economics 10/10/11 mrmilewski.com objective: demonstration of chapter#5 and begin examination of...
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Economics 10/10/11 mrmilewski.com
• OBJECTIVE: Demonstration of Chapter#5 and begin examination of price. MCSS E-1.2.2
• I. Administrative Stuff-attendance & distribution of test
• II. Chapter#5 Test• III. Journal #19 pt.A
-Read “Business Week Newsclip” p.126
-Answer questions (1-2) p.126
• IV. Journal #19 pt.B-notes on prices
• V. Journal#19 pt.C Film: I Pencil• NOTICE: Journals 11-20 Due Wednesday!
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How is price determined?• Price is determined
by the intersection of supply & demand.
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Prices as Signals• Price – the monetary value of a product as
established by supply & demand.• Price is a signal that helps us make
economic decisions.• High prices are a signal for producers to
produce more and consumers to buy less.• Low prices are a signal for producers to
produce less and consumers to buy more.
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Advantages of Prices• 1.) Prices in a competitive market favor
neither the producer nor the consumer.• 2.) Prices in a market economy are
flexible.• 3.) Prices have no administrative costs and
answer the questions WHAT, HOW, and for WHOM to produce.
• 4.) You have known it your entire life.
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Life without prices?• Prices help allocate scarce resources, but
what if there was no such thing as price?• Rationing – the government determines
everyone’s “fair” share.• Problem with determining what is fair.• High administrative stuff (cost,
enforcement, etc)• No incentive to work hard.
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I Pencil
http://school.discoveryeducation.com/clipart/images/box-o-pencils4c.gif
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Questions on “I Pencil”• 1.) What does Milton Friedman mean by saying
there is nobody in the world who knows how to make a pencil?
• 2.) What kind of transaction makes a free market possible?
• 3.) What must be true for all parties in a voluntary transaction?
• 4.) What is the price system?• 5.) What is the zero-sum game philosophy?• 6.) What is meant by the invisible hand?
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Economics 10/11/11 http://mrmilewski.com
• OBJECTIVE: Examine how change in demand can affect the prices of goods. MCSS E-1.3.3
• I. Journal #20 pt.A-Read “Profiles in Economics” p.141-Answer question #1 p.141
• II. Quiz#11• III. Return of Chapter#5 Test• IV. Journal#20 pt.B
-notes on how inelastic & elastic demand effects prices
• V. Journal#20 pt.C-Questions on NBR
NOTICE: Journals 11-20 Due Tomorrow!
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How is price determined?• Price is determined by
the intersection of the supply and demand curves.
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Inelastic Demand v. Elastic DemandFigure 6.3a Figure 6.3b
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Changes in Demand• A change in demand, like a change in
supply, can also affect the price of a good or service.
• All of the factors we examined in Chapter 4–changes in income, tastes, prices of related products, expectations, and the number of consumers–affect the market demand for goods and services.
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Demand for Gold• One example is the
demand for gold. Figure 6.4 shows why gold prices have changed so dramatically over a 20-year period.
Figure 6.4
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Why Gold Prices Fell• Whenever economic conditions or political instability threatens,
people tend to increase their demand for gold and drive the price up.
• Whenever the supply of gold increases dramatically–as when a major holder of gold like the Bank of England sells half of its gold holdings–the supply of gold increases, driving the price down.
• Price of gold 10/26/06: $584.40
• Price of gold 10/6/08: $886.40
• Price of gold 1/20/09: $846.94
• Price of gold 10/13/09: $1066.07
• Price of gold 10/11/10: $1340.36
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2 Year Gold Price
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10 Year Gold
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36 Year Gold
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NBR – segments 6-7• 1.) Why did farmers adjust their milk
production following the holiday season of 1998?
• 2.) Why did Kodak cut jobs in 1999?• 3.) What does leaner & meaner mean?• 4.) What is the elasticity of vacation homes?• 5.) What is the elasticity of prescription
drugs?
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Economics 10/12/11 http://mrmilewski.com
• OBJECTIVE: Examine the success of Wal-mart & its effect on the United States. MCSS E-1.2.2&E-2.1.9
• I. Administrative Stuff-Attendance
-Journals 11-20 Due!
• II. Frontline: “Is Wal-mart Good for America?”-questions on film about Wal-mart
• NOTICE: Chapter#6 Test Monday!
