Improvements in technology reduce the cost of producing DVD players Price S S1 P1 Supply Price Quantity P2 D DVD Player Market Q1 Q2 Quantity
How will this effect VCRs? Demand Price Quantity Price S P1 P2 D D1 VCR Player Market Q2 Q1 Quantity
How will this effect DVD Disks? Price Demand Price Quantity S P2 P1 D1 D DVD Disk Market Q1 Q2 Quantity
How will this effect VCR Tapes? Demand Price Quantity Price S P1 P2 D D1 VCR Tape Market Q2 Q1 Quantity
Environmental regulations reduce the number of power plants built in California Price S1 S P2 Supply Price Quantity P1 D California Electricity Market Q2 Q1 Quantity
How will this effect electricity produced in other states? Demand Price Quantity Price S P2 P1 D1 Other States Electricity Market D Q1 Q2 Quantity
How will this effect natural gas? Price Demand Price Quantity S P2 P1 D1 D Natural Gas Market Q1 Q2 Quantity
How will this effect energy-efficient furnaces? Price Demand Price Quantity S P2 P1 D1 Energy-Efficient Furnace Market D Q1 Q2 Quantity
Assume there is a new 200 percent excise tax on the sale of yachts S1 Price S P2 Supply Price Quantity P1 D Yacht Market Q2 Q1 Quantity
How will this effect luxury cars? Demand Price Quantity Price S P2 P1 D1 Luxury Car Market D Q1 Q2 Quantity
How will this effect boat marinas? Demand Price Quantity Price S P1 P2 D D1 Boat Marinas Market Q2 Q1 Quantity
How will this effect yacht workers? Demand Price Quantity Price S P1 P2 D D1 Yacht Workers Market Q2 Q1 Quantity
Assume the government imposes a tariff on foreign steel S1 Price S P2 Supply Price Quantity P1 D Foreign Steel Market Q2 Q1 Quantity
How will this effect steel produced in the United States? Demand Price Quantity Price S P2 P1 D1 U.S. Steel Market D Q1 Q2 Quantity
How will this effect automobiles? S1 Price S P2 Supply Price Quantity P1 D Automobiles Market Q2 Q1 Quantity
How will this effect auto workers? Demand Price Quantity Price S P1 P2 D D1 Auto Workers Market Q2 Q1 Quantity
Why Profits and Losses are our Friend… • People of a nation are better off if their resources produce _____________ __________________________________________ • Users of resources are encouraged to undertake productive projects andless productive use of resources are discouraged. • ___________________ perform this function.
What is the function of profit and loss in a market economy? • ______________ provide rewards to those who transform resources into something of greater value. • ______________ are just as important! They impose discipline on people, businesses and organizations that are not producing valuable goods and services. • ___________________________________________
The Circular Flow of Economic Activity Supply Resources resources G&S Households G&S resources $ Supply G&S $ $ $ $ $ $ Taxes & Resources G & S & $$ $ $ Demand Resources $ Demand G&S Government Land, Labor, Capital Taxes & G & S G & S & $$ $ $ $ $ $ resources $ $ $ $ $ Firms resources G&S G&S Resource Market Product Market
Circular Flow Questions • How do individuals and families in households depend on people in businesses? • How do businesses depend on households? • What is the role of government in the circular flow of economic activity? _______________________________
Earning Income • What do you have to do to earn a high income? • How do you know that others value the services or goods you provide?
Circular Flow Implications • A change in the system influences the entire system. • ________________________________________________________________________________ • Income losses by producers will reduce incomes for households.
Income Variation • College students are rewarded for studying. • Star athletes and entertainers are rewarded for their specialized skills. • Entrepreneurs are rewarded for their productive innovations and risk-taking. • Why does Tiger Woods earn more than a nurse?
#9 Production of goods and services people value, not just jobs, provides the source of high living standards.
Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. — ADAM SMITH (1776)
If jobs were the key to high incomes, we could easily create as many as we wanted. All of us could work one day digging holes and the next day filling them up. We would all be employed, but we would also be exceedingly poor because such jobs would not generate goods and services that people value. ______________________________________________________________________
Government pays for these jobs either through ___________________________ It crowds out ________________ jobs and spending. There is nothing like profit and loss that will direct funding toward productive projects in government. That is, ____________________________________ __________________________________________________________________________________________ When the government “creates” jobs
Politicians and proponents of government spending projects are fond of bragging about the jobs created by their spending programs and they exaggerate program benefits. Agricultural Adjustment Act (AAA) of 1933 2009 “Cash for Clunkers” Program Do spending programs create jobs of value?
It is not simply more jobs that improve our economic well-being but _________________ ____________________________________________________________________ Jobs of value matter!
When governments become heavily involved in subsidizing and granting favors to some businesses at the expense of others, how will this incentive structure influence the efficiency of resource allocation? Question for Thought: