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Economics, 9th Edition Class Notes

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    Chapter 0 1 - Economics and Economic Reasoning 1 - 1 CHAPTER ONE ECONOMICS AND ECONOMIC REASONING Learning Objectives After you teach the material in this chapter, your students should be able to do the following: LO1. Define economics and identify its components . LO2. Discuss various ways in which economists use economic reasoning . LO3. Explain real - world events in terms of economic forces, social forces, and political forces . LO4. Explain how economic insights are developed and used . LO5. Distinguish among positive economics, normative economics, and the art of economics . Teaching Objectives To help your students achieve the Learning Objectives above, you should anticipate common student difficulties with the material and be prepared to do the following:  Defend the concept of scarcity. Many students might feel that the claim that society has too few resources to satisfy all wants assumes that individuals are materialistic or greedy. Think about approaching the constant evolution of our wants and desires as a positive thing. (LO1)  Link the concept of scarcity to the task of decision - making and coordination. If our resources are too few to satisfy our wants, then there is a problem to be solved: which wants will be satisfied and which ones won’t? This problem lies at the heart of the three coordination problems covered in the chapter. (LO1 and LO2)  Defend marginal benefit and marginal cost analysis as the way that individuals make decisions. Students may think at first that they are being taught a new trick for decision - making. However, this is not the case. Explain to them that, whether conscious or not, this type of analysis already underlies all decision - making. (LO2)  Connect the concept of opportunity cost with marginal benefit and marginal cost analysis. Economists focus not only on the costs and benefits of choosing a certain action, but also on the costs and benefits of choosing a certain action

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    Chapter 0 1 - Economics and Economic Reasoning 1 - 2 rather than choosing another one. Mastery of this type of thinking will pay off for your students throughout the entire course. ( LO2 )  Provide examples of real life situations where economic forces (the instinct to respond to scarcity) are allowed to work through market forces and other situations where these forces are not (because of social forces or political forces). ( LO3 )  Introduce how economists develop models by referring to induction, deduction , and abduction. This is also an opportunity to introduce the distinction between theorems and precepts. These terms will be used throughout the text. ( LO4 )  Delineate the three uses of economics discussed in this chapter: to understand the economy (positive economics), to set goals for the economy (normative economics), and to achieve those goals given how the economy functions (the art of economics). ( LO5 ) For Professors New to Colander Every book presents material in slightly different ways, so it is helpful to note some of the names, notations, definitions , or symbols that Colander uses as compared to other books. It will be easier for your students connect material presented in the lecture to material covered in the text if you note the following:  Colander emphasizes coordination in the definition of economics, and then ties that into scarcity. “The three coordination problems” is how this textbook refers to the fundamental “What? How? And for whom?” questions.  The “invisible hand” focuses on “the price mechanism” and is presented as a “market” force, which is an “economic force” that is allowed to operate through the market. There are also social and political forces that interact with economic forces to determine what market forces are allowed to operate.  To keep any implicitly normative judgments out of the definition, “efficiency” is defined as in terms of goals, not resources. Thus, efficiency is defined as “achieving a goal as cheaply as possible” and not as “getting the most out of available resources.”  Colander uses Keynes' original tripartite division — positive, normative, and art of economics — rather than the positive/normative distinction used by many books. Policy discussions fall in the art of economics, and include both positive and normative elements. Precepts belong in the art of economics; theorems belong in positive economics.

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    Chapter 0 1 - Economics and Economic Reasoning 1 - 3 Answers to the Problem Set The following are the correct answers to the problem set that follows on the next two pages, along with the learning objective associated with each question. The problem set is designed to be photocopied directly from this book and distributed for student use. 1. (LO2) a. Going to the concert does have a cost to you. The cost is the benefit you would have received from another activity, or opportunity cost. b. Since the tuition is nonrefundable, it is a sunk cost and therefore no longer represents opportunity costs. The true opportunities costs of continuing to take the course are the benefit of doing something else during class time. c. Deciding not to make decisions is still a decision. The opportunity cost of not considering choices is the benefit you would have gained from making those choices. d. How much you paid for the apples is a sunk cost, and therefore is not relevant. 2. (LO 1 ) a. Macroeconomics; b. Microeconomics; c. Macroeconomics; d. Microeconomics 3. ( LO5 ) a. Positive; b. Normative; c. Normative; d. Positive; e. Art of economics; f. Normative 4. ( LO3 ) a. True. Economic forces always operate. b. True. Political forces, not market forces determine stamp prices. c. False. Even though the government regulates this market, because the medallions are sold at an auction, market forces determine their prices.

