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Ap macro unit_1_summary
The document provides an overview of basic economic concepts. It defines economics as the study of how individuals and societies deal with scarcity. Scarcity means that resources are limited and not enough to satisfy all wants, so choices must be made. Microeconomics studies small economic units like individuals and firms, while macroeconomics looks at the overall economy. Positive statements are factual, while normative statements include value judgments. Economists use theories and models to understand and address economic problems. The concepts of opportunity cost, marginal analysis, and supply and demand are introduced.
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Ap macro unit_1_summary
- 1. Unit I: Basic EconomicConcepts
- 2. What is Economicsin General? Economics is the study of _________. • Economics is the science of scarcity. • Scarcity is the condition in which our wants are greater than our limited resources. • Since we are unable to have everything we desire, we must make choices on how we will use our resources. • In economics we will study the choices of individuals, firms, and governments. choices
- 3. Economics Defined Economics-Social scienceconcerned with the efficient use of limited resources to achieve maximum satisfaction of economic wants. (Study of how individuals and societies deal with ________) Examples: You must choose between buying jeans or buying shoes. Businesses must choose how many people to hire Governments must choose how much to spend on welfare. scarcity
- 4. Micro vs. Macro MICROeconomics- Studyof small economic units such as individuals, firms, and industries (competitive markets, labor markets, personal decision making, etc.) MACROeconomics- Study of the large economy as a whole or in its basic subdivisions (National Economic Growth, Government Spending, Inflation, Unemployment, etc.)
- 5. Positive vs. Normative PositiveStatements- Based on facts. Avoids value judgements (what is). Normative Statements- Includes value judgements (what ought to be). How is Economics used? • Economists use the scientific method to make generalizations and abstractions to develop theories. This is called theoretical economics. • These theories are then applied to fix problems or meet economic goals. This is called policy economics.
- 6. Would you seethe movie three times? Notice that the total benefit is more than the total cost but you would NOT watch the movie the 3rd time. Thinking at the Margin # Times Watching Movie Benefit Cost 1st $30 $10 2nd $15 $10 3rd $5 $10 Total $50 $30
- 7. Marginal Analysis In economicsthe term marginal = additional “Thinking on the margin”, or MARGINAL ANALYSIS involves making decisions based on the additional benefit vs. the additional cost. For Example: You have been shopping at the mall for a half hour, the additional benefit of shopping for an additional half-hour might outweigh the additional cost (the opportunity cost). After three hours, the additional benefit from staying an additional half-hour would likely be less than the additional cost.
- 8. 5 Key EconomicAssumptions 1. Society’s wants are unlimited, but ALL resources are limited (scarcity). 2. Due to scarcity, choices must be made. Every choice has a cost (a trade-off). 3. Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self- interest.” 4. Everyone acts rationally by comparing the marginal costs and marginal benefits of every choice 5. Real-life situations can be explained and analyzed through simplified models and graphs.
- 9. Given the followingassumptions, make a rational choice in your own self-interest (hold everything else constant)… 1. You want to visit your friend for the weekend 2. You work every weekday earning $100 per day 3. You have three flights to choose from: Thursday Night Flight = $300 Friday Early Morning Flight = $345 Friday Night Flight = $380 Which flight should you choose? Why? 9
- 10. Trade-offs ALL decisions involvetrade-offs. The most desirable alternative given up as a result of a decision is known as opportunity cost. Trade-offs are all the alternatives that we give up whenever we choose one course of action over others. (Examples: going to the movies) What are trade-offs of deciding to go to college? What is the opportunity cost of going to college? 10
- 11. The Factors ofProduction 11
- 12. The Production Possibilities Curve (PPC) UsingEconomic Models… Step 1: Explain concept in words Step 2: Use numbers as examples Step 3: Generate graphs from numbers Step 4: Make generalizations using graph 12
- 13. What is theProduction Possibilities Curve? • A production possibilities graph (PPG) is a model that shows alternative ways that an economy can use its scarce resources • This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency. 4 Key Assumptions • Only two goods can be produced • Full employment of resources • Fixed Resources (Ceteris Paribus) • Fixed Technology 13
- 14. a b cd e f 14 12 9 5 0 0 0 2 4 6 8 10 Bikes Computers NOW GRAPH IT: Put bikes on y-axis and computers on x-axis Production “Possibilities” Table Each point represents a specific combination of goods that can be produced given full employment of resources. 14
- 15. Bikes Computers 14 12 10 8 6 4 2 0 0 2 46 8 10 A B C D E G Inefficient/ Unemployment Impossible/Unattainable (given current resources) Efficient PRODUCTION POSSIBILITIES How does the PPG graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency? 15
- 16. 2 Bikes 2.The opportunitycost of moving from b to d is… 4.The opportunity cost of moving from f to c is… 3.The opportunity cost of moving from d to b is… 7 Bikes 4 Computers 0 Computers 5.What can you say about point G? Unattainable 1. The opportunity cost of moving from a to b is… Example: Opportunity Cost 16
- 17. The Production Possibilities Curve(or Frontier) 17
- 18. PIZZA 0 12 3 4 CALZONES 4 3 2 1 0 • List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. • Constant Opportunity Cost- Resources are easily adaptable for producing either good. • Result is a straight line PPC (not common) PRODUCTION POSSIBILITIES A B C D E 18
- 19. PIZZA 18 1715 10 0 ROBOTS 0 1 2 3 4 • List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. • Law of Increasing Opportunity Cost- • As you produce more of any good, the opportunity cost (forgone production of another good) will increase. • Why? Resources are NOT easily adaptable to producing both goods. • Result is a bowed out (Concave) PPC A B C D E PRODUCTION POSSIBILITIES
- 20. 1 Bike 2.The PERUNIT opportunity cost of moving from b to c is… 4.The PER UNIT opportunity cost of moving from d to e is… 3.The PER UNIT opportunity cost of moving from c to d is… 1.5 (3/2) Bikes 2 Bikes 2.5 (5/2) Bikes = Opportunity Cost Units Gained 1. The PER UNIT opportunity cost of moving from a to b is… Example: PER UNIT Opportunity Cost How much each marginal unit costs NOTICE: Increasing Opportunity Costs 20
- 21.
- 22. PRODUCTION POSSIBILITIES 4 KeyAssumptions Revisited • Only two goods can be produced • Full employment of resources • Fixed Resources (4 Factors) • Fixed Technology What if there is a change? 3 Shifters of the PPC 1. Change in resource quantity or quality 2. Change in Technology 3. Change in Trade 22
- 23. PRODUCTION POSSIBILITIES Q Q Robots Pizzas 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 23 4 5 6 7 8 What happens if there is an increase in population? 23
- 24. PRODUCTION POSSIBILITIES Q Q Robots Pizzas 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 23 4 5 6 7 8 A’ B’ C’ D’ E’ What happens if there is an increase in population? 24
- 25. Technology improvements in pizza ovens Q Q Robots Pizzas 14 13 12 11 10 9 8 7 6 5 4 3 2 1 12 3 4 5 6 7 8 PRODUCTION POSSIBILITIES 25
- 26. The Production Possibilities Curveand Efficiency 26
- 27. Productive Efficiency- • Productsare being produced in the least costly way. • This is any point ON the Production Possibilities Curve Allocative Efficiency- • The products being produced are the ones most desired by society. • This optimal point on the PPC depends on the desires of society. Two Types of Efficiency 27
- 28. Productive and AllocativeEfficiencyBikes Computers 14 12 10 8 6 4 2 0 0 2 4 6 8 10 A B C D F E Which points are productively efficient? Which are allocatively efficient? G 28 Productively Efficient points are A through D Allocative Efficient points depend on the wants of society (What if this represents a country with no electricity?)
