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January 5, 2012 Name __________________
Main Ideas Concepts Details Discussion Questions
What are the main ideas? 1. Ideas connected to the main idea concept in the left column.
2. Ideas related to the previously stated purpose for reading.
3. Ideas important enough to be on the test.
4. Ideas the students find especially interesting.
1. Text explicit questions are “right there.”2. Text implicit questions are “think and
search.” Information is taken from several places in the text and infers from what the text implicit states.
3. Experience-based questions are “on your own.” Based on your prior experience and will vary. Do you think; How would you; If you; Do you think… Explain why; Where would you.
Prices and Making Decisions Chapter 6
Economic Standards being addressed are:
E.2.2.2, E1.3.1, E1.3.2, E1.3.3, E1.4.4, E1.4.5, E2.1.4, E2.1.9, E2.2.2, E2.2.3, E3.2.2, and E3.2.5
After you are done reading Chapter 6, what is the big idea of this chapter? There is a maximum of 15 words to your answer.
2
Directions: While reading the following text, fill in the blanks, write the definitions of all red words and list at least 3 unfamiliar words with their meaning, AND write additional notes on the side.
Section 1: Prices as SignalsLife is full of signals that help us make decisions. For example, when you pull
up to an intersection, you look to see if the traffic light is green, yellow, or red. We look at the other cars to see if any have their blinkers on, signaling their intentions to turn. While these are clear and obvious signals, there are other, more hidden ones. Pain, for example, signals you that something is wrong with your body. But how do signals work in the economy?
It turns out that something as simple as a price- the monetary value of a product as established by supply and demand- is a signal that helps us make economic decisions. Price gives information to buyers and sellers. High prices signal buyers to buy less and producers to produce more. Low prices signal buyers to buy more and producers to produce less. One of the spookiest features of the current economy crisis is the way everything seemed to go wrong at the same time. In 2007, as if some kind of secret signal went out among them, housing prices accelerated their decline while the prices of oil and food rocketed higher. These changes were abrupt, as they slammed into the economy with little forewarning of even bigger price shocks just ahead. The numbers are striking: from May 2007 to May 2008, the price of food jumped by 5.1 percent; in 2007, home prices fell 10 percent; over the course of 2007, oil zoomed to $92 from $62 a barrel and by the mid-2008, it was over $130 a barrel (New York Times). These housing, food and oil prices signaled an economic recession.
Advantages of Prices Prices help producers and consumers decide the three basic questions of WHAT, HOW, and FOR WHOM to produce. Without prices, the economy would not run as smoothly, and allocation decisions would have to be made some other way. Prices perform this function well for several reasons.
First, in a competitive market economy, prices are neutral because they favor neither the producer nor the consumer. Since prices are the result of competition between buyers and sellers, they represent compromises that both sides can live with.
Second, prices in a market economy are flexible. Unforeseen events such as natural disasters and war affect the prices of many items. Buyers and sellers then react to the new level of prices and adjust their consumption and production accordingly. Before long, the system adjusts and functions as smoothly again as it had before. The ability of the price system to absorb unexpected “shocks” is one of the strengths of a market economy.
Third, most people have known about prices all their lives. As a result, prices are familiar and easy to understand. There is no ambiguity over a price- if something costs $1.99, then we know exactly what we have to pay for it. This allows people to make decisions quickly and efficiently, with a minimum of time and effort.
Finally, prices have no cost of administration. Competitive markets tend to find their own prices without outside help or interference. No bureaucrats need to be hired, no committee formed, no laws passed, or other decisions made. Even when prices adjust from one level to another, the changes are usually so gradual that people hardly notice.
Essential Question: If prices act as “signals,” do we all react to the signals in exactly the same way?
Main Idea:
Adva
ntag
es o
f Pr
ices
3
Americans are constantly in motion. The popularity of cell phones and laptop computers illustrates this point. Luckily for on-the-go- consumers, the prices of these mobile products are falling. The average cost of a laptop in 2001 was more than $1,500. Each year, the average price has dropped by several hundred dollars. Competition has played the biggest role in the downward spiral of profits for laptop makers. In 2005, the profit margin for most laptops was only $50. This meager profit means that manufacturers are aiming for high sales volume rather than high profit margins. They are also counting on consumers to spend more on expensive accessories, such as service plans, docking stations, and batteries. How does this impact you? Consumers expect lower prices and a wider selection. In addition, the competition ensures innovation, as manufacturers search for the gadget or accessory that none of us can do without.
Allocation Without PricesPrices help us make the everyday economic decisions that allocate scarce
resources. But what would life be like without a price system? Would intelligence, good looks, political connections, or how tall you are (must be fun sized to get a cool car) determine the allocations? These criteria may seem far-fetched (with the exception of being fun sized to get a cool car), but this happens in countries with command economies. When the Baltimore Orioles played an exhibition baseball game in Cuba several years ago, there were not enough stadium seats for the local baseball fans who wanted to attend. Fidel Castro then solved the FOR WHOM questions by giving the seats to Communist Party members- whether or not they were baseball fans.
Without prices, another system must be used to decide who gets what. One method is rationing- a system in which a government agency decides everyone’s “fair” share. Under such a system, people receive a ration coupon, a ticket or a receipt that entitles the holder to obtain a certain amount of a product. The coupon can be given to people outright, or the government can charge a modest fee that is less than the product’s market value. Rationing has been widely used during wartime, but it can lead to problems.
The first problem with rationing is that almost everyone feels his or her share is too small. During the energy crisis of the early 1970s, the government made plans for, but never implemented, gasoline rationing. One problem was determining how to allocate the rationing coupons in a way that everyone would see as fair. A number of ways to allocate gas coupons were debated, but the issue of fairness was never resolved.
The second problem is the administrative cost of rationing. Someone must pay the salaries and the printing and distribution costs of the coupons. In addition, no matter how much care is taken some coupons will be stolen, sold, or counterfeited and used to get a product intended for someone else.
The third problem is the negative impact on the incentive to produce. What if you were paid with ration coupons and you received the same number of coupons as your coworkers? Without the possibility of earning more coupons, you might lose some of your incentive to work.
Average laptop price
Main Idea:
Prob
lem
s with
Ra
tioni
ng
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Prices as a SystemBecause of the difficulties with nonprice allocation systems, economists
overwhelmingly favor the price system. In fact, prices do more than help individuals make decisions: they also serve as signals that help allocate resources between markets.
Consider the way in which higher oil prices affected producer and consumer decisions when the price of oil went from under $35 to over $70 a barrel in 2005 and 2006. Because the demand for oil is basically inelastic (I still need to drive to work every day), people spent a greater part of their income on energy. Higher energy costs left them with less to spend elsewhere.
The SUV market was one of the first to feel the effects of high prices. Because most of these vehicles got poor gas mileage, people bought fewer SUVs, leaving dealerships with huge inventories. To move these inventories, some manufacturers offered consumers a rebate- a partial refund of the original price of the product. The rebate was the same as a temporary price reduction, because consumers were offered thousands of dollars back on each new car they bought. Other dealers offered zero-interest financing.
