Amount buyer (or consumer) pays
Cost= Amount seller pays to produce a good
Investment
Investment= the money spent by BUSINESSES
to improve their production
Ex: $1 Million new factory
•Consumer Goods- created for direct consumption
(example: pizza)
•Capital Goods- created for indirect consumption
(oven, blenders, knives, etc.)
•Goods used to make consumer goods
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The 4 Factors of
Production
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The Four Factors of Production
ALL resources can be classified as one of the
following four factors of production:
1. Land -All natural resources that are used to produce
goods and services. (Ex: water, sun, plants, animals)
2. Labor -Any effort a person devotes to a task for
which that person is paid. (Ex: manual laborers,
lawyers, doctors, teachers, waiters, etc.)
3. Capital Physical Capital- Any human-made resource that is used
to create other goods and services ( Ex: tools, tractors,
machinery, buildings, factories, etc.)
Human Capital- Any skills or knowledge gained by a
worker through education and experience
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The Four Factors of Production
4. Entrepreneurship -ambitious leaders that
combine the other factors of production to create goods
and services.
• Examples-Henry Ford, Bill Gates, Inventors, Store
Owners, etc.
Entrepreneurs:
1. Take The Initiative
2. Innovate
3. Act as the Risk Bearers
PROFIT
So they can obtain _________.
Profit = Revenue - Costs
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Unit 1: Basic
Economic Concepts
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Every society must answer three questions:
The Three Economic Questions
1. What goods and services should be
produced?
2. How should these goods and services be
produced?
3. Who consumes these goods and services?
The way these questions are answered
determines the economic system
An economic system is the method used by a
society to produce and distribute goods and
services.
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Economic Systems
1. Centrally-Planned
(Command) Economy
2. Free Market Economy
3. Mixed Economy
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Centrally-Planned
Economies
(aka Communism)
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Centrally Planned Economies
In a centrally planned economy (communism)
the government…
1. owns all the resources.
2. answers the three economic questions
Examples:
Cuba, North Korea, former Soviet Union, and China?
Why do centrally planned economies face
problems of poor-quality goods, shortages,
and unhappy citizens?
Little incentive to work harder and central
planners have a hard time predicting preferences
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Advantages and Disadvantages
What is GOOD about
Communism?
1. Low unemploymenteveryone has a job
2. Great Job Securitythe government
doesn’t go out of
business
3. Equal incomes means
no extremely poor
people
4. Free Health Care
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What is BAD about
Communism?
1. No incentive to work
harder
2. No incentive to
innovate or come up
with good ideas
3. No Competition keeps
quality of goods poor.
4. Corrupt leaders
5. Few individual
freedoms
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Free Market System
(aka Capitalism)
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Characteristics of Free Market
1. Little government involvement in the economy.
(Laissez Faire = Let it be)
2. Individuals OWN resources and answer the
three economic questions.
3. The opportunity to make PROFIT gives people
INCENTIVE to produce quality items
efficiently.
4. Wide variety of goods available to consumers.
5. Competition and Self-Interest work together to
regulate the economy (keep prices down and
quality up).
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Reword for Communism
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Example of Free Market
Example of how the free market regulates itself:
If consumers want smartphones and only one
company is making them…
•Other businesses have the INCENTIVE to start
making smartphones to earn PROFIT.
•This leads to more COMPETITION….
•Which means lower prices, better quality, and
more product variety.
•We produce the goods and services that society
wants because “resources follow profits”.
The End Result: Most efficient production of the
goods that consumers want, produced at the lowest
prices and the highest quality.
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Example of Central Planners
Example of why communism failed:
If consumers want smartphones and only one
company is making them…
•Other businesses CANNOT start making
computers.
•There is NO COMPETITION….
•Which means higher prices, lower quality, and
less product variety.
•More phones will not be made until the
government decides to create a new factory.
The End Result: There is a shortage of goods that
consumers want, produced at the highest prices
and the lowest quality.
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The Invisible Hand
The concept that society’s goals will be met as
individuals seek their own self-interest.
Example: Society wants fuel efficient cars…
•Profit seeking producers will make more.
•Competition between firms results in low
prices, high quality, and greater efficiency.