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    Chapter 0 1 - Economics and Economic Reasoning 1 - 4 E CONOMICS AND ECONOMIC REASONING PROBLEM SET NAME : _______________________________________ DATE : ____ / ____ / ____ Give the best answer to each of the following questions. 1. Briefly point out the faulty reasoning in each of the following situations: a. You win a free, nontransferable ticket to a Sheryl Crow concert. Since the ticket is free and it will therefore cost you nothing to go, you decide to go to the concert. b. You paid nonrefundable tuition of $3,000 to take a 15 - week course. Therefore, the opportunity cost of attending class each week is $3,000 divided by 15, or $200. c. You like to avoid costs; every decision involves opportunity cost. So you don’t make decisions. d. You have purchased 5 premium apples for $1.99 a pound, but when you get home, you discover they are mushy. Since you paid top dollar for these apples, you decide you have to eat them. 2. Classify the following Wall Street Journal articles as involving macroeconomic or microeconomic issues based on their titles: a. “ Bernanke Sees Long Slog to Trim U.S. Trade Deficit ” b. “How Drugs for Rare Diseases Became Lifeline for Companies” c. “Monetary Tightening Damps Brazil Investment” d. “Debut of Chicken Little Gives Disney Something to Crow Over”

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    Chapter 0 1 - Economics and Economic Reasoning 1 - 5 3. Identify the following statements as examples of positive economics , normative economics , or the art of economics : a. Based on microeconomic models, extending the tax cuts instituted in 2001 will likely continue to further the trend of growing income inequality in the United States. b. The Federal government needs to raise the minimum wage to $8 per hour so that families will have sufficient income to meet their basic needs. c. A country’s overall income is more important than how that income is distributed. d. One in four workers today has no access to employment - based family health coverage. e. To reduce income inequality in the U.S., we could increase the earned - income tax credit. f. It is the federal government’s responsibility to assure health coverage for all families . 4. Briefly explain why the following statements are either TRUE or FALSE: a. Even though school dormitory rooms are rationed by lottery, these rooms are still affected by economic forces. b. Because the U.S. postal service is a monopoly and Congress sets postal prices through legislation, market forces do not determine stamp prices. c. New York City government auctions taxi medallions that give the right to transport passengers by taxi. Because the government controls the number of medallions, market forces do not determine their price.

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    Chapter 0 2 - The Production Possibility Model, Trade, and Globalization 2 - 1 CHAPTER TWO THE PRODUCTION POSSIBILITY MODEL, TRADE, AND GLOBALIZATION Learning Objectives After you teach the material in this chapter, your students should be able to do the following: LO1. Demonstrate trade - offs with a production possibility curve . LO2. Relate the concept s of comparative advantage and efficiency to the production possibility cur v e . LO3. State how, through comparative advantage and trade, countries can consume beyond their individual production possibilities . LO4. Explain how globalization is guided by the law of one price . Teaching Objectives To help your students achieve the Learning Objectives above, you should anticipate common student difficulties with the material and be prepared to do the following:  Connect the negative slope of the PPC with the concept of tradeoffs, and the bowed - outward shape with the concept of increasing marginal costs. (LO1)  Relate the principle of increasing opportunity cost of trade - offs to the use of resources. Students often at first think increasing opportunity costs are counterintuitive, thinking that the more that one does something, the better one gets, or thinking about something like “economies of scale.” Talking about resources is a good way to help students understand this. Paper airplanes can be a good example. If the student were to make one paper airplane, he or she would have no problem finding a piece of paper to use. However, to make a thousand paper airplanes, the student would have to use some paper that has significant value, like a diploma or pages from their senior yearbook. Costs go up because people are smart; they do things at the lowest cost first. They don’t reach immediately for that diploma when making their first airplane. (LO 1 )  Connect comparative advantage to the PPC via the concept of productive efficiency. To be productively efficient, an economy must not only use all of its resources, but must also use them correctly . This correct use is related to using resources in a way that is consistent with comparative advantage. With respect to guns and butter, it may be helpful to name this essential: cows. If the economy wants to move from producing only guns to producing some butter, ask students

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    Chapter 0 2 - The Production Possibility Model, Trade, and Globalization 2 - 2 what resources should be moved from gun production to butter production. Cows. They’re great at making butter but terrible at making guns. (LO 2 )  Defend the idea that two countries can both consume outside of their production possibilities through specialization and trade based on comparative advantage, if necessary, by giving an example where one country has the absolute advantage in the production of both goods. Students might wrongly assume that it is absolute advantage that matters. Be prepared to provide an example where one country can produce more of both goods than can the other country, just to show that it is only comparative advantage that matters. The U.S. can benefit from trading even with a smaller economy that cannot produce more of any good than can the U.S. (LO 3 )  Discourage students from wanting to say, at least at this point, whether globalization and trade are ultimately “good” or “bad”; the law of one price is morally ambiguous. It is simply the way a global economy works, and the pressures are real and need to be addressed. (LO 4 ) For Professors New to Colander Every book presents material in slightly different ways, so it is helpful to note some of the names, notations, definitions or symbols that Colander uses as compared to other books. It will be easier for your students connect material presented in the lecture to material covered in the text if you note the following:  Colander refers to the central model of this chapter as the “Production Possibility Curve ” and “PPC” instead of “Production Possibility Frontier” and “PPF.”  Colander distinguishes between efficiency (achieving a goal using as few outputs as possible) and productive efficiency (getting the most out of available resources), recognizing the important reality that maximizing total output is not a necessary goal. Other goals are possible. The achievement of goals at least cost is “efficient” whether or not the goals implied or required “productive efficiency.” Answers to the Problem Set The following are the correct answers to the problem set that follows on the next two pages, along with the learning objective associated with each question. The problem set is designed to be photocopied directly from this book and distributed for student use. 1. (LO1) a. Decreasing butter production by 3 from 12 to 9 pounds. b. Decreasing butter production by 4 from 9 to 5 pounds. c. Opportunity costs of producing guns increase as more guns are produced. This is called the principle of increasing marginal opportunity cost. 2. (LO1) a. It would shift in along the axis labeled “agricultural goods.” b. It would shift out along the axis labeled “manufacturing goods.”

