MB MC Sept 23 -Oct 4 Essential Question-

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MB MC Sept. 23 -Oct. 4 Essential Question- What is Supply and Demand? Learning Goal- To compare/contrast supply and demand. SCALE: 4 - To compare/contrast supply and demand, and analyze how that affects personal finance. 3 - To compare/contrast supply and demand. 2 - To define supply and demand. 1 - No Understanding. Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 1

MB MC AN INTRO TO SUPPLY AND DEMAND- SEPT. 23 ENGLISH AUCTION: HOW TO APPLY ECONOMICS I will be selling an announced number of M&M packets through an English auction to derive a classroom demand curve. In the same lecture I will give each student a packet of M&Ms and buys back an announced number of packets through a reverse English auction to derive a classroom supply curve. Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 2

MB MC AUCTION: DEMAND n I am now going to run a classroom auction. Please listen carefully as I read the instructions for this auction. I am passing out blank index cards and you should each take ONE card. You should not write anything on this card until told to do so. n I (the teacher) will be auctioning off to the highest bidders "fun size" M&M packets (1. 69 oz), which you can see here in my hand. I will sell up to three packets. You can each purchase a maximum of one packet. Prior to participating in the auction, think about the maximum price at which you would be willing to buy an M&M packet. You will be required to pay in U. S. currency, so please do not bid values above $0 if you are not prepared to pay. Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 3

MB MC Demand n The auction begins with every student standing, so please stand up now. I am writing on the board the starting price for the auction, which will be $0. I will then begin to increase the price. By remaining standing, you are indicating that you would be willing to buy a packet of M&Ms at the price most recently announced. If at any point in the auction, the announced price rises above the maximum price at which you are willing to buy a packet, you should sit down. n When you sit down, please write on your index card the price that came before the announced price that caused you to sit down. In other words, write down the price that was either equal to or less than the maximum price that you were willing to pay for the M&M packet. You do not write anything else on the card. Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 4

MB MC Demand n The price will rise until three or fewer students remain standing. At this point the price stops rising and all bidders still standing will pay this price in exchange for a packet of M&Ms. I ask that these winning bidders estimate the maximum amount that they were willing to pay for the M&M packet, if the price had continued rising, and write it down on their index cards. We will then graph the results: DATA ENTRY WEBSITE http: //www. econport. org/content/teaching/modules/Demand. Supply/ Demand. Exp. html n Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 5

MB MC AUCTION: SUPPLY n I am now going to run another classroom auction that is similar to the previous one we ran with the exception that instead of selling M&M packets through the auction, I will be buying M&M packets. Please listen carefully as I read the instructions for this auction. I am passing out blank index cards and you should each take ONE card. You should not write anything on this card until told to do so. I am also passing around "fun size" M&M packets (1. 69 oz). You should each take just ONE packet. Please do not take any more than one packet. n I (the teacher) will be purchasing up to three M&M packets from students in the classroom. You can sell a maximum of one packet each. Prior to participating in the auction, think about the minimum price at which you would be willing to sell your M&M packet to me Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 6

MB MC SUPPLY n The auction begins with every student standing, so please stand up now. I am writing on the board the starting price for the auction, which will be $3. I will then begin to decrease the price. By remaining standing, you are indicating that you would be willing to sell your packet of M&Ms at the price most recently announced. If at any point in the auction, the announced price drops below the minimum price at which you are willing to sell a packet, you should sit down. When you sit down, please write on your index card the price that came before the announced price that caused you to sit down. In other words, write down the price that was either equal to or greater than the minimum price that you were willing to accept for giving up your M&M packet. You do not write anything else on the card. Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 7

MB MC SUPPLY n The price will decline until three or fewer students remain standing. At this point the price stops declining and all bidders still standing will receive this price in exchange for a packet of M&Ms. We ask that these winning bidders estimate the minimum amount that they were willing to accept for giving up their M&M packet, if the price had continued declining, and write it down on their index cards. MARKET ANALYSIS: DATA ENTRY- Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 8

MB MC n Supply and Demand: BELLWORK- Sept. 24 How do consumers get the goods and services they want in the right quantities and qualities? Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 9

MB MC n Supply and Demand: An Introduction Why do some goods and services have shortages or surpluses and others do not? l Some good and supplies services are regulated by government Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 11

MB MC n What, How, and For Whom? Three Problems All Economic Systems Must Address What should be produced? l How should it be produced? l For whom will it be produced? l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 12

MB MC n What, How, and For Whom? Free-Market or Capitalist Economic System l Individual choices determine: u Which careers to pursue u Which products to produce or buy u When to start and shut-down a business u Who gets what is decided by individual preferences and purchasing power Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 13

