1. Master Teacher in Economics Fundamentals Module
James B. Wilcox
Resources provided by:
The University of Southern Mississippi
Center for Economic and Entrepreneurship Education,
Mississippi State University, & Virtual Economics

2. MTE Course Overview Five In-Person Modules Class Format
Fundamental Economics
Microeconomics
Macroeconomics
International Economics
Personal Finance Economics
Class Format
Lecture & Discussion
Sample Lessons
Assessment
MTE Class #1 - Fundamentals

3. Lesson Plans for Today Kidney Transplant Case Study
Virtual Economics, v
Unit 1, Lesson 2 Activity 2
Scarcity, Opportunity Cost and Production Possibilities Curves
Advanced Placement Economics: Microeconomics, p. 7-8, 10-11
Unit 2, Lesson 10, Activity 1
Equilibrium Prices and Equilibrium Quantities
Capstone: Exemplary Lessons for High School Economics: Student Activities, p
Unit 2, Lesson 1, Activity 9
Demand Curves, Movements Along Demand Curves and Shifts in Demand Curves
Advanced Placement Economics: Microeconomics, p
MTE Class #1 - Fundamentals

4. Economics…
is the study of how individuals and society choose, with or without the use of money, to employ scarce productive resources to produce various commodities over time and distribute them for consumption, now and in the future, among various people and groups in a society.

5. Guide to Economic Reasoning
People choose.
The choices people make involve costs.
People respond to incentives in predictable ways.
People create economic systems that influence individual choices and incentives.
People gain when they trade voluntarily.
People’s choices have consequences that lie in the future.
MTE Class #1 - Fundamentals

6. Kidney Transplant

7. TASK You have one kidney to distribute.
You have to select one patient to receive a kidney transplant.
All suffer from urgent need.
The patients not chosen will die within the year
Be prepared to discuss the merits of your decision–
Why did you choose the person your group decided upon
Why did you pass up each of the others (to die)

8. CRITERIA Person’s merit Contribution to society (past or potential)
Ability to pay
Their need
Their age

9. Patient Profile Patient #1: Dr. M.
45 year old physician with large inner-city practice
Had mild heart attack 3 years ago, but made good recovery and heart seems sound
No wife or children
Present yearly income: $70,000
Potential lifetime earnings: $994,095
Has health insurance

10. Patient Profile Patient #2: Bonnie T.
24 year old mother of two children
Active in community work, Red Cross, and church
Plans to resume nursing career when children reach school age (4 years)
Present yearly income: $32,000 (husband’s income)
Potential lifetime earnings: $327,003
Has health insurance

11. Patient Profile Patient #3: Fred S.
3rd year medical student, doing well and considered “of great promise” by his advisors
Plans to specialize in neurology
Father of one child and another on the way
Present yearly income: $10,000
Potential lifetime earnings: $1,149,812
Has health insurance

12. Patient Profile Patient #4: Agnes M.
26 year old mother of two children, abandoned by husband
Unable to work because of lack of affordable daycare facilities in area
Presently on welfare
Active in church, tenant’s organization in her building and welfare rights organization
Present yearly income: $6,996 (public aid and food stamps)
Potential lifetime earnings: $121,425
Has Medicaid

13. Patient Profile Patient #5: Ellen R.
20 year old college junior, suffering from hereditary condition; family fears twin sister has same disease
Doing excellent work in college; has been accepted to law school
Present yearly income: $47,000 (parents’ income)
Potential lifetime earnings: $928,753
Has health insurance

14. Finalize group decision before proceeding

15. Future: Dr. M
Dies of a massive coronary attack 2 years after receiving the transplant

16. Future: Bonnie T.
Goes back to school and becomes an obstetrician.

17. Future: Fred
Drops out of medical school and leaves his wife

18. Future: Agnes M
Wins the lottery and volunteers time and money to children’s hospital programs

19. Future: Ellen R.
Becomes a lawyer and spends career defending the poor

20. Kidney Transplant

21. Opportunity Cost
Opportunity cost of a chosen activity is the value of the best alternative that is forgone
Similar to opportunity lost
Focuses on the alternatives associated with making choices
Opportunity cost is subjective
Only the individual making the choice can select the most attractive alternative
Chooser seldom knows the actual value of the “road not taken”

22. Opportunity Cost Time is the ultimate constraint
By pursuing one activity, we cannot at the same time do something else  each activity undertaken has an opportunity cost
May vary with circumstances
Depends on the value of the alternatives
Monetary cost
May be a reasonable approximation but can omit the time involved which may be substantial for some activities

23. Production Possibilities Frontier
Focus is on how much an economy can produce with a given set of resources and technology  What are the economy’s production capabilities?