Finally, automakers had to reduce their production of these vehicles. Ford Motor Company, for example, closed plants, laid off workers, and tried to sell more fuel-efficient cars. In the end, the result of higher international oil prices to shift productive resources out of SUV production into other products. Although the adjustment process was painful for many in the industry, it was a natural and necessary shift of resources for a market economy.
In the end, prices do more than convey information to buyers and sellers in a market; they also allocate resources between markets. This is why economists think of prices as a “system”- part of an informational network - that links all markets in the economy.
Section 1 Readings:
Directions: Using your notes taken from the text, answer the following questions. If you need to go back to the text to find the information, then your notes need more attention and detail. Not all of the answers will be directly from the text, as there are text implicit questions (think and search) and experience based questions (justify your own opinion) so you will have to use the information from the text and your own knowledge and logic to figure out an answer.
1. What two groups do prices link in the market? _______________________ and _____________________
2. In what way do prices perform the allocation function? __________________________________________
________________________________________________________________________________________
3. How do you think the profit margin for laptops sold in 2001 differed from the profit margin for laptops sold
in 2009? ________________________________________________________________________________
Main Idea:
5
a. What was the reason for that difference? _______________________________________________
4. What are the differences between the price system and rationing?
a. Price System_______________________________________________________________________
b. Rationing _________________________________________________________________________
5. Why are prices an efficient way to allocate goods and services?
________________________________________________________________________________________
________________________________________________________________________________________
6. How are most buyers likely to act if the price of a good goes up? ___________________________________
7. Why is allocating resources without prices difficult? _____________________________________________
________________________________________________________________________________________
8. Explain why prices are neutral ______________________________________________________________
9. How does rationing diminish people’s incentives to work and produce? _____________________________
10. The ___________________________ system lends itself to rationing because ________________________
answer the three economic questions. The ___________________________ system lends itself to price
system because _______________________ answer the three economic questions.
11. How do you think the actions of automakers would have been different if oil prices had dropped in mid-
2008? __________________________________________________________________________________
________________________________________________________________________________________
12. Create two other questions from the text and answer them.
a. Question 1:
i. Answer:
b. Question 2:
i. Answer:
6
Chapter 6.1 Power Point Notes
Chapter 6 ties together your previous learning on economic markets, demand, and supply. Section 1 discusses price as signals to producers and consumers.Section 2 explains how equilibrium prices are determined, and describes shortages and surpluses.Section 3 describes how prices operate in the economy as a whole.
Why It Matters: Why is it that famous athletes and entertainers make millions of dollars each year? Imagine that you are one of these athletes or entertainers and will be interviewed on a major television program. Knowing that the interviewer will ask you why you make so much money, prepare a list of 6 reasons that explain why you are worth your salary.
1. ________________________________________________________________________________________________________________________________________________________________________________
2. ________________________________________________________________________________________________________________________________________________________________________________
3. ________________________________________________________________________________________________________________________________________________________________________________
4. ________________________________________________________________________________________________________________________________________________________________________________
5. ________________________________________________________________________________________________________________________________________________________________________________
6. ________________________________________________________________________________________________________________________________________________________________________________
I. Prices as signalsA. Objectives
1. Explain how prices act as signals to both producers and consumers.2. Describe the advantages of using prices as a way to allocate to (set apart for a particular purpose)
economic products.3. Understand the difficulty of using rationing and other non-produce criteria to allocate scarce goods
and services.
B. Economic Signals 1. Signal- anything that serves to indicate, warn, direct, command, or the like, as a light, a gesture, an
act, etc.: a traffic signal; a signal to leave2. In economics we look at prices
a. Prices- the monetary value of a product as established by supply and demandb. Gives information to both buyers and sellers
1) Low prices signal buyers to buy more and producers to product less2) High prices signal buyers to buy less and producers to produce more3) Positive GNP signals a growing economy4) High housing, food and energy prices signals a recession
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C. Advantages of Price1. Prices serve to allocate (to set apart for a particular purpose) resources by helping producers and
consumers decide how to answer the three basic questions of WHAT, HOW, and FOR WHOM to produce
2. In a competitive market, the advantages of prices are:a. Neutral
1)Prices are result of competition between buyers and sellers, they represent a compromises that both sides can live with
b. Flexible1) Unforeseen events (natural disasters, wars, life…) affect prices
a) Buyers and sellers react to new price levels and adjust consumption and productionb) Life goes back to normal and the market or prices goes back to normal
2) Major innovations enter the economya) Computers- began being very expensive, consumers demanded that they be
cheaper and the market adjustedc. Familiar and easy to understand
1)People know how it works, so there is no ambiguity (uncertainty or doubt) over prices2)If something costs $5.99, then it costs $5.99
d. Have no administration cost1)Prices are usually found in the market place without interference from bureaucrats,
committees, laws or other governmental involvementa) an official who works by fixed routine without exercising intelligent judgment
2)New innovations enter the economy without the involvement of government
D. Allocations Without Prices1. Command Economy
a. An economic system characterized by a central authority that makes most of the major economic decisions
1) The central government serve to allocate (to set apart for a particular purpose) resources by telling producers and consumers WHAT, HOW, and FOR WHOM to produce and consequence buy
b. Rationing- a system under which a government agency decides everyone’s “fair” share1) People are given ration coupons that entitles the holder to receive a specified amount of
product2) Problems with rationing
a) Everyone feels that their share is too smallb) The government must spend an enormous amount of their resources on
overseeing, administrating, and policing the rationing systemc) Diminishes incentive to produce
i. Would you work harder than your colleague if you were going to receive the same ration as them?
2. Wartimea. The U.S. government has used rationing during wartime, but the problems are the same
8
E. Prices as a System1. Prices allocate resources between markets
a. If prices go up or down in one market, producers shift their resourced accordingly in their market
1) Due to higher gas prices, the U.S. automobile industry had to shift its SUV production to some other fuel efficient car which led to plants closing and the automobile companies laying off workers. Due to the automobile industry not producing so many cars, the market that had the contract to move the cars from the factory to the dealerships had to shift its resources and cut its fleet and personnel. The unemployed worker (automobile and trucking personnel) keep their children at home because there is no need or resources (money) to take their child to daycare (market). In turn, the daycare needs to lay people off because they lose children and don’t need all of their employees.
2) Prices work as a system- part of an informational network- that links all the markets together (interdependent)
Part 1 of the Assignment: Cookie Sales
Setting Prices: Students will set prices for cookies based on their estimates of production costs and potential demand.
You will be organized into groups and assigned a type of cookie. With the information below and your own research, you will find out how much it would cost to produce four dozen cookies. Include all ingredients plus the cost of advertisements (posters and markers) in your cost analysis. Then you will evaluate the potential demand for your cookies. (Remember what we did in Chapter 4? Each person in your group needs to ask at least 10 people) Finally, make a guess as to what you think the equilibrium price for the cookies will be.
