BasicEconomic

TermsSIMPSONS

STYLE

OPPORTUNITY COST

OPPORTUNITY COST

THE VALUE OF THE NEXT BEST ALTERNATIVE(WHAT YOU ARE GIVING UP TO DO WHAT YOU ARE DOING)

EXAMPLE:THINK OF WHAT BART COULD BE DOINGINSTEAD OF BEING IN ECON CLASS?SKATEBOARDING, SLEEPING, PLAYINGVIDEO GAMES, WORKING, ETC.

BUT HOW DO WE FIGURE OUT WHAT WE

ARE GIVING UP?

PRODUCTION POSSIBILITIES FRONTIER(PRODUCTION POSSIBILITIES CURVE)

SHOWS HOW MUCH OF ONE GOOD WE GIVE UP TO PRODUCE ONE MORE OF ANOTHER

EXAMPLE:TABLETS AND LAPTOPS

ASSUME A COMPANY MAKES BOTH TABLETS AND LAPTOPS

THEY MUST DECIDE HOW MANY OF EACH TO MAKE

WE KNOW THAT IN ONE DAY THEY CAN MAKE:1000 TABLETS OR 500 LAPTOPS

LAPTO

PS

TABLETS 0 200 400 600 800 1000

100

200

3

00

400

50

0

ASSUME A COMPANY MAKES BOTH TABLETS AND LAPTOPS

THEY MUST DECIDE HOW MANY OF EACH TO MAKE

WE KNOW THAT IN ONE DAY THEY CAN MAKE:1000 TABLETS OR 500 LAPTOPS

LAPTO

PS

TABLETS 0 200 400 600 800 1000

100

200

3

00

400

50

0

LET’S DECIDE WHICH POINTS ARE EFFICIENT, INEFFICIENT, &

IMPOSSIBLE AT THIS TIME

Graphing Supply & Demand

WHAT IS SUPPLY AND DEMAND? WHAT DOES IT

EVEN MEAN?

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The Law of Demand

As price goes up, the quantity demanded goes down. As price

goes down, the quantity demanded goes up.

HMMM…SO THE CHEAPER IT IS, THE MORE PEOPLE

WILL WANT IT…IF IT’S FREE, IT’S FOR ME!

DEMAND WILL SLOPE DOWNWARD

P

Q

S

The Law of Supply

As price goes up, the quantity supplied goes

up. As price goes down, the quantity supplied

goes down.

WHY WOULD I MAKE SOMETHING WORTH A DOLLAR WHEN I CAN

MAKE SOMETHING WORTH 100 DOLLARS…WOO HOO SUPPLY!

SUPPLY WILL GO UPHILL

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Q

S

D

BUT HOW DOES THIS SET PRICES?

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EQ

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D

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EQ

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D

EQUILIBRIUM POINT

WHERE SUPPLY MEETS DEMAND

AND THE MARKET CLEARS!

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EQ

S

D

BUT WHAT IF THE PRICE ISN’T AT THE EQUILIZING

THINGY?!

EQUILIBRIUM POINT

WHERE SUPPLY MEETS DEMAND

AND THE MARKET CLEARS!

P

Q

EP

EQ

PRODUCERS SET PRICE ABOVE EQUILIBRIUM POINT S

D

P

Q

EP

EQ

PRODUCERS SET PRICE ABOVE EQUILIBRIUM POINT

(Q SUPPLIED > Q DEMANDED)

QD QS

S

D

Change in QuantitySupplied

Change in Quantity

Demanded

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Q

EP

EQ

PRODUCERS SET PRICE ABOVE EQUILIBRIUM POINT

(Q SUPPLIED > Q DEMANDED)WE CALL THIS A SURPLUS

S

D

QD QS

P

Q

EP

EQ

PRODUCERS SET PRICE ABOVE EQUILIBRIUM POINT

(Q SUPPLIED > Q DEMANDED)WE CALL THIS A SURPLUS

S

D

QD QS

THE PRICE SHOULD FALL BACK

TO EQUILIBRIUM

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EP

EQ

S

D

PRODUCERS SET NEW PRICE BELOW EQUILIBRIUM POINT

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EQ

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D

QS QD

PRODUCERS SET NEW PRICE BELOW EQUILIBRIUM POINT

(Q DEMANDED > Q SUPPLIED)