24. Production Possibilities Frontier
Identifies the various possible combinations of the two types of goods that can be produced when all available resources are employed fully and efficiently
No change increases the production of one good without decreasing the production of the other good
Involves getting the maximum possible output from available resources

25. Exhibit 1: The Economy’s PPF

26. Factors that can Shift the PPF
Changes in Resource Availability
Increases / Improvements in Quality  rightward shift
Decreases /Reductions in Quality  leftward shift
Increases in the Capital Stock
Increases  rightward shift
Decreases  leftward shift
Technological Change
Employs available resources more efficiently

27. Exhibit 2a: Shifts in the Economy’s PPF
All of the following would lead to a rightward shift in the PPF from A to A‘:
Increase in the size or health of the labor force
Improvement in the skills of the labor force
Increases in the amount of capital
Decreases in any of the above factors would shift the PPF from A' to A  shift to the left
The parallel shift implies the change that occurred affected the production of both goods equally

28. Exhibit 2b: Shifts in the Economy’s PPF
A leftward shift from A to A" could be caused by any of the following:
Decrease in the size or health of the labor force
Decline in the skills of the labor force
Decreases in the amount of capital
The parallel shift implies the change that occurred affected the production of both goods equally

29. Lessons of PPF
Efficiency  PPF represents the combinations of output that are possible, given the economy’s resources and technology
Scarcity  Given the stock of resources and technology, the economy can produce only so much
Economic Growth  rightward shift or rotation of PPF
Choice
The PPF does not tell us what we SHOULD produce.

30. Activity
MTE Class #1 - Fundamentals

31. Law of Demand
Says that quantity demanded varies inversely with price, other things constant
The higher the price, the smaller the quantity demanded
The lower the price, the larger the quantity demanded

32. Substitution Effect
When the price of a good falls, its relative price makes consumers more willing to purchase this good
When the price of a good increases, its relative price makes consumers less willing to purchase this good
Changes in the relative prices – the price of one good compared to the prices of other goods – causes the substitution effect

33. Income Effect Money income Real income
Number of dollars received per period of time
Real income
Income measured in terms of the goods and services it can buy
When the price of a good decreases, real income increases
When the price of a good increases, real income declines

34. Exhibit 1: Demand Schedule & Demand Curve for Pizza
(b) Demand Curve e d c b $0 $3 $6 $9
$12
$15
$18 8 14 20 26 32
Millions of Pizzas per week
Price per Pizza a
(a) Demand Schedule
Price per
Quantity
Pizza
Demanded
Millions ($)
per Week a) 15 8 b) 12 14 c) 9 20 d) 6 26 e) 3 32
The demand schedule lists possible prices, along with quantity demanded at each price. The demand curve at the right shows each price / quantity combination listed in the demand schedule as a point on the demand curve.

35. Demand and Quantity Demanded
Demand for pizza is not a specific quantity, but rather the entire relation between price and quantity demanded, and is represented by the entire demand curve
An individual point on the demand curve shows the quantity demanded at a particular price.
The movement from say, b to c, is a change in quantity demanded and is represented by a movement along the demand curve and can only be caused by a change in price a
$15.00 t r a b u
12.00 q r e c p
9.00 e c i r
6.00 d P e
3.00 D
Millions of pizzas per week

36. Shifts of the Demand Curve
Demand curve focuses on the relationship between the price of a good and the quantity demanded when other factors that could affect demand remain unchanged
Money income of consumers
Prices of related goods
Consumer expectations
Number and composition of consumers in the market
Consumer tastes

37. Exhibit 2: Increase in the Market Demand
Suppose income increases: some consumers will now be able to buy more pizza at each price  market demand increases  demand shifts to the right from D to D'
A decrease in demand will mean demand shifts to the left from D' to D.
$15 b f 12
Price 9 6 D' 3 D 32
Millions of pizzas per week

38. Changes in Consumer Income
Goods can be classified into two broad categories:
Normal goods: the demand increases when income increases and decreases when income decreases
Inferior goods: the demand decreases when income increases and increases when income decreases

39. Changes in the Prices of Related Goods
Prices of other goods are another of the factors assumed constant along a given demand curve
Two general relationships
Two goods are substitutes if an increase in the price of one shifts the demand for the other rightward and, conversely, if a decrease in the price of one shifts the demand for the other good leftward
Two goods are complements if an increase in the price of one shifts the demand for the other leftward and a decrease in the price of one shifts the demand for the other rightward

