Transcript Unit 2 - Cobb Learning

Unit 2: Consumer
Choice, Demand, and
Supply
Introduction to Markets, Supply, and
Demand
The Circular Flows in a Market
Economy
The Circular Flows in a Market Economy
with Government
A Description of Production
Natural resources are transformed by human and
capital resources into goods and services.
Thus, human and capital resources do the work of
production, while natural resources provide the
material that they transform.
Because human and capital resources require energy
to work, natural resources also provide the energy
required for these resources (i.e., food for workers
and fuel for machines).
Productive Resources
Human resources
People: the mental and physical abilities
that allow them to make contributions in
the workforce.
Examples: construction workers, factory workers, teachers, doctors, truck drivers,
farmers, secretaries, actors, engineers, garbage collectors, and many other
occupations
Productive Resources
Capital resources
Goods that were specifically produced in
order to produce other goods.
Examples: machines, equipment, tools, office and factory buildings, tractors,
assembly lines, computers, grinders, trucks, and many other things that help in
the production process
Productive Resources
Natural resources
An actual or potential form of wealth
extracted or harvested from the natural
environment.
Examples: trees, fish, soil, minerals (such as copper, aluminum, iron ore, gold,
and zinc), air, water, fossil fuels (such as coal, oil, and natural gas), as well as
the space provided by a plot of land
The Role of Money
How would you obtain something you want without using
money?
Why is money an essential component of our production process?
Why Money?
1. Medium of Exchange:
•
used to determine the value during the exchange of goods
and services
•
alternative to barter
2. Unit of Account:
•
allows you to compare the value of goods and services
3. Store of Value:
•
keeps if you decide to hold on to it
Markets
• Institutions or mechanisms which bring together
buyers and sellers of particular goods, services, or
resources.
The Law of Demand
• States that there is an INVERSE relationship between price and
quantity demanded…
If Price increases, Quantity Demanded decreases…
P
Q
If Price decreases, Quantity Demanded increases…
P
Q
Law of Supply
• States that there is a direct relationship between quantity
supplied by producers and price…
If Price increases, Quantity Supplied increases…
P
Q
If Price decreases, Quantity Supplied decreases…
P
Q
Demand vs. Quantity Demanded
• Demand is the amount of a good and service that a consumer is
willing and able to buy at various possible prices during a given
time period.
• Quantity Demanded is the amount at each particular price a
consumer is willing and able to buy at during a given time period.
• How many will you buy at one specific price?
KNOW THE DIFFERENCE!!!!!
Supply vs. Quantity Supplied
• Supply represents the total amount of goods a
producer is willing and able to sell at various
possible prices during a given time period.
• Quantity Supplied refers to the amount of a
good that a producer is willing and able to sell at
a particular price during a given time period.
Representing Quantity Demanded
• Demand Schedules – table that shows the
relationship between demand and price of a given
product
• Demand Curves – graph where the x-axis
represents the quantity demanded from a given
product and the y-axis represents various prices
Demand Curves slope DOWNWARD
The Demand Schedule…
The Demand Curve…
DOWNWARD SLOPING!!!!
(p)
P
r
i
c
e
Quantity Demanded
(q)
Catherine’s Demand Schedule
Figure 1 Catherine’s Demand Schedule and Demand Curve
Price of
Ice-Cream Cone
$3.00
2.50
1. A decrease
in price ...
2.00
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
Copyright © 2004 South-Western
Changes in Quantity Demanded
Price of IceCream
Cones
B
$2.00
A tax that raises
the price of icecream cones
results in a
movement along
the demand curve.
A
1.00
D
0
4
8
Quantity of Ice-Cream Cones
MARKET VS. INDIVIDUAL
DEMAND
• Each consumer has his individual demand curve for
a product
• The market demand curve for that product is the
sum of all of the individual demand curves
Representing Quantity Supplied
• Supply Schedule (same idea as demand schedule) –
shows the relationship between price and quantity
supplied
• Supply Curve – Price is ALWAYS on Y-Axis &
Quantity supplied on X-Axis
• graph slopes upward (positive)
Supply Curve
(p)
UPWARD SLOPING
P
r
i
c
e
Quantity Supplied
(q)
Ben’s Supply Schedule
Supplied
Figure 5 Ben’s Supply Schedule and Supply Curve
Price of
Ice-Cream
Cone
$3.00
1. An
increase
in price ...
