NB # 1If the economy is the #1 issue in politics, what can the government do to actually affect the economy?

OPENING It is not from the benevolence of the

butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. Adam Smith

Use this quote to explain why some governments practice “laissez-faire economics”

Supply and Demand overviewThe basic insight underlying the law of

supply and demand is that at any given moment a price that is “too high” will leave disappointed would-be sellers with unsold goods, while a price that is “too low” will leave disappointed would-be buyers without the goods they wish to buy.

A. The Law of Demand The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded.

The Law of Supply This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

Equilibrium price At the equilibrium price, the quantity

that buyers are willing to purchase exactly equals the quantity the producers are willing to sell. Actions of buyers and sellers naturally tend to move a market towards the equilibrium.

Surplus

Equalibrium

Shortage

PRESEASON Supply 100$= 10 jerseys 10$= 1 jersey

Demand 90$=6 jerseys 10$=10 jerseys

PRESEASON Draw the supply and demand curves

What is the equilibrium price ?

HE WINS THE CY YOUNG Everyone is willing to buy 2 more

jerseys for the exact same price

Draw the new demand curve

What is the new equilibrium price?

What is the shortage if the price remains the same as it was during in the preseason?

HE’S A BUM The people are willing to buy 3 less

jerseys than there were during the preseason

What is the new equilibrium price? What would be the surplus if the price

remains the same?

SUPPLY AND DEMAND REVIEW As the price goes up the Demand for

the good goes___________

When the price of the good goes up, do companies want to make more of lessof it?

HOW THE GOVERNMENT CAN GET INVOLVED

GOVERNMENT INVOLVEMENT

Sometimes the market equilibrium outcome is perceived by certain groups or individuals to be unfair or unjust. Societal values may dictate that the market outcome be altered. Government can intervene in markets in any number of ways, including the banning of the production and consumption of certain goods and services entirely

PRICE CEILING A price ceiling is a legal maximum that

can be charged for a good. The ceiling is shown by a horizontal line at the ceiling price which--to be effective--is set below the equilibrium price.

The figure titled "Price Ceiling" illustrates a ceiling at $2. At a price of $2 quantity demanded is 40 units and quantity supplied is 20 units. The result is a shortage in which quantity demanded exceeds quantity supplied

PRICE FLOORS A price floor is a legal minimum that

can be charged for a good.

To be effective, the floor must be set above the equilibrium price.

In the figure the floor is set at $4. Quantity demanded is 20 units and quantity supplied is 40 units. The result of the floor is a surplus of 20 units.