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Chapter 3 Circular Flow Model

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Title: Chapter 3 and Chapter 5 Author: Karen Horn Last modified by: Owner Created Date: 6/13/2004 4:58:00 PM Document presentation format: On-screen Show (4:3) – PowerPoint PPT presentation

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Title: Chapter 3 Circular Flow Model


1
Chapter 3 Circular Flow Model
  • Supply and Demand

2
What Determines a Persons 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, teacher
  • b) supply and demand. If lot of people doing
    same things you are not likely to be paid
    much.(underwater welders) (dangerous- coal
    mining) (oil rigs) . 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

3
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?

4
Characteristics of Recession/Inflation
  • Recession
  • Businesses not selling what it produces
  • Inventories accumulate
  • Businesses then cut down on employment (hence
    unemployment/layoffs)
  • Inflation
  • Government and investors spending more
  • Inventories begin to be depleted
  • Prices increase
  • Production increases
  • More workers are hired

5
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, Utility
  • Price value of product in terms of money
  • Value has to do with relative scarcity
    exchange value
  • Utility satisfaction that good or service can
    provide

6
Law of Supply
  • As the price of the product increases, the
    quantity that the supplier tends to supply also
    increases.
  • Ceteris Paribus

7
  • Law of Supply positive relationship between the
    quantity of a good supplied and price.
  • PRICE IS THE INDEPENDENT VARIABLE

8
Determinants of Supply
  • Technique of production (technology)
  • (ovens, organic farming)
  • Resource Prices (Factor Costs) cost of inputs
  • Taxes and Subsidies
  • Prices of Other Goods (decline in wheat will
    cause farmer to shift to corn)
  • Expectations- (farmers expect price to rise..
    Hold back production)
  • Number of sellers in market more sellers,
    greater supply.

9
Important Concepts
  • Change in Supply (shifting of curve)
  • Or
  • Change in Quantity Supplied (movement along curve)

10
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 RUN
  • Examples
  • IN LONG RUN can adjust. The greater the amount
    of time producers have to adjust, the greater
    their output response.

11
Law of Demand
  • AS THE PRICE OF A GOOD DECREASES THE QUANTITY
    DEMANDED TENDS TO INCREASE.
  • Ceteris Paribus
  • Price once again is the independent variable!

12
  • 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 terms Relative price in terms of
    another good. Price of a car relative to an
    airplane.

13
  • 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.

14
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.

15
Determinants of Demand
  • Preferences
  • Prices of Related Goods
  • Number of Buyers
  • Expectations of future price
  • Income

16
Determinants of Demand
  • Tastes and preferences
  • Taste changes throughout our lifetime.

17
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 doesnt 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.

18
  • Complementary Goods Goods that go along with
    other goods consumers 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.

19
  • Independent Goods No connection between price
    and demand (golf clubs/bread)

20
Determinants Continued
  • 2. Number of buyers
  • The number of buyers will increase demand for
    the product which (if supply is fixed) will drive
    up the price.)
  • 3. Income- RATHER OBVIOUS HERE.
  • Show shifts
  • Superior or Normal goods commodities whose
    demand varies DIRECTLY with money income.

21
  • INFERIOR OR POOR MANS GOODS.
  • Goods whose demand varies inversely with a change
    in money income.
  • 4. 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!

22
IMPORTANT CONCEPTS OF DEMAND
  • Change in Demand
  • OR
  • Change in Quantity Demanded

23
Terms to Remember
  • Profit
  • TR-TC
  • Total Revenue
  • P x Q
  • Marginal 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.

24
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.

25
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,

26
  • 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.

27
Recap Ceilings and Floors
P
S
P
S

D
D
Q
Q
28
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)

29
Equilibrium Tutorial
  • Equilibrium

30
Supply and Demand for Cowboy Tickets
  • http//www.tickco.com/football/cowboys_tickets.htm
  • http//www.tickco.com/schedule/new-england-patriot
    s/

31
Activities for Check-point
  • Price of gasoline goes up, what happens to S D
    if you keep your demand at the same level.
  • You lose your job, what happens to demand?
  • Government subsidizes your pizza business. What
    happens to your supply?
  • Government sets a ceiling on price of hammers.
    Draw that graph. What can you tell me about the
    outcome?

32
More practice
  • Suppose that short skirts that were fashionable
    in the 1990s became unfashionable in the late
    2000s. If other factors were held constant, then
    there would be a. a rightward movement along the
    supply curve b. a rightward shift of the demand
    curve c. a leftward shift in the demand curve d.
    a leftward movement along the supply curve
  • Assuming that turkey, chicken, pork and beef are
    substitutes, suppose that the price of turkey has
    fallen. This will, other things being equal a.
    reduce demand for chicken, pork and beef b.
    Leave demand for chicken, pork and beef unchanged
  • c. Increase demand for chicken, pork, and beef
  • d. Increase quantity demanded of beef

33
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34
Kiley is my best friend She Supplies a lot of
love! ?
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