1. Unit 2: Microeconomics
Supply and Demand

2. The Circular Flow of Goods and Services
A Lesson in Market Economic Systems

3. Individuals and the Economy
People participate in economy in many ways
As consumers (buyers), they make decisions about purchasing goods and services
As producers (sellers/suppliers), they make decisions about providing labor and natural resources to businesses
Also can decide to save money, which allows businesses and others to borrow money to invest in capital resources
As citizens (VOTERS), individuals influence economic decisions make collectively in the economy.

4. 1. Households own and control resources and sell them to businesses.
Capital B U S I N E
Natural H O U S E L D
Human

5. 2. Businesses use the resources to make finished products.
Econo’s B U S I N E

6. 3. Businesses take finished products and sell them to households.
Econo’s
3. Businesses take finished products and sell them to households. H O U S E L D B U S I N E

7. The Activity Half the class will be households.
They will own 15 resource cards.
Households sell resources and buy the product.
Half the class will be businesses.
They will have $1000 each.
Businesses buy resources, make the product (called an Econos), and the sell product (Econos).

8. The Activity Top Businesses: The ones that make the most money.
Class record $3700
Top Household: The ones that buy the most “Econos”
Class record 14

9. Econoland Factory

10. Households/Businesses
What strategy worked best for you?
What would you change if we did the activity again?
Which group had it easier, the businesses or households and why?

11. Questions on Circular Flow
Which group started with the money?
Which group ended with (most of) the money?
How many transactions took place for this result to occur?
Which group started with the resources?
Which group ended with the products (econos)?
How many transactions took place for this result to occur?
What was exchanged in the initial transactions?
What name could you give the initial transactions?
What was exchanged in the secondary transactions?
What name could you give the secondary transactions?

12. The Circular Flow

13. The Circular Flow
Describe how you have been involved in the flow over the last week of your life.

14. The Circular Flow of Economic Activity
The flow of payments in an economy is a circular flow.
Individuals--people living in households--work for businesses, rent their property (or their capital) to businesses, and manage and own the businesses.

15. The Circular Flow of Economic Activity
All these activities generate incomes--flows of payments from businesses to households.
But households then spend their incomes--on consumption goods, in taxes paid to governments, and on assets like stock certificates and bank CDs that flow through the financial sector.

16. The Circular Flow of Economic Activity
The two flows--of incomes and of expenditures--are equal: all expenditures on products are ultimately someone's income, and every piece of total income is also expended in some way

17. Unit 2: Microeconomics
Supply and Demand

18. Demand
Why do consumers buy more of a good or service when the price goes down, but less of that product when the price goes up?

19. Economics Chapter 3
In this chapter we will learn about consumer demand for certain products and discuss the nature of demand and the law of demand.
We, as consumers have a great deal of power. What we want (or demand) influences what goods and services are available to us.

20. Demand vs. Quantity Demanded
Demand- the amount of a good or service that a consumer is willing and able to buy at various possible prices during a given time period.
Quantity Demanded- the amount of a good or service that a consumer is willing and able to buy at each given price during a given time period.

21. Demand Schedule for Stereos
Price per Car Stereo
$500
$400
$300
$200
$100
Quantity Demanded
500
1,000
1,500
2,500
5,000

22. Demand Curve
Price
500
400
300
200
100
1000
1500
2500
5000
Quantity Demanded D

23. You see, any point on the curve is the DEMAND for stereos.
But each point on the curve represents the QUANTITY DEMANDED for that particular price.
The law of demand – “an INCREASE in a good’s price causes a DECREASE in the quantity demanded, and a DECREASE in a goods price causes an INCREASE in the quantity demanded.

24. Things to consider when discussing a product’s demand
The Income Effect – Any increase or decrease in consumers’ PURCHASING POWER caused by a change in price.
For example, if a store lowers the price of its smartphones from $150 to $100, a consumer can buy more phones with the same amount of income. A person spending $300 can buy 3 phones at the new price of $100, but could have only purchased 2 phones at the earlier price of $150.
Of course, the two words “WILLING” and “ABLE” still apply to make the income effect work.