Change in Quantity

Demanded

Change in QuantitySupplied

P

Q

EP

EQ

PRODUCERS SET NEW PRICE BELOW EQUILIBRIUM POINT

(Q DEMANDED > Q SUPPLIED)WE CALL THIS A SHORTAGE

S

D

QS QD

P

Q

EP

EQ

PRODUCERS SET NEW PRICE BELOW EQUILIBRIUM POINT

(Q DEMANDED > Q SUPPLIED)WE CALL THIS A SHORTAGE

S

D

QS QD

THE PRODUCERS SHOULD MAKE

MORE TO RISE TO EQUILIBRIUM

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EQ

S

D

EQUILIBRIUM POINTMARKET CLEARS!

SURPLUSPRICE IS TOO HIGH TO SELL THEM ALL!

SHORTAGENOT ENOUGH

TO GO AROUND

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EQ

S

D

EQUILIBRIUM POINTMARKET CLEARS!

SURPLUSPRICE IS TOO HIGH TO SELL THEM ALL!

SHORTAGENOT ENOUGH

TO GO AROUND

NOTICE THAT THE SUPPLY AND DEMAND CURVES NEVER MOVE DUE TO A PRICE CHANGE…ONLY THE QUANTITY SUPPLIED AND

QUANTITY DEMANDED CHANGE!

SO WHEN DO THE CURVES SHIFT? WHAT CAUSES

THEM TO MOVE?

LOTS OF THINGS! TASTES, OTHER PRICES,

TECHNOLOGY, THE WEATHER…THE LIST GOES

ON AND ON!

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S

D

NOT THIS GRAPH AGAIN!

TRY TO NAME SOME REASONS

WHY THIS HAPPENS!

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Q

S

D

D1

TRY TO NAME SOME REASONS

WHY THIS HAPPENS!

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Q

S

DD1

CHANGES IN INCOME

PRICES OF OTHER GOODS

(SUBSTITUTES & COMPLEMENTS)

CHANGES IN TASTES

EXPECTATIONS

POPULATION(BABY BOOM)

NEWSTORIES

AND MORE…

CHANGES IN THE DEMAND CURVE CAN BE CAUSED BY:

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Q

S

D

D1

EP

EQ

P1

Q1

P

Q

S

D

D1

EP

EQ

P1

Q1

BOTH PRICE AND QUANTITY GO UP!

P

Q

S

DD1

EP

EQ

P1

Q1

P

Q

S

DD1

EP

EQ

P1

Q1

BOTH PRICE AND QUANTITY GODOWN!

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S

D

EP

EQ

P1

Q1

S1

TRY TO NAME SOME REASONS

WHY THIS HAPPENS!

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S

D

EP

EQ

P1

Q1

S1

TRY TO NAME SOME REASONS

WHY THIS HAPPENS!

INPUT COSTS

CHANGES IN TASTES

EXPECTATIONS

CLIMATE

EXTERNAL FACTORS

TECHNOLOGY

NEWSTORIES

AND MORE…

CHANGES IN THE SUPPLY CURVE CAN BE CAUSED BY:

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D

EP

EQ

P1

Q1

S1

PRICE GOES DOWN, BUT QUANTITY GOES UP!P

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D

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EQ

P1

Q1

S1

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D

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EQ

P1

Q1

S1

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D

EP

EQ

P1

Q1

PRICE GOES UP, BUT QUANTITY GOES DOWN!

S1

NORMAL GOODS v. INFERIOR GOODS

Normal Goods: As Income Rises, Demand Rises

Inferior Goods: As Income Rises, Demand Decreases

Can you name some examples ofInferior Goods?

SUBSTITUTE & COMPLEMENTARY GOODS

SUBSTITUTE GOOD:A Good That Can Be Interchanged With Another (Examples: Sodas, Juices, etc)

COMPLEMENTARY GOOD:A Good That Is Purchased WithAnother Good(Examples: Hot Dogs/Rolls, Toothbrush/Toothpaste)

P

Q

P

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S

D

S

D

EP

EQ

EP

EQ

GOOD 1 GOOD 2

WHY ARE THERE ARE TWO OF THEM?!?!