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    Chapter 0 2 - The Production Possibility Model, Trade, and Globalization 2 - 3 c. It would shift in along both axes. 3. (LO 1 , LO 2 ) a. See graph; b. See graph; c. See graph. d. Point B is inefficient because it is inside the production possibility curve. One could increase the number of guns while still produce the same amount of butter, or vice versa. 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 Butter Guns A B C 4. (LO 1 , LO 2 ) Parts a & b together: 0 1 2 3 4 5 6 7 8 9 10 11 0 20 40 60 80 100 120 140 160 180 200 220 240 260 Earrings Scarves 5. (LO 3 , LO4) a. True. If the U.S. exchange rate falls, the dollar value of foreign wages will rise. That is, the relative wages of U.S. workers will decline, which will help the U.S. regain its comparative advantage. b. False. Because trade restrictions restrict the flow of goods and services, they keep the law of one price from equalizing wages and prices internationally. c. False. A country that has a comparative advantage in producing one set of goods means that the other country has to have a comparative advantage in the other set of goods.

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    Chapter 0 2 - The Production Possibility Model, Trade, and Globalization 2 - 4 THE PRODUCTION POSSIBILITY MODEL, TRADE, AND GLOBALIZATION PROBLEM SET NAME : ___________ ____________________________ DATE : ____ / ____ / ____ Give the best answer to each of the following questions. 1. Refer to Figure 2 - 2 in the textbook to answer the following: a. What is the opportunity cost of increasing gun production from 7 to 9 guns? b. What is the opportunity cost of increasing gun production from 9 to 11 guns? c. What is happening to the opportunity cost of producing guns as more are produced? 2. Explain how a production possibility curve for agriculture goods and manufacturing goods would shift after each of the events described below: a. A drought in the Midwest reduces agricultural yield per acre. b. Advances in computer technology lower the cost of producing manufactured goods but do not affect the cost of producing agricultural goods. c. Civil war disrupts the production of all goods equally in the United States. 3. On the graph, below, label one example of each of the following: 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 Butter Guns a. Efficient production. Label it point A. b. Inefficient production. Label it point B. c. Unattainable production. Label it point C. d. Why is point B inefficient?

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    Chapter 0 2 - The Production Possibility Model, Trade, and Globalization 2 - 5 4. A clothing accessory company produces scarves and earrings. Below are the production possibility combinations it can produce with the resources that it has. a. Draw the production possibility curve in the space below. Scarves Earrings 10 0 9 50 8 90 7 120 6 145 5 165 4 185 3 200 2 215 1 225 0 230 b. Suppose technological advances increase production of both earrings and scarves by 10% without increasing costs. Demonstrate the effect of this innovation on the production possibility curve you drew above. 5. Briefly explain why the following statements are either TRUE or FALSE: a. One way for the United States to regain a comparative advantage in the production of goods is for the U.S. exchange rate to decline. b. Trade restrictions facilitate the impact of the law of one price on wages and prices internationally. c. Wages in China are lower than in the United States. Therefore, China has a comparative advantage in the production of all goods.

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    Chapter 0 3 – Economic Institutions 3 - 1 CHAPTER THREE ECONOMIC INSTITUTIONS Learning Objectives After you teach the material in this chapter, your students should be able to do the following: LO1. Define market economy and c ompare and contrast socialism with capitalism. LO2. Describe the role of businesses and households in a market economy. LO3. List and discuss the various roles of government. LO4. Explain why global policy issues differ from national policy issues. Teaching Objectives To help your students achieve the Learning Objectives above, you should anticipate common student difficulties with the material and be prepared to do the following:  Clarify the difference between the “pure” versions of capitalism and socialism and the real - life mixed versions. The Heritage Foundation’s Index of Economic Freedom ( http://www.heritage.org/Index ) is one way to introduce the idea that economic systems are more of a “spectrum” than simply two different market types. ( LO1 )  Reinforce the important distinction between households, business , and government established in the textbook by defining each according to its economic activity . ( LO2 )  Remind students that the three important economic institutions are not mutually exclusive; in fact, it is quite the opposite. Businesses are made up of individuals who are also part of households; likewise government decision - makers also belong to households. Rather, “business” and “government” are just different outlets through which households exert their power over the economy. ( LO2, LO3 ) For Professors New to Colander Every book presents material in slightly different ways, so it is helpful to note some of the names, notations, definitions or symbols that Colander uses as compared to other books. It will be easier for your students connect material presented in the lecture to material covered in the text if you note the following:

