Economics, 9th Edition Class Notes

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Chapter01-Economics and Economic Reasoning1-1CHAPTER ONEECONOMICS AND ECONOMIC REASONINGLearning ObjectivesAfter you teach the material in this chapter, your students should be able to do thefollowing:LO1.Defineeconomics andidentify its components.LO2.Discussvarious ways in which economists use economic reasoning.LO3.Explain real-world events in terms of economic forces, social forces, andpoliticalforces.LO4.Explainhow economic insights are developed and used.LO5.Distinguishamong positive economics, normative economics, and the art ofeconomics.Teaching ObjectivesTo help your students achieve the Learning Objectives above, you should anticipatecommon student difficulties with the material and be prepared to do the following:Defend the concept of scarcity. Many students might feel that the claim thatsociety has too few resources to satisfy all wants assumes that individuals arematerialistic or greedy. Think about approaching the constant evolution of ourwants and desires as a positive thing. (LO1)Link the concept of scarcity to the task of decision-making and coordination. Ifour resources are too few to satisfy our wants, then there is a problem to besolved: which wants will be satisfied and which ones won’t? This problem lies atthe heart of the three coordination problems covered in the chapter. (LO1 andLO2)Defend marginal benefit and marginal cost analysis as the way that individualsmake decisions. Students may think at first that they are being taught a new trickfor decision-making. However, this is not the case. Explain to them that, whetherconscious or not, this type of analysis already underlies all decision-making.(LO2)Connect the concept of opportunity cost with marginal benefit and marginal costanalysis. Economists focus not only on the costs and benefits of choosing acertain action, but also on the costs and benefits of choosing a certain action

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Chapter01-Economics and Economic Reasoning1-2rather than choosing another one. Mastery of this type of thinking will pay off foryour students throughout the entire course. (LO2)Provide examples of real life situations where economic forces (the instinct torespond toscarcity)areallowed toworkthrough marketforces and othersituations 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 betweentheorems and precepts. These terms will be used throughout the text. (LO4)Delineate the threeusesof economics discussed in this chapter: to understand theeconomy(positiveeconomics),tosetgoalsfortheeconomy(normativeeconomics), and to achieve those goals given how the economy functions (the artof economics). (LO5)For Professors New to ColanderEvery book presents material in slightly different ways, so it is helpful to note some of thenames, notations, definitions,or symbols that Colander uses as compared to other books.It will be easier for your students connect materialpresented in the lectureto materialcovered in the text if you note the following:Colander emphasizes coordination in the definition of economics, and then tiesthat into scarcity. “The three coordination problems” is how this textbook refersto 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 isallowed to operate throughthe market. There are also social and political forces that interact with economicforces to determine what market forces are allowed to operate.To keep any implicitly normative judgments out of the definition, “efficiency” isdefined as in terms of goals, not resources. Thus, efficiency isdefinedas“achieving a goal as cheaply as possible” and not as “getting the most out ofavailable resources.”Colander uses Keynes' original tripartite division—positive, normative, and art ofeconomics—rather than the positive/normative distinction used by many books.Policy discussions fall in the art of economics, and include both positive andnormative elements. Precepts belong in the art of economics; theorems belong inpositive economics.

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Chapter01-Economics and Economic Reasoning1-3Answers to the Problem SetThe following are the correct answers to the problem set that follows on the next twopages, along with the learning objective associated with each question. The problem setis 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 youwould have received from another activity, or opportunity cost.b.Since the tuition is nonrefundable, it is a sunk cost and therefore no longerrepresents opportunity costs. The true opportunities costs of continuing to takethe 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 notconsidering choices is the benefit you would have gained from making thosechoices.d.How much you paid for the apples is a sunk cost, and therefore is not relevant.2.(LO1)a.Macroeconomics; b. Microeconomics; c. Macroeconomics;d.Microeconomics3.(LO5)a.Positive; b. Normative; c. Normative; d. Positive; e. Art of economics;f.Normative4.(LO3)a.True. Economic forces always operate.b.True. Political forces, not market forces determine stamp prices.c.False.Eventhoughthegovernmentregulatesthismarket,becausethemedallions are sold at an auction, market forces determine their prices.