•The government doesn’t need to get involved
since the needs of society are automatically
met.
Competition and self-interest act as an invisible
hand that regulates the free market.
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Mixed Economies
A system with free markets but also some
government intervention.
Almost all countries, including the US, have mixed
economies
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Productivity Creates Wealth
Countries with free markets, property rights, and
The Rule of Law, have historically seen greater
economic growth because they are more productive
3rd World Countries
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Developed Countries
Index of Economic Freedom
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Unit 1: Basic
Economic Concepts
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The Production
Possibilities Curve
(PPC)
Using Economic Models…
Step 1: Explain concept in words
Step 2: Use numbers as examples
Step 3: Generate graphs from numbers
Step 4: Make generalizations using graph
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What is the Production Possibilities Curve?
• A production possibilities curve (or frontier) is
a model that shows alternative ways that an
economy can use its scarce resources
• This model graphically demonstrates scarcity,
trade-offs, opportunity costs, and efficiency.
•
•
•
•
4 Key Assumptions
Only two goods can be produced
Full employment of resources
Fixed Resources (Ceteris Paribus)
Fixed Technology
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Production “Possibilities” Table
Bikes
Computers
A
14
0
B
12
2
C
9
4
D
5
6
E
0
8
f
0
10
Each point represents a specific
combination of goods that can be
produced given full employment of
resources.
NOW GRAPH IT: Put bikes on y-axis and
computers on x-axis
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Production Possibilities
How does the PPG graphically demonstrates scarcity,
trade-offs, opportunity costs, and efficiency?
Impossible/Unattainable
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(given current resources)
A
B
12
Bikes
G
C
10
8
Efficient
D
6
Inefficient/
Unemployment
4
2
E
0
0
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2
4
6
8
10
Computers
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The Production Possibilities
Curve (or Frontier)
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Production Possibilities
CALZONES
PIZZA
A
B
C
D
E
4
0
3
1
2
2
1
3
0
4
• List the Opportunity Cost of moving from a-b,
b-c, c-d, and d-e.
• Constant Opportunity Cost- Resources are
easily adaptable for producing either good.
• Result is a straight line PPC (not common)
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Production Possibilities
PIZZA
ROBOTS
A
B
C
D
E
20
0
19
1
16
2
10
3
0
4
• List the Opportunity Cost of moving from a-b,
b-c, c-d, and d-e.
• Law of Increasing Opportunity Cost• As you produce more of any good, the
opportunity cost (forgone production of
another good) will increase.
• Why? Resources are NOT easily adaptable
to producing both goods.
• Result is a bowed out (Concave) PPC
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Constant vs. Increasing
Opportunity Cost
Identify which product would have a straight line
PPC and which would be bowed out?
Corn
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Cactus
Wheat
Pineapples
The Production Possibilities
Curve and Efficiency
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Two Types of Efficiency
Productive Efficiency• Products are being produced in the
least costly way.
• This is any point ON the Production
Possibilities Curve
Allocative Efficiency• The products being produced are the
ones most desired by society.
• This optimal point on the PPC depends
on the desires of society.
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Productive and Allocative Efficiency
Which points are productively efficient?
Which are allocatively efficient?
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A
B
12
Bikes
Productively Efficient
combinations are A through D
G
Allocative Efficient
combinations depend on
the wants of society
10
8
C
E
6
(What if this represents a
country with no electricity?)
4
F
2
D
0
0
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2
4
6
8
10
Computers
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Why two types of efficiency?
Is combination “A” efficient?
Yes and No. It is productively efficient but it is not the
combination society wants
Size 20 running
shoes
A
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Size 10 running shoes
Shifting the Production
Possibilities Curve
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Production Possibilities
4 Key Assumptions Revisited
• Only two goods can be produced
• Full employment of resources
• Fixed Resources (4 Factors)
• Fixed Technology
What if there is a change?
3 Shifters of the PPC
1. Change in resource quantity or quality
2. Change in Technology
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3. Change in Trade
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Computers
Production Possibilities
What happens if
there is an increase
in population?