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    Chapter 0 3 – Economic Institutions 3 - 2  To help students better understand and differentiate the parts of the circular flow diagram, the markets are referred to as “factor” and “goods” markets, rather than “input” and “output” markets (or some other formulation).  Colander’s presentation of the circular flow diagram includes government . Because the text focuses on the effects of extra - market (social and political) forces on decision - making, it makes sense to present all three “players” in the economy at once (since these three institutions all affect decision - making in any economy), rather than to introduce only businesses and households first, and then add government, as is the style of other textbooks. Other countries are not explicitly drawn into the circular flow diagram, but their presence is implied with arrows that flow out of and back into the model. At the end of the chapter, the relationships between economies are explored. Answers to the Problem Set The following are the correct answers to the problem set that follows on the next two pages, along with the learning objective associated with each question. The problem set is designed to be photocopied directly from this book and distributed for student use. 1. ( LO2 ) a. Goods sold by firms; b. Expenditures by households; c. C; d. H 2. ( LO2 ) a. corporation; b. partnership; c. partnership; d. sole proprietorship; e. corporation; f. corporation; g. corporation; h. sole proprietorship 3. ( LO1 ) a. Socialism ; b. Capitalism ; c. Socialism; d. Capitalism 4. ( LO3 ) a. Intergovernmental (other governments) ; b. Education; c. Individual income taxes; d. Income security 5. ( LO 3 ) a. Providing public goods b. Correcting for externalities c. Providing a stable set of institutions and rules d. Promoting effective and workable competition e. Adjusting for undesirable market results f. Ensuring economic stability and growth

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    Chapter 0 3 – Economic Insitutions 3 - 3 ECONOMIC INSTITUTIONS PROBLEM SET NAME : __________________________ _ ____________ DATE : ____ / ____ / ____ Give the best answer to each of the following questions. 1. The diagram below is a representation of a market economy. a. What is the meaning of flow A? b. What is the meaning of flow B? c. Which flow captures the flow of individual income taxes? d. Which flow captures the flow of labor to produce goods? 2. Indicate whether each of the following statements best describes a corporation , a sole proprietorship , or a partnership : a. Liability is limited to the amount invested. b. Unlimited liability for oneself and one’s partner’s actions. c. Ability to share work and risks of ownership without issuing shares. d. Direct control by the owner. e. Most difficult to organize. f. Greater ability to secure funds from outside investors. g. Accounts for largest sales receipts in the United States. h. The most common form of business.

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    Chapter 0 3 – Economic Insitutions 3 - 4 3. Indicate whether the following descriptions best characterize capitalism or socialism. a. It is an economic system based on individual’s goodwill toward others. b. Ownership of the means of production resides with a small group of individuals. c. Society decides what, how, and for whom to produce . d. Society relies on the self - interested individuals to decide what, how, and for whom to produce. 4. Answer the following questions based on Figure 3 - 3 and Figure 3 - 4 in the textbook: a. What is the largest source of income for state and local governments? b. What is the largest expenditure category for state and local governments? c. What is the largest source of income for the federal government? d. What is the largest expenditure category for the federal government? 5. For each of the following examples of government policy, determine to which specific role of government it relates. a. Local governments produce fire and police protection, rather than relying on markets. b. The government taxes the production and sale of goods that create pollution. c. The government makes laws that protect consumers and then uses its judicial branch to enforce those laws. d. A state government requires that physicians be licensed to practice medicine, but does not require licensure for newspaper deliverers. e. The government redistributes income from the wealthy to the poor through Social Security. f. The government passes a ‘stimulus bill’ to try to end a recession.

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    C hapter 0 4 - Supply and Demand 4 - 1 CHAPTER FOUR SUPPLY AND DEMAND Learning Objectives After you teach the material in this chapter, your students should be able to do the following: LO1. State the law of demand and d istinguish shifts in demand from movements along a demand curve. LO2. State the law of supply and distinguish shifts in supply from movements along a supply curve. LO3. Explain how the law of demand and the law of supply interact to bring about equilibrium. LO4. Discuss the limitations of demand and supply analysis. Teaching Objectives To help your students achieve the Learning Objectives above, you should anticipate common student difficulties with the material and be prepared to do the following:  Be patient with those students for whom reading a graph is difficult. Experienced economics instructors already know that their students arrive in economics classes with different levels of comfort with graphing. Following the book’s pedagogy will help because it begins with the curve and then links the curve to demand schedule data. This way, students who are not comfortable with plotting data can still feel comfortable using supply and demand curves. ( LO1 , LO2 )  Provide real - life examples of buyers and sellers responding to price changes to confirm the laws of supply and demand. The concept of substitution is incredibly helpful, because it provides the result of these laws without the need for more complicated explanations. Households try to stretch their budgets, so they buy less of things that become more expensive. Firms try to make as much profit as possible, so they make more of a particular good when its price goes up, and less of everything else. ( LO1, LO2 )  Reinforce the difference between movements along a curve and the shifts of a curve. The textbook distinguishes these very well, but like many things in your principles class, repetition is going to be key. Not wanting to waste your students’ time, the text explains this well once, and leaves it to you to reinforce this important distinction. ( LO1 , LO2 )