Chocolate Chip Cookies
1 cup butter, softened 3/4 cup granulated sugar 3/4 cup firmly packed brown sugar 2 eggs 1 tsp. vanilla 2-1/4 cups flour 1 tsp. baking soda 1/4 tsp. salt 12 oz. semi-sweet chocolate chunks
Peanut Butter Cookies
2-1/2 cups flour 1 tsp. baking powder 1 tsp. baking soda 1/2 tsp. salt 1 cup butter, softened 1 cup creamy peanut butter 1 cup each granulated and packed brown sugar 2 eggs
1 tsp. vanilla Sugar Cookies
3-1/4 cups flour 2 tsp. baking powder 1/2 tsp. salt 3/4 cup butter, softened 1-1/2 cups granulated sugar 2 eggs 1 Tbsp. milk 1-1/2 tsp. vanilla
Oatmeal Cookies
¾ cup butter1 cup packed brown sugar½ cup granulated sugar1 teaspoon baking powder¼ teaspoon baking soda1 egg1 teaspoon vanilla1¾ cups all-purpose flour
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2 cups rolled oats
Oats 18oz $2.99 Salt 26oz $1.18 Choco Chips 12oz $2.30Vanilla Extract 1oz $3.58 Baking Powder 10oz $4.65 Baking Soda 1lb $1.50Brown Sugar 32oz $2.19 Flour 5lb $1.99 Sugar 5lb $3.75Peanut Butter 28oz $5.99 Butter 2 cup 4.99 Eggs 12 $2.50Milk 1 gallon $3.99
1 tablespoon = 3 teaspoons = 1/2 ounce 4 tablespoons = 1/4 cup = 2 ounces 8 tablespoons = 1/2 cup = 4 ounces 16 tablespoons = 1 cup = 8 ounces 1 cup = 8 ounces = 1/2 pound 16 ounces = 1 pint = 1 pound 128 oz.=16 cups = 8 pints = 4 quarts = 1 gallon
Demand SchedulePric
eQuantity
Demanded30 025 120 315 610 105 15
Supply Schedule
Price Quantity Supplied
30 1325 1120 915 610 35 0
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Directions: While reading the following text, fill in the blanks, write the definitions of all red words and list at least 3 unfamiliar words with their meaning, AND write additional notes on the side.
Section 2: The Price System at Work
One of the most appealing features of a competitive market economy is that everyone who participates has a hand in determining prices. This is why economists consider prices to be neutral and impartial.
The process of establishing a price can be complicated- or even contentious- because buyers and sellers have exactly the opposite hopes and desires. Buyers want to find good buys at low prices. Sellers hope for high prices and large profits. Neither can get exactly what they want, so some adjustment is necessary to reach a compromise. Bids on the best seats in the house for a popular rock star’s concert commonly start at the face-value price of $350. Do I hear $450? Going once, going twice… Sold! To the person online. Tired of competition from scalpers, Ticketmaster and its clients are now auctioning “premium seats” to concerts, sports meets, and other events. This practice, dubbed “dynamic pricing,” allows customers to set their own prices. Competitors see it differently, saying the practice allows Ticketmaster to scalp its own tickets. (Scalping is a second-degree misdemeanor under Florida state law, punishable up to 60 days in jail and a $500 fine.) Will consumers pay too much for tickets? Most economists would argue that as long as the process is competitive and the transaction voluntary, then the price will be about right under a bidding system and that dynamic pricing endorses a free market economic principle: namely, that the market determines the fair value of a ticket.
The Price Adjustment Process Because transactions in a market economy are voluntary, the compromise
that settles the differences between buyers and sellers must be to the benefit of both, or the compromise would not occur.
A Market Model Separately, each of these schedules and curves represents either the
demand or supply side of the market. When the schedules and curves are combined, we have a complete model of the market, which will allow us to analyze how the interaction of buyers and sellers results in a price agreeable to all market participants. In other words: You take the demand schedule and a supply schedule and smack them together in one schedule to form a Market Demand and Supply Schedule.
+ =
Market Demand and Supply Schedule
Price
Quantity Demanded
Quantity Supplied
30 0 1325 1 1120 3 915 6 610 10 35 15 0
Essential Question: What factors can cause a change in the market price of a product?
Main Idea:
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Then you graph both on one graph and create a Market Demand and Supply Curve. (How cool and easy is that?.... for most of you… see why I insisted that you understand both of those chapters?...)
+
To show how the adjustment process works, economists use this illustration- one of the more popular “tools” used by economists. The figure illustrates how we can use an economic model to analyze behavior and predict outcomes. The purpose of an economic model is a simplified version of a complex behavior expressed in the form of an equation, graph, or illustration. Other examples of economic models are the product possibility frontier and circular flow diagram from Chapter 1 where complex economic activities are explained by simple models.
Note that the supply and demand curves intersect at a specific point. This point is called the equilibrium price, the price at which the number of units produced equals the number of units sold. It means that at this price there is neither a surplus nor a shortage of the product in the market. But how does the market reach this equilibrium price, and why does it settle at $15 rather than some other price? To answer these questions, we have to examine the reactions of buyers and sellers to different market prices. When we do this, we assume that neither the buyer nor the seller knows the final price, so we’ll have to find it using trial and error.
Main Idea:
Equilibrium Price
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Price
In D
olla
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Quantity Supplied
Supply Curve
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in D
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Quantity Demanded
Demand Curve
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0 2 4 6 8 10 12 14 16
Price
Quantity
Market Demand and Supply Curve
D S
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SurplusWe start on Day 1 with sellers thinking that the price will be $25.
If you examine the supply schedule, you will see that suppliers will produce 11 units for sale at that price. However, the suppliers soon discover that buyers will purchase only one unit at a price of $25, leaving a surplus of 10. A surplus is a situation in which the quantity supplied is greater than the quantity demanded at a given price. (Produce 11 units and 1 unit is demanded or 11-1= 10 units are left over).
It can also be shown graphically as the horizontal distance between the supply and demand curves at a price of $25.
This surplus shows up as unsold products on supplies’ shelves, and it begins to take up space in their warehouses. Sellers know that $25 is too high, and they know that they have to lower their price if they want to attract more buyers and dispose of the surplus. Therefore, the price tends to go down as a result of the surplus. The model cannot tell us how far the price will go down, but we can reasonably deduce that the price will go down only a little if the surplus is small, and much more if the surplus is larger.
Market Demand and Supply Schedule
Price Quantity Demanded
Quantity Supplied
Surplus/ Shortage
30 0 13 1325 1 11 1020 3 9 615 6 6 010 10 3 -75 15 0 -15
Surplus = 10 Notice that a surplus is ABOVE the equilibrium price or the point where the two curves cross.
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Price
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Market Demand and Supply Curve
DS
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ShortageSuppliers are more cautious on Day 2, so they anticipate a much lower price of $10.
At that price, the quantity they are willing to supply changes to three units. However, this price turns out to be too low. At the market price of $10, only three units are supplied and 10 are demanded- leaving a shortage of seven units. When you have a shortage, it is always a negative (-) number.
A shortage is a situation in which the quantity demanded is greater than the quantity supplied at a given price (at $10 supplier will supply 3 units and consumers will demand 10 units or 3-10= -7). When a shortage happens, producers have no more units to sell, and they end the day wishing that they had charged a higher price for their products.
Shortage can also be shown graphically as the horizontal distance between the supply and demand curves at a price of $10.