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S

D

EP

EQ

EP

EQ

GOOD 1:PENCIL

GOOD 2:PEN

ASSUME THE EQUILIBRIUM PRICE IS THE SAME FOR BOTH…KEEP IT SIMPLE

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D

S

D

EP

EQ

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EQ

ASSUME THE EQUILIBRIUM PRICE IS THE SAME FOR BOTH…KEEP IT SIMPLENOW, ASSUME THE PRICE OF GOOD 1 RISES

P1

QD Qs

GOOD 1:PENCIL

GOOD 2:PEN

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Q

P

Q

S

D

S

D

EP

EQ

EP

EQ

ASSUME THE EQUILIBRIUM PRICE IS THE SAME FOR BOTH…KEEP IT SIMPLENOW, ASSUME THE PRICE OF GOOD 1 RISES

PEOPLE STILL WILLING TO PAY THAT PRICE LOOK FOR ALTERNATIVE (SUBSTITUTE)

P1

QD Qs

GOOD 1:PENCIL

GOOD 2:PEN

P

Q

P

Q

S

D

S

D

EP

EQ

EP

EQ

ASSUME THE EQUILIBRIUM PRICE IS THE SAME FOR BOTH…KEEP IT SIMPLENOW, ASSUME THE PRICE OF GOOD 1 RISES

PEOPLE STILL WILLING TO PAY THAT PRICE LOOK FOR ALTERNATIVE (SUBSTITUTE)

P1

QD Qs

GOOD 1:PENCIL

GOOD 2:PEN

D1

SUBSTITUTE GOODS

AS THE PRICE OF ONE GOOD GOES UP, THE DEMAND FOR THE OTHER GOOD GOES UP

OR

AS THE PRICE OF ONE GOOD GOES DOWN, THE DEMAND FOR THE OTHER GOOD GOES DOWN

P

Q

P

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S

D

S

D

EP

EQ

EP

EQ

GOOD 1:PENCIL

GOOD 2:ERASER

P

Q

P

Q

S

D

S

D

EP

EQ

EP

EQ

ASSUME THE PRICE OF GOOD 1 RISES

P1

QD Qs

GOOD 1:PENCIL

GOOD 2:ERASER

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Q

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Q

S

D

S

D

EP

EQ

EP

EQ

ASSUME THE PRICE OF GOOD 1 RISESNOTICE THE LOSS OF QUANTITY DEMANDED

P1

QD Qs

GOOD 1:PENCIL

GOOD 2:ERASER

P

Q

P

Q

S

D

S

D

EP

EQ

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EQ

ASSUME THE PRICE OF GOOD 1 RISESNOTICE THE LOSS OF QUANTITY DEMANDED

PENCILS AND ERASERS ARE BOUGHT TOGETHER, SO DEMAND FOR ERASERS GOES DOWN

P1

QD Qs

GOOD 1:PENCIL

GOOD 2:ERASER

D1

COMPLEMENTARY GOODS

AS THE PRICE OF ONE GOOD GOES UP, THE DEMAND FOR THE OTHER GOOD GOES DOWN

OR

AS THE PRICE OF ONE GOOD GOES DOWN, THE DEMAND FOR THE OTHER GOOD GOES UP

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EP

EQ

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EQ

INPUT GOOD:WOOD

GOOD :PENCILS

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S

D

S

D

EP

EQ

EP

EQ

INPUT GOOD:WOOD

GOOD :PENCILS

S1

ASSUME A FOREST FIRE OCCURS AND SUPPLY OF WOOD FALLS.HOW DOES THIS IMPACT THE SUPPLY OF PENCILS?

P1

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D

S

D

EP

EQ

EP

EQ

INPUT GOOD:WOOD

GOOD :PENCILS

S1

ASSUME A DROUGHT OCCURS AND SUPPLY OF WOOD FALLS.HOW DOES THIS IMPACT THE SUPPLY OF PENCILS?

S1

P1 P1

CHANGES IN INPUT GOOD COSTS

AS THE PRICE OF INPUTS GOES UP, SUPPLY GOES DOWN.

OR

AS THE PRICE OF INPUTS GOES DOWN,SUPPLY GOES UP.