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    C hapter 0 4 - Supply and Demand 4 - 2  Develop the idea of equilibrium with non - economics examples so that students don’t think of equilibrium as only an economic concept. The text points out that the concept actually comes from physics. Dropping a marble into a bowl provides a good starting point for the concept of equilibrium: until it reaches the bottom, it continues to move, and once it reaches the bottom and stops, it remains there. Then, a discussion of markets with non - equilibrium prices and noting the upward or downward pressure on prices caused by excess demand or supply can follow directly. ( LO3 )  Be careful with demand and supply shifts that you explain the actual process. It is common for some economics instructors to teach shifts in supply or demand in a way that makes it sound like the market moves immediately from one equilibrium to the next. It is more beneficial to keep the price initially unchanged, to show how the shift in supply or demand causes excess supply or excess demand, which is the catalyst for the price change and the movement to the new equilibrium. This is the approach your students will encounter in the textbook. ( LO3 )  Present the limitations of supply and demand analysis in a measured way. Professors who are quick to dismiss supply and demand analysis as never providing useful answers will immediately lose the attention of their students. Remind your students that professional economists are aware of the limitations of this simple kind of analysis and that they build more complicated models that address these concerns. Build anticipation for the next chapter by letting students know that they will learn a lot about how supply and demand is used. ( LO4 ) For Professors New to Colander Every book presents material in slightly different ways, so it is helpful to note some of the names, notations, definitions or symbols that Colander uses as compared to other books. It will be easier for your students connect material presented in the lecture to material covered in the text if you note the following:  In this text, the phrase “shift factors” is consistently used to refer to the non - price determinants of demand and supply. Using this language consistently in class will help your students recall the well - organized list of shift factors they encountered in the text. Switching from “shift factors” to “determinants” or “shifters” may lead to confusion.  When presenting a supply or demand curve lacking specific values, Colander sub scripts P and Q with the letter name of the particular point on the curve(s). For example, point A on a curve would consist of price P A and quantity Q A . Though this is just a matter of style, consistency on your part will help prevent confusion among your students. Students often confuse super scripts with exponents.  Though the terms “surplus” and “shortage” are introduced, the text favors the use of the phrases “excess supply” and “excess demand,” which are easier for students to interpret.

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    C hapter 0 4 - Supply and Demand 4 - 3 Answers to the Problem Set The following are the correct answers to the problem set that follows on the next two pages, along with the learning objective associated with each question. The problem set is designed to be photocopied directly from this book and distributed for student use. 1. ( LO1 ) The completed diagram should look like the one below. 2. ( LO1 , LO2 ) a. Decrease in demand; b. Increase in supply; c. Increase in demand; d. Change in quantity demanded; e. Decrease in demand; f. Decrease in supply 3. ( LO1 , LO2 , LO3 ) The completed diagram should look like the one below. a. Equilibrium price is $9.50 and equilibrium quantity is 12 CDs. b. At a price of $8.00, there would be excess demand of 24 CDs; at a price of $10.00, there would be excess supply of 12 CDs. c. If the price were $9.00, there would be pressure on the price to rise because of the excess demand.

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    C hapter 0 4 - Supply and Demand 4 - 4 4. ( LO3 ) a. Equilibrium price rises, and equilibrium quantity declines. b. Equilibrium price declines, and equilibrium quantity rises. c. Equilibrium quantity rises. The effect on equilibrium price is unknown. d. Equilibrium quantity declines. The effect on equilibrium price is unknown. 5. ( LO4 ) The fallacy of composition is the false assumption that what is true for a part will also be true for the whole. Supply and demand analysis assumes that other things remain constant. The fallacy of composition reminds us that the larger the market under consideration, the more likely it is that other things will change when this market changes, so that actual observed changes in the market will differ from what the simple supply and demand analysis would suggest.

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    C hapter 0 4 - Supply and Demand 4 - 5 SUPPLY AND DEMAND PROBLEM SET NAME : ___ _ ___________________________________ DATE : ____ / ____ / ____ Give the best answer to each of the following questions. 1. Draw a demand curve from the following demand table on the axes below. Label it D 1 . Then suppose the demander gets an increase in income and decides to buy 2 more bars at every price level. Draw this change on your demand curve. Label it D 2 . Price per candy bar Candy bars purchased each week $0.50 10 0.75 8 1.00 6 1.25 4 1.50 2 2. Indicate whether each of the following statements describes an increase in demand , decrease in demand , change in quantity demanded , increase in supply , decrease in supply , or change in quantity supplied in the given market. a. Store - brand soup prices are cut, reducing sales of Campbell’s soup. Market: Campbell’s soup. b. Coffee bean prices hit an 18 - month low following a bountiful harvest. Market: coffee beans. c. A summer heat wave leads to higher prices for bottled water. Market: bottled water. d. Holiday clothing discounts boost clothing sales. Market: clothing. e. Apple introduces a tinier and more powerful iPod model. Market: older iPod models. f. The cost of pesticides increases , leading to a rise in the price of soy beans. Market: soy beans.