As a result of the shortage, both the price and the quantity supplied will go up in the next trading period. While our model does not show exactly how much the price will go up, we can assume that the next price will be less than $25, which we already know is too high.
Shortage= 7
Notice that a shortage is BELOW the equilibrium price or the point where the two curves cross.
0
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0 5 10 15 20
Price
Quantity
Market Demand and Supply Curve
DS
Market Demand and Supply Schedule
Price Quantity Demanded
Quantity Supplied
Surplus/ Shortage
30 0 13 1325 1 11 1020 3 9 615 6 6 010 10 3 -75 15 0 -15
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Equilibrium Price If the new price is $20 on Day 3, the result will be surplus of six units. This surplus
will cause the price to drop again, but probably not below $10, which already proved to be too low. However, if the price drops to $15, the market will have found its equilibrium price. As you learned earlier, the equilibrium price is the price that “clears the market” by leaving neither a surplus nor a shortage at the end of the trading period.
While our economic model of the market cannot show exactly how long it will take to reach equilibrium, the temporary surpluses and shortages will always be pushing the price in that direction. Whenever the price is too high, the surplus will tend to force it down. Whenever the price is too low, the shortage will tend to force it up. As a result, the market tends to seek its own equilibrium.
When the equilibrium price of $15 is finally reached, it will tend to remain there because the quantity supplied is exactly equal to the quantity demanded. Something could come along to disturb the equilibrium, but then new shortages, new surpluses, or both would appear to push the price toward its new equilibrium level.
Think of how much more difficult it would be to reach an equilibrium price if we did not have markets to help us with these decisions. You already learned that prices are neutral, flexible, understood by everybody, and free of administrative costs. It would be difficult to find another system that works equally well at setting equilibrium price at exactly $15 and the equilibrium quantity at exactly six units. Also, when markets set prices, everybody has a hand in determining the outcome.
Explaining and Predicting PricesEconomists use their market models to explain changes in prices. A change in price
is normally caused by a change in supply, a change in demand, or changes in both. Elasticity is also important when predicting how prices are likely to change.
Change in SupplyConsider agriculture, which often experiences wide swings in prices from one y to
the next. A farmer may keep up with all of the latest developments and have the best advice experts can offer, but the farmer can never be sure what price to expect for the crop. For example, a soybean farmer may put in 500 acres of beans, hoping for a price of $9 a bushel. However, the farmer also knows that the actual price may end up being anywhere from $5 to $20 (history has taught him that).
Weather is one of the main reasons for variations in agricultural prices. If it rains too much after planting, the seeds may rot or be washed away and the famer must replant. If it rains too little, the seeds may not sprout. Even if the weather is perfect during the growing season, rain can still interfere with the harvest. The weather then often causes a change in supply.
The result is that the supply curve for agricultural products is likely to shift, causing the price to go up or down. At the beginning of the season, the farmer may expect supply to look like curve S. If a bumper or record crop is harvested, however, supply may look like S1. If severe weather strikes, supply may look like S2. In either case the price of soybeans is likely to change dramatically.
Main Idea:
0
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of S
oybe
ans
Quantity in Bushels
Soybean Prices
D S1SS2
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Price
of O
il
Quantity in Barrels
Energy Prices
D2 D D1 S
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Change in DemandA change in demand, like change in supply, can affect the price of a good or
service. All of the factors we examined in Chapter 4 (change in income, tastes, price of related products, expectations, and the number of consumers) affect the market demand for goods and services. One example is the demand for oil.
A modest increase in demand, illustrated by a shift from D to D1, causes a large increase in the price. This is exactly what happened in the mid-2008 when economic growth, especially in China and India, increased the demand for energy and drove the price of oil to over $140 a barrel. The high oil prices, along with
housing market problems, then caused a decline in economic growth, which brought the price of oil back down, shifting the demand to D2. Because both the supply and the demand for oil are inelastic, the price of oil changes dramatically when supply or demand changes.
Change in Supply and DemandIn the real world, changes in both supply and demand often affect prices. For
example, we know that strong economic growth in 2005 caused the demand curve for oil to increase (or shift to the right), which drove prices up.To make matters worse, hurricanes Katrina and Rita tore through the Gulf of
Mexico, destroying and disabling hundreds of drilling platforms, refineries, and storage facilities. This caused the supply of oil to decrease (or shift to the left), driving the price of gasoline even higher. The resulting combination of increased demand and decreased supply gave the U.S. economy some of the highest energy prices it had seen since the 1970s.
The Importance of ElasticityWhenever supply or demand for a product fluctuates, the elasticity of the two
curves affects the size of the price change. To illustrate, both curves are relatively inelastic for “Soybean Prices” and “Energy Prices.” You can see that the change in price is relatively large when supply changes in “Soybean Prices” and “Energy Prices” shows that the change in price is also large when demand shifts. If one or both curves are elastic, though, the change in price will be smaller. Fortunately there are ways for us to determine the elasticity of both supply and
demand. This means that we can predict how prices are likely to change if we know the elasticity of each curve and the underlying factors that cause the supply and demand curves to change.Prices and Competitive Markets
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Change in Demand and Supply Curve for Oil in 2005
D D1 SS1
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Economists like to see competitive markets because the price system is more efficient when markets are competitive. A perfectly competitive market requires a set of ideal conditions and outcomes that are seldom found in the real world, but fortunately markets don’t have to be perfect to be useful. As long as prices are allowed to adjust to new levels of response to the pressures exerted by surpluses and shortages, price will perform their role as signals to both consumers and producers.
In the final analysis, a competitive market economy is one that “runs itself.” There is no need for a bureaucracy, planning commission, or other agency to set prices, because the market tends to find its own equilibrium. In addition, the three basic economic questions of WHAT, HOW and FORM WHOM to produce are decided by the participants- the buyers and sellers- in the market
Section 2 Readings:
Directions: Using your notes taken from the text, answer the following questions. If you need to go back to the text to find the information, then your notes need more attention and detail. Not all of the answers will be directly from the text, as there are text implicit questions (think and search) and experience based questions (justify your own opinion) so you will have to use the information from the text and your own knowledge and logic to figure out an answer.
1. Why would an economist use an economic model? ______________________________________________
2. What is market equilibrium? ________________________________________________________________
3. What is equilibrium price? __________________________________________________________________
a. How does that differ from market equilibrium? __________________________________________
_________________________________________________________________________________
b. Why is the equilibrium price important? ________________________________________________
_________________________________________________________________________________
4. Do you think it is common for sellers to offer a new product at a price well above what turns out to be the
equilibrium price? _________
a. Why? ____________________________________________________________________________
_________________________________________________________________________________
5. Demonstrate how a change in demand or supply affects the price of a product.
6. What will happen to the price you pay for concert tickets if a popular group has to move its show to a
smaller venue? ___________________________________________________________________________
Decrease
Increases
Demand / Supply
Price___________________________ / ___________________________
Price___________________________ / ___________________________
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a. Why?
