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Principles of Macroeconomics Unit 2

Outline of concepts discussed in www.inflateyourmind.com unit 2.
by

John Bouman

on 12 August 2014

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Transcript of Principles of Macroeconomics Unit 2

Price in Dollars Per Gallon
Quantity Supplied
2.50
3.00
3.50
4.00
4.50
5.00
Market Supply Curve
S
Price
Quantity Demanded Per Day
$5
$2
$3
$4
90
100
110
120
D
S
Producer Surplus
Price in Dollars Per Gallon
Quantity Demanded
2.50
3.00
3.50
4.00
4.50
5.00
One Individual’s Demand Curve
D
Price in Dollars Per Gallon
Quantity Demanded
2.50
3.00
3.50
4.00
4.50
5.00
Market Demand Curve
D
Unit 2 - Supply and Demand
Equilibrium Price and Quantity
Price
Quantity
S1
D
$3
50
S2
$2
60
When supply increases, the supply curve shifts to the right.
Equilibrium price decreases, and equilibrium quantity increases.
Price
Quantity Demanded Per Day
$5
$6
$7
$8
90
100
110
120
D
S
Consumer Surplus
Price in Dollars Per Gallon
Quantity Supplied
2.50
3.00
3.50
4.00
4.50
5.00
Individual Supply Curve
S
Price of Labor
Quantity Demanded of Labor
DL
SL
$6.00
1,000
Minimum Wage
$7.50
900
1,100
The Minimum Wage
Price of Labor
Quantity Demanded of Labor
DL
SL
$10.00
1,000
Minimum Wage – New York Example
$7.50
900
1,100
$8.50
Unit 2 - Supply and Demand
Equilibrium Price and Quantity
Price
Quantity
S
D1
$3
50
D2
$4
70
When demand increases, the demand curve shifts to the right.
Equilibrium price increases, and equilibrium quantity increases.
0 / 30
Cross-Tab Label
Determine price and quantity of paper towels when future price is expected to rise and production tax rises
Pe increases; Qe decreases
Pe increases; Qe change is unknown
Pe decreases; Qe decreases
Pe increases; Qe increases
Pe is unknown; Qe decreases
none
0
Seconds
Remaining
23
30
Unit 2 - Supply and Demand
The Demand Curve
A change in the price is a movement along the demand curve. This is called a change in “quantity demanded”.
Price
Quantity Demanded
Individual product demand curves always extend from the upper left to the lower right. They are downward sloping.
Demand Curve
A
B
$4
$1.75
60
80
Rent
Quantity Demanded
D
S
$1,800
900
$1,000
700
The Case of Rent Control
0 / 30
Cross-Tab Label
What happens to the price and quantity bought/sold of Ipods if incomes rise and technology advances?
Price down; quantity up
Price same; quantity up
Price up; quantity up
Price down; quantity down
None of the above
23
30
0
Seconds
Remaining
Unit 2 - Supply and Demand
The Supply Curve
A change in the price is a movement along the supply curve from point A to point B. This is called a change in “ _______.”
Price
Quantity Supplied
A supply curve is upward sloping.
A
B
$2
$4.50
30
90
Supply Curve
Unit 2 - Supply and Demand
Equilibrium Price and Quantity
In a free market the equilibrium price and quantity occur where the supply and demand curves intersect.
Price
Quantity
S
D
$3
50
Businesses that pollute:
Should be fined by the government and the revenue should be used to help clean the environment
Should be forced to go out of business
Should be allowed to operate just like any other business
No opinion/other
19
30
0
Seconds
Remaining
Organizations that provide products that have positive externalities:
Should be subsidized by the government
Should be fully funded by the government
Should operate just like any other organization
No opinion/other
0
Seconds
Remaining
20
30
Unit 2 - Supply and Demand
The Free Market Economy and Externalities
Do prices reflect their true market value?
Unit 2 - Supply and Demand
Substitution Effect
When the price of a product decreases, ceteris paribus, the product becomes cheaper. It is, therefore, more attractive relative to other products (and vice versa).
Unit 2 - Supply and Demand - Micro
Why Do You Purchase 10 instead of 11 Gallons of Gasoline When You Visit the Gas Station?
Unit 2 - Supply and Demand
The Law of Supply
Producers supply more of a product at higher than at lower prices, ceteris paribus (and vice versa).
Cell Phones
Big Screen TVs
CDs
Unit 2 - Supply and Demand
One Supplier

If you had a small oil well in your backyard and it took you some effort to get the oil out, and you were able to sell the oil, how much gasoline would you supply if you could sell the oil at the following prices in the market (gallons per month)?
Unit 2 - Supply and Demand
Changes in Demand and Supply – Example 2

What happens to the equilibrium price and quantity of paper towels when simultaneously
Buyers expect the future price of paper towels to be significantly higher in the near future.
The government
taxes the production of
paper towels.
Unit 2 - Supply and Demand
The Law of Demand
Buyers of a product will purchase more of the product if its price is lower and vice versa, assuming all other things remain constant (ceteris paribus).
Unit 2 - Supply and Demand
Income Effect
When the price of a product decreases, ceteris paribus, consumers have more relative income. They can, therefore, purchase additional products (and vice versa).
Unit 2 - Supply and Demand
One Buyer

How much gasoline would you purchase at the following prices (gallons per month)?
Unit 2 - Supply and Demand - Micro
The Law of Diminishing Marginal Utility
As consumers purchase more of a product, the value (satisfaction) of additional items purchased declines.
Unit 2 - Supply and Demand
Several Suppliers

If you had a small oil well in your backyard and it took you some effort to get the oil out, and you were able to sell the oil, how much gasoline would you supply at the following prices (gallons per month)?
Unit 2 - Supply and Demand
The Free Market Economy


Free market economy = capitalist economy = laissez-faire economy = price system

In a free market economy prices of goods and services, wages, interest rates, foreign exchange values, etc., are determined by supply and demand
Unit 2 - Supply and Demand
The Free Market Economy
Should all prices, including wages, be determined by supply and demand?
Celebrities receive millions of dollars per year in compensation Baltimore Sun photo by Ezra Shaw.
Unit 2 - Supply and Demand
Prices of Manufactured Products
Manufactured products are abundantly available and are produced in competitive industries. Examples include computers, cell phones, CDs, and bicycles.