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    C hapter 0 4 - Supply and Demand 4 - 6 3. Given the following data for individuals, draw the market demand curve and market supply curve for CDs. Assume that these are the only individuals in the entire market. Price is per CD. Price $8.00 $8.50 $9.00 $9.50 $10.00 $10.50 Quantity demanded in units per week Mark 3 3 1 0 0 0 Lynn 8 7 6 3 2 1 Jason 6 5 4 3 0 0 Erin 10 9 7 6 4 2 Quantity supplied in units per week Jeff 0 1 2 3 4 6 Beth 2 3 3 4 6 7 Chris 0 1 2 3 5 6 Abby 1 1 2 2 3 5 a. What would be the equilibrium price and quantity in this market? b. Which would there be — excess demand or excess supply — at a price of $8.00? How much? What about at a price of $10.00? c. If the price of a CD was initially set at $9.00 but the price was allowed to adjust, would the price rise or fall? Explain your answer. 4. State the effect of the following events on equilibrium price and quantity of the market given. a. Beetle infestation decimates tobacco crop. Market: cigars. b. The Organization for Petroleum Export Countries raises oil export quotas. Market: gasoline. c. Digital image albums become the rage among households while improved technology reduces the cost of producing digital cameras. Market: digital cameras. d. Hurricanes in the Gulf coast cause gasoline supply disruptions while the summer travel season ends. Market: gasoline. 5 . What is the fallacy of composition and how is it related to supply and demand analysis?

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    C hapter 0 5 - Using Supply and Demand 5 - 1 CHAPTER FIVE USING SUPPLY AND DEMAND Learning Objectives After you teach the material in this chapter, your students should be able to do the following: LO1. Apply the supply and demand model to real - world events . LO2. Demonstrate the effect of a price ceiling and a price floor on a market. LO3. Explain the effect of excise taxes and tariffs on a market . LO4. Explain the effect of quantity restrictions on a market. LO5. Explain the effect of a third - party - payer system on equilibrium price and quantity. Teaching Objectives To help your students achieve the Learning Objectives above, you should anticipate common student difficulties with the material and be prepared to do the following:  Remind students that in the real world, unlike in an economics tex tbook, changes do not take place in a vacuum. All markets are linked inasmuch as production and spending are both linked to income, and households choose to spend that finite income on a certain set of possibly substitutable goods and services. Theoretically, one change in supply or demand could lead to infinite changes in successive markets. (LO1)  Provide or elicit other examples of price ceilings and price floors. ( LO2 )  Defend the notion that a tax does not lead to an increase in consumer prices exactly equal to the size of the tax. Many students are used to hearing that taxes, etc., can be “passed on to the consumer.” The text’s approach to this is a helpful one: in your examples, begin by allowing the entire tax to be passed on to consumers, and then point out that quantity demanded would have fallen. This excess supply would cause price (including the tax) to fall. You may want to try an example where the consumer is taxed and tries to “pass on” the tax to the seller — by, say, being “unwilling to pay any more for the good.” In this case, quantity supplied will fall. The excess demand will require that price eventually rises. ( LO3 )  Explain to students that the primary effect of many quantity restrictions is simply an increase in price. In some states, barbers must be licensed by the state. Ask your students whether they believe this type of licensing provides more benefits to

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    C hapter 0 5 - Using Supply and Demand 5 - 2 consumers or producers. You may find that the answers are very different from those you'll get if you ask about the licensure of lawyers or physicians.  Demonstrate the impact of third - party - payer systems by using counter - factual examples that remind students of the rationing effect of prices. Gasoline might be a good example. Nobody likes high gas prices, but they encourage people to use less gas and to think seriously about their gas consumption — two impacts that few people would consider negative. But what if you only had to pay for 10% of the gas price and the government paid the rest? Would you be as careful about your gas usage? (LO5) For Professors New to Colander Every book presents material in slightly different ways, so it is helpful to note some of the names, notations, definitions or symbols that Colander uses as compared to other books. It will be easier for your students to connect material presented in the lecture to material covered in the text if you note the following:  While there are no significant notations or names used in this chapter that should differ from what experienced teachers are used to seeing, it is worth noting that Colander also includes the very important concepts of quantity restrictions and third - party - payer systems in this chapter. These extensions of supply and demand analysis are important not just for their obvious real - life relevance, but also because they give students additional opportunities to work with supply and demand. The textbook you might have previously used may not have introduced these concepts so early. Make sure you are prepared to teach them. Answers to the Problem Set The following are the correct answers to the problem set that follows on the next two pages, along with the learning objective associated with each question. The problem set is designed to be photocopied directly from this book and distributed for student use. 1. (LO1) a. graph 3; b. graph 1; c. graph 2 2. ( LO 2, LO 3 , LO4 ) a. Price floor, excise tax, quantity restriction b. Price ceiling c. None of these d. Price floor, price ceiling, excise tax, quantity restrictions e. Excise tax