Pizzas
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Computers
Production Possibilities
What if there is a
technology improvement
in pizza ovens
Pizzas
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Computers
Production Possibilities
What if there is a
technology improvement
in pizza ovens
Pizzas
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Capital Goods and Future Growth
Countries that produce more capital goods will have
more growth in the future.
Panama – Favors
Consumer Goods
Mexico – Favors
Capital Goods
Future
PPC
Consumer goods
Panama
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Future
PPC
Capital Goods
Capital Goods
Current
PPC
Current
PPC
Consumer goods
Mexico
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PPC Practice
Draw a PPC showing changes for each of the
following:
Pizza and Computers (3)
1. New computer making technology
2. Decrease in the demand for pizza
3. Mad cow disease kills 85% of cows
Consumer goods and Capital Goods (4)
4. Destruction of power plants leads to severe
electricity shortage
5. Faster computer hardware
6. Many workers unemployed
7. Significant increases in education
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Capital Goods
Extra graph to manipulate or add to
powerpoint or questions
X
Y
Z
PPC1
PPC2
PPC3
Consumer Goods
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Unit 1: Basic
Economic Concepts
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Specialization and Trade
Why do people trade?
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Why do people trade?
1. Assume people didn’t trade. What things would
you have to go without?
Everything you don’t produce yourself!
(Clothes, car, cell phone, bananas, heath care, etc)
The Point: Everyone specializes in the production
of goods and services and trades it to others
2. What would life be like if cities couldn’t trade
with cities or states couldn’t trade with states?
Limiting trade would reduce people’s choices and
make people worse off.
The Point: More access to trade means more
choices and a higher standard of living. 59
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Absolute and Comparative
Advantage
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Per Unit Opportunity Cost Review
Per Unit Opportunity Cost = Opportunity Cost
Units Gained
Assume it costs you $50 to produce 5 t-shirts. What is
your PER UNIT cost for each shirt?
$10 per shirt
Now, take money our of the equation. Instead of
producing 5 shirts you could have made 10 hats.
1. What is your PER UNIT OPPORTUNITY COST for
each shirt in terms of hats given up?
1 shirt costs 2 hats
2. What is your PER UNIT OPPORTUNITY COST for
each hat in terms of shirts given up?
1 hat costs a half of a shirt
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Absolute and Comparative Advantage
Absolute Advantage
•The producer that can produce the most output OR
requires the least amount of inputs (resources)
•Ex: Papa John has an absolute advantage in pizzas
because he can produce 100 and Ronald can only
make 20.
Comparative Advantage
•The producer with the lowest opportunity cost.
•Ex: Ronald has a comparative advantage in burgers
because he has a lowest PER UNIT opportunity cost.
Countries should trade if they have a
relatively lower opportunity cost
They should specialize in the good that is “cheaper” for
them to produce
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Benefits of Specialize
and Trade
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International Trade
Trade: 1 Wheat for 1.5 Sugar
0
30
1.5
29
3
28
4.5
27
6
26
7.5
25
9
24
10.5
23
12
22
13.5
21
15
20
16.5
19
18
18
19.5
17
USA
45
Brazil
40
35
30
The US Specializes and
makes ONLY Wheat
Sugar (tons)
W
Sugar (tons)
S
25
20
15
30
25
20
15
10
10
5
5
0
Brazil Makes
ONLY Sugar
0
5
10
15
20
Wheat (tons)
25
30
5
10
15
20
Wheat (tons)
S
W
20
0
18.5
1
17
2
15.5
3
14
4
12.5
5
11
6
9.5
7
8
8
6.5
9
5
10
3.5
11
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International Trade
TRADE SHIFTS THE PPC!
USA
45
Brazil
40
35
AFTER TRADE
25
20
15
25
20
AFTER TRADE
15
10
10
5
5
0
0
5
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Sugar (tons)
Sugar (tons)
30
10
15
20
Wheat (tons)
25
30
5
10
15
20
Wheat (tons)
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Terms of Trade
Both countries can benefit from trade if they
each have relatively lower opportunity costs.
Terms of Trade- The agreed upon conditions
that would benefit both countries
Ex: Trade 1 ton of wheat for 1.5 tons of sugar
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Pineapples
Kenya
Radios
30
10
India 40
40
1. Who has an absolute advantage in Radios?
2. What is the cost of one radio for India?
3. What is the per unit opportunity cost for 1
pineapple for Kenya?
