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Transcript of © 2010 Pearson Education CanadaChapter 4 - 1 Chapter 4 Coordinating Smart Choices © 2010 Pearson...
© 2010 Pearson Education CanadaChapter 4 - 1
Chapter 4
Coordinating
Smart Choices
© 2010 Pearson Education Canada
© 2010 Pearson Education CanadaChapter 4 - 3
LEARNING OBJECTIVES
4.1 Describe how buyers and sellers compete
and cooperate in markets
4.2 Explain how shortages and surpluses affect
prices
4.3 Identify how market-clearing prices coordinate
the smart choices of consumers and businesses
4.4 Illustrate how changes in demand and supply
affect market-clearing prices and quantities
© 2010 Pearson Education CanadaChapter 4 - 4
WHAT’S A MARKET?
Markets connect competition between buyers,
competition between sellers, and cooperation between buyers and sellers.
Government guarantees of property rights allow
markets to function.
© 2010 Pearson Education CanadaChapter 4 - 5
WHAT’S A MARKET?
• Market
the interactions of buyers and sellers
– competition between buyers
– competition between sellers
– cooperation and voluntary exchange between buyers and sellers
continued…
© 2010 Pearson Education CanadaChapter 4 - 6
• Property rights
legally enforceable guarantees of ownership
of physical, financial, and intellectual
property
• Government sets the rules of the game,
defining and enforcing property rights
necessary for free and voluntary exchange
© 2010 Pearson Education CanadaChapter 4 - 7
WHERE DO PRICES COME FROM?PRICE SIGNALS FROM
COMBINING DEMAND AND SUPPLY
When there are shortages, competition between buyers drives prices up.
When there are surpluses, competition between sellers drives prices down.
© 2010 Pearson Education CanadaChapter 4 - 8
Figure 4.1 Market Demand & Supply for Piercings
Price Quantity
Demanded
Quantity
Supplied
$ 20 1200 200
$ 40 900 400
$ 60 600 600
$ 80 300 800
$ 100 0 1000
© 2010 Pearson Education CanadaChapter 4 - 9
PRICE SIGNALS FROM COMBINING DEMAND & SUPPLY
• Frustrated Buyers
market price too low
– shortage or excess demand quantity demanded exceeds quantity supplied
– shortages create pressure for prices to rise
– rising prices provide signals and incentives for businesses to increase quantity supplied and for consumers to decrease quantity demanded, eliminating the shortage
continued…
© 2010 Pearson Education CanadaChapter 4 - 10
Figure 4.1 Market Demand & Supply for Piercings
Price Quantity
Demanded
Quantity
Supplied
$ 20 1200 200
$ 40 900 400
$ 60 600 600
$ 80 300 800
$ 100 0 1000
© 2010 Pearson Education CanadaChapter 4 - 11
• Frustrated Sellers
market price too high
– surplus or excess supplyquantity supplied exceeds quantity demanded
– surplus create pressure for prices to fall
– falling prices provide signals and incentives for businesses to decrease quantity supplied and for consumers to increase quantity demanded, eliminating the surplus
© 2010 Pearson Education CanadaChapter 4 - 12
WHEN PRICES SIT STILLMARKET-CLEARING PRICES BALANCING
QUANTITY DEMANDED & QUANTITY SUPPLIED
Market-clearing prices coordinate the smart choices of consumers and
businesses, balancing quantity demanded and quantity
supplied.
© 2010 Pearson Education CanadaChapter 4 - 13
MARKET-CLEARING PRICES BALANCING QUANTITY DEMANDED & QUANTITY SUPPLIED• The price that coordinates the smart choices
of consumers and businesses has two names
– market-clearing priceprice when quantity demanded equals quantity supplied
– equilibrium priceprice balancing forces of competition and cooperation
continued…
© 2010 Pearson Education CanadaChapter 4 - 14
Figure 4.1 Market Demand & Supply for Piercings
Price Quantity
Demanded
Quantity
Supplied
$ 20 1200 200
$ 40 900 400
$ 60 600 600
$ 80 300 800
$ 100 0 1000
© 2010 Pearson Education CanadaChapter 4 - 15
• Price signals in markets create incentives,
so that each person acts only in self-interest
– interactions coordinated through Adam Smith’s invisible hand of competition
– result is the miracle of markets — continuous ever-changing production of products/services we want
© 2010 Pearson Education CanadaChapter 4 - 16
THE INVISIBLE HAND
• When an individual makes choices
“…he intends only his own gain, and he is in this... led by an invisible hand to promote an end which was no part of his intention.... By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”
Adam Smith, The Wealth of Nations, 1776
© 2010 Pearson Education CanadaChapter 4 - 17
MOVING TARGETS WHAT HAPPENS WHEN DEMAND & SUPPLY
CHANGE?
