Topic 6.1 combining supply and demand

6.1: Combining Supply and Demand
Objectives
1. Explain how supply and demand create balance in the marketplace.
2. Compare a market in equilibrium with a market in disequilibrium.
3. Identify how the government sometimes intervenes in markets to control prices.
4. Analyze the effects of price ceilings and price floors.

Buyers always want to pay the lowest possible price, while sellers hope to sell at the highest possible price. With buyers and sellers at odds, how can a market system satisfy both groups? In a free market system, supply and demand work together. The result is a price that both sides can agree on.

Price of a slice of pizza ($) Quantity Demanded Quantity Supplied Result
.50 300 100 Shortage from
1.00 250 150 excess demand
1.50 200 200
Equilibrium

2.00 150 250 Surplus from excess
2.50 100 300 supply
3.00 50 350












Equilibrium – The point at which quantity demanded and quantity supplied are equal.

What is the equilibrium price in the example above?

Disequilibrium – describes any price or quantity not at equilibrium; when quantity supplied is not equal to quantity demanded.


Excess Demand (Shortage )– When quantity demanded is more than quantity supplied.

Excess Supply (Surplus) – When quantity supplied is more than quantity demanded.

Excess Demand Excess Supply













Suppliers will raise or lower their prices to meet consumers’ wishes. And in the process, restore the market to equilibrium.

Government Intervention

The government can purposefully make a market in disequilibrium in two ways: price floors and price ceilings.

Price Ceiling – A maximum price that can be legally charged for a good or service.

EX: Rent control













Pros/Cons




Price Floor – a minimum price for a good or service.

EX: Minimum wage












Pros/Cons

Topic 4.3 Elasticity

3.3 Elasticity of Demand
Objectives
1. Explain how to calculate elasticity of demand.
2. Determine elasticity of demand from a demand schedule and a demand curve.
3. Identify factors that affect elasticity.

Are there some goods that you would buy no matter the price? Are there other goods that you would not buy if the price changed a little?

Elasticity of Demand – A measure of how consumers react to a change in price.

Inelastic – Describes demand that is NOT sensitive to a change in price.

EX: Gas, medicine, milk

Elastic – Describes demand that is very sensitive to a change in price.

EX: Restaurant meals, foreign travel, specific brands of toothpaste and pizza slices, potato chips





Graphic Examples
Elastic Demand (Chips) Inelastic demand (Gas)







Calculating elasticity of demand

Elasticity of demand = Percentage change in quantity demanded
Percentage change in price

Percentage change = Original number – New number
Original number



Calculation:
If the elasticity is greater than 1, then it is elastic
If the elasticity is less than 1, then it is inelastic
If elasticity is equal to 1, then it is called unitary elastic

Elastic Demand
% change in Qd = 10-20 = 1
10

% change in P = 4-3 = (1/4)
4

Elasticity = % change in Qd = 1 = 4, which is greater than one so gas is inelastic
% change in P (1/4)

Inelastic Demand
% change in Qd = 10-15 = (5/10) = (1/2)
10


% change in P = 6-2 = (4/6) =(2/3)
6

Elasticity = % change in Qd = (1/2) = (3/4)
% change in P (2/3)

(3/4) is less than one so chips are elastic

Four Factors Affecting Elasticity of Demand
1. Availability of substitutes - If there are few subs for a good, then if the price rises greatly, you still might buy it.

EX: Your favorite concert group and Aquafresh toothpaste

2. Relative importance - What percentage of your budget do you spend on goods and services?

EX: ½ your budget goes to clothes or the increase of price in toothpicks

3. Necessities vs. luxuries
i. Necessities tend to inelastic
EX: milk and medicine

ii. Luxuries tend to be elastic
EX: Steak and lobster dinners

4. Change over time - You need time to find subs for goods/services. So demand in short-run maybe inelastic and more elastic in long-run

EX: gas in the Summer of 2008

4.2 Notes Shifts in Demand

Topic 4.2 Shifts in the Demand Curve
Objectives
1. Understand the difference between a change in quantity demanded and a shift in the demand curve.
2. Identify several factors that determine demand and can cause a shift in the demand curve.
3. Explain how the change in the price of good can affect demand for a related good.