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    C hapter 0 5 - Using Supply and Demand 5 - 3 3 . (LO5) a. Equilibrium price would be $90; equilibrium quantity would be 20 visits per year. b. Total expenditures would be $90 × 20 = $1,800. c. At a price of $30, consumers would demand 28 visits per year. d. In order to supply 28 visits per year, doctors would require $120 per visit. e. Total expenditures would be $120 × 28 = $3,360. f. With the co - payment, total expenditures are $3,360 – $1,800 = $1,560 higher.

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    C hapter 05 - Using Supply and Demand 5 - 4 USING SUPPLY AND DEMAND PROBLEM SET NAME : _______________________________________ DATE : ____ / ____ / ____ Give the best answer to each of the following questions. 1. Match the graph that best illustrates the event described. Quantity Quantity Quantity Price Price D0 D1 Supply S0 S1 Demand Q 1 Q 0 Q 0 Q 1 P 1 P 0 P 0 P 1 Price D0 D1 Q 0 Q 1 P 1 P 0 S1 S0 (1) (2) (3) a. The price for a gallon of milk is projected to hit $3 in the United States because fewer dairy cows are available from Canada because of mad cow disease and there is greater foreign demand for dairy products. Market: milk. b. Hurricanes and heavy rains lead to a huge increase in tomato prices. Market: tomatoes. c. Low interest rates and a booming economy lead to a boom in housing construction. As a result, plywood prices rise 24%. Market: plywood. 2. For each of the statements below, determine which, if any, government interventions it properly describes. Your choices are: a price ceiling , a price floor , an excise tax , or a quantity restriction . More than one may apply. a. The price that buyers pay will rise. b. The price that buyers pay will fall. c. The number of units bought and sold will rise. d. The number of units bought and sold will fall. e. The market will clear — that is, quantity demanded will be equal to quantity supplied.

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    C hapter 05 - Using Supply and Demand 5 - 5 3 . The graph below shows supply and demand curves for annual medical office visits. Using this graph, answer the questions below. a. If the market were free from government regulation, what would be the equilibrium price and quantity? b. Calculate total expenditures on office visits with this equilibrium price and quantity. c. If the government subsidized office visits and required that all consumers were to pay $30 per visit no matter what the actual cost, how many visits would consumers demand? d. What payment per visit would doctors require in order to supply that quantity of visits? e. Calculate total expenditures on office visits under the condition of this $30 co - payment. f. How do total expenditures with a co - payment of $30 compare to total expenditures without government involvement? Provide a numerical answer.

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    C hapter 0 6 – Describing Supply and Demand: Elasticities 6 - 1 CHAPTER SIX DESCRIBING SUPPLY AND DEMAND: ELASTICITIES Learning Objectives After you teach the material in this chapter, your students should be able to do the following: LO1. Use elasticity to describe the responsiveness of quantities to changes in price and d istinguish five elasticity terms. LO2. Explain the importance of substitution in determining elasticity of supply and demand. LO3. Relate price elasticity of demand to total revenue. LO4. Define and calculate income elasticity and cross - price elasticity of demand . LO5. Explain how the concept of elasticity makes supply and demand analysis more useful. Teaching Objectives To help your students achieve the Learning Objectives above, you should anticipate common student difficulties with the material and be prepared to do the following:  Choose your words deliberately. Beyond the challenges of understanding the concept of elasticity and learning how to calculate it, students also have to learn a great deal of vocabulary in this chapter. Using correct and consistent language will help them with this. (LO1, LO4 )  Review a little bit of arithmetic, especially as it relates to percent changes, depending on the population you teach. Also, this chapter in the text gives students many opportunities to practice calculations. It may be helpful if you can encourage your students to try these and are prepared to review them. ( LO1 )  Provide real - life examples, in addition to those in the text, to reinforce the ideas. Be sure to review those examples used in the text, so that you can supplement these examples. ( LO2 , LO3 , LO5 ) For Professors New to Colander Every book presents material i n slightly different ways , so it is helpful to note some of the names, notations , definitions or symbols that Colander us es as compared to other books.