25. The Substitution Effect
The Substitution Effect – Consumers’ tendency to SUBSTITUTE a similar, lower-priced product for another product that is relatively MORE EXPENSIVE.
For example, when the price of steak INCREASES, many consumers reduce the quantity of beef demanded and buy more CHICKEN (a lower priced substitute.

26. Diminishing Marginal Utility
The marginal utility of each unit consumed diminishes with each unit.
Diminishing= LESSEN
Marginal= ADDITIONAL STEP (means a difference of 1)
Utility= USEFULNESS

27. Diminishing Marginal Utility
The ADDITIONAL USEFULNESS of each unit consumed LESSENS with each unit.
EX. 1st slice of pizza is well worth the $2 you paid.
2nd slice= $2
3rd slice=$1.50
4th slice=$.75
5th slice=$0

28. Diminishing Marginal Utility helps explain why demand for a product is not LIMITLESS.
At some point, consumers cannot use any more of a product. There is a limit to a product’s UTILITY to consumers and thus a limit to consumers’ DEMAND.

29. Up until now, we saw that the only thing that affected the quantity demanded for a product was PRICE.
But some factors can cause the entire demand for a product to change. This is called a SHIFT in demand.

30. CHANGES in Demand
INCREASE in Demand
DECREASE in Demand

31. What can cause a demand curve to shift to the right or left. Price. NO
What can cause a demand curve to shift to the right or left? Price? NO. A change in price just causes a change in the Quantity Demanded. The curve doesn’t move.
To make the curve move (change demand), other things must change:
Income of consumers
Number of consumers
Complementary goods’ price
Expectations of consumers
Substitute goods’ price
Tastes and preferences

32. Price Elasticity of Demand
Elastic demand exists when a SMALL change in a good’s price causes a major, OPPOSITE change in the QUANTITY DEMANDED.
Ex. Car stereos, movie tickets
Usually wants

33. Price Elasticity of Demand
Inelastic demand exists when a change in a good’s price has LITTLE IMPACT on the quantity demanded.
Ex. Soap, milk, medications
Usually needs

34. SUPPLY
The Law of Supply and changes in quantity supplied vs. changes in supply

35. Chapter 5 Supply
The actions of suppliers are based on one simple motivation: PROFIT
PROFIT = when revenues are greater than cost of production
Examples of cost of production include: wages, salaries, rent, bills, interest on loans, etc.

36. Like “demand” there are two important different definitions to understand:
Supply – The quantity of goods and services that producers are willing to offer at various possible prices during a given time period.
Quantity Supplied – The amount of a good or service that a producer is willing to sell at each particular price.

37. Supply Schedule Price per Car Stereo $500 $400 $300 $200 $100
Quantity Supplied
4000
3750
3500
2500

38. Supply Curve
Price
500
400
300
200
100
1000
2000
3000
4000
5000
Quantity Supplied S

39. Law of Supply
Law of Supply – producers supply more goods and services when they can sell them at higher prices and fewer goods and services when they can sell them at lower prices.

40. When the entire supply of a product increases or decreases, the supply has shifted.
Increase in Supply
Decrease in Supply

41. What would cause a product’s supply to shift? (Changes in…)
Resource Prices
Expectations of producers
Number of producers
Technology (new technology or back to Stone Age…)
Government actions (taxes, regulations, subsidies)
Other (related) goods prices

42. Price Elasticity of Supply
Elastic Supply exists when a SMALL change in price causes a MAJOR change in the quantity supplied.
Usually products with elastic supplies can be made QUICKLY, inexpensively, and using FEW resources.
An example would be T-shirts of a WINNING sports team.

43. Inelastic supply exists when a change in a good’s price has LITTLE IMPACT on the quantity supplied (usually because it will take too much time, money, and resources).
Relatively VERTICAL
What would cause a supply curve to be “perfectly inelastic?” THEY CAN’T INCREASE SUPPLY EX. GOLD
How would the curve look? COMPLETELY VERTICAL

44. Combining Supply and Demand
Creating a Market Graph

45. Two Powerful Laws
Law of Demand: As price goes up, people want less of a good
Explains wide variety: why people will sit in the upper deck of a stadium