4. Who has a comparative advantage in
pineapples?
5. Who has a comparative advantage in radios?
6. Who should import pineapples?
7. Trading 1 radio for how many pineapples would
benefit both countries?
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Comparative Advantage Practice
Create a chart for each of the following problems.
•First- Identify if it is a output or input question
•Second-Identify who has the ABSOLUTE ADVANTAGE
•Third-Identify who has a COMPARATIVE ADVANTAGE
•Fourth- Identify how they should specialize
1. Sara gives 2 haircuts or 1 perm and hour. Megan gives 3 haircuts
or 2 perms per hour.
2. Justin fixes 4 flats or 8 brakes per day. Tim fixes 1 flats or 5
brakes per day.
3. Hannah takes 30 minutes to wash dishes and 1 hour to vacuum
the house. Kevin takes 15 minutes to wash dishes and 45 minutes to
vacuum.
4. Americans produce 50 computers or 50 TVs per hour. Chinese
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produce
30 computers or 40 TVs per hour.
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More Practice
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Input or Output Question?
Number caught per day
Deer
Antelope
Henry
4
6
John
24
12
Months to produce one
Car
Canada
Japan
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8
15
Plane
10
12
Acres to produce 100 bushels
Corn
Rice
Henry
9
3
John
8
2
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Absolute Advantage?
Number caught per day
Deer
Antelope
Henry
4
6
John
24
12
Months to produce one
Car
Canada
Japan
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8
15
Plane
10
12
Acres to produce 100 bushels
Corn
Rice
Henry
9
3
John
8
2
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Unit 1: Basic
Economic Concepts
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The Circular Flow
Model
The Product Market•The “place” where goods and services
produced by businesses are sold to households.
The Resource (Factor) Market•The “place” where resources (land, labor,
capital, and entrepreneurship) are sold to
businesses.
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Resource Market
$$$
Taxes
Subsidies
Businesses
Taxes
Transfer Payments
Public Goods
Public Goods
Government
Individuals
$$$
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Product Market
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Circular Flow Model Vocab
Private Sector- Part of the economy that is run by
individuals and businesses
Public Sector- Part of the economy that is
controlled by the government
Factor Payments- Payment for the factors of
production, namely rent, wages, interest, and
profit
Transfer Payments- When the government
redistributes income (ex: welfare, social security)
Subsidies- Government payments to businesses
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Free Response
Questions
When you do a FRQ don’t forget to R.O.L.L.:
READ the entire question first
ORAGANIZE your answer
LIST your answers like the question
LABEL everything
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5 Problem Set Hints:
1. NEVER use your computer to create graphs
2. Answer in the same FORMAT as the
questions. (A, B, C i, C ii. etc.)
3. Fully EXPLAIN or give examples when
asked to do so. It is better to over explain.
4. Answer the ENTIRE question explicitly.
5. NEVER straight copy your book or my
notes. Use your own words and examples.
Take out your Problem Set
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Unit 1: Basic
Economic Concepts
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The Circular Flow
Model
The Product Market•The “place” where goods and services
produced by businesses are sold to households.
The Resource (Factor) Market•The “place” where resources (land, labor,
capital, and entrepreneurship) are sold to
businesses.
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Resource Market
$$$
Taxes
Subsidies
Businesses
Taxes
Transfer Payments
Public Goods
Public Goods
Government
Individuals
$$$
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Product Market
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Circular Flow Model Vocab
Private Sector- Part of the economy that is run by
individuals and businesses
Public Sector- Part of the economy that is
controlled by the government
Factor Payments- Payment for the factors of
production, namely rent, wages, interest, and
profit
Transfer Payments- When the government
redistributes income (ex: welfare, social security)
Subsidies- Government payments to businesses
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Free Response
Questions
When you do a FRQ don’t forget to R.O.L.L.:
READ the entire question first
ORAGANIZE your answer
LIST your answers like the question
LABEL everything
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5 Problem Set Hints:
1. NEVER use your computer to create graphs
2. Answer in the same FORMAT as the
questions. (A, B, C i, C ii. etc.)
