1. The Demand and Supply Curve Economic Model Objectives: – Understand the demand curve – Understand the supply curve – What happens when supply and demand meet and what causes an increase or decrease in one or the other?

2. Can of Coke How much are you willing to pay for an ice cold can of Coca Cola, that I will allow you to drink in class? Let´s graph the result

3. Can of Coke 100 soles? 20 soles? 12 soles? 8 soles? 5 soles? 50 centimos? Whatt do we have? Go to next slide

5. The Demand Curve As the price increases (goes up) the quantity demanded decreases (goes down) = MOVEMENT ALONG THE CURVE However, some things can actually move the curve, examples: – Changes in income (how much they people get paid) – Changes in consumer preference – Competitor prices

7. Movement (increase or decrease) of the demand curve Practice: In which direction (right = increase or left = decrease) does the demand curve move in the following situations: – People get a pay rise (or in our example, your parents give you more money to bring to school) – A competitor decreases its prices

8. Movement (Increase or decrease) of the demand curve – You have a very successful advertisement on TV – The government increases income taxes – Ther product is found to be harmful to your health

9. The Supply Curve How much you would have to be paid (in soles, by other students) to be make a Mother´s Day Card that you will make yourself (to sell to other students for their moms) For each card, 250 soles, 40 soles, 20 soles, 8 soles, 4 soles, 1 sol What do we have? Go to next slide

11. The Supply Curve As the price increases, supply increases = MOVEMENT ALONG THE CURVE However, some things can actually move the supply curve to the right (= increase) or to the left (= decrease) – Raw materials become cheaper – New machinery – Labor costs go up – Energy costs increase

12. TODAY´S CLASS – 4.1 & 4.2 Objective: Solidify our knowledge of Demand and Supply Curve Economic model And……teach the absent students about the model…..Students absent last week will be tutored by classmates, and will take a 10 minute quiz at the end of the class

13. Review REVIEW

15. Putting the Demand and Supply Curves Together We drew a demand curve We drew a supply curve When we put them together we have a model for a MARKET FOR A PARTICULAR GOOD OR SERVICE, WHERE BUYERS (DEMAND) AND SELLERS (SUPPLY) MEET

16. Demand and Supply Curves meet The point of equilibrium, where the two curves meet, or market clearing price (point A) is where the quantity demanded equals the quantity supplied at a certain price

18. Now, how do the four different possibilities look? 1. Increase in demand - DEMAND CURVE SHIFTS TO THE THE RIGHT INCREASE IN INCOME, DECREASE IN TAXES, INCREASE IN THE PRICE OF FANTA, ESPECIALLY HOT WEATHER END UP AT EQUILIBRIUM POINT B, with a higher price and a higher quantity demanded

20. Decrease in Demand 2. Decrease in demand - DEMAND CURVE SHIFTS TO THE LEFT INCREASE IN TAXES, DECREASE IN INCOME, A NEW JOB THAT PAYS LESSS, DECREASE IN PRICE OF COMPETITORS PRODUCT (FANTA), COLD WEATHER ALL SUMMER END UP AT EQUILIBRIUM POINT C, with a lower price and lower quantity demanded

22. Increase in Supply 3. Increase in supply - SUPPLY CURVE SHIFTS TO THE RIGHT RAW MATERIALS TO MAKE THE MOTHERS DAY CARD ARE CHEAPER, YOU GET SOME NEW SCISSORS OR MARKERS OR TAKE AN ART CLASS ANY OF WHICH MAKE YOU ABLE TO MAKE THE CARDS QUICKER, YOUR TEACHERS GIVE YOU EXTRA TIME TO MAKE THE CARDS IN CLASS, FOR COKE COULD BE A NEW DISCOVERY THAT MAKES THE PROCESSS TO MAKE COKE CHEAPER, OR THE TAXES THEY HAVE TO PAY TO THE GOVERNMENT DECREASE, OR THEIR WORKERS BECOME MORE EFFICIENT IN MAKING COKE END UP AT EQUILIBRIUM POINT E, with a higher price and lower quantity demanded