_________________________________________________________________________________
____________________________________________________________________________
7. What do merchants usually do to sell items that are overstocked? __________________________________
a. What does this tell you about the equilibrium price for the product? _________________________
_________________________________________________________________________________
8. Describe the role of shortages and surpluses in competitive markets?
a. shortages_________________________________________________________________________
b. surpluses _________________________________________________________________________
9. A change in price is normally caused by a ____________________________________, _________________
________________________________, or __________________________.
10. What are the major nonprice factors that affect change in supply?
________________________________________________________________________________________
11. How does the elasticity of a good affect its price? _______________________________________________
________________________________________________________________________________________
12. How does the elasticity of supply and demand for a product affect the size of a price change?
________________________________________________________________________________________
________________________________________________________________________________________
13. What are three objects that could be used to illustrate the concept of fluctuate? (no shared answers)a. __________________________b. __________________________c. __________________________
14. What are three objects that could be used to illustrate the concept elastic? (no shared answers)a. __________________________b. __________________________c. __________________________
15. What are three objects that could be used to illustrate the concept inelastic? (no shared answers)a. __________________________b. __________________________c. __________________________
16. Directions: For each of the following items draw a supply and demand curve that would illustrate the change that would occur due to each situation. Also, state what the reasons were for the shift for each of the demand and supply curves, then tell what the resulting effect would be on prices for each situation.
a. Consumer income increased due to strong war economy.
Demand ____________________
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Supply_____________________
Effect on price _________________
b. Disco balls become the new retro trend.
Demand ____________________
Supply_____________________
Effect on price _________________
Chapter 6.2 Power Point Notes
II. The Price System at WorkA. The Price Adjustment Process
1. A Market Modela. Transactions are voluntary and based on compromise between the buyers and sellersb. Market Models allow us to analyze the compromise process between the buyers and sellers
that create a price for all market participantsc. The purpose of his economic model is to analyze behaviors and predict outcomesd. Market Demand and Supply Schedule
1) Take the demand schedule2) Take the supply schedule3) Put them together in one schedule
e. The Market Demand and Supply curve1) Create your demand curve2) Create your supply curve3) Combine them on one graph/curve
2. Equilibrium Pricea. The price at which the number of units produced equals the number of units soldb. It is where the demand curve crosses the supply curve
Practice Time: In the space provided, please tell me what the equilibrium price and equilibrium quantity would be.
Market Demand and Supply SchedulePric
eQuantity
DemandedQuantity Supplied
Surplus/ Shortag
e30 0 1325 1 1120 3 915 6 610 10 35 15 0
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3. Surplus on Market Schedulea. The quantity supplied to the market is bigger than the consumer’s demand at a given priceb. The quantity demanded is less than the quantity supplied at a given pricec. At $20, the quantity demanded is 3, while the quantity supplied is 9
1) 9 units are sitting on the shelf and only 3 people will buy a unit at that price2) The amount left over on the shelf is the surplus
d. Mathematical Formula1) QS-QD= Positive Number2) 9 – 3 = 63) Solve for $30 and $254) 13-0=135) 11-1=10
4. Shortage on Market Schedulea. Quantity demanded is greater than
the quantity suppliedb. Quantity supplied is less than the
quantity demandedc. At $10, 10 units will be demanded and 3 units will be supplied
1) There a 3 units on the shelf and 10 consumers waiting to buy them2) The number of consumers that did not receive one, but wanted one is the shortage
d. Mathematical Formula1) QS – QD = Negative Number2) 3 – 10 = -73) Solve for $54) 0-15= -15
5. Equilibrium Price on Market Schedulea. When the price is too high, surplus will force the price down and when the price is too low,
shortage will force the price up
126
132
138
144
150
0 5 10 15 20
Price
Quantity
Teddy Bears
SD
32
40
48
56
118 123 128 133 138 143
Price
Quantity
Men's Oxford Shirts
SD
20
b. The market tends to seek a compromise or common ground where there is no surplus nor shortage at the end of the trading period
c. At $15, suppliers will supply 6 units and consumers will demand 6 units1) There will be 6 units on the shelves and 6 consumers will purchase them2) The number of units supplied equals the number that consumers demand
d. Mathematic Formula1) QS – QD = 02) 6 – 6 = 0
6. Surplus on Market Curvea. Where on the graph do you believe a surplus would exist?
1) Why?
b. Surplus can also be shown graphically as any horizontal distance between the supply and demand curve above the equilibrium point
c. At $20, suppliers would produce 9 units and consumers would demand 3 units
d. Mathematical Formula1) QS – QD = Positive Number2) 9 – 3 = 6 units
7. Shortage on Market Curvea. Where on the graph do you believe a shortage
would exist?
1) Why?
b. Shortages can also be shown graphically as any horizontal distance between the supply and demand curve below the equilibrium point
c. At $10, suppliers would produce 3 units and consumers would demand 10 unitsd. Mathematical Formula
1) QS – QD = Negative Number2) 3 – 10 = -7 units
Practice Time: Examine the Demand and Supply Schedule below for Red Wing t-shirts. Information provided for you is price and quantity demanded and supplied. You are to calculate the shortage or surplus
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for each. Place the number of t-shirts in the shortage/surplus column and label whether it is a surplus, shortage, or equilibrium price.
The Demand Schedule and Supply Schedule for Red Wings T-shirts
Price Quantity Demanded Quantity Supplied Shortage/Surplus$20 1990 2800$19 2050 2750$18 2120 2700$17 2200 2650$16 2290 2600$15 2390 2550$14 2500 2500$13 2620 2450$12 2750 2400$11 2890 2350$10 3040 2300
From the Red Wings t-shirts schedule,
a. When does a surplus exist? ____________________
b. When is equilibrium reached? ____________________
c. When does a shortage exist? ____________________
Use the graph provided below graph the information from the Red Wings t-shirt schedule. In your graph be sure to label the following: title, all labels for axis/curves and the equilibrium price and quantity. Lightly shade in with different colors and label the area on the graph where a surplus and a shortage exist.
B. Explaining and Predicting Prices
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1. Economists use their market model to explain changes in pricea. Price changes in relation to change in supply, change in demand, both, and elasticity
2. Change in Supplya. It is done for the same reasons and executed using the same process as we did last
chapter, but with a demand curve in the mixb. Reasons
1) Input2) Productivity3) Technology4) Taxes and Subsidies5) Expectations6) Governmental Regulations7) Number of Sellers
c. Overall line shifts to the right to show an increase in supplyd. Overall line shifts to the left to show a decrease in supplye. What is different?
3. Change in Demanda. It is done for the same reasons and executed using the same process as we did before, but
with a supply curve in the mixb. Reasons
1) Consumer’s Income2) Consumer’s Taste3) Price of Related Products
a) Substituteb) Complement
4) Expectations5) Number of Consumers
c. Overall line shifts to the right to show an increase in demandd. Overall line shifts to the left to show a decrease in demand
e. What’s different?
0
10
20
30
40
50
60
0 10 20 30 40 50 60 70 80
Price
Quantity
Change In Supply Market Curve
SD S2 S1Equilibrium Price
Equilibrium Quantity
S
S1
S2
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4. Change in Supply and Demanda. Combine both change in supply and change in demandb. Unemployment is increasing due to a recession and companies are going out of business.
1) Change in Demand- Consumer Income2) Change in Supply- Number of Sellers
c. What happen to the equilibrium?
