Demand: What is it?
Demand
The desire to own something and the ability to pay for it
Law of Demand
When a good’s price is lower, consumers will buy more of it
When a good’s price is higher, consumers will buy less of it
How much would you pay for a slice of pizza?
Law of Demand: How it emerges
2 Factors that create the Law of Demand
#1 Substitution Effect--Consumer reaction to price increase
Result: consume less of good and more of another(Pizza vs Tacos)
#2 Income Effect--Change in consumption b/c of real income change
Gas Price ↑ Favorite Pizza Parlor↓
Demand Schedule
Demand Schedule
A table showing quantities people will buy at given prices
Market Demand Schedule
A table showing quantities all people will buy at given prices
Demand Curve
Graphic Representation of a demand schedule
Demand Curve
Demand curves function this way assuming no other factors change
Demand Curve
Ceteris paribus “all other things remain constant”
Demand curves function this way assuming no other factors change
Only considers price as a factor
When ceteris paribus is dropped, the whole curve shifts
What Causes Demand Shifts?
#1 Income
Normal goods – consumers demand more when they have more income
Example: buying more pizza
Inferior Good – consumer demands less of when income increases
Ex: Mac’n Cheese, Ramen noodles and SPAM!!!!!!
Causes of Demand Shifts
#2 Consumer Expectations
Future Prices determine spending habits
Will the item(s) be on sale or more expensive in the future?
#3 Population
Growing populations need more goods
Example: Baby boom, Post WWII
More needs for baby goods
#4 Consumer Tastes and Advertising
Consumers opinions are effected by popularity of items and ads appealing to their desires
Elasticity of Demand
How consumers react to change in price:
Inelastic
Demand isn't sensitive to a change in price
Elastic
Demand is sensitive to a change in price
Calculating Elasticity
PEoD = (% Change in Quantity Demanded)/(% Change in Price)
Price Range
Goods can go from being inelastic to elastic
For Example: $1.00 pizza sliceÞ $1.50 versus $1.00Þ $4.00
Values of Elasticity
Unitary Elastic
Demand whose elasticity is exactly equal to 1
Quantity demanded is = to percentage change in price
Increase of price 50%, demand effected by 50%
Factors Affecting Elasticity
Available Substitutes
Is there something else that can replace the demand you have?
Relative Importance
How much of your budget would you spend on the item--The larger the item is in the budget, the more effect is has upon elasticity
Necessities vs. Luxuries
Change Over Time
Demand becomes more elastic over time
Total Revenue
Amt of $ a firm receives by selling goods or services
Firms must know if goods are elastic or inelastic
This helps to make sure they make maximum revenue
Thursday, January 14, 2010
Wednesday, January 6, 2010
Honors Economics
Intro Unit 1, Lesson 1
ECONOMICS: Concerned with the efficient use and management of limited productive resources to achieve maximum satisfaction of human material wants.
ECONOMICS: The study of our behavior in producing, distributing, and consuming material goods and services in a world of scarce resources.
SCARCITY: WANTS EXCEED RESOURCES
ECONOMICS: The study of how limited resources are allocated in a world of unlimited wants.
We want more than we are capable of getting.
MICROECONOMICS: deals with specific economic units and a detailed consideration of these individual units. The economist is placing a specific portion of the economy under a microscope.
MACROECONOMICS: Deals either with the economy as a whole or the basic subdivision or aggregates such as government, household, or business sectors, which make up the economy.
relation v. causation: Just because something happens when something else happens does not mean one caused the other. It may just be that they are correlated. (They are associated in some systematic but dependable way.) It may be that a third variable is the cause yet that variable makes the first two correlated.
An example of this is hot weather and electric bills. When the weather gets hot your parents’ electric bills go up. These two are not related by causation. (one does not cause the other.) Instead, they are correlated. When the weather gets hot the air conditioners are turned on and this causes the electric bills to go up.
To illustrate the example of ceteris parabus use the example of shooting a bullet out of a gun at an angle. How far does the bullet travel. In physics what do you consider? Velocity, projectory, friction (air pollution)...