40. Changes in Consumer Expectations
If individuals expect income to increase in the future, current demand increases and vice versa
If individuals expect prices to increase in the future, current demand increases and decreases if future prices are expected to decrease

41. Activity
MTE Class #1 - Fundamentals

42. Supply
Supply indicates how much of a good producers are willing and able to offer for sale per period at each possible price, other things constant
Law of supply states that the quantity supplied is usually directly related to its price, other things constant
The lower the price, the smaller the quantity supplied
The higher the price, the greater the quantity supplied

43. Exhibit 3: Supply Schedule & Supply Curve
Price per
Quantity
Pizza
Supplied
Millions ($)
per Week 15 28 12 24 9 20 6 16 3
Price S
$15 12
The supply curve and the supply schedule both show quantities of pizza supplied per week at various prices by all the pizza makers in the market
Price and quantity supplied are directly, or positively, related: producers offer more for sale at higher prices than at lower ones: Supply curve slopes upward 9 6 3 12
Millions of pizzas per week

44. Supply and Quantity Supplied
Supply refers to the relation between the price and quantity supplied as reflected by the supply schedule or the supply curve
Quantity supplied refers to a particular amount offered for sale at a particular price, a particular point on a given supply curve

45. Shifts of the Supply Curve
Determinants of supply other than the price of the good
State of technology
Prices of relevant resources
Prices of alternative goods
Producer expectations
Number of producers in the market

46. Exhibit 4: Change in Technology Can Mean an Increase in Supply
A more efficient technology, a high-tech oven, is invented
Production costs fall  suppliers will be more willing and more able to supply the good  rightward shift of the supply curve from S to S'.
Result: more is supplied at each possible price S S'
$15.00 g
12.00 h
9.00
Price per quart
6.00
3.00
Millions of pizzas per week

47. Changes in the Prices of Relevant Resources
Resources that are employed in the production of the good in question
For example, if the price of mozzarella cheese falls, the cost of pizza production declines
Conversely, if the price of some relevant resource increases, supply decreases

48. Prices of Alternative Goods
Alternative goods are those that use some of the same resources employed to produce the good under consideration
For example, as the price of bread increases, so does the opportunity cost of producing pizza and the supply of pizza declines
Conversely, a fall in the price of an alternative good makes pizza production more profitable and supply increases

49. Changes in Producer Expectations
When a good can be easily stored, expecting future prices to be higher may reduce current supply
More generally, any change expected to affect future profitability could shift the supply curve

50. Number of Producers
Since market supply sums the amounts supplied at each price by all producers, the market supply depends on the number of producers in the market
If that number increases, supply increases
If the number of producers decreases, supply decreases

51. Demand and Supply Create a Market
Demanders and suppliers have different views of price
Demanders, consumers, pay the price
Suppliers, sellers, receive the price
As price rises, consumers reduce their quantity demanded along the demand curve, and producers increase their quantity supplied along the supply curve

52. Exhibit 5: The Market for Pizzas
At initial price $12, producers supply 24 million pizzas per week (supply curve) while consumers demand only 14 million: excess quantity supplied (or surplus) of 10 million pizzas per week
To eliminate this surplus, suppliers put downward pressure on prices
As prices fall, quantity supplied declines and quantity demanded increases: market moves towards equilibrium at point c c S D
Price
$15.00
Surplus
12.00
9.00
6.00
3.00 14 20 24
Millions of pizzas per week

53. Exhibit 5: The Market for Pizzas
Initial price is $6 per pizza, 26 million are demanded, but producers supply only 16 million: an excess quantity demanded (or shortage) of 10 million pizzas per week
As prices increase, producers increase quantity supplied and consumers reduce their quantity demanded, moving towards equilibrium at point c S
$15.00
12.00 c
9.00
6.00
Shortage
3.00 D 16 20 26
Millions of pizzas per week

54. Equilibrium
When the quantity consumers are willing and able to pay equals the quantity producers are willing and able to sell, the market reaches equilibrium
Independent plans of both buyers and sellers exactly match
Market forces exert no pressure to change price or quantity

55. Changes in Equilibrium
Once a market reaches equilibrium, that price and quantity will prevail until one of the determinants of demand or supply changes
A change in any one of these determinants will usually change equilibrium price and quantity in a predictable way