EquilibriumPrice
EquilibriumQuantity
D
D1
D2
EquilibriumPrice
EquilibriumQuantity
D and S
D1 and S1
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Practice Time: Fill in the blanks
What are the two reasons one can have a change in quantity demanded?1._____________________
2._____________________
What are the three reasons and 2 sub-reasons one can have a change in demand?1. ____________________
2. ____________________
3. ____________________
a. ________________________
b. ________________________
When do you have a change in quantity supplied?
_____________________________________
What seven reasons do you have a change in supply?
1. ____________________
2. ____________________
3. ____________________
4. ____________________
5. ____________________
6. ____________________
7. ___________________
Directions: For each of the following items draw a supply and demand curve that would illustrate the change that would occur due to each situation. Also, state what the reasons were for the shift for each of the demand and supply curves, then tell what the resulting effect would be on prices for each situation.
1. Consumer tastes for a product you desire drops and, simultaneously, government regulations on that supplier become more stringent.
Demand ____________________
Supply_____________________
Effect on price _________________
2. The technology for producing a product improves and at the same time consumer income increases.
Demand ____________________
Supply_____________________
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Effect on price _________________
3. The productions level for a product you desire decreases and, simultaneously, consumer income increases.
Demand ____________________
Supply_____________________
Effect on price _________________
4. Government increases subsidies for a product that you desire, and at the same time, the price of a substitute for that product decreases.
Demand ____________________
Supply_____________________
Effect on price _________________
5. Popularity of running shoes increases due to new McDonald healthy burgers.
Demand ____________________
Supply_____________________
Effect on price _________________
5. The Importance of Elasticitya. Types of Elastic Demanded
1) Elastic Demand- Decrease in price creates an increase in expenditures2) Inelastic Demand- Decrease in price creates a decrease in expenditures3) Unit Demand- Decrease in price has no effect on expenditures
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b. Types of Elasticity for Supply1) Elastic- Change in price causes a more than proportional change in quantity supplied2) Inelastic- Change in price causes a less than proportional change in quantity supplied3) Unit Elastic- Change in price causes a proportional change in quantity supplied
c. Elasticity and the Market1) Whenever the market changes, elasticity of either or both curves affects the size of the price
changea) Elastic will have a smaller change in priceb) Inelastic will have a large change in pricec) Because we can determine the underlying factors, as wells as, the elasticity of both supply
and demand, we can predict how prices are likely to change
Part 2 of the Assignment: Cookie Sales
Determine the Equilibrium Price: Students will set and evaluate the prices of cookies that they will bake and sell.
Bake a batch of your designated cookies.
Day 1- tomorrow during lunch/academic center, place only six of your cookies on sale for 10 cents apiece. Time how long it takes you to sell out.
Day 2- offer three dozen of your cookies for sale at $1.00 apiece. Time how long it takes you to sell the cookies and how many cookies were sold.
0
1
2
3
4
0 1 2 3 4
Price
Quantity
Unit Elastic Demand
Expenditures$2per 3 unites =
Expenditures$3 per 2 unites =
D
0
1
2
3
4
0 1 2 3
Price
Quantity
Inelastic Demand
Expenditures$2per 2.5 unites
Expenditures$3 per 2 unites D
0
1
2
0 1 2 3 4 5 6 7 8
Price
Quantity
Unit Elastic
S
Proportional
0
1
2
0 1 2 3 4 5 6 7 8
Price
Quantity
Inelastic Supply
SLess than proportion
0
1
2
0 1 2 3 4 5 6 7 8
Price
Quantity
Elastic Supply
S
More thanproportional
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Day 3- offer two dozen of your cookies for sale at 30 cents apiece. Time how long it takes you to sell the cookies and how many cookies were sold.
Day 4- you decide how many cookies and how much to sell the cookies based on what you believe your equilibrium price is. Time how long it takes you to sell the cookies and how many cookies were sold.
What is your equilibrium price? _________
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Section 3: Social Goals and Market Efficiency
In Chapter 2, we examined seven broad economic and social goals that most people seem to share. We also observed that these goals, while commendable, are sometimes in conflict with one another. For every goal that is picked as being important, there is always an opportunity cost with that goal. These goals also have been partially responsible for the increased role that government plays in our economy. Attempts to achieve one of these goals- economic security- occasionally result in legislation such as a price ceiling in place in San Francisco. Janinie Palley argues that numerous studies show that rent control tends to raise prices and create an artificial housing shortage. “Those living in regulated apartments tend to vacate infrequently and thus, all the demand is funneled into the unregulated (or temporarily vacant) sector. Eventually, the competition for those apartments creates highly inflated prices,” says policy analyst William Tucker. Newcomers to San Francisco panic because of the perceived shortage of apartments. Desperate to find a place to live, they drive the prices of available units up to ridiculous heights. Eliminating rent control would allow the market to regulate itself once again, with vacancies and rent prices reflecting a more normalized pattern. While the legislation is clearly beneficial to some people, it can be detrimental to others. What is common to all of these situations, however, is that the outcome –rent control- can only be achieved through government interference with the price system and distorting the allocations made in the market.
Distorting Market OutcomesOne common way to achieve social goals is to have the government set prices at “socially desirable” levels. When this happens, prices are not allowed to adjust to their equilibrium levels, and the price system cannot transmit accurate information to other buyers and sellers in the market.
Essential Question: Should government interfere with market prices?
Main Idea:
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Price CeilingsSome cities, especially New York City, have a long history of using rent
controls to try to make housing more affordable. This is an example of a price ceiling, a maximum legal price that can be charged for a product.
0
300
600
900
1200
1500
1 1.2 1.4 1.6 1.8 2 2.2 2.4 2.6 2.8
Price
of A
part
men
ts
Quantity (in millions)
Price Ceilings
Series1Equilibrium Price
Price Cei lings
In houseing markets, a rent control is a price cei l ing.
D S
Shortage
Equilibrium Price
Price Cei lings
In houseing markets, a rent control is a price cei l ing.
D S
Shortage
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Let us assume that without the ceiling, the market would establish monthly rents at $900, which is an equilibrium price because 2.0 million apartments would be supplied and rented at that rate. If authorities think $900 is too high, and if they want to achieve the social goals of equity and security for people who cannot afford these rents, they can arbitrarily establish a price ceiling at $600 a month.
No doubt renters would love the lower price and might demand 2.4 million apartments. Landlords, on the other hand would try to convert some apartments to other uses, such as condominiums and office buildings that offer higher returns. Therefore, the supply might only reach 1.6 million apartments at $600 per month, leaving a permanent shortage of 800,000 apartments.
Are consumers better off? Perhaps not? More than likely, the better apartments will be converted to condos or offices- leaving the poorer ones to be rented. In addition, 800,000 people are now unhappy because they cannot get an apartment, although they are willing and able to pay for one. Prices no longer allocate apartments. Instead, landlords resort to long waiting lists or other nonprice criteria such as excluding children and pets to discourage applicants.
Rent controls also freeze a landlord’s total revenue and threaten his or her profits. As a result, the landlord tries to lower costs by providing the absolute minimum upkeep. In addition, landlords have little incentive to add additional units if they feel rents are too low. Some apartment buildings may even be torn down to make way for shopping centers, factories, or high-rise office buildings.