The demand schedule only took prices into account, while keeping all other factors the same, or constant. What if a government report came out that stated eating tomato sauce is the best way to cure a cold? What would happen to the demand of pizza?





Graphing Changes in Demand

Change in Quantity Demanded Demand shifting to left














Demand shift to right














Factors that cause the demand curve to shift

1. Income

Normal Good – A good that consumers demand more of when their incomes increase.

EX: New clothing, Roast beef sandwiches

Inferior Good – A good that consumers demand less of when their incomes increase.

EX: Used clothing, “mystery meat” sandwiches



Shift in Demand when your income increases

Used Clothing New Clothing













2. Consumer Expectations – Our expectations about the future affect are buying decisions now.

EX: A salesman tells you a bike you want will go on sale in one week so your demand for the bike now falls.

Demand for Bikes













3. Population
EX: After the baby boom, demand for bottles and baby food increased.

Demand for baby products after baby boom






4. Consumer Tastes and Advertising
EX: Nike pumps shoes, light up shoes (LA Lights), shoes with wheels.

Demand for Pumps after people thought they were not cool anymore













5. Price of Complements – Two goods that are bought and used together.
EX: Basketballs and basketball shoes

Demand for Basketballs after the price for basketball shoes goes up drastically












6. Price of Substitutes – Goods used in place of one another.
EX: Coffee and tea

Demand for coffee if the price of tea goes down

Topic 4.1 Demand schedule

4.1 Understanding Demand
Objectives
1. Explain the law of demand.
2. Understand how the substitution effect and the income effect influence decisions.
3. Create a demand schedule for an individual and a market.
4. Analyze the information presented in a demand curve.

Buyers demand goods, sellers supply those goods, and the interactions between the two groups lead to an agreement on the price and the amount traded.

Law of Demand – Consumers buy more of a good when its price decrease and less when its price increases.

Price Increase Quantity Demanded Decrease

Price Decrease Quantity Demanded Increase

The law of demand is explained by two patterns

Substitution Effect – When consumers react to an increase in a good’s price by consuming less of that good and more of other goods.

EX: The price of school pizza goes up so you eat bagels instead.

Income Effect – The change in consumption resulting from a change in real income.

EX: When the price of movie tickets goes up, it makes you feel poorer, so you buy fewer movie tickets.

You only demand goods that you can afford to buy. You may want a Lamborghini, but if you cannot afford one then you don’t demand it.

Demand Schedule – A table that lists the quantity of a good a person will but each different price.

Market Demand Schedule – A table that lists the quantity of a good all consumers in a market will buy at each different price.




Individual Demand
Price of a slice
of pizza ($) Quantity demanded
per day
.50 6
1.00 4
1.50 3
2.00 1
2.50 1
3.00 0

Market Demand (everyone in the classroom added together)
Price of a slice
of pizza ($) Quantity demanded
per day
.50 95
1.00 72
1.50 60
2.00 32
2.50 15
3.00 8

Graphing
Individual Demand Curve Market Demand Curve

Price on y-axis
Quantity Demanded on x-axis
Draw demand for both












The demand curve tells how quantity demanded will be affected by a change in price.

Topic 3.3 Public Goods

3.3 Providing Public Goods

Objectives
1. Analyze market failures.
2. Identify examples of public goods.
3. Evaluate how the government allocates some resources by managing externalities.

If the government did not build roads, who would? If you wanted a road built in front of your house, would you build it? Would you allow your neighbors to use it? Would they have to pay you?

Market Failure – A situation in which the market does not distribute resources efficiently.

The government decides to intervene when the market fails if the benefits outweigh the negatives.

Public Good – A shared good or service for which it would be impractical to make consumers pay individually and to exclude non-payers.

EX: Dams, Parks.

For the most part, any number of consumers can use a public good without reducing the benefits to any single consumer.
EX: People driving next to you don’t diminish your ability to use a road.

To determine whether something is produced as a public good one must look at the costs and benefits. When a good or service is public…
1. The benefit to each individual is less than the cost that each would have to pay if it were provided privately.
2. The total benefits to society are greater than the total cost.
In these cases the government provides the good, or else it wouldn’t get done.

Public Sector – The part of the economy that involves the transactions of the government

Private Sector – The part of the economy that involves transactions or individuals and businesses.

Free-rider – Some who would not choose to pay for a certain good or service, but who would get the benefits of it anyway if it were provided as a public good.

