Chapter 3 Supply and Demand Additional – Circular Flow Model.
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Transcript of Chapter 3 Supply and Demand Additional – Circular Flow Model.
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Chapter 3 Supply and Demand
Additional – Circular Flow Model
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What Determines a Person’s Income in the Market?
This means… what is the value of the human being?Determined by:
a) value of their product…. Rock singer, athlete, Shaq, Oprah, department store clerk, insurance salesman, teacherb) supply and demand…. If lot of people doing same things you are… not likely to be paid much.(underwater welders)……. As demand for product decreases, reduces number of available jobs… gas station jobs!c) if demand for product lacking- rewards minimal and number of competing workers is few, demand high, wages high. 20 years ago… heart surgeons
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Who Determines the value of a product?
The value of the product is the worth that society puts on it….
What worth does society put on sports?
What worth does society put on music industry?
What worth does society put on sport cars, SUVs, large houses, motorcycles, eating out, designer clothes, entertainment. Etc, etc. etc. Education?
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WORKING MODEL OF THE ECOMONYWORKING MODEL OF THE ECOMONY
Product Market
Receive Goods & Services
Payments for Goods & Services
BUSINESS HOME
Land,Labour, Capital, Entrepreneurs
Rent, Wages, Interest, Profit
Leakage
Injection
Savings Taxes
Investment
Banks
Leakage S + T = I + G InjectionS+T > I+G = RecessionI+G > S+T = Inflation
Factor Market
International Participants
International Participants
Government
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Circular Flow Explanation
Flow of resources in the market shows how the market works…
In market system, voluntary exchanges continually take place in circular flow model
System works that what is an expense to one is ultimately an income to the other
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Two Leakages Explained
Savings and Taxes Savings does not help unless it is
invested back into the flow (economy). Financial intermediaries: why are they
called this? (because they take savings of one group and
make it available to another to borrow or invest) Financial Intermediaries are: banks, savings & loan,
credit unions, stock market, insurance companies.
If savings is greater than investment..business expenses mount.*****
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Taxes are also a leakage.
Government injects tax dollars back into the economy (flow) by spending the money that taxes take out.
What expenditures does government make into the flow?
****Money spent on redistribution of income or transfer payments is not “productive into the flow.” Why?**This is where a lot of the controversy occurs about stimulus package.
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S + T greater than I + G = recession
G + I greater than S + T = inflation
Supply-siders favor strong IDemand-siders (Keynesian
economy) favor strong G *** this is where we are now for most of populous thinking
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What if???
Banks will not loan money?People lose their jobs?Companies are not hiring?People are under-employed?Consumption decreases significantly?
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Characteristics of Recession/InflationRecession:
Businesses not selling what it producesInventories accumulateBusinesses then cut down on employment
(hence unemployment/layoffs)Inflation:_____________________________Government and investors spending moreInventories begin to be depletedPrices increaseProduction increasesMore workers are hired
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What is a Market?Any Place Where Goods and Services are
Voluntarily Exchanged (brings together buyers and sellers)Price is a primary influence in determining
allocation of resources in our free enterprise economy.
Difference between Price, Value, UtilityPrice= value of product in terms of
moneyValue= has to do with relative scarcity
= exchange valueUtility = satisfaction that good or
service can provide
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Law of Supply
As the price of the product increases, the quantity that the supplier tends to supply also increases.
****Ceteris Paribus Ceteris Paribus Assumption[KAY-ter-us PEAR-uh-bus]
Nothing changes except the factor or factors being studied.
Other things “constant” “equal”
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Economics as a Science (cont'd)
Ceteris Paribus Assumption[KAY-ter-us PEAR-uh-bus]
Nothing changes except the factor or factors being studied.
“Other things constant”
“Other things equal”
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Law of supply
= positive relationship between the quantity of a good supplied and price.
PRICE IS THE INDEPENDENT VARIABLE
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Determinants of Supply
1. Technique of production (technology)(ovens, organic farming)
2. Resource Prices (Factor Costs)– cost of inputs
3. Taxes and Subsidies4. Prices of Other Goods – (decline in wheat
will cause farmer to shift to corn)5. Expectations- (farmers expect price to
rise.. Hold back production)6. Number of sellers in market – more
sellers, greater supply….
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Important Concepts
Change in Supply (shifting of curve)OrChange in Quantity Supplied (movement
along curve)
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Ability to Respond to Price varies
Often the ability of an individual firm to respond to an increase in price is limited or constrained by its existing scale of operations, or capacity, or ability to obtain resources….. IN SHORT RUNIN SHORT RUN
Examples:IN LONG RUNIN LONG RUN… can adjust. The greater the
amount of time producers have to adjust, the greater their output response.