Supplied
2.50
2.00
1.50
1.00
0.50
0
1 2
3
4
5
6
7
8
9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity of cones supplied.
Copyright©2003 Southwestern/Thomson Learning
Change in Quantity Supplied
Price of IceCream
Cone
S
C
$3.00
A rise in the price
of ice cream
cones results in a
movement along
the supply curve.
A
1.00
0
1
5
Quantity of
Ice-Cream
Cones
MARKET SUPPLY VS.
INDIVIDUAL SUPPLY
• Each producer has his own individual supply curve
• The market supply curve is the sum of all the
individual supply curves
Unit 2:
Microeconomic
Concepts
Supply, Demand and the
Market
SUBSTITUTION EFFECT
• At a lower price buyers have an incentive to
substitute what is now a less expensive product for
similar products that are now relatively more
expensive.
• The lower priced product is seen as a “better deal”
• Why do you think products like Coke run specials?
INCOME EFFECT
• The impact a change in price of a product has on a
consumer’s real income and consequently on the
quantity demanded of that good
The Market Never Stands Still
• ENTIRE curves for both supply and demand can shift to
the left or right
• Changes that INCREASE supply and demand shift the curve
to the right
• Changes that DECREASE supply and demand shift the curve
to the left
CHANGES IN PRICE OF A PRODUCT
NEVER SHIFT A CURVE
Figure 3 Shifts in the Demand Curve
Price of
Ice-Cream
Cone
Increase
in demand
Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0
Quantity of
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning
Consumer Behavior
There are several factors that change overall consumer
demand
Determinants of Demand
1) Change in Consumer Taste and Preferences
2) Change in Consumer Income
3) Change in Consumer Expectations
4) Change in the Price of Related Goods…
•
SUBSTITUTE GOODS
•
COMPLEMENTARY GOODS
5) Change in the Number of Consumers
Substitutes and Complements
• Substitute Goods
• A product that is used in place of another
• Chick-fil-a has a huge sale on sandwiches…it impacts the
demand for burgers
• Complementary Goods
• A product that is used together with another good.
• If cost of peanut butter rises, demand for jelly would decrease
and shift its curve to the left
Price of IceCream Cone
Consumer Income
Normal Good
$3.00
An increase
in income...
2.50
Increase
in demand
2.00
1.50
1.00
0.50
D1
0 1
2 3 4 5 6 7 8 9 10 11 12
D2
Quantity of
Ice-Cream
Cones
Consumer Income
Inferior Good
Price of IceCream Cone
$3.00
2.50
An increase
in income...
2.00
Decrease
in demand
1.50
1.00
0.50
D2
0 1
D1
2 3 4 5 6 7 8 9 10 11 12
Quantity of
Ice-Cream
Cones
Producer Behavior
There are several factors that change overall producer
supply…
DETERMINANTS OF SUPPLY
• Resource Prices
• Other goods prices
• Taxes and subsidies
• Technology
• Expectations of Producers
• Number of sellers (competition)
Figure 7 Shifts in the Supply Curve
Price of
Ice-Cream
Cone
Supply curve, S3
Decrease
in supply
Supply
curve, S1
Supply
curve, S2
Increase
in supply
0
Quantity of
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning
PRICE ELASTICITY
• Price Elasticity of Demand – the responsiveness
of consumers to changes in price
• Price Elasticity of Supply – the responsiveness of
producers to changes in price
ELASTICITY OF DEMAND
• Demand is INELASTIC when the percentage
change in the price of a good is greater than the
percentage change in quantity demanded for that
good.
• Demand is ELASTIC when the percentage change
in the price of a good is less than the percentage
change in the quantity demanded of that good.
RELATIVELY ELASTIC
DEMAND
(p)
Large change in Q
with change in P
D1
(q)
PERFECTLY ELASTIC
DEMAND
Q increases despite no
change in P
(p)
D1
(q)
RELATIVELY INELASTIC
DEMAND
(p)
D1
Little change in Q
when P changes
(q)
PERFECTLY INELASTIC
DEMAND
(p)
D1
No change in Q when
P changes
(q)
ELASTICITY OF SUPPLY
• Supply is INELASTIC when the percentage change
in the price of a good is greater than the percentage
change in the quantity supplied for that good.
P
or
= Little or no change in QS
ELASTICITY OF SUPPLY
• Supply is ELASTIC when the percentage change in
the price of a good is less than the percentage
change in the quantity supplied for that good.