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Chapter01-Economics and Economic Reasoning1-4ECONOMICS AND ECONOMIC REASONINGPROBLEM SETNAME: _______________________________________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 freeand 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, theopportunity 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 makedecisions.d.You have purchased 5 premium apples for $1.99 a pound, but when you get home, youdiscover they are mushy. Since you paid top dollar for these apples, you decide you haveto eat them.2.Classify the followingWall Street Journalarticles as involvingmacroeconomicormicroeconomicissues 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 ofChicken LittleGives Disney Something to Crow Over”

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Chapter01-Economics and Economic Reasoning1-53.Identify the following statements as examples ofpositive economics,normative economics, orthe art of economics:a.Based on microeconomic models, extending the tax cuts instituted in 2001 will likelycontinue 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 familieswill 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 stillaffected by economic forces.b.Because the U.S. postal service is a monopoly and Congress sets postal prices throughlegislation, market forces do not determine stamp prices.c.New York City government auctions taxi medallions that give the right to transportpassengers by taxi. Because the government controls the number of medallions, marketforces do not determine their price.

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Chapter02-The Production Possibility Model, Trade, and Globalization2-1CHAPTER TWOTHE PRODUCTION POSSIBILITY MODEL,TRADE, AND GLOBALIZATIONLearning ObjectivesAfter you teach the material in this chapter, your students should be able to do thefollowing:LO1.Demonstratetrade-offswith a production possibility curve.LO2.Relate the conceptsof comparative advantageand efficiencyto the productionpossibility curve.LO3.State how, through comparative advantage and trade, countries can consumebeyond theirindividualproduction possibilities.LO4.Explain how globalizationisguided by the law of one price.Teaching ObjectivesTo help your students achieve the Learning Objectives above, you should anticipatecommon 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 thebowed-outward shape with the concept of increasing marginal costs. (LO1)Relate the principle of increasing opportunity costof trade-offsto the use ofresources.Studentsoftenatfirstthinkincreasingopportunitycostsarecounterintuitive, thinking that the more that one does something, the better onegets, or thinking about something like “economies of scale.” Talking aboutresources is a good way to help students understand this. Paper airplanes can be agood example. If the student were to make one paper airplane, he or she wouldhave no problem finding a piece of paper to use. However, to make athousandpaper airplanes, the student would have to use some paper that has significantvalue, like a diploma or pages from their senior yearbook. Costs go up becausepeople are smart; they do things at the lowest cost first. They don’t reachimmediately for that diploma when making theirfirstairplane. (LO1)ConnectcomparativeadvantagetothePPCviatheconceptofproductiveefficiency. To be productively efficient, an economy must not only use all of itsresources, but must also use themcorrectly. This correct use is related to usingresources in a way that is consistent with comparative advantage. With respect toguns and butter, it may be helpful to name this essential: cows. If the economywants to move from producing only guns to producingsomebutter, ask students

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Chapter02-The Production Possibility Model, Trade, and Globalization2-2what resources should be moved from gun production to butter production. Cows.They’re great at making butter but terrible at making guns. (LO2)Defend the idea that two countries can both consume outside of their productionpossibilities through specialization and trade based on comparative advantage, ifnecessary, by giving an example where one country has the absolute advantage inthe production of both goods. Students might wrongly assume that it is absoluteadvantage that matters. Be prepared to provide an example where one country canproduce more of both goods than can the other country, just to show that it is onlycomparative advantage that matters. The U.S. can benefit from trading even witha smaller economy that cannot produce more of any good than can the U.S. (LO3)Discouragestudentsfromwantingtosay,atleastatthispoint,whetherglobalization and trade are ultimately “good” or “bad”; the law of one price ismorally ambiguous. It is simply the way a global economy works, and thepressures are real and need to be addressed. (LO4)For Professors New to ColanderEvery book presents material in slightly different ways, so it is helpful to note some of thenames, notations, definitions or symbols that Colander uses as compared to other books.It will be easier for your students connect materialpresented in the lectureto materialcovered in the text if you note the following:Colander refers to the central model of this chapter as the “Production PossibilityCurve” and “PPC” instead of “Production Possibility Frontier” and “PPF.”Colander distinguishes betweenefficiency(achieving a goal using as few outputsaspossible)andproductiveefficiency(gettingthemostoutofavailableresources), recognizing the important reality that maximizing total output is not anecessary 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 SetThe following are the correct answers to the problem set that follows on the next twopages, along with the learning objective associated with each question. The problem setis 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. Thisis 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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Chapter02-The Production Possibility Model, Trade, and Globalization2-3c.It would shift in along both axes.3.(LO1, LO2)a.See graph; b. See graph; c. See graph.d.Point B is inefficient because it is inside the production possibility curve. Onecould increase the number of guns while still produce the same amount ofbutter, or vice versa.012345678910012345678910ButterGunsABC4.(LO1, LO2)Parts a & b together:01234567891011020406080100120140160180200220240260EarringsScarves5.(LO3, LO4)a.True. If the U.S. exchange rate falls, the dollar value of foreign wages willrise. That is, the relative wages of U.S. workers will decline, which will helpthe U.S. regain its comparative advantage.b.False. Because trade restrictions restrict the flow of goods and services, theykeep the law of one price from equalizing wages and prices internationally.c.False. A country that has a comparative advantage in producing one set ofgoods means that the other country has to have a comparative advantage in theother set of goods.