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Law of Demand
AS THE PRICE OF A GOOD DECREASES THE QUANTITY DEMANDED TENDS TO INCREASE….
***Ceteris ParibusPrice once again is the independent
variable!
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Wishing for a new boat does not constitute demand… one must be WILLING AND ABLE to purchase a boat.
Generally speaking…. The higher the price obstacle, the less of a product a consumers will buy.
Bargain days are based on law of demand.Two prices- Absolute and Relative.
Absolute = price in $ termsRelative = price in terms of another good.Price of a car relative to an airplane.
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The greater the want satisfaction…. The greater the utility…
Marginal Utility… How much more utility do you get adding or subtracting units (more doughnuts… more cars… more steak in one day)
DIMINISHING MARGINAL UTILITY.As the number of units of a
product a consumer has increases, the satisfying power for each extra unit decreases.
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Utility
Purpose of Utility analysis is to study how people behave not how they think.
Theory of consumer choice is based on the idea that each consumer spends his/her income in a way that yields the greatest satisfaction.
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Determinants of Demand
1.Preferences2.Prices of Related Goods 3.Number of Buyers4.Expectations of future price5.Income
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Determinants of Demand
1. Tastes and preferencesTaste changes throughout our lifetime.
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# 2 Determinant: Prices of Related Goods
Your preference is Coke… price skyrockets….
Affected in the market by substitute goods and complimentary goods.*Substitute goods… anything that can be substituted for the product or service desired…
(Coke/Pepsi, Millers/Coors, potato chips/popcorn). If price of Coke rises… and consumer doesn’t feel
strongly about brand preference… will buy Pepsi until Coke price declines)
When two products are substitutes, the price of one good and the demand for the other are DIRECTLY RELATED.
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*Complementary Goods… Goods that “go along with other goods consumer’s buy”peanut butter/jelly, beer/pretzels, milk/cookies, golf balls/golf tees,
When two goods are complements, an increase in the price of one good adversely affects the demand for the other and creates an inverse relationship.
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Independent Goods… No connection between price and demand (cars/bread)
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Determinants Continued
3. Number of buyersThe number of buyers will increase demand for the product which (if supply is fixed) will drive up the price.)
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Determinant #4
Income- RATHER OBVIOUS HERE.Show shifts…
Superior or Normal goods= commodities whose demand varies DIRECTLY with money income.
INFERIOR OR “POOR MAN’S” GOODS.
Goods whose demand varies inversely with a change in money income.
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5. Expectations…
If you are in medical school or law school, the expectation of you getting a larger income when you get out of school will affect your demand for goods… Inheriting money, winning the lottery!
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IMPORTANT CONCEPTS OF DEMAND
Change in Demand ORChange in Quantity Demanded
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Terms to RememberProfit:
TR-TCTotal Revenue
P x QMarginal Utility
To maximize utility, consumers should choose that good which delivers the most marginal utility per dollar. Optimal utility is then achieved.
Optimal consumption= mix of output that maximizes total utility for the limited amount of income you have to spend.
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Equilibrium
Equilibrium = market clearing price… supply and demand are “in balance.”
Does not occur often if ever with the constantly changing “invisible hand” and the consumer fickleness.
In our U.S. economy we have consumer sovereignty… which tends to shift both curves or move along the curve almost continuously.
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Ceilings and Floors
Price Ceiling- a legally established maximum price
that sellers may charge (rent control)
Direct effect of a price ceiling is a shortage
Secondary effect- reduction in the quality of the good, inefficient use, lower future supply, black markets,
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Price Floors Price floor is a legally established
minimum price that buyers must pay. (minimum wage)
Direct effect= reduces employment of low-skilled labor
Indirect effects – reduction in nonwage component of compensation (perks), lesson-the-job training.
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Recap Ceilings and Floors
Q
S
D
P
Q
S
D
P
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Black Markets
Markets that operate outside the legal system
Have a higher incidence of defective products, higher profit rates, greater violence (cigarettes, drugs {both prescription and illegal}, Levis during cold war)
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Equilibrium Tutorial
Equilibrium
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Supply and Demand for Cowboy Tickets
http://www.tickco.com/schedule/dallas-cowboys/
http://www.tickco.com/schedule/new-england-patriots
/
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Kiley is my best friend… SheSupplies a lot of love!