EX: People who don’t pay taxes or are illegal immigrants benefit from military protection.

Externalities

Externality – An economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume.

Externalities are split into two categories: positives and negative externalities.

Public goods generate benefits for many people, even those who do not pay. Such beneficial side effects are called positive externalities.

• Examples: A new neighbor moves in next-door to you into an old rundown house. She paints it, cuts the grass and plants a garden; everyone in your neighborhood benefits from the beautiful new house.

• A computer company has an outreach program that trains underprivileged youth to be computer programmers. These teens will then go out and be hired by other companies who will benefit from the skills the already have.

Some decisions produce goods and services that generate unintended costs, called negative externalities.

• Examples: A sawmill pollutes a river that flows past a nearby town. The town has to clean up the pollution and deal with its consequences.

• Your neighbor has late night polka parties, which keep you awake. Plus, you hate polka music.

The government’s goal is to increase positive externalities, like education, and decrease negative externalities, like pollution.

Topic 3.2 Notes Safety Nets

Topic 3.2 Providing a Safety Net

Objectives
1. Summarize the U.S. political debate on ways to fight poverty.
2. Describe the main programs through which the government redistributes income.

In a free market some people are very rich, some are very poor and most are in between. So how do societies care for the old, poor and young?

Poverty Threshold – An income level below that which is needed to support families or households.

The poverty threshold fluctuates and is determined by the government. What can the government do to combat poverty? What should it do? Is government regulation the best way to help the poor?

Welfare – A general term that refers to government aid to the poor.

There are many government redistribution programs to help those in need.

• Social Security

• Unemployment Insurance

• Workers’ Compensation

• Medicare/Medicaid

• Education

Topic 3.1 Free Enterprise Notes

Topic 3 American Free Enterprise

3.1 Preserving Economic Freedoms

Objectives
1. Identify ways that the government acts to protect Americans’ economic rights within our system of free enterprise.
2. List examples of how the government creates policies to serve the public interest.
3. Describe how the government intervenes to protect public health, safety, and well-being.


Public Interest – The concerns of the public as a whole.

Examples of how the government acts in the public’s interest:
• Warning labels on cigarettes
• Safety ratings on cars and MPG estimates
• Nutritional facts on food

The government can address problems the free market might ignore, like toxic substances in food.

Protecting public interest means giving up some economic freedom. Most Americans are willing to make the trade-off between less economic freedom for some government intervention.

Consumers can let their voices be heard by producers and the government in two ways:
1) Through consumers buying decisions
2) Through electing officials

Public Policy – Law and standards on topics of public interest

EX: Should we spend more money on defense or improve housing for the poor?
Should we dam a river to generate power or leave it in its natural state?

Interest Group – A private organization that tries to persuade public officials to act or vote according to group members’ interests.

EX: The National Rifle Association (NRA) resisting stricter gun laws.

Pros
• Collection of individuals is more influential than just one citizen.
• Can bring about change that reflects interest off the entire public.

Cons
• Corporate funded groups outspend citizens
• Powerful groups can bring about change that is not beneficial to all.

In order create economic freedom and give consumers choices, then the public needs to be informed of relevant information.

Public Disclosure Laws – Laws requiring companies to provide full information about their products.

EX: Many times hamburger will have its label the day it was packed, the “best buy” date and preparation instructions.

Major Federal Regulatory Agencies

FDA (Food and Drug Administration) – Sets and enforces standards for food, drugs and cosmetic drugs.

FTC (Federal Trade Commission) – Enacts and enforces antitrust laws to protect consumers.

FCC (Federal Communications Commission) – Regulates interstate and international communications by radio, television, satellite and cable.

FAA (Federal Aviation Administration) – Regulates civil aviation, air-traffic and piloting standards, and air commerce.

EEOC (Equal Employment Opportunity Commission) – Promotes equal job opportunity through enforcement of civil right laws, educations and other programs.

EPA (Environmental Protection Agency) – Enacts policies to protect human health and the natural environment.

OHSA (Occupational Safety and Health Administration) – Enacts policies to save lives, prevent injuries and protect the health of workers.

FEMA (Federal Emergency Management Agency) – Coordinates a response to a disaster in the U.S. that overwhelms the resources of local and state authorities.