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James B. WilcoxJames B. Wilcox
Resources provided by:Resources provided by:
The University of Southern MississippiThe University of Southern MississippiCenter for Economic and Entrepreneurship Education,Center for Economic and Entrepreneurship Education,
Mississippi State University, & Virtual EconomicsMississippi State University, & Virtual Economics
Master Teacher in EconomicsFundamentals Module
MTE Course Overview
MTE Class #1 - Fundamentals
Five In-Person Modules Fundamental Economics Microeconomics Macroeconomics International Economics Personal Finance Economics
Class Format Lecture & Discussion Sample Lessons Assessment
Lesson Plans for Today
MTE Class #1 - Fundamentals
Kidney Transplant Case Study Virtual Economics, v. 2.0.2
Unit 1, Lesson 2 Activity 2Scarcity, Opportunity Cost and Production Possibilities Curves
Advanced Placement Economics: Microeconomics, p. 7-8, 10-11
Unit 2, Lesson 10, Activity 1 Equilibrium Prices and Equilibrium Quantities
Capstone: Exemplary Lessons for High School Economics: Student Activities, p. 26-27
Unit 2, Lesson 1, Activity 9 Demand Curves, Movements Along Demand Curves and Shifts in Demand Curves
Advanced Placement Economics: Microeconomics, p. 51-53
Economics…is the study of how individuals and society choose, with or without the use of money, to employ scarce productive resources to produce various commodities over time and distribute them for consumption, now and in the future, among various people and groups in a society.
Guide to Economic Reasoning
MTE Class #1 - Fundamentals
People choose.The choices people make involve costs.People respond to incentives in predictable ways.People create economic systems that influence
individual choices and incentives.People gain when they trade voluntarily.People’s choices have consequences that lie in the
future.
Kidney Transplant
TASK You have one kidney to distribute.
You have to select one patient to receive a kidney transplant.
All suffer from urgent need.
The patients not chosen will die within the year
Be prepared to discuss the merits of your decision–
Why did you choose the person your group decided upon
Why did you pass up each of the others (to die)
CRITERIA1) Person’s merit
2) Contribution to society (past or potential)
3) Ability to pay
4) Their need
5) Their age
Patient ProfilePatient #1: Dr. M.45 year old physician with large inner-city
practiceHad mild heart attack 3 years ago, but
made good recovery and heart seems sound
No wife or childrenPresent yearly income: $70,000Potential lifetime earnings: $994,095Has health insurance
Patient ProfilePatient #2: Bonnie T.24 year old mother of two childrenActive in community work, Red Cross,
and churchPlans to resume nursing career when
children reach school age (4 years)Present yearly income: $32,000
(husband’s income)Potential lifetime earnings: $327,003Has health insurance
Patient ProfilePatient #3: Fred S.3rd year medical student, doing well and
considered “of great promise” by his advisors
Plans to specialize in neurologyFather of one child and another on the
wayPresent yearly income: $10,000Potential lifetime earnings: $1,149,812Has health insurance
Patient ProfilePatient #4: Agnes M.26 year old mother of two children, abandoned
by husbandUnable to work because of lack of affordable
daycare facilities in areaPresently on welfareActive in church, tenant’s organization in her
building and welfare rights organizationPresent yearly income: $6,996 (public aid and
food stamps)Potential lifetime earnings: $121,425Has Medicaid
Patient ProfilePatient #5: Ellen R.20 year old college junior, suffering from
hereditary condition; family fears twin sister has same disease
Doing excellent work in college; has been accepted to law school
Present yearly income: $47,000 (parents’ income)
Potential lifetime earnings: $928,753Has health insurance
Finalize group decision before proceeding
Future: Dr. M
Dies of a massive coronary attack 2 years after receiving the transplant
Future: Bonnie T.
Goes back to school and becomes an obstetrician.
Future: Fred
Drops out of medical school and leaves his wife
Future: Agnes M
Wins the lottery and volunteers time and money to children’s hospital programs
Future: Ellen R.
Becomes a lawyer and spends career defending the poor
Kidney Transplant
Opportunity CostOpportunity cost of a chosen activity is the value of
the best alternative that is forgoneSimilar to opportunity lostFocuses on the alternatives associated with making
choicesOpportunity cost is subjective
Only the individual making the choice can select the most attractive alternative
Chooser seldom knows the actual value of the “road not taken”
21
Opportunity CostTime is the ultimate constraint
By pursuing one activity, we cannot at the same time do something else each activity undertaken has an opportunity cost
May vary with circumstancesDepends on the value of the alternatives
Monetary costMay be a reasonable approximation but can omit the
time involved which may be substantial for some activities
22
Focus is on how much an economy can produce with a given set of resources and technology What are the economy’s production capabilities?