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Chapter02-The Production Possibility Model, Trade, and Globalization2-4THE PRODUCTION POSSIBILITY MODEL,TRADE, AND GLOBALIZATIONPROBLEM SETNAME: _______________________________________DATE: ____ / ____ / ____Give the best answer to each of the following questions.1.Refer to Figure 2-2in thetextbook 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 goodswould 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 butdo 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:012345678910012345678910ButterGunsa.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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Chapter02-The Production Possibility Model, Trade, and Globalization2-54.A clothing accessory company produces scarves and earrings. Below are the productionpossibility combinations it can produce with the resources that it has.a.Draw the production possibility curve in the space below.ScarvesEarrings10095089071206145516541853200221512250230b.Suppose technological advances increase production of both earrings and scarves by 10%without increasing costs. Demonstrate the effect of this innovation on the productionpossibility 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 ofgoods is for the U.S. exchange rate to decline.b.Trade restrictions facilitate the impact of the law of one price on wages and pricesinternationally.c.Wages in China are lower than in the United States. Therefore, China has a comparativeadvantage in the production of all goods.

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Chapter03–Economic Institutions3-1CHAPTER THREEECONOMIC INSTITUTIONSLearning ObjectivesAfter you teach the material in this chapter, your students should be able to do thefollowing:LO1.Definemarket economyandcompare and contrast socialism with capitalism.LO2.Describethe role ofbusinessesandhouseholds in a market economy.LO3.List and discuss the variousroles of government.LO4.Explain why global policy issues differ from national policy issues.Teaching ObjectivesTo help your students achieve the Learning Objectives above, you should anticipatecommon student difficulties with the material and be prepared to do the following:Clarify the difference between the “pure” versions of capitalism and socialismand the real-life mixed versions. The Heritage Foundation’s Index of EconomicFreedom (http://www.heritage.org/Index) is one way to introduce the idea thateconomic systems are more of a “spectrum” than simply two different markettypes. (LO1)Reinforcetheimportantdistinctionbetweenhouseholds,business,andgovernmentestablishedinthetextbookbydefiningeachaccordingtoitseconomicactivity. (LO2)Remind students that the three important economic institutions are not mutuallyexclusive; in fact, it is quite the opposite. Businesses are made up of individualswho are also part of households; likewise government decision-makers alsobelong to households. Rather, “business” and “government” are just differentoutlets through which households exert their power over the economy. (LO2,LO3)For Professors New to ColanderEvery book presents material in slightly different ways, so it is helpful to note some of thenames, notations, definitions or symbols that Colander uses as compared to other books.It will be easier for your students connect materialpresented in the lectureto materialcovered in the text if you note the following:

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Chapter03–Economic Institutions3-2To help students better understand and differentiate the parts of the circular flowdiagram, the markets are referred to as “factor” and “goods” markets, rather than“input” and “output” markets (or some other formulation).Colander’spresentationofthecircularflowdiagramincludesgovernment.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 theeconomy at once (since these three institutions all affect decision-making in anyeconomy), rather than to introduce only businesses and households first, andthenadd government, as is the style of other textbooks. Other countries are notexplicitly drawn into the circular flow diagram, but their presence is implied witharrows that flow out of and back into the model. At the end of the chapter, therelationshipsbetweeneconomies are explored.Answers to the Problem SetThe following are the correct answers to the problem set that follows on the next twopages, along with the learning objective associated with each question. The problem setis 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. H2.(LO2)a. corporation; b. partnership; c. partnership; d. sole proprietorship; e. corporation;f. corporation; g. corporation; h. sole proprietorship3.(LO1)a.Socialism; b.Capitalism; c. Socialism; d. Capitalism4.(LO3)a.Intergovernmental (other governments); b. Education;c. Individual income taxes; d. Income security5.(LO3)a.Providing public goodsb.Correcting for externalitiesc.Providing a stable set of institutions and rulesd.Promoting effective and workable competitione.Adjusting for undesirable market resultsf.Ensuring economic stability and growth

