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James B. Wilcox Resources provided by: The University of Southern Mississippi Center for Economic and Entrepreneurship Education, Mississippi State University,

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Presentation on theme: "James B. Wilcox Resources provided by: The University of Southern Mississippi Center for Economic and Entrepreneurship Education, Mississippi State University,"— Presentation transcript:

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

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

3 Lesson Plans for Today MTE Class #1 - Fundamentals Kidney Transplant Case StudyVirtual Economics, v Unit 1, Lesson 2 Activity 2 Scarcity, Opportunity Cost and Production Possibilities Curves Advanced Placement Economics: Microeconomics, p. 7-8, 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

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 MTE Class #1 - Fundamentals 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. Peoples choices have consequences that lie in the future.

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 1) Persons merit 2) Contribution to society (past or potential) 3) Ability to pay 4) Their need 5) 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 (husbands 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, tenants 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 childrens 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 21

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 22

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

24 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 24 Production Possibilities Frontier

25 25 Exhibit 1: The Economys PPF

26 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 26 Factors that can Shift the PPF

27 27 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 Exhibit 2a: Shifts in the Economys PPF

28 28 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 Exhibit 2b: Shifts in the Economys PPF

29 Efficiency PPF represents the combinations of output that are possible, given the economys 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. 29 Lessons of PPF

30 Activity MTE Class #1 - Fundamentals

31 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 31 Law of Demand

32 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 32 Substitution Effect

33 Money 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 33 Income Effect

34 34 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. (b) Demand Curve e d c b $0 $3 $6 $9 $12 $15 $ Millions of Pizzas per week Price per Pizza a Exhibit 1: Demand Schedule & Demand Curve for Pizza (a) Demand Schedule Price perQuantity PizzaDemanded Millions ($)per Week a)158 b)1214 c)920 d)626 e)332

35 35 P r i c e p e r q u a r t $ a b c d e D Millions of pizzas per week 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 Demand and Quantity Demanded

36 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 36 Shifts of the Demand Curve

37 37 $ Price 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 Millions of pizzas per week D b D' f Exhibit 2: Increase in the Market Demand

38 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 38 Changes in Consumer Income

39 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 39 Changes in the Prices of Related Goods

40 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 40 Changes in Consumer Expectations

41 Activity MTE Class #1 - Fundamentals

42 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 42 Supply

43 $ S Millions of pizzas per week 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 Price Exhibit 3: Supply Schedule & Supply Curve Supply Schedule Price perQuantity PizzaSupplied Millions ($)per Week

44 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 44 Supply and Quantity Supplied

45 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 45 Shifts of the Supply Curve

46 46 $ Millions of pizzas per week S g S' h 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 Price per quart Exhibit 4: Change in Technology Can Mean an Increase in Supply

47 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 47 Changes in the Prices of Relevant Resources

48 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 48 Prices of Alternative Goods

49 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 49 Changes in Producer Expectations

50 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 50 Number of Producers

51 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 51 Demand and Supply Create a Market

52 52 Millions of pizzas per week $ c S D Surplus 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 Price Exhibit 5: The Market for Pizzas

53 53 Millions of pizzas per week $ c S D Shortage 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 Exhibit 5: The Market for Pizzas

54 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 54 Equilibrium

55 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 55 Changes in Equilibrium

56 56 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. 20 Millions of pizzas per week 9 0 D S $12 D' 2430 Price c g Exhibit 6: Effects of an Increase in Demand

57 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 57 Shifts of the Demand Curve

58 58 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. D S $9 20 S'S' Price Millions of Pizzas per Week d c Exhibit 7: Effects of an Increase in Supply

59 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 59 Shifts of the Supply Curve

60 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 60 Simultaneous Shifts in Demand and Supply

61 61 p 0 Units per period S D p' Q' S' D' Q 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 Price Exhibit 8: Indeterminate Effect of an Increase in Both Supply and Demand

62 62 p Units per period D S 0 p" Q" D" S" Q Price 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. b) Shift in supply dominates Exhibit 8: Indeterminate Effect of an Increase in Both Supply and Demand

63 63 Exhibit 11: Price Floors and Price Ceilings

64 64 $ S D Millions of gallons per month Surplus 0 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 Price per gallon $1.90 Exhibit 11a: Effects of a Price Floor

65 65 $1000 $ D S Thousands of rental units per month 0 Shortage 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 Monthly rent Exhibit 11b: Effects of a Price Ceiling

66 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 66 Price Floors / Ceilings Summary

67 Real World Example: Zimbabwe Zimbabwes 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?

68 Activity MTE Class #1 - Fundamentals

69 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. Real World Example: Zimbabwe

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


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