46. Two Powerful Laws
Law of Supply: The higher the price of a good, the greater the quantity suppliers will produce
Explains why parking places at the beach are more expensive in the summer months, why people are paid overtime at a premium wage

47. Equilibrium

48. Disequilibrium
If the price is anywhere but equilibrium, quantity supplied does not equal quantity demanded
Leads to excess supply or excess demand

49. Excess Demand
When the quantity demanded is greater than the quantity supplied
Price is below market equilibrium
Low price encourages buyers but not sellers
When there is excess demand suppliers will raise their price

50. Excess Supplied
When quantity supplied is greater than quantity demanded
High price encourages sellers but not consumers
Price is above equilibrium
Suppliers will lower prices to sell excess supply

51. Effects of Excess
When the market is in disequilibrium and prices are able to change, the market will naturally correct itself
Suppliers may get tired of throwing away extra product if there is excess supply
Suppliers may raises prices to increase profit when there is excess demand

52. Sample Cards SAMPLE BUYER CARD
You want to buy a unit of wheat. You are willing and able to pay ______ for this unit, but you want to pay the lowest price you can. The lower the price you negotiate, the greater your gain.
SAMPLE SELLER CARD
You want to sell a unit of wheat. This unit cost you ______ to produce, but you want to sell it for the highest price you can. The higher the price you negotiate, the greater your gain.

53. Gain or Loss (if Negative)
Score Sheet
Transaction Number
Column A:
Amount on Card
Column B:
Price Negotiated
Column C:
Gain or Loss (if Negative) 1 2 3 4 5 6 7 8 9 10

54. Price per Unit
Round 1
Round 2
Round 3 $1 $2 $3 $4 $5 $6 $7 $8 $9
$10

55. Market Equilibrium

56. The Role of Prices In a Market Economy
Ch. 6 Section 3

57. Prices in the Free Market
Aid in moving the factors of production to producers
Aid in moving finished products to consumers

58. The Advantages of Prices
Price are an incentive
Buyers and Sellers look at prices to retrieve information on a product’s demand and supply
Law of supply and law of demand show prices as a signal that tell producers and consumers how to adjust

59. The Advantages of Prices
Prices as Signals
Think of prices as a traffic light . . .
Producers: if consumers buying at higher prices, producers produce more (GREEN LIGHT); low prices cause producers to produce less (RED LIGHT).
Consumers: At low prices, consumers buy more (GREEN LIGHT); at high prices, consumers think carefully before buying (RED LIGHT).

60. The Advantages of Prices
Flexibility
When shifts occur in the supply or demand curve that change equilibrium, price can easily change to solve the problem of excess supply or excess demand

61. The Advantages of Prices
Price System is “Free”
It does not cost the government anything to regulate prices, the market regulates the prices (unlike a command economy)

62. Government Intervention
What happens in markets when government gets involved?

63. Public Goods
Public Good: a shared good or service for which it would be inefficient or impractical
To make consumers pay individually and
To exclude nonpayers
I.E. Dams, Roads, Bridges, etc.

64. Price Ceilings A maximum price that can be charged for a good
Set by law on goods considered essential and might become too expensive
Rent control is the most famous example
Symbolized on a curve by drawing a straight line across at the price ceiling

65. Price Ceilings Reduce quantity supplied and the price charged
Means lower total revenue
Lower revenue means no incentives to improve the product
Excess demand is created

66. Consequences of a Price Ceiling
Excess demand means some non-price factor will develop to determine who gets and who does not
Wait list, discrimination, bribery, luck

67. Price Ceiling

68. Price Floors A minimum price that must be paid for a good or service
Governments wants sellers to receive some reward for their efforts

69. Minimum Wage Most well known price floor
Employers must pay at least a certain rate per hour

70. Minimum Wage
If set above market equilibrium it will decrease the quantity of labor supplied
Results in excess supply – more people looking for work at the wage than employers will hire

71. Price Floor

72. Costs of Production

73. 4 Different Costs
Fixed costs: costs where the amount paid doesn’t change month to month
Ex: rent for the office space or land for factory
Variable costs: costs that change month to month
Labor costs, input costs (for resources)
Total costs: the full cost to produce and operate
fixed + variable costs
Marginal cost: cost to produce one more unit of product