23
Production Possibilities Frontier
Identifies the various possible combinations of the two types of goods that can be produced when all available resources are employed fully and efficientlyNo change increases the production of one good
without decreasing the production of the other good
Involves getting the maximum possible output from available resources
24
Production Possibilities Frontier
25
Exhibit 1: The Economy’s PPF
Changes in Resource AvailabilityIncreases / Improvements in Quality rightward
shiftDecreases /Reductions in Quality leftward shift
Increases in the Capital StockIncreases rightward shiftDecreases leftward shift
Technological ChangeEmploys available resources more efficiently
26
Factors that can Shift the PPF
27
All of the following would lead to a rightward shift in the PPF from A to A‘:Increase in the size or health of the labor forceImprovement in the skills of the labor forceIncreases in the amount of capital Decreases in any of the above factors would shift the PPF from A' to A shift to the leftThe parallel shift implies the change that occurred affected the production of both goods equally
Exhibit 2a: Shifts in the Economy’s PPF
28
A leftward shift from A to A" could be caused by any of the following:Decrease in the size or health of the labor forceDecline in the skills of the labor forceDecreases in the amount of capital The parallel shift implies the change that occurred affected the production of both goods equally
Exhibit 2b: Shifts in the Economy’s PPF
Efficiency PPF represents the combinations of output that are possible, given the economy’s resources and technology
Scarcity Given the stock of resources and technology, the economy can produce only so much
Economic Growth rightward shift or rotation of PPF
ChoiceThe PPF does not tell us what we SHOULD produce.
29
Lessons of PPF
Activity
MTE Class #1 - Fundamentals
Says that quantity demanded varies inversely with price, other things constant
The higher the price, the smaller the quantity demanded
The lower the price, the larger the quantity demanded
31
Law of Demand
When the price of a good falls, its relative price makes consumers more willing to purchase this good
When the price of a good increases, its relative price makes consumers less willing to purchase this good
Changes in the relative prices – the price of one good compared to the prices of other goods – causes the substitution effect
32
Substitution Effect
Money incomeNumber of dollars received per period of time
Real incomeIncome measured in terms of the goods and services it
can buyWhen the price of a good decreases, real income
increasesWhen the price of a good increases, real income
declines
33
Income Effect
34
The demand schedule lists possible prices, along with quantity demanded at each price. The demand curve at the right shows each price / quantity combination listed in the demand schedule as a point on the demand curve.
(b) Demand Curve
e
d
c
b
$0
$3
$6
$9
$12
$15
$18
8 14 20 26 32
Millions of Pizzas per week
Pric
e pe
r P
izza
a
Exhibit 1: Demand Schedule & Demand Curve for Pizza
(a) Demand Schedule Price per Quantity
Pizza Demanded
Millions ($) per Week
a) 15 8
b) 12 14
c) 9 20
d) 6 26
e) 3 32
35
Pri
c e p
er
qu
art
8 14 20 26 32
$15.00
12.00
9.00
6.00
3.00
0
a
b
c
d
e
D
Millions of pizzas per week
Demand for pizza is not a specific quantity, but rather the entire relation between price and quantity demanded, and is represented by the entire demand curve An individual point on the demand curve shows the quantity demanded at a particular price.The movement from say, b to c, is a change in quantity demanded and is represented by a movement along the demand curve and can only be caused by a change in price
Demand and Quantity Demanded
Demand curve focuses on the relationship between the price of a good and the quantity demanded when other factors that could affect demand remain unchangedMoney income of consumersPrices of related goodsConsumer expectationsNumber and composition of consumers in the marketConsumer tastes
36
Shifts of the Demand Curve
37
$15
12
9
6
3
Pric
e
Suppose income increases: some consumers will now be able to buy more pizza at each price market demand increases demand shifts to the right from D to D'A decrease in demand will mean demand shifts to the left from D' to D.