CETERIS PARIBUS: Means other things being equal. In economics when you are working on a problem we must assume that only those variables will change. All others remain the same.
Unit One: Lesson 2
Once again, look at the definitions of Economics. Relate this to limited resources.
ECONOMICS: Concerned with the efficient use and management of limited productive resources to achieve maximum satisfaction of human material wants.
ECONOMICS: The study of our behavior in producing, distributing, and consuming material goods and services in a world of scarce resources
SCARCITY: WANTS EXCEED RESOURCES
ECONOMICS: The study of how limited resources are allocated in a world of unlimited wants.
Economics is the study of the distribution of goods and services. It is all based on the idea that we live in a world of unlimited wants with limited or scares resources.
Examples of Resources are:
1) Land: This includes the land and its natural resources
2) Labor: This includes all services of people used in production except Entrepreneurial ability, which will be discussed later.
3) Capital: This is all the things used in production. Can anyone give me examples? (Tools, machinery, equipment, the factory itself...) (Notice that money is not capital because it in itself is useless.)
4) Entrepreneurial Ability: This is the person responsible for taking the first three and combining them into a product or service. He is also the one who bears the risk of the undertaking.
Some assumptions are (CETERIS PARIBUS)
1) Fixed Resources:
2) Fixed Technology:
3) Two Products: (Usually one capital good and one consumer good)
4) We are achieving economic efficiency:
Inside the PPC you would not be at economic efficiency. We might not be at full employment.
This could be that workers that want to work can not find jobs. We are not at FULL EMPLOYMENT.
This also assumes that what is being produced is what we want to be produced.
ALLOCATIVE EFFICIENCY: Resources are devoted to goods most wanted by society.
PRODUCTIVE EFFICIENCY: Least costly production techniques are used to produce wanted goods and services. If you building boats by hand you are not utilizing full production.
Given that we have a world of unlimited wants in a world of limited resources we must decide how to allocate production to satisfy society. We must look at our production possibilities.
Production Possibilities Curve (also called Production Possibility Frontier)
1. What are the tradeoffs involved?
Must give up units of one good in order to produce units of the other.
Notice that if they give up more capital goods for consumer goods they are hurting their future.
2. Why is the PPC concave?
As more and more of a good is produced it takes more away from the other because the resources are not easily converted. (Law of Increasing Opportunity Costs)
3. What does a point inside the curve represent?
A point in which efficiency is not being achieved.
4. Can you think of an example in history when we were inside the PPC?
Great Depression
5. What is the significance of a point outside the PPC.
Without advancements in technology or changes in factors of production this is unattainable for long period of time.
Suppose that additional resources (land, labor, capital and entrepreneurial ability was found. (In other words the economy is expanding.) HOW WOULD THIS AFFECT OUR PPC? (It would shift it outward.)
The same is true for technological advancements
One thing a society must decide is if it wants to produce more goods that will help it advance or more goods that it can consume now. Should we produce at A or B? Either works, it just depends on what society wants. However, A will help you advance quicker in the long run.
6. Under what conditions could the point outside the PPC be reached?
Technological advancements or new resources
Make sure that students understand that no point on the curve is more desirable from an economist standpoint. That gets into societies specific wants, which is outside the scope of the class.
OPPORTUNITY COSTS: THE AMOUNT OF OTHER PRODUCTS WHICH MUST BE FOREGONE OR SACRIFICED TO OBTAIN SOME AMOUNT OF ANY GIVEN PRODUCT.
Ex: In order to have more pizzas we must give up robots. The opportunity of pizzas is therefore robots.
OPPORTUNITY COST: The best alternative forgone. This takes into consideration all types of opportunity costs rather than just production costs. Ex. Study or go on a date
Implicit Costs: Resources that could have been used in the next best alternative. You could be taking team sports or marketing instead of A.P. Economics. You could take a nap tonight instead of studying.
Explicit Costs: These are the measurable costs. It costs $3 for a Big Mac. This is measurable.
Marginal means change.
