Economics Unit 2

Why Did Communism Collapse?Capstone Lesson 6 The Collapse of communism in the USSR

was one of the most important events in the 20th Century

We want to apply economic reasoning to try to explain why

Visual 1 What was the position of the former Soviet

Union for much of the 20th century?

How was the Soviet Union Opposed?

What is the Mystery? Why did the Soviet Union collapse?

Battle of the Superpowers

Visual 2 Speculate as to whether or not these questions are true or false Now Read Activity 1 Now Let’s look back at visual 2 and answer the questions A. True For much of the twentieth century, nearly one-third of

the world’s population lived under communism or socialism B. True The USSR worked form the premise that only

government planners could provide for the overall economic well being of Soviet Society

C. True In a market economy, prices send important information to producers and consumers regarding the relative value of goods and services

D. True In command economies, prices are controlled by the government

Solve the Mystery

Solve the Mystery continued Visual 3

Visual 4 Basic characteristics of a market economy Private Property-

Freedom of Choice-

Self Interest-

Profit Motive-

Markets and Prices-

Competition-

Limited Government-

Visual 5 Basic characteristics of a command economy Public Ownership-

Centralized Decision Making-

Economic Planning-.

Allocation by Command-

Guide to economic reasoning 1. people Choose 2. people’s choices involve costs 3. people respond to incentives in predictable ways 4. people create economic systems that influence

individual choices and incentives 5. people gain when they trade voluntarily 6. people’s choices have consequences that lie in the

future.

Why did communism collapse?

Markets

Farmer’s Market, Supermarket, Flea Market

Barter

In order for barter to work you have to have what the other wants.

If I have an item that I want to trade to you for another item, you must want what I have

Double coincidence of wants

Transaction Costs

If we just were to concentrate on making exchanges through barter without money, we would have very high transaction costs

Relative Price

When people agree to trade or exchange, they must establish a rate of exchange or a price

For example, if a plumber and a doctor agreed to exchange services they would have to establish the value of one compared to the other. In this case they might agree that one hour of the doctor’s services are equal to three hours of the plumber’s services

Demand

This is what people are willing and able to buy.

Quantity Demanded

Key difference demand refers to every price, quantity demanded refers to specific price

Law of Demand

This states that people are going to demand more at a lower price and demand less at a higher price as long as everything else stays constant.

Demand Schedule

PriceQuantityDemanded

5 10

4 17

3 26

2 38

1 53

Demand Curve

Demand Curve All demand curves slope down because of the

law of demand: as price falls, quantity demanded increases vice versa. Everything held constant (with this statement we are assuming that tastes don’t change)

Market Demand

We add together the quantity demanded at each price not the dollars to determine market demand

Changes in Demand A number of factors may influence the

demand for a product, and changes in one or more of those factors may cause a shift in the demand curve

Increase Decrease

Determinants of Demand

Income

Normal Good

Inferior Goods

Ex. Bankruptcy Services, Inexpensive Goods and Services

Tastes Individual Tastes and preferences have an

effect on demand.

Price of Related Goods

Example. Taco Bell finds that it’s lettuce has e coli poisoning. More people eat at McDonalds

Substitute Goods

Ex. Fords and Chevy’s, Coal and Oil, Steak and Chicken etc.

Complementary Goods -. Ex. CD players and CDs, DVD players and

DVD’s etc

Future Expectations Future expectations can have an effect on

demand today. What you think you might earn at a later date or if you think an item’s price will rise in the future

Number of Buyers

Changes in Quantity Demanded

Supply

Quantity Supplied

Law of Supply

Supply Schedule

PriceQuantitySupplied

1 12

2 28

3 42

4 52

5 60

Supply Curve

Market Supply

Changes in Supply A number of factors may influence the supply

for a product, and changes in one or more of those factors may cause a shift in the supply curve

Increase Decrease

Determinants of Supply

Prices of Resources If labor decreases, one of the resources used

in producing goods, then supply will decrease and vice versa.

Technology and Productivity If resources are used more efficiently in

production, then more of that good can be supplied for the same cost.

Productivity-

Number of Producers When more people produce the supply

increases (supply curve shifts to the right)

Prices of Related Goods and Services

McDonalds Burger King

Changes in Quantity Supplied

Equilibrium

Disequilibrium

Surplus

Whenever the price is greater than the equilibrium price, a surplus arises.

