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

© 2010 Pearson Education CanadaChapter 4 - 1

Chapter 4

Coordinating

Smart Choices

© 2010 Pearson Education Canada


Coordinating Smart Choices

Demand & Supply


LEARNING OBJECTIVES

4.1 Describe how buyers and sellers compete

and cooperate in markets

4.2 Explain how shortages and surpluses affect

prices

4.3 Identify how market-clearing prices coordinate

the smart choices of consumers and businesses

4.4 Illustrate how changes in demand and supply

affect market-clearing prices and quantities


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.


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…


• 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


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.


Figure 4.1 Market Demand & Supply for Piercings

Price Quantity

Demanded

Quantity

Supplied

$ 20 1200 200

$ 40 900 400

$ 60 600 600

$ 80 300 800

$ 100 0 1000


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…



Price Quantity

Demanded

Quantity

Supplied

$ 20 1200 200

$ 40 900 400

$ 60 600 600

$ 80 300 800

$ 100 0 1000


• Frustrated Sellers

market price too high

– surplus or excess supplyquantity 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


WHEN PRICES SIT STILLMARKET-CLEARING PRICES BALANCING

QUANTITY DEMANDED & QUANTITY SUPPLIED

Market-clearing prices coordinate the smart choices of consumers and

businesses, balancing quantity demanded and quantity

supplied.


MARKET-CLEARING PRICES BALANCING QUANTITY DEMANDED & QUANTITY SUPPLIED• The price that coordinates the smart choices

of consumers and businesses has two names

– market-clearing priceprice when quantity demanded equals quantity supplied

– equilibrium priceprice balancing forces of competition and cooperation

continued…



Price Quantity

Demanded

Quantity

Supplied

$ 20 1200 200

$ 40 900 400

$ 60 600 600

$ 80 300 800

$ 100 0 1000


• 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


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


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.


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…


• 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…


• Supply changes due to changes in

– technology

– prices of inputs

– prices of related products produced

– expected future prices

– number of businesses

continued…


• 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


Chapter 4Refresh Slides


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…


1. 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?


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…


1. 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?


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…


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”?



1. What happens to the market-clearing price

and quantity when demand increases? When

demand decreases? When supply increases?

When supply decreases?

continued…



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…


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?

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

Documents

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