ECONOMICS: Concerned with the efficient use and management of limited productive resources to achieve maximum satisfaction of human material wants.
ECONOMICS: The study of our behavior in producing, distributing, and consuming material goods and services in a world of scarce resources.
SCARCITY: WANTS EXCEED RESOURCES
ECONOMICS: The study of how limited resources are allocated in a world of unlimited wants.
We want more than we are capable of getting.
MICROECONOMICS: deals with specific economic units and a detailed consideration of these individual units. The economist is placing a specific portion of the economy under a microscope.
MACROECONOMICS: Deals either with the economy as a whole or the basic subdivision or aggregates such as government, household, or business sectors, which make up the economy.
relation v. causation: Just because something happens when something else happens does not mean one caused the other. It may just be that they are correlated. (They are associated in some systematic but dependable way.) It may be that a third variable is the cause yet that variable makes the first two correlated.
An example of this is hot weather and electric bills. When the weather gets hot your parents’ electric bills go up. These two are not related by causation. (one does not cause the other.) Instead, they are correlated. When the weather gets hot the air conditioners are turned on and this causes the electric bills to go up.
To illustrate the example of ceteris parabus use the example of shooting a bullet out of a gun at an angle. How far does the bullet travel. In physics what do you consider? Velocity, projectory, friction (air pollution)...
CETERIS PARIBUS: Means other things being equal. In economics when you are working on a problem we must assume that only those variables will change. All others remain the same.
Unit One: Lesson 2
Once again, look at the definitions of Economics. Relate this to limited resources.
ECONOMICS: Concerned with the efficient use and management of limited productive resources to achieve maximum satisfaction of human material wants.
ECONOMICS: The study of our behavior in producing, distributing, and consuming material goods and services in a world of scarce resources
SCARCITY: WANTS EXCEED RESOURCES
ECONOMICS: The study of how limited resources are allocated in a world of unlimited wants.
Economics is the study of the distribution of goods and services. It is all based on the idea that we live in a world of unlimited wants with limited or scares resources.
Examples of Resources are:
1) Land: This includes the land and its natural resources
2) Labor: This includes all services of people used in production except Entrepreneurial ability, which will be discussed later.
3) Capital: This is all the things used in production. Can anyone give me examples? (Tools, machinery, equipment, the factory itself...) (Notice that money is not capital because it in itself is useless.)
4) Entrepreneurial Ability: This is the person responsible for taking the first three and combining them into a product or service. He is also the one who bears the risk of the undertaking.
Some assumptions are (CETERIS PARIBUS)
1) Fixed Resources:
2) Fixed Technology:
3) Two Products: (Usually one capital good and one consumer good)
4) We are achieving economic efficiency:
Inside the PPC you would not be at economic efficiency. We might not be at full employment.
This could be that workers that want to work can not find jobs. We are not at FULL EMPLOYMENT.
This also assumes that what is being produced is what we want to be produced.
ALLOCATIVE EFFICIENCY: Resources are devoted to goods most wanted by society.
PRODUCTIVE EFFICIENCY: Least costly production techniques are used to produce wanted goods and services. If you building boats by hand you are not utilizing full production.
Given that we have a world of unlimited wants in a world of limited resources we must decide how to allocate production to satisfy society. We must look at our production possibilities.
Production Possibilities Curve (also called Production Possibility Frontier)
1. What are the tradeoffs involved?
Must give up units of one good in order to produce units of the other.
Notice that if they give up more capital goods for consumer goods they are hurting their future.
2. Why is the PPC concave?
As more and more of a good is produced it takes more away from the other because the resources are not easily converted. (Law of Increasing Opportunity Costs)
3. What does a point inside the curve represent?
A point in which efficiency is not being achieved.
4. Can you think of an example in history when we were inside the PPC?
Great Depression
5. What is the significance of a point outside the PPC.
Without advancements in technology or changes in factors of production this is unattainable for long period of time.
Suppose that additional resources (land, labor, capital and entrepreneurial ability was found. (In other words the economy is expanding.) HOW WOULD THIS AFFECT OUR PPC? (It would shift it outward.)