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Economics 10/13/11 http://mrmilewski.com
• OBJECTIVE: Examine the price system at work. MCSS E-1.4.1
• I. Journal#21 pt.A-Read “The Global Economy” p.138
-Answer questions (1-2) p.138
• II. Journal#21 pt.B-notes on the price system at work
• III. Mindjogger-video quiz on price
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Price Adjustment Process• “Because transactions in a market economy
are voluntary, the compromise that eventually takes place must be to the benefit of both parties, or the compromise would not occur in the first place.” p.142
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Market Equilibrium• When prices are relatively stable, and the
quantity of goods and services supplied is equal to the quantity demanded.
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Surplus & Shortage• Surplus – a situation in which the quantity
supplied is greater than the quantity demanded at a given price.
• Shortage – a situation in which the quantity demanded is greater than the quantity supplied at a given price.
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The Price Adjustment Process
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Explaining and Predicting Prices• Economists use market models to explain how
the world around us works and predict how certain events such as changes in prices might occur.
• A change in price is normally the result of a change in supply, a change in demand, or changes in both.
• Elasticity of demand is also important when predicting prices.
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Inelastic Demand v. Elastic DemandFigure 6.3a Figure 6.3b
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Economic goals• The seven broad economic and social goals we
examined in Chapter #2 often conflict with each other. This is why the government has been playing a larger role in the economy than someone like Adam Smith would have liked.
• One way the government tries to achieve equity and security is by setting prices at “socially desirable” levels.
• What does “socially desirable” mean?
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Distorting Market Outcomes• Price ceiling – a maximum legal price that can be
charged for a product.• Price ceilings can be found in places like NYC
who put rent controls on housing in an attempt to make it affordable.
• Price floor – the lowest legal price that can be paid for a good or service.
• Minimum wage – the lowest legal wage that can be paid to most workers is an example of a price floor.
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Rent control• For example, without rent controls the equilibrium price for
housing in NYC might be $900 per month. At this price, suppliers would be willing to provide 2 million units of housing.
• REMINDERS: Law of Demand – as price drops quantity demanded increases.
Law of Supply – as price drops quantity supplied decreases.
• If NYC were to put a price ceiling of $600 per month on rent, what would happen to quantity demanded? What about quantity supplied?
• What is it called when quantity demanded exceeds quantity supplied?
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Rent control in NYC
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Federal Minimum Wage
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Economics 10/14/11 http://mrmilewski.com
• OBJECTIVE: Begin examination of taxes. MCSS E-1.4.3
• I. Journal #22 pt.A-Examine “Economics at a Glance” p.225
-Answer question #1 p.225
• II. Quiz#12
• III. Journal #22 pt.B-notes on taxes
• III. Tax Film
• NOTICE: Chapter#6 Test Monday!
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Chapter#9
• We will cover sections (1-3)
• Section#4 can take a long walk off a short pier.
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Why taxes?• An enormous amount of money is required to run
the federal, state, and local governments of the United States.
• Total revenue collections by all levels of government have grown dramatically over the years.
• Even when adjusted for inflation and population growth, these revenues increased by nearly 800% since 1940.
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Growth of TaxesFigure 9.1
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Economic Impact of Taxes• Taxes and other gov’t revenues influence the
economy.• It affects resource allocation, consumer behavior,
and the nation’s productivity and growth.• The burden of a tax does not always fall on the
party being taxed, because some of the tax can be transferred to others.
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Types of TaxesFigure 9.3
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Taxing Suppliers• A tax placed on a good or
service at the factory raises the cost of production, which shifts the supply curve to the left.
• If demand remains unchanged, the equilibrium price of the product goes up.
• People react to the higher price in a predictable manner–they buy less.
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Corporate Tax Rates
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Criteria for Effective Taxes• Some taxes will
always be needed, so we want to make them as effective as
possible.• Taxes must meet
three criteria:• 1.) equitable• 2.) simple• 3.) efficient
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QuintilesMinimum household income
Lowest Quintile $0Second Quintile $17,900Middle Quintile $30,500Fourth Quintile $45,200Highest Quintile $67,400Top 1% $307,500
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Simple v. Complex Taxes• Individual income
tax–the tax on people’s earnings–is a prime example of a complex tax.
• Sales tax–a general tax levied on most consumer purchases–is much simpler.
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Sin Tax• Often taxes are used
to encourage or discourage certain types of activities.
• Sin taxes are designed to raise revenue and reduce consumption of a socially undesirable product.
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