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Chapter03–Economic Insitutions3-3ECONOMIC INSTITUTIONSPROBLEM SETNAME: _______________________________________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 acorporation, asoleproprietorship, or apartnership: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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Chapter03–Economic Insitutions3-43.Indicate whether the following descriptions best characterize capitalismorsocialism.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, andfor whom to produce.d.Society relies on theself-interested individualsto decide what, how, andfor whomtoproduce.4.Answer the following questions based on Figure 3-3 and Figure 3-4in thetextbook: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 ofgovernment 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 toenforce those laws.d.A state government requires that physicians be licensed to practice medicine, but does notrequire licensure for newspaper deliverers.e.The government redistributes income from the wealthy to the poor through SocialSecurity.f.The government passes a ‘stimulus bill’ to try toend a recession.

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Chapter04-Supply and Demand4-1CHAPTER FOURSUPPLY AND DEMANDLearning ObjectivesAfter you teach the material in this chapter, your students should be able to do thefollowing:LO1.State the law of demand anddistinguish shifts in demand from movementsalong a demand curve.LO2.State the law of supply and distinguish shifts in supply from movements alonga supply curve.LO3.Explain how the law of demand and the law of supply interact to bring aboutequilibrium.LO4.Discussthe limitations of demand and supply analysis.Teaching ObjectivesTo help your students achieve the Learning Objectives above, you should anticipatecommon student difficulties with the material and be prepared to do the following:Be patient with those students for whom reading a graph is difficult. Experiencedeconomics instructors already know that their students arrive in economics classeswith different levels of comfort with graphing. Following the book’s pedagogywill help because it begins with the curve and then links the curve to demandschedule data. This way, students who are not comfortable with plotting data canstill feel comfortable using supply and demand curves. (LO1,LO2)Provide real-life examples of buyers and sellers responding to price changes toconfirm the laws of supply and demand. The concept of substitution is incrediblyhelpful, because it provides the result of these laws without the need for morecomplicated explanations. Households try to stretch their budgets, so they buyless of things that become more expensive. Firms try to make as much profit aspossible, so they make more of a particular good when its price goes up, and lessof everything else. (LO1, LO2)Reinforce the difference between movements along a curve and the shifts of acurve. The textbook distinguishes these very well, but like many things in yourprinciples 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 thisimportant distinction. (LO1,LO2)

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Chapter04-Supply and Demand4-2Develop the idea of equilibrium with non-economics examples so that studentsdon’t think of equilibrium as only an economic concept. The text points out thatthe concept actually comes from physics. Dropping a marble into a bowl providesa good starting point for the concept of equilibrium: until it reaches the bottom, itcontinues 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 upwardor downward pressure on prices caused by excess demand or supply can followdirectly. (LO3)Be careful with demand and supply shifts that you explain the actual process. It iscommon for some economics instructors to teach shifts in supply or demand in away that makes it sound like the market moves immediately from one equilibriumto the next. It is more beneficial to keep the price initially unchanged, to showhow the shift in supply or demand causes excess supply or excess demand, whichis the catalyst for the price change and the movement to the new equilibrium. Thisis 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 neverproviding useful answers will immediately lose the attention of their students.Remind your students that professional economists are aware of the limitations ofthis simple kind of analysis and that they build more complicated models thataddress these concerns. Build anticipation for the nextchapterby letting studentsknow that they will learn a lot about how supply and demand is used. (LO4)For Professors New to ColanderEvery book presents material in slightly different ways, so it is helpful to note some of thenames, notations, definitions or symbols that Colander uses as compared to other books.It will be easier for your students connect materialpresented in the lectureto materialcovered in the text if you note the following:In this text, the phrase “shift factors” is consistently used to refer to the non-pricedeterminants of demand and supply. Using this language consistently in class willhelp your students recall the well-organized list of shift factors they encounteredin the text. Switching from “shift factors” to “determinants” or “shifters” maylead to confusion.When presenting a supply or demand curve lacking specific values, ColandersubscriptsPandQwith the letter name of the particular point on the curve(s). Forexample, pointAon a curve would consist of pricePAand quantityQA. Thoughthis is just a matter of style, consistency on your part will help prevent confusionamong your students. Students often confusesuperscripts with exponents.Though the terms “surplus” and “shortage” are introduced, the text favors the useof the phrases “excess supply” and “excess demand,” which are easier forstudents to interpret.

