Daily Warm-Up It’s been more then a decade then Tupac Shakur’s murder. In “changes” he describes the way he saw the world around him. Pay attention to the social issues he is speaking to. What are some things that have changed in the decade since Tupac’s death? What are some of the things he describes that are still the same? How do you think he felt about economic equity, and why do you think he felt that way?

What are we doing today?Beginning Unit 2, Chapters 5 & 6 (Supply &

Demand) The Frozen Price Game / “Simulation” Pop Quiz on your assigned readings (you

may use your notes if you have any) (If we have free time) begin watching the

film “Wal-Mart: The High Cost of Low Prices.”

Supply & Demand

<- Look it’s a puppy :)

Ceteris Paribus

“All things equal”This is a simplification and not really

how things work (just kidding [no im not*])

*yes I am

The law of demand!

Prices go up demand goes down.

Prices go down demand goes up

The law of supply!

Prices go up quantity produced goes up

Prices go down quantity produced goes down

Draw Your Own Supply/Demand DiagramThe product is ice.The equilibrium price is $1.

A hurricane has struck Miami!! Oh no!!What will happen to the supply and demand

curves?

What happens?The Supply curve will shift to the left.

It requires power to produce ice. Fewer producers of ice = less supply.

The Demand curve will shift to the right.The need for ice will increase – no electricity =

no refridgerators, etc.

The Frozen Price Game

RulesMr. Benson is the Ice Store.Ice is $1 per package.Each customer can only buy one

package of ice.Get an occupation card.

(Mr. Benson)

Round OneIce is sold on a first-come, first-serve basis. So:

Get into a single-file line.Find out your wait time.

Your wait time is the same regardless of the length of the line.

Cost/Benefit AnalysisShould you wait in line or sit down?

Compare the benefit to the cost.Cost = Price of ice ($1) + opportunity cost.

If cost > benefit, sit down.If benefit > cost, continue to wait in line.

First-Come, First-Served Allocation Why I Want the Ice Benefi

t of the Ice

Cost of the Ice

Keep groceries from spoilingKeep sodas coolKeep prom corsage fresh

Keep fishing bait cold

Keep caviar from spoiling

First-Come, First-Served Allocation

First-Come, First-Served Allocation Why I Want the Ice Benefi

t of the Ice

Cost of the Ice

Keep groceries from spoiling

$8 $1

Keep sodas cool $2 $1

Keep prom corsage fresh $9 $5

Keep fishing bait cold $6 $5

Keep caviar from spoiling $26 $16

First-Come, First-Served Allocation

Round OneReturn to your seats.

Round TwoQuantity supplied increases as price increases. Why?

Higher price = more encouragement to use costlier means of production. For instance, trucking in ice from areas with electricity or by using generators.

More profit = more production.

ElasticityHow demand/supply respond to outside

factors.Elastic: Not sensitive to changes in price –

substitutes/compliments exist, or the product is not necessary.

Inelastic: Very sensitive to changes in price – substitutes/compliments do not exist.

Elastic Goods

Inelastic Goods

Oil Elasticity

 If a monopolist decides to increase the price of their product, how will this affect their sales revenue?

Will the increased price offset the decrease in sales?

If a government imposes a tax on a good, thereby increasing the price, how will this affect thedemand?

Round Two: Price AllocationRound Two: Price Allocation

<- (Also, a puppy)

Round TwoThis round, we will allocate ice based upon price.

Stand by your desk.The ice store is going to gradually raise the

price.Sit down when the price exceeds your

benefit.

Round TwoPrice of Ice: $1

Round TwoPrice: $3Who is priced out?Why did you want the ice?What was your benefit?

Price: $5Who is priced out?Why did you want the ice?What was your benefit?

Price: $7Who is priced out?Why did you want the ice?What was your benefit?

Price: $9Who is priced out?Why did you want the ice?What was your benefit?

Why I Want the Ice Benefit of the Ice

Cost of the Ice

Keep wedding cake from meltingKeep penguins coolKeep caviar from spoilingKeep wine cellar coolKeep donated kidney coldMake ice packs for feversCold drinks for yacht partyKeep meat from spoilingKeep donated blood cool

Why I Want the Ice Benefit of the Ice

Cost of the Ice

Keep wedding cake from melting $30 $9Keep penguins cool $14 $9Keep caviar from spoiling $26 $9Keep wine cellar cool $10 $9Keep donated kidney cold $100 $9Make ice packs for fevers $16 $9Cold drinks for yacht party $40 $9Keep meat from spoiling $20 $9Keep donated blood cool $50 $9

Which allocation method did the best job?

What did we/are we going to learn?The advantages of price allocation.That the opportunity cost of time affects

decisions.That consumers compare costs and benefits

when making decisions.That demand is related to marginal benefit.That a price ceiling will result in a shortage.That there’s a trade-off between efficiency

and equity.

What did we/are we going to learn?The demand and supply curves.What the equilibrium price represents.Elastic/Inelastic goods.The role of the supply and demand in

production and consumption.That economics is the best class, and Mr.

Benson should be president of the world (mwahahaha).

Something to think aboutAre people really rational all the time?Is “Ceteris Paribus” representative of reality?How accurately can we predict economic

activity?

“funny”

Predictably Irrational

Water Scarcity

Pop-Quiz Time!But also candy time!Woo-WooAw YeahOh no I didn’t read!!!!!!!!!!!!!!!!!!