- 29. Panama - FAVORS CONSUMERGOODS Mexico - FAVORS CAPITAL GOODS Consumer goods CapitalGoods CURRENT CURVE FUTURE CURVE Consumer goods CapitalGoods FUTURE CURVE CURRENT CURVE Capital Goods and Future Growth MexicoPanama 29
- 30. PPC Practice Draw aPPC showing changes for each of the following: Pizza and Robots (3) 1. New robot making technology 2. Decrease in the demand for pizza 3. Mad cow disease kills 85% of cows Consumer goods and Capital Goods (4) 4. BP Oil Spill in the Gulf 5. Faster computer hardware 6. Many workers unemployed 7. Significant increases in education 30
- 31. New robot makingtechnology Q Q Robots Pizzas Question #1 31 A shift only for Robots
- 32. Decrease in thedemand for pizza Q Q Robots Pizzas Question #2 32 The curve doesn’t shift! A change in demand doesn’t shift the curve
- 33. Mad cow diseasekills 85% of cows Q Q Robots Pizzas Question #3 33 A shift inward only for Pizza
- 34. BP Oil Spillin the Gulf Q Q CapitalGoods(Guns) Consumer Goods (Butter) Question #4 34 Decrease in resources decrease production possibilities for both
- 35. Faster computer hardware Q Q CapitalGoods(Guns) ConsumerGoods (Butter) Question #5 35 Quality of a resource improves shifting the curve outward
- 36. Many workers unemployed Q Q CapitalGoods(Guns) ConsumerGoods (Butter) Question #6 36 The curve doesn’t shift! Unemployment is just a point inside the curve
- 37. Significant increases ineducation Q Q CapitalGoods(Guns) Consumer Goods (Butter) Question #7 37 The quality of labor is improved. Curve shifts outward.
- 38. Scarcity Means ThereIs Not Enough For Everyone Government must step in to help allocate (distribute) resources 38
- 39. Every society mustanswer three questions: The Three Economic Questions 1. What goods and services should be produced? 2. How should these goods and services be produced? 3. Who consumes these goods and services? The way these questions are answered determines the economic system An economic system is the method used by a society to produce and distribute goods and services. 39
- 40. Economic Systems 1. Centrally-Planned (Command)Economy 2. Free Market Economy 3. Mixed Economy 40
- 41.
- 42. Centrally Planned Economies Ina centrally planned economy (communism) the government… 1. owns all the resources. 2. decides what to produce, how much to produce, and who will receive it. Examples: – Cuba, China, North Korea, former Soviet Union Why do centrally planned economies face problems of poor-quality goods, shortages, and unhappy citizens? NO PROFIT MEANS NO INCENTIVES!! 42
- 43. Advantages and Disadvantages 1.Low unemployment- everyone has a job 2. Great Job Security- the government doesn’t go out of business 3. Equal incomes means no extremely poor people 4. Free Health Care What is GOOD about Communism? What is BAD about Communism? 1. No incentive to work harder 2. No incentive to innovate or come up with good ideas 3. No Competition keeps quality of goods poor. 4. Corrupt leaders 5. Few individual freedoms 43
- 44. Free Market System (akaCapitalism) 44
- 45. Characteristics of FreeMarket 1. Little government involvement in the economy. (Laissez Faire = Let it be) 2. Individuals OWN resources and answer the three economic questions. 3. The opportunity to make PROFIT gives people INCENTIVE to produce quality items efficiently. 4. Wide variety of goods available to consumers. 5. Competition and Self-Interest work together to regulate the economy (keep prices down and quality up). Reword for Communism 45
- 46. Example of FreeMarket Example of how the free market regulates itself: If consumers want computers and only one company is making them… Other businesses have the INCENTIVE to start making computers to earn PROFIT. This leads to more COMPETITION…. Which means lower prices, better quality, and more product variety. We produce the goods and services that society wants because “resources follow profits”. The End Result: Most efficient production of the goods that consumers want, produced at the lowest prices and the highest quality. 46
- 47. The Invisible Hand Theconcept that society’s goals will be met as individuals seek their own self-interest. Example: Society wants fuel efficient cars… •Profit seeking producers will make more. •Competition between firms results in low prices, high quality, and greater efficiency. •The government doesn’t need to get involved since the needs of society are automatically met. Competition and self-interest act as an invisible hand that regulates the free market. 47
- 48. The difference betweenNorth and South Korea at night. North Korea's GDP is $40 Billion South Korea's GDP is $1.3 Trillion (32 times greater).
- 49. Connection to thePPC Communism in the Long Run Free Markets in the Long Run Consumer goods CapitalGoods CURRENT CURVE FUTURE CURVE Consumer goods CapitalGoods FUTURE CURVE CURRENT CURVE Puerto RicoCuba 49
- 50.
- 51.