Shortage

Whenever the price is below the equilibrium price, the quantity demanded is greater than the quantity supplied and there is a shortage

Note that a shortage is not the same thing as scarcity. A shortage exists only when the quantity that people are willing and able to purchase at a particular price is more than the quantity supplied at that price. Scarcity occurs when more is wanted at a zero price than is available.

Changes in the Equilibrium Price: Demand Shifts This occurs only when the determinants of demand change. If say taste results in a increase in demand, the demand curve will shift to

the right, resulting in a higher equilibrium price and quantity. The opposite could occur as well, an decrease in demand would result in a

lower equilibrium price and quantity.

Changes in Equilibrium Price: Supply Shifts Again focused on changes in the Determinants of Supply The decrease in supply is represented by the leftward shift of the supply

curve. A decrease in supply with no change in demand results in a higher price and a lower quantity. Conversely, an increase in supply would be represented as a rightward shift of the supply curve. An increase in supply with no change in demand would result in a lower price and a higher quantity.

Equilibrium in Reality If not in equilibrium the price and quantities

demanded and supplied change until equilibrium is established.

All items may not reach equilibrium. Ex. Sale items in a store

Price Floor

A price floor keeps the price from falling not rising.

Price Ceiling

Whenever a price ceiling exists a shortage results. A price ceiling is only effective if it is set below equilibrium price.

Silver MarketCapstone Lesson 7 Read Activity 1 Go over Rules Buyers Sellers Marketplace Activity 2 Calculate gains or losses

Round 1, 2, 3 Visual 1 will help you Sellers must report the price to me Make as many deals as you can in the time

permitted. You can take a loss in order to get a new

transaction card Visual 1 contains useful information

Post Simulation At what price was the silver most frequently sold at

each round? Look at your class tally sheet In which round did the greatest spread in prices

occur? Why did the prices become more clustered in later

rounds? Did Buyers or Sellers determine the final market

price for silver? How did competition within both buyers and sellers

influence price?

Consumer Surplus Buyers report cumulative profit or loss Total Profit for Buyers

Producer Surplus Sellers report your cumulative profit or loss Total Profit for Sellers

Consumer surplus and producer surplus are the main reasons why market economies work better than command economies. In a voluntary market, both buyers and sellers gain.

Complete Activity 3 Use the graph provided to plot your points

and answer the questions provided Visual 2 Review Answers to Activity 3

Answers to Activity 3

Review In a market who or what determines the

equilibrium price?

Who gains and who loses when people trade in a market?

DemandCapstone Lesson 8 DO NOT COPY JUST LISTEN One day you are shopping with your friends, and you walk

into a small greeting card shop close to school to buy a birthday card for one of your relatives. While you are checking out the cards, you overhear the owner complaining that a certain style of card is not selling, and the display of that card is taking up precious space in the small store. “Unfortunately, I bought these cards up front and they cannot be returned,” he says. “I guess I will just throw them away and use the space for something that has a better chance of selling.” As the store owner looks over to you and your friends, he continues: “I learned in my economics class in high school that a person shouldn’t cry over spilt milk or let costs incurred in the past influence future choices, right?” It becomes obvious that the owner is soliciting a response from you.

Do you support the owner’s view or do you suggest an alternative course of action Possible Answers: The owner is right Lower the price of the cards Put them in a better place in the store Donate the cards to charity Advertise Recycle them

SALE Why do businesses put items on sale? To sell more merchandise To reduce surplus merchandise Avoid throwing items away that may still

have value Increase consumer demand* *Remember a change in price does not

change demand

If the owner puts the cards that weren’t selling on sale, will that be a good way for him to begin solving his problem?

SALE When business people put products on sale, they are

attempting to predict consumer behavior. They are predicting that the number of products bought will increase at lower prices. That is not the only possible way to increase sales, of course. If the owner could change his customers’ perception of value for the cards, the customers also would buy more. Changing customers’ perceptions is one of the purposes of marketing through advertising.

Experiment I want to conduct an experiment to see whether these

predictions of consumer behavior are correct. I have a candy bar that I put in my lunch today but

I’ve decided to cut out sugar from my diet starting today.

I don’t want to waste it and think that somebody in here might find some value in consuming it.