0 8 14 20 26 32
Millions of pizzas per week
D
b
D'
f
Exhibit 2: Increase in the Market Demand
Goods can be classified into two broad categories:Normal goods: the demand increases when income
increases and decreases when income decreasesInferior goods: the demand decreases when income
increases and increases when income decreases
38
Changes in Consumer Income
Prices of other goods are another of the factors assumed constant along a given demand curve
Two general relationshipsTwo goods are substitutes if an increase in the price of
one shifts the demand for the other rightward and, conversely, if a decrease in the price of one shifts the demand for the other good leftward
Two goods are complements if an increase in the price of one shifts the demand for the other leftward and a decrease in the price of one shifts the demand for the other rightward
39
Changes in the Prices of Related Goods
If individuals expect income to increase in the future, current demand increases and vice versa
If individuals expect prices to increase in the future, current demand increases and decreases if future prices are expected to decrease
40
Changes in Consumer Expectations
Activity
MTE Class #1 - Fundamentals
Supply indicates how much of a good producers are willing and able to offer for sale per period at each possible price, other things constant
Law of supply states that the quantity supplied is usually directly related to its price, other things constantThe lower the price, the smaller the quantity suppliedThe higher the price, the greater the quantity
supplied
42
Supply
43
12 16 20 24 28
$15
12
9
6
3
0
S
Millions of pizzas per week
The supply curve and the supply schedule both show quantities of pizza supplied per week at various prices by all the pizza makers in the marketPrice and quantity supplied are directly, or positively, related: producers offer more for sale at higher prices than at lower ones: Supply curve slopes upward
Price
Exhibit 3: Supply Schedule & Supply CurveSupply Schedule
Price per QuantityPizza Supplied
Millions ($) per Week15 2812 24
9 206 163 12
Supply refers to the relation between the price and quantity supplied as reflected by the supply schedule or the supply curve
Quantity supplied refers to a particular amount offered for sale at a particular price, a particular point on a given supply curve
44
Supply and Quantity Supplied
Determinants of supply other than the price of the goodState of technologyPrices of relevant resourcesPrices of alternative goodsProducer expectationsNumber of producers in the market
45
Shifts of the Supply Curve
46
$15.00
12.00
9.00
6.00
3.00
0
12 16 20 24 28
Millions of pizzas per week
S
gg
S'
h
A more efficient technology, a high-tech oven, is inventedProduction costs fall suppliers will be more willing and more able to supply the good rightward shift of the supply curve from S to S'. Result: more is supplied at each possible price
Pric
e pe
r qu
art
Exhibit 4: Change in Technology Can Mean an Increase in Supply
Resources that are employed in the production of the good in questionFor example, if the price of mozzarella
cheese falls, the cost of pizza production declines
Conversely, if the price of some relevant resource increases, supply decreases
47
Changes in the Prices of Relevant Resources
Alternative goods are those that use some of the same resources employed to produce the good under considerationFor example, as the price of bread increases, so does
the opportunity cost of producing pizza and the supply of pizza declines
Conversely, a fall in the price of an alternative good makes pizza production more profitable and supply increases
48
Prices of Alternative Goods
When a good can be easily stored, expecting future prices to be higher may reduce current supply
More generally, any change expected to affect future profitability could shift the supply curve
49
Changes in Producer Expectations
Since market supply sums the amounts supplied at each price by all producers, the market supply depends on the number of producers in the marketIf that number increases, supply increases If the number of producers decreases, supply
decreases
50
Number of Producers
Demanders and suppliers have different views of priceDemanders, consumers, pay the price Suppliers, sellers, receive the price
As price rises, consumers reduce their quantity demanded along the demand curve, and producers increase their quantity supplied along the supply curve
51
Demand and Supply Create a Market
52 Millions of pizzas per week
$15.00
12.00
9.00
6.00
3.00
0
c
S
D
Surplus
At initial price $12, producers supply 24 million pizzas per week (supply curve) while consumers demand only 14 million: excess quantity supplied (or surplus) of 10 million pizzas per weekTo eliminate this surplus, suppliers put downward pressure on pricesAs prices fall, quantity supplied declines and quantity demanded increases: market moves towards equilibrium at point c
14 20 24
Price
Exhibit 5: The Marketfor Pizzas
53 Millions of pizzas per week
$15.00
12.00
9.00
6.00
3.00
0
c
S
D
Shortage
Initial price is $6 per pizza, 26 million are demanded, but producers supply only 16 million: an excess quantity demanded (or shortage) of 10 million pizzas per weekAs prices increase, producers increase quantity supplied and consumers reduce their quantity demanded, moving towards equilibrium at point c
16 20 26
Exhibit 5: The Marketfor Pizzas
When the quantity consumers are willing and able to pay equals the quantity producers are willing and able to sell, the market reaches equilibriumIndependent plans of both buyers and sellers exactly