- 52. 52 Product Market Resource Market BusinessesIndividuals Goods and Services$$$ Revenue $$$ $$$ Spending $$$G oods and Services SUPPLYDEMAND DEMANDSUPPLY $$$ Costs $$$ Resources $$$ Incom e $$$Resources (Factors of Production)
- 53. DEMAND DEFINED What isDemand? What is the Law of Demand? 53
- 54. Why does theLaw of Demand occur? The law of demand is the result of three separate behavior patterns that overlap: 1. 2. 3. We will define and explain each… 54
- 55. 1. The SubstitutionEffect 2. The Income Effect Why does the Law of Demand occur? 55
- 56. • Utility =Satisfaction • We buy goods because we get utility from them • The law of diminishing marginal utility states that as you consume more units of any good, the additional satisfaction from each additional unit will eventually start to decrease • In other words, the more you buy of ANY GOOD the less satisfaction you get from each new unit. Discussion Questions: 1. What does this have to do with the Law of Demand? 2. How does this effect the pricing of businesses? 3. Law of Diminishing Marginal Utility Why does the Law of Demand occur? U-TIL-IT-Y 56
- 57. The Demand Curve •A demand curve is a graphical representation of a demand schedule. • The demand curve is downward sloping showing the inverse relationship between price (on the y-axis) and quantity demanded (on the x-axis) • When reading a demand curve, assume all outside factors, such as income, are held constant. (This is called ceteris paribus) Let’s draw a new demand curve for cereal… 57
- 58. GRAPHING DEMAND Qo $5 4 3 2 1 Price ofCereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 58 Price Quantity Demande d $5 10 $4 20 $3 30 $2 50 $1 80
- 59. Where do youget the Market Demand? Q Billy Price Q Demd $5 1 $4 2 $3 3 $2 5 $1 7 Jean Other Individuals Price Q Demd $5 0 $4 1 $3 2 $2 3 $1 5 Price Q Demd $5 9 $4 17 $3 25 $2 42 $1 68 Price Q Demd $5 10 $4 20 $3 30 $2 50 $1 80 Market 3 P Q2 P Q25 P Q30 P $3 $3 $3 $3 D DDD
- 60. Shifts in Demand CHANGESIN DEMAND • Ceteris paribus-“all other things held constant.” • When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts. • A shift means that at the same prices, more people are willing and able to purchase that good. This is a change in demand, not a change in quantity demanded 60
- 61. Change in Demand Qo $5 4 3 2 1 Priceof Cereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 61 Price Quantity Demande d $5 10 $4 20 $3 30 $2 50 $1 80 Demand
- 62. Change in Demand Qo $5 4 3 2 1 Priceof Cereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 62 Price Quantity Demande d $5 10 30 $4 20 40 $3 30 50 $2 50 70 $1 80 100 Demand D2 Increase in Demand Prices didn’t change but people want MORE cereal
- 63. Change in Demand Qo $5 4 3 2 1 Priceof Cereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 63 Price Quantity Demande d $5 10 $4 20 $3 30 $2 50 $1 80 What if cereal causes baldness? Demand
- 64. Change in Demand Qo $5 4 3 2 1 Priceof Cereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 64 Price Quantity Demande d $5 10 0 $4 20 5 $3 30 20 $2 50 30 $1 80 60 DemandD2 Decrease in Demand Prices didn’t change but people want LESS cereal
- 65. What Causes aShift in Demand? 5 Determinates (SHIFTERS) of Demand: 1.Tastes and Preferences 2.Number of Consumers 3.Price of Related Goods 4.Income 5.Future Expectations Changes in PRICE don’t shift the curve. It only causes movement along the curve. 65
- 66. Prices of RelatedGoods 2. Complements are two goods that are bought and used together. 1. Substitutes are goods used in place of one another. The demand curve for one good can be affected by a change in the price of ANOTHER related good. 66
- 67. Income 2. Inferior Goods 1.Normal Goods The incomes of consumer change the demand, but how depends on the type of good. 67
- 68. P Q Cerealo $3 $2 D1 Price ofCereal Quantity of Cereal 10 20 Change in Qd vs. Change in Demand A C B There are two ways to increase quantity from 10 to 20 D2 1. A to B is a change in quantity demand (due to a change in price) 2. A to C is a change in demand (shift in the curve)
- 69. Practice First, identify thedeterminant (shifter) then decide if demand will increase or decrease 69 Shifter Increase or Decrease Left or Right 1 2 3 4 5 6 7 8
- 70. Practice Hamburgers (a normalgood) 1. Population boom 2. Incomes fall due to recession 3. Price for Carne Asada burritos falls to $1 4. Price increases to $5 for hamburgers 5. New health craze- “No ground beef” 6. Hamburger restaurants announce that they will significantly increase prices NEXT month 7. Government heavily taxes shake and fries causes their prices to quadruple. 8. Restaurants lower price of burgers to $.50 First identify the determinant (Shifter). Then decide if demand will increase or decrease 70
- 71.