I only have one so I want to make sure that the consumer who values it the most gets it, so I am going to conduct an auction

Visual 1

Results

Graph We can graph this information Visual 2 (Everybody gets a copy) Write Price near the Vertical Axis Write Quantity near the Horizontal axis Enter the quantities demanded Use the demand schedule to plot the points on the

chart Connect the dots Compare yours to mine

Summary of Graph As the price rose, the quantity people were

willing and able to buy declined. As the price fell, the quantity people were

willing and able to buy increased

Demand Sometimes demand for products actually

changes when certain variables change Consumers are influenced by outside factors

such as income, tastes and preferences, price of related products, expectations, and number of buyers

These are the determinants of demand

Change in Demand Visual 1

Shifts in Demand Raise your right hand if demand in this

scenario will shift to the right Raise your left hand if demand in this

scenario will shift to the left The demand for cars when people get a tax

refund The demand for gasoline today when people

expect prices to fall tomorrow. The demand for Ice Cream when the price of

Ice Cream drops.

SupplyCapstone Lesson 9 DO NOT COPY LISTEN The owner of a local fast food restaurant is having

trouble hiring workers for the closing shift. Although the closers have a few more responsibilities than other workers, including cleaning, the closing shift often fits best with students’ schedules. The owner of the restaurant doesn’t know what to do. He is angry. He says that “ Young people today are just plain lazy and maybe spoiled too.”

Is the owner right? Are there other explanations of why young

people might not choose to work as closers in the fast food restaurant?

Being a bat boy might be a better job

Producer Why do producers offer goods and services

for sale?

Law of Supply To understand this better look at yourself as a

producer You produce labor You can sell your labor at the price and to

who you want You probably would want to sell your labor at

a higher price?

Experiment Activity 1 Complete Activity 1 Visual 1 4-5 volunteers What patterns do you observe in the responses on Visual 1?

Several students chose not to supply labor at any wage rate. Why?

h What influences your decision to work or not to work?

Why does a higher wage usually increase the number of hours people are willing to work?

Would you predict that a different group of people would fill out the questionnaire differently

Graph Record Information on Activity 1 can be

graphed Visual 2 (Everybody Gets one) Place Price on the Vertical Axis Place Quantity on the Horizontal Axis Graph, plot points, draw line (curve)

Law of supply Higher prices higher quantity supplied, lower

prices lower quantity supplied

Determinants of Supply Variables other than price that can shift the supply curve

which include input prices, technology, expectations, number of sellers

Activity 2 Why did so many farmers leave farming to go into

other careers?

When many producers leave a market, what is likely to happen to the quantity produced at any given price?

Shifts in Supply Shift to the left raise left hand Shift to the right raise right hand The supply of cars when open trade agreements

bring in new producers. The supply of coffee when freezing temperatures hit

the major coffee producing regions in Brazil and Costa Rica

The supply of lumber when a new computerized saw reduces the cost of lumber producers

EquilibriumCapstone Lesson 10 Is a state of balance between opposing forces It occurs because everywhere else there is a state of

imbalance or disequilibrium Ball in Yankee Stadium Visual 1 What if the market price were $4

How would sellers get rid of the surplus?

What if the market price were $2

Equilibrium Which buyers will get the yo-yos?

This is a process where prices, incentives, shortages and surpluses determine an equilibrium or resting place

Prices in equilibrium may not remain so for long. Any change in underlying conditions leads to a new equilibrium

Activity 1 Complete parts A-E Visual 2 (Answers)

Activity 1 *Underlying conditions = determinants

Review Why does the price decrease if it is above equilibrium?

Why does the price increase if it is below equilibrium?

For each of the following predict the change in equilibrium price of turkeys and explain your prediction

Turkey is called a health food by the US Surgeon General New technology helps turkeys breed faster Thanksgiving is abolished

Do Prices Matter to Consumers?Capstone lesson 11 Standard Yellow Pencil Mechanical Pencil What are both items used for? Hopefully the answer is obvious-writing Which one of these writing implements do you like

best? Vote Explain the result, why is one preferred over

another.

Theory Assume that the preferred pencil starting now

cost $2 more than they have in the past Given this new information about prices, how

many still would want to buy the pencil? Explain the results: Why have some students

remained loyal to their pencil?

Economizing Behavior The pencil choice is an example of economizing behavior Get into groups of three or four Look at Activity 1 Spend $100 for each hypothetical person described in

Activity 1. Goal is to predict what that person would in fact buy if he or

she went out to spend $100. Use the Catalog of items from Part 2 Discuss the personality and likes and dislikes of each person

before deciding on the purchases to be made. Report your predictions Record on Board Visual 1

Results Which person’s consumer behavior was easiest to predict? Why?

Why are the students’ lists so different from the carpenter’s list?

What overall similarities or differences do you see in how the lists were created?

Could the money spent on the listed items have been spend on other listed items?

Could people have bought different items within given categories-clothes, tools and so on?