matchMarket forces exert no pressure to change price or
quantity
54
Equilibrium
Once a market reaches equilibrium, that price and quantity will prevail until one of the determinants of demand or supply changes
A change in any one of these determinants will usually change equilibrium price and quantity in a predictable way
55
Changes in Equilibrium
56
Assume one of the determinants of demand changes so that demand increases from D to D'After the increase, the amount demanded at $9 is 30 million – which exceeds the amount supplied of 20 million pizzas: shortage and upward pressure on priceAs price increases, quantity demanded decreases along the new demand curve, D'. The quantity supplied increases along the existing supply curve, S, until the two quantities are in equilibrium. 20 Millions of pizzas per week
9
0D
S
$12
D'
24 30
Pric
e
c
g
Exhibit 6: Effects of an Increase in Demand
Given an upward-sloping demand curve, an increase in demand leads to a rightward shift of the demand curve, increasing both the equilibrium price and quantity
Alternatively, a decrease in demand leads to a leftward shift of the demand curve, reducing both the equilibrium price and quantity
57
Shifts of the Demand Curve
58
Suppose supply shifts from S to S' increasesAfter supply increases, the amount supplied at the initial price of $9 increases from 20 to 30 million pizzas per week a surplus existsSurplus puts downward pressure on price quantity demanded increases along the existing demand curve until a new equilibrium is reached. D
S
$9
20
S'
26
6
30
Pric
e
Millions of Pizzas per Week
d
c
Exhibit 7: Effects of anIncrease in Supply
An increase in supply: a rightward shift of the supply curve reduces equilibrium price but increases equilibrium quantity
A decrease in supply: a leftward shift of the supply curve increases equilibrium price but decreases equilibrium quantity
Given a downward-sloping demand curve, a rightward shift of the supply curve decreases price, but increases quantityA leftward shift increases price, but decreases quantity
59
Shifts of the Supply Curve
As long as only one curve shifts, we can say for sure what will happen to equilibrium price and quantity
If both curves shift, however, the outcome is less obvious
60
Simultaneous Shifts in Demand and Supply
61
p
0 Units per period
S
D
p'
Q'
S'
D'
Suppose supply and demand both increase and that demand increases more than supply as shown by D' and S'Here both price and quantity increaseIf both demand and supply were to decrease, for example from D' S' to D and S, both equilibrium price and quantity would decline.
a) Shift in demand dominates
Pric
e
Exhibit 8: Indeterminate Effect of an Increase in Both Supply and Demand
62
p
Units per period
D
S
0
p"
Q"
D"
S"
Q
Pric
e
Again, suppose both supply and demand increase but supply shifts by more than demand: price decreases from p to p'' and quantity increases
Conversely, if both supply and demand decrease with the shift in supply dominating, price will increase and quantity will decrease.
b) Shift in supply dominates
Exhibit 8: Indeterminate Effect of an Increase in Both Supply and Demand
63
Exhibit 11: Price Floors and Price Ceilings
64
$2.50
14 19 24
S
D
Millions of gallons per month
Surplus
0
To achieve higher prices, the federal government sets a price floor, a minimum selling price that is above the equilibrium priceSuppose it places a $2.50 per gallon price floor for milkAt this price, farmers supply 24 million gallons per weekConsumers demand only 14 million gallons a surplus of 10 million gallons
Pric
e pe
r ga
llon
$1.90
Exhibit 11a: Effects of a Price Floor
65
$1000
$600
40 50 60
D
S
Thousands of rental units per month
0
Shortage
A common example of a price ceiling is rent control in some citiesSuppose the market-clearing rent is $1,000 per month with 50,000 apartments being rentedNow suppose the government decides to set a maximum rent of $600At this ceiling price, 60,000 rental units are demandedHowever, only 40,000 are supplied, a shortage
Mon
thly
ren
t
Exhibit 11b: Effects of a Price Ceiling
To have an impact, a price floor must be set above the equilibrium price and a price ceiling must be set below the equilibrium price
Effective price floors and ceilings distort markets in that they create a surplus and a shortage, respectively
In these situations, various nonprice allocation devices emerge to cope with the disequilibrium resulting from the intervention
66
Price Floors / Ceilings Summary
Real World Example: Zimbabwe
Zimbabwe’s government, in an effort to fight inflation, passed a law which forced all sellers to cut their prices by 50% compared to the market prices.
Can you guess what happened?
Activity
MTE Class #1 - Fundamentals
Police forcing people to sell inventory below cost, jailing offenders.
Massive shortages due to lower prices.Goods only available on the Black Market at
prices 7 times higher than the original market price.
Sellers closing their stores because the cost is higher than the prices they are allowed to charge.
Real World Example: Zimbabwe
James B. WilcoxJames B. Wilcox
Resources provided by:Resources provided by:
The University of Southern MississippiThe University of Southern MississippiCenter for Economic and Entrepreneurship Education,Center for Economic and Entrepreneurship Education,
Mississippi State University, & Virtual EconomicsMississippi State University, & Virtual Economics
Master Teacher in EconomicsFundamentals Module