- 72. Supply Defined What issupply? Supply is the different quantities of a good that sellers are willing and able to sell (produce) at different prices. What is the Law of Supply? There is a DIRECT (or positive) relationship between price and quantity supplied. •As price increases, the quantity producers make increases •As price falls, the quantity producers make falls. Why? Because, at higher prices profit seeking firms have an incentive to produce more. EXAMPLE: Mowing Lawns 72
- 73. GRAPHING SUPPLY Qo $5 4 3 2 1 Price ofCereal Quantity of Cereal Supply Schedule 10 20 30 40 50 60 70 80 73 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Supply
- 74. GRAPHING SUPPLY Qo $5 4 3 2 1 Price ofCereal Quantity of Cereal Supply Schedule 10 20 30 40 50 60 70 80 74 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Supply What if new companies start making cereal?
- 75. Change in Supply Qo $5 4 3 2 1 Priceof Cereal Quantity of Cereal Supply Schedule 10 20 30 40 50 60 70 80 75 Supply S2 Price Quantity Supplied $5 50 70 $4 40 60 $3 30 50 $2 20 40 $1 10 30 Increase in Supply Prices didn’t change but there is MORE cereal produced
- 76. Change in Supply Qo $5 4 3 2 1 Priceof Cereal Quantity of Cereal Supply Schedule 10 20 30 40 50 60 70 80 76 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Supply What if a drought destroys corn and wheat crops?
- 77. Change in Supply Qo $5 4 3 2 1 Priceof Cereal Quantity of Cereal Supply Schedule 10 20 30 40 50 60 70 80 77 Supply S2 Price Quantity Supplied $5 50 30 $4 40 20 $3 30 10 $2 20 1 $1 10 0 Decrease in Supply Prices didn’t change but there is LESS cereal produced
- 78. 6 Determinants (SHIFTERS)of Supply 1. Prices/Availability of inputs (resources) 2. Number of Sellers 3. Technology 4. Government Action: Taxes & Subsidies 5. Opportunity Cost of Alternative Production 6. Expectations of Future Profit Changes in PRICE don’t shift the curve. It only causes movement along the curve. 78
- 79. Supply Practice First, identifythe determinant (shifter) then decide if supply will increase or decrease 79 Shifter Increase or Decrease Left or Right 1 2 3 4 5 6
- 80. Supply Practice Hamburgers 1. Madcow kills 20% of cows 2. Price of burgers increase 30% 3. Government taxes burger producers 4. Restaurants can produce burgers and/or tacos. A demand increase causes the price for tacos to increase 500% 5. New bun baking technology cuts production time in half 6. Minimum wage increases to $10 1. Which determinant (SHIFTER)? 2. Increase or decrease? 3. Which direction will curve shift? 80
- 81. Qo $5 4 3 2 1 PDemand Schedule 10 20 3040 50 60 70 80 81 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 Supply Schedule P Qs $5 50 $4 40 $3 30 $2 20 $1 10 Supply and Demand are put together to determine equilibrium price and equilibrium quantity Equilibrium Price = $3 (Qd=Qs) Equilibrium Quantity is 30 D S
- 82. Qo $5 4 3 2 1 PDemand Schedule 10 20 3040 50 60 70 80 82 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 Supply Schedule P Qs $5 50 $4 40 $3 30 $2 20 $1 10 Supply and Demand are put together to determine equilibrium price and equilibrium quantity D S What if the price increases to $4?
- 83. Qo $5 4 3 2 1 PDemand Schedule 10 20 3040 50 60 70 80 83 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 Supply Schedule P Qs $5 50 $4 40 $3 30 $2 20 $1 10 D S At $4, there is disequilibrium. The quantity demanded is less than quantity supplied. Surplus (Qd<Qs) How much is the surplus at $4? Answer:
- 84. Qo $5 4 3 2 1 PDemand Schedule 10 20 3040 50 60 70 80 84 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 Supply Schedule P Qs $5 50 $4 40 $3 30 $2 20 $1 10 D S How much is the surplus if the price is $5? Answer:
- 85. Qo $5 4 3 2 1 PDemand Schedule 10 20 3040 50 60 70 80 85 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 Supply Schedule P Qs $5 50 $4 40 $3 30 $2 20 $1 10 D S At $2, there is disequilibrium. The quantity demanded is greater than quantity supplied. Shortage (Qd>Qs) How much is the shortage at $2? Answer: What if the price decreases to $2?