24. Decrease in Supply Decrease in supply – SUPPLY CURVE SHIFTS TO THE LEFT THE COST OF THE RAW MATERIALS INCREASE, YOUR SCISSORS BREAK AND YOU HAVE TO USE OLD SCISSORS OR BAD MARKERS, OR YOUR TEACHERS DONT GIVE YOU ANY TIME TO MAKE THE CARDS IN CLASS. FOR COKE, COULD BE INCREASE IN THE TAXES THEY HAVE TO PAY, OR THEIR MACHINERY BREAKS, OR THEIR EMPLOYEES SAY THEY WANT TO BE PAID MORE MONEY.. END UP AT EQUILIBRIUM POINT F, with a lower price and lower quantity demanded

26. 4.2 Group Project Results Diego´s group - 3 GHMs, 3 extra points Carlos Siles´ group - 2 GHMs, 2 extra points Santiago´s group - 1 GHM, 1 extra point too few groups (one less than planned) confusion on students´ names (had to change groups) confusion on what was required poor exam results for the group project, etc…

27. 4.1 and 4.2 - ANSWER KEY AND WIKISPACES Answer key being handed out today Powerpoint is on wikispaces Please be ready for any exam question, and ask the teacher if you need help We will have two exams later this term (2 assessments)

28. Important Macroeconomic Lecture – 5 Interrelated Topics Interest rates and Inflation (closely linked) Unemployment the Business Cycle Leading and Lagging Indicators Interest rates and Inflation (closely linked) Unemployment the Business Cycle Leading and Lagging Indicators

29. The Party is going fine Level of Economic Activity = amount of spending by businesses and people, and how many people are employed and spending their earnings on goods and services Rate of Inflation Amount of Borrowing by businesses and consumers Level of Interest Rates

30. Danger! Things still ok, but may be partying too much Level of Economic Activity = amount of spending by businesses and people, and how many people are employed and spending their earnings on goods and services Rate of Inflation Amount of Borrowing by businesses and consumers Level of Interest Rates

31. Uh oh, we partied too much - Recession Level of Economic Activity UNEMPLOYMENT GOES UP TOO HIGH CAUSING ECONOMIC ACTIVITY TO START TO REVERSE ( RECESSION IN WORST CASE) Inflation is TOO HIGH SO THE Amount of Borrowing DECREASES Interest Rates GO UP TOO MUCH

32. Interest Rates It is the cost of money, it is what you pay to the bank or another person who lends you money You are the borrower and get a loan, and you must pay the money back to the lender (the bank) The terms of your loan (how many years is the loan for, and the interest rate) will be put in a contract called a promissary note, which says that you promise to pay the money back to the lender

33. Why do you have to pay interest? Any bank or company or person that has money can do something themself with it and earn money Money is a tool that allows us to make more money (like buying a business that then become profitable and lets you earn more money than you had before) So if you are going to use their money instead of letting them use their own YOU OF COURSE HAVE TO PAY THEM FOR USING YOUR MONEY

34. Interest rates So borrowing money is like RENTING money, like if you rent a house in Asia (Perú) for the summer, you pay rent because the owner of the house could either: A) spend the summer there themself B) Let a friend of family member stay there B) rent it out to someone else and collect rent

35. Next Definition - Inflation Inflation – is the rate of increase in the prices of goods and services in an economy (each country takes a basket of approximately 30 goods and services) Every country has its own inflation rate, calculated monthly and annually In the rare case that prices are going DOWN, it is called deflation

36. Goods and Services included in the US inflation rate (called the Consumer Price Index) RECREATION (televisions, cable television, pets and pet products, sports equipment, admissions) EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories) OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses) RECREATION (televisions, cable television, pets and pet products, sports equipment, admissions) EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories) OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses)

37. Goods and Services included in the US inflation rate (called the Consumer Price Index) FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals and snacks) HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture); APPAREL (men's shirts and sweaters, women's dresses, jewelry) TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance) MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services) FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals and snacks) HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture); APPAREL (men's shirts and sweaters, women's dresses, jewelry) TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance) MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)

38. Inflation Question: If the inflation rate in 2011 was 3.2% and the inflation rate in 2012 was 2.4%, in 2012 did prices: A) go down in 2012 B) go up at a lesser rate in 2012 than in 2011 C) go up at a faster rate in 2012 than 2011