3. Fully EXPLAIN or give examples when
asked to do so. It is better to over explain.
4. Answer the ENTIRE question explicitly.
5. NEVER straight copy your book or my
notes. Use your own words and examples.
Take out your Problem Set
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Unit 1: Basic
Economic Concepts
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Supply
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Supply Defined
What is supply?
Supply is the different quantities of a good that sellers
are willing and able to sell (produce) at different prices.
What is the Law of Supply?
There is a DIRECT (or positive) relationship between
price and quantity supplied.
•As price increases, the quantity producers make
increases
•As price falls, the quantity producers make falls.
Why? Because, at higher prices profit seeking
firms have an incentive to produce more.
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EXAMPLE: Mowing Lawns
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GRAPHING SUPPLY
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
40
Price of Milk
Draw this large
in your notes
$5
4
3
2
$3
30
$2
20
$1
10
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1
10
20
30
40
50
60
Quantity of Milk
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Q
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GRAPHING SUPPLY
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
40
Price of Milk
Supply
$5
4
3
2
$3
30
$2
20
$1
10
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1
10
20
30
40
50
60
Quantity of Milk
70
80
Q
88
GRAPHING SUPPLY
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
40
Price of Milk
Supply
$5
4
3
2
$3
30
$2
20
$1
10
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1
10
20
30
40
50
60
Quantity of Milk
70
80
Q
89
Change in Supply
Supply
Schedule
Quantity
Supplied
Price
$5
50
$4
40
Price of Milk
Supply
$5
4
3
2
$3
30
$2
20
$1
10
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1
10
20
30
40
50
60
Quantity of Milk
70
80
Q
90
Change in Supply
Supply
Schedule
Quantity
Supplied
Price
$5
50
$4
40
Price of Milk
Supply
$5
4
3
2
$3
30
$2
20
$1
10
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1
10
20
30
40
50
60
Quantity of Milk
70
80
Q
91
Change in Supply
Supply
Schedule
Quantity
Supplied
Price
$5
50 70
$4
40 60
Price of Milk
Supply
$5
4
3
2
$3
30 50
$2
20 40
$1
10 30
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1
10
20
30
40
50
60
Quantity of Milk
70
80
Q
92
Change in Supply
Supply
Schedule
Quantity
Supplied
Price
$5
50 70
$4
40 60
Price of Milk
Supply
4
3
2
$3
Increase in Supply
Prices didn’t change but
there is MORE milk
produced
30 50
$2
20 40
$1
10 30
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S2
$5
1
10
20
30
40
50
60
Quantity of Milk
70
80
Q
93
Change in Supply
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
40
Price of Milk
Supply
$5
4
3
2
$3
30
$2
20
$1
10
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1
10
20
30
40
50
60
Quantity of Milk
70
80
Q
94
Change in Supply
Supply
Schedule
Quantity
Supplied
Price
$5
50
$4
40
Price of Milk
Supply
$5
4
3
2
$3
30
$2
20
$1
10
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1
10
20
30
40
50
60
Quantity of Milk
70
80
Q
95
Change in Supply
Supply
Schedule
Quantity
Supplied
Price
$5
50
$4
40
Price of Milk
Supply
$5
4
3
2
$3
30
$2
20
$1
10
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1
10
20
30
40
50
60
Quantity of Milk
70
80
Q
96
Change in Supply
Supply
Schedule
Quantity
Supplied
Price
$5
50 30
$4
40 20
Price of Milk
Supply
$5
4
3
2
$3
30 10
$2
20 1
$1
10 0
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1
10
20
30
40
50
60
Quantity of Milk
70
80
Q
97
Change in Supply
Supply
Schedule
Quantity
Supplied
Price
$5
50 30
$4
40 20
Price of Milk
Supply
S2
$5
4
3
Decrease in Supply
Prices didn’t change but
there is LESS milk
produced
2
$3
30 10
$2
20 1
$1
10 0
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1
10
20
30
40
50
60
Quantity of Milk
70
80
Q
98
Change in Supply
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
40
Price of Milk
Supply
$5
4
3
2
$3
30
$2
20
$1
10
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1
10
20
30
40
50
60
Quantity of Milk
70
80
Q
99
5 Shifters (Determinants) of Supply
1.