MB MC READING DAY n Students will read Freakonomics during the rest of their class in preparation to address Question 2 in their Freakonomics Paper. Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 14

MB MC n Market l n Buyers and Sellers In Markets Consists of all buyers and sellers of a good or service What do you think? l What determines the price of pizza, gasoline, a car wash, or other goods and services? Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 16

MB MC n Buyers and Sellers In Markets The Demand Curve l A schedule or graph that tells us the quantity of a good that buyers wish to buy at each price Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 17

MB MC n Buyers and Sellers In Markets A Property of Demand As price of a good or service goes down the quantity consumers wish to buy will increase l Therefore, the demand curve is downwardsloping l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 18

MB MC The Daily Demand Curve for Pizza in Chicago Price ($ per slice) 4 3 2 Demand 8 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 12 16 Quantity (1000 s of slices per day) Slide 19

MB MC n Buyers and Sellers In Markets The Demand Curve l Why do buyers purchase a greater quantity at lower prices and vice-versa? u The substitution effect u The income effect Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 22

MB MC n Buyers and Sellers In Markets The Substitution Effect l The change in the quantity demanded of a good that results because buyers switch to substitutes when the price of the good changes Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 23

MB MC n Buyers and Sellers In Markets The Income Effect l The change in the quantity demanded of a good that results because a change in the price of a good changes the buyer’s purchasing power Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 24

MB MC n Buyers and Sellers In Markets The Cost-Benefit Principle The reservation price is the benefit the buyer receives from the good l The cost of the good is its market price l If the reservation price (benefit) exceeds the market price (cost) the consumer will purchase the good l At higher prices, benefit will exceed cost for a smaller quantity than at lower prices l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 25

MB MC Buyers and Sellers In Markets Price ($ per slice) The buyers reservation price: The largest dollar amount the buyer would be willing to pay for a good 4 3 2 Demand 8 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 12 16 Quantity (1000 s of slices per day) Slide 26

MB MC Buyers and Sellers In Markets Horizontal Interpretation Price ($ per slice) Price determines quantity demanded 4 3 2 Demand 8 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 12 16 Slide 27

MB MC Buyers and Sellers In Markets Vertical Interpretation Price ($ per slice) Quantity measures the marginal buyer’s reservation price 4 3 2 Demand 8 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 12 16 Slide 28

MB MC n What do people want to wear? -Demand Activity http: //www. econedlink. org/lessons/index. php? lid=458&type=student Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 29

MB MC n n n How many hours would you study if you were paid $1 an hour? $10 an hour? If you would study more at a higher price, you are following the Law of Supply. Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 33

MB MC n Buyers and Sellers In Markets The Supply Curve l A curve or schedule showing the quantity of a good that sellers wish to sell at each price Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 34

MB MC n Buyers and Sellers In Markets Question l Will the opportunity cost of producing additional units of pizza increase or decrease? Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 35

MB MC n Buyers and Sellers In Markets The Supply Curve l Sellers must receive a higher price to produce additional units of product to cover the higher opportunity costs of each additional unit Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 36

MB MC The Daily Supply Curve for Pizza in Chicago Price ($ per slice) Supply 4 3 2 8 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 12 16 Quantity (1000 s of slices per day) Slide 37

MB MC The Daily Supply Curve for Pizza in Chicago Horizontal Interpretation Price ($ per slice) Supply 4 Shows the quantity produced for each price 3 2 8 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 12 16 Quantity (1000 s of slices per day) Slide 38

MB MC The Daily Supply Curve for Pizza in Chicago Vertical Interpretation Price ($ per slice) Supply 4 Shows the marginal cost (reservation price) for producing each additional unit 3 2 8 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 12 16 Quantity (1000 s of slices per day) Slide 39

MB MC n The Daily Supply Curve for Pizza in Chicago Seller’s Reservation Price l The smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 40

MB MC n n n Thus, the Law of Supply states that the quantity supplied varies directly with its price. In other words, if prices are high, suppliers will offer greater quantities for sale. If prices are low, they will offer smaller quantities for sale. Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 41

MB MC n n Students will read article, to prepare them for the day’s activity. http: //www. econedlink. org/interactives/i ndex. php? iid=221&type=student Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 44

MB MC n Equilibrium l n Market Equilibrium A system is in equilibrium when there is no tendency for it to change Market Equilibrium l Occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 45

MB MC The Equilibrium Price and Quantity of Pizza In Chicago Price ($ per slice) Supply Equilibrium at $3 Quantity Demanded = Quantity Supplied 4 3 2 Demand 8 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 12 16 Quantity (1000 s of slices per day) Slide 46