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Chapter04-Supply and Demand4-3Answers to the Problem SetThe following are the correct answers to the problem set that follows on the next twopages, along with the learning objective associated with each question. The problem setis 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 supply3. (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 excessdemandof 24 CDs; at a price of$10.00, there would be excesssupplyof 12 CDs.c.If the price were $9.00, there would be pressure on the price to rise because ofthe excess demand.

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Chapter04-Supply and Demand4-44.(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 willalso be true for the whole. Supply and demand analysis assumes that other thingsremain constant. The fallacy of composition reminds us that the larger the marketunder consideration, the more likely it is thatotherthingswill change when thismarket changes, so that actual observed changes in the market will differ fromwhat the simple supply and demand analysis would suggest.

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Chapter 04-Supply and Demand4-5SUPPLY AND DEMANDPROBLEM SETNAME: _______________________________________DATE: ____ / ____ / ____Give the best answer to each of the following questions.1.Draw ademand curvefrom the following demand table on the axes below. Label itD1. Thensuppose the demander gets an increase in income and decides to buy 2 more bars at everyprice level. Draw this change on your demand curve. Label itD2.Price percandy barCandy barspurchased each week$0.50100.7581.0061.2541.5022.Indicate whether each of the following statements describes anincrease in demand,decreasein demand,change in quantity demanded,increase in supply,decrease in supply, orchange inquantity suppliedin the given market.a.Store-brand soup prices are cut, reducing sales of Campbell’s soup. Market: Campbell’ssoup.b.Coffee bean prices hit an 18-month low following a bountiful harvest. Market: coffeebeans.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 pesticidesincreases, leading to a rise in the price of soy beans. Market: soybeans.

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Chapter 04-Supply and Demand4-63.Given the following data for individuals, draw the market demand curve and market supplycurve for CDs. Assume that these are the only individuals in the entire market. Price is perCD.Price$8.00$8.50$9.00$9.50$10.00$10.50Quantity demanded in units per weekMark331000Lynn876321Jason654300Erin1097642Quantity supplied in units per weekJeff012346Beth233467Chris012356Abby112235a.What would be the equilibrium price and quantity in this market?b.Which would there be—excessdemandor excesssupply—at a price of $8.00? Howmuch? 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, wouldthe 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 technologyreduces the cost of producing digital cameras. Market: digital cameras.d.Hurricanes in the Gulf coast cause gasoline supply disruptions while the summer travelseason ends. Market: gasoline.5.What is the fallacy of composition and how is it related to supply and demand analysis?

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Chapter05-Using Supply and Demand5-1CHAPTER FIVEUSING SUPPLY AND DEMANDLearning ObjectivesAfter you teach the material in this chapter, your students should be able to do thefollowing: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 ona market.LO4.Explain the effect of quantity restrictions on a market.LO5.Explain the effect of a third-party-payer system on equilibrium price andquantity.Teaching ObjectivesTo help your students achieve the Learning Objectives above, you should anticipatecommon student difficulties with the material and be prepared to do the following:Remind students that in the real world, unlike in an economics textbook, changesdo not take place in a vacuum. All markets are linked inasmuch as production andspending are both linked to income, and households choose to spend that finiteincomeonacertainsetofpossiblysubstitutablegoodsandservices.Theoretically, one change in supply or demand could lead to infinite changes insuccessive 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 pricesexactly 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 helpfulone: in your examples, begin by allowing the entire tax to be passed on toconsumers, and then point out that quantity demanded would have fallen. Thisexcess supply would cause price (including the tax) to fall. You may want to tryan example where the consumer is taxed and tries to “pass on” the tax to theseller—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 eventuallyrises. (LO3)Explain to students that the primary effect of many quantity restrictions is simplyan increase in price. In some states, barbers must be licensed by the state. Askyour students whether they believe this type of licensing provides more benefits to