39. Answer B) go up at a lesser rate in 2012 than in 2011 Now rising at 2.4% instead of 3.2% B) go up at a lesser rate in 2012 than in 2011 Now rising at 2.4% instead of 3.2%

40. What determines interest rates? 1) The amount of time you have the money The longer the amount of time, the higher the interest rate because there is more of a chance that something could go wrong and you cannot pay back the money

41. Interest rates – Length of time Company A borrows for 1 year Interest rate might be 6% Company A borrows for 20 years Interest rate might be 10%

42. What determines interest rates? 2) The general level of interest rates in an economy, which are determined by the inflation rate If there is high inflation, you are losing purchasing power of your money, so you demand to be paid a higher interest rate so as protect you from that loss in purchasing power

43. Lost Purchasing Power? It means that your money is losing its value (called lost purchasing power) If the inflation rate is 2%, your same $1.00 has to worth $1.02 to buy the same amoung of things one year later That is why your salary must go up by at least the same amount as the rate of inflation, or you are worse off

44. And lost purchasing power affects the lenders - Why? SO THEY DON´T GET PAID BACK WITH LESS MONEY THAN THEY LENT

45. Example Jan 2014 - borrow $10.00 2014 inflation rate = 8% December 2014, pay back the $10 to the bank, you are only paying the bank about $9.20

46. What determines the interest rates? 3) The riskiness of making the loan (who the borrower is) For example, Microsoft is a less risky company to make a loan to than a small Venezuelan company that has not been profitable (has been losing money) 3) The riskiness of making the loan (who the borrower is) For example, Microsoft is a less risky company to make a loan to than a small Venezuelan company that has not been profitable (has been losing money)

47. More on Inflation A high inflation rate is very bad for an economy (hurts growth) Deflation can also be bad Leaving us with the fact that there is an ideal rate of inflation, not too high, not too low, around 2 to 3%

48. Inflation can be caused two ways 1) Demand pull - the economy is growing too fast (so the demand curve keeps shifting up to the right for all products), increasing prices 2) Cost Push - an event that makes the price of some important goods in the economy go up (and supply curve of many products shifts to the left)

49. Example of Cost Push Inflation If there were a war in the middle east between Iraq and Iran, the price of oil would go way up, and it would affect the inflation rate of almost all countries

50. Inflation Inflation in LEDC´s is almost always higher than inflation in MEDC´s The MEDC´s have more mature economies and there is less growth and/or fluctuation in the economy, leading the lower, more stable inflation rates Inflation in LEDC´s is almost always higher than inflation in MEDC´s The MEDC´s have more mature economies and there is less growth and/or fluctuation in the economy, leading the lower, more stable inflation rates

51. Inflation rates LEDCs - 5.5% average MEDCs - 2.2% average http://www.tradingeconomics.com/country- list/inflation-rate LEDCs - 5.5% average MEDCs - 2.2% average http://www.tradingeconomics.com/country- list/inflation-rate

52. Inflation – is it good for anyone? It is only good for people that have investments, like in real estate (a home or building)

53. AND NOTE -- There are goods that are have limited supply, and they will be immune to inflation The 1913 Liberty nickle (5 cents in USA) is worth $3 million dollars because there are so few of the coins that exist

54. Why is an increase in inflation bad? It makes interest rates go up (lenders need to charge higher rates to protect themselves from inflation)

55. Why is an increase in interest rates bad? If interest rates rise too much, businesses stop borrowing money for projects and expanding (which is what leads to the growth in an economy), and consumers stop borrowing also That makes the economy grow at a slower rate, or, when interest rates become really high, it causes a recession

56. It causes a recession in the worst case! A recession is a DECLINE in economic activity for at least six months (two consecutive 3- month quarters)

57. Recession A recession causes people to lose jobs and have hard times

58. So why do you think deflation is also bad? Think about a company that would like to charge more for its product in 2014 than it is charging in 2013 to make more profit……..

59. ANSWER If there is deflation, then the company will have a hard time increasing its prices And will make less money, and that can affect many companies and the whole economy

60. ANSWER And if many companies are not making as much money then they cannot emply as many people and we have higher unemployment