When demand or supply change, market-clearing
prices and quantities change. The price changes
cause businesses and consumers to adjust their
smart choices. Well-functioning markets supply
the changed products and services demanded.
© 2010 Pearson Education CanadaChapter 4 - 18
WHAT HAPPENS WHEN DEMAND & SUPPLY CHANGE?
• Demand changes due to a change in
– preferences
– prices of related products
– income
– expected future prices
– number of consumers
continued…
© 2010 Pearson Education CanadaChapter 4 - 19
• Increase in demand causes
– rise in market-clearing price
– increase in quantity supplied
• Decrease in demand causes
– fall in market-clearing price
– decrease in quantity supplied
continued…
© 2010 Pearson Education CanadaChapter 4 - 20
• Supply changes due to changes in
– technology
– prices of inputs
– prices of related products produced
– expected future prices
– number of businesses
continued…
© 2010 Pearson Education CanadaChapter 4 - 21
• Increase in supply causes
– fall in market-clearing price
– increase in quantity demanded
• Decrease in supply causes
– rise in market-clearing price
– decrease in quantity demanded
© 2010 Pearson Education CanadaChapter 4 - 23
WHAT’S A MARKET?
1. What is a market?
2. You are negotiating with a car dealer over
the price of a new car. Explain where
competition enters the process, and where
cooperation enters.
continued…
© 2010 Pearson Education CanadaChapter 4 - 24
1. The Recording Industry Association of
America’s (RIAA) mission is “to foster a
business and legal climate that supports
and promotes our members’ . . . intellectual
property rights worldwide.” Have you ever
downloaded music?
If so, what arguments do you use to
counter the RIAA’s defence of property
rights?
© 2010 Pearson Education CanadaChapter 4 - 25
PRICE SIGNALS FROM COMBINING DEMAND & SUPPLY
1. Define a shortage, and explain who competes
and what happens to prices.
2. Old Navy decides to price a new line of jeans
at $75, which covers all marginal opportunity
costs as well as a healthy profit margin. If Old
Navy has priced the jeans too high, what signals
does the company receive? What actions might
Old Navy take next?
continued…
© 2010 Pearson Education CanadaChapter 4 - 26
1. Most provincial parks charge a fixed price for
a camping permit, and allow you to reserve
specific campsites well in advance. By the
time a summer holiday weekend arrives, all
the permits are taken. There is excess demand,
and no price adjustment. If you want to reserve
your favourite campsite for next year, how do
you compete, and who do you compete against?
© 2010 Pearson Education CanadaChapter 4 - 27
MARKET-CLEARING PRICES BALANCING QUANTITY DEMANDED & QUANTITY SUPPLIED
1. Name and define the two other names for
“prices that sit still”?
2. Explain the balance between the forces of
competition and cooperation at “prices that
sit still.” (I can’t give away the answer to
question 1, can I?)
continued…
© 2010 Pearson Education CanadaChapter 4 - 28
3. In an attempt to promote the social good of energy conservation, Toronto Hydro introduced the Peaksaver Program. Participating households received a $25 reward for allowing a “peaksaver” switch to be installed on their central air conditioners, which briefly turns off the air conditioner during peak demand times on hot summer days. Do you think the program would work without the $25 reward? How does this illustrate the “invisible hand”?
© 2010 Pearson Education CanadaChapter 4 - 29
WHAT HAPPENS WHEN DEMAND & SUPPLY CHANGE?
1. What happens to the market-clearing price
and quantity when demand increases? When
demand decreases? When supply increases?
When supply decreases?
continued…
© 2010 Pearson Education CanadaChapter 4 - 30
WHAT HAPPENS WHEN DEMAND & SUPPLY CHANGE?
2. Predicting changes in market-clearing
prices and quantities is harder when both
demand and supply change at the same
time. You run a halal butcher shop in
Ottawa and expect an increase in the
number of Muslims in Ottawa. Rents for
retail space are falling all over town. What
do you think will happen to the market-
clearing price for halal meat? What will
happen to the quantity sold?continued…
© 2010 Pearson Education CanadaChapter 4 - 31
3. In response to the business boom in
Alberta,
the city of Edmonton offered $200 per
month
rent subsidies to low-income families so
they could afford to live and work in the
city. What impact would this effective
increase in income have on rents? What
was the intention of the subsidies?