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Chapter05-Using Supply and Demand5-2consumers or producers. You may find that the answers are very different fromthose you'll get if you ask about the licensure of lawyers or physicians.Demonstrate the impact of third-party-payer systems by using counter-factualexamples that remind students of the rationing effect of prices. Gasoline might bea good example. Nobody likes high gas prices, but they encourage people to useless gas and to think seriously about their gas consumption—two impacts that fewpeople would consider negative. But what if you only had to pay for 10% of thegas price and the government paid the rest? Would you be as careful about yourgas usage? (LO5)For Professors New to ColanderEvery book presents material in slightly different ways, so it is helpful to note some of thenames, notations, definitions or symbols that Colander uses as compared to other books.It will be easier for your students to connect materialpresented in the lectureto materialcovered in the text if you note the following:While there are no significant notations or names used in this chapter that shoulddiffer from what experienced teachers are used to seeing, it is worth noting thatColander also includes the very important concepts of quantity restrictionsandthird-party-payer systems in this chapter. These extensions of supply and demandanalysis are important not just for their obvious real-life relevance, but alsobecause they give students additional opportunities to work with supply anddemand. The textbook you might have previously used may not have introducedthese concepts so early. Make sure you are prepared to teach them.Answers to the Problem SetThe following are the correct answers to the problem set that follows on the next twopages, along with the learning objective associated with each question. The problem setis designed to be photocopied directly from this book and distributed for student use.1.(LO1)a. graph 3; b. graph 1; c. graph 22.(LO2, LO3, LO4)a.Price floor, excise tax, quantity restrictionb.Price ceilingc.None of thesed.Price floor, price ceiling, excise tax, quantity restrictionse.Excise tax

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Chapter05-Using Supply and Demand5-33. (LO5)a.Equilibrium price would be $90; equilibrium quantity would be 20 visits peryear.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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Chapter 05-Using Supply and Demand5-4USING SUPPLY AND DEMANDPROBLEM SETNAME: _______________________________________DATE: ____ / ____ / ____Give the best answer to each of the following questions.1.Match the graph that best illustrates the event described.QuantityQuantityQuantityPricePriceD0D1SupplyS0S1DemandQ1 Q0Q0 Q1P1P0P0P1PriceD0D1Q0Q1P1P0S1S0(1)(2)(3)a.The price for a gallon of milk is projected to hit $3 in the United States because fewerdairy cows are available from Canada because of mad cow disease and there is greaterforeign 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 aresult, plywood prices rise 24%. Market: plywood.2.For each of the statements below, determinewhich, if any, government interventions itproperly describes. Your choices are:aprice ceiling, aprice floor, anexcise tax, or aquantityrestriction. 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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Chapter 05-Using Supply and Demand5-53.The graph below shows supply and demand curves for annual medical office visits. Usingthis graph, answer the questions below.a.If the market were free from government regulation, what would be the equilibrium priceand 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 expenditureswithout government involvement? Provide a numerical answer.

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Chapter06–Describing Supply and Demand: Elasticities6-1CHAPTER SIXDESCRIBING SUPPLY AND DEMAND:ELASTICITIESLearning ObjectivesAfter you teach the material in this chapter, your students should be able to do thefollowing:LO1.Useelasticityto describe the responsiveness of quantities to changes in priceand distinguish five elasticity terms.LO2.Explain the importance of substitution in determining elasticity of supply anddemand.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 ofelasticitymakes supply and demand analysis moreuseful.Teaching ObjectivesTo help your students achieve the Learning Objectives above, you should anticipatecommon student difficulties with the material and be prepared to do the following:Choose your words deliberately. Beyond the challenges of understanding theconcept of elasticity and learning how to calculate it, students also have to learn agreat deal of vocabulary in this chapter. Using correct and consistent languagewill 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 givesstudents many opportunities to practice calculations. It may be helpful if you canencourage 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 supplementthese examples. (LO2,LO3,LO5)For Professors New to ColanderEvery book presents material inslightly different ways,so it is helpful to note some of thenames, notations, definitionsor symbolsthat Colander uses as compared to other books.

