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

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

3. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. AUCTION: DEMAND I am now going to run a classroom auction. Please listen carefully as I read the instructions for this auction. I am passing out blank index cards and you should each take ONE card. You should not write anything on this card until told to do so. I (the teacher) will be auctioning off to the highest bidders "fun size" M&M packets (1.69 oz), which you can see here in my hand. I will sell up to three packets. You can each purchase a maximum of one packet. Prior to participating in the auction, think about the maximum price at which you would be willing to buy an M&M packet. You will be required to pay in U.S. currency, so please do not bid values above $0 if you are not prepared to pay. Slide 3

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

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

6. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. AUCTION: SUPPLY I am now going to run another classroom auction that is similar to the previous one we ran with the exception that instead of selling M&M packets through the auction, I will be buying M&M packets. Please listen carefully as I read the instructions for this auction. I am passing out blank index cards and you should each take ONE card. You should not write anything on this card until told to do so. I am also passing around "fun size" M&M packets (1.69 oz). You should each take just ONE packet. Please do not take any more than one packet. I (the teacher) will be purchasing up to three M&M packets from students in the classroom. You can sell a maximum of one packet each. Prior to participating in the auction, think about the minimum price at which you would be willing to sell your M&M packet to me Slide 6

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

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

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

10. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. BELLWORK- ANSWER Some goods and services are allocated by the market forces of supply and demand Slide 10

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

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

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

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

15. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Bellwork- Sept. 25 Define a Capitalistic Economy Slide 15

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

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

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

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

20. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. DEMAND ACTIVITY http://www.bized.co.uk/learn/economics/ markets/mechanism/interactive/part1.ht m Slide 20

21. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. SEPT. 26 th - Bellwork Define Demand- what is it? Slide 21

22. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 22 Buyers and Sellers In Markets The Demand Curve Why do buyers purchase a greater quantity at lower prices and vice-versa?  The substitution effect  The income effect

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

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

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

26. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 26 Buyers and Sellers In Markets Price ($ per slice) Quantity (1000s of slices per day) Demand 81216 The buyers reservation price: The largest dollar amount the buyer would be willing to pay for a good 4 2 3

27. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 27 Buyers and Sellers In Markets Horizontal Interpretation Price determines quantity demanded Price ($ per slice) 4 2 3 81216 Demand

28. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 28 Buyers and Sellers In Markets Vertical Interpretation Quantity measures the marginal buyer’s reservation price Price ($ per slice) 4 2 3 81216 Demand

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

30. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Bellwork- 9/27 Why do businesses look to the consumer to determine the supply? Slide 30

31. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. An Intro to Supply and Demand The Toy Market- Supply and Demand Slide 31

32. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Bellwork- Sept. 30th How many hours do you spend studying every night? Slide 32

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

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

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

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

37. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 37 The Daily Supply Curve for Pizza in Chicago Price ($ per slice) Quantity (1000s of slices per day) 4 2 3 81216 Supply

38. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 38 The Daily Supply Curve for Pizza in Chicago Price ($ per slice) Quantity (1000s of slices per day) 4 2 3 81216 Supply Horizontal Interpretation Shows the quantity produced for each price

39. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 39 The Daily Supply Curve for Pizza in Chicago Price ($ per slice) Quantity (1000s of slices per day) 4 2 3 81216 Supply Vertical Interpretation Shows the marginal cost (reservation price) for producing each additional unit

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

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

42. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. video http://www.econedlink.org/interactives/in dex.php?iid=221&type=student Slide 42

43. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Bellwork-Oct. 1 Define Supply, why do demand and supply go hand-in-hand? Slide 43

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

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

46. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 46 The Equilibrium Price and Quantity of Pizza In Chicago Price ($ per slice) Quantity (1000s of slices per day) 4 2 3 81216 Supply Demand Equilibrium at $3 Quantity Demanded = Quantity Supplied

47. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 47 Market Equilibrium Equilibrium Price and Equilibrium Quantity The values of price and quantity for which quantity supplied and quantity demanded are equal

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

49. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 49 Excess Supply Price ($ per slice) Quantity (1000s of slices per day) 4 2 3 81216 Supply Demand Excess supply = 8,000 slices per day

50. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 50 Excess Demand Price ($ per slice) Quantity (1000s of slices per day) 4 2 3 816 Excess demand = 8,000 slices per day Supply Demand

51. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 51 Points Along the Demand and Supply Curves of a Pizza Market Demand for pizzaSupply of pizza Price ($/slice) Quantity demanded (1000s of slices/day) Price ($/slice) Quantity supplied (1000s of slices/day) 1812 2624 3436 4248

52. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 52 Graphing Supply and Demand and Finding the Equilibrium Price and Quantity Price ($per slice) Quantity (1000s of slices per day) 5 2 3 4 1 4 102 Demand 0 68 Supply 2.50 5 The Equilibrium Price = $2.50 The Equilibrium Quantity = 5

53. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Activity Students will complete worksheet. This is your Exit Slip for today’s class. http://www.econedlink.org/lessons/docs_l essons/747_ChangingYourPrice15.pdf Slide 53

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

55. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. READING DAY- Oct. 2 Students will read Freakonomics in preparation for their next paper due date. Slide 55

56. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Bellwork: Oct. 3 Why do prices always change on gas? (hint: think current events) Slide 56

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

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

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

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

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

62. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 62 Price Controls In The Pizza Market Price ($ per slice) Quantity (1000s of slices per day) Supply Demand Excess demand = 8,000 slices per day 4 Price ceiling = 2 3 81216

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

64. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Reading http://web.archive.org/web/2007110911 1737/http://www.cnn.com/US/9706/15/r ent.control/ Slide 64

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

66. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Bellwork: Oct. 4 Are there any substitutes for gasoline? Slide 66

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

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

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

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

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

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