56. Exhibit 6: Effects of an Increase in Demand
Assume one of the determinants of demand changes so that demand increases from D to D'
After the increase, the amount demanded at $9 is 30 million – which exceeds the amount supplied of 20 million pizzas: shortage and upward pressure on price
As price increases, quantity demanded decreases along the new demand curve, D'. The quantity supplied increases along the existing supply curve, S, until the two quantities are in equilibrium.
Price S g
$12 c 9 D' D 20 24 30
Millions of pizzas per week

57. Shifts of the Demand Curve
Given an upward-sloping demand curve, an increase in demand leads to a rightward shift of the demand curve, increasing both the equilibrium price and quantity
Alternatively, a decrease in demand leads to a leftward shift of the demand curve, reducing both the equilibrium price and quantity

58. Millions of Pizzas per Week
Exhibit 7: Effects of an
Increase in Supply S
Suppose supply shifts from S to S'  increases
After supply increases, the amount supplied at the initial price of $9 increases from 20 to 30 million pizzas per week  a surplus exists
Surplus puts downward pressure on price  quantity demanded increases along the existing demand curve until a new equilibrium is reached. S'
Price c $9 6 d D 20 26 30
Millions of Pizzas per Week

59. Shifts of the Supply Curve
An increase in supply: a rightward shift of the supply curve reduces equilibrium price but increases equilibrium quantity
A decrease in supply: a leftward shift of the supply curve increases equilibrium price but decreases equilibrium quantity
Given a downward-sloping demand curve, a rightward shift of the supply curve decreases price, but increases quantity
A leftward shift increases price, but decreases quantity

60. Simultaneous Shifts in Demand and Supply
As long as only one curve shifts, we can say for sure what will happen to equilibrium price and quantity
If both curves shift, however, the outcome is less obvious

61. a) Shift in demand dominates
Exhibit 8: Indeterminate Effect of an Increase in Both Supply and Demand
Suppose supply and demand both increase and that demand increases more than supply as shown by D' and S'
Here both price and quantity increase
If both demand and supply were to decrease, for example from D' S' to D and S, both equilibrium price and quantity would decline.
a) Shift in demand dominates S S' p'
Price p D' D Q Q'
Units per period

62. b) Shift in supply dominates
Exhibit 8: Indeterminate Effect of an Increase in Both Supply and Demand
b) Shift in supply dominates
Again, suppose both supply and demand increase but supply shifts by more than demand: price decreases from p to p'' and quantity increases
Conversely, if both supply and demand decrease with the shift in supply dominating, price will increase and quantity will decrease. S
S"
Price p
p"
D" D Q
Q"
Units per period

63. Exhibit 11: Price Floors and Price Ceilings

64. Exhibit 11a: Effects of a Price Floor
To achieve higher prices, the federal government sets a price floor, a minimum selling price that is above the equilibrium price
Suppose it places a $2.50 per gallon price floor for milk
At this price, farmers supply 24 million gallons per week
Consumers demand only 14 million gallons  a surplus of 10 million gallons S
Surplus
Price per gallon
$2.50
$1.90 D
Millions of gallons per month

65. Exhibit 11b: Effects of a Price Ceiling
A common example of a price ceiling is rent control in some cities
Suppose the market-clearing rent is $1,000 per month with 50,000 apartments being rented
Now suppose the government decides to set a maximum rent of $600
At this ceiling price, 60,000 rental units are demanded
However, only 40,000 are supplied, a shortage S
$1000
Monthly rent
$600
Shortage D
Thousands of rental units per month

66. Price Floors / Ceilings Summary
To have an impact, a price floor must be set above the equilibrium price and a price ceiling must be set below the equilibrium price
Effective price floors and ceilings distort markets in that they create a surplus and a shortage, respectively
In these situations, various nonprice allocation devices emerge to cope with the disequilibrium resulting from the intervention

67. Real World Example: Zimbabwe
Zimbabwe’s government, in an effort to fight inflation, passed a law which forced all sellers to cut their prices by 50% compared to the market prices.
Can you guess what happened? 67

68. Activity
MTE Class #1 - Fundamentals

69. Real World Example: Zimbabwe
Police forcing people to sell inventory below cost, jailing offenders.
Massive shortages due to lower prices.
Goods only available on the Black Market at prices 7 times higher than the original market price.
Sellers closing their stores because the cost is higher than the prices they are allowed to charge. 69

70. Master Teacher in Economics Fundamentals Module
James B. Wilcox
Resources provided by:
The University of Southern Mississippi
Center for Economic and Entrepreneurship Education,
Mississippi State University, & Virtual Economics