Prices of manufactured goods equal the cost of production plus a reasonable profit. Prices are rarely excessive, especially in the long run.
Unit 2 - Supply and Demand
Prices of Limited-Supply Products

Examples of limited-supply products include land, office space, labor, Super Bowl tickets, and products sold by monopolies.

Prices of limited-supply products can be excessive, even in the long run.
Unit 2 - Supply and Demand - Micro
Marginal Utility

Marginal utility is the increase in satisfaction (as measured in “utils”) per additional item consumed.
Unit 2 - Supply and Demand
Several Buyers (the Market)

How much gasoline would you purchase at the following prices (gallons/month)?
Unit 2 - Supply and Demand
Reasons why producers produce more at higher prices
The Substitution Effect
When the market price increases, other competing products will become less profitable and less attractive to produce (and vice versa).
The Income Effect
When the price increases, the product earns more money (income) and the supplier has more incentive to produce (and vice versa).
Unit 2 - Supply and Demand
Demand Determinants
The following changes will shift the demand curve to the right or to the left.
A change in real incomes or wealth (normal and inferior products).
A change in tastes or preferences.
A change in the prices of related products (substitute and complementary products).
A change in the expectation of the product’s future price or buyers’ future incomes.
A change in the number of buyers (population).
Unit 2 - Supply and Demand
Supply Determinants

The following changes will shift the supply curve to the right or to the left.
An advance in technology.
A change in input prices.
A change in taxes, subsidies, or regulations.
A change in the number of firms selling the product.
Unit 2 - Supply and Demand
The Effect of a Change in Supply on Equilibrium Price and Quantity

When supply increases (a rightward shift of the supply curve)
The equilibrium price decreases, and
The equilibrium quantity increases.

When supply decreases (a leftward shift of the supply curve)
The equilibrium price increases, and
The equilibrium quantity decreases.
Unit 2 - Supply and Demand
Changes in Demand and Supply – Example 1

What happens to the equilibrium price and quantity of an Ipod (a normal product) when simultaneously:
Buyers’ incomes rise, and
Technology to make the
Ipods improves?
Unit 2 - Supply and Demand
Changes in Demand and Supply – Example 1 Answer

An increase in incomes will increase demand (price and quantity increase).
An advance in technology will increase supply (price decreases and quantity increases).

The combined effect is that price change is indeterminate and equilibrium quantity increases.
Unit 2 - Supply and Demand
Changes in Demand and Supply -Example 2 Answer

The expectation of a higher future price increases the current demand for the product (price and quantity increase).
The imposition of a government tax reduces the supply (price increases and quantity decreases).

The combined effect is that the equilibrium quantity change is unknown (indeterminate) and the equilibrium price increases.
Unit 2 - Supply and Demand
Two Reasons Why Buyers Buy More at Lower Prices and Less at Higher Prices

The Substitution Effect
The Income Effect
Unit 2 - Supply and Demand
The Effect of a Change in Demand on Equilibrium Price and Quantity

In the short run, when demand increases
the equilibrium price increases, and
the equilibrium quantity increases.

In the short run, when demand decreases
the equilibrium price decreases, and
The equilibrium quantity decreases
Unit 2 - Supply and Demand
Consumer Surplus

is the difference in what consumers are willing to pay for the price of the product and what they are actually paying for it in the market.
Unit 2 - Supply and Demand
Producer Surplus

is the difference in what suppliers are willing to sell the product for and what they are actually receiving for it in the market.
Price
Quantity
It's because of ...
Why are gasoline prices changing?
Why do professional athletes earn more than teachers?
Why is the value of the dollar going up
(or down)?
Why are interest rates so ...
Why are housing prices ...
LOW?
Why did Facebook's stock decrease
(or increase)?
Supply and Demand!
Each market has two sides:
Supply
Demand
Let's take a look at the demand side
and
You buy less gas at high prices
$8
$3
10
25
This is the law of demand
and vice versa
gallons per month
price per gallon
Oil companies produce more at higher prices
and versi vica
millions of gallons per month
price per gallon
$8
14
3
$2.50
This is the law of supply
Buyers want low prices ...
And suppliers
want high prices ...
We must compromise!
and come up with an equilibrium price and quantity.
Demand
Demand
Supply
How do changes in demand and supply affect equilibrium prices and quantities?
Supply
Pe
Qe
Pe
Pe
Pe
Qe
Qe
Qe
Reasons for changes in demand:
1. income changes
2. preference changes
3. related product price changes
4. expected future price changes
5. population changes
Reasons for supply changes:
1. technology changes
2. input cost changes
3. taxes or subsidies changes
4. changes in number of firms
Does the free market work?
What about externalities?
... falling? (or rising?)
What do you do if you disagree?
Supply 2
Demand 2
Full transcript