1. © 2010 Pearson Education CanadaChapter 4 - 1 Chapter 4 Coordinating Smart Choices © 2010 Pearson Education Canada

2. Chapter 4 - 2 Coordinating Smart Choices Demand & Supply

3. © 2010 Pearson Education CanadaChapter 4 - 3 LEARNING OBJECTIVES 4.1Describe how buyers and sellers compete and cooperate in markets 4.2Explain how shortages and surpluses affect prices 4.3Identify how market-clearing prices coordinate the smart choices of consumers and businesses 4.4Illustrate how changes in demand and supply affect market-clearing prices and quantities

4. © 2010 Pearson Education CanadaChapter 4 - 4 WHAT’S A MARKET? Markets connect competition between buyers, competition between sellers, and cooperation between buyers and sellers. Government guarantees of property rights allow markets to function.

5. © 2010 Pearson Education CanadaChapter 4 - 5 WHAT’S A MARKET? Market the interactions of buyers and sellers – competition between buyers – competition between sellers – cooperation and voluntary exchange between buyers and sellers continued…

6. © 2010 Pearson Education CanadaChapter 4 - 6 Property rights legally enforceable guarantees of ownership of physical, financial, and intellectual property Government sets the rules of the game, defining and enforcing property rights necessary for free and voluntary exchange

7. © 2010 Pearson Education CanadaChapter 4 - 7 WHERE DO PRICES COME FROM? PRICE SIGNALS FROM COMBINING DEMAND AND SUPPLY When there are shortages, competition between buyers drives prices up. When there are surpluses, competition between sellers drives prices down.

8. © 2010 Pearson Education CanadaChapter 4 - 8 Figure 4.1 Market Demand & Supply for Piercings Price Quantity Demanded Quantity Supplied $ 20 1200200 $ 40 900400 $60 600 $80 300800 $100 01000

9. © 2010 Pearson Education CanadaChapter 4 - 9 PRICE SIGNALS FROM COMBINING DEMAND & SUPPLY Frustrated Buyers market price too low – shortage or excess demand quantity demanded exceeds quantity supplied – shortages create pressure for prices to rise – rising prices provide signals and incentives for businesses to increase quantity supplied and for consumers to decrease quantity demanded, eliminating the shortage continued…

10. © 2010 Pearson Education CanadaChapter 4 - 10 Figure 4.1 Market Demand & Supply for Piercings Price Quantity Demanded Quantity Supplied $ 20 1200200 $ 40 900400 $60 600 $80 300800 $100 01000

11. © 2010 Pearson Education CanadaChapter 4 - 11 Frustrated Sellers market price too high – surplus or excess supply quantity supplied exceeds quantity demanded – surplus create pressure for prices to fall – falling prices provide signals and incentives for businesses to decrease quantity supplied and for consumers to increase quantity demanded, eliminating the surplus

12. © 2010 Pearson Education CanadaChapter 4 - 12 WHEN PRICES SIT STILL MARKET-CLEARING PRICES BALANCING QUANTITY DEMANDED & QUANTITY SUPPLIED Market-clearing prices coordinate the smart choices of consumers and businesses, balancing quantity demanded and quantity supplied.

13. © 2010 Pearson Education CanadaChapter 4 - 13 MARKET-CLEARING PRICES BALANCING QUANTITY DEMANDED & QUANTITY SUPPLIED The price that coordinates the smart choices of consumers and businesses has two names – market-clearing price price when quantity demanded equals quantity supplied – equilibrium price price balancing forces of competition and cooperation continued…

14. © 2010 Pearson Education CanadaChapter 4 - 14 Figure 4.1 Market Demand & Supply for Piercings Price Quantity Demanded Quantity Supplied $ 20 1200200 $ 40 900400 $60 600 $80 300800 $100 01000

15. © 2010 Pearson Education CanadaChapter 4 - 15 Price signals in markets create incentives, so that each person acts only in self-interest – interactions coordinated through Adam Smith’s invisible hand of competition – result is the miracle of markets — continuous ever-changing production of products/services we want

16. © 2010 Pearson Education CanadaChapter 4 - 16 THE INVISIBLE HAND When an individual makes choices “…he intends only his own gain, and he is in this... led by an invisible hand to promote an end which was no part of his intention.... By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” Adam Smith, The Wealth of Nations, 1776

17. © 2010 Pearson Education CanadaChapter 4 - 17 MOVING TARGETS WHAT HAPPENS WHEN DEMAND & SUPPLY CHANGE? When demand or supply change, market-clearing prices and quantities change. The price changes cause businesses and consumers to adjust their smart choices. Well-functioning markets supply the changed products and services demanded.