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    C hapter 0 6 – Describing Supply and Demand: Elasticities 6 - 2 It will be easier for your students to connect material presented in the lecture to material covered in the text if you note the following :  In keeping with the KISS principle established earlier in the book, Colander’s presentation and notation for elasticity is simp le, so as not to confuse. The text uses “ E ” when referring generically to elasticities and “ E D ” and “ E S ” for price elasticity of demand and price elasticity of supply respectively. The Greek letter delta (Δ) is not used in presenting the formulas. Finally, it is only mentioned once that price elasticities of demand are actually negative; they are referred to as positive numbers throughout. Follow the text's lead and do not belabor this unimportant point.  The text teaches what other texts call “the midpoint method” but without using that name. Rather, this method is presented as a solution to the “endpoint problem.” This language presents this formula as having a particular usefulness for students, and not just as an arbitrarily complicated and esoteric “method” of calculating elasticities.  Rather than presenting demand elasticities first and one supply elasticity later, Colander presents the price elasticities (of both demand and supply) first, and develops them together. This presentation is different from the presentation in many texts, but is much more helpful, and avoids making price elasticity of supply seem like an afterthought.  Many texts teach the concept of changing elasticity along a straight - line demand curve but confusingly neglect to provide the same insight for supply. Because this text presents the concept of price elasticity for both demand and supply by developing them together, this confusing omission is avoided. If you have never presented this material to students before, you might need a quick review.  Colander presents all of the ‘determinants’ of price elasticity as being related to the idea of substitutability, which echoes the important role that substitution played in the development of demand and supply curves earlier in the text. Any professor who has tried to present a list of the determinants of the price elasticity of demand to students has recognized that substitution is at the heart of all of them, and has no doubt wondered why “substitutes” is included in the list as its own item (as it is in many texts). Finally, if you follow this text’s presentation, you won’t be repeating yourself.  In presenting income and cross - price elasticity, the text does not use symbols, but rather writes them out. Also, this text correctly uses “percentage change in demand ” and not quantity demanded as the numerator in the formulas for these elasticities.  Colander presents two equations for calculating percentage changes in price when either supply or demand shifts. This useful and interesting formula is left out of

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    C hapter 0 6 – Describing Supply and Demand: Elasticities 6 - 3 many principles texts, so you may not have seen or used these formulas for some time. Be sure to review them. Answers to the Problem Set The following are the correct answers to the problem set that follows on the next two pages, along with the learning objective associated with each question. The problem set is designed to be photocopied directly from this book and distributed for student use. 1. (LO1 , LO3 ) a. 0.76; b. Inelastic ; c. R evenue rose by $1 , 2 6 0 , which makes sense because demand is inelastic . 2. (LO1 ) a. 0.67, inelastic; b. 1.0, unit elastic; c. 1.6, elastic 3 . ( LO4 ) a. 3 ; b. 1 ; c. 4 ; d. 6 ; e. 2 ; f. 5 4. ( LO1 ) The completed graph should look like the one below. The midpoint is (20, $5). 5. ( LO2 ) a. Diet caffeine - free Pepsi because it is a narrowly - defined good and therefore has more substitutes than soda in general. b. Filet mignon because it is a luxury and it will be a greater percentage of one’s budget than table salt. c. Bottled water because it is less of a necessity than is tap water. d. Plasma - screen TV s because they are more narrowly - defined than televisions. 6 . ( LO5 ) a. Price increases 10%; b. Pric e decreases 5%; c. Price decreases 10%

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    C hapter 0 6 – Describing Supply and Demand: Elasticities 6 - 4 DESCRIBING SUPPLY AND DEMAND: ELASTICITIES PROBLEM SET NAME : ________________________________ DATE : ____ / ____ / ____ Give the best answer to each of the following questions. 1. Suppose the price of gasoline rises from $1.89 to $2.17 per gallon, and in response the quantity demanded decreases from 20,000 to 18,000 gallons. a. What is the price elasticity of demand? b. Is demand elastic or inelastic within this range? c. What is the change in total revenue? Does this make sense? 2. Calculate the price elasticity of demand for the following products and state whether demand is price elastic, inelastic, or unit elastic. a. Raw sugar prices rose by 3% and raw sugar consumption declined by 2%. b. A 10% increase in the price of cigarettes reduce s smoking among 8 th to 10 th graders by 10%. c. The price of luxury cars increases by 5 % while the quantity demanded decreases by 8%. 3 . Match the following words with the appropriate statement about elasticity : a. Luxury ____ 1. Cross price elasticity of demand is negative. b. Complement____ 2. Income elasticity of demand is negative. c. Necessity____ 3. Income elasticity of demand is greater than one. d. Substitute____ 4. Income elasticity of demand is less than one. e. Inferio r good ____ 5. Income elasticity of demand is positive. f. Normal good ____ 6. Cross - price elasticity of demand is positive.

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    C hapter 0 6 – Describing Supply and Demand: Elasticities 6 - 5 4. On the following graph, indicate the point s where demand is unit elastic , perfectly elastic , and perfectly inelastic . Label the ranges where demand is elastic and where demand is inelastic . 5. Circle the good in the following pairs that is likely to have more elastic demand . Explain your answer. a. Diet caffeine - free Pepsi / Soda b. Table salt / Filet mignon c. Bottled water / Tap water d. Plasma - screen TV s / Televisions 6 . Calculate the percentage change in price for the following situations. Be sure to state whether price is rising or falling. a. Elasticity of demand is 1 and elasticity of supply is 2. Demand increases 30%. b. Elasticity of demand is 1.5 and elasticity of supply is 0 .5. Demand decreases 10%. c. Elasticity of demand is 2 and elasticity of supply is 1. Supply increases 30%.

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