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Chapter06–Describing Supply and Demand: Elasticities6-2It will be easier for your studentstoconnect materialpresented in the lectureto materialcovered in the text if younotethe following:In keeping with the KISS principle established earlier in the book, Colander’spresentation and notation for elasticity is simple, so as not to confuse. The textuses “E” when referring generically to elasticities and “ED” and “ES” for priceelasticity of demand and price elasticity of supply respectively. The Greek letterdelta(Δ) isnotused in presenting the formulas. Finally,it is only mentioned oncethat price elasticitiesof demandare actually negative; they are referred toaspositive numbers throughout. Follow the text's lead and do not belabor thisunimportant point.The text teaches what other texts call “the midpoint method” but without usingthat name. Rather, this method is presented as asolutionto the “endpointproblem.” This language presents this formula as having a particular usefulnessfor students, and not just as an arbitrarily complicated and esoteric “method” ofcalculating elasticities.Rather than presentingdemandelasticities first and onesupplyelasticity later,Colander presents theprice elasticities(of both demand and supply) first, anddevelops them together. This presentation is different from the presentation inmany texts, but is much more helpful, and avoids making price elasticity ofsupply seem like an afterthought.Many texts teach the concept of changing elasticity along a straight-line demandcurve but confusingly neglect to provide the same insight for supply. Because thistext presents the concept of price elasticity for both demand and supply bydeveloping them together, this confusing omission is avoided. If you have neverpresented this material to students before, you might need a quick review.Colander presents all of the ‘determinants’ of price elasticity as being related tothe idea of substitutability, which echoes the important role that substitutionplayed in the development of demand and supply curves earlier in the text. Anyprofessor who has tried to present a list of the determinants of the price elasticityof demand to students has recognized that substitution is at the heart of all ofthem, and has no doubt wondered why “substitutes” is included in the list as itsown 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, butrather writes them out. Also, this text correctly uses “percentage change indemand” and notquantity demandedas the numerator in the formulas for theseelasticities.Colander presents two equations for calculating percentage changes in price wheneither supply or demand shifts. This useful and interesting formula is left out of

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Chapter06–Describing Supply and Demand: Elasticities6-3many principles texts, so you may not have seen or used these formulas for sometime. Be sure to review them.Answers to the Problem SetThe following are the correct answers to the problem set that follows on the next twopages, along with the learning objective associated with each question. The problem setis designed to be photocopied directly from this book and distributed for student use.1.(LO1,LO3)a. 0.76; b. Inelastic;c. Revenue rose by $1,260, which makes sensebecause demand is inelastic.2.(LO1)a. 0.67, inelastic; b. 1.0, unit elastic; c. 1.6, elastic3.(LO4)a.3;b.1;c.4;d.6;e.2;f.54.(LO1)The completed graph should look like the one below. The midpoint is (20, $5).5.(LO2)a.Diet caffeine-freePepsi because it is a narrowly-defined good and thereforehas more substitutes than soda in general.b.Filet mignon because it is a luxury and it will be a greater percentage of one’sbudget than table salt.c.Bottled water because it is less of a necessity thanistap water.d.Plasma-screen TVsbecausethey are more narrowly-defined than televisions.6.(LO5)a. Price increases 10%;b.Price decreases 5%;c.Price decreases 10%

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Chapter 06–Describing Supply and Demand: Elasticities6-4DESCRIBING SUPPLY AND DEMAND:ELASTICITIES PROBLEM SETNAME: ________________________________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 thequantity 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 demandis price elastic, inelastic, or unit elastic.a.Raw sugar prices rose by 3% and raw sugar consumption declined by 2%.b.A10% increase in the price of cigarettes reducessmoking among 8thto 10thgraders by10%.c.The price of luxury cars increases by5% while the quantity demanded decreases by 8%.3.Match the following words with theappropriate 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 elasticityof demand isgreater than one.d.Substitute____4. Income elasticityof demand isless than one.e.Inferior good____5. Income elasticity of demand is positive.f.Normal good____6. Cross-price elasticity of demand is positive.

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Chapter 06–Describing Supply and Demand: Elasticities6-54.On the following graph, indicate the pointswhere demand isunit elastic,perfectly elastic,andperfectly inelastic. Label the ranges where demand iselasticand where demand isinelastic.5.Circle the good in the following pairs that is likely tohave moreelasticdemand. Explain youranswer.a.Diet caffeine-free Pepsi/Sodab.Table salt/Filet mignonc.Bottled water/Tap waterd.Plasma-screen TVs /Televisions6.Calculate the percentage change in price for the following situations. Be sure to state whetherprice 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 is0.5. Demand decreases 10%.c.Elasticity of demand is 2 and elasticity of supply is 1. Supply increases 30%.

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