MB MC n Market Equilibrium Price and Equilibrium Quantity l The values of price and quantity for which quantity supplied and quantity demanded are equal Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 47

MB MC n Market Equilibrium What Do You Think? Would buyers prefer a lower price than the equilibrium price? l Would sellers prefer a higher price than the equilibrium price? l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 48

MB MC Excess Supply Price ($ per slice) Excess supply = 8, 000 slices per day Supply 4 3 2 Demand 8 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 12 16 Quantity (1000 s of slices per day) Slide 49

MB MC Excess Demand Price ($ per slice) Supply 4 Excess demand = 8, 000 slices per day 3 2 Demand 8 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 16 Quantity (1000 s of slices per day) Slide 50

Points Along the Demand Supply Curves of a Pizza Market MB MC Demand for pizza Supply of pizza Price ($/slice) Quantity demanded (1000 s of slices/day) Price ($/slice) Quantity supplied (1000 s of slices/day) 1 8 1 2 2 6 2 4 3 6 4 2 4 8 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 51

MB MC Graphing Supply and Demand Finding the Equilibrium Price and Quantity Price ($per slice) Supply 5 4 The Equilibrium Price = $2. 50 The Equilibrium Quantity = 5 3 2. 50 2 1 0 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Demand 2 4 5 6 8 10 Quantity (1000 s of slices per day) Slide 52

MB MC Activity Students will complete worksheet. This is your Exit Slip for today’s class. http: //www. econedlink. org/lessons/docs_l essons/747_Changing. Your. Price 15. pdf Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 53

MB MC Bellwork- Oct. 2 n What Do You Think? l Is the market equilibrium always an ideal outcome for all market participants? Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 54

MB MC An Unregulated Housing Market Monthly Rent ($/apartment) Supply What Do You Think? Is $1600 more than some people can afford? 1, 600 Demand 2 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Quantity (Millions of apartments/day) Slide 57

MB MC Rent Controls Monthly Rent ($/apartment) Supply 2, 400 Excess demand = 2 million apartments per month 1, 600 Controlled = 800 Demand 0 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 1 2 3 Quantity (Millions of apartments/day) Slide 58

MB MC n Market Equilibrium Rent Controls Reconsidered l Other consequences of rent controls u Maintenance will decline and housing quality will fall u Illegal payments u Creation of co-ops and conversion to condominiums u Reduction in household mobility u Discrimination Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 59

MB MC n Market Equilibrium What do you think? l How can we make housing affordable for poor people without using rent ceilings? Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 60

MB MC Rent Controls Monthly Rent ($/apartment) Supply 1, 200 What is the impact of a rent control set at $1, 200/month? 800 Demand 0 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 1 2 3 Quantity (Millions of apartments/day) Slide 61

MB MC Price Controls In The Pizza Market Price ($ per slice) Supply 4 Excess demand = 8, 000 slices per day 3 Price ceiling = 2 Demand 8 Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 12 16 Quantity (1000 s of slices per day) Slide 62

MB MC n Market Equilibrium Pizza Price Controls? l Market responses to a pizza price ceiling u Long lines u Preferential treatment to selected customers u Alternative pricing strategies u Poorer quality ingredients u Black-market pizzas Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 63

MB MC Price Ceiling Questions 1. Make a list of who wins and who loses under rent control. 2. What happens to all of the dissatisfied apartment-seekers? Make a list of alternative rationing devices. 3. How do rent controls affect the following? Amount of new rental property Quality of rental property Age of population 4. How would you predict residents of rent-controlled units would vote on a referendum to repeal rent-control laws? Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 65

MB MC Predicting and Explaining Changes In Prices and Quantities Gasoline Activity: http: //www. stlouisfed. org/education_resou rces/assets/lesson_plans/07 ITV_Shifting Curves. pdf Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 67

MB MC n Predicting and Explaining Changes In Prices and Quantities Shifts in Demand l Changes In Demand u An increase (decrease) in the demand for a good will shift the demand curve to the right (left) Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 68

MB MC n Predicting and Explaining Changes In Prices and Quantities A Change In Income l Normal Good u One whose demand increases (decreases) when the incomes of buyers increase (decrease) Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 69

MB MC n Predicting and Explaining Changes In Prices and Quantities A Change In Income l Inferior Good u One whose demand decreases (increases) when the incomes of buyers increase (decrease) Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 70

MB MC n Predicting and Explaining Changes In Prices and Quantities Factors that Shift Demand Price of complements l Price of substitutes l Income l Preferences l Population of potential buyers l Expectations l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 71

MB MC n Predicting and Explaining Changes In Prices and Quantities Factors that Shift Supply Costs of production l Technology l Weather l Number of suppliers l Expectations l Copyright c 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved. Slide 72