The same is true for technological advancements
One thing a society must decide is if it wants to produce more goods that will help it advance or more goods that it can consume now. Should we produce at A or B? Either works, it just depends on what society wants. However, A will help you advance quicker in the long run.
6. Under what conditions could the point outside the PPC be reached?
Technological advancements or new resources
Make sure that students understand that no point on the curve is more desirable from an economist standpoint. That gets into societies specific wants, which is outside the scope of the class.
OPPORTUNITY COSTS: THE AMOUNT OF OTHER PRODUCTS WHICH MUST BE FOREGONE OR SACRIFICED TO OBTAIN SOME AMOUNT OF ANY GIVEN PRODUCT.
Ex: In order to have more pizzas we must give up robots. The opportunity of pizzas is therefore robots.
OPPORTUNITY COST: The best alternative forgone. This takes into consideration all types of opportunity costs rather than just production costs. Ex. Study or go on a date
Implicit Costs: Resources that could have been used in the next best alternative. You could be taking team sports or marketing instead of A.P. Economics. You could take a nap tonight instead of studying.
Explicit Costs: These are the measurable costs. It costs $3 for a Big Mac. This is measurable.
Marginal means change.
AP Macro Notes Unit 4
Money has been around forever.
Barter system: Problem with Barter system is double coincidence of wants. You have to want what I have and vice versa. We would have to spend time searching for others to trade with. Huge waste of time!
Functions of Money:
1) Medium of Exchange: It must be able to be used to buy goods and services.
That way I do not have to trade Bonsai for hamburgers.
2) Measure of Value: It must be capable of being a measurement as to the relative worth of a good or service.
Which is worth more a Bonsai or a hamburger?
3) Store of Value: You can hold it without worrying about it spoiling.
Three definitions of money
M1 = Currency + Checkable Deposits
Currency: Coins and Paper Money
Coins are token money because the value of the metal is not worth what the actual coins represents.
Paper money is actually Federal Reserve Notes.
plus
Checkable Deposits: (the largest component of M1 (It constitutes around 70%))
Checking accounts are a way of transferring money from one account to another. They can be easily converted into liquid cash.
*** Notice that M1 must be in the hands of individuals. Not in the hands of the treasury or the banks. This avoids double counting money. (Your money is in your checking account but it is yours. It is counted as part of yours. It is not counted as part of the banks money.)
M2 = M1 + savings accounts + small time deposits + money market deposit accounts + money market mutual funds
Savings accounts: you can readily convert this to cash. (Sometimes called near money)
Time deposits: money that can only be gotten when they mature. (C.D.'s of less than $100,000...)
Money Market Deposit Accounts: you buy shares in a money market. This money is then used by the bank to make large loans. You get a larger rate of return.
Money Market Mutual Funds: This money us use to buy short-term securities such as T bills (treasury bills).
M3 = M1 + M2 + large time deposits
Large Time deposits: These are usually held by business.
For the most part M1 is a good definition of money. Other times we will use M2. Rarely will economist use M3 because it is so broad. No matter what the definition the models work.
Credit cards are not included because they do not represent money. Instead, they are short term loans from the creditor.
Unit 4 Lesson 2, Day 1
Equation of Exchange
MV = PQ
M = supply of money
V = velocity of money (number of times a year that a dollar is spent on final G & S.
P = price level (average price of each unit of output)
Q = physical volume of G & S produced.
MV is the amount spent by consumers This is the same as the total C + I + G + Xn
PQ is the amount received by sellers. This is the same as nominal GDP (current output at current prices)
What happens if M changes? When M increases you have to look to see if the economy is in full capacity. If it is not then Q increase. If it is then P increases.
One argument about V is that it is determined by people’s willingness to hold money in a non interest bearing form. If the interest rates go way up people are willing to hold less money. This means that the money they are holding must turn over quicker so V increases.
V is actually fairly stable.
Unit 4 Lesson 3 Days 2 and 3
Balance Sheet: a statement of assets and claims summarizing the financial position of a firm or bank at some point in time.