2.
3.
4.
Prices/Availability of inputs (resources)
Number of Sellers
Technology
Government Action: Taxes & Subsidies
Subsidies
A subsidy is a government payment that supports a business or market.
Subsidies cause the supply of a good to increase.
Taxes
Regulation
5. The
Expectations
of
Future
Profit
government can reduce the
Regulation occurs when the
supply of somein
goods
by placing
an government
into a market
to
Changes
PRICE
don’t
shift thesteps
curve.
It only
excise tax on them. An excise tax affect the price, quantity, or quality of
causes
movement
along
the curve.
is a tax on the
production
or sale of
a good.
Regulation
usually raises
a good.
costs.
100
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Supply Practice
Identify the determinant (shifter) then decide if
supply will increase or decrease
Shifter
Increase or
Decrease
Left or Right
1
2
3
4
5
6
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101
Putting Supply and
Demand Together!!!
102
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Supply and Demand are put together to determine
equilibrium price and equilibrium quantity
Demand P
Schedule $5
P Qd
Supply
Schedule
S
P Qs
4
$5 10
$5 50
3
$4 20
$3 30
$2 50
$1 80
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$4 40
2
$3 30
1
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
103
Supply and Demand are put together to determine
equilibrium price and equilibrium quantity
Demand P
Schedule $5
P Qd
S
P Qs
4
$5 10
$5 50
Equilibrium Price = $3
(Qd=Qs)
$4 40
3
$4 20
$3 30
$2 50
$1 80
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Supply
Schedule
2
$3 30
1
D
10
20
30
40
50
60
70
Equilibrium Quantity is 30
80
Q
$2 20
$1 10
104
Supply and Demand are put together to determine
equilibrium price and equilibrium quantity
Demand P
Schedule $5
P Qd
Supply
Schedule
S
P Qs
4
$5 10
$5 50
3
$4 20
$3 30
$2 50
$1 80
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$4 40
2
$3 30
1
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
105
At $4, there is disequilibrium. The quantity
demanded is less than quantity supplied.
Demand P
Schedule $5
P Qd
How much is the
surplus at $4?
Answer: 20
$4 20
$1 80
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P Qs
4
3
$2 50
S
Surplus
(Qd<Qs)
$5 10
$3 30
Supply
Schedule
2
$5 50
$4 40
$3 30
1
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
106
How much is the surplus if the price is $5?
Demand P
Schedule $5
P Qd
Supply
Schedule
S
P Qs
4
$5 10
Answer: 40
3
$4 20
$3 30
$2 50
$1 80
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$5 50
$4 40
2
$3 30
1
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
107
At $2, there is disequilibrium. The quantity
demanded is greater than quantity supplied.
Demand P
Schedule $5
P Qd
S
P Qs
4
How much is the
shortage at $2?
Answer: 30
$5 10
3
$4 20
$3 30
$2 50
$1 80
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Supply
Schedule
2
10
20
30
40
$4 40
$3 30
Shortage
(Qd>Qs)
1
$5 50
D
50
60
70
80
Q
$2 20
$1 10
108
How much is the shortage if the price is $1?
Demand P
Schedule $5
P Qd
Supply
Schedule
S
P Qs
4
$5 10
Answer: 70
3
$4 20
$3 30
$2 50
$1 80
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$5 50
$4 40
2
$3 30
1
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
109
The FREE MARKET system automatically
pushes the price toward equilibrium.
Demand P
Schedule $5
P Qd
Supply
Schedule
S
When there is a
surplus, producers P Qs
lower prices
$5 50
When there is a
shortage, producers $4 40
raise prices
$3 30
4
$5 10
3
$4 20
$3 30
$2 50
$1 80
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2
1
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
110
Unit 1: Basic
Economic Concepts
111
Shifting Supply and
Demand
112
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Supply and Demand Analysis
Easy as 1, 2, 3
1. Before the change:
• Draw supply and demand
• Label original equilibrium price and quantity
2. The change:
• Did it affect supply or demand first?