- 86. Qo $5 4 3 2 1 PDemand Schedule 10 20 3040 50 60 70 80 86 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 Supply Schedule P Qs $5 50 $4 40 $3 30 $2 20 $1 10 D S Answer: How much is the shortage if the price is $1?
- 87. Qo $5 4 3 2 1 PDemand Schedule 10 20 3040 50 60 70 80 87 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 Supply Schedule P Qs $5 50 $4 40 $3 30 $2 20 $1 10 D S When there is a surplus, producers lower prices The FREE MARKET system automatically pushes the price toward equilibrium. When there is a shortage, producers raise prices
- 88.
- 89. Supply and DemandAnalysis Easy as 1, 2, 3 1. Before the change: • Draw supply and demand • Label original equilibrium price and quantity 2. The change: • Did it affect supply or demand first? • Which determinant caused the shift? • Draw increase or decrease 3. After change: • Label new equilibrium? • What happens to Price? (increase or decrease) • What happens to Quantity? (increase or decrease) Let’s Practice! 89
- 90. S&D Analysis Practice AnalyzeHamburgers 1. Price of sushi (a substitute) increases 2. New grilling technology cuts production time in half 3. Price of burgers falls from $3 to $1. 4. Price for ground beef triples 5. Human fingers found in multiple burger restaurants. 1. Before Change (Draw equilibrium) 2. The Change (S or D, Identify Shifter) 3. After Change (Price and Quantity After) 90
- 91. Double Shifts • Supposethe demand for sports cars fell at the same time as production technology improved. • Use S&D Analysis to show what will happen to PRICE and QUANTITY. If TWO curves shift at the same time, EITHER price or quantity will be indeterminate. 91
- 92. Consumer Surplus isthe difference between what you are willing to pay and what you actually pay. CS = Buyer’s Maximum – Price Producer’s Surplus is the difference between the price the seller received and how much they were willing to sell it for. PS = Price – Seller’s Minimum Voluntary Exchange Terms 92
- 93. S P Q D Consumer and Producer’sSurplus $10 8 6 $5 4 2 1 102 4 6 8 CS PS 93 Calculate the area of: 1. Consumer Surplus 2. Producer Surplus 3. Total Surplus 1. CS= $25 2. PS= $20 3. Total= $45
- 94. Government Involvement #1-Price Controls: Floorsand Ceilings #2-Import Quotas #3-Subsidies #4-Excise Taxes 94
- 95. #1-PRICE CONTROLS Who likesthe idea of having a price ceiling on gas so prices will never go over $1 per gallon? 95
- 96. Qo $5 4 3 2 1 P 10 20 3040 50 60 70 80 96 D S Shortage (Qd>Qs) Maximum legal price a seller can charge for a product. Goal: Make affordable by keeping price from reaching Eq. Gasoline Does this policy help consumers? Result: BLACK MARKETS Price Ceiling Price Ceiling To have an effect, a price ceiling must be below equilibrium
- 97. Qo $ 4 3 2 1 P 10 20 3040 50 60 70 80 97 D S Surplus (Qd<Qs) Minimum legal price a seller can sell a product. Goal: Keep price high by keeping price from falling to Eq. Corn Does this policy help corn producers? Price Floor Price Floor To have an effect, a price floor must be above equilibrium
- 98. Practice Questions 1. Whichof the following will occur if a legal price floor is placed on a good below its free market equilibrium? A. Surpluses will develop B. Shortages will develop C. Underground markets will develop D. The equilibrium price will ration the good E. The quantity sold will increase A. A price ceiling causes a shortage if the ceiling price is above the equilibrium price B. A price floor causes a surplus if the price floor is below the equilibrium price C. Price ceilings and price floors result in a misallocation of resources D. Price floors above equilibrium cause a shortage 2. Which of the following statements about price control is true? 98
- 99. Are Price ControlsGood or Bad? To be “efficient” a market must maximize consumers and producers surplus P D S Pc Qe CS PS 99
- 100. Are Price ControlsGood or Bad? To be “efficient” a market must maximize consumers and producers surplus Price FLOOR P D S Pc QeQfloor DEADWEIGHT LOSS The Lost CS and PS. INEFFICIENT! CS PS 100
- 101. Are Price ControlsGood or Bad? To be “efficient” a market must maximize consumers and producers surplus P D S Pc Qe CS PS 101
- 102. Are Price ControlsGood or Bad? To be “efficient” a market must maximize consumers and producers surplus Price CEILING P D S Pc QeQceiling DEADWEIGHT LOSS The Lost CS and PS. INEFFICIENT! CS PS 102
- 103. #2 Import Quotas Aquota is a limit on number of exports. The government sets the maximum amount that can come in the country. Purpose: •To protect domestic producers from a cheaper world price. •To prevent domestic unemployment 103
- 104. International Trade andQuotas Identify the following: 1. CS with no trade 2. PS with no trade 3. CS if we trade at world price (PW) 4. PS if we trade at world price (PW) 5. Amount we import at world price (PW) 6. If the government sets a quota on imports of Q4 - Q2, what happens to CS and PS? This graphs show the domestic supply and demand for grain. The letters represent area.