A balance sheet must always balance. Every asset is claimed by someone.
net worth: the claims of the owners against the firm’s assets
liabilities: claims of the non-owners.
Assets = net worth + liabilities
In the beginning people would not want to carry around large sums of gold. They would therefore bring the gold to goldsmiths who would issue them receipts. Eventually people found it easier to trade receipts rather than gold. They knew that they could get the gold if they wanted to. The receipt was backed by gold.
Soon the goldsmiths saw that more gold was deposited than taken out. They decided to issue receipts that was not backed by gold. They did this in the form of loans.
The fractional reserve system of banking was started. Only a fraction of the receipts were covered with gold.
The goldsmiths created money. Today the same thing occurs. Banks make loans based on an amount that the Federal Reserve requires them to keep in reserve.
legal reserve (reserve): an amount of funds equal to a specified percentage of its own deposit liabilities which a member bank must keep on deposit with the Federal Reserve Bank in its district or as vault cash.
reserve ratio: this is the specified percentage of its demand liabilities, which the commercial bank must keep as reserves.
Reserve ratio = banks required reserves / banks demand-deposit liabilities.
EX: 10% = 10,000/100,000
From here on we will for simplicity reasons assume a rate of 20%.
Notice the amount by which the banks actual reserves exceed its required reserves is called excess reserves.
actual reserves - required reserves = excess reserves.
110,000 - 20,000 = 90,000
**** It is very important that you understand this concept. You must be able to compute all of these numbers. It is the excess reserves that allow a bank to create money. ****
This is called the Fractional Reserve Banking System: A system in which depository institutions hold reserves that are less than the amount of total deposits.
The required reserves are not there for the banks to draw on if a run occurs. Instead the required reserves are there so that the Fed can control the amount of money the bank lends.
When the bank puts its reserves in the Fed what does this represent for the Fed? a liability for the Fed.
Lets look and see what happens if one of our banks customers writes a 50,000 dollar check. This check will go through another bank. This bank will credit the account of the person that our customer paid.
The other bank will now send the check to the Fed. (This actually happen electronically now.) The Fed will take this check and increase the other banks reserves by 50,000.
It will then take 50,000 out of our reserves. The check will then be sent to us. We will then take the money out of our customer’s account (reducing our demand deposit by 50,000 and reduce our reserves by the 50,000.
Barter system: Problem with Barter system is double coincidence of wants. You have to want what I have and vice versa. We would have to spend time searching for others to trade with. Huge waste of time!
Functions of Money:
1) Medium of Exchange: It must be able to be used to buy goods and services.
That way I do not have to trade Bonsai for hamburgers.
2) Measure of Value: It must be capable of being a measurement as to the relative worth of a good or service.
Which is worth more a Bonsai or a hamburger?
3) Store of Value: You can hold it without worrying about it spoiling.
Three definitions of money
M1 = Currency + Checkable Deposits
Currency: Coins and Paper Money
Coins are token money because the value of the metal is not worth what the actual coins represents.
Paper money is actually Federal Reserve Notes.
plus
Checkable Deposits: (the largest component of M1 (It constitutes around 70%))
Checking accounts are a way of transferring money from one account to another. They can be easily converted into liquid cash.
*** Notice that M1 must be in the hands of individuals. Not in the hands of the treasury or the banks. This avoids double counting money. (Your money is in your checking account but it is yours. It is counted as part of yours. It is not counted as part of the banks money.)
M2 = M1 + savings accounts + small time deposits + money market deposit accounts + money market mutual funds
Savings accounts: you can readily convert this to cash. (Sometimes called near money)
Time deposits: money that can only be gotten when they mature. (C.D.'s of less than $100,000...)
Money Market Deposit Accounts: you buy shares in a money market. This money is then used by the bank to make large loans. You get a larger rate of return.
Money Market Mutual Funds: This money us use to buy short-term securities such as T bills (treasury bills).
M3 = M1 + M2 + large time deposits
Large Time deposits: These are usually held by business.
For the most part M1 is a good definition of money. Other times we will use M2. Rarely will economist use M3 because it is so broad. No matter what the definition the models work.