• Which determinant caused the shift?
• Draw increase or decrease
3. After change:
• Label new equilibrium?
• What happens to Price? (increase or decrease)
• What happens to Quantity? (increase or decrease)
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Let’s Practice!
113
Double Shifts
• Suppose the demand for milk increased at
the same time as production technology
improved.
• Use S&D Analysis to show what will
happen to PRICE and QUANTITY.
Double Shift Rule:
If TWO curves shift at the same time,
EITHER price or quantity will be
indeterminate (ambiguous).
114
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Demand increases AND supply increases
Price
S
S1
P1 Pe
D
P indeterminate
Q increase
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Qe
D1
Q1 Quantity
115
Trick: Draw it out
separately and
combine the results
P indeterminate
Q increase
116
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What if supply
increases and
demand falls?
P decrease
Q indeterminate
117
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What if supply
decreases and
demand falls?
P indeterminate
Q decrease
118
Unit 1: Basic
Economic Concepts
119
Note to Teachers:
Questions on price controls and
elasticity are very rarely asked
on the AP Macro exam.
Price Controls
Who likes the idea of having a price ceiling on
gas so prices will never go over $2 per gallon?
120
Price Ceiling
Maximum legal price a seller can charge for a product.
Goal: Make affordable by keeping price from reaching Eq.
Price Gasoline
S
$8
Does this
policy help 6
consumers?
4
Result:
BLACK
Price
MARKETS 2
Ceiling
Shortage
1
(Qd>Qs)
D
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10
20
30
40
50
60
70
80
Q
121
Price Floor
Minimum legal price a seller can sell a product.
Goal: Keep price high by keeping price from falling to Eq.
P
Corn
S
$
Surplus
(Qd<Qs)
Price Floor
4
3
Does this
policy help
corn
producers?
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2
1
D
10
20
30
40
50
60
70
80
Q
122
Elasticity
Elasticity shows how sensitive quantity is
to a change in price.
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Inelastic Demand
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Inelastic Demand
INelastic Demand= Quantity is
INsensitive to a change in price.
•If price increases, quantity
20%
demanded will fall a little
•If price decreases, quantity
demanded increases a little.
In other words, people will
continue to buy it.
5%
A INELASTIC demand curve is steep! (looks like an “I”)
Examples:
•Gasoline
•Milk
•Diapers
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•Chewing Gum
•Medical Care
•Toilet paper
Inelastic Demand
General Characteristics
of INelastic Goods:
20%
•Few Substitutes
•Necessities
•Small portion of
income
•Required now, rather
than later
•Elasticity coefficient
less than 1
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5%
Elastic Demand
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Elastic Demand
Elastic Demand = Quantity is
sensitive to a change in price.
•If price increases, quantity
demanded will fall a lot
•If price decreases, quantity
demanded increases a lot.
In other words, the amount
people buy is sensitive to price.
An ELASTIC demand curve is flat!
Examples:
•Soda
•Boats
•Beef
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•Real Estate
•Pizza
•Gold
Elastic Demand
General Characteristics
of Elastic Goods:
• Many Substitutes
• Luxuries
• Large portion of
income
• Plenty of time to
decide
• Elasticity coefficient
greater than 1
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Elastic or Inelastic?
BeefGasolineReal EstateMedical CareElectricityGold-
What about the
Elastic- 1.27
demand for insulin for
INelastic - .20
diabetics?
Elastic- 1.60
INelastic - .31
What if % change in
INelastic - .13 quantity demanded equals
% change in price?
Elastic - 2.6
Perfectly INELASTIC
(Coefficient = 0)
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Unit Elastic (Coefficient =1)
Price Elasticity of Supply
Price Elasticity of Supply• Elasticity of supply shows how sensitive producers
are to a change in price.
Elasticity of supply is based on time limitations.
Producers need time to produce more.
INelastic = Insensitive to a change in price (Steep curve)
• Most goods have INelastic supply in the short-run
Elastic = Sensitive to a change in price (Flat curve)
• Most goods have elastic supply in the long-run
Perfectly Inelastic Supply= Q doesn’t change Set
quantity supplied (Vertical line)
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