- 105. #3 Subsidies The governmentjust gives producers money. The goal is for them to make more of the goods that the government thinks are important. Ex: •Agriculture (to prevent famine) •Pharmaceutical Companies •Environmentally Safe Vehicles •FAFSA 105
- 106. Result of Subsidiesto Corn Producers Qo Price of Corn Quantity of Corn 106 S SSubsidy Price Down Quantity Up Everyone Wins, Right? Pe P1 Qe Q1 D
- 107. #4 Excise TaxesExciseTax = A per unit tax on producers For every unit made, the producer must pay $ NOT a Lump Sum (one time only)Tax The goal is for them to make less of the goods that the government deems dangerous or unwanted. Ex: •Cigarettes “sin tax” •Alcohol “sin tax” •Tariffs on imported goods •Environmentally Unsafe Products •Etc. 107
- 108. Excise Taxes Qo $5 4 3 2 1 P 108 Supply Schedule P Qs $5140 $4 120 $3 100 $2 80 $1 60 D S 40 60 80 100 120 140 Government sets a $2 per unit tax on Cigarettes
- 109. Excise Taxes Qo $5 4 3 2 1 P 109 Supply Schedule P Qs $5$7 140 $4 $6 120 $3 $5 100 $2 $4 80 $1 $3 60 D S 40 60 80 100 120 140 Government sets a $2 per unit tax on Cigarettes
- 110. Excise Taxes Qo $5 4 3 2 1 P 110 Supply Schedule P Qs $5$7 140 $4 $6 120 $3 $5 100 $2 $4 80 $1 $3 60 D S 40 60 80 100 120 140 Tax is the vertical distance between supply curves STax
Editor's Notes
- #68 Spam-Inferior Yachts- Normal Off Brand Cereal-Inferior McDonald’s-Inferior Toilet Paper- Probably no connection to income (The point-some products are very reliant on income and others are not)
- #70 Number of consumers, increase. Income, decrease. Substitutes, decrease. Price doesn’t shift curve, no change. Tastes and preferences, decrease. Expectations, increase. Complements, decrease. Price doesn’t shift curve, no change.
- #71 Number of consumers, increase. Income, decrease. Substitutes, decrease. Price doesn’t shift curve, no change. Tastes and preferences, decrease. Expectations, increase. Complements, decrease. Price doesn’t shift curve, no change.
- #80 Number of consumers, increase. Income, decrease. Substitutes, decrease. Price doesn’t shift curve, no change. Tastes and preferences, decrease. Expectations, increase. Complements, decrease. Price doesn’t shift curve, no change.
- #81 Decrease in availability of resources, decrease. Price doesn’t shift curve, no shift. Government action, decrease. Opportunity cost of alternative production, decrease. Technology, increase. Price of resources, decrease.
- #91 1. Demand Increases 2. Supply Increases 3. No Shift. Shortage 4. Supply Decreases 5. Demand Decreases
- #99 Answers: D C
- #105 1.H 2.TLI 3.HIJKLMNRS 4.T 5.Q5-Q1 6. CS gets smaller and PS gets bigger