The price ceiling, like any other price, affects the allocation of resources- but not in the way intended. The attempt to limit rent makes some people happy, until their building begin to deteriorate. Others, including landlords and potential renters on waiting lists, are unhappy from the beginning. Finally, some productive resources- those used to build and maintain apartments- slowly move out of the rental market.
Price FloorsOther prices are sometimes considered too low, so the government takes steps to keep them higher. The
minimum wage, the lowest legal wage that can be paid to most workers, is such a case. The minimum wage in fact is a price floor, or lowest legal price that can be paid for a good or service. The federal minimum wage provisions are contained in the Fair Labor Standards Act (FLSA), which states that the federal minimum wage is $7.25 per hour effective July 24, 2009. Many states also have minimum wage laws; Michigan’s minimum wage is set at $7.40. Employers that have 2 or more employees must comply with both, or in other words, pay the higher amount of wage.
Using a minimum wage of the federal $7.25 as an illustration of a price floor, we see that the supply curve shows that 14 million people would want to offer their services. According to the demand curve for labor, however, only 10 million would be hired, leaving a surplus of 4 million workers without jobs.
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The figure also shows that without the minimum wage, the actual demand and supply of labor would establish an equilibrium price of $6.00 per hour. At this age, 12 million workers would offer their services and the same number would be hired- which means that there would be neither a shortage nor a surplus in the labor market.
Most economists argue that the minimum wage actually increases the number of people who do not have jobs because employers hire fewer workers at higher wages. According to the case in the graph, the number of people who lose jobs between the 12 million- the difference between the 12 million who would have worked at the equilibrium price and the 10 million who actually work at the higher wage of $7.25 per hour.
Is the minimum use good or bad for the economy? Certainly the minimum wage is not as efficient as a wage se by supply and demand, but not all decisions in our economy are made on the basis of efficiency. The basic agreement in favor of the minimum wage is that it raises poor people’s income and provides a small measure of equity- on of our seven major economic and social goals. A federal minimum wage is evidence that the small measure of equity provided by the minimum wage is preferred to the loss of efficiency.
Finally, it could be argued that the minimum wage is irrelevant because it is actually lower than the lowest wage paid in many areas. Consider the wages in your area, for example. More than likely, most employers pay wages higher than the minimum wage and would not lower them even if the minimum wage were eliminated. Do you think that your employer would pay you less if he or she were allowed to do so? You response will provide a partial answer to the questions.Agricultural Price SupportsDuring the Great Depression of the 1930s, prices plummeted everywhere. Farmers, however, had an even more difficult time because they were having the “bumper yields” illustrated in the graph “Food Prices” in section 2. The “bumper yields” pushed prices even lower. Because both the demand for and supply of food were inelastic, farm prices fell much further than other prices in the economy. To help farmers, the federal government established the Commodity Credit Corporation (CCC), an agency in the Department of Agriculture. The CCC then used a target price, which is essentially a price floor, to help stabilize farm prices.
Loan SupportsUnder one CC support program, a farmer borrowed money from the CCC at the target price and pledged his or her crops as security in return. The faro choices: either sell the crop in the market and use the proceeds to repay the CCC loan. Or keep the proceeds of the loan and let the CCC take possession of the crop. The farmer could get at least the target price because the loan was a nonrecourse loan- a loan that carries neither a penalty nor further obligation to repay if no paid back.
Main Idea:Main Idea:
Policy
Effect
Price Floor
0
2
4
6
8
10
12
0 2 4 6 8 10 12 14 16 18
Price
of L
abor
(per
hou
r)
Quanitity (in millions)
Price Floor
$7.25 Price Floor
Equilibrium Price
Surplus
In labor markets, a minimum wage is a price floor.
D S
Angora goat
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Deficiency PaymentsWhile the CCC loan program helped farmers, it created new problems because the
U.S. Department of Agriculture soon owned enormous stockpiles of food. The department had to resort to storing surplus wheat in rented warehouses or on open ground. Surplus milk was made into cheese and stored in underground caves. The military received some of the food, while public schools received other food that they could use in their “free lunch” programs. Still the surplus grew, leaving politicians to consider how they could support farm prices and avoid holding large surpluses at the same time.The solution was a new government program that combined the competitive
market with price supports. Farmers sold their crops on the open market for the best price they could get based on demand and supply. The CCC then gave farmers a deficiency payment – a check the government sends to producers to make up the
difference between the market price and the target price. Under the CCC deficiency payment program, a target price such as $4.00 per bushel of wheat was set. At this price farmers would produce and sell 10,000 bushels. With 10,000 bushels produced, buyers would pay $2.50 per bushel in the marketplace; the CCC would need to give an additional payment of $1.50 per bushel to farmers to hit the target price.
Conservation “Land Banks”The loan support and deficiency
payment programs of the 1930s continued for several decades. By the 1980s, though, two factors combined to make these programs increasingly expensive to maintain. For one, agricultural output increased dramatically because of increased farm productivity. In addition, there were simply too many farmers involved in agriculture. Many experts concluded that the solution was to get some farmers to stop farming.
The result was the Conservation Reserve Program of 1985 that paid farmers to not farm. To enroll in the program, acreage where crops previously grew was set aside in a “land bank” to save the land for future use. The U.S. Department of Agriculture would then pay the farmer an annual fee as long as the land was not farmed. While the program was expensive for taxpayers, it has since become very popular with farmers and today accounts for nearly 10 percent of total farm subsidies.
Reforming Price SupportsIn an effort to make responsive to the
market forces for supply and demand, Congress passed the Federal Agricultural Improvement and reform (FAIR) Act in 1996. Under FAIR, “lean rates” took the place of target prices, and temporary cash payments replaced price supports and
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
0 2 4 6 8 10 12 14 16 18
Price
of W
heat
Quantity (in thousands of bushels)
Deficiency Payments
Target Price
Market Price
The farmer is paid the difference between the target and the market price.
D S
33
deficiency payments. Lawmakers hoped that when the law expired, farmers would be experienced enough with the law of supply and demand to no longer need help. However, the new payments turned out to be larger than the ones they replaced, and the overall cost the U.S. farm support programs actually went up. Then, when FAIR was about to expire in 2002, Congress replaced it with a series of bills ending with the Food Conservation, and Energy Act of 2008, which provided for even larger price support payments.
Continued Agricultural SupportToday, American agriculture is more dependent than ever on subsidies and price
supports. In addition to subsidizing basic commodities like rice, corn, sugar, and cotton, crops such as peanuts, sunflowers seeds, and mohair (a silk-like fabric or yarn made from the hair of the Angora goat) are also covered. The amount of land that farmers are paid to not farm has grown to be larger than the state of New York. Whether this is good or bad depends on your perspective. If you are a taxpayer
supplying the funds for these payments, you might think that the government spends too much on these programs. If you are a farmer receiving payments, you are probably gland that the government is supporting the goal of economic security.
When Markets TalkMarkets are impersonal mechanisms that bring buyers and sellers together. Although markets do not talk
in the usual sense of the word, they do send signals in that they speak collectively for all of the buyers and sellers who trade in the markets. Markets are said to “talk” when prices in them move up or down significantly in reaction to events that take place elsewhere in the economy.