Credit cards are not included because they do not represent money. Instead, they are short term loans from the creditor.
Unit 4 Lesson 2, Day 1
Equation of Exchange
MV = PQ
M = supply of money
V = velocity of money (number of times a year that a dollar is spent on final G & S.
P = price level (average price of each unit of output)
Q = physical volume of G & S produced.
MV is the amount spent by consumers This is the same as the total C + I + G + Xn
PQ is the amount received by sellers. This is the same as nominal GDP (current output at current prices)
What happens if M changes? When M increases you have to look to see if the economy is in full capacity. If it is not then Q increase. If it is then P increases.
One argument about V is that it is determined by people’s willingness to hold money in a non interest bearing form. If the interest rates go way up people are willing to hold less money. This means that the money they are holding must turn over quicker so V increases.
V is actually fairly stable.
Unit 4 Lesson 3 Days 2 and 3
Balance Sheet: a statement of assets and claims summarizing the financial position of a firm or bank at some point in time.
A balance sheet must always balance. Every asset is claimed by someone.
net worth: the claims of the owners against the firm’s assets
liabilities: claims of the non-owners.
Assets = net worth + liabilities
In the beginning people would not want to carry around large sums of gold. They would therefore bring the gold to goldsmiths who would issue them receipts. Eventually people found it easier to trade receipts rather than gold. They knew that they could get the gold if they wanted to. The receipt was backed by gold.
Soon the goldsmiths saw that more gold was deposited than taken out. They decided to issue receipts that was not backed by gold. They did this in the form of loans.
The fractional reserve system of banking was started. Only a fraction of the receipts were covered with gold.
The goldsmiths created money. Today the same thing occurs. Banks make loans based on an amount that the Federal Reserve requires them to keep in reserve.
legal reserve (reserve): an amount of funds equal to a specified percentage of its own deposit liabilities which a member bank must keep on deposit with the Federal Reserve Bank in its district or as vault cash.
reserve ratio: this is the specified percentage of its demand liabilities, which the commercial bank must keep as reserves.
Reserve ratio = banks required reserves / banks demand-deposit liabilities.
EX: 10% = 10,000/100,000
From here on we will for simplicity reasons assume a rate of 20%.
Notice the amount by which the banks actual reserves exceed its required reserves is called excess reserves.
actual reserves - required reserves = excess reserves.
110,000 - 20,000 = 90,000
**** It is very important that you understand this concept. You must be able to compute all of these numbers. It is the excess reserves that allow a bank to create money. ****
This is called the Fractional Reserve Banking System: A system in which depository institutions hold reserves that are less than the amount of total deposits.
The required reserves are not there for the banks to draw on if a run occurs. Instead the required reserves are there so that the Fed can control the amount of money the bank lends.
When the bank puts its reserves in the Fed what does this represent for the Fed? a liability for the Fed.
Lets look and see what happens if one of our banks customers writes a 50,000 dollar check. This check will go through another bank. This bank will credit the account of the person that our customer paid.
The other bank will now send the check to the Fed. (This actually happen electronically now.) The Fed will take this check and increase the other banks reserves by 50,000.
It will then take 50,000 out of our reserves. The check will then be sent to us. We will then take the money out of our customer’s account (reducing our demand deposit by 50,000 and reduce our reserves by the 50,000.
Sunday, January 3, 2010
AP Macro
Welcome back, folks!
Make sure you have completed the handouts I gave you the week of finals (the ones on "what is money?", etc). We will begin Unit III this week!
Make sure you have completed the handouts I gave you the week of finals (the ones on "what is money?", etc). We will begin Unit III this week!
Honors World History
Welcome back! This week we will be finishing up our castle projects and wrapping up our unit on Medieval Europe. Make sure you review previous notes and handouts!
Honors Economics Syllabus
Please see the August 6th, 2009 post on this blog for a copy of the course syllabus. Please print and complete with parent signature and bring to class by the end of the week. If you cannot print from home, Mr. Robinson will provide you with a printed copy. Please ask him.
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