P
or
= MUCH change in QS
RELATIVELY ELASTIC SUPPLY
(p)
S1
Large change in Q
with change in P
(q)
PERFECTLY ELASTIC SUPPLY
(p)
S1
Q changes when P
stays the same
(q)
RELATIVELY INELASTIC
SUPPLY
(p)
S1
Little change in Q
with change in P
(q)
PERFECTLY INELASTIC
SUPPLY
(p)
S1
No change in Q with
change in P
(q)
Ways to think about elasticity…
% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
• If % change is > 1, it’s elastic
• When it comes to elasticity of demand, think about
whether there is a substitute, how important it is, and
whether it is a luxury good or a necessity
• When it comes to elasticity of supply, think about how
quickly a producer can change its output
EQUILIBRIUM
• Producers want high prices while consumers want
low prices…
How do they work together in the market?
EQUILIBRIUM
• When quantity demanded=quantity supplied at the
same price
• There is an equilibrium (market clearing) price
• There is also an equilibrium quantity
• The intersection of the supply and demand curves
shows the equilibrium point
EQUILIBRIUM
• Law of supply and demand
• The claim that the price of any good adjusts to bring the
quantity supplied and the quantity demanded for that good
into balance.
• The market always seeks equilibrium!!!!
SUPPLY AND DEMAND
TOGETHER
Demand Schedule
Supply Schedule
At $2.00, the quantity demanded
is equal to the quantity supplied!
Figure 8 The Equilibrium of Supply and Demand
Price of
Ice-Cream
Cone
Supply
Equilibrium
Equilibrium price
$2.00
Equilibrium
quantity
0
1
2
3
4
5
6
7
8
Demand
9 10 11 12 13
Quantity of Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning
The Answer…
They are used to illustrate how the market determines…
PRICE where we
sell all goods
Thinking About the Market
• The market ALWAYS seeks the market-clearing price
where goods sell out
• Price below equilibrium = SHORTAGE
• Price above equilibrium = SURPLUS
SURPLUS
• A surplus occurs when quantity supplied exceeds
quantity demanded at the market price (the market is
not in equilibrium – also called disequilibrium)
Figure 9 Markets Not in Equilibrium
(a) Excess Supply
Price of
Ice-Cream
Cone
Supply
Surplus
$2.50
2.00
Demand
0
4
Quantity
demanded
7
10
Quantity
supplied
Quantity of
Ice-Cream
Cones
Copyright©2003 Southwestern/Thomson Learning
SHORTAGE
• A shortage occurs when quantity demanded exceeds
quantity supplied at the market price (the market is
not in equilibrium)
Figure 9 Markets Not in Equilibrium
(b) Excess Demand
Price of
Ice-Cream
Cone
Supply
$2.00
1.50
Shortage
Demand
0
4
Quantity
supplied
7
10
Quantity of
Quantity
Ice-Cream
demanded
Cones
Copyright©2003 Southwestern/Thomson Learning
Determining Price Outside of the
Market
• Market does not reach equilibrium due to
government intervention
• Price Controls – occur when a local, state, or national
government decide a legal minimum/maximum for a good
or service…
1. Price Floors
2. Price Ceilings
Price Floors
• A legal MINIMUM price for a good, service, or
factor of production
• Set ABOVE equilibrium
• Charging BELOW that price can be illegal
• (ex. Minimum Wage)
• Surpluses result because producers are willing to produce
more than consumers are willing to consume
Price Floor
S1
(p)
Price Floor
A
B
MARKET
EQUILIBRIUM
(q)
D1
Price Ceilings
• A legal MAXIMUM price for a good, service, or
factor of production
• Set below equilibrium price
• Charging ABOVE that price can be illegal
• Causes Shortages: Consumer demand is greater than
producers are willing/able to provide
• Creates potential for a black market (like ticket scalpers)
Price Ceiling
S1
(p)
MARKET
EQUILIBRIUM
Price Ceiling
A
(q)
B
D1
Graphing Shifts Practice
Graph each situation and state what happens to the equilibrium
price
a) Supply decreases and demand is constant.
b) Demand decreases and supply is constant.
c) Supply increases and demand is constant.
d) Demand increases and supply increases.
e) Demand increases and supply is constant.
f) Supply increases and demand decreases.
g) Demand increases and supply decreases.
h) Demand decreases and supply decreases.