Suppose the federal government announced that it would raise taxes to pay off some of the federal debt. If investors thought this policy would not work or that other policies might be better, they might decide to sell some of their stocks and other investments to buy gold. As a result, stock prices would fall, and the price of gold would rise. In a sense, the market would “talk” by voicing its disapproval of the new tax policy. In this example, individual investors made decisions on the likely outcome of the new policy and sold stocks for cash or gold. Together, investors’ actions were enough to influence stock prices and to send a signal to the government that investors did not favor the policy. If investors’ feelings were divided about the new policy, some would sell while others bought stocks, as a result, prices might not change, and the message would be that, as yet, the market had not made up its mind.
Section 3: Readings
1. Using the information/graph from the graph titled “Price Ceiling,” explain what would likely happen if the government raised the price ceiling by $400?________________________________________________________________________________________________________________________________________________________________________________
2. Why does the government sometimes impose restrictions such as price ceilings on the market? ________________________________________________________________________________________________________________________________________________________________________________
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3. What are the negative and positive attributes of a price ceiling?Negative: _______________________________________________________________________________Positive: ________________________________________________________________________________
4. Who benefits from price floors? _____________________________________________________________________________________________________________________________________________________
5. Who is placed at a disadvantage? ____________________________________________________________________________________________________________________________________________________
6. What are the negative and positive attributes of a price floors?Negative: _______________________________________________________________________________Positive: ________________________________________________________________________________
7. Using the information from the graph titled “Deficiency Payments,” how much would the farmer have produced and earned without the deficiency payment programs? __________________________________
8. Why might some people have opposed the CCC’s program during the Great Depression? ________________________________________________________________________________________________________________________________________________________________________________
9. What has been the effect of agricultural prices supports? _________________________________________________________________________________________________________________________________________________________________________________________________________________________
10. Illustrate how prices floors affect quantity demanded and supplied.
Quantity Price Quantity Demanded Floor Supplied
_________________ _________________
11. How do markets speak collectively for buyers and sellers? ________________________________________________________________________________________________________________________________________________________________________________
12. Give and explain an example of a price ceiling that you would like to see.________________________________________________________________________________________________________________________________________________________________________________
13. Give and explain an example of a price floor that you would like to see.________________________________________________________________________________________________________________________________________________________________________________
14. What would happen if the government eliminated all farm subsidies?________________________________________________________________________________________________________________________________________________________________________________
15. What factors influence how prices are set in a market economy? ___________________________________________________________________________________________________________________________
16. Suppose that the State of Michigan wanted to make health care more affordable for everyone. To do this, state legislators put a series of price controls or price ceilings in place that cut the cost of medical services in half.
a. What would happen to the demand for medical services at the new, lower level? ________________________________________________________________________________________________
b. What would happen to the supply of medical services that doctors would be willing to provide at the new, lower price? ________________________________________________________________________________________________________________________________________________
c. What considerations would new doctors take into account when they decide where to set up their practice?
35
Directions: Using the terms below to identify the missing cause or effect in the following situations.
a. rationing b. surplus c. shortage d. equilibrium price e. price ceiling f. price floor
17. Cause: The government tries to keep prices down by legislating a price ceiling. Effect ____18. Cause: The government wants to allocate scarce goods and services without the help of a price system.
Effect ____19. Cause: A reasonably competitive market experiences brief, minor shortages and surpluses. Effect ____20. Causes: _____ Effect: New York City has many apartments with very low rents but also has a shortage of
apartment units.21. Cause: A market is at equilibrium, but the product falls out of style before producers can reduce
production. Effect _____22. Cause: ____ Effect: Farmers receive higher prices for milk and cheese but also experience a surplus.
Chapter 6.3 Power Point Notes
III. Social Goals and Market EfficiencyA. Economic and Social Goals
1. In Chapter 2 we looked at seven broad economic and social goalsa. Economic Freedom, economic efficiency, economic equity, economic security, full employment,
price stability, and economic growth2. We found we all had different goals that were important to us and that there was always a
opportunity cost of another goal that was associated with that goal3. Government steps in to try to rectify the opportunity cost
a. They create laws and “guide lines” and expand their power1) Economic Security
a) Government sets prices at “socially desirable” levelsb) Prices are not allowed to adjust to equilibrium price and cannot communicate
accurately with buyers and sellers in the market because government is distorting the allocation of resources
B. Distorting Market Outcomes1. Price Ceilings
a. A maximum legal price that can be charged for a product or serviceb. A price ceiling occurs when the price is artificially held below the equilibrium price and is not
allowed to rise1) Rent control- the maximum rent that can be charged is set by a governmental agency
a) Rent is below the equilibrium price2) Occasionally, price ceilings are imposed by the sellers
a) When the Chargers and Padres played in the playoffs, they sold about 65,000 seats and there was a demand of at least twice that many
b) Nothing prevented the Chargers or Padres form raising the price to whatever the market would bear.
c) They chose not to do so3) 1973-1981 there was a price ceiling for gasoline
a) Any gas station owner charging more than this maximum price would be guilty of fraudb) Assume the equilibrium price is $2.00 (I wish)c) Assume that the price ceiling is set by the government at $1.50
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d) At $1.50 per gallon, the quantity demanded is 10 million gallons per weeke) At $1.50 per gallon, the quantity supplied is 5 million gallons per weekf) There is a shortage of 5 million gallons per week
c. Price ceilings lead to shortages, and shortages create a rationing problem1)Most common solution is first-come, first served
a) Shortages are typically associated with long linesi. For apartments/housing, there could be hundreds of people looking for
each apartment that becomes vacantii. People could stand in line for hours or even days to be able to buy gasoline
or ticket to special sporting events 2)Seller to choose which buyer they will sell to
a) Landlords often rent to preferred renters and discriminate against the handicapped, minorities, single parents, or couples with children or pets
b) Gasoline station owners sell gasoline to those customers who regularly have their cars repaired at that station
c) The Chargers, Padres, or Red Wings assure that season ticket buyers get tickets for the playoffs
3)Lottery- Those who pick the right numbers are allowed to buya) The Chargers used a system such as this to determine who would be able to buy
some of the tickets for their Super Bowl gameb) In the State of Hawaii where land is very scarce , the lottery system is used for
people to purchase single family dwellings4)The government makes the choice of buyer
a) In 1970, the California government decided that those with license plates that end in an odd number could buy gasoline only on odd days of the month and people with license plates that ended in an even number could buy gasoline only on the even days of the month
Part 3 of the Assignment: Cookie Sales
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Evaluate Effects: Students will evaluate how price ceilings or price floors affect cookie sales.
Two groups will be told that they must sell their cookies at a price no more than 15 cents below the equilibrium price they determined in Step 2. The other two groups must charge a price per cookie no less than 15 cents above the equilibrium price they determined in Step 2
Write a paragraph comparing and explaining the results of their cookie sales at the controlled price with the results of their sales at equilibrium price.
Assignment: Bringing it All Together
Part 4: Students will synthesize what they learned in previous steps.