18. © 2010 Pearson Education CanadaChapter 4 - 18 WHAT HAPPENS WHEN DEMAND & SUPPLY CHANGE? Demand changes due to a change in – preferences – prices of related products – income – expected future prices – number of consumers continued…

19. © 2010 Pearson Education CanadaChapter 4 - 19 Increase in demand causes – rise in market-clearing price – increase in quantity supplied Decrease in demand causes – fall in market-clearing price – decrease in quantity supplied continued…

20. © 2010 Pearson Education CanadaChapter 4 - 20 Supply changes due to changes in – technology – prices of inputs – prices of related products produced – expected future prices – number of businesses continued…

21. © 2010 Pearson Education CanadaChapter 4 - 21 Increase in supply causes – fall in market-clearing price – increase in quantity demanded Decrease in supply causes – rise in market-clearing price – decrease in quantity demanded

22. © 2010 Pearson Education CanadaChapter 4 - 22 Chapter 4 Refresh Slides

23. © 2010 Pearson Education CanadaChapter 4 - 23 WHAT’S A MARKET? 1.What is a market? 2.You are negotiating with a car dealer over the price of a new car. Explain where competition enters the process, and where cooperation enters. continued…

24. © 2010 Pearson Education CanadaChapter 4 - 24 3.The Recording Industry Association of America’s (RIAA) mission is “to foster a business and legal climate that supports and promotes our members’... intellectual property rights worldwide.” Have you ever downloaded music? If so, what arguments do you use to counter the RIAA’s defence of property rights?

25. © 2010 Pearson Education CanadaChapter 4 - 25 PRICE SIGNALS FROM COMBINING DEMAND & SUPPLY 1.Define a shortage, and explain who competes and what happens to prices. 2.Old Navy decides to price a new line of jeans at $75, which covers all marginal opportunity costs as well as a healthy profit margin. If Old Navy has priced the jeans too high, what signals does the company receive? What actions might Old Navy take next? continued…

26. © 2010 Pearson Education CanadaChapter 4 - 26 3.Most provincial parks charge a fixed price for a camping permit, and allow you to reserve specific campsites well in advance. By the time a summer holiday weekend arrives, all the permits are taken. There is excess demand, and no price adjustment. If you want to reserve your favourite campsite for next year, how do you compete, and who do you compete against?

27. © 2010 Pearson Education CanadaChapter 4 - 27 MARKET-CLEARING PRICES BALANCING QUANTITY DEMANDED & QUANTITY SUPPLIED 1.Name and define the two other names for “prices that sit still”? 2.Explain the balance between the forces of competition and cooperation at “prices that sit still.” (I can’t give away the answer to question 1, can I?) continued…

28. © 2010 Pearson Education CanadaChapter 4 - 28 3.In an attempt to promote the social good of energy conservation, Toronto Hydro introduced the Peaksaver Program. Participating households received a $25 reward for allowing a “peaksaver” switch to be installed on their central air conditioners, which briefly turns off the air conditioner during peak demand times on hot summer days. Do you think the program would work without the $25 reward? How does this illustrate the “invisible hand”?

29. © 2010 Pearson Education CanadaChapter 4 - 29 WHAT HAPPENS WHEN DEMAND & SUPPLY CHANGE? 1.What happens to the market-clearing price and quantity when demand increases? When demand decreases? When supply increases? When supply decreases? continued…

30. © 2010 Pearson Education CanadaChapter 4 - 30 WHAT HAPPENS WHEN DEMAND & SUPPLY CHANGE? 2.Predicting changes in market-clearing prices and quantities is harder when both demand and supply change at the same time. You run a halal butcher shop in Ottawa and expect an increase in the number of Muslims in Ottawa. Rents for retail space are falling all over town. What do you think will happen to the market-clearing price for halal meat? What will happen to the quantity sold? continued…

31. © 2010 Pearson Education CanadaChapter 4 - 31 3.In response to the business boom in Alberta, the city of Edmonton offered $200 per month rent subsidies to low-income families so they could afford to live and work in the city. What impact would this effective increase in income have on rents? What was the intention of the subsidies?